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| DKAM.OB > SEC Filings for DKAM.OB > Form 10-K on 13-Aug-2009 | All Recent SEC Filings |
13-Aug-2009
Annual Report
The following discussion and analysis of the consolidated financial condition and results of operations should be read with "Selected Financial Data" and our consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this report.
Year ended April 30, 2009 compared to year ended April 30, 2008
Net Sales: Net sales were $2,478,000 for the year ended April 30, 2009 compared to net sales of $4,509,000 for the year ended April 30, 2008, a decrease of 45%. 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 $1,100,000 which accounted for 44% of total dollar sales for the year ended April 30, 2009. For the year ended April 30, 2008, Trump Super Premium Vodka sales aggregated $2,652,000 which accounted for 59% of total dollar sales. We believe that the recent economic downturn has hurt the sales of this premium product. Interruption of access to production financing resulted in temporary inventory disruption. In addition sales of Trump for the year ended April 30, 2009 were effected by issues relating to our California , Chicago distributors as with Liquor Group, who represented us in several "controlled state" which have been corrected with new distributors being appointed. The launch of Trump Super Premium Vodka in Texas in July 2007 also contributed to greater sales of Trump Super Premium Vodka for the year ended April 30, 2008 compared to the year ended April 30, 2009. Sales of all wine and spirits products aggregated $2,042,000 for the year ended April 30, 2009 compared to $3,842,000 for the year ended April 30, 2008. Net sales of Old Whiskey River Bourbon totaled $231,000 on 1,864 cases sold for the year ended April 30, 2009 compared to net sales of $452,000 on 3,806 cases sold for the year ended April 30, 2008. Net sales of our Aguila Tequila aggregated $74,600 on 895 cases sold for the year ended April 30, 2009 compared to $133,000 on 1,418 cases sold for the year ended April 30, 2008. This represents a dollar decrease of 44% and a case increase of 37%. Net sales of our Damiana Liqueur aggregated $145,400 on 1,094 cases sold for the year ended April 30, 2009 compared to net sales of $196,700 on 1555 cases sold for the year ended April 30, 2008 Net sales of our premium imported wines totaled $269,000 on 2,769 cases sold for the year ended April 30, 2009 compared to net sales of $392,000 on 3,396 cases sold for the year ended April 30, 2008. Net sales of our non alcoholic product, Newman's Own sparkling fruit beverages and sparkling waters decreased to $443,990 on 53,265 cases sold for the year ended April 30, 2009 compared to $666,620 on 75,300 cases sold for the year ended April 30, 2008. Sales of our Newmans Own products were affected the Company's decision to exit this business. We have made the strategic decision to discontinue selling the Newman's Own products in light of the fact our contract ends in October 2009. The Newman's Own organization and the Company have agreed that the Newman's Own organization will assume the selling of the product. The Company's decision was based on enhancing profitability and our inability to have equity in the brand. 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 is, produced in Holland is sold at an economy price. The Company's management believes, and customer demand indicates, 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 $145,000 in revenue on 773 cases sold.
Gross margin: Exclusive of our allowance for slow moving inventory ($120,000), gross profit was $628,000 (25% of net sales) for the year ended April 30, 2009 a decrease of $1,057,000 compared to gross profit of $1,685,000 (37% of net sales) for the year ended April 30, 2008. Gross margin for our wine and spirits business was 30% percent for the year ended April 30, 2009, exclusive of allowances for slow moving inventory, compared to 41 % for the prior year. Gross margin for our non alcoholic business was 17% for the year ended April 30, 2009 compared to 22% for the year ended April 30, 2008. The inherent low margins for the Newmans' Own products, the increased costs in production together with the inability to sustain its growth has lead to our decision to discontinue to sell the products. . Gross margin of Trump Super Premium Vodka, decreased to 35% for the year ended April 30, 2009 compared to 40 % for the year ended April 30, 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 year ended April 30, 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 $5,720,000 for the year ended April 30, 2009, compared to $7,838,000 for the year ended April 30, 2008, a decrease of 27%. Total selling and marketing costs aggregated $2,200,000 for the year ended April 30, 2009 compared to $3,900,000 for the year ended April 30, 2008. The decrease in selling and marketing expenses is due to the overall decreased marketing spend to a normalized level as sales promotions for Trump Vodka have become more targeted. General and administrative expenses aggregated $3,520,000 for the year ended April 30, 2009 compared to $3,938,000 for the year ended April 30, 2008. Professional fees, including legal fees have decreased from the prior year and travel related expenses have also decreased for the year ended April 30, 2009 compared to the year ended April 30, 2008. For the year ended April 30, 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 $151,000 for the year ended April 30, 2009 compared to expense of $164,000 for the year ended April 30, 2008. For the year ended April 30, 2009 other income aggregated $409,000 which is the result of the Company's settlement with RBCI Holdings, Inc. For the year ended April 30, 2009 the Company recognized an imparment loss on its Rheingold license based on additional investment to eventually bring the product to market. 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 $28,000,000, 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.
