UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10Q
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(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2009
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from __________ to ___________
Commission file number: 000-22095
LIQUOR GROUP WHOLESALE, INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-1039267
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(State of Incorporation) (IRS Employer ID Number)
4600 Touchton Road, Building 100, Suite 150, Jacksonville, FL 32246
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(Address of principal executive offices)
904-285-5885
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(Registrant's Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated file, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of share outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of June 30, 2009, there were 12,543,733 shares of the registrant's common
stock issued and outstanding.
LIQUOR GROUP WHOLESALE, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance sheets as of May 31, 2009 (unaudited) and August 31, 2008 F-1
Statements of operations for the three and nine months ended May 31, 2009
and May 31, 2008 (unaudited) F-2
Statements of cash flows for the three and nine months ended May 31, 2009
and May 31, 2008 (unaudited) F-3
Statements of changes in stockholders' equity for the three and nine months ended
May 31, 2009 (unaudited) F-4
Notes to financial statements (unaudited) F-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 1
Item 3. Quantitative and Qualitative Disclosures About Market Risk 5
Item 4. Controls and Procedures 5
Item 4T. Controls and Procedures 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 7
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 7
Item 3. Defaults Upon Senior Securities 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Item 5. Other Information 7
Item 6. Exhibits 8
Signatures 9
PART I
ITEM 1. FINANCIAL STATEMENTS
LIQUOR GROUP WHOLESALE, INC.
BALANCE SHEETS
AS OF MAY 31, 2009 (UNAUDITED) AND AUGUST 31, 2008
May 31, 2009 August 31,2008
ASSETS ------------ --------------
Cash and cash equivalents $ 1,250 $ 821
Accounts receivable (includes related party balances of
$1,905,406 at May 31, 2009 and $1,651,915 at
August 31, 2008) 2,335,565 1,994,609
--------------- ---------------
Total current assets 2,336,815 1,995,430
--------------- ---------------
Deferred tax assets, net of valuation allowance - -
--------------- ---------------
TOTAL ASSETS $ 2,336,815 $ 1,995,430
=============== ===============
LIABILITIES
Accounts payable (includes related party balances of
$545,381 at May 31, 2009 and $517,225 at
August 31, 2008) $ 1,215,574 $ 1,261,524
Other liabilities 244,365 226,503
Notes payable-related parties, unsecured, without interest 78,000 78,900
--------------- ---------------
Total current liabilities 1,537,939 1,566,927
--------------- ---------------
COMMITMENTS AND CONTINGENCIES - -
--------------- ---------------
TOTAL LIABILITIES 1,537,939 1,566,927
--------------- ---------------
STOCKHOLDERS' EQUITY
Convertible preferred stock, Series A, $0.0001 par value
2,000,000 shares authorized, issued and outstanding 953,460 95 95
Common stock, $0.0001 par value, 100,000,000 shares
authorized, issued and outstanding 11,793,733 at May 31, 2009,
and 9,512,851 at August 31, 2008 1,179 952
Additional paid in capital 235,906 24,839
Retained earnings 561,696 402,617
--------------- ---------------
Total stockholders' equity 798,876 428,503
--------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,336,815 $ 1,995,430
=============== ===============
See accompanying notes to financial statements.
F-1
LIQUOR GROUP WHOLESALE, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2009
AND MAY 31, 2008 (UNAUDITED)
For the Three Months Ended For the Nine Months Ended
May 31, May 31, May 31, May 31,
2009 2008 2009 2008
--------------------------- --------------------
SALES
Related party $ 89,014 $ 80,463 $ 288,087 $ 372,745
Other (net) 9,070 76,263 192,617 116,506
-------------- ------------ --------------- -------------
98,084 156,726 480,704 489,251
COST OF SALES (39,664) (117,596) (248,895) (379,637)
-------------- ------------ --------------- -------------
GROSS PROFIT 58,420 39,130 231,809 109,614
-------------- ------------ --------------- -------------
OTHER INCOME
Vendor contract terminations 92,152 - 188,917 -
Interest 6,039 - 6,039 -
-------------- ------------ --------------- -------------
98,191 - 194,956 -
-------------- ------------ --------------- -------------
OPERATING EXPENSES
Stock issued for compensation expense (see Note 7) 135,000 - 135,000 -
Professional, consulting, and
administrative costs, (which includes
$31,000 in stock issued for professional
and consulting fees for both three and
nine months ended May 31, 2009 (see Note 7)) 52,816 5,759 83,789 20,706
Insurance - 4,110 - 12,330
Interest expense 3,820 3,392 10,995 9,952
Rent - related party 3,000 3,500 11,391 9,500
Licenses and fees 100 60 1,344 9,494
Bank charges 1,231 2,412 2,514 6,248
Other 9,693 367 22,653 5,892
-------------- ------------ --------------- -------------
205,660 19,600 267,686 74,122
-------------- ------------ --------------- -------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (49,049) 19,530 159,079 35,492
PROVISION FOR INCOME TAXES - - - -
-------------- ------------ --------------- -------------
NET INCOME (LOSS) $ (49,049) $ 19,530 $ 159,079 $ 35,492
============= ============ ============ =============
Average common shares outstanding 11,282,863 9,512,851 10,109,339 9,509,188
Fully diluted common shares outstanding 54,188,563 52,418,551 53,015,039 52,414,888
Basic earnings (loss) per common share $ (0.004) $ 0.002 $ 0.016 $ 0.004
Fully diluted earnings (loss) per common share $ (0.001) $ - $ 0.003 $ 0.001
See accompanying notes to financial statements.
F-2
LIQUOR GROUP WHOLESALE, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2009
AND MAY 31, 2008 (UNAUDITED)
For the Three Months Ended For the Nine Months Ended
May 31, May 31, May 31, May 31,
2009 2008 2009 2008
--------------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (49,049) $ 19,530 $ 159,079 $ 35,492
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Compensation expense 135,000 - 135,000 -
Professional services 31,000 - 31,000 -
(Increase) decrease in:
Accounts receivable (14,836) (73,702) (340,956) (172,361)
Other assets - 4,110 - (4,110)
Increase (decrease) in:
Accounts payable (147,046) 46,205 (45,950) 120,734
Notes payable (2,000) - (900) -
Other current liabilities 46,408 3,391 63,156 (86,767)
------------ ------------ ------------- ------------
Net cash provided (used) by operating activities (523) (466) 429 (107,012)
------------ ------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used by investing activities - - - -
------------ ------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Registration costs - - - (36,335)
Proceeds from issuance of common stock - - - 14,515
------------ ------------ ------------- ------------
Net cash used by financing activities - - - (21,820)
------------ ------------ ------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (523) (466) 429 (128,832)
CASH AND CASH EQUIVALENTS, BEGINNING 1,773 1,634 821 130,000
------------ ------------ ------------- ------------
CASH AND CASH EQUIVALENTS, ENDING $ 1,250 $ 1,168 $ 1,250 $ 1,168
============ ============ ============= ============
NONCASH TRANSACTIONS (see Note 7):
Common stock issued in settlement of merger
lawsuit, compensation, and professional services $ 211,294 $ - $ 211,294 $ -
============ ============ ============= ============
See accompanying notes to financial statements.
