UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-53085
HARBREW IMPORTS LTD. CORP.
(Exact Name of Registrant as Specified in Its Charter)
Florida | 13-4362274 | |
(State or Other Jurisdiction | (I.R.S. Employer | |
of Incorporation or Organization) | Identification No.) |
102 Buffalo Avenue, Freeport, New York 11520
(Address of Principal Executive Offices)
(516) 377-2636
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 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. (Check one):
Accelerated Filer ¨ | |
Smaller Reporting Company x | |
(Do not check if a 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 December 18, 2008, the registrant had outstanding 24,592,160 shares of common stock.
TABLE OF CONTENTS
Page | ||||
PART I. FINANCIAL INFORMATION | ||||
ITEM 1. Financial Statements | 1 | |||
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | |||
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk | 20 | |||
ITEM 4T. Controls and Procedures | 20 | |||
PART II. OTHER INFORMATION | ||||
ITEM 1. Legal Proceedings | 22 | |||
ITEM 1A. Risk Factors | 22 | |||
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds | 23 | |||
ITEM 3. Defaults upon Senior Securities | 23 | |||
ITEM 4. Submission of Matters to a Vote of Security Holders | 23 | |||
ITEM 5. Other Information | 24 | |||
ITEM 6. Exhibits | 24 | |||
SIGNATURES | 26 |
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Harbrew Imports Ltd. Corp. and Subsidiary
Consolidated Balance Sheets
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,511 | $ | 43,664 | ||||
Accounts receivable, net of allowance for doubtful accounts of $ 35,000 and $ 0, respectively | 119,797 | 491,280 | ||||||
Inventories | 731,009 | 1,319,426 | ||||||
Prepaid expenses and other current assets | 739,016 | 310,406 | ||||||
Total current assets | 1,591,333 | 2,164,776 | ||||||
Property, plant and equipment, net | 6,294 | 6,994 | ||||||
Restricted cash and cash equivalents | 108,785 | 108,785 | ||||||
Total assets | $ | 1,706,412 | $ | 2,280,555 | ||||
Liabilities and Stockholders’ Equity (Deficiency) | ||||||||
Current liabilities: | ||||||||
Current portion of debt | $ | 3,828,020 | $ | 3,132,319 | ||||
Negative bank account balances | 57,627 | - | ||||||
Accounts payable | 1,101,570 | 1,245,640 | ||||||
Accrued expenses | 754,523 | 326,520 | ||||||
Total current liabilities | 5,741,740 | 4,704,479 | ||||||
Long term debt | 2,275,934 | 1,979,285 | ||||||
Total liabilities | 8,017,674 | 6,683,764 | ||||||
Stockholders’ equity (deficiency): | ||||||||
Preferred stock, $.001 par value; authorized 20,000,000 shares, none issued and outstanding | - | - | ||||||
Common stock, $.001 par value; authorized 100,000,000 shares, issued and outstanding 24,592,160 and 16,336,200 shares, respectively | 24,592 | 16,336 | ||||||
Additional paid-in capital | 1,249,195 | 379,257 | ||||||
Retained earnings (deficit) | (7,585,049 | ) | (4,798,802 | ) | ||||
Total stockholders’ equity (deficiency) | (6,311,262 | ) | (4,403,209 | ) | ||||
Total liabilities and stockholders’ equity (deficiency) | $ | 1,706,412 | $ | 2,280,555 |
See notes to consolidated financial statements
1
Harbrew Imports Ltd. Corp. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Sales | $ | 252,322 | $ | 358,861 | $ | 1,058,363 | $ | 713,078 | ||||||||
Cost of goods sold | 167,725 | 261,216 | 817,694 | 552,615 | ||||||||||||
Gross profit | 84,597 | 97,645 | 240,669 | 160,463 | ||||||||||||
Selling, general and administrative expense | ||||||||||||||||
Selling, marketing and promotion | 110,595 | 150,134 | 350,619 | 314,362 | ||||||||||||
Administrative compensation and benefits | 552,055 | 349,019 | 1,120,691 | 927,994 | ||||||||||||
Professional fees | 108,729 | 80,472 | 296,278 | 165,920 | ||||||||||||
Occupancy and warehousing | 61,148 | 252,728 | 200,331 | 370,639 | ||||||||||||
Travel and entertainment | 25,051 | 81,183 | 216,195 | 199,107 | ||||||||||||
Bad Debts | - | 37,894 | - | 37,894 | ||||||||||||
Office | (30,398 | ) | 27,289 | 33,210 | 43,777 | |||||||||||
Licenses and permits | 4,694 | 7,122 | 36,484 | 49,051 | ||||||||||||
Other | 6,219 | (7,357 | ) | 21,283 | 31,986 | |||||||||||
Total | 838,093 | 978,484 | 2,275,091 | 2,140,730 | ||||||||||||
Income (loss) from operations | (753,496 | ) | (880,839 | ) | (2,034,422 | ) | (1,980,267 | ) | ||||||||
Interest income | 44 | - | 44 | - | ||||||||||||
Interest expense | (167,618 | ) | (169,316 | ) | (751,869 | ) | (314,569 | ) | ||||||||
Merger fee | - | - | - | (150,000 | ) | |||||||||||
Income (loss) before income taxes | (921,070 | ) | (1,050,155 | ) | (2,786,247 | ) | (2,444,836 | ) | ||||||||
Income taxes | - | - | - | |||||||||||||
Net income (loss) | $ | (921,070 | ) | $ | (1,050,155 | ) | $ | (2,786,247 | ) | $ | (2,444,836 | ) | ||||
Net income (loss) per share - basic and diluted | $ | (0.04 | ) | $ | (0.07 | ) | $ | (0.15 | ) | $ | (0.18 | ) | ||||
Weighted average number of shares outstanding - basic and diluted | 21,913,067 | 15,740,783 | 18,557,336 | 13,789,952 |
See notes to consolidated financial statements
2
Harbrew Imports Ltd. Corp. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2008 | 2007 | |||||||
(Unaudited) | (Unaudited) | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (2,786,247 | ) | $ | (2,444,836 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 700 | 3,009 | ||||||
Amortization of debt discounts charged to interest expense | 64,440 | 5,072 | ||||||
Stock-based compensation | 546,004 | 206,250 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | 371,483 | (116,293 | ) | |||||
Inventories | 588,417 | (266,674 | ) | |||||
Prepaid expenses and other current assets | (130,199 | ) | (456,292 | ) | ||||
Restricted cash and cash equivalents | - | - | ||||||
Negative bank account balance | 57,627 | 22,602 | ||||||
Accounts payable | (144,070 | ) | 233,000 | |||||
Accrued expenses | 428,003 | 67,434 | ||||||
Net cash provided by (used in) operating activities | (1,003,842 | ) | (2,746,728 | ) | ||||
Cash flows from investing activities: | ||||||||
Property, plant and equipment additions | - | (3,009 | ) | |||||
Cash flows from financing activities: | ||||||||
Increases in debt, net | 1,366,540 | 2,779,300 | ||||||
Repayment of debt | (404,851 | ) | (35,292 | ) | ||||
Net cash provided by (used in) financing activities | 961,689 | 2,744,008 | ||||||
Increase (decrease) in cash and cash equivalents | (42,153 | ) | (5,729 | ) | ||||
Cash and cash equivalents, beginning of period | 43,664 | 26,045 | ||||||
Cash and cash equivalents, end of period | $ | 1,511 | $ | 20,316 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid | $ | 577,486 | $ | 288,290 | ||||
Income taxes paid | $ | - | $ | - |
See notes to consolidated financial statements
3
Harbrew Imports Ltd. Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Information as of and for the Nine Months Ended September 30, 2008 and 2007 is Unaudited)
1. | ORGANIZATION AND NATURE OF BUSINESS |
Harbrew Imports Ltd. Corp. (“Harbrew Florida”) was incorporated in Florida on January 4, 2007 under the name Stassi Harbrew Imports Corp. pursuant to the Bankruptcy Court Approved Reorganization Plan for the Stassi Interaxx, Inc. (“Stassi”) Reorganization approved on December 29, 2006. On May 17, 2007, Harbrew Florida acquired Harbrew Imports, Ltd. (“Harbrew New York”), a New York corporation incorporated on September 8, 1999. Pursuant to the Amended and Restated Reorganization & Merger Agreement dated April 10, 2007, 288 creditors and shareholders of Stassi were issued 1,383,256 shares of Harbrew Florida’s common stock and the two shareholders of Harbrew New York were issued 12,457,944 shares of Harbrew Florida’s common stock.
