NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Panache was incorporated in the State of Florida on December 28, 2004 under the name Biometrix International Inc. On May 30, 2007, the Company changed its name to BMX Development Corp. On August 19, 2011, the Company completed a stock exchange transaction with Panache LLC, a New York limited liability company and in connection with such transaction changed its name to Panache Beverage Inc. to more accurately reflect its business. We currently own 65.5% ownership of Wodka LLC (“Wodka”), a New York Limited Liability Company organized on August 14, 2009. Upon its organization, Panache assumed ownership of Wodka from a related party. Wodka imports vodka under the brand name Wodka for wholesale distribution to retailers located throughout the United States and internationally.
The stock exchange transaction involved two simultaneous transactions:
The majority shareholder of the Company delivered 2,560,000 shares of the Company’s common stock to James Dale, our current CEO, in exchange for total payments of $125,000 in cash; and
The Company issued to the Panache LLC members an amount equal to 17,440,000 new shares of the Company’s common stock in exchange for one hundred percent (100%) of the issued and outstanding membership interest units of Panache LLC from the Panache members.
In October 2013, the Company reincorporated in the State of Delaware.
Alibi NYC, LLC (“Alibi”) was organized as a limited liability company in the State of New York on May 17, 2007 and remained dormant until it conducted its first business operations during the first quarter of 2012. Effective January 1, 2012, the members of Alibi transferred their interests to Panache Beverage, Inc. and Alibi became a 100% owned subsidiary of Panache Beverage, Inc. Alibi markets and distributes Alibi American Whiskey.
Panache Distillery, LLC (“Panache Distillery”) was organized as a limited liability company in the State of Florida on February 20, 2013 as a wholly owned subsidiary of Panache Beverage, Inc. On August 23, 2013, Panache Distillery closed on the purchase of a distillery in New Port Richey, Florida for a total purchase price of $4,200,000, of which $700,000 was paid in cash at closing and the remaining $3,500,000 shall be payable in the form of a Promissory Note to be held by the sellers. The distillery will offer full integration of domestic distillation, bottling and sales operations.
Panache IP Holdings, Inc. (“IP Holdings”) was organized as a domestic corporation in the State of Delaware on September 26, 2013 as a wholly owned subsidiary of Panache Beverage, Inc. IP Holdings was established to preserve the Company’s patented intellectual property and trademarks. As of March 31, 2014, IP Holdings is dormant with no activity.
On March 10, 2014, the Company organized three limited liability companies, OGB Holdings, LLC (“OGB”), Old South Shine, LLC (“Old South Shine”) and Spirytus, LLC (“Spirytus”), in the State of Delaware as wholly owned subsidiaries of Panache Beverage, Inc. These entities are part of the Company’s intention to release an entire line of spirits from its Panache Distillery facility in New Port Richey, FL.
As of March 31, 2014, these entities are dormant with no material activity.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
Basis of consolidation
The consolidated financial statements include the accounts of Panache Beverage, Inc., Panache LLC, Wodka LLC, Alibi NYC, LLC and Panache Distillery, LLC (collectively, the “Company”). All material intercompany transactions have been eliminated.
Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results to be expected for a full year.
The unaudited consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the Company’s annual audited consolidated financial statements for the preceding fiscal year. The financial statements of the Company are presented in US dollars.
Accounting basis
The Company uses the accrual basis of accounting and generally accepted accounting principles in the United States of America (“US GAAP”). The Company has adopted a December 31 fiscal year end. Certain reclassifications were made to the 2013 financial statements presentation in order to conform to the 2014 presentation. Such reclassifications had no effect on reported income.
Revenue recognition
We recognize revenue when title and risk of loss pass to the customer, typically when the product is shipped. Some sales contracts contain customer acceptance provisions that grant a right of return. Under these provisions, customers can return products that are not merchantable and fit and suitable for their intended use, are not of the same premium quality as products currently in existence, or are defectively packaged, bottled or labeled. Customers may also return any product that does not comply with all applicable laws and regulations. We record revenue net of the estimated cost of sales returns and allowances.
Advertising
Advertising costs are expensed as incurred and aggregated $289,115 and $267,044 for the three months ended March 31, 2014 and 2013, respectively.