F-3
LIQUOR GROUP WHOLESALE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2009 (UNAUDITED)
Preferred Stock Common Stock Additional
Convertible Voting Paid in Retained Stockholders'
------------------- --------------------------
Shares Amount Shares Amount Capital Earnings Equity
------------------- -------------------------- -------------- --------------- ----------------
Balance, August 31, 2008 953,460 $ 95 9,512,851 $ 952 $ 24,839 $ 402,617 $ 428,503
Net income for the period - - - - - 6,112 6,112
Balance, November 30, 2008 953,460 95 9,512,851 952 24,839 408,729 434,615
Net income for the period - - - - - 202,016 202,016
----------- ------ ---------------- ---------- ----------- ----------- -------------
Balance, February 28, 2009 953,460 95 9,512,851 952 24,839 610,745 636,631
Stock issued for settlement
of merger lawsuit,
compensation, and
professional services
(see Note 7) - - 2,280,882 227 211,067 - 211,294
Net loss for the period - - - - - (49,049) (49,049)
----------- ------ ---------------- ---------- ----------- ----------- -------------
Balance, May 31, 2009 953,460 $ 95 11,793,733 $ 1,179 $ 235,906 $ 561,696 $ 798,876
=========== ====== ================ ========== =========== =========== =============
See accompanying notes to financial statements
F-4
LIQUOR GROUP WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2009
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background - Liquor Group Holdings, LLC, was organized in Florida in 2002 and
distributes alcohol products on behalf of manufacturers in 31 U.S. States.
Liquor Group Wholesale ("LGW") was created in 2007 as a separate company
contracted to manage the wholesale operations and receive the net profits
generated from the wholesale distribution of liquor to the customers of Liquor
Group Holdings.
In January 2007, North American Food and Beverage Corp. ("NAFB") signed an
agreement to acquire Liquor Group Wholesale in return for shares of NAFB's
common and Series A preferred stock. On August 31, 2007, NAFB met required
contingencies and acquired LGW in consideration for the issuance of the shares
of NAFB's common and Series A Preferred stock. As a result of the merger with
NAFB, LGW became the accounting acquirer in a reverse acquisition. When a
reverse acquisition occurs, the pre-merger financial statements of the
accounting acquirer become the historical financial statements of the combined
company. Accounting for the merger transaction as a recapitalization requires
the historical stockholders' equity of LGW to be retroactively restated for an
equivalent number of shares received in the merger after giving effect to any
difference in par value of the issuer's stock with an offset to paid-in capital.
The effect of the recapitalization has been reflected in the Statements of
Changes in Stockholders' Equity.
The combined operations of NAFB and LGW are hereinafter referred to as the
"Company."
Business Description and Activity - The Company's major markets are Florida and
Michigan, and other states in which the Company has active sales efforts and/or
licensed operations include: Alabama, Arkansas, California, Georgia, North
Carolina, South Carolina, Virginia, West Virginia, Oklahoma, Texas, Oregon,
Washington, Wisconsin, and Indiana. The Company has sales contracts for several
products in distribution in other states making up the balance of the 31
markets.
The manufacturing, importation, distribution, and sale of alcohol-based
beverages are subject to regulation by the Federal government through the
Alcohol and Tobacco Tax and Trade Bureau ("TTB"), as well as by State and local
regulatory agencies. Brand suppliers, distributors, and retailers must be
properly licensed in order to sell alcohol-based beverages.
General - This summary of significant accounting policies of the Company is
presented to assist in understanding the Company's financial statements for the
three and nine months ended May 31, 2009. The financial statements and notes are
representations of the Company's management. The Company's management is
responsible for the integrity and objectivity of these financial statements. The
accounting policies conform to accounting principles generally accepted in the
United States of America and to general practices within the wine and spirits
wholesale distribution industry and have been consistently applied in the
preparation of the financial statements.
The Company operates in only one reportable industry segment, wine and spirits
wholesale distribution. The Company's interim financial statements for the three
and nine months ended May 31, 2009 and May 31, 2008, have not been audited and
do not include information or footnotes necessary for a complete presentation of
financial condition, results of operations, and cash flows in conformity with
accounting principles generally accepted in the United States of America. In
management's opinion, the accompanying interim financial statements contain all
adjustments, which are of a normal recurring nature, necessary for a fair
presentation. Our results of operations for the interim periods are not
necessarily indicative of the results that may be expected for an entire year.
The accounting policies followed by us are set forth in the financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 2008, which are incorporated herein by reference.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-5
LIQUOR GROUP WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2009
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As a result of the merger with NAFB, the Company has recorded a deferred tax
asset of approximately $9.5 million at May 31, 2009, which has been completely
offset by a valuation allowance (see Note 3). Realization of the deferred tax
asset is dependent on generating sufficient taxable income in the future. The
amount of the deferred tax asset considered realizable could change in the near
term if estimates of future taxable income are modified or as net operating loss
carryforward periods expire.
Revenue Recognition - Revenue from product sales is recognized by the Company
when title and risk of loss passes to the distributor (or customers of the
Company, the majority being Control States), which generally occurs upon
shipment from the manufacturing facilities or third party storage facilities.
The Company is notified electronically when shipments occur and periodically
verifies that the electronic notifications are reconciled with the physical
delivery of product to the distributors. The Company's customers are SLC, which
consist of licensed liquor distributors and the 18 Control States. Most states
require wine and spirits retailers to purchase alcohol-based beverages from
licensed distributors. Brand suppliers in these states may not legally sell
directly to retail customers. Revenue is billed based on unit prices negotiated
with the customer and approved by the brand supplier or manufacturer, subject to
volume discounts.
In contract negotiations by and between the Company and brand suppliers, the
price per unit from the supplier is generally established as a base price
delivered to the SLC, aka: Freight on Dock ("FOD"), per unit price listed on an
exhibit to the contract. This price is what the brand supplier expects to be
paid by the Company per unit sold to the SLCs for all sales under the agreement.
This price is then marked up at a variable rate depending on the product
category, overall landed cost, the taxable rate charged in the individual
territory, and the merchantability of the brands, which is sufficient to cover
the estimated expenses and profit requirement of the Company for implementing
the sale of the goods to its SLCs. All of these factors are considered when
establishing the price of a particular product within a specific territory.
