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| DKAM.OB > SEC Filings for DKAM.OB > Form 10QSB on 13-Mar-2008 | All Recent SEC Filings |
13-Mar-2008
Quarterly Report
Introduction
The following discussion and analysis summarizes the significant factors affecting (1) our consolidated results of operations for the nine and three months ended January 31, 2008, compared to the nine and three months ended January 31, 2007, and (2) our liquidity and capital resources. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes included in Item 1 of this Report, and the audited consolidated financial statements and notes included in Form 10-KSB, which Report was filed on August 8, 2007.
Nine Months Ended January 31, 2008 and 2007:
Net sales were $3,344,000 for the nine months ended January 31, 2008, compared to net sales of $5,259,000 for the nine months ended January 31, 2007. The decrease is due to the impact of the launch of Trump Super Premium Vodka on prior year sales.
Total Trump Super Premium Vodka sales aggregated $1,798,000 on 21,074 cases sold, which accounted for 53.8% of total dollar sales and 22.1% of total case sales for the nine months ended January 31, 2008. For the nine months ended January 31, 2007, Trump Super Premium Vodka Sales aggregated $4,252,194 on 39,673 cases sold, which accounted for 80.9% of total dollar sales and 48.7% of total case sales. This represents a dollar decrease of 57.2% and a case decrease of 46.9%. The launch and national pipeline fill-in of Trump Super Premium Vodka in October 2006 accounted for the build in sales of the product in the prior year. From the time of launch 38 distributors have ordered Trump with an aggregate of 130 re-orders through the end of our third quarter. Sales of all wine and spirits products aggregated $2,756,000 on 29,334 cases sold for the nine months ended January 31, 2008 compared to $4,970,000 on 45,468 cases for the nine months ended January 31, 2007. Net sales of Old Whiskey River Bourbon aggregated $363,547 on 3,119 cases sold for the nine months ended January 31, 2008, compared to net sales of $ 262,000 on 2,066 cases sold for the nine months ended January 31, 2007. This represents a dollar increase of 51.0% and a case increase of 38.7%. Net sales of our premium imported wines were $ 366,000 on 2,939 cases sold for the nine months ended January 31, 2008 compared to $306,000 on 2,473 cases for the nine months ended January 31, 2007. This represents a dollar increase of 18.6% and a case increase of 18.8%. Net sales of our non-alcoholic product, Newman's Own sparking fruit beverages and sparkling waters increased to $586,000, on 66,138 cases sold, in the nine months ended January 31, 2008 compared to $326,000, on 35,737 cases sold, in the nine months ended January 31, 2007. The Company has substantially improved the Newman's Own beverage products over the last year. We eliminated the high fructose corn syrup and replaced it with pure cane sugar. And, Newman's Own is now kosher certified. The Company has been expanding distribution of Newman's Own across the country. As a result, the case volume is increasing nationally. Further, the December 2007 financing has enabled the Company to invest in additional inventory and provide for additional promotional support for our brands.
Gross margin was $1,288,000 for the nine months ended January 31, 2008 (38.7% of net sales) a decrease of $1,058,000, compared to gross margin of $2,346,000 (44.6% of net sales) for the nine months ended January 31, 2007. This decrease is due to the sales mix and the increase in Newman's Own Products which have significantly lower dollar gross margins than our wine and spirits (19.7 % and 22.2% for the nine months ended January 31, 2008 and 2007, respectively). The decrease in gross-profit percentage of our Newman's Own products is a direct result of increased component costs. This decrease in gross profit percentage of Newman's Own products is expected to be mitigated in the future by the implementation of alternate packaging which will lead to lower product costs in summer of 2008. Gross profit for our wine and spirits brands remained at industry average but decreased to 42.6% for the nine months ended January 31, 2008 from 46.2% for the same period in 2007. The decrease is also largely due to the weakening dollar which has increased Trump Vodka glass component costs; the introduction of Trump 1.75 liters; as well as an increase in the sales of the Company's other portfolio of wine and spirits products (products other than Trump Super Premium Vodka). The decrease in gross-profit percentage for our Trump Super Premium Vodka is expected to be offset by lower product costs as a result of our shift in glass production of this product to China, reduction in sampling requirements and the end of Trump roll-out events.