Other Significant Accounting Policies
Other significant accounting policies are set forth in Note 1 of the audited financial statements included in the Company’s 2013 Annual Report on Form 10-K and remain unchanged as of March 31, 2014.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
Use of estimates
The preparation of financial statements in conformity with GAAP 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 date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recently issued accounting standards
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its consolidated financial condition or the consolidated results of its operations.
NOTE 2 – ACCOUNTS RECEIVABLE
The Company grants customers standard credit terms as governed by the terms specified in the contracts. Our major customers receive payment credit terms that range between 30 and 65 days.
The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based on management’s review of outstanding balances, no allowance for doubtful accounts was recorded as of March 31, 2014 and December 31, 2013.
Bad debt expense was $0 for the three months ended March 31, 2014 and 2013.
NOTE 3 – PREPAID EXPENSES
The Company has entered into various agreements with consultants whereby the Company issues common stock in exchange for consulting services. The Company values the common stock and the consulting services based on the closing price of its common stock on the date of the agreement or the negotiated value of the consulting services. The Company recognized $0 and $135,250 of professional fee expense in relation to these agreements for the three months ended March 31, 2014 and 2013, respectively. No prepaid expenses relating to these agreements were outstanding as of March 31, 2014 and December 31, 2013.
NOTE 4 – FACTORING AGREEMENT
The Company is party to a purchase and sale factoring agreement with a commercial factor whereby the Company sells certain Alchemia accounts receivable to the factor. Under the terms of the agreement, the factor may, in its sole discretion, make advances to the Company of amounts representing up to 75% of the net amount of eligible accounts receivable up to an initial maximum of $250,000 for each brand and possible increased maximum of $1,000,000 and $500,000, respectively. The factor's purchase of the eligible accounts receivable includes a discount fee which is deducted from the face value of each collection. The Discount Fee is based on the number of days outstanding from the date of purchase. The Discount Fee is 3.0% if paid within 30 days and 1.0% for each 10 day period until the account is paid. Based on this arrangement, the Company is liable to the factor if the accounts receivable is not collected, and therefore the Company has accounted for cash received on factored receivables as a liability.
NOTE 4 – FACTORING AGREEMENT – (Continued)
From time to time, the Company enters into purchase and sale factoring agreement with a different commercial factor whereby the Company sells certain accounts receivable to the factor. Under the terms of these agreements, the factor makes advances to the Company of amounts representing up to 90% of certain accounts receivable. The factor purchases the accounts receivable at a $500 discount plus monthly compounded interest of 2% of the factored amount for the period the factored accounts receivable remain outstanding. Based on this arrangement, the Company is liable to the factor if the accounts receivable is not collected, and therefore the Company has accounted for cash received on factored receivables as a liability.
In the third quarter of 2013, the Company entered into a factoring and advance agreement with a commercial factor whereby the Company sells its accounts receivables to the factor. Under the terms of the agreement, the factor may purchase individually or collectively any invoice of the Company if the Company agrees to sell them and make advances of amounts representing up to 85% of the net amount of eligible accounts receivable up to $2,000,000. The factor's purchase of the eligible accounts receivable includes a discount fee which is deducted from the face value of each collection. The discount fee is based on the number of days outstanding from the date of purchase and shall be 2.5% if paid within 30 days and 0.85% for each 10 day period until the account is paid. Based on this arrangement, the Company is liable to the factor if the accounts receivable is not collected, and therefore the Company has accounted for cash received on factored receivables as a liability.
The combined balance due to the factors as of March 31, 2014 and December 31, 2013 was $351,271and $312,500, respectively. Factor expense charged to operations for the three months ended March 31, 2014 and 2013 amounted to $21,427 and $65,311, respectively.
NOTE 5 – NOTES PAYABLE
On June 11, 2013, the Company borrowed $22,860 from a third party at an interest rate of 7.20% per annum. The loan was used to finance directors’ and officers’ insurance and is due in nine equal monthly payments of $2,617. The balance of this loan was $0 and $5,187 as of March 31, 2014 and December 31, 2013.
On August 11, 2011, the Company borrowed $28,000 from a third party for working capital purposes. The loan is non-interest bearing and payable on demand. The balance of this loan was $28,000 as of March 31, 2014 and December 31, 2013.