Prior to the merger on May 17, 2007, Harbrew Florida had no assets, liabilities, or business operations. Accordingly, the merger has been treated for accounting purposes as a recapitalization by the accounting acquirer Harbrew New York and the financial statements reflect the assets, liabilities, and operations of Harbrew New York from its inception on September 8, 1999 to May 17, 2007 and Harbrew Florida and Harbrew New York thereafter. Harbrew Florida and its wholly-owned subsidiary Harbrew New York are hereafter referred to as the “Company”.
The Company sells various liquor products in North America under exclusive distribution agreements.
2. | INTERIM FINANCIAL STATEMENTS |
The unaudited financial statements as of September 30, 2008 and for the three and nine months ended September 30, 2008 and 2007 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of September 30, 2008 and the results of operations and cash flows for the periods ended September 30, 2008 and 2007. The financial data and other information disclosed in these notes to the interim financial statements related to those periods are unaudited. The results for the three months ended September 30, 2008 are not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending December 31, 2008. The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date.
Certain information and footnote disclosures normally included in financials statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2007 as included in the Company’s annual report on Form 10-KSB filed December 4, 2008.
4
Harbrew Imports Ltd. Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Information as of and for the Nine Months Ended September 30, 2008 and 2007 is Unaudited)
3. | INVENTORIES |
Inventories consist of:
Sept. 30, 2008 | Dec. 31, 2007 | |||||||
Danny DeVito's Premium Limoncello (liqueur) brand | $ | 136,044 | $ | 302,194 | ||||
Hot Irishman (Irish coffee) brand | 127,543 | 205,453 | ||||||
Molly's (Irish cream liqueur) brand | 43,400 | 146,315 | ||||||
Glen Master (scotch) brand | 122,090 | 139,618 | ||||||
George Vesselle (champagne) brand | 88,822 | 110,703 | ||||||
Other | 213,110 | 415,143 | ||||||
Total | $ | 731,009 | $ | 1,319,426 |
4. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets consist of:
Sept. 30, 2008 | Dec. 31, 2007 | |||||||
Prepaid inventory purchases | $ | 423,068 | $ | 300,000 | ||||
Prepaid stock compensation paid to consultants | 298,411 | - | ||||||
Other | 17,537 | 10,406 | ||||||
Total | $ | 739,016 | $ | 310,406 |
5. | PROPERTY, PLANT AND EQUIPMENT, NET |
Property, plant and equipment, net consist of:
Sept. 30, 2008 | Dec. 31, 2007 | |||||||
Vehicles | $ | 126,295 | $ | 126,295 | ||||
Office equipment | 15,711 | 15,711 | ||||||
Total | 142,006 | 142,006 | ||||||
Accumulated depreciation | (135,712 | ) | (135,012 | ) | ||||
Net | $ | 6,294 | $ | 6,994 |
5
Harbrew Imports Ltd. Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Information as of and for the Nine Months Ended September 30, 2008 and 2007 is Unaudited)
6. | DEBT |
Debt consists of:
Sept. 30, 2008 | Dec. 31, 2007 | |||||||
Due under Purchase Order Financing | ||||||||
Agreement | $ | 2,652,468 | $ | 2,721,933 | ||||
Due under Discount Factoring Agreement | - | 231,424 | ||||||
Convertible notes, interest at 7%, due July 2, 2012 to July 2, 2013 - net of unamortized discounts of $350,447 and $331,056, respectively | 745,178 | 599,569 | ||||||
9% convertible debentures, interest at 9%, due December 10, 2008 to January 23, 2009 - net of unamortized discounts of $4,448 and $0, respectively | 100,552 | - | ||||||
Interim loan convertible promissory notes issued from July 22, 2008 to September 9, 2008, interest at 0%, due the earlier of (1) one year after the date of issuance or (2) completion of $3,000,000 minimum new private placement (in which case the notes will be automatically converted into new units) | 1,000,000 | - | ||||||
Convertible promissory notes, interest at 10%, due October 25, 2007 to November 27, 2007 | 75,000 | 175,000 | ||||||
Due Donald Chadwell (owner of 6,228,972 shares of common stock), interest at 0%, no repayment terms | 763,000 | 748,000 | ||||||
Due Richard DeCicco (officer, director, and owner of 8,959,932 shares of common stock) and affiliates, interest at 0%, no repayment terms | 767,756 | 631,716 | ||||||
Notes payable secured by vehicles | - | 3,962 | ||||||
Total | 6,103,954 | 5,111,604 | ||||||
Less current portion of debt | (3,828,020 | ) | (3,132,319 | ) | ||||
Long term debt | $ | 2,275,934 | $ | 1,979,285 |
The Purchase Order Financing Agreement was dated January 22, 2007, has a term of two years, and provides for advances of credit from Capstone Capital Group I, LLC (the “Secured Party”) to the Company. Among other things, the agreement provides for fees to the Secured Party equal to 2.5% for the first 30 days (or part thereof) that each advance is outstanding and 1.25% for every 14 days (or part thereof) that such advance remains outstanding, subject to minimum fees of $325,000 for the first year and $425,000 for the second year of the agreement. Repayment of the advances are due the earlier of 60 days from the date of an advance or the day on which any of the goods which are the subject of such advance are shipped to a buyer. Obligations to the Secured Party are collateralized by substantially all the assets of the Company and have been personally guaranteed by Richard DeCicco, the Company’s chief executive officer. See also Note 11 to consolidated financial statements.
The Discount Factoring Agreement was dated January 22, 2007 and provides for financing of certain Company accounts receivable by Capstone Business Credit, LLC (the “Factor”). Among other things, the agreement provides for commissions to the Factor equal to 2% for the first 30 days (or part thereof) that each such account receivable is outstanding and 1% for every 14 days (or part thereof) thereafter that such account receivable remains outstanding, subject to minimum commissions of $420,000 for the first year and $540,000 for the second year of the agreement. Obligations to the Factor under the agreement are collateralized by substantially all the assets of the Company and have been personally guaranteed by Richard DeCicco, the Company’s chief executive officer. The agreement may be terminated by either party upon the giving of not less than 30 days prior written notice of termination to the other party. See also Note 11 to consolidated financial statements.
6
Harbrew Imports Ltd. Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Information as of and for the Nine Months Ended September 30, 2008 and 2007 is Unaudited)
Fees and commissions charged pursuant to the Purchase Order Financing Agreement and the Discount Factoring Agreement are included in interest expense in the accompanying statements of operations.
