0001185185-13-000175.txt : 20130122 0001185185-13-000175.hdr.sgml : 20130121 20130122172632 ACCESSION NUMBER: 0001185185-13-000175 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20121031 FILED AS OF DATE: 20130122 DATE AS OF CHANGE: 20130122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRINKS AMERICAS HOLDINGS, LTD CENTRAL INDEX KEY: 0000873540 STANDARD INDUSTRIAL CLASSIFICATION: BEVERAGES [2080] IRS NUMBER: 870438825 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19086 FILM NUMBER: 13541073 BUSINESS ADDRESS: STREET 1: 424R MAIN STREET CITY: RIDGEFIELD STATE: CT ZIP: 06877 BUSINESS PHONE: 2037627000 MAIL ADDRESS: STREET 1: 424R MAIN STREET CITY: RIDGEFIELD STATE: CT ZIP: 06877 FORMER COMPANY: FORMER CONFORMED NAME: GOURMET GROUP INC DATE OF NAME CHANGE: 20001019 FORMER COMPANY: FORMER CONFORMED NAME: SEAIR GROUP INC DATE OF NAME CHANGE: 19980529 FORMER COMPANY: FORMER CONFORMED NAME: VICUNA INC DATE OF NAME CHANGE: 19930328 10-Q 1 drinksamericas10q103112.htm drinksamericas10q103112.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 


FORM 10-Q
 

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
   
For the quarterly period ended October 31, 2012
   
OR
   
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to ____________
 
Commission File Number:  000-19086
 
Drinks Americas Holdings, Ltd.
(Exact name of registrant as specified in its charter)
 
Delaware
 
87-0438825
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer Identification No.)
     
4101 Whiteside St.
   
Los Angeles, Ca.
 
90063
(Address of principal executive offices)
 
(Zip Code)
 
(323) 266-8765
(Registrant’s telephone number, including area code)
 
372 Danbury Road, Suite 163, Wilton, Connecticut 06897
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x   No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
¨   Large accelerated filer
¨    Accelerated filer
¨   Non-accelerated filer
x   Smaller reporting company
  
  
(Do not check if smaller reporting company)
  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
 
As of January 22, 2013, the number of shares outstanding of the registrant’s common stock, $0.001 par value, was 25,416,908.
 
 
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY

FORM 10-Q

FOR THE QUARTER ENDED OCTOBER 31, 2012

TABLE OF CONTENTS

     
Page
PART 1     FINANCIAL INFORMATION
 
3
    
   
   
Item 1.
 
3
       
   
3
    
     
   
4
       
   
5
   
     
   
6
       
Item 2.
 
20
       
Item 3.
 
22
       
Item 4.
 
23
       
PART II   OTHER INFORMATION
 
24
       
Item 1.
 
24
       
Item 1A
 
24
       
Item 2.
 
24
       
Item 3.
 
24
       
Item 4.
 
25
       
Item 5.
 
25
       
Item 6.
 
25
       
 
26

 
PART I – FINANCIAL INFORMATION
Item 1.   Financial Statements
 
DRINKS AMERICAS HOLDINGS, LTD., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 
   
October 31,
   
April 30,
 
 
 
2012
   
2012
 
 ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 6,076     $ 295,403  
Accounts receivable, net
    575,704       739,565  
Inventory
    --       841,401  
Other current assets
    --       61,574  
Total current assets
    581,780       1,937,943  
                 
Property and equipment, net of accumulated depreciation
    --       13,518  
Investment in equity investees
    --       102,345  
Intangible assets, net of accumulated amortization
    --       5,193,355  
Deposits
    --       6,225  
Other assets
    --       48,550  
      --       5,363,993  
                 
Total assets
  $ 581,780     $ 7,301,936  
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
               
                 
Current liabilities
               
Accounts payable
  $ 1,011,771     $ 2,889,969  
Accounts payable - related party
    2,301,121       --  
Accrued expenses
    1,535,560       900,929  
Due to factor
    141       --  
Series A Convertible Preferred Stock redemption liability
    8,552,390       --  
Operating line of credit, related party
    660,938       215,946  
Convertible note payable, net of debt discount of $60,000 and $0
    265,000       --  
Investor notes payable
    460,000       793,000  
Notes and loans payable
    219,500       247,000  
Notes and loans payable - related party
    405,008       145,008  
Total current liabilities
    15,411,429       5,191,852  
                 
Long term debt
               
Deferred rent
    --       2,735  
Total liabilities
    15,411,429       5,194,587  
                 
Stockholders' equity (deficit):
               
Preferred stock: $0.001 par value; 1,000,000 shares authorized;
Series A Convertible: $0.001 par value; 2,884 and 10.544 shares issued and
outstanding as of October 31, 2012 and April 30, 2012
    3       11  
Series D Convertible: $0.001 par value; 114,000 and 0 shares issued and
outstanding as of October 31, 2012 and April 30, 2012
    114       -  
Common stock, $0.001 par value; 900,000,000 shares authorized; 24,826,487 and
21,279,339 issued and outstanding as of October 31, 2012 and April 30, 2012:
    24,826       21,279  
Additional paid-in capital
    43,185,411       50,672,809  
Accumulated deficit
    (58,040,003 )     (48,586,318 )
Total stockholders' equity (deficit)
    (14,829,649 )     2,107,781  
Equity attributable to non-controlling interest
    --       (432 )
Total stockholders' equity (deficit)
    (14,829,649 )     2,107,349  
                 
Total liabilities and stockholders' equity (deficit)
  $ 581,780     $ 7,301,936  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
DRINKS AMERICAS HOLDINGS, LTD., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
For the three months ended
October 31, 2012
   
For the three months ended
October 31, 2011
   
For the six months ended
October 31, 2012
   
For the six months ended
October 31, 2011
 
                         
Sales
  $ 1,931,456     $ 1,270,589     $ 3,221,394     $ 1,418,669  
Cost of sales
    1,524,152       968,212       2,520,933       1,100,994  
Gross margin
    407,304       302,377       700,461       317,675  
                                 
Operating expense
                               
Selling, general and administrative
    4,161,401       731,168       4,862,736       1,245,662  
Impairment losses
    5,295,700       --       5,295,700       --  
Loss on settlement of royalty agreement
    --       250,000       --       250,000  
Total operating expenses
    9,457,101       981,168       10,158,436       1,495,662  
                                 
 Net loss from operations
    (9,049,797 )     (678,791 )     (9,457,975 )     (1,177,987 )
                                 
Other income (expense)
                               
Interest expense
    (338,048 )     (56,486 )     (367,747 )     (168,674 )
Gain on change in fair value of derivative
    --       31,055       --       1,671  
Other expense
    --       (1,913 )     --       (5,396 )
Gain on settlement of accounts payable, net
    372,957       321,932       372,469       339,437  
Gain on disposal of product line
    --       -       --       280,478  
Total other income (expense)
    34,909       294,588       4,722       447,516  
                                 
Net loss before non-controlling interest
    (9,014,888 )     (384,203 )     (9,453,253 )     (730,471 )
                                 
Net loss attributable to non-controlling interest
    432       -       432       -  
                                 
Net loss
  $ (9,015,320 )   $ (384,203 )   $ (9,453,685 )   $ (730,471 )
                                 
Basic loss per common share
  $ (0.38 )   $ (0.19 )   $ (0.42 )   $ (0.40 )
                                 
Basic weighted average common shares outstanding     23,830,584       2,055,928       22,547,991       1,843,956  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
   
For the six months ended
October 31, 2012
   
For the six months ended
October 31, 2011
 
             
Cash flows from operating activities:
           
Net loss
  $ (9,453,685 )   $ (730,471 )
Adjustments to reconcile net loss to net
 cash used in operating activities:
               
Depreciation and amortization
    13,518       195,631  
Impairment losses
    5,295,700       -  
Bad debt expense
    -       22,388  
Stock-based compensation for services
    425,963       191,907  
Net loss allocated to non-controlling interest
    432       -  
Gain on settlement of debts
    (372,469 )     (339,437 )
Non-cash interest income
    -       (9,876 )
Non-cash interest expense
    233,770       -  
Gain on sale of interest in products line
    -       (280,478 )
Gain on change in fair value of derivative liability
    -       (1,671 )
Changes in operating assets and liabilities:
               
Accounts receivable
    163,861       (666,036 )
Inventories
    841,401       (634,941 )
Other assets
    110,124       8,770  
Deposits
    6,225       -  
Accounts payable
    (1,730,895 )     252,672  
Accounts payable-related party
    2,301,121       -  
Accrued expenses
    1,275,188       344,191  
Deferred rent
    (2,735 )     -  
Net cash used in operating activities
    (892,481 )     (1,647,351 )
                 
Cash flows from investing activities:
               
Net cash used in investing activities
    -       -  
                 
Cash flows from financing activities:
               
Proceeds from factor
    555,062       -  
Repayments to factor
    (647,301 )     -  
Proceeds from related party line of credit
    444,992       286,019  
Proceeds from convertible debt
    250,000       -  
Proceeds from common stock subscription
    -       1,350,000  
Net repayments of related party loans
    -       (657 )
Proceeds from investor notes payable
    (333,000 )     -  
Proceeds from the issuance of notes payable, related party
    360,901       227,475  
Repayments of notes payable
    (27,500 )     (102,316 )
Net cash provided by financing activities
    603,154       1,760,521  
                 
Net change in cash
    (289,327 )     113,170  
                 
Cash, beginning of period
    295,403       1,923  
                 
Cash, end of period
  $ 6,076     $ 115,093  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for interest
  $ 17,816     $ 8,005  
Cash paid for taxes
  $ -     $ -  
                 
Non-cash investing and financing activities:
               
Redemption of convertible Preferred A shares
  $ 8,426,000     $ -  
Shares of common stock issued for settlement of accounts payable
  $ 274,892     $ 96,155  
Warrants issued for settlement of debt
  $ 241,000     $ -  
Payment of accounts payable and accrued expense with shares of common stock
  $ -     $ 463,251  
Common stock issued to acquire trademark
  $ -     $ 240,000  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
 
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS

Basis of Presentation

On March 9, 2005 the shareholders of Drinks Americas, Inc., ("Drinks") a company engaged in the business of importing and distributing unique, premium alcoholic and non-alcoholic beverages to beverage wholesalers throughout the United States, acquired control of Drinks Americas Holdings, Ltd. ("Holdings" or the "Company "). Holdings and Drinks were incorporated in the State of Delaware on February 14, 2005 and September 24, 2002, respectively. On March 9, 2005 Holdings merged with Gourmet Group, Inc. ("Gourmet"), a publicly traded Nevada corporation, which resulted in Gourmet shareholders acquiring 1 share of Holdings' common stock in exchange for 10 shares of Gourmet's common stock. Both Holdings and Gourmet were considered "shell" corporations, as Gourmet had no operating business on the date of the share exchange, or for the previous three years. Pursuant to the June 9, 2004 Agreement and Plan of Share Exchange among Gourmet, Drinks and the Drinks' shareholders, Holdings, with approximately 16,232 shares of outstanding common stock, issued approximately 180,656 of additional shares of its common stock on March 9, 2005 (the "Acquisition Date") to the common shareholders of Drinks and to the members of its affiliate, Maxmillian Mixers, LLC ("Mixers"), in exchange for all of the outstanding Drinks' common shares and Mixers' membership units, respectively. As a result Maxmillian Partners, LLC ("Partners") a holding company which owned 99% of Drinks' outstanding common stock and approximately 55% of Mixers' outstanding membership units, became Holdings' controlling shareholder with approximately 87% of Holdings' outstanding common stock. For financial accounting purposes this business combination has been treated as a reverse acquisition, or a recapitalization of Partners' subsidiaries (Drinks and Mixers).
 