NOTE 6 – LOANS PAYABLE – RELATED PARTIES
The Company had an outstanding loan payable to its former chief executive officer, majority shareholder and former member of Panache LLC in the amount of $245,000 as of March 31, 2014 and December 31, 2013. The loan balance includes $110,275 that was transferred into Wodka from a related entity as a deemed distribution. The loan is unsecured, and non-interest bearing. In order to induce a new member to purchase a membership interest, the related party agreed that the loan would not be repaid without unanimous Board approval. In addition, the loan would not become due and payable until all of the equity interests of Wodka, or substantially all of the assets of Wodka are sold to an unrelated third party.
The Company had additional loans payable to related parties totaling $253,231 at March 31, 2014 and December 31, 2013. The loans are unsecured and non-interest bearing with no stated payment terms. Proceeds from the loans were used to fund operations.
NOTE 7 – OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following as of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Excise taxes payable
|
|
$
|
141,237
|
|
|
$
|
75,954
|
|
Customer deposits
|
|
|
-
|
|
|
|
9,561
|
|
Accrued salaries
|
|
|
377,119
|
|
|
|
330,374
|
|
Deferred revenue
|
|
|
100,000
|
|
|
|
100,000
|
|
Accrued expenses and other liabilities
|
|
|
175,859
|
|
|
|
103,723
|
|
Total other current liabilities
|
|
$
|
794,215
|
|
|
$
|
619,612
|
|
NOTE 8 – LONG TERM DEBT
On August 22, 2013, in connection with the acquisition of the Panache Distillery the Company issued a promissory note for $3,500,000 to Douglas Joint Venture, Empire Joint Venture, and V-3 Joint Venture, LLC (“the Sellers”) due on August 22, 2016 and bearing interest at 6% per annum. Interest is payable semiannually in arrears. The promissory note is secured by a first lien Purchase Money Mortgage and Security Agreement secured by the purchased assets. The principal amount of this note as of March 31, 2014 and December 31, 2013 was $3,500,000.
On May 9, 2013, Panache Beverage, Inc. issued a promissory note to Consilium Corporate Recovery Master Fund, Ltd. ("Consilium"), which resulted in gross proceeds of $4,000,000 before fees and other expenses associated with the transaction (the “$4,000,000 Note”). The $4,000,000 Note bears interest at 8% per annum with interest payable quarterly in arrears starting on March 31, 2014. Interest accrued through December 31, 2013 was capitalized and added to the principal. On December 31, 2013, the Company capitalized $210,667 of interest into the principal of the note. The Company agreed to retain a portion of this loan in escrow to be released in accordance with annual budgets approved by the lender. In March 2014, the Company and Consilium entered into an agreement that extended the maturity date of the $4,000,000 Note to May 9, 2017. The principal amount the note as of March 31, 2014 and December 31, 2013 was $4,210,667.
On February 14, 2013, pursuant to a term loan agreement dated February 14, 2013 (“2013 Loan Agreement”) between the parties, Wodka issued a promissory note for $1,400,000 to Consilium due on February 14, 2016 and bearing interest at 12% per annum (the “$1,400,000 Note”). Interest is payable quarterly in arrears. The Company used the proceeds to fund operations and repay existing debt. The Company pledged its tangible and intangible assets pursuant to the 2013 Loan Agreement and agreed to retain $800,000 of the proceeds in escrow to be released in accordance with annual budgets approved by the lender. As of June 6, 2014, $7,000 of such funds remained in escrow. In March 2014, the Company and Consilium entered into an agreement that extended the maturity date of the $1,400,000 Note to May 9, 2017. As of March 31, 2014 and December 31, 2013, the principal amount of the note is $1,400,000.