Convertible notes consisted of:
Sept. 30, 2008 | Dec. 31, 2007 | |||||||
Convertible notes - face amount (convertible into a total of up to 2,191,250 and 1,861,250 shares of common stock, respectively) | $ | 1,095,625 | $ | 930,625 | ||||
Discounts relating to the fair value of the warrants included in the sale of Units ($165,659 and $140,711, respectively) and the costs relating to the sale of Units ($262,251 and $207,751, respectively), net of accumulated amortization of $77,463 and $17,406, respectively | (350,447 | ) | (331,056 | ) | ||||
Convertible notes, net of unamortized discounts | $ | 745,178 | $ | 599,569 |
On July 20, 2007, the Company commenced a private placement offering of up to 60 Units of securities at a price of $25,000 per Unit to accredited investors. Each Unit consists of (a) a 7% convertible promissory note in the principal amount of $25,000 which is convertible into shares of the Company’s common stock at a price of $0.50 per share and is due five years from the date of issuance; (b) a five-year warrant to purchase 50,000 shares of common stock exercisable at a price of $1.00 per share (the “Class A Warrant”); and (c) a five-year warrant to purchase 50,000 shares of common stock exercisable at a price of $1.50 per share (the “Class B Warrant”). Interest on the convertible promissory notes is payable semiannually at the rate of 7% by issuance of additional notes. In the event that the Company’s common stock is not trading on the OTC Bulletin Board, American Stock Exchange or the NASDAQ Stock Market one year from the date of issuance of the notes, the rate of interest increases to 14% retroactive to the date of issuance. Basic Investors, Inc. (“Basic”), the placement agent of the offering, is entitled to a placement agent fee of 10% of the gross proceeds and a 3% non-accountable expense allowance. Basic is also entitled to receive one Unit for each ten Units sold in the offering.
On July 2, 2007, the Company sold 10 Units to Basic and affiliates for gross proceeds of $250,000. The warrants (to purchase up to 1,000,000 shares of Company common stock) included in the Units were valued at $37,800 using the Black-Scholes option pricing model and the following assumptions: $0.10 stock price, risk free interest rate of 4%, volatility of 100%, and term of five years. The discount attributable to the $37,800 fair value of the warrants and the $12,500 costs relating to the sale are being amortized over the convertible notes’ term of five years as interest expense. No compensation was due Basic in connection with these sales.
On August 27, 2007, the Company closed on the sale of an additional 10 Units for gross proceeds of $250,000 and issued 1 Unit to Basic as part of their compensation. The discount attributable to the $41,580 fair value of the warrants (to purchase up to 1,100,000 shares of Company common stock) included in the Units (valued using the same assumptions described in the preceding paragraph) and the $92,000 costs relating to the sale are being amortized over the convertible notes’ term of five years as interest expense.
7
Harbrew Imports Ltd. Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Information as of and for the Nine Months Ended September 30, 2008 and 2007 is Unaudited)
On November 27, 2007, the Company closed on the sale of an additional 14.75 Units for gross proceeds of $368,750 and issued 1.475 Units to Basic as part of their compensation. The net proceeds to the Company, after deducting $47,938 placement agent fees paid to Basic, was $320,812. The 16.225 Units consist of a total of $405,625 face value of convertible notes (convertible into a total of up to 811,250 shares of common stock) and warrants to purchase up to 1,622,500 shares of common stock. The discount attributable to the $61,331 fair value of the warrants (to purchase up to 1,622,500 shares of Company common stock) included in the Units (valued using the same assumptions described in the second preceding paragraph) and the $103,251 costs relating to the sale are being amortized over the convertible notes’ term of five years as interest expense.
On March 5, 2008, the Company closed on the sale of an additional 3.5 Units for gross proceeds of $87,500 and issued .35 Units to Basic as part of their compensation. The net proceeds to the Company, after deducting $11,375 placement agent fees paid to Basic, was $76,125 The 3.85 Units consist of a total of $96,250 face value of convertible notes (convertible into a total of up to 192,500 shares of common stock) and warrants to purchase up to 385,000 shares of common stock. The discount attributable to the $14,553 fair value of the warrants (to purchase up to 385,000 shares of Company common stock) included in the Units (valued using the same assumptions described in the third preceding paragraph) and the $35,500 costs relating to the sale are being amortized over the convertible notes’ term of five years as interest expense.
On June 10, 2008, the Company closed on the sale of an additional .5 Units for gross proceeds of $12,500 and issued .05 Units to Basic as part of their compensation. The net proceeds to the Company, after deducting $1625 placement agent fees paid to Basic, was $10,875. The ..55 Units consist of a total of $13,750 face value of convertible notes (convertible into a total of up to 27,500 shares of common stock) and warrants to purchase up to 55,000 shares of common stock. The discount attributable to the $2,079 fair value of the warrants (to purchase up to 55,000 shares of Company common stock) included in the Units (valued using the same assumptions described in the fourth preceding paragraph) and the $4,500 costs relating to the sale are being amortized over the convertible notes’ term of five years as interest expense.
On July 2, 2008, the Company closed on the sale of an additional 2 Units for gross proceeds of $50,000 and issued .2 Units to Basic as part of their compensation. The net proceeds to the Company, after deducting $6,000 placement agent fees paid to Basic, was $44,000. The 2.2 Units consist of a total of $55,000 face value of convertible notes (convertible into a total of up to 110,000 shares of common stock) and warrants to purchase up to 220,000 shares of common stock. The discount attributable to the $8,316 fair value of the warrants (to purchase up to 220,000 shares of Company common stock) included in the Units (valued using the same assumptions described in the fifth preceding paragraph) and the $14,500 costs relating to the sale are being amortized over the convertible notes’ term of five years as interest expense.
As part of the related agreements, the Company agreed to file a registration statement with the SEC within 30 days to register the shares issuable upon conversion of the Convertible notes and exercise of the warrants. As of September 30, 2008, the Company has not filed such a registration statement since its shares of common stock have not yet become publicly traded. Other than the retroactive increase in interest rate to 14% for failure to start trading on the OTC Bulletin Board, American Stock Exchange or the NASDAQ Stock Market one year from the date of issuance of the notes, there is no penalty provision in these agreements for late filing of a registration statement.
8
Harbrew Imports Ltd. Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Information as of and for the Nine Months Ended September 30, 2008 and 2007 is Unaudited)
At September 30, 2008, 9% convertible debentures consisted of:
Sept. 30, 2008 | ||||
Convertible debentures - face amount (convertible into a total of up to 210,000 shares of common stock) | $ | 105,000 | ||
Discounts relating to the fair value of the warrants included in the debentures ($8,831), net of accumulated amortization of $4,383 | (4,448 | ) | ||
Convertible debentures, net of unamortized discounts | $ | 100,552 |
In June and July 2008, the Company sold to two investors a total of $105,000 principal amount of 9% convertible debentures, including warrants exercisable for a period of 5 years from the date of conversion to purchase up to 105,000 shares of common stock at a price of $1.00 per share and up to 105,000 shares of common stock at a price of $1.50 per share, for $105,000 cash. The debentures bear interest at the rate of 9% and are due six months from the date of issuance. The Company may elect to pay interest in cash or common stock. The holders of the debentures at their option may convert all or any part of the principal amount outstanding plus accrued interest into shares of common stock at the conversion price (initially $0.50 per share). The discount attributable to the $8,831 fair value of the warrants (to purchase up to 210,000 shares of Company common stock), valued using the Black-Scholes option pricing model and the following assumptions: $0.10 stock price, risk free interest rate of 4%, volatility of 100%, and term of 5.5 years, is being amortized over the respective debentures’ term of six months as interest expense.
The convertible promissory notes were sold to 5 investors in October and November 2006 and provide that, if the Company provides the respective Holders with actual notice of completion of the merger between Harbrew Florida and Harbrew New York (which occurred May 17, 2007), the Holders are required to convert the notes and all accrued interest then owing into common stock at a Conversion Price of $1.50 per share. If the share price of the common stock on the day that is 120 days after the commencement of trading of the shares on the OTC Bulletin Board or other such recognized exchange is less than $1.50 per share, then the Conversion Price will be adjusted to such price and the respective Holders will be issued the appropriate number of additional shares of common stock.