Subsequent to the Acquisition Date, Partners, which was organized as a Delaware limited liability company on January 1, 2002 and incorporated Drinks in Delaware on September 24, 2002, transferred all its shares of holdings to its members as part of a plan of liquidation.

On January 15, 2009, Drinks acquired 90% of Olifant U.S.A Inc. (“Olifant”), a Connecticut corporation, which owns the trademark and brand names and holds the worldwide distribution rights (excluding Europe) to Olifant Vodka and Gin.  During the year ended April 30, 2012, the Company reduced its ownership to 48% of Olifant recognizing a gain on disposal of product line of $280,478. In conjunction with the ownership reduction to 48%, the Company eliminated the remaining outstanding debt obligation of $600,000 and transitioned to the equity method of accounting.
 
Our license agreement with respect to Kid Rock’s BadAss Beer and related trademarks currently requires payments to Drinks Americas based upon volume through the term of the agreement.
 
Nature of Business

Through our wholly owned subsidiary, Drinks Americas Holdings, Inc. (“Drinks”), Drinks distributes and markets unique premium alcoholic beverages to beverage wholesalers throughout the United States and internationally.

In June of 2011, the company entered into an agreement to license and distribute the brands of Worldwide Beverage Imports ("WBI") in the eastern United States with brands to include KAH Tequila, Agave 99, Ed Hardy Tequila, Mexicali Beer, Chili Beer and Red Pig ale as well as various other products produced and imported by Worldwide Beverage Imports in return for the shares in the Company that would be no greater than 49% of the Company.
 
On November 1, 2011, the Company amended its agreement with Worldwide Beverage Imports. The Company was granted worldwide distribution rights on both the spirits and beer products of WBI.  In connection with the agreement, the Company agreed to issue $1,500,000 in additional restricted shares of common stock (the “Additional Shares”) to Worldwide at a purchase price of $0.50 per share in exchange for Worldwide forgiving a $300,000 loan owed by the Company to Worldwide and Worldwide delivering $1,200,000 in Inventory to the Company, the sale proceeds of which are to be contributed to the capital of the Company.
 
 
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
 
Upon the completion of the purchase of the Initial Issuance and the Additional Shares and until one (1) year from the date of the completion of the close of the transaction, the Company agreed not to issue any additional shares of the Company without prior written consent of the Purchaser, provided that the Company may issue certain exempt issuances without the prior written consent of the Purchaser in accordance with the terms of the Purchase Agreement.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. However, the results from operations for the six months ended October 31, 2012, are not necessarily indicative of the results that may be expected for the year ending April 30, 2013. These unaudited consolidated financial statements should be read in conjunction with the consolidated April 30, 2012 financial statements and footnotes thereto included in the Company's Form 10-K filed with the SEC.

The consolidated financial statements as of April 30, 2012 have been derived from the audited consolidated financial statements at that date but do not include all disclosures required by the accounting principles generally accepted in the United States of America.

The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiary (collectively, the "Company"). All significant inter-company transactions and balances have been eliminated in consolidation.

Revenue Recognition
 
The Company recognizes revenues when title passes to the customer, which is generally when products are shipped. The Company recognizes royalty revenue based on its license agreements with its distributors, which typically is the greater of either the guaranteed minimum royalties payable under our license agreement or a royalty rate computed on the net sales of the distributor shipments to its customers.
 
The Company recognizes revenue dilution from items such as product returns, inventory credits, discounts and other allowances in the period that such items are first expected to occur. The Company does not offer its clients the opportunity to return products for any reason other than manufacturing defects. In addition, the Company does not offer incentives to its customers to either acquire more products or maintain higher inventory levels of products than they would in ordinary course of business. The Company assesses levels of inventory maintained by its customers through communications with them. Furthermore, it is the Company's policy to accrue for material post shipment obligations and customer incentives in the period the related revenue is recognized.
 
 
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
 
Accounts Receivable
 
Accounts receivable are recorded at the original invoice amount less an allowance for uncollectible accounts that management believes will be adequate to absorb estimated losses on existing balances. Management estimates the allowance based on collectability of accounts receivable and prior bad debt experience. Accounts receivable balances are written off upon management's determination that such accounts are uncollectible. Recoveries of accounts receivable previously written off are recorded when received. Management believes that credit risks on accounts receivable will not be material to the financial position of the Company or results of operations at October 31, 2012 and April 30, 2012, the allowance for doubtful accounts was $0 and $138,491, respectively.
 
Inventories

Inventories are valued at the lower of cost or market, using the first-in first-out cost method. The Company assesses the valuation of its inventories and reduces the carrying value of those inventories that are obsolete or in excess of the Company’s forecasted usage to their estimated net realizable value. The Company estimates the net realizable value of such inventories based on analysis and assumptions including, but not limited to, historical usage, expected future demand and market requirements. A change to the carrying value of inventories is recorded to cost of goods sold.  During the six months ended October 31, 2012, the Company ceased carrying inventory and ships directly from manufacturer/wholesaler to the customer.
 
Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amounts of such assets may not be recoverable. The Company's policy is to record an impairment loss at each balance sheet date when it is determined that the carrying amount may not be recoverable. Recoverability of these assets is based on undiscounted future cash flows of the related asset. For the six months ended October 31, 2012, the Company recorded impairment losses of $5,193,355 and $102,345 for intangible assets and investment in equity investees, respectively.
 
Intangible Assets

The costs of intangible assets with determinable useful lives are amortized over their respective useful lives and reviewed for impairment when circumstances warrant. Intangible assets that have an indefinite useful life are not amortized until such useful life is determined to be no longer indefinite. Evaluation of the remaining useful life of an intangible asset that is not being amortized must be completed each reporting period to determine whether events and circumstances continue to support an indefinite useful life. Indefinite-lived intangible assets must be tested for impairment at least annually, or more frequently if warranted. Intangible assets with finite lives are generally amortized on a straight line bases over the estimated period benefited. The costs of trademarks and product distribution rights are amortized over their related useful lives of between 15 to 40 years. We review our intangible assets for events or changes in circumstances that may indicate that the carrying amount of the assets may not be recoverable, in which case an impairment charge is recognized currently. 
 

DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
 
Income Taxes
 
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the results of operations in the period the new laws are enacted.  A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless, it is more likely than not, that such assets will be realized. The Company has recognized no adjustment for uncertain tax provisions.
 
Stock Based Compensation

The Company accounts for stock-based compensation using the modified prospective approach. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity based compensation issued to employees and non-employees.
 
Earnings (Loss) Per Share
 
The Company computes earnings (loss) per share whereby basic earnings (loss) per share is computed by dividing net income (loss) attributable to all classes of common shareholders by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings (loss) per share is determined in the same manner as basic earnings (loss) per share except that the number of shares is increased to assume exercise of potentially dilutive and contingently issuable shares using the treasury stock method, unless the effect of such increase would be anti-dilutive. For the three and six months ended October 31, 2012 and 2011, the diluted earnings per (loss) share amounts equal basic earnings (loss) per share because the Company had net losses or the impact of the assumed exercise of contingently issuable shares would have been anti-dilutive.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.

Fair Value

Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying amount reported in the consolidated balance sheets for accounts receivables, accounts payable and accrued expenses approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported in the accompanying consolidated balance sheets for notes payable approximates fair value because the actual interest rates do not significantly differ from current rates offered for instruments with similar characteristics.

Recent accounting pronouncements
 
There are various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.
 
 
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
 (Unaudited)
3. GOING CONCERN

The accompanying consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern.  As of October 31, 2012, the Company has stockholders' equity (deficit) of $(14,829,649) and current liabilities exceeded current assets (working capital deficit) by $14,829,649 as of October 31, 2012. The Company has incurred significant operating losses and negative cash flows from operating activities since inception. For the six months ended October 31, 2012, the Company sustained a net loss of $9,453,685 compared to a net loss of $730,471 for the six months ended October 31, 2011 and used cash of approximately $892,481 in operating activities for the six months ended October 31, 2012 compared with approximately $1,647,351 for the six months ended October 31, 2011.

Our business plan includes increasing our sales from beverages and the issuance of additional equity securities of the Company for cash. If we are unable to implement our business plan or if we are delayed all or part of our business plan, our ability to attain profitable operations, generate positive cash flows from operating and investing activities and materially expand the business will be adversely affected.

The accompanying consolidated financial statements do not include any adjustments relating to the classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the company be unable to continue in existence.
 
4. ACCOUNTS RECEIVABLE

Accounts Receivable as of October 31, 2012 and April 30, 2012 consist of the following:
 
   
October 31,
2012
   
April 30,
2012
 
             
Accounts receivable
 
$
575,704
   
$
878,056
 
Allowances
   
-
     
(138,491 
)
   
$
575,704
   
$
739,565
 
 
5. INVENTORIES
 
Inventories as of October 31, 2012 and April 30, 2012 consist of the following:
 
  
 
October 31,
2012
   
April 30,
2012
 
               
Raw Materials
 
$
-
   
$
20,431
 
Finished goods
   
-
     
820,970
 
   
$
-
   
$
841,401
 
 
All raw materials used in the production of the Company's inventories are purchased by the Company and delivered to independent production contractors.  During the six months ended October 31, 2012, the Company ceased carrying inventory and ships directly from manufacturer/wholesaler to the customer.
 