Selling, general and administrative expenses were $5,816,760 for the nine months ended January 31, 2008 compared to $7,520,000 for the nine months ended January 31, 2007, a decrease of $1,703,000 or 22.6%. During the nine months ended January 31, 2007 the Company issued shares of its common stock to several employees and a director of the Company for their roles in the successful launch of Trump Super Premium Vodka. The aggregate value of the shares issued by the Company for the nine months ended January 31, 2007 was $1,140,000.There were additional one-time expenses recognized by the Company for the nine months ended January 31, 2007 relating to the Trump Super Premium Vodka launch including product development expenses aggregating $174,000. Charges relating to purchase order financing aggregated $45,000 for the nine months ended January 31, 2008 compared to $215,000 for the nine months ended January 31, 2007. Shipping and warehousing expenses have increased to $327,000 for the nine months ended January 31, 2008 compared to $156,000 for the nine months ended January 31, 2007. The increase is due to the warehousing of Trump Super Premium Vodka for a full nine months of national availability in the current year as compared to four months for the same period of the prior year. In addition, for the nine months ended January 31, 2008 we incurred higher freight charges than for the nine months ended January 31, 2007 ($155,000 compared to $55,000). The increase in freight charges is the result of fewer direct container sales of Trump Super Premium Vodka from our Netherlands warehouse. Selling expenses are expected to be reduced in the future as sales promotions for Trump Vodka become more targeted.
Net other expense was $142,000 for the nine months ended January 31, 2008 compared to $2,380,000 for the nine months ended January 31, 2007, a decrease of $2,238,000. The significant decrease is due to the fact that nearly $1.7 million was recognized as a loss on debt extinguishment in the prior year's fiscal period that was not incurred in the current year's fiscal period. There has been a corresponding reduction in interest expense (interest expense was $709,000 for the nine months ending January 31, 2007 versus $144,000 for the nine months ending January 31, 2008) due to the extinguishment of much of our long term debt.
Three Months Ended January 31, 2008 and 2007:
Net sales were $561,000 for the three months ended January 31, 2008, compared to net sales of $2,681,000 for the three months ended January 31, 2007. This decrease of $2,120,000 or 79.0% was due to the revenue recognized in the prior year as a result of our launch of Trump Super Premium Vodka and national pipeline distribution warehouse fill-in in October 2006.
Total Trump Super Premium Vodka sales aggregated $ 246,000 on 2,540 cases sold, which accounted for 41.9% of total dollar sales and 16.5% of total case sales for the three months ended January 31, 2008. For the three months ended January 31, 2007, Trump Super Premium Vodka sales aggregated 2,327,000 on 21,704 cases sold, which accounted for 85.4% % of total dollar sales and 49.5% of total case sales. This represents a dollar decrease of $2,081,000 and a volume decrease of 19,164 cases. From the time of launch thru the end of our quarter ended January 31, 2008 30 distributors have re-ordered Trump an aggregate of 130 times. Sales of all wine and spirits aggregated $501,000 on 5,119 cases sold for the three months ended January 31, 2008 compared to $2,507,236 on 23,522 cases sold for the three months ended January 31, 2007. Net sales of Old Whiskey River Bourbon aggregated $133,000 on 1,317 cases sold for the three months ended January 31, 2008, compared to net sales of $136,000 on 1,156 cases sold for the three months ended January 31, 2007. Net sales of Aquila Tequila aggregated $56,000 on 551 cases sold for the three months ended January 31, 2008. There were no sales of Aquila during the three months ended January 31, 2007. Net sales of our Damiana Liqueur aggregated $40,000 on 311 cases sold for the three months ended January 31, 2008 compared to net sales of $12,000 on 101 cases during the three months ended January 31, 2007. Net sales of our international wines were $27,000 on 400 cases sold for the three months ended January 31, 2008 compared to $60,000 on 561 cases for the three months ended January 31, 2007. Net sales of our non-alcoholic product, Newman's Own sparking fruit beverages and sparkling waters decreased to $84,000 on 10,281 cases sold, in the three months ended January 31, 2008 compared to $191,000, on 20,320 cases sold in the three months ended January 31, 2007. Newman's Own sales for the three months ended January 31, 2007 benefited from the commencement of the expansion into several states during that period.
Gross margin was $217,000 for the three months ended January 31, 2008 (39.6% of net sales) a decrease of $1,013,000 compared to gross margin of $1,230,000 (45.8% of net sales) for the three months ended January 31, 2007. The margin percentage decrease is largely due to the weakening dollar which has increased Trump Vodka component costs, in addition to the introduction of the lower-margin Trump 1.75 liter bottle, as well as the price support for Trump Super Premium Vodka necessary in order to achieve competitive pricing. The component costs are expected to be reduced as a result of our shift in glass production of the bottle from Poland to China. The gross margin percentage decrease is also a function of growth in our lower gross margin wine and spirits products (products other than Trump Super Premium Vodka) and not necessarily indicative of weakening margins within a product class.