At September 30, 2008, the accrued interest payable on convertible debt (included in accrued expenses in the accompanying consolidated balance sheet) consisted of:
Sept. 30, 2008 | ||||
Convertible notes, interest at 7%, due July 2, 2012 to July 2, 2013 | $ | 114,959 | ||
Convertible promissory notes, interest at 10%, due October 25, 2007 to November 27, 2007 | 32,888 | |||
Total | $ | 147,847 |
9
Harbrew Imports Ltd. Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Information as of and for the Nine Months Ended September 30, 2008 and 2007 is Unaudited)
7. | STOCKHOLDERS’ EQUITY |
On June 28, 2007, the Company authorized the issuance of a total of 1,250,000 shares of common stock to designees of Basic Investors, Inc. (“Basic”) for future services to be rendered by such designees pursuant to a Business Consulting Agreement executed with Basic. The Company expensed the $125,000 estimated fair value of these shares as professional fees (and recognized the issuance of the 1,250,000 shares) over the one year term of the Business Consulting Agreement. The fair value of the shares was estimated assuming the shares were priced at $0.10 per share.
On January 15, 2008, the Company issued a total of 250,000 shares of common stock to two attorneys in consideration of legal services. The Company included this issuance in its statement of operations for the three months ended March 31, 2008 in professional fees at the $25,000 estimated fair value of the shares.
On July 14, 2008, the Company issued a total of 1,600,000 shares of the Company’s common stock to two consulting firms pursuant to consulting agreements with terms of one year. The Company initially capitalized as prepaid expenses and is amortizing the $160,000 estimated fair value of the shares over the one year terms of the agreements as professional fees.
On August 8, 2008, the Company issued 2,730,960 shares of common stock to its chief executive officer in consideration of services rendered. The Company included this issuance in its statement of operations for the three months ended September 30, 2008 in administrative compensation and benefits at the $273,096 estimated fair value of the shares.
On August 8, 2008, the Company issued a total of 1,050,000 shares of common stock to designees of Danny DeVito in consideration of services rendered. The Company included this issuance in its statement of operations for the three months ended September 30, 2008 in administrative compensation and benefits at the $105,000 estimated fair value of the shares.
On August 11, 2008, the Company issued 2,000,000 shares of the Company’s common stock to a consulting firm pursuant to a one year financial consulting agreement. The Company initially capitalized as prepaid expenses and is amortizing the $200,000 estimated fair value of the shares over the one year term of the agreement as professional fees.
8. | INCOME TAXES |
No provision for income taxes was recorded in the periods presented since the Company incurred net losses in these periods.
Based on management’s present assessment, the Company has not yet determined it to be more likely than not that a deferred tax asset of $1,154,363 attributable to the future utilization of the $3,395,185 net operating loss carry forward as of December 31, 2007 will be realized. Accordingly, the Company has provided a 100% allowance against the deferred tax asset in the financial statements at December 31, 2007. The Company will continue to review this valuation allowance and make adjustments as appropriate. The $3,395,185 net operating loss carry forward expires in 2027.
Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited.
9. | COMMITMENTS AND CONTINGENCIES |
Rental agreement – The Company occupies its facilities in Freeport, New York under a month to month agreement at a monthly rent of $14,350. For the nine months ended September 30, 2008 and 2007, rent expense was $128,726 and $142,609, respectively.
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Harbrew Imports Ltd. Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Information as of and for the Nine Months Ended September 30, 2008 and 2007 is Unaudited)
License agreement – On April 26, 2007 and as amended November 1, 2007, the Company entered into an exclusive License Agreement with Seven Cellos, LLC (“DDV”), pursuant to which the Company was granted a limited license of certain rights in and to Danny DeVito’s name, likeness and biography for use by the Company in connection with the Danny DeVito Premium Limoncello brand. The term of the Agreement continues through perpetuity unless the agreement is terminated. In consideration for the license, the Company agreed to pay royalties as follows: (a) 5% of Net Profits (as defined) to Behr Abrahamson & Kaller, LLP (“BAK”), (b) a payment of 50% of the remaining Net Profits to DDV after the payment described above; and (c) a payment of 2% of Net Profits to Sichenzia Ross Friedman Ference LLP after payment of 50% of Net Profits to DDV. In addition, the Company granted DDV and others warrants to purchase up to a total of 145,000 shares of Company common stock at an exercise price equal to the lower of $1.00 per share or 85% of the 30 day average bid and ask price, provided, however, that in no event shall the exercise price be less than $0.50 per share. Danny DeVito agreed to use reasonable efforts to be available for a reasonable number of promotional appearances during each consecutive 12 month period, the duration of which shall not exceed 2 days. Pursuant to the agreement, Danny DeVito granted the Company a right of first refusal for a period of 5 years to license any other liquor, spirit or alcoholic beverage which Danny DeVito may determine to endorse or develop. A condition precedent to Danny DeVito’s performance under the agreement are subject to the Company applying for a trademark for the brand name “Danny DeVito’s Premium Limoncello” with Danny DeVito being designated as 50% co-owner of such trademark. The Company has filed for this trademark with the U.S. Patent and Trademark Office and, as of December 12, 2008, is awaiting disposition. The $2,717 estimated fair value of the 145,000 warrants (using the Black-Scholes option pricing model and the following assumptions: $0.10 stock price, $0.50 exercise price, 4% risk free interest rate, and 100% volatility) is being amortized over the exercise period of the warrants as compensation and benefits.
For the periods presented, the Company calculated “Net Profits” from the brand to be negative and thus did not pay or accrue any royalty’s expense under the License Agreement.
Employment agreement with chief executive officer - On January 23, 2008, the Company entered into an employment agreement with its chief executive officer Richard DeCicco. The agreement provides for a term of 5 years, commencing on January 1, 2008. The term can be extended by a written agreement of the parties. The agreement provides for annual compensation ranging from $265,000 to $350,000. In addition, if the Company enters into an agreement and further sells any brand in the company’s portfolio, Mr. DeCicco will receive 5% of such sale. Mr. DeCicco is also entitled to incentive bonus compensation, stock and/or options in accordance with Company policies established by the Board of Directors. The agreement provides for the grant of a non-qualified ten year option to purchase up to 1,000,000 shares of common stock of the Company at an exercise price which shall represent a discount to the market price. The options shall be granted pursuant to the 2008 incentive and non-qualified stock option plan which the Company intends to implement. Mr. DeCicco has the right to terminate the agreement upon 60 days notice to the Company for any reason. Pursuant to the terms of the agreement, if Mr. DeCicco is absent from work because of illness or incapacity cumulatively for more than 2 months in addition to vacation time in any calendar year, the Company may terminate the agreement upon 30 days written notice. The agreement also provides that the agreement may be terminated upon 90 days notice to Mr. DeCicco if: (A) there is a sale of substantially all of the Company’s assets to a single purchaser or group of associated purchasers; (B) there is a sale, exchange or disposition of 50% of the outstanding shares of the Company’s outstanding stock; (C) the Company terminates its business or liquidates its assets; or (D) there is a merger or consolidation of the Company in which the Company’s shareholders receive less than 50% of the outstanding voting shares of the new or continuing corporation. Mr. DeCicco shall be entitled to severance pay in the amount of 2 years compensation and medical and other benefits in the event of a termination of the agreement under certain circumstances.