 
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
 
6. OTHER CURRENT ASSETS
 
Other Current Assets as of October 31, 2012 and April 30, 2012 consist of the following:
 
  
 
October 31, 
2012
   
April 30,
 2012
 
             
Employee advances
 
$
-
   
$
46,659
 
Prepaid Other
   
-
     
14,915
 
   
$
-
   
$
61,574
 
 
Prepaid other are comprised of prepaid marketing fees, employee travel advances and expenses.
  
7. PROPERTY AND EQUIPMENT
 
Property and equipment as of October 31, 2012 and April 30, 2012 consist of the following:
 
  
Useful
Life
 
October 31,
2012
   
April 30,
2012
 
  
             
Computer equipment
5 years
 
$
-
   
$
8,401
 
Furniture & fixtures
5 years
   
-
     
44,028
 
Automobiles
5 years
   
-
     
27,136
 
Production molds & tools
5 years
   
-
     
92,400
 
       
-
     
171,965
 
Accumulated depreciation
     
-
     
(158,447
)
     
$
-
   
$
13,518
 
 
Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of 5 years.

Depreciation expense for the six months ended October 31, 2012 and 2011 was $13,518 and $5,877, respectively.
 
 
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
 
8. INTANGIBLE ASSETS
 
Intangible assets include the acquisition costs of trademarks, license rights and distribution rights for the Company’s alcoholic beverages.
 
As of October 31, 2012 and April 30, 2012, intangible assets are comprised of the following:
 
  
 
October 31,
2012
   
April 30,
2012
 
             
Trademark and license rights of Rheingold beer
 
$
-
   
230,000
 
Worldwide Beverages agreement
   
-
     
4,870,391
 
Other trademark and distribution rights
   
-
     
475,000
 
     
-
     
5,575,391
 
Accumulated amortization
   
-
     
(382,036
)
   
$
-
   
$
5,193,355
 
 
Amortization expense for the six months ended October 31, 2012 and 2011 was $16,965 and $14,703, respectively.

9. INVESTMENT IN EQUITY INVESTEES
 
Investment in equity investees represents the Company's investment in Old Whiskey Rivers and is recorded at fair value.  During the six months ended October 31, 2012, the Company recorded an impairment loss of $102,345 in the investment in equity investees.

10. INVESTOR NOTES PAYABLE
 
On June 19, 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 January 19, 2010, subject to certain contingencies.    
 
On December 13, 2011, the Company and the Investor entered into a Forbearance Agreement (the “Forbearance Agreement”) whereby the Investor agreed to forbear from enforcing the Investor’s remedial rights under the Loan Documents until January 1, 2013 (the “Forbearance Agreement”).  Pursuant to the Forbearance Agreement, the Debenture will remain in full force and effect and, as a result of certain defaults under the Loan Documents, the outstanding amount owed under the Debenture, including interest, fees, penalties and legal fees, was agreed to be no less than $2,000,000, with interest, fees and penalties continuing to accrue (the “Debenture Balance”).  Notwithstanding the Debenture Balance, the Company and the Investor agreed to a payoff balance of $1,126,360 (the “Forbearance Amount”), which Forbearance Amount shall accrue interest at a rate of 8% per annum, commencing on December 13, 2011.  So long as the Company complies with the terms of the Forbearance Agreement and no further defaults occur under the Loan Documents, the Company’s obligation will be entirely satisfied upon due payment of the Forbearance Amount in accordance with the following schedule of fixed cash payments:

 
· $285,360 upon execution of the Forbearance Agreement, which payment was made on December 13, 2011;
 
· $50,000 to be paid on or before March 1, 2012, which payment was made on February 27, 2012;
 
· $283,000 to be paid on or before June 1, 2012, which payment was made on May 31, 2012;
 
· $50,000 to be paid on or before September 1, 2012, which payment was made on September 6, 2012;
· $50,000 to be paid on or before November 1, 2012; and
· $408,000 plus all accrued and unpaid interest to be paid on or before January 1, 2013, which payment was not made (See Note 21).

 
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
 
On October 5, 2011 the Company paid the Investor $50,000 and shortly thereafter a final issuance of 77,280 shares of Common Stock which payment and issuance were credited to the Debenture Balance and the Forbearance Amount and were reflected in the amounts owed under the Debenture Balance and the Forbearance Amount.
 
In the event that the Company does not comply with all of its obligations or a default occurs under the Forbearance Agreement or the Loan Documents (a “Future Default”), the outstanding balance under the Debenture will be deemed to be the Debenture Balance with all accrued interest, fees and penalties, less any payments made in accordance with the payment schedule.  In the event of a Future Default, the Investor will have a right to convert all or part of the Debenture Balance for shares of Common Stock.  Accordingly, the Company agreed to reserve 400,000 shares of Common Stock for issuance to the lender upon such conversion.  In addition, the Company entered into an Escrow Agreement whereby the Company agreed to deliver 400,000 shares (the “Forbearance Conversion Shares”) to be held in escrow.  In the event of certain defaults under the Forbearance Agreement or the Debenture, the Investor will have the right to receive the Forbearance Conversion Shares, which right was memorialized in that certain letter containing Irrevocable Instructions to Transfer Agent dated December 13, 2011.  Pursuant to the Forbearance Agreement, the Company also consented to a Judgment by Confession whereby the Company agreed to allow a court of proper jurisdiction to enter a Judgment against the Company in favor of the Investor.

11. LINE OF CREDIT, RELATED PARTY

As of October 31, 2012 and April 30, 2012, the Company has outstanding $660,938 and $215,946 on a $660,000 line of credit, unsecured at 15% per annum, due upon demand, respectively.  The line of credit is provided by a current note holder and a former director of the Company.  

12. CONVERTIBLE DEBENTURE

On October 12, 2012, the Company issued a convertible debenture for total cash proceeds of $250,000 and a face value of $325,000. The face value of $325,000, which includes all principal and interest, is due in full on January 15, 2013. The debenture is convertible, at the option of the holder, into shares of common stock of the Company at a fixed conversion price of $0.50 and is secured under the terms of the Security Interest and Pledge Agreement. The convertible debenture is record net of debt discount of $60,000 on October 31, 2012.

13. NOTES AND LOANS PAYABLE
 
Notes and Loans Payable as of October 31, 2012 and April 30, 2011 consisted of the following: 
 
  
 
October 31,
2012
   
April 30, 
2012
 
             
Note Payable (a)
 
$
192,000
   
$
192,000
 
Note Payable (b)
   
27,500
     
55,000
 
     
219,500
     
247,000
 
Less current portion
   
219,500
     
247,000
 
                 
Long-term portion
 
$
-
   
$
-
 
 
(a)  
On December 13, 2010, in connection with the settlement of accrued but unpaid salary compensation due to our former Vice President of Sales, we issued a promissory note for $192,000. The note accrues interest at the annual rate of 6% and is due the earliest of thirty business days following the successful completion and receipt of a financing equal to or greater than one million dollars or January 1, 2012. At October 31, 2012, the Company accrued interest payable of $13,056 and the note payable was in default.
 
(b)  
In December 2011, in connection with the settlement of accrued but unpaid salary compensation due to an ex-employee, we agreed to a payment plan containing fourteen payments with the final payment due September 1, 2012 for a total of $140,000. Balance due under this agreement as of October 31, 2012 and April 30, 2012 was $27,500 and $55,000, respectively.

 
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
 
14. NOTES AND LOANS PAYABLE – RELATED PARTY
 
 Notes and Loans Payable – Related Party, due to a former director of the Company, as of October 31, 2012 and April 30, 2011 consisted of the following: 
 
  
 
October 31,
2012
   
April 30, 
2012
 
             
Note Payable (a)
 
$
125,008
   
$
145,008
 
Note Payable (b)
   
280,000
     
-
 
     
405,008
     
145,008
 
Less current portion
   
405,008
     
145,008
 
                 
Long-term portion
 
$
-
   
$
-
 
 
(a)  
As of October 31, 2012, the Company has borrowed an aggregate of $250,000 net of $124,992 of repayments, from an investor under an informal agreement for working capital purposes.  The loan is payable on demand and is classified under notes and loans payable as a current liability of $125,008 and $145,008 as of October 31, 2012 and April 30, 2012, respectively.  Interest is paid on a monthly basis.
 
(b)  
Note payable is unsecured and has no specific terms of repayment.  Interest is 18% per annum.

15. DUE TO FACTOR

On June 18, 2012, the Company entered a recourse factoring agreement expiring six months from execution.  The factoring agreement advances 80% of approved invoices.  The factoring agreement is secured by continuing lien on accounts receivable, contract rights, instruments, chattel paper, general intangibles and inventory.

16. ACCRUED EXPENSES
 
Accrued expenses consist of the following at October 31, 2012 and April 30, 2012:
 
  
 
October 31,
2012
   
April 30, 
2012
 
             
Payroll, board compensation and consulting fees owed to officers,  directors and shareholders
 
$
-
   
$
770,690
 
Other payroll and consulting fees
   
-
     
6,563
 
Interest
   
  118,170
     
40,850
 
Accrued expenses
   
1,088,390
     
 82,826
 
Royalties
   
  329,000
     
-
 
   
$
1,535,560
   
$
900,929
 
 
 
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
 
17. SHAREHOLDERS’ EQUITY (DEFICIT)

Preferred Stock

(i)  
Series A Convertible Preferred Stock

On September 24, 2012 and on October 9, 2012, the Company received a notice from Enable Opportunity Partners, LP, a holder of approximately 7,660 shares the Company’s Series A Convertible Preferred Stock, electing a full redemption of its Preferred A holdings. The total redemption price of $8,426,000 is 110% of the stated value of $1,000 per share of the Series A Convertible Preferred Shares. Interest is payable at 18% per annum on the unpaid redemption price.  At October 31, 2012, interest payable of $126,390 was accrued. The total redemption liability of $8,552,390 is recorded as a current liability on the balance sheet.

(ii)  
Series D Convertible Preferred Stock

On August 30, 2012, the Company entered into Amendment No. 2 (the “Amendment”) to that certain License Agreement dated  June 27, 2011 with Worldwide Beverage Imports, LLC.  Pursuant to the Amendment (i) the Company is now permitted to sell and distribute WBI licensed spirits in all states of the United States, including California; and (ii) the Company’s right to an exclusive license to use and display certain trademarks, service marks, and trade names which are applicable to WBI products was made into a non-exclusive license.  The exclusive distribution license for WBI products was not altered.