After the FOD price has been established with the brand suppliers, there are
factors that may cause pricing and margin variations. Brand suppliers may lower
their FOD price for various circumstances, which may or may not affect the
margin that the Company is able to achieve per unit. Often times, if sales are
weak or they have softened from the previous year, the brand supplier may lower
their FOD price to help jump-start sales. These types of price decreases are
generally passed on to the SLC, and they will have the effect of temporarily
lowering the Company's margin.
Other times, the brand suppliers lower their price after field research or
pricing trends point towards a downturn in the shelf prices of that particular
brand category. In addition, there are some seasonal trends that cause price
shifts to occur, or post-offs* in certain instances, wherein there is a
pre-planned price decrease for a given time period. These types of discounts on
the FOD costs also have the effect of lowering the margin that the Company
achieves.
* A post-off is a planned decrease in the wholesale cost of a product
affecting only the depletion of goods for a specific time period in a
specific territory. One example would be for a brand supplier to announce in
September that they will discount their product in December by a specific
dollar or percentage amount per unit in specific SLCs so that these SLCs have
time to prepare for implementing the sale price within their territory. This
discount is generally passed on directly to the SLC from LGW and the SLC
generally passes on the discount to the consumer. At the end of a post-off
period, all merchandise would return to the previous FOD cost.
In some instances, brand suppliers may choose to lower their FOD price as a
reward to the Company for achieving certain sales goals in a specific market.
This type of change raises the margin that the Company is able to achieve.
The contract allows for the brand supplier to raise the FOD price of the goods;
however, such a change requires notification and implementation time, and in
some states the laws or rules related to such a change makes the price increase
an annual event at best. Generally, brand suppliers will raise their FOD price
by a modest amount at the completion of each contract term renewal, to adjust
for inflation and higher cost of transportation or cost of goods.
F-6
LIQUOR GROUP WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2009
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Consistent with EITF 99-19, Reporting Revenue Gross as a Principal versus Net as
an Agent, the Company has recorded revenue on the gross amounts billed to the
distributor (or customers of the Company, the majority being Control States).
The Company assumes the risks of loss for collection, delivery, or returns when
the title effectively passes to the distributor and the revenue is recorded.
Accounts payable reflect the cost of product for which payment has not been
remitted to the manufacturer (net of returns). These remittances to the
manufacturer generally occur within 7-14 days after the distributor pays the
Company for product sales.
The Company does not take possession of any products (and thereby does not
maintain inventories) as they are transferred from manufacturers to the
distributor directly. The Company's SLC operations utilize a series of master
warehouses strategically located throughout the U.S. and Control State
warehouses to store and ship products pending sales to customers. In some
instances, product maintained in the master warehouses may be returned by
customers of the Company. The Company will generally grant credit memos provided
the manufacturer will accept the returned product. Returns of product have been
reported in the periods that the initial sale occurred, if significant.
Cost of sales in the Statements of Operations includes the wholesale cost of
products shipped to the distributors, commissions, freight and delivery costs,
and other direct costs. Operating expenses in the Statements of Operations
include all general and administrative costs not allocated to cost of sales.
Cash and Cash Equivalents - For purposes of the statement of cash flows, the
Company considers cash and highly liquid securities (consisting of a
non-interest-bearing checking account) with an original maturity or redemption
option of three months or less to be cash and equivalents. During fiscal years
2009 and 2008, the Company maintained cash and cash equivalents with a bank.
Bank deposits are insured by the FDIC up to the maximum permitted by law or
regulation. The Company may, from time to time, maintain balances in excess of
these insured limits.
Concentration of Credit Risk - Financial instruments that potentially subject
the Company to credit risk consist principally of trade receivables. Trade
receivables terms are generally 30 days, but the Company does not anticipate
payment to be received from its customers until the customers ship the product
to a retailer or other customers of the distributor. The Company performs
services and extends credit based on an evaluation of the customers' financial
condition without requiring collateral. Exposure to losses on receivables is
expected to vary by customer due to the financial condition of each customer.
The Company monitors exposure to credit losses and maintains allowances for
anticipated losses considered necessary under the circumstances.
Income Taxes - The Company accounts for income taxes under the liability method
according to Statement of Financial Accounting Standards No. 109. Deferred tax
assets and liabilities are recognized for future tax consequences attributable
to differences between the financial statements' carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Prior to the merger with NAFB, no deferred income tax
assets or liabilities existed.
Rent - The Company leases facilities and equipment using short term lease
agreements with an affiliate. The Company is responsible for maintenance, taxes,
and other operating costs. During the three and nine months ended May 31, 2009
and 2008, rent expense totaled $3,000 and $3,500, respectively, and $11,391 and
$9,500, respectively.
Under the terms of the lease, which expires August 31, 2009, the Company is
obligated for lease payments in 2009 of $12,000. The Company may renew the lease
for one additional year at $24,000 annual rent payments.
Fair Value of Financial Instruments - The carrying values of accounts
receivable, accounts payable, other liabilities, and notes payable approximate
their fair values due to the short maturity of these instruments.
Net Income Per Share - During the three months ended May 31, 2009 and 2008, the
Company had average common shares outstanding totaling 11,282,863 and 9,512,851,
F-7
LIQUOR GROUP WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2009
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
respectively, and under the treasury method, fully diluted common shares
outstanding of 54,188,563 and 52,418,551 respectively. During the nine months
ended May 31, 2009 and 2008, the Company had average common shares outstanding
totaling 10,109,339 and 9,509,188, respectively, and under the treasury method,
fully diluted common shares outstanding of 53,015,039 and 52,414,888
respectively. For purposes of calculating fully diluted common shares
outstanding, we assumed that all of the preferred stock would have been
converted as of August 31, 2007, under the treasury method.
Comprehensive Income - The items affecting comprehensive income are not material
to the financial statements and, accordingly, are not presented herein.
Commissions to Affiliate - For the three and nine months ended May 31, 2009 and
2008, commissions paid to an affiliate, Liquor Group Michigan, totaled $3,250
and $4,100, respectively, and $5,463 and $20,616, respectively.
Reclassifications - Management periodically revises its classification of
certain items within the financial statements in order to provide a more
meaningful presentation of the Company's financial position, results of
operations, and cash flows. In those cases where the revisions in presentation
have been adopted in the current period financial statements, the corresponding
prior period(s) balances have also been reclassified to enhance comparability
between periods.
Recent Accounting Pronouncements - In December 2007, the FASB issued SFAS No.
141(R), "Business Combinations," ("SFAS 141(R)") which replaces SFAS 141. SFAS
141(R) establishes principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any controlling interest;
recognizes and measures goodwill acquired in the business combination or a gain
from a bargain purchase; and determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. FAS 141(R) is effective for acquisitions by the
Company taking place on or after September 1, 2009. Early adoption is
prohibited. Accordingly, the Company is required to record and disclose business
combinations following existing accounting guidance until September 1, 2009. The
Company will assess the impact of SFAS 141(R) if and when a future acquisition
occurs.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Before this statement, limited guidance existed for reporting
noncontrolling interests (minority interest). As a result, diversity in practice
exists. In some cases minority interest is reported as a liability and in others
it is reported in the mezzanine section between liabilities and equity.
