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| DKAM.OB > SEC Filings for DKAM.OB > Form 10-Q on 23-Mar-2009 | All Recent SEC Filings |
23-Mar-2009
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 2009, compared to the nine and three months ended January 31, 2008, 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 4, 2008.
Nine Months Ended January 31, 2009 and 2008:
Net Sales: Net sales were $2,215,000 for the nine months ended January 31, 2009 compared to net sales of $3,344,000 for the nine months ended January 31, 2008, a decrease of 34%. The decrease is predominantly due to inventory shortfalls as a result of insufficient working capital and the resulting delay of certain shipments. Trump Super Premium Vodka sales aggregated $1,040,000 which accounted for 47% of total dollar sales for the nine months ended January 31, 2009. For the nine months ended January 31, 2008, Trump Super Premium Vodka sales aggregated $1,798,000 which accounted for 54% of total dollar sales. This represents a dollar decrease of 42%. In addition to temporary inventory shortfalls for Trump Super Premium Vodka, sales of Trump for the nine months ended January 31, 2009 were also effected by issues relating to our California distributor which have been corrected with a change to a new distributor in that market. The launch of Trump Super Premium Vodka in Texas in July 2007 also contributed to greater sales of Trump Super Premium Vodka for the nine months ended January 31, 2008 compared to the nine months ended January 31, 2009. Trump sales in New Jersey have increased for the nine months ended January 31, 2009 compared to January 31, 2008 due to improved casino sales. Sales of all wine and spirits products aggregated $1,793,000 for the nine months ended January 31, 2009 compared to $2,756,000 for the nine months ended January 31, 2008. Net sales of Old Whiskey River Bourbon totaled $228,000 on 1,824 cases sold for the nine months ended January 31, 2009 compared to net sales of $363,000 on 3,119 cases sold for the nine months ended January 31, 2008. This represents a dollar decrease of 37% and a case decrease of 42%. Net sales of our Aguila Tequila aggregated $65,000 on 783 cases sold for the nine months ended January 31, 2009 compared to $90,000 on 959 cases sold for the nine months ended January 31, 2008. This represents a dollar decrease of 27% and a case increase of 18%. Net sales of our Damiana Liqueur aggregated $116,000 on 878 cases sold for the nine months ended January 31, 2009 compared to net sales of $126,000 on 1,001 cases sold for the nine months ended January 31, 2008. This represents a dollar increase of 8% and a case increase of 12%. Net sales of our premium imported wines totaled $259,000 on 2,448 cases sold for the nine months ended January 31, 2009 compared to net sales of $366,000 on 2,939 cases sold for the nine months ended January 31, 2008. This represents a dollar decrease of 28% and a case decrease of 7%. The percentage dollar decrease compared to case decrease was significantly greater due increased liquidation of certain closed-out wines in the current year. The Company is considering whether it should continue this product line. Net sales of our non alcoholic product, Newman's Own sparkling fruit beverages and sparkling waters decreased to $431,000 on 50,003 cases sold for the nine months ended January 31, 2009 compared to $586,000 on 66,138 cases sold for the nine months ended January 31, 2008. This represents a dollar decrease of 26% and a case decrease of 24 %. Sales of our Newmans Own products were also affected by temporary inventory shortfalls. In January 2009 the Company acquired a 90% interest in Olifant USA, Inc, which has the worldwide rights (excluding Europe) to Olifant Vodka and gin. Olifant Vodka and Gin, as is Trump Super Premium Vodka, produced in Holland is sold at a lower price point than Trump Super Premium Vodka and the Company's management believes that with national distribution already in place sales of these products will be very successful in this economic environment. In January 2009 the Company commenced sales of its Leyrat Cognac recognizing $42,000 in revenue on 220 cases sold.