Selling, general and administrative expenses were $1,812,000 for the three months ended January 31, 2008 compared to $4,777,000 for the three months ended January 31, 2007, a decrease of $2,965,000 or 62.1%. This decrease is reflective of the higher than usual costs incurred last year, and a demonstrated effort to reduce overall costs this fiscal period. For example, during the three months ended January 31, 2007, the Company had issued shares of its common stock to several employees and a director of the Company for their roles in the successful launch of Trump Super Premium Vodka. The value of these shares recognized by the Company for the three months ended January 31, 2007 was $1,140,000. There were additional one-time expenses recognized by the Company for the three months ended January 31, 2007 relating to the launch of Trump Super Premium Vodka of approximately $1.4 million that quarter as well. Charges relating to our purchase order financing were reduced, totaling $8,000 for the three months ended January 31, 2008 compared to $83,000 for the same period prior year. During the three months ended January 31, 2008, the Company incurred $75,000 in directors' fees as they have been recognized evenly in the current year whereas for the three months ended January 31, 2007, we incurred directors' fees of $300,000 when they were paid for the first time by the Company.
Net other expense was $26,000 in the three months ended January 31, 2008 compared to $2,005,000 for the three months ended January 31, 2007. The significant decrease is due to the reduction in interest expense corresponding to our reduction of long term debt quarter over quarter and the non-recurrence of the $1.7 million loss on debt extinguishment in the same quarter prior year.
Impact of Inflation
Inflation has not had a material effect on our results of operations.
Although our working capital position has been somewhat improved as a result of the December 2007 Private Placement of our preferred stock, we will need to continue to carefully manage our working capital, and our business decisions will continue to be influenced by our working capital requirements.
We have experienced net losses and negative cash flows from operations and investing activities since our inception in 2003. Net losses for the nine months ended January 31, 2008 and 2007 were $4,670,875 and $7,555,703, respectively. Cash used in operating and investing activities for the nine months ended January 31, 2008 and 2007 were $2,631,022 and $5,205,955, respectively. We have to date funded our operations predominantly through bank borrowings, loans from shareholders and investors, and proceeds from the sale of our common stock, preferred stock, and warrants. Net cash provided by financing totaled $2,876,909 for the nine month period ended January 31, 2008 compared to $11,375,647 for the nine month period ended January 31, 2007.
On January 17, 2008 the Company's Chief Executive Officer (CEO) elected to convert $25,000 due him for compensation into shares of Company common stock at a price of $0.50 per share resulting in the Company issuing 50,000 shares to him.
From July 2007 through November 2007, the Company borrowed an aggregate of $514,321 from our CEO for working capital purposes. The borrowings bear interest at 12% per annum. As of January 31, 2008, $210,352 plus interest of $20,772 has been repaid. As of January 31, 2008 the interest accrued on amounts owed to our CEO was $9,367. This amount is included in accrued expenses on the accompanying January 31, 2008 balance sheet. On February 5, 2008 an additional $25,000 was repaid to the CEO.
On December 18, 2007 (the "Closing Date") we sold to three related investors (the "December Investors") an aggregate of 3,000 shares of our Series A Preferred Stock, $.001 par value (the "Preferred Stock"), at a cash purchase price of $1,000 per share, generating gross proceeds of $3,000,000 (the "December Financing"). The Preferred Stock is convertible into our common stock at $.50 per share, which if all of the Preferred Stock is converted, would result in the issuance of 6,000,000 shares of our common stock. The Preferred Stock has no voting or dividend rights. Out of the gross proceeds of this Offering, we paid Midtown Partners & Co., LLC (the "Placement Agent") $180,000 in commissions and $30,000 for non-accountable expenses. We also issued to the Placement Agent, warrants to acquire 600,000 shares of our Common Stock for a purchase price of $.50 per share (the "Placement Agent Warrants"), which warrants are exercisable for a five year period and contain anti-dilution provisions in the case of stock splits and similar matters. The financing that we consummated in January of 2007 (the "January Financing"), provided participating investors (the "January Investors") with rights to exchange the common stock they acquired in the January Financing for securities issued in subsequent financings consummated at a common stock equivalent of $2.00 per share or less. Under this provision, the January Investors have exchanged 4,444,444 shares of our common stock for 8,000 shares of our Preferred Stock, which Preferred Stock is convertible into an aggregate of 16,000,000 shares of our common stock. Also in the January Financing, the January Investors acquired warrants to purchase 3,777,778 shares of our common stock at an exercise price of $3.00 per share (the "January Warrants"). The January Warrants contain full ratchet anti-dilution provisions, as to both the exercise price and the number of shares purchasable under the warrants, which due to the December Financing, would have resulted in the January Warrants representing the right to acquire 22,666,668 shares of our common stock, i.e., an additional 18,888,890 shares (the "Warrant Increment") at a reduced exercise price of $.50 per share. We have issued 5,000,000 shares of our common stock to the January Investors, in consideration of their waiver of the Warrant Increment (the "Waiver Shares"). This waiver will apply to future financings as well. The provisions of the January Warrants which result in the reduction of the exercise price remain in place and, as a result of the December Financing, the exercise price of the January Warrants have been reduced to $.50 per share. Each of our December Investors participated in the January Financing but not all of our January Investors participated in the December Financing.