Employment agreement with chief financial officer - On October 1, 2007, the Company entered into an employment agreement with its chief financial officer William Blacker. The agreement provides for a term of 3 years, commencing on October 1, 2007. The term can be extended by a written agreement of the parties. The Company agreed to issue options to purchase shares of its common stock to Mr. Blacker if and when the common stock becomes publicly traded, as follows: (A) upon execution of the agreement, 100,000 options at an exercise price of $0.05 per share; (B) on October 1, 2008, 100,000 options at an exercise price of $0.15 per share; and (C) on October 1, 2009, 100,000 options at an exercise price of $.75 per share. Pursuant to the terms of the agreement, Mr. Blacker is to receive an annual salary of $150,000. Mr. Blacker has the right to terminate the agreement upon 60 days notice to the Company for any reason. The agreement further provides that if the agreement is terminated for any reason other than willful malfeasance by Mr. Blacker, Mr. Blacker shall be entitled to receive severance pay in the amount of 6 months or the balance of the agreement’s term of existence, whichever is greater, and shall receive all benefits under the agreement.
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Harbrew Imports Ltd. Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Information as of and for the Nine Months Ended September 30, 2008 and 2007 is Unaudited)
The $16,850 estimated fair value of the 300,000 options (using the Black-Scholes option pricing model and the following assumptions: $0.10 stock price, 4% risk free interest rate, 100% volatility, and term of 3.5 years) is being amortized over the 3 year term of the employment agreement as compensation and benefits.
10. | STOCK OPTIONS AND WARRANTS |
A summary of stock option and warrant activity for the nine months ended September 30, 2008 follows:
Stock | ||||||||
Options | Warrants | |||||||
Outstanding at January 1, 2008 | 300,000 | 3,887,500 | ||||||
Granted and issued | 1,000,000 | 1,870,000 | ||||||
Exercised | - | - | ||||||
Forfeited/expired/cancelled | - | - | ||||||
Outstanding at September 30, 2008 | 1,300,000 | 5,757,500 |
Stock options outstanding at September 30, 2008 consist of:
Date | Number | Number | Exercise | Expiration | ||||||
Granted | Outstanding | Exercisable | Price | Date | ||||||
October 1, 2007 | 100,000 | $ | - 0.05 | April 1, 2011 | ||||||
October 1, 2007 | 100,000 | $ | - 0.15 | April 1, 2011 | ||||||
October 1, 2007 | 100,000 | $ | - 0.75 | April 1, 2011 | ||||||
January 1, 2008 | 1,000,000 | $ | - 0.10 | (a) | June 30, 2013 | |||||
Total | 1,300,000 | - |
(a) Estimated since exercise price is to be determined based on future stock price.
The 1,300,000 options are not exercisable until the Company’s common stock becomes publicly traded. The 300,000 options granted on October 1, 2007 vest 100,000 on October 1, 2007, 100,000 on October 1, 2008, and 100,000 on October 1, 2009. As of September 30, 2008, there was $88,329 of total unrecognized compensation cost relating to unexpired stock options. That cost is expected to be recognized $5,939 in the three months ended December 31, 2008, $23,756 in 2009, $22,352 in 2010, $18,140 in 2011 and $18,142 in 2012.
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Harbrew Imports Ltd. Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Information as of and for the Nine Months Ended September 30, 2008 and 2007 is Unaudited)
Warrants outstanding at September 30, 2008 consist of:
Date | Number | Number | Exercise | Expiration | |||||||||
Issued | Outstanding | Exercisable | Price | Date | |||||||||
April 26, 2007 | 120,000 | 120,000 | $ | 0.50 | April 30, 2009 | ||||||||
July 2, 2007 | 500,000 | 500,000 | $ | 1.00 | July 2, 2012 | ||||||||
July 2, 2007 | 500,000 | 500,000 | $ | 1.50 | July 2, 2012 | ||||||||
August 27, 2007 | 550,000 | 550,000 | $ | 1.00 | August 27, 2012 | ||||||||
August 27, 2007 | 550,000 | 550,000 | $ | 1.50 | August 27, 2012 | ||||||||
November 1, 2007 | 45,000 | 45,000 | $ | 0.50 | November 30, 2009 | ||||||||
November 8, 2007 | 811,250 | 811,250 | $ | 1.00 | November 8, 2012 | ||||||||
November 8, 2007 | 811,250 | 811,250 | $ | 1.50 | November 8, 2012 | ||||||||
March 5, 2008 | 192,500 | 192,500 | $ | 1.00 | March 5, 2013 | ||||||||
March 5, 2008 | 192,500 | 192,500 | $ | 1.50 | March 5, 2013 | ||||||||
June 10, 2008 | 27,500 | 27,500 | $ | 1.00 | June 10, 2013 | ||||||||
June 10, 2008 | 27,500 | 27,500 | $ | 1.50 | June 10, 2013 | ||||||||
June 10, 2008 | 25,000 | 25,000 | $ | 1.00 | December 10, 2013 | ||||||||
June 10, 2008 | 25,000 | 25,000 | $ | 1.50 | December 10, 2013 | ||||||||
June 11, 2008 | 30,000 | 30,000 | $ | 1.00 | December 11, 2013 | ||||||||
June 11, 2008 | 30,000 | 30,000 | $ | 1.50 | December 11, 2013 | ||||||||
July 2, 2008 | 110,000 | 110,000 | $ | 1.00 | January 2, 2014 | ||||||||
July 2, 2008 | 110,000 | 110,000 | $ | 1.50 | January 2, 2014 | ||||||||
July 23, 2008 | 50,000 | 50,000 | $ | 1.00 | January 23, 2014 | ||||||||
July 23, 2008 | 50,000 | 50,000 | $ | 1.50 | January 23, 2014 | ||||||||
August 11, 2008 | 1,000,000 | 1,000,000 | $ | 1.00 | August 11, 2013 | ||||||||
Total | 5,757,500 | 5,757,500 |
As of September 30, 2008, there was $917 of total unrecognized compensation cost relating to 165,000 of the unexpired warrants. That cost is expected to be recognized $334 in the three months ended December 31, 2008 and $583 in 2009.
11. | SUBSEQUENT EVENTS |
Litigation:
On or about January 24, 2008, Connecticut Container Corp., a wholesale distributor of packaging materials, initiated litigation against the Company in the Supreme Court of the State of New York in Nassau County. The Plaintiff had demanded payment of an aggregate of $31,693 in connection with certain amounts allegedly owed by the Company. On August 7, 2008, the Company settled the litigation for the full amount, by agreeing to pay one-half of such amounts on each of August 20, 2008 and September 20, 2008. The Company paid $24,250 and expects to pay the remaining $7,443 in December 2008.
On February 14, 2008, Chester Stewart, an individual, initiated a lawsuit in the State of Connecticut Superior Court alleging breach of a promissory note in the amount of $100,000. The Company has retained counsel and is defending the action. Negotiations continue and the Company has responded to all allegations as of the filing date of this report.
On or about July 24, 2008, Elite Marketing Concepts, a wholesale distributor of wine, initiated litigation against the Company in the Supreme Court of New York in Nassau County. The Plaintiff has demanded payment in the amount of $32,270 for goods sold and delivered to the Company by the Plaintiff. On August 15, 2008, an agreement was reached to pay Elite $29,000 in two equal payments. As of September 30, 2008, one payment has been made in accordance with the agreement, leaving a remaining balance of $14,500 due Elite.
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Harbrew Imports Ltd. Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Information as of and for the Nine Months Ended September 30, 2008 and 2007 is Unaudited)
On October 23, 2008, Thermo Plastic Tech, Inc., a manufacturer of thermo plastic material, initiated litigation against the Company in the Superior Court of New Jersey Law Division, Civil Part Union County. The Plaintiff has demanded payment in the amount of $ 30,292 for goods sold and delivered to the Company by the Plaintiff. The Company has retained counsel and is defending the action.