Specifically, SFAS 160 requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financial statements and
separate from the parent's equity. The amount of net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement. SFAS 160 clarifies that changes in a parent's ownership
interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial interest. In
addition, this statement requires that a parent recognize gain or loss in net
income when a subsidiary is deconsolidated. Such gain or loss will be measured
using the fair value of the noncontrolling equity investment on the
deconsolidation date. SFAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling interests. SFAS 160
is effective for the Company on September 1, 2009. Earlier adoption is
prohibited. The Company does not believe the adoption of SFAS 160 will have a
material impact on its financial position, results of operations, and cash
flows.
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109." Interpretation 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. Benefits from tax positions should be recognized in the financial
statements only when it is more likely than not that the tax position will be
sustained upon examination by the appropriate taxing authority that would have
full knowledge of all relevant information. A tax position that meets the
more-likely-than-not recognition threshold is measured at the largest amount of
F-8
LIQUOR GROUP WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2009
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in the first
subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. Interpretation 48
also provides guidance on the accounting for and disclosure of unrecognized tax
benefits, interest, and penalties. The adoption of Interpretation 48 did not
significantly impact the Company's financial statements.
FSP No. 48-1 "Definition of Settlement in FASB Interpretation No. 48." FSP 48-1
provides guidance on how to determine whether a tax position is effectively
settled for the purpose of recognizing previously unrecognized tax benefits. FSP
48-1 was effective retroactively to January 1, 2007, and did not significantly
impact the Company's financial statements.
In May 2009, the FASB issued SFAS No. 166, Subsequent Events ("SFAS 166"). The
objective of this statement is to establish general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In particular,
this statement sets forth: (a) the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, (b) the circumstances under which an entity should recognize events
or transactions occurring after the balance sheet date in its financial
statements, and (c) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. SFAS 166 is effective
for interim or annual financial periods ending after June 15, 2009. The adoption
of this statement is not expected to have a material impact on the Company's
financial statements.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations, or cash flows.
NOTE 2 - MERGER
On August 31, 2007, NAFB acquired the Company in consideration for the issuance
of the shares of NAFB's common and Series A preferred stock. Each Series A
preferred share may, at the option of the Holder, be converted into 45 shares of
the Company's common stock. Each Series A preferred share is entitled to 45
votes on any matter submitted to the shareholders of the Company. Each Series A
preferred share is entitled to an annual dividend of $1.00 per share, if such a
dividend is authorized by the Company's directors. The Company's directors are
not required to declare any dividends, and dividends not declared will not
accumulate.
The Series A preferred shares may not be converted until September 1, 2008.
Vigor Holding Corporation and C.J. Eiras, the largest holders of the Series A
preferred shares, have agreed that between September 1, 2008 and August 31,
2012, they will convert not more than 10,000 preferred shares (or 20,000 shares
in total) during each year. The Company will not register any shares of
preferred stock, and it is not expected that a public market will ever develop
for the Series A preferred shares. Upon conversion of the Series A preferred
shares into common stock of the Company, those shares of common stock will be
registered and subject to certain sale limitations under Rule 144 of the SEC.
On December 20, 2007, the Company changed its name to Liquor Group Wholesale,
Inc.
F-9
LIQUOR GROUP WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2009
NOTE 2 - MERGER (Continued)
The shares of common stock outstanding after the acquisition of Liquor Group
Wholesale, and as of May 31, 2009, and August 31, 2008, as well as the shares
that may be issued upon the conversion of the Series A preferred stock and the
exercise of outstanding warrants follow:
Shares outstanding prior to acquisition of Liquor Group Wholesale 8,717,562
Shares of common stock issued to the shareholders of Liquor Group Wholesale 2,000,000
Shares issued to Class 4 creditors in settlement of their claims 124,985
Shares returned to treasury and cancelled (2,000,000)
Shares issued to Arnold Rosen for his services in structuring
the acquisition of Liquor Group Wholesale 500,000
Shares issued to Arnold Rosen in payment of amounts advanced to or
on behalf of the Company 33,972
Shares issued to unrelated third parties in payment of amounts
owed by the Company prior to the acquisition of Liquor Group Wholesale 63,038
Shares sold to private investors at a price of $2.00 per share 65,000
-------------
Total outstanding shares at August 31, 2007 9,504,557
Shares that may be issued in the future:
Shares issuable upon exercise of outstanding warrants 1,046,965(1)
Potential number of shares issuable upon conversion of Series A
preferred shares 42,905,700(2)
-------------
Total potential outstanding shares at August 31, 2007 53,457,222
-------------
Shares issued for warrants exercised in 2008 8,294
Warrants exercised in 2008 (8,294)
Warrants expired in 2008 (1,038,671)
-------------
Total potential outstanding shares at August 31, 2008 52,418,551
Shares issued in 2009 (see Note 7) 2,280,882
-------------
Total potential shares at May 31, 2009 54,699,433
=============
(1) In 2001, NAFB (now LGW) issued warrants to its shareholders. Each warrant
entitles the holder to purchase one share of the Company's common stock at
a price of $1.75 per share. The warrants expired on January 1, 2008, with
8,294 warrants exercised.
(2) Any shares of common stock issuable upon the conversion of the Series A
preferred shares will be restricted securities and may, after August 31,
2008, be sold to a market-maker or in brokerage transactions, provided that
the amount sold does not, during any three-month period, exceed 1% of the
Company's outstanding common stock.
The following table outlines, for the periods presented, the maximum increase in
the Company's outstanding common shares upon the allowable conversion of the
Series A preferred shares and the shares of the Company's common stock available
for resale upon the conversion of the preferred shares. The numbers in the table
assume there is no change in the control of the Company prior to September 30,
2012.
2008 -0-
2009 2,225,000
2010 900,000
2011 900,000
2012 900,000
------------
4,925,000
Shares issuable upon conversion of all remaining
Series A Preferred shares 37,980,700*
----------
Total 42,905,700
==========
* This total is not the number of common shares that can be sold, but only
the total number of shares allowed to be converted. There is a restriction
that the amount of common shares allowed to be sold during any three-month
period, cannot exceed 1% of the Company's outstanding common stock.
