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| DKAM.OB > SEC Filings for DKAM.OB > Form 10-Q on 21-Sep-2009 | All Recent SEC Filings |
21-Sep-2009
Quarterly Report
Introduction
The following discussion and analysis summarizes the significant factors affecting (1) our consolidated results of operations for the three months ended July 31, 2009, compared to the three months ended July 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-K, which Report was filed on August 13, 2009.
Three months ended July 31, 2009 compared to three months ended July 31, 2008.
Net Sales: Net sales were $434,000 for the three months ended July 31, 2009 compared to net sales of $1,069,000 for the three months ended July 31, 2008. 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 $85,000 which accounted for 20% of total dollar sales for the three months ended July 31, 2009. For the three months ended July 31, 2008, Trump Super Premium Vodka sales aggregated $521,000 which accounted for 49% of total dollar sales. We believe that the recent economic downturn has hurt the sales of this premium product. In addition sales of Trump for the three months ended July 31, 2009 were effected by issues relating to our California and, Chicago distributors and with Liquor Group, who represented us in several "controlled states" which have been corrected with new distributors being appointed. Sales of all alcoholic products aggregated $434,000 for the three months ended July 31, 2009 compared to $795,000 for the three months ended July 31, 2008. Net sales of Old Whiskey River Bourbon totaled $38,000 on 293 cases sold for the three months ended July 31, 2009 compared to net sales of $96,000 on 763 cases sold for the three months ended July 31, 2008. There were no sales of our Aguila Tequila for the three months ended July 31, 2009 compared to net sales of $32,000 on 374 cases for the three months ended July 31, 2008. Net sales of our Damiana Liqueur aggregated $29,400 on 214 cases sold for the three months ended July 31, 2009 compared to net sales of $74,000 on 558 cases sold for the three months ended July 31, 2008 Net sales of our premium imported wines totaled $17,000 on 796 cases sold for the three months ended July 31, 2009 compared to net sales of $72,000 on 796 cases sold for the three months ended July 31, 2008. For the three months ended July 31, 2009 there were no sales of our non alcoholic product, Newman's Own sparkling fruit beverages and sparkling waters due to the Company's decision to exit this business, compared to sales of $273,000 on 29,482 cases sold for the three months ended July 31, 2008. 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. Net sales of our Olifant Vodka which was acquired by the Company in January 2009 aggregated $234,000 on 5,514 cases sold for the three months ended July 31, 2009 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. Net sales of our Leyrat Cognac , which commenced in January 2009, aggregated $4,500 on 30 cases for the three months ended July 31, 2009. In partnership with Kid rock the Company the Company has the license rights to distribute Kid Rock's BadAss Beer on a worldwide basis for a term of five years with an option to renew for an additional five years. In July 2009 the company commenced sales of BadAss Beer on a very limited basis in the state of Michigan recognizing $21,970 in net sales on the equivalent of 2,325 cases sold.
Gross margin: Gross profit was $128,000 (29% of net sales) for the three months ended July 31, 2009 compared to gross profit of $338,000 (32% of net sales) for the three months ended July 31, 2008. Gross margin for our wine, spirits and beer business was 34% percent for the three months ended July 31, 2009 compared to 35% for the prior year. Gross margin for our non alcoholic business was 23% for the three months ended July 31, 2008. For the three months ended July 31, 2009 we wrote-off Newman's Own related inventory resulting in a charge of $29,000 to cost of goods sold. 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.
Selling, general and administrative: Selling, general and administrative expenses totaled $1,624,000,000 for the three months ended July 31, 2009, compared to $1,617,000 for the three months ended July 31, 2008, , an increase of 0.4%. Total selling and marketing costs aggregated $638,000 for the three months ended July 31, 2009 compared to $761,000 for the three months ended July 31, 2008. For the three months ended July 31, 2009 marketing expenses included $290,000 of fees relating to the Olifant Summer Concert Series. Local marketing expenses decreased from the prior year because many customers were out of inventory of our brands. General and administrative expenses aggregated $986,000 for the three months ended July 31, 2009 compared to $856,000 for the three months ended July 31, 2008. Legal and finance fees have increased from the prior year due to our June 2009 financing and increase in litigation.