On November 11, 2008, Albea, S.P.A d/b/a/ Agribon SRL, a wine maker in Italy, initiated litigation against the Company in the Supreme Court of the State of New York County of Nassau. The Plaintiff has demanded payment in the amount of 22,260 Euros (approximately $29,574). The Company has retained counsel and is defending the action.
At September 30, 2008, the Company has included in liabilities amounts relating to the above actions. The Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial condition or operations.
Debt:
On August 21, 2008, the Company executed an agreement with Capstone Capital Group I, LLC (“CCG”) and Capstone Business Credit, LLC (“CBC”) whereby the Company was to pay $1,500,000 in full and complete satisfaction of all debts due by the Company to both CCG and CBC (approximately $2,976,904 at August 21, 2008). The agreement called for an initial down payment in the amount of $150,000 (which was paid), with the balance of $1,350,000 due on October 21, 2008. On November 7, 2008, the Company executed an amendment to the settlement agreement whereby the amount of the note was increased to $2,664,406 and is due on or before August 21, 2009. The note will bear interest at the rate of 16%. The Company will receive 50% of all collections on sales made after November 7, 2008, less the applicable interest due within that month.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included in this report. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We were incorporated in Florida on January 4, 2007 under the name Stassi Harbrew Imports Corp. pursuant to the Bankruptcy Court Approved Reorganization Plan for the Stassi Reorganization approved on December 20, 2006. Subsequently, we changed our name to Harbrew Imports Ltd. Corp. On May 17, 2007, we and Harbrew Imports Ltd., a New York corporation incorporated on September 8, 1999 (“Harbrew New York”), merged. Pursuant to the Amended and Restated Reorganization & Merger Agreement dated April 10, 2007, 288 creditors and shareholders of ours were issued 1,383,256 shares of common stock and the two stockholders of Harbrew New York were issued 12,457,944 shares of common stock.
Prior to the merger on May 17, 2007, we had no assets, liabilities, or business operations. Accordingly, the merger has been treated for accounting purposes as a recapitalization by the accounting acquirer, Harbrew New York, and the financial statements reflect the assets, liabilities, and operations of Harbrew New York from its inception on September 8, 1999 to May 17, 2007 and us thereafter. References to our company are with respect to Harbrew New York to May 17, 2007 and us thereafter.
We are in the business of importing and wholesaling spirits, wine and beer to distributors in the United States on a national basis and to retail licensees both on and off premise in New York, through our wholesale license. We are federally licensed, maintaining licenses to both import and sell to wholesale licensed distributors in 51 markets in the United States. In addition to the federal import and wholesale licenses, we maintain a federal customs bonded facility license for our premises in Freeport, New York. Within the licensing category, we also maintain a New York State wholesale license and a New York State warehousing license, permitting us to warehouse products of other companies.
Results of Operations
Three Months ended September 30, 2008 Compared to Three Months ended September 30, 2007
Revenues
Total revenues were $252,322 and $358,861 for the three months ended September 30, 2008 and 2007, respectively, a decrease of $106,539, or 30%. This reflects the changing product mix from whiskies and wines to Danny DeVito’s Premium Limoncello. The introduction of Danny DeVito’s Premium Limoncello commenced the start of an aggressive marketing campaign which yielded $186,829 of sales in the third quarter of 2008, compared to $94,887 in the same period of 2007. The sales for the balance of the portfolio were mixed as we prioritized our sales effort in line with the new product.
Cost of Revenues
Cost of revenues was $167,725 and $261,216 for the three months ended September 30, 2008 and 2007, respectively, a decrease of $93,491, or 36%.
The gross profit for the three months ended September 30, 2008 and 2007 was $84,597 and $97,645, respectively, a decrease of $13,048, or 13%. The decrease in gross profit as a percentage of sales was lower than the decrease in sales reflecting the shift in product emphasis to the higher margin products in preference to the commodity brands.
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Selling, General and Administrative Expenses
Selling general and administrative expenses for the three months ended September 30, 2008 and 2007 were $838,093 and $978,484, respectively, a decrease of $140,391, or 14%. The decrease was due to reductions in advertising, marketing and promotion of $39,539; warehouse, delivery and rent of $191,580; and travel and entertainment of $56,132, offset by higher stock-based compensation in 2008. We now utilize the direct selling personnel of both Southern Wine and Spirits and Phoenix Beehive to distribute Danny DeVito’s Premium Limoncello and Molly’s Irish Cream, respectively. These companies have sales forces in excess of 400 salespeople each and offer us significant benefit in getting the products purchased by both on premises and off premises accounts.
Interest Expense
Interest expense for the three months ended September 30, 2008 and 2007 was $167,618 and $169,316, respectively, a decrease of $1,698, or 1%, but approximately even with last year.
Nine Months ended September 30, 2008 Compared to Nine Months ended September 30, 2007
Revenues
Total revenues were $1,058,363 and $713,078 for the nine months ended September 30, 2008 and 2007, respectively, an increase of $345,285, or 48%. Sales of Danny DeVito’s Premium Limoncello were $565,850, or $470,963 higher than the soft launch period last year, and accounted for the majority of the sales increase. The balance of the portfolio showed decreases in Molly’s Irish Cream, whiskies and wines due to the increased competitive nature of the category, and the focus on the main brand.
Cost of Revenues
Cost of revenues was $817,694 and $552,615 for the nine months ended September 30, 2008 and 2007, respectively, an increase of $265,079, or 48%.
The gross profit for the nine months ended September 30, 2008 and 2007 was $240,669 and $160,463, respectively, an increase of $80,206, or 50%. The increase in gross profit resulted from the portfolio shift to Danny DeVito’s Premium Limoncello, which produced a higher gross profit versus the balance of the product line. Other products in the sales category maintained their margin percentages while sales decreased as the focus to Danny DeVito’s Premium Limoncello increased.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September 30, 2008 and 2007 were $2,275,091 and $2,140,730, respectively, an increase of $134,361, or 6%. This resulted from increases in advertising, marketing and promotional materials of $36,257; administrative compensation and benefits (including stock-based compensation) of $192,697; professional fees of $130,358 and travel and entertainment of $17,088, being offset by significantly lower costs of the balance of the category as a result of reducing our wholesale operation. Southern Wine and Spirits has taken the Danny DeVito’s Premium Limoncello brand for distribution in the greater New York area and Phoenix Beehive has taken the Molly’s Irish Cream brand for distribution within the same area. These companies have sales forces in excess of 400 salespeople each and offer us significant benefit in getting the products purchased by both on premises and off premises accounts.
Interest Expense
Interest expense for the nine months ended September 30, 2008 and 2007 was $751,869 and $314,569, respectively, an increase of $437,300, or 139%. The interest cost to finance the loan for inventory and receivables, and the interest on the convertible notes comprise the majority of this category.
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Liquidity and Capital Resources
As of September 30, 2008, we had negative working capital of $4,150,407 compared to negative working capital of $2,539,703 at December 31, 2007. Our balance of cash and cash equivalents at September 30, 2008 was $1,511.