In consideration for and as an inducement to enter into the Amendment, the Company agreed to transfer 2,750,000 shares of the Company’s common stock and 114,000 shares of the Company’s Series D Preferred Stock, which was newly designated on August 30, 2012, to WBI (the “Holder”). The Holder is a related party and, as such, the transaction was valued at the cost basis of the Holder which was $0.

The Series D Preferred Stock vote as a single class with the common stock of the Company and the holders of the Series D Preferred Stock hold the number of votes equal to 100 times the number of shares of Series D Preferred Stock.  Upon liquidation, the holders of the Series D Preferred Stock have the right to receive, prior to any distribution with respect to the Company’s common stock, but subject to the rights of the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, the Stated Value (plus any other fees or liquidated damages payable thereon).
 
Provided that the Holder and the Holder’s affiliates have been relieved of their personal guarantees on behalf of the Company and all debt to the Holder and the Holder’s affiliates is paid in full, the Series D Preferred Stock shall automatically be converted into 250,000 shares of the Company’s Common Stock, if, at any time, (i) the Holder and the Holder’s affiliates reduces its ownership of the Company’s Common Stock below 50% of 10,229,602 shares, the number of shares the Holder and the Holder’s affiliates held on August 23, 2012 and the concentration of Common Stock has not exceeded 20% of 10,229,602 shares by any other individual or affiliate group; or (ii) the total number of the Company’s common stock shareholders exceeds 1,000 shareholders.

Common Stock
 
On July 12, 2012, the Company issued 25,000 warrants to a consultant with an exercise price of $0.70 and a life of five years which vest immediately. The warrants were measured at their fair value on July 12, 2012 using the following Black-Scholes Model Assumptions: risk free interest (0.63%); expected volatility (96%); expected life (60 months) and no dividends. These warrants were valued at $12,565 and expensed immediately.
 
On August 9, 2012, the Company entered into an agreement to settle accounts payable in the amount of $83,194 by issuing 250,000 shares of common stock.  The fair value of the shares was $140,000, of which $56,806 was recognized as a loss on debt settlement in the statement of operations.

On August 9, 2012, the Company entered into an agreement to settle accounts payable in the amount of $10,000 for consulting fees due to Timothy J. Owens, the CEO of the Company, by issuing 100,000 shares of common stock.  The fair value of the shares was $56,000, of which $46,000 was recognized as a loss on debt settlement in the statement of operations.

On August 9, 2012, the Company issued 80,000 shares of its common stock to a consultant for services rendered with a fair value of $44,800 based on the quoted market price of the shares at time of issuance.
 

DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
 
On August 9, 2012, the Company entered into an agreement to settle accounts payable in the amount of $43,145 by issuing 142,148 shares of common stock.  The fair value of the shares was $78,892, of which $35,747 was recognized as a loss on debt settlement in the statement of operations.

On August 9, 2012, the Company issued 571,000 warrants to a consultant with an exercise price of $0.56 and a life of five years which vest immediately. The warrants were measured at their fair value on August 9, 2012 using the following Black-Scholes Model Assumptions: risk free interest (0.74%); expected volatility (116%); expected life (60 months) and no dividends. These warrants were valued at $270,257 and expensed immediately.
 
On September 12, 2012, the Company entered into an agreement to settle accounts payable and debts of $752,422 by issuing 1,596,000 warrants. The fair value of the warrants was $241,400, of which $511,022 was recognized as a gain on debt settlement in the statement of operations. The warrants have an exercise price of $0.30 and a life of five years which vest immediately. The warrants were measured at their fair value on September 12, 2012 using the following Black-Scholes Model Assumptions: risk free interest (0.70%); expected volatility (128%); expected life (60 months) and no dividends.

On October 1, 2012, the Company issued 150,000 shares of its common stock to a consultant for services rendered with a fair value of $45,000 based on the quoted market price of the shares at time of issuance.

On October 12, 2012, the Company issued 75,000 shares of its common stock to consultant for services rendered with a fair value of $24,000 based on the quoted market price of the shares at time of issuance.

Stock option expense related to executive and employee options granted resulting in a charge to operations during the six month period ended October 31, 2012 of $41,906.

18. WARRANTS AND OPTIONS

Warrants

The following table summarizes the warrants outstanding and related prices for the shares of the Company’s common stock issued as of October 31, 2012:
 
           
Warrants Outstanding
Weighted Average
               
Warrants Exercisable
 
           
Remaining
   
Weighted
         
Weighted
 
     
Number
   
Contractual
   
Average
   
Number
   
Average
 
Exercise Price
   
Outstanding
   
Life (years)
   
Exercise price
   
Exercisable
   
Exercise Price
 
$
0.30
     
1,596,000
     
4.87
   
$
0.30
     
1,596,000
   
$
0.30
 
 
0.56
     
571,000
     
4.78
     
0.56
     
571,000
     
0.56
 
 
0.70
     
25,000
     
4.70
     
0.70
     
25,000
     
0.70
 
 
23.44
     
213
     
2.21
     
23.44
     
213
     
23.44
 
 
51.56
     
182
     
2.17
     
51.56
     
182
     
51.56
 
 
59.78
     
647
     
2.14
     
59.78
     
647
     
59.78
 
 
84.38
     
1,120
     
2.13
     
84.38
     
1,120
     
84.38
 
 
93.75
     
1,254
     
2.07
     
93.75
     
1,254
     
93.75
 
 
234.38
     
53
     
1.83
     
234.38
     
53
     
234.38
 
 
243.75
     
51
     
1.83
     
243.75
     
51
     
243.75
 
 
351.56
     
67
     
4.62
     
351.56
     
67
     
351.56
 
 
562.50
     
2,624
     
7.50
     
562.50
     
2,624
     
562.50
 
 
1,312.50
     
667
     
1.64
     
1,312.50
     
667
     
1,312.50
 
 
1,640.00
     
33
     
1.64
     
1,640.00
     
33
     
1,640.00
 
 
1,875.00
     
620
     
0.65
     
1,875.00
     
620
     
1,875.00
 
 
4,815.00
     
213
     
4.62
     
4,815.00
     
213
     
4,815.00
 
Total
     
2,199,744
     
4.84
     
  2.60
     
2,199,744
     
  2.60
 


DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)

Transactions involving the Company’s warrant issuance are summarized as follows:
 
   
Number of
Shares
   
Weighted
Average Price
Per Share
 
Outstanding at April 30, 2011
   
8,225
   
$
812.50
 
Issued
   
-
     
-
 
Expired
   
(81
)
   
(697.50
)
Canceled
   
-
     
-
 
Outstanding at April 30, 2012
   
7,744
     
812.50
 
Issued
   
2,192,000
     
0.37
 
Expired
   
-
         
Canceled
   
-
     
-
 
Outstanding at October 31, 2012
   
2,199,744
   
$
2.60
 

Options
 
The following table summarizes the options outstanding and related prices for the shares of the Company’s common stock issued as of October 31, 2012:
 
           
Options Outstanding
Weighted Average
               
Warrants Exercisable
 
           
Remaining
   
Weighted
         
Weighted
 
     
Number
   
Contractual
   
Average
   
Number
   
Average
 
Exercise Price
   
Outstanding
   
Life (years)
   
Exercise price
   
Exercisable
   
Exercise Price
 
$
600.00
     
620
     
1.37
   
$
600.00
     
465
   
$
600.00
 
 
660.00
     
667
     
1.37
     
660.00
     
 500
     
660.00
 
 
1,312.50
     
133
     
1.37
     
1,312.50
     
133
     
1,312.50
 
Total
     
1,420
     
1.37
             
1,098
         
 
Transactions involving the Company’s options issuance are summarized as follows:
 
   
Number of
Shares
   
Weighted
Average Price
Per Share
 
Outstanding at April 30, 2011
   
1,420
   
$
695.00
 
Issued
   
-
     
-
 
Exercised
   
-
     
-
 
Canceled or expired
   
-
     
-
 
Outstanding at April 30, 2012
   
1,420
     
695.00
 
Issued
   
-
     
-
 
Expired
   
-
         
Canceled
   
-
     
-
 
Outstanding at October 31, 2012
   
1,420
   
$
695.00
 

The Company did not issue options during the six months ended October 31, 2012.
 
 
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
 
19.  RELATED PARTY TRANSACTIONS

Due to Stockholders

The Company is obligated to issue shares of its common stock to several of its stockholders in connection with its June 2009 debt financing (see Note 10).

During the six months ended October 31, 2012, the Company incurred $117,086, net of repayments of $16,185, to the Company's CEO for incurred past expenses.   

As described in Notes 11 and 14 above, a note holder and former director of the Company provides a $660,000 line of credit, of which $660,938 is being utilized. For the six months ended October 31, 2012, the Company has paid $5,489 of interest on the credit line.

Please refer to the Company's filed 10-K for the year ended April 30, 2012 for additional related party transactions.
 
20. CUSTOMER CONCENTRATION
 
For the six months ended October 31, 2012 and 2011, five customers accounted for 52% and 66%, of the Company's sales, respectively, and five customers accounted for 55% and 68%, respectively of the Company's accounts receivable as of October 31, 2012 and April 30, 2012, respectively.
 
The Company’s national spirits sales are generally done through the top five spirits and wine distributing companies in the nation, Glazers, Southern Wine and Spirits, Republic National Distributing Company, Johnson Brothers Distributing Company and Youngs Market. The Company’s beer business is done primarily through a network of Anhueser Busch and Miller and Coors Brewing company distributors in 15 states.

21. SUBSEQUENT EVENTS

On November 27, 2012, the Company issued 140,000 shares of its common stock to a consultant for services rendered with a fair value of $28,000 based on the quoted market price of the shares at time of issuance.

On November 27, 2012, the Company entered into an agreement to settle accounts payable in the amount of $31,661 for consulting by issuing 450,421 shares of common stock.  The fair value of the shares was $90,084, of which $58,423 was recognized as a loss on debt settlement in the statement of operations.

On November 27, 2012, Federico Cabo resigned his positions as the Company’s Chief Executive Officer, as well as his position serving as chairman of the Company’s board of directors.  Federico Cabo’s resignation was not due to any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

On November 27, 2012, Richard Cabo resigned his positions as the Company’s Chief Executive Officer, as well as his position serving on the Company’s board of directors.  Richard Cabo’s resignation was not due to any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

On November 27, 2012, Timothy J. Owens was appointed to serve as the Company’s Chief Executive Officer and elected to serve as chairman of the Company’s board of directors.