NOTE 8 – LONG TERM DEBT – (Continued)
On December 21, 2012, pursuant to a term loan agreement (“Loan Agreement”) between the parties, the Company issued a promissory note for $2,100,000 to Consilium due on December 31, 2015 and bearing interest at 12% per annum (the “$2,100,000 Note”). Interest is payable quarterly in arrears. The Company used the proceeds to fund operations and repay existing debt. The Company pledged its tangible and intangible assets pursuant to the Loan Agreement and agreed to retain $600,000 of the proceeds in escrow to be released in accordance with annual budgets approved by the lender. As of June 6, 2014, $7,000.00 remains in escrow. Concurrent with the issuance of the note, the managing director of Consilium Investment Management, LLC (“CIM”) was appointed to the Board of Directors of the Company. On April 21, 2014, the Managing Director of CIM resigned from the Board of Directors of the Company and as Chairman. In March 2014, the Company and Consilium entered into an agreement that extended the maturity date of the $2,100,000 Note to May 9, 2017. The principal amount of this note as of March 31, 2014 and December 31, 2013 was $2,100,000.
On May 6, 2014, the Company received written notice from Consilium (the “Default Notice”) of certain events of defaults under the above loans. The aggregate principal amount due as of the date of the Default Notice was $6,310,667. Pursuant to the Default Notice, Consilium agreed not to charge the default interest rate or late fee on the outstanding obligations and does not intend to exercise any other rights and remedies available to it at this time, but reserved the right to do so.
On May 8, 2014, in connection with the Default Notice, the Company entered into a forbearance agreement (the “Forbearance Agreement”) with
Consilium,
which provided that Consilium would not exercise any of its rights under the above noted loan agreements for a period ending on June 6, 2014, which period has since been extended to June 13, 2014. In addition, the Forbearance Agreement allowed the Company to draw down the remaining funds held in escrow. As of June 6, 2014,
$7,000 of such funds remained in escrow and
Consilium has provided an additional $3
45,000 of funding. Such funds will be used solely to pay operating costs set forth in a budget agreed to by the Company and Consilium.
Future maturities of long term debt as of March 31, 2014 are as follows:
For the year ended:
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|
|
|
December 31, 2014
|
|
$
|
526,231
|
|
December 31, 2015
|
|
|
-
|
|
December 31, 2016
|
|
|
3,500,000
|
|
December 31, 2017
|
|
|
7,710,667
|
|
December 31, 2018
|
|
|
-
|
|
|
|
$
|
11,736,898
|
|
NOTE 9 – RELATED PARTY TRANSACTIONS
As noted above, the Company recorded unsecured, non-interest bearing loans totaling $245,000 to a related party in 2009. The loan consists of $110,275 transferred in from a related entity as a deemed distribution, plus cash loans of $134,725 for operations. The loan balance of $245,000 was outstanding as of March 31, 2014 and December 31, 2013.
In addition, the Company received various loans from related parties to fund operations. The related party loans totaled $253,231 at March 31, 2014 and December 31, 2013 and are unsecured and non-interest bearing with no stated payment terms.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
On August 8,
2013, the Company entered into an agreement with Engine Shop LLC, to sublease administrative space for monthly rent of $5,000 through January 30, 2018. The Company has the right to terminate the sublet agreement with 30 days’ notice.
Rent expense was $15,000 and $1,080 for the three months ended March 31, 2014 and 2013, respectively.
NOTE 11 – STOCKHOLDERS’ DEFICIT
The following table shows the warrant activity for the three months ended March 31, 2014:
Warrants
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of January 1, 2014
|
|
|
7,365,000
|
|
|
$
|
0.69
|
|
|
|
|
|
Issued
|
|
|
15,000
|
|
|
$
|
1.50
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Outstanding as of March 31, 2014
|
|
|
7,380,000
|
|
|
$
|
0.69
|
|
3.0 years
|
|
$
|
-
|
|
On March 31, 2014, the Company issued a director warrants to purchase 15,000 shares of common stock at an exercise price of $1.50 with an expiration date of December 31, 2015. The warrants vest on September 30, 2014. The Company valued the stock warrants at $447 using the Black Scholes model.
The Company recognized $47,434 and $170,950 of stock compensation expense for the quarters ended March 31, 2014 and 2013, respectively.
On February 14, 2013, pursuant to the Financial Advisory Agreement dated November 28, 2012 (“Financial Advisor Agreement”), the Company issued CIM warrants to purchase up to 1,840,000 shares of the Company’s common stock at an exercise price of $0.50 per share in exchange for consulting services to be provided over four years. The warrants vest in eight equal tranches every six months over the consulting period and are exercisable upon at least 61 days’ notice. The warrants expire on February 14, 2018. The Company valued the stock warrants at $740,968 using the Black Scholes model.