F-10
LIQUOR GROUP WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2009
NOTE 3 - INCOME TAXES
The provision for income taxes on income is summarized as follows:
For the Three Months Ended For the Nine Months Ended
May 31, May 31, May 31, May 31,
2009 2008 2009 2008
---------------------------- --------------------------
Current:
Federal $ (15,759) $ 6,275 $ 51,113 $ 11,403
State (2,698) 1,074 8,749 1,953
----------- ------------ ------------ ------------
(18,457) 7,349 59,862 13,356
----------- ------------ ------------ ------------
Deferred:
Federal 15,759 (6,275) (51,113) (11,403)
State 2,698 (1,074) (8,749) (1,953)
----------- ------------ ------------ ------------
18,457 (7,349) (59,862) (13,356)
----------- ------------ ------------ ------------
Total income tax provision $ - $ - $ - $ -
=========== ============ ============ ============
The major elements contributing to the difference between the income tax
provision and the amount computed by applying the federal statutory tax rate of
34% to income before income taxes are as follows:
For the Three Months Ended For the Nine Months Ended
May 31, May 31, May 31, May 31,
2009 2008 2009 2008
---------------------------- --------------------------
Tax provision (benefit) at
U. S. Statutory rates $ (16,677) $ 6,640 $ 54,087 $ 12,067
State income tax (1,780) 709 5,775 1,289
Utilization of net operating loss 18,457 (7,349) (59,862) (13,356)
----------- ------------ ------------ ------------
Income tax provision $ - $ - $ - $ -
=========== ============ ============ ============
As a result of the merger with NAFB, the Company has recorded deferred tax
assets of $9.5 million, principally comprised of net operating losses. The
deferred tax assets were offset by a valuation allowance in the same amount.
Deferred tax assets, net of a valuation allowance, are recorded when management
believes it is more likely than not that tax benefits will be realized. A
summary follows:
Deferred
Tax Asset
(Net of
Deferred Valuation Valuation
Tax Asset Allowance Allowance)
--------- --------- ---------
Balance at August 31, 2008 $9,511,486 $(9,511,486) $ -
Income offset by net operating
loss carryforward for the nine months
ended May 31, 2009 (59,862) 59,862 -
------------- -------------- -----------------
$9,451,624 $(9,451,624) $ -
============= ============== =================
The Company has net operating loss carryforwards at May 31, 2009, totaling
approximately $25.3 million that begin expiring in 2014. The Company believes
that the current tax benefit from the use of the net operating loss
carryforwards would withstand an Internal Revenue Service challenge.
F-11
LIQUOR GROUP WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2009
NOTE 4 - NOTES PAYABLE AND OTHER LIABILITIES
As a result of the merger with NAFB, the Company recorded demand notes payable
to certain formerly related parties who took legal action against the Company to
collect after the merger was completed ("Plaintiffs"). The total amount
outstanding was encapsulated in a summary judgment of approximately $163,000 in
the Circuit Court of Broward County, Florida, representing amounts Plaintiffs
contended they loaned the Company prior to the merger, including accrued
interest and costs.
The Company successfully negotiated a settlement of this issue with the
following results:
o $80,000 to be paid over 18 months at $500 per month beginning March 1,
2009, interest free.
o Any balance due after 18 months shall accrue interest at regular
commercial rates until paid in full.
o Roughly 10% of any capital or debt raise made by the Company shall be
used to pay down the balance due.
o Payment of Plaintiffs attorneys costs fees of approximately $4,000.
o Return of common shares as restricted 144 stock surrendered by the
Plaintiffs as part of the initial restructuring of NAFB.
o Other related parties were required to provide shares to the
Plaintiffs as a contingency, which was not related directly to the
Plaintiffs claims.
Full details of the settlement are recorded with the Circuit Court of Broward
County, Florida. The Company and its Board of Directors and executive officers
believe that this settlement was the best solution that could be negotiated
under the circumstances.
The Company continues to consider this obligation as short-term due to the
acceleration clause.
As a result of the merger with NAFB, the Company assumed a liability for unpaid
withheld income and employment taxes for former NAFB employees. In 2003, NAFB
entered into an installment agreement to pay 36 equal payments of $5,710 to
satisfy its obligation. Payments were discontinued in late-2004, and on June 8,
2006, the Internal Revenue Service filed a Notice of Federal Tax Lien in the
amount of $128,762. At May 31, 2009, the Company has estimated the liability at
$172,344, which includes estimated interest, and has reported this amount in
Other Liabilities in the Balance Sheet. However, the Company has been
negotiating a reduction in the remaining amount due, and we believe the
employees who owed these income and a portion of the unemployment taxes had
satisfied the bulk of the obligations prior to the merger.
NOTE 5 - STOCKHOLDERS' EQUITY
Preferred Stock - The Company is authorized to issue up to 20,000,000 shares of
preferred stock. The Company's Articles of Incorporation provide that the Board
of Directors has the authority to divide the preferred stock into series and,
within the limitations provided by the Colorado Business Corporation Act, to fix
by resolution the voting power, designations, preferences, and relative
participation, special rights, and the qualifications, limitations or
restrictions of the shares of any series so established. As the Board of
Directors has authority to establish the terms of, and to issue, the preferred
stock without shareholder approval, the preferred stock could be issued to
defend against any attempted takeover of the Company. Effective August 31, 2007,
953,460 preferred shares were issued pursuant to the merger with NAFB.
Common Stock - The Company is authorized to issue 100,000,000 shares of common
stock. Holders of common stock are each entitled to cast one vote for each share
held of record on all matters presented to shareholders.
F-12
LIQUOR GROUP WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2009
NOTE 5 - STOCKHOLDERS' EQUITY (Continued)
Cumulative voting is not allowed; hence, the holders of a majority of the
outstanding common stock can elect all directors.
Holders of common stock are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefore and,
in the event of liquidation, to share pro rata in any distribution of the
Company's assets after payment of liabilities. The Board is not obligated to
declare a dividend. It is not anticipated that dividends will be paid in the
foreseeable future.
Holders of common stock do not have preemptive rights to subscribe to additional
shares if issued by the Company. There is no conversion, redemption, sinking
fund, or similar provisions regarding the common stock. All outstanding shares
of common stock are fully paid and non-assessable.
Effective August 31, 2007, 721,995 common shares were issued pursuant to the
merger. Effective August 31, 2007, an additional 65,000 common shares were
issued at an offering price of $2.00 per share. The proceeds of $130,000 from
this private placement were designated for working capital needs.
In the early 2001, NAFB (now the Company) issued 1,046,965 warrants to its
shareholders. Each warrant entitled the holder to purchase one share of the
Company's common stock at a price of $1.75 per share. Warrants totaling 8,294
common shares were exercised effective December 31, 2007, and the remaining
unexercised warrants totaling 1,038,671 expired January 1, 2008.
See Note 7 for stock transactions during the quarter ended May 31, 2009.