Gross margin: Exclusive of our allowance for slow moving inventory ($106,000), gross profit was $631,000 (28% of net sales) for the nine months ended January 31, 2009 a decrease of $657,000 compared to gross profit of $1,288,000 (10% of net sales) for the nine months ended January 31, 2008. Gross margin for our wine and spirits business was 31% percent for the nine months ended January 31, 2009 compared to 42 % for the prior year. Gross margin for our non alcoholic business was 19% for the nine months ended January 31, 2009 compared to 20% for the nine months ended January 31, 2008. Although we have increased the selling price of our Newmans' Own products the decrease in margin is the result of the sale of sparkling waters at below cost in order to deplete certain inventory. The gross profit margin of our non alcoholic Newman's Own products is expected to improve with the implementation of alternate packaging which will lead to lower product costs. Gross margin of our wines decreased to 13% for the nine months ended January 31, 2009 from 28% for the nine months ended January 31, 2008. This decrease is the direct result of the aforementioned close-out of certain wines in the current year. Gross margin of Trump Super Premium Vodka, decreased to 33% for the nine months ended January 31, 2009 compared to46 % for the nine months ended January 31, 2008. The gross margin decrease is largely due to a decrease in the percentage of direct sales which leads to increased direct costs such as excise taxes and freight, price competition, and a greater amount of sales to our distributor in "controlled" states for which we generally recognize lower margins. For the nine months ended January 31, 2009 the Company recorded a loss for Cohete Rum as the Company has liquidated the inventory and terminate the brand.
Selling, general and administrative: Selling, general and administrative expenses totaled $4,367,000 for the nine months ended January 31, 2009, compared to $5,817,000 for the nine months ended January 31, 2008, a decrease of r 25%. Total selling and marketing costs aggregated $1,800,000 for the nine months ended January 31, 2009 compared to $2,800,000 for the nine months ended January 31, 2008. The decrease in
selling and marketing expenses is due to the overall decreased marketing spend on Trump Super Premium Vodka to a normalized level as sales promotions for Trump Vodka have become more targeted. General and administrative expenses aggregated $2,567,000 for the nine months ended January 31, 2009 compared to $3,017,000 for the nine months ended January 31, 2008. Professional fees, including legal fees have decreased from the prior year and travel related expenses have also decreased for the nine months ended January 31, 2009 compared to the nine months ended January 31, 2008. For the nine months ended January 2009 we recognized a non-cash charge of $220,000 relating to stock bonuses to certain employees of the Company for services they have provided.
Other Income (expense): Interest expense totaled $123,000 for the nine months ended January 31, 2009 compared to expense of $144,000 for the nine months ended January 31, 2008 In early December 2008 the Company was notified by its lender, Sovereign , that the lender calculated interest on the working capital line incorrectly since the inception of the line in June 2006. At October 31, 2008 the Company accrued $100,000 of interest relating to this error. On December 17, 2008 the Company modified the terms of its credit facility with Sovereign Business Capital. Pursuant to this modification the credit facility will be due April 3, 2009 rather than June 2, 2009 and in order to reduce our fees on the unutilized credit line, in addition to Sovereign's request, we changed the amount we can borrow to $300,000. The amount of the past due interest was reduced to $50,000. For the nine months ended January 31, 2009 other income aggregated $409,000 which is the result of the Company's settlement with RBCI Holdings, Inc. The Company issued 350,000 shares of Company stock full consideration of a note payable to RBCI for $500,000. The value of the shares on the settlement date was $91,000.
Income Taxes: We have incurred substantial net losses from our inception and as a result, have not incurred any income tax liabilities. Our federal net operating loss carry forward is approximately $25,000,000, which we can use to reduce taxable earnings in the future. No income tax benefits were recognized in fiscal 2008 and 2007 as we have provided valuation reserves against the full amount of the future carry forward tax loss benefit. We will evaluate the reserve every reporting period and recognize the benefits when realization is reasonably assured.