Our primary uses of cash have been for selling and marketing expenses, employee compensation, new product development and working capital. The main sources of cash have been from the financing of purchase orders and the factoring of accounts receivable. In addition, we issued convertible notes and promissory notes to bridge the gap between our primary lender and our working capital requirements. All funds received have been expended in the furtherance of growing the business and establishing the brand portfolios. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
· | An increase in working capital requirements to finance higher level of inventories and accounts receivable, |
· | Addition of administrative and sales personnel as the business grows, |
· | Increases in advertising, public relations and sales promotions for existing and new brands as the company expands within existing markets or enters new markets, |
· | Development of new brands to complement our celebrity portfolio, and |
· | The cost of being a public company and the continued increase in costs due to governmental compliance activities. |
Net Cash Used in Operating Activities
A substantial portion of our available cash has been used to fund operating activities. In general, these cash funding requirements are based on operating losses, driven principally by our sizeable investment in selling and marketing, and general expenses. The business has incurred significant losses since inception.
For the nine months ended September 30, 2008, net cash used in operating activities was $1,003,842, consisting primarily of losses from operations of $2,786,247, offset by a non-cash charge for stock-based compensation of $546,004, decreases in receivables of $371,483, decreases in inventories of $588,417 and increases in accrued expenses of $428,003. The uses of cash consisted of a reduction in accounts payable of $144,070, and an increase in prepaid expenses and other current assets (excluding non-cash stock-based compensation) of $130,199.
Net Cash Used in Investing Activities
For the nine months ended September 30, 2008 and 2007, net cash used in investing activities was $0 and $3,009, respectively, in the latter case reflecting small investments in office equipment.
Net Cash Provided by Financing Activities
For the nine months ended September 30, 2008, funds provided from financing activities amounted to $961,869. The funds consisted of the issuance of 7% convertible notes in the principal amount of $150,000, 9% convertible debentures in the principal amount of $105,000 and interim loan convertible promissory notes in the principal amount of $1,000,000; loans from Richard DeCicco, our President, in the amount of $136,040 and a loan from an individual lender in the amount of $15,000. Offsetting these sources of funds were repayments to Capstone Business Credit, LLC, our purchase order financier, of $300,889, and the repayment of $100,000 due on our 10% notes.
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We anticipate that we will need to make significant expenditures during the next 12 months, contingent upon raising capital. These anticipated expenditures are for advertising, marketing, promotional items, overhead and working capital purposes. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. We anticipate that we will require up to $7,500,000 for funding our plan of operations for the next twelve months, depending on revenues, if any, from operations.
By adjusting our operations and development to the level of capitalization, we believe we have sufficient capital resources to meet projected cash flow deficits. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition.
We will still need additional investments in order to continue operations to cash flow break even. We are seeking additional investments, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the lack of a trading price of our common stock and a downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.
Impact of Inflation
We expect to be able to pass inflationary increases for raw materials and other costs on to our customers through price increases, as required, and do not expect inflation to be a significant factor in our business.
Seasonality
Although our operating history is limited, we do not believe our products are seasonal.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Critical Accounting Policies and Estimates
Basis of Presentation
The financial statements have been prepared on a “going concern” basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, as of September 30, 2008, we had negative working capital of $4,150,407 and a stockholders’ deficiency of $6,311,262. Further, from inception to September 30, 2008, we incurred losses of $7,585,049. These factors create substantial doubt as to our ability to continue as a going concern. We expect to improve our financial condition as recently launched products mature and brand awareness increases, thereby increasing the profitability of our operations. Additionally, we intend to obtain new financing which will primarily be used to market and promote Danny DeVito’s Premium Limoncello and other new products. However, we cannot assure you that we will be successful in accomplishing these objectives.
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Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, net, current portion of debt, negative bank account balance, accounts payable, accrued expenses, and long term debt. Except for long term debt, the fair value of these financial instruments approximate their carrying amounts reported in the balance sheets due to their short term maturity.
Cash and Cash Equivalents
We consider all liquid investments purchased with original maturities of three months or less to be cash equivalents.
Accounts Receivable, Net of Allowance for Doubtful Accounts
We extend unsecured credit to our customers in the ordinary course of business but mitigate the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and recorded based on historical experience and the aging of the related accounts receivable.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market, with due consideration given to obsolescence and to slow moving items.
Property, Plant and Equipment, Net
Property, plant and equipment, net is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets.
Revenue Recognition
Revenue from product sales is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) the price is fixed or determinable, (3) collectability is reasonably assured, and (4) delivery has occurred. Persuasive evidence of an arrangement and fixed price criteria are satisfied through purchase orders. Collectability criteria are satisfied through credit approvals. Delivery criteria are satisfied when the products are shipped to a customer and title and risk of loss pass to the customer in accordance with the terms of sale. We have no obligation to accept the return of products sold other than for replacement of damaged products. Other than quantity price discounts negotiated with customers prior to billing and delivery (which are reflected as a reduction in sales), we do not offer any sales incentives or other rebate arrangements to customers.
Shipping and Handling Costs
Shipping and handling costs are reported as selling, general and administrative expenses in the accompanying statements of operations.
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Advertising
Advertising costs are expensed as incurred.
Stock-Based Compensation
Stock-based compensation is accounted for at fair value in accordance with Statement of Financial Accounting Standards Nos. 123 and 123R.
Foreign Currency Transactions
Gains and losses arising on settlement of foreign currency denominated transactions or balances are included in other selling, general and administrative expenses.
Income Taxes
Income taxes are accounted for under the assets and liability method. Current income taxes are provided in accordance with the laws of the respective taxing authorities. Deferred income taxes are provided for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is not more likely than not that some portion or all of the deferred tax assets will be realized.
Net Income (Loss) per Share
Basic net income (loss) per common share is computed on the basis of the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed on the basis of the weighted average number of common shares and dilutive securities (such as stock options and convertible securities) outstanding. Dilutive securities having an anti-dilutive effect on diluted net income (loss) per share are excluded from the calculation.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not required.
ITEM 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2008, based on their evaluation of these controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Exchange Act is accumulated and communicated to management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
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Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
On or about November 26, 2007, G.S. Schwartz & Co., Inc. initiated litigation against us in the Supreme Court of New York (Docket No. 6003962/07). Schwartz sought damages of $43,847. The complaint alleged that the plaintiff performed certain public relations on our behalf for which it did not receive certain agreed upon fees. We submitted an answer on January 23, 2008. On August 28, 2008, we settled the lawsuit for $30,000, of which the entire amount has been paid in full satisfaction of such claim.
On or about January 24, 2008, Connecticut Container Corp., a wholesale distributor of packaging materials, initiated litigation against us in the Supreme Court of the State of New York in Nassau County (Docket No. 1458/08). The plaintiff had demanded payment of an aggregate of $31,693 in connection with certain amounts allegedly owed by us. On August 7, 2008, we settled the litigation for the full amount. We agreed to pay one-half of such amount on each of August 20, 2008 and September 20, 2008. We paid $24,500 and expect to pay the remaining $7,443 in December 2008.
On February 14, 2008, Chester Stewart, an individual, initiated a lawsuit in the State of Connecticut Superior Court (Docket No. D.N. HHD CV08-5018180S) alleging breach of a promissory note in the amount of $100,000. We have retained counsel and are defending the action. Negotiations continue and we have responded to all allegations as of the filing date of this report.
On or about July 24, 2008, Elite Marketing Concepts, a wholesale distributor of wine, initiated litigation against us in the Supreme Court of New York in Nassau County (Docket No. 08-009338). The plaintiff has demanded payment in the amount of $32,270 for goods sold and delivered to us by the plaintiff. On August 15, 2008, we reached an agreement to pay Elite $29,000 in two equal payments. We paid the first $14,500 and expect to pay the remaining $14,500 in December 2008.
On October 23, 2008, Thermo Plastic Tech, Inc., a manufacturer of thermo plastic material, initiated litigation against us in the Superior Court of New Jersey Law Division, Civil Part, Union County (Docket No. UNN-L-3062-08). The plaintiff has demanded payment in the amount of $30,292 for goods sold and delivered to us by the plaintiff. We have retained counsel and are defending the action.