On December 7, 2012, Steven Dallas resigned his positions as Interim Chief Financial Officer of the Company.  Mr. Dallas’ resignation was not due to any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

On December 10, 2012, the Company received a letter from WBI demanding that the Company immediately pay all amounts due to WBI under that certain License Agreement (Spirits) dated June 27, 2011, as amended, by and between the Company and WBI (the “License Agreement”).  Pursuant to the License Agreement, if the Company fails to cure a violation of a material provision of the License Agreement within thirty (30) days after written notice of such breach, the License Agreement may be terminated.  The Company was unable to pay all past due amounts owed to WBI within thirty days of December 10, 2012.

 
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2012
(Unaudited)
 
On January 10, 2013, the Company received a notice from WBI terminating the License Agreement based on the Company’s failure to cure all past due invoices.  Accordingly, the Company (i) is immediately obligated to pay WBI all sums owed by the Company to WBI; (ii) must discontinue use of WBI’s trademarks, service marks, and trade names; (iii) must take all other actions as may be reasonably necessary to terminate the Company s business and contractual arrangements with WBI and to transition of its sales and services to WBI.

On January 14, 2013, the holders of the majority of the shares of common of the Company, acting by written consent in lieu of a meeting of the shareholders, voted to decrease the number of Directors on the Board of Directors to three (3) Directors.  As a result of the decreased size of the Board, Fredrick Schulman, Douglas Cole and Jack Kleinert ceased to be members of the Board.  Timothy Owens, Leonard Moreno and Steven Dallas remained on the Board.

On January 15, 2013, Steven Dallas, tendered his resignation from the Board.  Mr. Dallas’ resignation was not as a result of any disagreements with the Company.  On January 16, 2013, the remaining Directors, acting by unanimous written consent in lieu of a meeting, elected Mr. Charles Menzies to fill the vacancy created by Mr. Dallas’ resignation.  As a result the current members of the Board are Timothy Owens, Leonard Moreno and Charles Menzies.

June 19, 2009 Debenture

As previously reported on the Company’s Current Reports on Form 8-K, filed with the SEC on June 25, 2009 and on December 20, 2011, the Company sold to one accredited investor (the “Investor”) a $4,000,000 non-interest bearing debenture (the “Debenture”) pursuant to a Securities Purchase Agreement (the “SPA”).  The Company’s obligations under the Debenture and the SPA were secured by a Pledge Agreement (the “Pledge Agreement” and, the Pledge Agreement together with the Debenture, the SPA and all other documents entered into in conjunction therewith or as an amendment thereto, the “Loan Documents”).  Additionally, on December 13, 2011, the Company and the Investor entered into a Forbearance Agreement (the “Forbearance Agreement”) whereby the Investor agreed to forbear from enforcing the Investor’s remedial rights against certain defaults under the Loan Documents until January 1, 2013 (the “Forbearance Agreement”).  Pursuant to the Forbearance Agreement, the Debenture remained in full force and effect and, as a result of certain defaults under the Loan Documents, the outstanding amount owed under the Debenture, including interest, fees, penalties and legal fees, was agreed to be no less than $2,000,000, with interest, fees and penalties continuing to accrue (the “Debenture Balance”).  Notwithstanding the Debenture Balance, the Company and the Investor agreed to a payoff balance of $1,126,360 (the “Forbearance Amount”).  Pursuant to the Forbearance Agreement, the Company made various scheduled payments towards the Forbearance Amount.  However, the Company was unable to pay the final payment for $408,000 plus all accrued and unpaid interest on or prior to its due date, January 1, 2013, or within the five business day cure period.

On January 15, 2013, the Investor delivered a notice of default (“Default Notice”) to the Company.  The Default Notice contained, among other things, (i) a termination of the Forbearance Agreement; (ii) a request for partial repayment of the Debenture Balance by release, pursuant to the Forbearance Agreement, of 400,000 shares of the Company’s Common stock held in escrow; (iii) a demand for the immediate and accelerated payment of all amounts due under the Debenture and/or Forbearance Agreement equal to $2,149,888.

October 15, 2012 Debenture

On October 15, 2012, the Company sold a $325,000 convertible debenture (the “Convertible Debenture”) to one accredited investor (the “Holder”).  The proceeds to the Company were $250,000 and the Convertible Debenture contained an original issue discount of $75,000.  The Convertible Debenture bears a 0% interest rate, an 18% default interest rate and matured on January 15, 2013 (the “Maturity Date”).  In connection with the sale of the Convertible Debenture, the Company, the Holder and a pledgor (the “Pledgor”), an entity owned by the Company’s former Chief Executive Officer and Chairman, Federico Cabo, entered into a security interest and pledge agreement (the “Security Agreement”) whereby the Pledgor, deposited 2,000,000 shares (the “Pledge Shares”) of the Company’s common stock as security for the performance of the Company under the Convertible Debenture.

On January 15, 2013, the Company received a letter of default (“Letter of Default”) for the nonpayment of the $325,000 due to the Holder on the Maturity Date.  In the Letter of Default, the Holder declared the Company’s default under the Convertible Debenture and demanded the release of the Pledge Shares pursuant to the Security Agreement.
 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Unless otherwise indicated or the context otherwise requires, all references in this Report on Form 10-Q to “we”, “us”, “our” and the “Company” are to Drinks Americas Holdings, Ltd., a Delaware corporation and formerly Gourmet Group, Inc., a Nevada corporation, and its majority owned subsidiaries Drinks Americas, Inc., Drinks Beers, Drinks Global Imports, LLC, D.T. Drinks, LLC, and Maxmillian Mixers, LLC and Maxmillian Partners, LLC.
 
Cautionary Notice Regarding Forward Looking Statements
 
The disclosure and analysis in this Report contains some forward-looking statements. Certain of the matters discussed concerning our operations, cash flows, financial position, economic performance and financial condition, in particular, future sales, product demand, competition and the effect of economic conditions include forward-looking statements within the meaning of section 27A of the Securities Act of 1933, referred to herein as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, referred to herein as the Exchange Act.
 
Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates" and similar expressions, are forward-looking statements. Although we believe that these statements are based upon reasonable assumptions, including projections of orders, sales, operating margins, earnings, cash flow, research and development costs, working capital, capital expenditures, distribution channels, profitability, new products, adequacy of funds from operations and other projections, and statements expressing general optimism about future operating results, and non-historical information, they are subject to several risks and uncertainties, and therefore, we can give no assurance that these statements will be achieved.
 
Readers are cautioned that our forward-looking statements are not guarantees of future performance and the actual results or developments may differ materially from the expectations expressed in the forward-looking statements.
 
As for the forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainty of estimates, forecasts and projections and may be better or worse than projected. Given these uncertainties, you should not place any reliance on these forward-looking statements. These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this filing to reflect events or changes in circumstances or changes in expectations or the occurrence of anticipated events.
 
We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part II, "Item 1A. Risk Factors" and elsewhere in this report and in our Annual Report on Form 10-K for the year ended April 30, 2012, and those described from time to time in our future reports filed with the Securities and Exchange Commission.  This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
 
Introduction
 
The following discussion and analysis summarizes the significant factors affecting: (1) our consolidated results of operations for the three and six months ended October 31, 2012, compared to the three and six months ended October 31, 2011, 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 Quarterly Report on Form 10-Q, and the audited consolidated financial statements and notes included  in our Annual Report Form 10-K, filed on August 14, 2012.
 
 
Results of Operations

Three months Ended October 31, 2012 Compared to Three months Ended October 31, 2011
 
Net Sales: Net sales were approximately $1,931,456 for the three months ended October 31, 2012 compared to net sales of approximately $1,270,589 for the same period last year, an increase of 52% as a result of the Company’s sales of products from the license agreement with Worldwide Beverage Imports.  KAH Tequila is the primary driver of revenue growth for the Company.
 
Gross Margin:  Gross margin was $407,304, or 21.0% of net sales for the three months ended October 31, 2012 compared to gross margin of $302,377, or 24% of net sales for the three months ended October 31, 2011. 
 
Selling, General and Administrative Expenses: Selling, general and administrative expenses totaled approximately $4,161,401 for the three months ended October 31, 2012, compared to $731,168 for the three months ended October 31, 2011, an increase of approximately $3,430,233, or 469%, is primarily the result of increased accrued expenses for royalties and contingent liabilities, and increased promotion expenses.

Impairment Losses: For the three months ended October 31, 2012, the Company recorded impairment losses of $5,193,355 and $102,345 for intangible assets and investment in equity investees, respectively.
 
Interest expense:  Interest expense for the three months ended October 31, 2012 was approximately $338,048 compared to $56,486 for the same period last year, a net increase of $281,562 or 498%.  This increase is predominantly due to increased short term debt and interest of $126,390 charged on the redemption amount of Series A Convertible Preferred Shares.
 
Loss on change in fair value of derivative:  During the three months ended October 31, 2011, we were required to bifurcate the conversion option embedded in certain convertible promissory notes and record at fair value each reporting period as a liability.  During the three months ended October 31, 2012, we recorded a loss on change in fair value of $0 as compared to $31,055 the same period current year.
 
Loss (gain) on settlement of debt:  During the three months ended October 31, 2012 and 2011, we negotiated and settled outstanding debt, primarily trade vendors.  As such, we recognized a gain on settlement of debt of approximately $372,957 for the three months ended October 31, 2012 compared to a gain of approximately $321,932 the same period last year.
 
Six months Ended October 31, 2012 Compared to Six months Ended October 31, 2011
  
Net Sales: Net sales were approximately $3,221,394 for the six months ended October 31, 2012 compared to net sales of approximately $1,418,669 for the same period last year, an increase of 127% as a result of the Company’s sales of products from the license agreement with Worldwide Beverage Imports.  KAH Tequila is the primary driver of revenue growth for the Company.
 
Gross Margin:  Gross margin was $700,461, or 21.7% of net sales for the six months ended October 31, 2012 compared to gross margin of $317,675, or 22.4% of net sales for the six months ended October 31, 2011. 

Selling, General and Administrative Expenses: Selling, general and administrative expenses totaled approximately $4,862,736 for the six months ended October 31, 2012, compared to $1,245,662 for the six months ended October 31, 2011, an increase of approximately $3,617,074, or 290%, is primarily the result of increased accrued expenses for royalties and contingent liabilities, and increased promotion expenses.

Impairment Losses: For the six months ended October 31, 2012, the Company recorded impairment losses of $5,193,355 and $102,345 for intangible assets and investment in equity investees, respectively.
 