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.
SEASONALITY
As a general rule, the second and third quarters of our fiscal year (August-January) are the periods that we realize our greatest sales as a result of sales of alcoholic beverages during the holiday season. During the fourth quarter of our fiscal year (February-April) we generally realize our lowest sales volume as a result of our distributors working off inventory which remained on hand after the holiday season. As we increase our beer sales, as a result of the launch of Kid Rock's beer, we would expect sales in first quarter of our fiscal year (May-July), to increase since the spring and summer tends to be the strongest periods for sales of this beverage.
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 year ended April 30, 2009 and 2008 were $5,041,000 and $6,311,000 , respectively. Cash used in operating activities for the years ended April 30, 2009 and 2008 was $630,000 and $3,848,000, 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 year ended April 30, 2009 and 2008 net cash provided by financing activities totaled $509,000 and $2,987,000, respectively.
As described in Item 5 (under Unregistered Sale of Equity Securities) in June, 2009 (the "Closing Date") we sold to one investor (the "Investor") a $4,000,000 non interest bearing debenture with a 25% ($1,000,000) original issue discount, that matures in 48 months from the Closing Date (the Drink's Debenture) for $3,000,000, consisting of $375,000 paid in cash at closing and eleven secured promissory notes, aggregating $2,625,000, bearing interest at the rate of 5% per annum, each maturing 50 months after the Closing Date(the "Investor Notes"). The Investor Notes, the first ten of which are in the principal amount of $250,000 and the last of which is in the principal amount of $125,000, are mandatorily pre-payable, in sequence, at the rate of one note per month commencing on the seven month anniversary of the Closing Date. If the prepayment occurs, the entire aggregate principal balance of the Investor Notes in the amount of $2,625,000, together with the interest outstanding thereon, will be paid in eleven monthly installments (ten in the amount of $250,000 and one the amount of $125,000)such that the entire amount would be paid to us by November 26, 2010. These monthly payments will help fund operations over their eleven month period.
The Company has an agreement with a factor through September 2009 ,with automatic six month renewals which can be terminated by either parties at their discretion, to which a substantial portion of Olifant's accounts receivable are sold to the factor without recourse as to bad debts but with recourse as to all customer claims. Immediately upon assigning a customer invoice the Company receives a cash advance equal to 70% of the invoice amount and is paid the balance of the invoice less fees incurred at the time the factor receives the final payment from the customer. The facility has a maximum account limit of $200,000. The factor fee is 1% of the factored receivable for every ten days the related invoice remains unpaid and is subject to a monthly administrative charge based on monthly volume. The factor has first security interest in the factored receivable of Olifant and a security interest in the related inventory.
The Company also has an agreement with a different factor pursuant to which a substantial portion of the Company's accounts receivable, other than Olifant's, is sold to the factor with recourse to bad debts and other customer claims. The Company receives a cash advance equal to 80% of the invoice amount and is paid the balance of the invoice less fees incurred at the time the factor receives the final payment from the customer. The factor fee is 1.75% for the first 30 days the invoice remains unpaid and 0.07% for each day thereafter. The facility shall remain open until a 30 day notice by either party of termination of the agreement The facility is secured by all assets of the Company other than Olifants'.
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. As consideration for extending the note in March
1, 2009 the Company issued the lender 286,623 shares of Company common stock
. As of July , 2009 the Company had not made any payments under the amended note
and has reached an informal agreement with the note-holder, to issue 50,000
shares of the Company's common stock for each week of nonpayment. As of July,
2009 the Company has issued the note-holder 400,000 shares of its stock to
remain in compliance with the amended note.
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. The Company recorded a gain of $409,000 on the settlement.
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.. 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 were a total of 11,000 shares of preferred shares outstanding with a redemption value of $11,000,000 at April 30, 2009. 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. As a provision of the June 2009 sale of our debentures, , in order to satisfy the ratcheting provisions of the preferred stock financing we allowed, and the three December Investors (see below) elected, to convert an aggregate of $335,800(335.8 shares) of our preferred stock into 3,358,000 shares of our common stock.
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.
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.
On January 15, 2009 (the "Closing"), the Company acquired 90% of the capital stock of Olifant U.S.A, Inc. ("Olifant") , pursuant to a Stock Purchase Agreement (the "Agreement. The Company has agreed to pay the sellers $1,200,000 for its 90% interest: $300,000 in cash and common stock valued at $100,000 to be paid 90 days from the Closing date The initial cash payment of $300,000 which was due 90 days from Closing , was initially reduced by $138,000 at Closing because Olifant's liabilities exceeded the amount provided for in the Purchase Agreement. In accordance with the Agreement, the initial cash payment was subject to additional offsets to be mutually agreed upon by both parties. As of July 31, 2009 the parties have agreed to additional offsets aggregating $4,702 with potential offsets of $37,030 which are to be determined by August 20, 2009 in accordance with a supplementary agreement entered into by the parties, Settlement Agreement and General Release, on July 31, 2009. The initial payment in accordance with the supplementary agreement is due August 31, 2009. The Company issued a promissory note for the $800,000 balance. The promissory note is payable in four annual installments, the first payment is due one year from Closing. Each $200,000 installment is payable $100,000 in cash and Company stock valued at $100,000with the stock value based on the 30 trading days immediately prior to the installment date. The cash portion of the note accrues interest at a rate of 5% per annum.