NOTE 6 - RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
Individual accounts receivable balances at May 31, 2009, and August 31, 2008, in
excess of 10% of total accounts receivable to affiliated and non-affiliated
customers were as follows:
May 31, 2009 August 31, 2008
-------------------------------- -----------------------------
% of Accounts % of Accounts
Amount Receivable Amount Receivable
Affiliated Customers
Liquor Group Florida $1,884,685 81% $1,624,011 81%
Non-affiliated Customers
ABC Michigan $ 278,261 12% $ 206,641 10%
Accounts receivables from other affiliated customers were immaterial at May 31,
2009, and August 31, 2008.
Approximately 45% and 41%, respectively, of the accounts payable at May 31,
2009, and August 31, 2008, were owed to affiliated companies with Happy Vodka
Corporation representing approximately 42% and 37%, respectively, of total
accounts payable during both periods.
NOTE 7 - STOCK TRANSACTIONS
During the quarter ended May 31, 2009, the Board of Directors approved the
transfer of 1,000,000 shares of the Company's common stock to the LGW Employee
Trust, which was valued at $0.07 to $0.20 per share as determined by the opening
price of the Company's shares as traded on the NASDAQ OTC Stock Market.
Compensation expense of $135,000 was recorded for the quarter ended May 31,
2009.
F-13
LIQUOR GROUP WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2009
NOTE 7 - STOCK TRANSACTIONS (Continued)
In addition, the Board of Directors approved the payment of 375,000 shares of
the Company's common stock for professional services rendered for consultation
related to the merger litigation and investor relations. These shares were
valued at $0.04 to $0.20 per share as determined by the opening price of the
Company's shares as traded on the NASDAQ OTC Stock Market.
As settlement for litigation and related matters associated with the merger (see
Note 4), the Company recorded issuance of common shares totaling 905,882.
A summary of the activity follows:
Shares Issued For: Date Value per Share Total
----------------- ---- --------------- -----
Compensation expense:
500,000 3/4/2009 $0.07 $ 35,000
500,000 5/13/2009 $0.20 100,000
----------
135,000
Professional services: ----------
275,000 3/5/2009 $0.04 11,000
100,000 5/13/2009 $0.20 20,000
-----------
31,000
Litigation settlement and other -----------
related to merger:
905,882 3/1/2009 $0.05 45,294
-----------
Total noncash stock transactions $ 211,294
===========
The Company's earnings per common share before recognition of the noncash stock
transactions were as follows:
For the Three For the Nine
Months Ended Months Ended
Earnings Per Common Share May 31, 2009 May 31, 2009
------------------------- ------------ ------------
Basic $0.012 $0.034
Fully diluted $0.002 $0.006
On June 12, 2009, the Board of Directors approved an additional 750,000 shares
of common stock to be transferred to the LGW Employee Trust, which will be
reported during the quarter ended August 31, 2009. The LGW Employee Trust paid
$75,000 for the transferred shares. Compensation expense of $90,000 will be
recorded in the fourth quarter ended August 31, 2009.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal proceedings of a nature
considered normal to its business, which include claims that may arise from
vendor contract disputes from time to time. The Company believes that the
results of these claims will not have a material adverse effect on the Company's
financial condition.
The Company has agreements with related parties to purchase minimum quantities
of product from Happy Vodka and Urban Brands. The commitments require annual
purchases totaling $118,750 and $29,400, respectively. All outstanding related
party purchase commitments may be terminated by either party upon 90-days
notice. No other material purchase commitments existed at May 31, 2009.
F-14
LIQUOR GROUP WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2009
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
During the past quarter, as is a normal part of business operations, certain
vendors failed to honor their agreements with the Company by not accepting
exchanges, returns, or meeting required marketing and other program commitments.
As permitted by the agreements with these vendors, and after a six-month notice,
the Company liquidated the vendors' inventory to cover the vendor obligations
under the agreements. The liquidation of the vendors' inventory resulted in
income of $96,765 and $92,152 in the second and third quarter of fiscal year
2009, respectively, for a total of $188,917 for the nine months ended May 31,
2009. While the suppliers may dispute the Company's action, the Company believes
any resolution of such disputes will not have a material effect on the Company's
financial condition.
The Company is dependent upon payment from related parties of trade receivables
totaling $1,905,406. Also, the Company may accept returns of product from its
customers, which may not be fully offset by a reduction in trade payables or
supplier buy backs. If nonpayment of related party trade receivables, defaults
on supplier contracts, or early termination of significant contracts including
those with related parties were to occur, these events would likely have a
material effect on the Company's financial condition.
The Company's liability insurance was not renewed for the fiscal year ending
August 31, 2009, due to excessive premiums. Accordingly, the Company will
self-insure for any claims arising subsequent to August 31, 2008.
F-15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our unaudited
financial statements and notes thereto included herein. In connection with, and
because we desire to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not
in future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward looking
statements made by, or on our behalf. We disclaim any obligation to update
forward-looking statements.
RESULTS OF OPERATIONS
Liquor Group Wholesale was formed to take over the supplier-to-wholesale
component of alcohol distribution operations for Liquor Group Holdings, LLC, and
receives all net profits generated from these transactions pursuant to an
agreement effective September 1, 2007. Liquor Group Holdings was organized in
Florida in 2002 and distributes alcohol products on behalf of manufacturers in
31 U.S. States. Liquor Group Wholesale synergizes its operations with the
privately owned Liquor Group Distribution companies in license states and Liquor
Group Brokerage Companies in the 18 Control States; each of whom market and
promote the products represented to them by Liquor Group Wholesale; and in the
case of license states, each of whom also sell, distribute and deliver these
alcohol beverage products to state level vendors such as bars, restaurants,
liquor stores and other licensed entities.
Two important factors which influence our net income are our sales volume and
the prices charged to us by our suppliers.
Our sales volume for any given period is influenced by brand recognition among
consumers of the products we sell, the prices charged by our competitors for
products in the same categories as ours, and the amount spent by our suppliers
on promotion (such as advertising and in-store tastings).
The price per product unit from our suppliers is generally established by
contract as a base price delivered to the customer. We mark up this price to
cover our expenses and provide a profit. Suppliers typically will raise their
prices by a modest amount at the end of each contract term to adjust for
inflation and higher costs of transportation. However, suppliers often lower
their prices:
o to help jump-start sales if sales are weak or have softened from the
previous year.
o if field research or pricing trends point towards a downturn in the
shelf prices of a particular brand category.
o as a result of seasonal trends (i.e., holidays) or pre-planned price
decreases (i.e., sporting events) for a given time period.
o as a reward if we achieve sales goals in a specific market.
Generally, and unless the price decrease is to reward us for meeting sales
goals, we pass any price reduction on to our customers.
Inflation has not had a material impact on our operations since for the most
part we are able to pass on to our customers any price increases from our
suppliers.
1
Financial Information
For financial statement purposes, our acquisition of the wholesale operations of
Liquor Group Holdings was treated as a reverse acquisition and as though Liquor
Group Wholesale, the wholesale division of Liquor Group Holdings, had acquired
us. Accordingly, as of August 31, 2007, and for all prior periods, the
historical financial statements of Liquor Group Holdings (wholesale operations
only) are considered our historical financial statements.