Interest expense:  Interest expense for the six months ended October 31, 2012 was approximately $367,747 compared to $168,674 for the same period last year, a net increase of $199,073 or 118%.  This increase is predominantly due to increased short term debt and interest of $126,390 charged on the redemption amount of Series A Convertible Preferred Shares.

Loss on change in fair value of derivative:  During the six months ended October 31, 2011, we were required to bifurcate the conversion option embedded in certain convertible promissory notes and record at fair value each reporting period as a liability.  During the six months ended October 31, 2012, we recorded a loss on change in fair value of $0 as compared to $1,671 the same period current year.
 
Loss (gain) on settlement of debt:  During the six months ended October 31, 2012 and 2011, we negotiated and settled outstanding debt, primarily trade vendors.  As such, we recognized a gain on settlement of debt of approximately $372,469 for the six months ended October 31, 2012 compared to a gain of approximately $339,437 the same period last year.
 
 
Gain on disposal of product line:  During the six months ended October 31, 2011, we exchanged 42% of our interest in Olifant U.S.A, Inc. for the cancellation of our remaining outstanding debt obligation and related accrued interest.  With the exchange, we reduced our ownership to 48% and realized a gain on sale of the product line of approximately $280,478 compared to $0 for the six months ended October 31, 2012.
 
Financial Liquidity and Capital Resources
 
Our accompanying consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern. As of October 31, 2012, the Company has shareholders' equity (deficit) of approximately $(14,829,649) and working capital deficiency of approximately $14,829,649 as of October 31, 2012 and has incurred significant operating losses and negative cash flows since inception. For the six months ended October 31, 2012, the Company sustained an operating loss of approximately $9,453,253 compared to an operating loss of $730,471 for the six months ended October 31, 2011 and used cash of approximately $892,481 in operating activities for the six months ended October 31, 2012 compared with approximately $1,647,351 for the six months ended October 31, 2011. We have converted certain liabilities into equity.   The accompanying consolidated financial statements do not include any adjustments relating to the classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the company be unable to continue in existence. Without substantial inflows of cash from the sale of our equity, together with successful negotiations with our legacy creditors to convert our debts to equity, the Company will be unable to continue as an ongoing concern.
 
We will need to continue to manage carefully our working capital and our business decisions will continue to be influenced by our working capital requirements.
 
Net Cash Used in Operating Activities: Net cash used in operating activities for the six months ended October 31, 2012 was approximately $892,481, primarily from our loss of approximately $9,453,685 net with non cash activities of approximately $13,518 depreciation, $425,963 stock based compensation, $5,295,700 impairment losses, $2,964,290 changes in operating assets and sundry other non-cash activities (primarily decreases in our accounts receivable and inventory). We have to date funded some of our operations predominantly through loans from shareholders, officers and investors.
 
Net Cash provided by Investing Activities: Nil for the six months ended October 31, 2012 and 2011.

Net Cash provided by Financing Activities: Net cash provided by financing activities for the six months ended October 31, 2012 was approximately $603,154 primarily from net proceeds from related party line of credit, convertible debt and notes payable.

Based on our current operating activities and plans, we believe without new sources of financings the Company will not have sufficient cash for its requirements over the next twelve months.

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
 
Generally, 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 decreasing their inventory levels, which typically remain on hand after the holiday season.
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk.
 
Not applicable to smaller reporting companies.
 

Item 4.    Controls and Procedures.
 
Disclosure Controls and Procedures  
 
We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC's rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.
 
Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of October 31, 2012, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of October 31, 2012, our Chief Executive Officer and our Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were ineffective due to the Company’s inability to file this quarterly report within the period specified by the SEC, the Company’s ineffective period end closing procedures, and the Company’s lack of competent accounting staff.  
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting as defined in Rule 13a-15 under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
PART II – OTHER INFORMATION
 
Item 1.    Legal Proceedings.
 
There have been no material changes in legal proceeds previously disclosed in our Annual Report on Form 10-K for the year ended April 30, 2012.

Item 1A.  Risk Factors.
 
There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended April 30, 2012.
 
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.
 
On October 1, 2012, the Company issued 150,000 shares of its common stock to a consultant for services rendered with a fair value of $45,000 based on the quoted market price of the shares at time of issuance.

On October 15, 2012, the Company issued 75,000 shares of its common stock as incentive for an accredited investor to loan money to the Company with a fair value of $24,000 based on the quoted market price of the shares at time of issuance.

On November 27, 2012, the Company issued 115,000 shares of its common stock to a consultant for services rendered with a fair value of $23,000 based on the quoted market price of the shares at time of issuance.

Item 3.    Defaults Upon Senior Securities.
 
June 19, 2009 Debenture

As previously reported on the Company’s Current Reports on Form 8-K, filed with the SEC on June 25, 2009 and on December 20, 2011, the Company sold to one accredited investor (the “Investor”) a $4,000,000 non-interest bearing debenture (the “Debenture”) pursuant to a Securities Purchase Agreement (the “SPA”).  The Company’s obligations under the Debenture and the SPA were secured by a Pledge Agreement (the “Pledge Agreement” and, the Pledge Agreement together with the Debenture, the SPA and all other documents entered into in conjunction therewith or as an amendment thereto, the “Loan Documents”).  Additionally, on December 13, 2011, the Company and the Investor entered into a Forbearance Agreement (the “Forbearance Agreement”) whereby the Investor agreed to forbear from enforcing the Investor’s remedial rights against certain defaults under the Loan Documents until January 1, 2013 (the “Forbearance Agreement”).  Pursuant to the Forbearance Agreement, the Debenture remained in full force and effect and, as a result of certain defaults under the Loan Documents, the outstanding amount owed under the Debenture, including interest, fees, penalties and legal fees, was agreed to be no less than $2,000,000, with interest, fees and penalties continuing to accrue (the “Debenture Balance”).  Notwithstanding the Debenture Balance, the Company and the Investor agreed to a payoff balance of $1,126,360 (the “Forbearance Amount”).  Pursuant to the Forbearance Agreement, the Company made various scheduled payments towards the Forbearance Amount.  However, the Company was unable to pay the final payment for $408,000 plus all accrued and unpaid interest on or prior to its due date, January 1, 2013, or within the five business day cure period.

On January 15, 2013, the Investor delivered a notice of default (“Default Notice”) to the Company.  The Default Notice contained, among other things, (i) a termination of the Forbearance Agreement; (ii) a request for partial repayment of the Debenture Balance by release, pursuant to the Forbearance Agreement, of 400,000 shares of the Company’s Common stock held in escrow; (iii) a demand for the immediate and accelerated payment of all amounts due under the Debenture and/or Forbearance Agreement equal to $2,149,888.

October 15, 2012 Debenture

On October 15, 2012, the Company sold a $325,000 convertible debenture (the “Convertible Debenture”) to one accredited investor (the “Holder”).  The proceeds to the Company were $250,000 and the Convertible Debenture contained an original issue discount of $75,000.  The Convertible Debenture bears a 0% interest rate, an 18% default interest rate and matured on January 15, 2013 (the “Maturity Date”).  In connection with the sale of the Convertible Debenture, the Company, the Holder and a pledgor (the “Pledgor”), an entity owned by the Company’s former Chief Executive Officer and Chairman, Federico Cabo, entered into a security interest and pledge agreement (the “Security Agreement”) whereby the Pledgor, deposited 2,000,000 shares (the “Pledge Shares”) of the Company’s common stock as security for the performance of the Company under the Convertible Debenture.

On January 15, 2013, the Company received a letter of default (“Letter of Default”) for the nonpayment of the $325,000 due to the Holder on the Maturity Date.  In the Letter of Default, the Holder declared the Company’s default under the Convertible Debenture and demanded the release of the Pledge Shares pursuant to the Security Agreement.  
 
Note Payable

On December 13, 2010, in connection with the settlement of accrued but unpaid salary compensation due to our former Vice President of Sales, we issued a promissory note for $192,000. The note accrues interest at the annual rate of 6% and is due the earliest of thirty business days following the successful completion and receipt of a financing equal to or greater than one million dollars or January 1, 2012. At October 31, 2012, the note payable was in default.
 
 
Item 4.    Mine Safety Disclosures.
  
Not Applicable.
 
Item 5.    Other Information.
 
None.
 
Item 6.    Exhibits.
 

101 INS
XBRL Instance Document
   
101 SCH
XBRL Taxonomy Extension Schema Document
   
101 CAL
XBRL Taxonomy Extension Calculation Linkbase Document
   
101 DEF
XBRL Taxonomy Extension Definition Linkbase Document
   
101 LAB
XBRL Taxonomy Extension Label Linkbase Document
   
101 PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
DRINKS AMERICAS HOLDINGS, LTD.
 
       
January 22, 2013
By:
/s/ Timothy J. Owens
 
   
Timothy J. Owens
Chief Executive Officer
 

January 22, 2013
By:
/s/ Timothy J. Owens
 
   
Timothy J. Owens
Chief Financial Officer
(Principal Accounting Officer)
 
 
EX-31.1 2 ex31-1.htm ex31-1.htm
Exhibit 31.1
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
 
I, Timothy J. Owens, certify that:
 
1.  I have reviewed this quarterly report on Form 10-Q of Drinks Americas Holdings, Ltd.;
 
2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly for the period in which this quarterly report is being prepared;
 
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
 
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
 
5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
 
 
a)
all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to  adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
 
 
Dated:  January 22, 2013
 
By: 
/s/ Timothy J. Owens
 
     
Timothy J. Owens
Chief Executive Officer (Principal Executive Officer) 
 
EX-31.2 3 ex31-2.htm ex31-2.htm
Exhibit 31.2
 
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
 
I, Timothy J. Owens, certify that:
 
1.  I have reviewed this quarterly report on Form 10-Q of Drinks Americas Holdings, Ltd.;
 
2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly for the period in which this quarterly report is being prepared;
  
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
 
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
 
5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
 
 
a)
all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
  
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
 
 
Dated:  January 22, 2013
 
By: 
/s/ Timothy J. Owens
 
     
Timothy J. Owens
Chief Financial Officer (Principal Financial and Accounting Officer)
 
EX-32.1 4 ex32-1.htm ex32-1.htm
Exhibit 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Drinks Americas Holdings, Ltd. (the “Company”) on Form 10-Q for the period ended October 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Timothy J. Owens, Chief Executive Officer (Principal Executive Officer) of the Company, certifies, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
 
(1)  
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
Date:  January 22, 2013
/s/ Timothy J. Owens
 
 
Timothy J. Owens, Chief Executive Officer
(Principal Executive Officer)
 