On November 11, 2008, Albea, S.P.A d/b/a/ Agribon SRL, a wine maker in Italy, initiated litigation against us in the Supreme Court of the State of New York in Nassau County (Docket No. 08-20104). The plaintiff has demanded payment in the amount of 22,260 Euros (approximately $29,574). We have retained counsel and are defending the action.
We believe that the ultimate resolution of these matters will not have a material adverse effect on our financial condition or operations. Apart from the legal proceedings noted in the previous paragraphs, we are not party to any legal proceedings, nor are we aware of any contemplated or pending legal proceedings against us.
ITEM 1A. Risk Factors
Not required.
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities during the Three Months ended September 30, 2008
From July 2007 to July 2008, we privately placed with accredited investors 40.75 units consisting of (i) a 7% convertible promissory note in the principal amount of $25,000 which is convertible into shares of common stock at a price of $.50 per share and is due five years from the date of issuance, (ii) a five-year warrant to purchase 50,000 shares of common stock exercisable at a price of $1.00 per share; and (iii) a five-year warrant to purchase 50,000 shares of common stock exercisable at a price of $1.50 per share. Of these 40.75 units, two were sold during the three months ended September 30, 2008. Interest on the 7% convertible promissory notes is payable semi-annually at the rate of 7% per annum by issuance of additional notes. In the event that our common stock is not trading on the OTC Bulletin Board, American Stock Exchange or Nasdaq Capital Market one year from the date of issuance of the notes, the rate of interest increases to 14% retroactive to the date of issuance. Basic Investors, the placement agent of the offering, received a placement agent fee of 10% of the gross proceeds, a 3% non-accountable expense allowance and one unit for each ten units sold in the offering.
From July to September 2008, we issued interim loan convertible promissory notes to six accredited investors in the aggregate principal amount of $1,000,000. These notes mature one year from issuance or, if earlier, upon the consummation of a merger or combination or sale of all or substantially all of our stock or assets.
On July 7, 2008, we entered into consulting agreements with The Bentley Asset Investment Group and New Century Capital Consultants, Inc. Pursuant to the terms of the agreements, we issued to each 800,000 shares of common stock for providing consulting services related to the further development of our business and comprehensive marketing program.
In August 2008, we entered into a financial consulting agreement with MLF Group LLC. Pursuant to the terms of the agreement, we issued 2,000,000 shares of common stock and five-year warrants to purchase 1,000,000 shares of common stock at an exercise price of $1.00 per share to the consultant for providing financial consulting services, including a complete analysis of our business and industry, the drafting of any documents needed to secure additional equity participants or to seek merger and acquisition candidates, and advising us in any business combination transaction.
On August 8, 2008, we issued 2,730,960 shares of common stock to Richard J. DeCicco, our President, in consideration of services rendered and 1,050,000 shares of common stock to designees of Danny DeVito in consideration of services rendered.
All of the above offerings and sales were deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of ours or executive officers of ours, and transfer was restricted in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
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ITEM 5. Other Information
None.
ITEM 6. Exhibits
The exhibits listed in the following Exhibit Index are filed as part of this quarterly report.
Exhibit No. | Description | |
3.1 | Articles of Incorporation, as amended of Harbrew Imports Ltd. Corp. (1) | |
3.2 | Certificate of Incorporation, as amended, of Harbrew Imports Ltd. (1) | |
3.3 | Articles of Merger filed with the Secretary of State of the State of Florida. (1) | |
3.4 | Amended and Restated Reorganization and Merger Agreement, filed May 17, 2007. (Included as part of Exhibit 3.3) (1) | |
3.5 | Bylaws. (1) | |
4.1 | Form of Note. (1) | |
4.2 | Form of Warrants. (1) | |
4.3 | Secured Promissory Note, dated as of August 21, 2008, issued by Harbrew Imports, Ltd. (2) | |
4.4 | Amended and Restated Secured Promissory Note, dated as of November 7, 2008, issued by Harbrew Imports, Ltd. (3) | |
10.2 | License Agreement between the company and Seven Cellos, LLC, dated April 26, 2007. (1) | |
10.3 | Exclusive Manufacturing Agreement between Sorrento Delizie Di de Luca Antonino, dated August 14, 2007. (1) | |
10.4 | Discount Factoring Agreement between Capstone Business Credit, LLC and Harbrew Imports, Ltd., dated as of January 22, 2007. (1) | |
10.5 | Purchase Order Financing Agreement between Harbrew Imports, Ltd. and Capstone Capital Group, I, LLC, dated as of January 22, 2007. (1) | |
10.6 | Letter Agreement among Harbrew Imports, Ltd., Capstone Capital Group, I, LLC and Capstone Capital Group, II, LLC. (1) | |
10.7 | First Amendment to Purchase Order Financing Agreement between Harbrew Imports, Ltd. and Capstone Capital Group, I, LLC, dated as of October 25, 2007. (1) | |
10.8 | First Amendment to Discount Factoring Agreement between Harbrew Imports, Ltd. and Capstone Business Credit, LLC, dated as of October 25, 2007. (1) | |
10.9 | Employment Agreement with Richard J. DeCicco, dated January 23, 2008. (1) | |
10.10 | Employment Agreement with William S. Blacker, dated October 1, 2008. (1) | |
10.11 | Addendum to License Agreement between Seven Cellos and Harbrew Imports, Ltd., dated November 1, 2007. (1) | |
10.12 | Advisory Services Engagement Letter between The Griffin Group LLC and Harbrew Imports, Ltd., dated February 23, 2008. (3) | |
10.13 | Consulting Agreement between Harbrew Imports, Ltd. and The Bentley Asset Investment Group, dated July 7, 2008. (3) | |
10.14 | Consulting Agreement between Harbrew Imports, Ltd. and New Century Capital Consultants, Inc., dated July 7, 2008. (3) |
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10.15 | Agreement to Engage MLF Group LLC as a Financial Consultant between Harbrew Imports, Ltd. and MLF Group LLC, dated July 31, 2008. (3) | |
10.16 | Settlement Agreement, dated as of August 21, 2008, by and among Harbrew Imports, Ltd., Capstone Business Credit, LLC and Capstone Capital Group I, LLC. (2) | |
10.17 | First Amendment to the Settlement Agreement, dated as of November 7, 2008, by and among Harbrew Imports, Ltd., Capstone Business Credit, LLC and Capstone Capital Group I, LLC. (3) | |
31.1* | Certification of Chief Executive Officer required by Rule 13(a)-14(a). | |
31.2* | Certification of Chief Financial Officer required by Rule 13(a)-14(a). | |
32.1* | Certifications pursuant to Sec. 906. |
* | Filed herewith. |
(1) | Incorporated by reference to the exhibits included with our Form 10, File No. 000-53085, filed with the U.S. Securities and Exchange Commission on February 7, 2008. |
(2) | Incorporated by reference to the exhibits included with our Current Report on Form 8-K, dated August 21, 2008, and filed with the U.S. Securities and Exchange Commission on August 27, 2008. |
(3) | Incorporated by reference to the exhibits included with our Annual Report on Form 10-KSB for the year ended December 31, 2007, filed with the U.S. Securities and Exchange Commission on December 4, 2008. |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: December 18, 2008
HARBREW IMPORTS LTD. CORP. | ||
By: | /s/ Richard J. DeCicco | |
Richard J. DeCicco | ||
President, Secretary and Director | ||
(principal executive officer) | ||
By: | /s/ William S. Blacker | |
William S. Blacker | ||
Chief Financial Officer and Vice President- Finance and Administration | ||
(principal financial and accounting officer) |
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