During the nine months ended May 31, 2009, the only material changes in our
Balance Sheet components were as follows:
Increase (I)
Component Decrease (D) Amount Percentage Explanation
- --------- ----------- ------ ---------- -----------
Accounts Receivable I $340,956 17.1% We typically expect payment of accounts receivables from our
customers when the customer ships the product from the bailment
warehouse to a retailer or other customers of the distributor. Due
to the current economic environment, we have experienced delays in
customer payments including payments from the Control States. We
expect full payment; however, as these states deal with their
budget constraints, our payments on accounts receivable have slowed.
Accounts Payable D $45,950 3.6% When we make a sale, we record a receivable for the sale price and
a payable for the cost of the product. We normally pay our
suppliers within 7-14 days of the date we receive payment from a
customer. Accordingly, our accounts payable will normally increase
or decrease in line with our receivables. However, during the
period vendor contract terminations resulted in decreases to
accounts payable of $188,917, which the Company included in other
income.
RESULTS OF OPERATIONS
For the Three Months Ended May 31, 2009 Compared to the Three Months Ended May
31, 2008
Material changes in items in our Statements of Operations for the three months
ended May 31, 2009, as compared to the same period in the prior year, are
discussed below:
Increase (I)
Component Decrease (D) Amount Percentage Explanation
- --------- ----------- ------ ---------- -----------
Sales D $58,642 37.4% Our sales force continues to outpace our suppliers creating more
demand than some of our suppliers are able to fulfill. All but one
of our major suppliers were able to fulfill their older outstanding
back orders over the past quarter; however, one of our largest and
most geographically diversified unaffiliated suppliers, Drinks
Americas, was unable to fulfill the confirmed orders that we
generated during the last several quarters, leaving more than
$830,000 of orders unfilled as of June 30, 2009.
2
Increase (I)
Component Decrease (D) Amount Percentage Explanation
- --------- ----------- ------ ---------- -----------
Cost of sales D $77,932 66.3% Decreased sales and increased vendor liquidations equated directly
to decreased cost of sales for this quarter.
Gross profit I $19,290 * Increased vendor liquidations equated directly to decreased cost of
sales and higher gross profit for this quarter.
Other income I $98,191 * Includes the income recorded from vendor contract terminations and
liquidation of vendor inventories. The Company also began
assessing interest on outstanding monthly accounts receivable
balances in this quarter.
Operating expenses:
Compensation I $135,000 100% Common stock issued as compensation. See Note 7 of Notes to
Financial Statements.
Professional,
consulting, and
administrative
costs I $47,057 * We experienced increases in professional, consulting, and
administrative costs related principally to our operating as a
publicly-traded Company. See Note 7 of Notes to Financial
Statements. Additionally, we experienced a one time charge for
legal costs associated with the settlement of litigation related to
the merger, which is described in more detail at Note 4 of Notes to
the Financial Statements and Item 1. Legal Proceedings. shown in
Part II. Other Information.
Insurance D $4,110 100.0% In 2008, we decided to self-insure our risks.
Rent D $500 14.3% More space was required short-term to accommodate our operations in
the prior period.
Bank charges D $1,181 49.0% Bank charges decreased due to improved cash and increased profits.
Other I $9,326 * The establishment and maintenance of our website and increased
travel and entertainment expenses and telephone expenses.
* Not meaningful.
3
For the Nine Months Ended May 31, 2009 Compared to the Nine Months Ended May 31, 2008
Material changes in items in our Statements of Operations for the nine months
ended May 31, 2009, as compared to the same period in the prior year, are
discussed below:
Increase (I)
Component Decrease (D) Amount Percentage Explanation
- --------- ----------- ------ ---------- -----------
Cost of sales D $130,742 34.4% Lower cost of sales is attributable to one time charge off of
vendor accounts in default of their contractual obligations.
Gross profit I $122,195 111.5% Decreased sales and increased vendor liquidations equated directly
to decreased cost of sales and higher gross profit for the nine
months ended May 31, 2009.
Other income I $194,956 * Includes the income recorded from vendor contract terminations and
liquidation of vendor inventories. The Company also began assessing
interest on outstanding monthly accounts receivable balances in the
quarter ended May 31, 2009.
Operating expenses:
Compensation I $135,000 100% Common stock issued as compensation. See Note 7 of Notes to
Financial Statements.
Professional,
consulting, and
administrative
costs I $63,083 304.7% We experienced increases in professional, consulting, and
administrative costs related principally to our operating as a
publicly-traded Company. See Note 7 of Notes to Financial
Statements. Additionally, we experienced a one time charge for
legal costs associated with the settlement of litigation related to
the merger, which is described in more detail at Note 4 of Notes to
the Financial Statements and Item 1. Legal Proceedings. shown in
Part II. Other Information.
Insurance D $12,330 100.0% In 2008, we decided to self-insure our risks.
Rent I $1,891 19.9% More space was required short-term to accommodate our operations.
Licenses and fees D $8,150 85.8% Licensing with government alcohol and liquor authorities began on
September 1, 2007. Licensing fees were paid and expensed during
the three months ended November 30, 2007. We expect these licenses
will be renewed annually at the beginning of each calendar year
(January 1st). Since the licensing fees are nonrefundable, we did
not allocate the licensing costs over the entire year and expensed
them when paid.
4
Increase (I)
Component Decrease (D) Amount Percentage Explanation
- --------- ----------- ------ ---------- -----------
Bank charges D $3,743 59.8% Bank charges decreased due to improved cash and increased profits.
Other I $16,761 284.5% Increased travel and entertainment, trade show and advertising
costs, and accrual of additional settlement cost for merger lawsuit.
LIQUIDITY
Our sources and (uses) of cash during the periods presented below were:
For the Three Months Ended For the Nine Months Ended
------------------------------- ------------------------------
May 31, 2009 May 31, 2008 May 31, 2009 May 31, 2008
------------ ------------ ------------ ------------
Net cash provided (used) by
operating activities $ (523) $ (466) $ 429 $ (107,012)
Net cash provided (used) by
financing activities $ - $ - $ - $ (21,820)
As our sales increase, we believe that cash generated from our operations will
enable us to slowly expand our markets and increase sales. As of May 31, 2009,
we had not made any decision as to whether we will attempt to raise additional
capital in light of the current turmoil in the financial markets.
We believe that our cash on hand and collections from accounts receivable will
satisfy our working capital requirements if we decide to expand slowly without
raising additional capital.
We do not have any commitments or arrangements from any persons to provide us
with any additional capital we may need.