Three Months Ended January 31, 2009 and 2008:
Net Sales: Net sales were $565,000 for the three months ended January 31, 2009 compared to net sales of $561,000 for the three months ended January 31, 2008, an increase of 2 %. Trump Super Premium Vodka sales aggregated $243,000 which accounted for 43% of total dollar sales for the three months ended January 31, 2009. For the three months ended January 31, 2008, Trump Super Premium Vodka sales aggregated $ 246,000 which accounted for 44% of total dollar sales. Sales of all wine and spirits products aggregated $434,000 for the three months ended January 31, 2009 compared to $501,000 for the three months ended January 31, 2008. Net sales of Old Whiskey River Bourbon totaled $86,000 on 714 cases sold for the three months ended January 31, 2009 compared to net sales of $133,000 on 1,317 cases sold for the three months ended January 31, 2008. This represents a dollar decrease of 35% and a case decrease of 46 %. Net sales of our Aquila Tequila aggregated $ 21,000 on 250 cases sold for the three months ended January 31, 2009 compared to $56,000 on 551 cases sold for the three months ended January 31, 2008. This represents a dollar increase of 63% and a case increase of 55%. Net sales of our Damiana Liqueur aggregated $7,000 on 53 cases sold for the three months ended January 31, 2009 compared to net sales of $40,000 on 311 cases sold for the three months ended January 31, 2008. This represents a dollar decrease of 82% and a case decrease of 83%. Our Old Whiskey, Aguila and Damaina brands were affected by inventory shortfalls during the three months ended January 31, 2009. Net sales of our premium imported wines totaled $3,000 on 55 cases sold for the three months ended January 31, 2009 compared to net sales of $27,000 on 350 cases sold for the three months ended January 31, 2008. This represents a dollar decrease of 91% and a case decrease of 86%. Net sales of our non alcoholic product, Newman's Own sparkling fruit beverages and sparkling waters increased to $131,000 on 15,502 cases sold for the three months ended January 31, 2009 compared to $84,000 on 10,281 cases sold for the three months ended January 31, 2008. This represents a dollar increase of 56% and a case increase of 51%.
Gross margin: Gross profit was $145,000 (26% of net sales) for the three months ended January 31, 2009 a decrease of $72,000 compared to gross profit of $217,000 (39.6% of net sales) for the three months ended January 31, 2008. Excluding our sales of our Cohete Rum which has been discontinued , gross margin for our wine and spirits business was 32% percent for the three months ended January 31, 2009 compared to 40% for the prior year. Gross margin for our non alcoholic business was 18% for the three months ended January 31, 2009 compared to 26% for the three months ended January 31, 2008. The decrease in gross margin for our Newmans' Own products is the result of the selling of remaining cases at below. Gross margin of our wines decreased to 0% for the three months ended January 31, 2009 from 6% for the three months ended January 31, 2008. Both periods were effected by sales of a large portion of the Company's wines at a deep discount. Gross margin of Trump Super Premium Vodka, decreased to 33% for the three months ended January 31, 2009 compared to 38% for the three months ended January 31, 2008. The gross margin decrease is largely due to a decrease in the percentage of direct sales which leads to increased direct costs such as excise taxes and freight and price support for Trump Super Premium Vodka necessary in order to achieve competitive pricing.
Selling, general and administrative: Selling, general and administrative expenses totaled $1,660,000 for the three months ended January 31, 2009, compared to $1,812,000 for the three months ended January 31, 2008, a decrease of $152,000 or 8%. Total selling and marketing costs aggregated $630,000 for the three months ended January 31, 2009 compared to $760,000 for the three months ended January 31, 2008. The decrease in selling and marketing expenses is due to the overall decreased marketing spend on Trump Super Premium Vodka to a normalized level as sales promotions for Trump Vodka have become more targeted. General and administrative expenses aggregated $900,000 for the three months ended January 31, 2009 compared to $1,021,000 for the three months ended January 31, 2008. Professional fees, including
accounting and legal fees have decreased from the prior year and travel related expenses have also decreased for the three months ended January 31, 2009 compared to the three months ended January 31, 2008.
Other Income (expense): Excluding the $50,000 of income recognized as the result of the settlement with the Company's lender, Sovereign, interest expense totaled $15,371 for the three months ended January 31, 2009 compared to $27,939 for the three months ended January 31, 2008. For the three months ended January 31, 2009 Other income aggregated $409,000 which is the result of the Company's settlement with RBCI Holdings, Inc. The Company issued 350,000 shares of Company stock full consideration of a note payable to RBCI for $500,000. The value of the shares on the settlement date was $91,000.
Income Taxes: We have incurred substantial net losses from our inception and as a result, have not incurred any income tax liabilities. Our federal net operating loss carry forward is approximately $25,000,000, which we can use to reduce taxable earnings in the future. No income tax benefits were recognized in fiscal 2009 and 2008 as we have provided valuation reserves against the full amount of the future carry forward tax loss benefit. We will evaluate the reserve every reporting period and recognize the benefits when realization is reasonably assured.
