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WDKA > SEC Filings for WDKA > Form 10-K on 1-Apr-2013All Recent SEC Filings

Show all filings for PANACHE BEVERAGE, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for PANACHE BEVERAGE, INC.


1-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This management's discussion and analysis should be read in conjunction with the consolidated financial statements and notes included elsewhere in the report on Form 10-K.

This management's discussion and analysis, as well as other sections of this report on Form 10-K may contain "forward-looking statements" that involve risks and uncertainties, including statements regarding our plans, future events, objectives, expectations, estimates, forecasts, assumptions or projections. Any statement that is not a statement of historical fact is a "forward -looking statement", and in some cases, words such as "believe", "expect", "anticipate", "optimistic", "intend", "will", "project", "may", "plan", "seek", and similar expressions identify forward-looking statements. These statements involve risks and uncertainties that could cause actual outcomes to differ materially from the anticipated outcomes or results, and undue reliance should not be placed on these statements. These risks and uncertainties include, but are not limited to, the matters discussed under the caption "Risk Factors" in Item 1A of this report and other risks and uncertainties discussed in filings made with the Securities and Exchange Commission (including risks described in prior and subsequent reports on Form 10-Q, Form 10-K, Form 8-k, and other filings). Panache Beverage, Inc. disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. These forward-looking statements include statements of management's plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements, our expansion strategy, our ability to achieve operating efficiencies, our dependence on distributors, capacity, suppliers, industry pricing and industry trends, evolving industry standards, domestic and international regulatory matters, general economic and business conditions, the strength and financial resources of our competitors, our ability to find and retain skilled personnel, the political and economic climate in which we conduct operations. Additional factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:
1) our ability to successfully develop and deliver our products on a timely basis and in the prescribed condition; 2) our ability to compete effectively with other companies in the same industry; 3) our ability to raise sufficient capital in order to effectuate our business plan; and 4) our ability to retain our key executives.

Overview

Significant Transactions

On September 10, 2012, the Company entered into a production and sales agreement with Przedsiebiorstwo Handlowo-Produkcyjne Wieslaw Wawrzyniak ("PHPWW") from Kalisz, Poland. Pursuant to such agreement, PHPWW supplies the Company with Wodka Vodka and Alchemia Vodka.

In the third quarter of 2012, the Company entered into a purchase and sale factoring agreement with a commercial factor whereby the Company sells certain Alchemia accounts receivable to the factor. Under the terms of the agreement, the factor may, in its sole discretion, make advances to the Company of amounts representing up to 75% of the net amount of eligible accounts receivable up to an initial maximum of $150,000 with a possible increased maximum of $300,000. In the fourth quarter of 2012, the agreement was expanded to include Wodka and Alibi accounts receivable with the initial limits of $250,000 for each brand and possible increased maximum of $1,000,000 and $500,000, respectively. The factor's purchase of the eligible accounts receivable includes a discount fee which is deducted from the face value of each collection. The Discount Fee is based on the number of days outstanding from the date of purchase. The Discount Fee is 3.0% if paid within 30 days and 1.0% for each 10 day period until the account is paid. Based on this arrangement, the Company is liable to the factor if the accounts receivable is not collected, and therefore the Company has accounted for cash received on factored receivables as a liability.

On November 12, 2012, the Company entered into an exclusive importer and distributor agreement with Domaine Select Wine Estates, LLC ("DSWE"). The agreement appoints DSWE as the exclusive importer and wholesale distributor of Alibi American Whiskey in the United States.


On December 21, 2012, pursuant to a Term Loan Agreement ("Loan Agreement") between the parties, the Company issued a promissory note for $2,100,000 to Consilium Corporate Recovery Master Fund, LTD due on December 31, 2015 and bearing interest at 12% per annum. Interest is payable quarterly in arrears. The Company is using the proceeds to fund operations and repay existing debt. The Company pledged its tangible and intangible assets pursuant to the Loan Agreement and agreed to retain $600,000 of the proceeds in escrow. Concurrent with the issuance of the note, the managing director of Consilium Investment Management, LLC ("Consilium") was appointed to the Board of Directors of the Company. As part of this transaction, the Company also issued Consilium warrants to purchase up to 2,760,000 shares of the Company's common stock at an exercise price of $0.50 per share. The warrants are exercisable upon at least 61 days notice and expire on December 21, 2015.