On December 21, 2012, pursuant to the Financial Advisory Agreement, the Company issued CIM warrants to purchase up to 2,760,000 shares of the Company’s common stock at an exercise price of $0.50 per share in exchange for consulting services to be pro
vided over four years. The warrants vest in eight equal tranches every six months over the consulting period and are exercisable upon at least 61 days’ notice. The warrants expire on December 21, 2017. The Company valued the stock warrants at $1,229,304 using the Black Scholes model.
The Company has recognized $123,141 and $104,950 of consulting expense in relation to warrant agreements with CIM for consulting services for the quarters ended March 31, 2014 and March 31, 2013.
NOTE 12 – NON-CONTROLLING INTERESTS
As of March 31, 2014 and December 31, 2013, the non-controlling interests balance was a deficit of $(1,384,389) and $(1,202,804), respectively, due to minority members owning 34.5% of the membership interests of Wodka.
Profits and losses are allocated to the members of Wodka in accordance with Wodka’s Limited Liability Company Agreement (the “Agreement”). Profits are allocated first to members in the amounts and proportions necessary to bring the members’ respective capital account balances in proportion to their percentage ownership interests and thereafter to the members pro rata in accordance with their percentage ownership interests. The Agreement allocates losses first to the members in an amount equal to the positive balances in their Capital Accounts until the balances in such accounts are reduced to zero and thereafter to the members pro rata in accordance with their respective percentage ownerships interests.
For the three months ended March 31, 2014 and 2013, $344,749 and $229,671, respectively, of Wodka’s net loss was allocated to Panache and $181,585 and $120,972, respectively, was allocated to noncontrolling interests.
NOTE 13 – CONCENTRATIONS AND RISK
Major customers
The Company had three customers represent approximately 48% of revenues for the three months ended March 31, 2014. These customers represented approximately 44% of the receivables outstanding as of March 31, 2014.
The Company had one customer represent approximately 100% of revenues for the three months ended March 31, 2013. This customer represented approximately 72% of the receivables outstanding as of March 31, 2013.
Major suppliers
The Company had one supplier represent approximately 95% of purchases for the three months ended March 31, 2014. This supplier represented approximately 4% of the payables outstanding as of March 31, 2014.
The Company had two suppliers represent approximately 98% of purchases for the three months ended March 31, 2013. These suppliers represented approximately 19% of the payables outstanding as of March 31, 2013.
Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash with commercial banking institutions. At times, such cash may be in excess of the Federal Deposit Insurance Corporation’s insurance limit. From time to time the Company may also hold cash in accounts with foreign financial institutions. The Company regularly assesses the risk associated with its foreign cash portfolio. The Company performs ongoing credit evaluations of its customers’ financial condition, but does not require collateral to support such receivables.
NOTE 14 – LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of common shares outstanding during the three months ended March 31, 2014 and 2013, respectively. There was no dilutive earnings per share due to net losses during the periods.
The following table sets forth the computation of basic net loss per share for the periods indicated:
|
|
Three months ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Numerator:
|
|
|
|
|
|
|
Net loss attributable to
Panache Beverage, Inc.
|
|
$
|
(1,435,539
|
)
|
|
$
|
(808,515
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
27,055,891
|
|
|
|
26,310,526
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
NOTE 15 – GOING CONCERN
These consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.
As of March 31, 2014, the Company had an accumulated deficit of $11,801,542. Management has taken certain actions and continues to implement changes designed to improve the Company’s financial results and operating cash flows. The actions involve certain cost-saving initiatives and growing strategies, including (a) reductions in operating expenses; and (b) expansion of the business model into new markets. Management believes that these actions will enable the Company to improve future profitability and cash flow in its continuing operations through March 31, 2015, as its intent is to resolve the defaults under the Amended Loan Agreement with Consilium and restructure such loans. As a result, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the Company’s ability to continue as a going concern.
NOTE 16 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date on which these financial statements were available to be issued. On May 6, 2014, the Company received the Default Notice from Consilium under the Loan Agreement and on May 8, 2014 entered into the Forbearance Agreement with Consilium. See Note 8 – Long Term Debt.