Impact of Inflation
Although management expects that our operations will be influenced by general economic conditions we do not believe that inflation has had a material effect on our results of operations.
Financial Liquidity and Capital Resources
Although our working capital position was initially improved as a result of the exercise of warrants to acquire our common stock pursuant to our October 2008 warrant re-pricing and our December 2007 Private Placement of our preferred stock, our business continues to be effected by insufficient working capital. 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. Lack of liquidity continues to negatively affect our business and curtail the execution of our business plan.
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, 2009 and 2008 were $3,555,000 and $4,671,000, respectively. Cash used in operating activities for the nine months ended January 31, 2009 and 2008 was $705,000 and $2,863,000, 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. For the nine months ended January 31, 2009 and 2008 net cash provided by financing activities totaled $576,000 and $2,877,000, respectively.
In March 2009 Olifant entered into a $200,000, six month credit facility with Riviera Finance ("Riviera"). Fees accrue 1% every ten days. The facility is secured by a first security interest in the assets of Olifant.
In October 2006, the Company borrowed $250,000 and issued a convertible promissory note in like amount. The due date of the loan was originally extended by the Company to October 2008 from October 2007 in accordance with the terms of the original note agreement. On March 1, 2009 the note was amended to extend the due date to October 18, 2009. The principal amount of the amended note is $286,623, which includes the original $250,000of principal plus accrued and unpaid interest of 36,623 as of March 1, 2009. The amended note is convertible into shares of our common stock at $0.35 per share with certain anti-dilution provisions. The note bears interest at 12% per annum and is payable quarterly. At the option of the lender, interest can be paid in shares of Company common stock. Monthly principal payments of $20,000 commence June 1, 2009 with the balance paid at maturity.
On October 27, 2005, the Company acquired certain assets of Rheingold Beer ("Rheingold") and assumed certain obligations from Rheingold Brewing Company, Inc. ("RBCI"). Holdings issued 724,638 shares of common stock with a fair value of approximately $650,000 to RBCI and assumed approximately $142,000 of their liabilities and are contractually obligated to RBCI to issue an additional $500,000; payable in Holdings common stock with a value of $350,000 and $150,000 cash, accruing no interest. The obligation due RBCI was originally due on October 27, 2006. Due to nonpayment of the balance as a result of disagreements over certain of the acquired assets and liabilities, the Company was sued by RBCI. On January 15, 2009 the Company reached a settlement with RBCI in which it will issue 350,000 shares of common stock in satisfaction of the note.
On October 27, 2008, in order to encourage holders of warrants which we issued in our January Financing (described below) to exercise their warrants, and enabling us to decrease the number of unexercised warrants and raise short-term working capital at low cost, the Company reduced the exercise price from $.50 to $0.20 per share of common stock for a period of 5 trading days, subject to adjustment in the event that the Company's stock trades for $1.50 or higher (subject to adjustments for forward and reverse stock splits, recapitalizations, stock dividends, and the like after the date hereof) for ten (10) consecutive trading days through February 28, 2009 then the exercise price reverts to the exercise price of $.50 per share and the warrant holders must pay the Company the difference of $.30 per share, as part of this re-pricing
program. Each of the investors who participated in the January Financing exercised all of the warrants issued in the private placement representing a total of 3,777,778 newly issued shares of common stock, resulting in proceeds to the Company of $755,556 less a due diligence fee paid of $70,693. We also agreed to reduce the conversion price of the preferred stock acquired by these investors in our December Financing (described below) from $0.50 per share of common stock to $0.35 per share. There are a total of 11,000 shares of preferred shares outstanding with a redemption value of $11,000,000 which if all the preferred stock was converted would result in the issuance of 31,428,571 shares of our common stock. One other investor, Greenwich Beverage Group LLC, who is controlled by a member of our board of directors, elected to exercise warrants for a total of 166,667 shares of common stock at $0.20 per share, which the Company reduced from $1.25, for an aggregate exercise price of $33,333.
On December 18, 2007 (the "Closing Date") the Company 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 has no voting or dividend rights. Out of the gross proceeds of the December Financing, 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 events of stock splits and similar matters. Both the commissions and expenses were accounted for as a reduction of Additional Paid in Capital.