On February 14, 2013, pursuant to a Term Loan Agreement dated February 14,2013 ("2013 Loan Agreement") between the parties, Wodka, LLC issued a promissory note for $1,400,000 to Consilium Corporate Recovery Master Fund, LTD due on February 14, 2016 and bearing interest at 12% per annum. Interest is payable quarterly in arrears. The Company is using the proceeds to fund operations and repay existing debt. The Company pledged its tangible and intangible assets pursuant to the 2013 Loan Agreement and agreed to retain $800,000 of the proceeds in escrow. As part of this transaction, the Company also issued Consilium warrants to purchase up to 1,840,000 shares of the Company's common stock at an exercise price of $0.50 per share. The warrants are exercisable upon at least 61 days notice and expire on February 14, 2016.

Results of Operations for the Years Ended December 31, 2012 and 2011

Revenues

Net revenues increased $1,356,403 or 70% to $3,290,814 for the year ended December 31, 2012 from $1,934,411 for the year ended December 31, 2011. We generate our revenues from sales of distilled spirits. The revenues are recognized when persuasive evidence of a sale exists, transfer of title has occurred, the selling price is fixed or determinable and collectability is reasonably assured. Our sales arrangements are not subject to warranty. Gross revenue was reduced due to sales discounts by $59,079 and $99,197 during 2012 and 2011, respectively.

The increase in revenues from 2012 to 2011 was due primarily to successful implementation of our Wodka marketing and sales strategies, as well as to the launch of our Alibi brand in the fourth quarter of 2012.

We expect sales to increase during 2013 and we believe our customer base will continue developing through extending the marketing and sales strategy from New York State to other key regions throughout the U.S. Unlike traditional growth plans, we must maintain our current marketing philosophy and avoid scaling the business through traditional block and tackle methods employed by the major spirits companies.

Cost of Goods Sold

Cost of goods sold included expenses directly related to selling our products. Product delivery, broker fees and direct labor would be examples of cost of goods sold items. Cost of goods sold was $2,129,240, or 65% of revenue, and $1,439,700, or 74% of revenue, for the years ended December 31, 2012 and 2011, respectively.

The increase in cost of goods sold during 2012 was attributable to the growth in revenues during the same period. Cost of goods sold as a percentage of revenue decreased in 2012 due to obtaining better terms upon switching Wodka production to a new distillery in Poland, as well as to a higher profit margin on Alibi sales.

Expenses

Operating expenses increased 19% in 2012 to $4,881,121 from $4,105,551 in 2011. The increase in operating expenses in 2012 was primarily attributable to an increase in general and administrative expense of $1,961,540, which was partially offset by a decrease in advertising and promotion expense of $1,082,152 and a decrease in consulting expense of $268,212. Payroll, insurance, and travel and entertainment expenses were among general and administrative expenses that increased substantially in 2012 due to the rapid growth of Panache as a new public company.


Professional fees increased $164,394 in 2012 and included $487,213 of non-cash expenses paid for with common stock and warrants issued for services.

Net Loss

The Company's net loss for stockholders was $3,262,175 and $1,459,578 for the years ended December 31, 2012 and 2011, respectively. The increase in the net loss of $1,802,597 was attributable to the surge in general and administrative expenses, which included non-cash expenses of $736,584 paid for by issuing warrants and shares of common stock to employees and external professionals for services rendered.

Liquidity and Capital Resources

Cash flows used in operating activities were $3,738,579 and $1,174,748 for the years ended December 31, 2012 and 2011, respectively. Negative cash flows from operations in 2012 were due primarily to the net loss of $3,262,175, plus the loss allocated to non-controlling interests of $620,670 and changes in asset and liabilities of $730,073 offset by non-cash expenses of $736,584 paid for by issuing stock and warrants to employees and external professionals for services rendered and other non-cash expenses of $737,755. Negative cash flows in 2011 were primarily due to the net loss of $1,459,578 plus the loss allocated to non-controlling interests of $2,218,862 offset by non-cash advertising expense of $1,757,057 and other non-cash expenses of $673,985.