From July 2007 through April 2009 the Company borrowed an aggregate of $654,435 from our CEO for working capital purposes. The borrowings bear interest at 12% per annum.. For the years ended April 30, 2009 and 2008 interest incurred on this loan aggregated $38,204 and $37,798, respectively. As of April 30, 2009 and, 2008 amounts owed to our CEO on these loans including accrued and unpaid interest aggregated $305,935 and $232,547, respectively.
ROYALTIES/LICENSING AGREEMENTS
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.
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 Damaina Liqueur we pay $3 per case.
Under our license agreement with Aguila Tequila we are obligated to pay $3 per case.
Under our joint ventures agreement with Dr. Dre and Interscope Records, which includes our Leyrat Cognac, we are obligated to pay a percentage of gross profits, less certain direct selling expenses.
We license our Kid Rock related trademarks, indirectly as a member of a limited liability company (the "LLC"). The license requires the LLC to pay the licensor a per case royalty (or equivalent liquid volume), with certain minimum royalties for years 2 through 5 of the agreement payable on the first day of the applicable year.
OTHER AGREEMENTS
The Company has an agreement with a foreign distributor, through December 2023, to distribute our products in their country. The agreement requires the distributor to purchase a set monthly amount of our products, predominately our Trump Super Premium Vodka for the term of the agreement. The distributor is to pay the Company a monthly fee over the term of the agreement for the rights to be the exclusive distributor in their country. As of April 30, 2009 the distributor has not received its distribution license. Once the distributor receives its license and begins purchasing our products the Company will accrue the monthly "exclusivity" fee to revenue based on the intent of the agreement and such fee
In April 2009 the Company entered into a sponsorship agreement with concert producer and promoter to promote Olifant Vodka in its concert tour which runs from July 10, thru August 8, 2009. In consideration for their services the Company has given the promoter the following: 1,500,000 shares of its stocks which were issued in May 2009; 3% of the net profits of Olifant for each fiscal year beginning following the third anniversary of the agreement (years beginning May 2012) and ending the earlier of Olifant's fiscal year ending in 2018 or when Olifant is sold. If Olifant is sold prior to expiration the promoter will receive 3% of the consideration received from the sale. The Company has agreed to grant an additional 2% (of Olifant or a future brand) for promotion in the 2010 concert tour; and warrants to purchase 200,000 shares of Company stock at an exercise price of 200,000 shares which shall be issued at the end of the 2009 tour. The value of the 1,500,000 shares issued aggregating $225,000, based on the market price of the Company's stock on the date of the agreement, and the warrants granted , $8,000 , will be amortized over the life of the tour. In accordance with the agreement the amount of cash and stock based consideration issued by the Company shall not be less than $400,000. In accordance with the agreement, in May 2009, the Company issued a promissory note to the promoter for a loan in the same amount to cover expenses relating to the tour. The note, which bears no interest, was to be paid in four equal installments beginning in June 2009 is secured by 500,000 shares of Company stock. The promoter has deferred the requirement of payment under the note pending the completion of a future financing for the Company at which time they will elect payment or take the 500,000 shares of stock.
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 April 30, 2009, we were indebted to MTA in the amount of $256,248.
In December 2002 the Company entered into a consulting agreement with one of its shareholders which provides for $600,000 in fees payable in five fixed increments over a period of 78 months. The agreement expired on June 9, 2009. The Company has an informal agreement with the shareholder pursuant to which he has the option of converting all or a portion of the consulting fees owed him into shares of Holding's common stock at a conversion price to be agreed upon. In March 2009 the consultant elected to convert $120,000 due him for consulting fees into shares of Company stock at a price of $0.35 per share resulting in the Company issuing 342,857 shares to him. In February, 2008 the consultant elected to convert $190,000 due him for consulting fees into shares of Company common stock at a price of $0.50 per share resulting in the Company issuing 380,000 shares to him. Each of the conversions were was at a premium to the market price of the Company's common on the date of the elections to convert. As of April 30, 2009 to this shareholder aggregated $30,000.
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 June 2009 sale of our debentures , 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 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, for beer and spirits, will be on Trump Super Premium Vodka, Old Whiskey River Bourbon, Damiana, Aquila Tequila, and in association with our recent joint venture with music icon Dr. Dre, our Leyrat Cognac and our recent joint venture with music icon Kid Rock, BadAss Beer. 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.
OFF BALANCE SHEET ARRANGEMENTS
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