The financing that we consummated in January 2007 (the "January Financing") provided participating investors (the "January Investors") rights to exchange the common stock they acquired for securities issued in subsequent financings which were consummated at a common stock equivalent of $2.00 per share or less. Under this provision, the January Investors have exchanged 4,444,445 shares of common stock for 8,000 shares of Preferred Stock. The 4,444,445 shares returned were accounted for as a reduction of Additional Paid in Capital and a reduction of Common Stock since the shares have been cancelled. 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"). These warrants were exercised at $.20 per share of common stock. We have issued an aggregate of 11,000 shares of our Series A Preferred Stock with a redemption value of $11,000,000, which under their original terms were convertible into our Common Stock at $50 per share, and now convertible at $.35 per share.
Each of our December Investors participated in the January Financing but not all of our January Investors participated in the December Financing.
The December Investors may allege that certain penalties are owed to them by the Company based on certain time requirements in the documentation relating to the December Financing. If such claim is successfully made, we may lack the liquidity to satisfy such claim.
From July 2007 through April 2008 the Company borrowed an aggregate of $522,303 from our CEO for working capital purposes. For the nine months ended January 31, 2009 the Company borrowed an additional $123,375 from our CEO for working capital purposes. The borrowings bear interest at 12% per annum. As of January 31, 2009, a total of $417,477 including interest has been repaid. For the nine months ended January 31, 2009 and 2008 interest accrued on this loan aggregated $29,179 and $30,139, respectively and for the three months ended January 31, 2009 and 2008, $10,349 and $14,491, respectively. As of January 31, 2009 and April 30, 2008 amounts owed to our CEO on these loans aggregated $295,179 and $232,547, respectively, including accrued interest.
In June 2006, the Company entered into a $10 million, three year, working capital revolving finance facility with Sovereign Business Capital ("Sovereign") (formally BACC), a division of Sovereign Bank. Interest on the line of credit is prime rate plus 1.5%. At January 31, 2009 and April 30, 2008 interest was a4.75 and 6.50%, respectively. The facility is secured by a first security interest in the assets of the Company (other
than those of Olifant). At January 31, 2009 and April 30, 2008, $128,503 and $307,940 respectively, was outstanding on this facility. In early December 2008 the Company was notified by the lender, Sovereign , that the lender calculated interest on the working capital line incorrectly since the inception of the line in June 2006. At October 31, 2008 the Company accrued $100,000 of interest relating to this error. On December 17, 2008 the Company modified the terms of its credit facility with Sovereign Business Capital. Pursuant to this modification the credit facility will be due April 3, 2009 rather than June 2, 2009 and in order to reduce our fees on the unutilized credit line, and to satisfy Sovereign's request, we reduced the amount we can borrow under the facility to $300,000. In consideration for the modifications the amount of the past due interest was reduced to $50,000.
In 2008 the Company entered into a licensing agreement with Vetrerie Bruni S.p.A. ("Bruni"), which has the patent to the Trump Vodka bottle design. The agreement is retroactive to January 1, 2008 and calls for annual minimum royalties of $150,000. Royalties are due on a per bottle basis on bottles produced by another bottle supplier of approximately 18% of the cost of such bottles. The agreement terminates upon the expiration of the patent or the expiration of the Company's license agreement with Trump Marks
In November 2005, the Company entered into an eight-year license 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 provides for certain minimum royalty payments
through November 2012 which if not satisfied could result in termination of the license. The Company is currently engaged in a negotiation with Trump Marks LLC to modify certain terms of its license agreement, including, without limitation, the deferral of certain minimum aggregate royalties and the payment of on-going minimum royalties.
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.
Under our license agreement for Damaina Liqueur we are obligated to pay $3 per case.
Under our license agreement with Aguila Tequila we are obligated to pay $3 per 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, 2009, we were indebted to MTA in the amount of $231,248.
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, 2009, the aggregate amount owed to Mr. Gordon was $120,000. We have an informal understanding with Mr. 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.
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 cash balance was initially improved as a result of our October 2008 Warrant Re-pricing Program and our December and January, 2007 private placement of our common stock, preferred stock and warrants, our business continues to be effected by insufficient working capital. 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 . . .
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