Cash flows used in investing activities in both 2012 and 2011 were due to the purchase of equipment.

Cash flows provided by financing activities were $4,311,208 and $1,303,287 during 2012 and 2011, respectively. Positive cash flows from financing activities in 2012 were due primarily to proceeds of $1,147,500 from sales of common stock and net proceeds of $1,916,500 from long term debt financing. Positive cash flows also resulted from net proceeds of $691,027 from factoring accounts receivable, net proceeds of $417,062 from notes payable, and net proceeds of $239,119 from related party loans. Positive cash flows from financing activities in 2011 were due primarily to proceeds of $755,000 from sales of common stock. Positive cash flows also resulted from contributions from non-controlling interests of $199,800 and net proceeds of $317,293 from factoring accounts receivable.

We had cash of $1,314,178 on hand as of December 31, 2012. In February of 2013, we received additional long term debt financing in the amount of $1,400,000 and do not anticipate that additional funding will be needed for the year of 2013. We plan to strengthen our position in the global markets through aggressive marketing and sales of our products, as well as through implementation of other elements of our business plan. However, if our revenue projections fail to materialize and/or our future costs substantially exceed our current estimates, we would need to obtain additional capital to sustain our operations. In the past we have funded our cash needs with a series of debt and equity transactions, primarily with related parties. If we are unable to receive additional cash from our related parties, we may need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on operations and financial condition. For example, if we unable to raise sufficient capital to develop our business plan, we may need to:

Curtail new product launches

Limit our future marketing efforts to areas that we believe would be the most profitable.

Demand for the products and services will be dependent on, among other things, market acceptance of our products, our brands' recognition, distilled spirits market in general, and general economic conditions, which are cyclical in nature. Inasmuch as a major portion of our activities is the receipt of revenues from the sales of our products, our business operations may be adversely affected by our competitors and prolonged recession periods.


Our success will be dependent upon implementing our plan of operations and the risks associated with our business plans. We specialize in development, global sales and marketing of spirits brands. We plan to strengthen our position in these markets. We also plan to expand our operations through aggressively marketing our products and our concept.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments. We believe that revenue recognition, the accounting methodology for advertising costs and the valuation allowance of deferred tax assets are the most critical areas where management's judgments and estimates most affect our reported results. While we believe our estimates are reasonable, misinterpretation of the conditions that affect the valuation of these assets could result in actual results varying from reported results, which are based on our estimates, assumptions and judgments as of the balance sheet date.

Revenue recognition

We recognize revenue when title and risk of loss pass to the customer, typically when the product is shipped. Some sales contracts contain customer acceptance provisions that grant a right of return. Under these provisions, customers can return products that are not merchantable and fit and suitable for their intended use, are not of the same premium quality as products currently in existence, or are defectively packaged, bottled or labeled. Customers may also return any product that does not comply with all applicable laws and regulations. We record revenue net of the estimated cost of sales returns and allowances. From time to time the Company provides incentives to its customers in the form of free product. The costs associated with producing this product is included as an expense in costs of goods sold. No revenue is recognized with respect to such product giveaways.

Advertising

Advertising costs are expensed as incurred.

Income taxes

The Company's primary operating subsidiaries are limited liability companies and allocate taxable income or loss to their members in accordance with their respective percentage ownership. Therefore, no provision or liability for federal or state income taxes has been included in the financial statements for the period prior to the reverse merger on August 19, 2011. Subsequent to the August 19, 2011 reverse merger, income taxes are provided in accordance Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740 "Income Taxes". A deferred tax asset or liability is recorded for all temporary differences between financial and tax and net operating loss carry forwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or the entire deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment. No provision for income taxes has been made for the years ended December 31, 2012 and 2011 due to the Company's loss position. The Company has fully reserved its deferred tax assets due to the uncertainty of the Company's ability to generate net income in the future.

The Company recognizes and measures its unrecognized tax benefits in accordance with generally accepted accounting principles concerning income taxes. Under the guidance, the Company assesses the likelihood, based on their technical merit, that tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period. The measurement of unrecognized tax benefits is adjusted when new information is available, or when an event occurs that requires a change.

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