 
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EX-32.2 5 ex32-2.htm ex32-2.htm
Exhibit 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Drinks Americas Holdings, Ltd. (the “Company”) on Form 10-Q for the period ended October 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Timothy J. Owens, Chief Financial Officer (Principal Financial and Accounting Officer) of the Company, certifies, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
 
(1)  
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
Date:  January 22, 2013
By: 
/s/ Timothy J. Owens
 
   
Timothy J. Owens, Chief Financial Officer (Principal Financial and Accounting Officer)
 
 
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
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0000873540 us-gaap:SalesRevenueGoodsNetMember 2012-05-01 2012-10-31 0000873540 us-gaap:SalesRevenueGoodsNetMember 2011-05-01 2011-10-31 0000873540 us-gaap:AccountsReceivableMember 2012-05-01 2012-10-31 0000873540 us-gaap:AccountsReceivableMember 2011-05-01 2012-04-30 0000873540 dkam:November27_2012ShareIssuanceMember 2012-11-01 2012-11-30 0000873540 dkam:November27_2012AccountsPayableSettlementMember 2012-11-01 2012-11-30 iso4217:USD iso4217:USD xbrli:shares xbrli:shares xbrli:pure iso4217:USD compsci:item On December 13, 2010, in connection with the settlement of accrued but unpaid salary compensation due to our former Vice President of Sales, we issued a promissory note for $192,000. The note accrues interest at the annual rate of 6% and is due the earliest of thirty business days following the successful completion and receipt of a financing equal to or greater than one million dollars or January 1, 2012. At October 31, 2012, the Company accrued interest payable of $13,056. In December 2011, in connection with the settlement of accrued but unpaid salary compensation due to an ex-employee, we agreed to a payment plan containing fourteen payments with the final payment due September 1, 2012 for a total of $140,000. Balance due under this agreement as of October 31, 2012 and April 30, 2012 was $27,500 and $55,000, respectively. As of October 31, 2012, the Company has borrowed an aggregate of $250,000 net of $124,992 of repayments, from an investor under an informal agreement for working capital purposes. 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Interest is 18% per annum. 6076 295403 575704 739565 841401 61574 581780 1937943 13518 102345 5193355 6225 48550 5363993 581780 7301936 1011771 2889969 2301121 1535560 900929 141 8552390 660938 215946 265000 460000 793000 219500 247000 405008 145008 15411429 5191852 2735 15411429 5194587 3 11 114 24826 21279 43185411 50672809 -58040003 -48586318 -14829649 2107781 -432 -14829649 2107349 581780 7301936 60000 0 0.001 0.001 2884 10544 2884 10544 0.001 0.001 1000000 1000000 0.001 0.001 114000 0 114000 0 0.001 0.001 900000000 500000000 24826487 21279339 24826487 21279339 1931456 1270589 3221394 1418669 1524152 968212 2520933 1100994 407304 302377 700461 317675 4161401 731168 4862736 1245662 5295700 5295700 -250000 -250000 9457101 981168 10158436 1495662 -9049797 -678791 -9457975 -1177987 338048 56486 367747 168674 31055 1671 -1913 -5396 372957 321932 372469 339437 280478 34909 294588 4722 447516 -9014888 -384203 -9453253 -730471 432 0 432 -9015320 -384203 -9453685 -730471 -0.38 -0.19 -0.42 -0.40 23830584 2055928 22547991 1843956 13518 195631 22388 425963 191907 9876 233770 -163861 666036 -841401 634941 -110124 -8770 -6225 -1730895 252672 2301121 1275188 344191 -2735 -892481 -1647351 0 0 555062 647301 444992 286019 250000 1350000 -657 -333000 360901 227475 27500 102316 603154 1760521 -289327 113170 1923 115093 17816 8005 0 0 8426000 274892 96155 241000 463251 240000 Drinks Americas Holdings, Ltd. 10-Q --04-30 25416908 false 0000873540 Yes No Smaller Reporting Company No 2013 Q2 2012-10-31 <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">1. BASIS OF PRESENTATION AND NATURE OF BUSINESS</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Basis of Presentation</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">On March 9, 2005 the shareholders of Drinks Americas, Inc., ("Drinks") a company engaged in the business of importing and distributing unique, premium alcoholic and non-alcoholic beverages to beverage wholesalers throughout the United States, acquired control of Drinks Americas Holdings, Ltd. ("Holdings" or the "Company "). Holdings and Drinks were incorporated in the State of Delaware on February 14, 2005 and September 24, 2002, respectively. On March 9, 2005 Holdings merged with Gourmet Group, Inc. ("Gourmet"), a publicly traded Nevada corporation, which resulted in Gourmet shareholders acquiring 1 share of Holdings' common stock in exchange for 10 shares of Gourmet's common stock. Both Holdings and Gourmet were considered "shell" corporations, as Gourmet had no operating business on the date of the share exchange, or for the previous three years. Pursuant to the June 9, 2004 Agreement and Plan of Share Exchange among Gourmet, Drinks and the Drinks' shareholders, Holdings, with approximately 16,232 shares of outstanding common stock, issued approximately 180,656 of additional shares of its common stock on March 9, 2005 (the "Acquisition Date") to the common shareholders of Drinks and to the members of its affiliate, Maxmillian Mixers, LLC ("Mixers"), in exchange for all of the outstanding Drinks' common shares and Mixers' membership units, respectively. As a result Maxmillian Partners, LLC ("Partners") a holding company which owned 99% of Drinks' outstanding common stock and approximately 55% of Mixers' outstanding membership units, became Holdings' controlling shareholder with approximately 87% of Holdings' outstanding common stock. For financial accounting purposes this business combination has been treated as a reverse acquisition, or a recapitalization of Partners' subsidiaries (Drinks and Mixers).</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Subsequent to the Acquisition Date, Partners, which was organized as a Delaware limited liability company on January 1, 2002 and incorporated Drinks in Delaware on September 24, 2002, transferred all its shares of holdings to its members as part of a plan of liquidation.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">On January 15, 2009, Drinks acquired 90% of Olifant U.S.A Inc. (&#8220;Olifant&#8221;), a Connecticut corporation, which owns the trademark and brand names and holds the worldwide distribution rights (excluding Europe) to Olifant Vodka and Gin.&#160;&#160;During the year ended April 30, 2012, the Company reduced its ownership to 48% of Olifant recognizing a gain on disposal of product line of $280,478. In conjunction with the ownership reduction to 48%, the Company eliminated the remaining outstanding debt obligation of $600,000 and transitioned to the equity method of accounting.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Our license agreement with respect to Kid Rock&#8217;s BadAss Beer and related trademarks currently requires payments to Drinks Americas based upon volume through the term of the agreement.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Nature of Business</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Through our wholly owned subsidiary, Drinks Americas Holdings, Inc. (&#8220;Drinks&#8221;), Drinks distributes and markets unique premium alcoholic beverages&#160;to beverage wholesalers throughout the United States and internationally.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">In June of 2011, the company entered into an agreement to license and distribute the brands of Worldwide Beverage Imports ("WBI") in the eastern United States with brands to include KAH Tequila, Agave 99, Ed Hardy Tequila, Mexicali Beer, Chili Beer and Red Pig ale as well as various other products produced and imported by Worldwide Beverage Imports in return for the shares in the Company that would be no greater than 49% of the Company.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">On November 1, 2011, the Company amended its agreement with Worldwide Beverage Imports. The Company was granted worldwide distribution rights on both the spirits and beer products of WBI. &#160;In connection with the agreement, the Company agreed to issue $1,500,000 in additional restricted shares of common stock (the &#8220;Additional Shares&#8221;) to Worldwide at a purchase price of $0.50 per share in exchange for Worldwide forgiving a $300,000 loan owed by the Company to Worldwide and Worldwide delivering $1,200,000 in Inventory to the Company, the sale proceeds of which are to be contributed to the capital of the Company.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Upon the completion of the purchase of the Initial Issuance and the Additional Shares and until one (1) year from the date of the completion of the close of the transaction, the Company agreed not to issue any additional shares of the Company without prior written consent of the Purchaser, provided that the Company may issue certain exempt issuances without the prior written consent of the Purchaser in accordance with the terms of the Purchase Agreement.</font> </div><br/> Gourmet shareholders acquiring 1 share of Holdings' common stock in exchange for 10 shares of Gourmet's common stock 16232 issued approximately 180,656 of additional shares of its common stock on March 9, 2005 (the "Acquisition Date") to the common shareholders of Drinks and to the members of its affiliate, Maxmillian Mixers, LLC ("Mixers"), in exchange for all of the outstanding Drinks' common shares and Mixers' membership units, respectively. 0.99 0.55 0.87 0.90 0.48 280478 600000 no greater than 49% of the Company 1500000 0.50 300000 1200000 <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">2. SIGNIFICANT ACCOUNTING POLICIES</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Principles of consolidation</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule S-X of the Securities and Exchange Commission (the &#8220;SEC&#8221;) and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. However, the results from operations for the six months ended October 31, 2012, are not necessarily indicative of the results that may be expected for the year ending April 30, 2013. These unaudited consolidated financial statements should be read in conjunction with the consolidated April 30, 2012 financial statements and footnotes thereto included in the Company's Form 10-K filed with the SEC.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The consolidated financial statements as of April 30, 2012 have been derived from the audited consolidated financial statements at that date but do not include all disclosures required by the accounting principles generally accepted in the United States of America.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiary (collectively, the "Company"). All significant inter-company transactions and balances have been eliminated in consolidation.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Revenue Recognition</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company recognizes revenues when title passes to the customer, which is generally when products are shipped. The Company recognizes royalty revenue based on its license agreements with its distributors, which typically is the greater of either the guaranteed minimum royalties payable under our license agreement or a royalty rate computed on the net sales of the distributor shipments to its customers.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company recognizes revenue dilution from items such as product returns, inventory credits, discounts and other allowances in the period that such items are first expected to occur. The Company does not offer its clients the opportunity to return products for any reason other than manufacturing defects. In addition, the Company does not offer incentives to its customers to either acquire more products or maintain higher inventory levels of products than they would in ordinary course of business. The Company assesses levels of inventory maintained by its customers through communications with them. Furthermore, it is the Company's policy to accrue for material post shipment obligations and customer incentives in the period the related revenue is recognized.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Accounts Receivable</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Accounts receivable are recorded at the original invoice amount less an allowance for uncollectible accounts that management believes will be adequate to absorb estimated losses on existing balances. Management estimates the allowance based on collectability of accounts receivable and prior bad debt experience. Accounts receivable balances are written off upon management's determination that such accounts are uncollectible. Recoveries of accounts receivable previously written off are recorded when received. Management believes that credit risks on accounts receivable will not be material to the financial position of the Company or results of operations at October 31, 2012 and April 30, 2012, the allowance for doubtful accounts was&#160;$0 and $138,491, respectively.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Inventories</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Inventories are valued at the lower of cost or market, using the first-in first-out cost method. The Company assesses the valuation of its inventories and reduces the carrying value of those inventories that are obsolete or in excess of the Company&#8217;s forecasted usage to their estimated net realizable value. The Company estimates the net realizable value of such inventories based on analysis and assumptions including, but not limited to, historical usage, expected future demand and market requirements. A change to the carrying value of inventories is recorded to cost of goods sold.&#160;&#160;During the six months ended October 31, 2012, the Company ceased carrying inventory and ships directly from manufacturer/wholesaler to the customer.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Impairment of Long-Lived Assets</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amounts of such assets may not be recoverable. The Company's policy is to record an impairment loss at each balance sheet date when it is determined that the carrying amount may not be recoverable. Recoverability of these assets is based on undiscounted future cash flows of the related asset. For the six months ended October 31, 2012, the Company recorded impairment losses of $5,193,355 and $102,345 for intangible assets and investment in equity investees, respectively.