Other than the turbulence in the economy that began to intensify in the summer
of 2008 and continued during 2009, we do not know of any challenges, risks,
demands, commitments, events, trends or uncertainties that would materially
affect our future operating results or liquidity and capital resources.
We do not have any off balance sheet arrangements.
See Note 1 to the financial statements included as part of this report for
information concerning our significant accounting policies and recent accounting
pronouncements.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
Disclosures Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is
defined in Rules 13a 15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act, is
recorded, processed, summarized and reported within the time periods required
under the SEC's rules and forms and that the information is gathered and
communicated to our management, including our Chief Executive Officer (Principal
Executive Officer) and Chief Financial Officer (Principal Financial Officer), as
appropriate, to allow for timely decisions regarding required disclosure.
5
As required by SEC Rule 15d-15(b), our Chief Executive Officer carried out an
evaluation under the supervision and with the participation of our management,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period
covered by this report. Based on the foregoing evaluation, our Chief Executive
Officer has concluded that our disclosure controls and procedures are effective
in timely alerting them to material information required to be included in our
periodic SEC filings and to ensure that information required to be disclosed in
our periodic SEC filings is accumulated and communicated to our management,
including our Chief Executive Officer, to allow timely decisions regarding
required disclosure as a result of the deficiency in our internal control over
financial reporting discussed below.
ITEM 4T. CONTROLS AND PROCEDURES
Management's Quarterly Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company in accordance with as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes
those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our
assets;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation
(iii)provide reasonable assurance regarding prevention or timely detection
of unauthorized
Management's assessment of the effectiveness of the Company's internal control
over financial reporting is as of the quarter ended May 31, 2009. We believe
that internal control over financial reporting is effective. We have not
identified any, current material weaknesses considering the nature and extent of
our current operations and any risks or errors in financial reporting under
current operations.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
This quarterly report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
There was no change in our internal control over financial reporting that
occurred during the fiscal quarter ended May 31, 2009, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
6
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 2008, we were served with a summons and complaint filed by Royal
Strategies and Solutions, Inc., Melvin Leiner and Darren Marks. The complaint
was filed on November 15, 2007, in the Circuit Court of Broward County, Florida.
Subsequently, a judgment in favor of the Plaintiffs for approximately $162,000
(plus accrued interest) representing amounts Plaintiffs contended they loaned us
prior to 2007 was rendered. In February 2009, we reached a settlement of this
dispute that provided for:
1. $80,000 to be paid to the Plaintiffs over an 18-month period with
monthly payments of $500 for the first 18 months beginning in March
2009, and the balance of $71,000 due at the end of 18 months.
2. 844,935 shares of our common stock to be returned to Royal Strategies
and Solutions, Inc.
3. 120,300 shares of our common stock to be transferred by an existing
shareholder to Melvin Leiner and Darren Marks.
The Company inherited this obligation through its merger with NAFB, and it has
complied with the continued requirements of the settlement by paying $500 each
month the per the settlement agreement, reducing the principal balance due for
closure of this claim to $78,000 at May 31, 2009. During the quarter ended May
31, 2009, the Company recorded the additional shares issued and outstanding
associated with this settlement and the merger.
The Company recently settled a legal dispute with Anson Imports, LTD, wherein an
inventory obligation recorded on the books of the Company for more than $15,000
was negotiated directly with Anson's legal counsel and settled for $10,000. The
Company realized more than $5,000 of additional gross profit and resolved the
dispute without any cost of legal fees.
On June 30, 2009, the Company filed a breach of contract claim against Drinks
Americas Holdings, LTD / Drinks Americas, Inc. ("DKAM") claiming damages in
excess of $1.95 million. The Company documented the failure of DKAM to pay their
contracted and agreed marketing obligations totaling $7,000 per month for each
month of the contract beginning May 2008 to the time of the filing; as well as
DKAM's failure to fulfill back order obligations to Liquor Group customers in 18
States in excess of $830,000. Under the terms of our contract with DKAM, the
contract entitles the Company to triple damages against DKAM, which now exceed
more than $2.0 million. Further details of the claim can be found in the
Company's filing on Form 8-K dated July 1, 2009.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company made the following unregistered sales of its securities from March
1, 2009 through May 31, 2009.
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION CLASS OF PURCHASER
- ------------------ -------------------- ---------------- ----------------------- -----------------------------
3/1/2009 Common Stock 905,882 Litigation settlemen* Non-affiliate
- ------------------ -------------------- ---------------- ----------------------- -----------------------------
3/4/2009 Common Stock 500,000 $35,000 Compensation Employees' Benefit
under Benefit Plan Plan (2008)
- ------------------ -------------------- ---------------- ----------------------- -----------------------------
3/5/2009 Common Stock 275,000 $11,000 Professional Consultants
Services
- ------------------ -------------------- ---------------- ----------------------- -----------------------------
5/13/2009 Common Stock 300,000 $60,000 Compensation Employees' Benefit
under Benefit Plan Plan (2009)
7
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION CLASS OF PURCHASER
- ------------------ -------------------- ---------------- ----------------------- -----------------------------
5/13/2009 Common Stock 200,000 $40,000 Compensation Officers and Directors
for services
- ------------------ -------------------- ---------------- ----------------------- -----------------------------
5/13/2009 Common Stock 100,000 $20,000 Professional Consultants
Services
- ------------------ -------------------- ---------------- ----------------------- -----------------------------
* Royal Strategies and Solutions, Inc.
Exemption From Registration Claimed
All of the sales by the Company of its unregistered securities were made by the
Company in reliance upon Section 4(2) of the Securities Act of 1933, as amended
(the "1933 Act"). All of the individuals and/or entities listed above that
purchased the unregistered securities were almost all existing shareholders, all
known to the Company and its management, through pre-existing business
relationships, as long standing business associates, and employees. All
purchasers were provided access to all material information, which they
requested, and all information necessary to verify such information and were
afforded access to management of the Company in connection with their purchases.
All purchasers of the unregistered securities acquired such securities for
investment and not with a view toward distribution, acknowledging such intent to
the Company. All certificates or agreements representing such securities that
were issued contained restrictive legends, prohibiting further transfer of the
certificates or agreements representing such securities, without such securities
either being first registered or otherwise exempt from registration in any
further resale or disposition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
ITEM 5. OTHER INFORMATION
NONE.
8
ITEM 6. EXHIBITS
Exhibits. The following is a complete list of exhibits filed as part of this
Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act
Exhibit 32.1 Certification of Principal Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act
Exhibit 32.2 Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act
9
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LIQUOR GROUP WHOLESALE, INC.
(Registrant)
Dated: July 14, 2009 By: /s/ C. J. Eiras
-------------------
(Principal Executive Officer,
President and Chief Executive Officer)
Dated: July 14, 2009 By: /s/ Jason Bandy
-------------------
(Chief Financial Officer/Principal
Accounting Officer/Secretary / Treasurer)
10