In October 2006, the Company borrowed $250,000 and issued a convertible promissory note in like amount. This note is payable in October 2008 and is convertible into shares of our common stock at $0.60 per share. The note bears interest at 12% per annum and is payable quarterly commencing in January 2007. At the option of the lender, interest can be paid in shares of Company common stock. During the nine months ended January 31, 2008, the Company issued the note holder an aggregate of 49,307 shares of our common stock to satisfy $29,583 of interest accrued through October 31, 2007, and in February 2008, the Company paid the note holder $7,742 for interest accrued through January 10, 2008. In connection with this borrowing, we issued warrants to purchase 250,000 shares of our common stock for $0.60 per share. These warrants are exercisable for a five-year period from the date of issuance.
In June 2006, we entered into a $10 million, three-year, asset-based revolving credit facility with a financial institution to be used for working capital purposes. Under this line, we may borrow 85% of eligible accounts receivable as defined under the agreement. Interest on the line will accrue at 1.5% above the prime rate. Also, in June 2006, we entered into a secured purchase order financing facility with another financial institution. The amount we are able to borrow under these facilities will depend on our outstanding eligible accounts receivable and inventory, and our outstanding eligible purchase orders, respectively. Both of these facilities are secured by our assets. On January 31 2008, $126,528 was outstanding on our revolving credit facility and nothing has been borrowed on our purchase order facility.
Royalties/Licensing Agreements
In November 2005, the Company entered into an eight-year partnership agreement for sales of Trump Super Premium Vodka. Under the agreement the Company is required to pay royalties on sales of the licensed product. The agreement requires minimal royalty payments through November 2012.
Under our license agreement for Old Whiskey River, we are obligated to pay royalties of between $10 and $33 per case, depending on the size of the bottle.
Under our license agreement for Newman's Own, we are obligated to pay royalties of $.95 per twelve bottle case.
Other Agreements
In fiscal 2003 we entered into a consulting agreement with a company, Marvin Traub & Associates ("MTA"), owned 100% by Marvin Traub, a member of the Board of Directors. Under the agreement, MTA is being compensated at the rate of $100,000 per annum. As of January 31, 2008, we were indebted to MTA in the amount of $131,245.
In December 2002, we entered into a consulting agreement with Mr. Shep Gordon which provides for payment of $120,000 per year to Mr. Gordon, payable through June 2009. As of January 31, 2008, the aggregate amount owed to Mr. Gordon was approximately $190,000. We have an informal understanding with Mr. Shep Gordon pursuant to which he can convert all or a portion of the consulting fees which we owe to him into shares of our common stock at a conversion price negotiated from time to time. In February 2008 the Company issued 380,000 shares of its common stock to Mr. Gordon to satisfy $190,000 of consulting fees owed to Mr. Gordon as of January 31, 2008.
Since we were founded in 2002, the implementation of our business plan has been negatively affected by insufficient working capital. Business judgments have been substantially affected by the availability of working capital. Although our working capital position and our balance has been improved as a result of our December and January, 2007 private placement of our common stock, preferred stock and warrants, we will need to continue to carefully manage our working capital and our business decisions will continue to be influenced by our working capital requirements. Therefore, our short term business strategy will rely heavily on our cost efficient icon brand strategy and the resources available to us from our media and entertainment partners. We will continue to focus on those of our products which we believe will provide the greatest return per dollar of investment with the expectation that as a result of increases in sales and the resulting improvement in our working capital position, we will be able to focus on those products for which market acceptance might require greater investments of time and resources. To that end, our short-term focus will be, for wine and spirits, Trump Super Premium Vodka, Old Whiskey River Bourbon, Damiana, Aquila Tequila, our select label wines and, for the non-alcoholic beverages Newman's Own lightly sparkling fruit juice drinks and waters. In order for us to continue and grow our business, we will need additional financing which may take the form of equity or debt. There can be no assurance we will be able to secure the financing we require, and if we are unable to secure the financing we need, we may be unable to continue our operations. We anticipate that increased sales revenues will help to some extent, but we will need to obtain funds from equity or debt offerings, and/or from a new or expanded credit facility. In the event we are not able to increase our working capital, we will not be able to implement or may be required to delay all or part of our business plan, and our ability to attain profitable operations, generate positive cash flows from operating and investing activities and materially expand the business will be materially adversely affected.
3. Controls and Procedures
We carried out an evaluation of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. This evaluation was done under the supervision of our Chief Executive Officer and Principal Accounting Officer. Based upon the evaluation they concluded that our disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy our obligations under the Exchange Act.
There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.
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