Other Income (expense): Interest expense totaled $438,000 for the three months ended July 31, 2009 compared to expense of $24,000 for the three months ended July 31, 2008. During the three months ended July 31, 2009 we incurred non-cash charges of $66,000 relating to stock issued to one investor in connection with extending his note. In addition during the three months ended July 31, 2009 we incurred approximately $347,000 in non-cash interest charges relating to our June sales of our debentures.
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 for the three months ended July 31, 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.
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 we expect that our working capital position will benefit from our June 2009 sales of our debentures and our August 2009 agreement relating to our Series B 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 three months ended July 31, 2009 and 2008 were $1,876,000 and $1,303,000 , respectively. Cash used in operating activities for the three months ended July 31, 2009 and 2008 and 2008 was $451,000 and $81,000, 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.
As of August 17, 2009, we entered into a Preferred Stock Purchase Agreement (the
"Purchase Agreement") with Optimus Capital Partners, LLC, d/b/a Optimus Special
Situations Capital Partners, LLC an unaffiliated investment fund (the "Fund"),
which provides that, upon the terms and subject to the conditions set forth
therein, the Fund is committed to purchase up to $5,000,000 of our Series B
Preferred Stock. Under the terms of the Purchase Agreement, from time to time
until August 16, 2011 and at our sole discretion, we may present the Fund with a
notice to purchase such Series B Preferred Stock (the "Notice"). The Fund is
obligated to purchase such Series B Preferred Stock on the tenth trading day
after the Notice date, subject to satisfaction of certain closing
conditions. The Fund will not be obligated to purchase the Series B Preferred
Stock (i) in the event the closing price of our common stock during the nine
trading days following delivery of a Notice falls below 75% of the closing price
on the trading day prior to the date such Notice is delivered to the Fund, or
(ii) to the extent such purchase would result in the Fund and its affiliates
beneficially owning more than 9.99% of our common stock. Our ability to send a
notice is also subject to certain conditions. Therefore, the actual amount of
the Fund's investment is not certain.
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 (less the $200,000 August prepayment) in the amount of $2,425,000, together with the interest outstanding thereon, will be paid in eleven monthly installments (ten in the amount of $230,000 and one the amount of $125,000) such that the entire amount would be paid to us by November 26, 2010. These monthly payments if made will help fund operations over their eleven month period.
The Company has an agreement with a factor entered into April 2009, pursuant to which a substantial portion of the Company's accounts receivable, 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.
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 September 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 September , 2009 the Company has issued the note-holder 400,000 shares of its
stock to remain in compliance with the amended note.
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. As security for the balance due to the sellers 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 $100,000 with 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 July 2009 the Company borrowed an aggregate of $813,035 from our CEO for working capital purposes. The borrowings bear interest at 12% per annum.. For the three months ended July 31, 2009 and 2008 interest incurred on this loan aggregated $9,149 and $8,479, respectively. As of July 31, 2009 and April 30, 2009 amounts owed to our CEO on these loans including accrued and unpaid interest aggregated $335,867 and $305,935, 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 venture agreements 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.
The license agreement with respect tot the Kid Rock related tradememarks requires the payment of 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 Israel. As of July 31, 2009 the distributor has not received its distribution license. As of july 31, 2009 the distributor has not received its distribution license. Once the distributor receives its license performance under the contract will commence.
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 common stock 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 that were to occur. 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 $.50 per share 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 in cash 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 July 31, 2009, we were indebted to MTA in the amount of $281,248.
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 July 31, 2009 to this shareholder aggregated $43,000.
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. We expect that our working capital position and our cash balance will benefit from our June 2009 sale of our debentures and potentially, the issuance of our Series B 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. 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.
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