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Intangible Assets</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The costs of intangible assets with determinable useful lives are amortized over their respective useful lives and reviewed for impairment when circumstances warrant. Intangible assets that have an indefinite useful life are not amortized until such useful life is determined to be no longer indefinite. Evaluation of the remaining useful life of an intangible asset that is not being amortized must be completed each reporting period to determine whether events and circumstances continue to support an indefinite useful life. Indefinite-lived intangible assets must be tested for impairment at least annually, or more frequently if warranted. Intangible assets with finite lives are generally amortized on a straight line bases over the estimated period benefited. The costs of trademarks and product distribution rights are amortized over their related useful lives of between 15 to 40 years. We review our intangible assets for events or changes in circumstances that may indicate that the carrying amount of the assets may not be recoverable, in which case an impairment charge is recognized currently.&#160;</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Income Taxes</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future&#160;tax consequences attributable to differences between the financial statement&#160;carrying amounts of existing assets and liabilities and their respective tax&#160;basis.&#160;&#160;The effect on deferred tax assets and liabilities of a change in tax&#160;laws is recognized in the results of operations in the period the new laws&#160;are enacted.&#160;&#160;A valuation allowance is recorded to reduce the carrying&#160;amounts of deferred tax assets unless, it is more likely than not, that such&#160;assets will be realized. The Company has recognized no adjustment for uncertain tax provisions.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Stock Based Compensation</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company accounts for stock-based compensation using the modified prospective approach. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity based compensation issued to employees and non-employees.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Earnings (Loss) Per Share</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company computes earnings (loss) per share whereby basic earnings (loss) per share is computed by dividing net income (loss) attributable to all classes of common shareholders by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings (loss) per share is determined in the same manner as basic earnings (loss) per share except that the number of shares is increased to assume exercise of potentially dilutive and contingently issuable shares using the treasury stock method, unless the effect of such increase would be anti-dilutive. For the three and six months ended October 31, 2012 and 2011, the diluted earnings per (loss) share amounts equal basic earnings (loss) per share because the Company had net losses or the impact of the assumed exercise of contingently issuable shares would have been anti-dilutive.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Use of Estimates</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Fair Value</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Accounting Standards Codification subtopic 825-10, Financial Instruments (&#8220;ASC 825-10&#8221;) requires disclosure of the fair value of certain financial instruments. The carrying amount reported in the consolidated balance sheets for accounts receivables, accounts payable and accrued expenses approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported in the accompanying consolidated balance sheets for notes payable approximates fair value because the actual interest rates do not significantly differ from current rates offered for instruments with similar characteristics.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Recent accounting pronouncements</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">There are various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.</font> </div><br/> <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Principles of consolidation</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule S-X of the Securities and Exchange Commission (the &#8220;SEC&#8221;) and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. However, the results from operations for the six months ended October 31, 2012, are not necessarily indicative of the results that may be expected for the year ending April 30, 2013. These unaudited consolidated financial statements should be read in conjunction with the consolidated April 30, 2012 financial statements and footnotes thereto included in the Company's Form 10-K filed with the SEC.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The consolidated financial statements as of April 30, 2012 have been derived from the audited consolidated financial statements at that date but do not include all disclosures required by the accounting principles generally accepted in the United States of America.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiary (collectively, the "Company"). All significant inter-company transactions and balances have been eliminated in consolidation.</font></div> <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Revenue Recognition</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company recognizes revenues when title passes to the customer, which is generally when products are shipped. The Company recognizes royalty revenue based on its license agreements with its distributors, which typically is the greater of either the guaranteed minimum royalties payable under our license agreement or a royalty rate computed on the net sales of the distributor shipments to its customers.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company recognizes revenue dilution from items such as product returns, inventory credits, discounts and other allowances in the period that such items are first expected to occur. The Company does not offer its clients the opportunity to return products for any reason other than manufacturing defects. In addition, the Company does not offer incentives to its customers to either acquire more products or maintain higher inventory levels of products than they would in ordinary course of business. The Company assesses levels of inventory maintained by its customers through communications with them. Furthermore, it is the Company's policy to accrue for material post shipment obligations and customer incentives in the period the related revenue is recognized.</font></div> <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Accounts Receivable</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Accounts receivable are recorded at the original invoice amount less an allowance for uncollectible accounts that management believes will be adequate to absorb estimated losses on existing balances. Management estimates the allowance based on collectability of accounts receivable and prior bad debt experience. Accounts receivable balances are written off upon management's determination that such accounts are uncollectible. Recoveries of accounts receivable previously written off are recorded when received. Management believes that credit risks on accounts receivable will not be material to the financial position of the Company or results of operations at October 31, 2012 and April 30, 2012, the allowance for doubtful accounts was&#160;$0 and $138,491, respectively.</font></div> 0 138491 <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Inventories</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Inventories are valued at the lower of cost or market, using the first-in first-out cost method. The Company assesses the valuation of its inventories and reduces the carrying value of those inventories that are obsolete or in excess of the Company&#8217;s forecasted usage to their estimated net realizable value. The Company estimates the net realizable value of such inventories based on analysis and assumptions including, but not limited to, historical usage, expected future demand and market requirements. A change to the carrying value of inventories is recorded to cost of goods sold.&#160;&#160;During the six months ended October 31, 2012, the Company ceased carrying inventory and ships directly from manufacturer/wholesaler to the customer.</font></div> <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Impairment of Long-Lived Assets</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amounts of such assets may not be recoverable. The Company's policy is to record an impairment loss at each balance sheet date when it is determined that the carrying amount may not be recoverable. Recoverability of these assets is based on undiscounted future cash flows of the related asset. For the six months ended October 31, 2012, the Company recorded impairment losses of $5,193,355 and $102,345 for intangible assets and investment in equity investees, respectively.</font></div> 5193355 102345 <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Intangible Assets</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The costs of intangible assets with determinable useful lives are amortized over their respective useful lives and reviewed for impairment when circumstances warrant. Intangible assets that have an indefinite useful life are not amortized until such useful life is determined to be no longer indefinite. Evaluation of the remaining useful life of an intangible asset that is not being amortized must be completed each reporting period to determine whether events and circumstances continue to support an indefinite useful life. Indefinite-lived intangible assets must be tested for impairment at least annually, or more frequently if warranted. Intangible assets with finite lives are generally amortized on a straight line bases over the estimated period benefited. The costs of trademarks and product distribution rights are amortized over their related useful lives of between 15 to 40 years. We review our intangible assets for events or changes in circumstances that may indicate that the carrying amount of the assets may not be recoverable, in which case an impairment charge is recognized currently.</font></div> 15 to 40 years <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Income Taxes</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future&#160;tax consequences attributable to differences between the financial statement&#160;carrying amounts of existing assets and liabilities and their respective tax&#160;basis.&#160;&#160;The effect on deferred tax assets and liabilities of a change in tax&#160;laws is recognized in the results of operations in the period the new laws&#160;are enacted.&#160;&#160;A valuation allowance is recorded to reduce the carrying&#160;amounts of deferred tax assets unless, it is more likely than not, that such&#160;assets will be realized. The Company has recognized no adjustment for uncertain tax provisions.</font></div> <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Stock Based Compensation</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company accounts for stock-based compensation using the modified prospective approach. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity based compensation issued to employees and non-employees.</font></div> <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Earnings (Loss) Per Share</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company computes earnings (loss) per share whereby basic earnings (loss) per share is computed by dividing net income (loss) attributable to all classes of common shareholders by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings (loss) per share is determined in the same manner as basic earnings (loss) per share except that the number of shares is increased to assume exercise of potentially dilutive and contingently issuable shares using the treasury stock method, unless the effect of such increase would be anti-dilutive. For the three and six months ended October 31, 2012 and 2011, the diluted earnings per (loss) share amounts equal basic earnings (loss) per share because the Company had net losses or the impact of the assumed exercise of contingently issuable shares would have been anti-dilutive.</font></div> <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Use of Estimates</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.</font></div> <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Fair Value</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Accounting Standards Codification subtopic 825-10, Financial Instruments (&#8220;ASC 825-10&#8221;) requires disclosure of the fair value of certain financial instruments. The carrying amount reported in the consolidated balance sheets for accounts receivables, accounts payable and accrued expenses approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported in the accompanying consolidated balance sheets for notes payable approximates fair value because the actual interest rates do not significantly differ from current rates offered for instruments with similar characteristics.</font></div> <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Recent accounting pronouncements</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">There are various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.</font></div> <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">3. GOING CONCERN</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The accompanying consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern.&#160;&#160;As of October 31, 2012, the Company has stockholders' equity (deficit) of $(14,829,649) and&#160;current liabilities exceeded current assets (working capital deficit) by $14,829,649 as of October 31, 2012. The Company has incurred significant operating losses and negative cash flows from operating activities since inception. For the six months ended October 31, 2012, the Company sustained a net loss of $9,453,685&#160;compared to a net loss of&#160;$730,471 for the six months ended October 31, 2011 and used cash of approximately $892,481 in operating activities for the six months ended October 31, 2012 compared with approximately&#160;$1,647,351 for the six months ended October 31, 2011.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Our business plan includes increasing our sales from beverages and the issuance of additional equity securities of the Company for cash. 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