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PANACHE BEVERAGE, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This management's discussion and analysis should be read in conjunction with the consolidated financial statements and notes included elsewhere in the report on Form 10-K. This management's discussion and analysis, as well as other sections of this report on Form 10-K may contain "forward-looking statements" that involve risks and uncertainties, including statements regarding our plans, future events, objectives, expectations, estimates, forecasts, assumptions or projections. Any statement that is not a statement of historical fact is a "forward -looking statement", and in some cases, words such as "believe", "expect", "anticipate", "optimistic", "intend", "will", "project", "may", "plan", "seek", and similar expressions identify forward-looking statements. These statements involve risks and uncertainties that could cause actual outcomes to differ materially from the anticipated outcomes or results, and undue reliance should not be placed on these statements. These risks and uncertainties include, but are not limited to, the risks and uncertainties discussed in filings made with the Securities and Exchange Commission (including risks described in prior and subsequent reports on Form 10-Q, Form 10-K, Form 8-k, and other filings). Panache Beverage, Inc. disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. These forward-looking statements include statements of management's plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements, our expansion strategy, our ability to achieve operating efficiencies, our dependence on distributors, capacity, suppliers, industry pricing and industry trends, evolving industry standards, domestic and international regulatory matters, general economic and business conditions, the strength and financial resources of our competitors, our ability to find and retain skilled personnel, the political and economic climate in which we conduct operations. Additional factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: 1) our ability to successfully develop and deliver our products on a timely basis and in the prescribed condition; 2) our ability to compete effectively with other companies in the same industry; 3) our ability to raise sufficient capital in order to effectuate our business plan; and 4) our ability to retain our key executives. Overview 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. 16 -------------------------------------------------------------------------------- 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. Recent Developments In the summer of 2013 the Company terminated its exclusive importation agreement with Domaine Select Wine Estates (DSWE) for Wodka Vodka, making the Company the importer of record for Wodka Vodka as well as the registered agent for Alibi American Whiskey. This upward integration offers Panache the autonomy to tailor national pricing and programming, as well as creates the potential to generate additional profit. The process in 2013 of achieving mobility as our own importer was costlier and more time consuming than anticipated. The Development of the distribution network is expected to result in an increase in sales depletion for Wodka and Alibi by distributors in Q2, 2014. On August 23, 2013, Panache Distillery, LLC ("PDL"), a wholly owned subsidiary of the Company, closed on an Asset Purchase Agreement with Douglas Joint Venture, Empire Joint Venture, and V-3 Joint Venture, LLC, (collectively the "Sellers"), pursuant to which, PDL acquired all right, title and interest in and to certain assets owned by the Sellers located at 11807 Little Road, New Port Richey, Florida. This property includes land, buildings and machinery used in the distillation, bottling and sales operations (the "Purchased Assets"). As consideration, PDL paid to the Sellers a total purchase price of $4,200,000, of which $700,000 was paid in cash at the closing and the remaining $3,500,000 was paid in the form of a promissory note (the "Note). The Note accrues interest at a rate of 6%, payable in semiannual installments of interest only, is prepayable without penalty, and is due thirty-six months from the date of execution. The Note is secured by a first lien Purchase Money Mortgage and Security Agreement secured by the Purchased Assets. On December 3, 2013, the Company announced that it was creating two new liquor brands, OGB Whiskey and Spirytus Vodka, at its New Port Richey, Florida distillery. The Company recently created Old South Shine Clear Spirit and in March of 2014, Old South Shine LLC entered into a Florida distribution agreement with Premier Beverage Company. On March 18, 2014, the Company announced the intention to release an entire line of spirits under the Old Grumpy Bastard brand. The brand's line will feature premium value expressions of American-made whiskey, vodka, gin, white rum, dark rum and tequila with a suggested retail price of $15.99 per 750ml bottle and launched late Q3 in select markets including New York, Florida and Texas. Spirytus Vodka is scheduled to launch in Q2. 17 -------------------------------------------------------------------------------- Results of Operations for the Years Ended December 31, 2013 and 2012 Revenues Net revenues increased $403,206 or 12% to $3,694,020 for the year ended December 31, 2013 from $3,290,814 for the year ended December 31, 2012. We generate our revenues from sales of distilled spirits. The revenues are recognized when persuasive evidence of a sale exists, transfer of title has occurred, the selling price is fixed or determinable and collectability is reasonably assured. Our sales arrangements are not subject to warranty. Gross revenue was reduced due to sales discounts by $0 and $59,079 during 2013 and 2012, respectively. The increase in revenues from 2013 to 2012 was due primarily to successful implementation of our Wodka marketing and sales strategies, as well as to the continued growth of our Alibi brand in 2013. We expect sales to increase during 2014 through the vertical integration provided by the distillery acquisition and the expansion of the Company's sales and marketing infrastructure. Cost of Goods Sold Cost of goods sold included expenses directly related to selling our products including product delivery, broker fees and direct labor. Cost of goods sold was $2,537,248, or 69% of revenue, and $2,129,240, or 65% of revenue, for the years ended December 31, 2013 and 2012, respectively. The increase in cost of goods sold during 2013 was attributable to the growth in revenue. The increase in costs of goods sold as a percentage of revenue is mostly due to costs associated with the transition to becoming our own importer of Wodka Vodka and the agent for Alibi American Whiskey. Expenses Operating expenses increased 27% in 2013 to $6,214,203 from $4,889,472 in 2012. The increase in operating expenses in 2013 was primarily attributable to an increase in professional fees of $666,968 and consulting expenses of $318,067. The surge in professional fees was due to higher than usual legal costs attributed to the acquisition of the distillery, defense of Wodka's trade dress, creation of new holding companies, the change of domicile of the Company to Delaware from Florida, the modification of governing documents, investment into intellectual property, and the settlement of legal matters and proceedings. The increase in consulting expenses was attributable to non-cash expenses linked to the graded vesting of warrants issued to the financial advisor. Additionally, general & administrative expenses increased $261,854 from 2012 to 2013 due to investment in human capital and resulting higher head count, non-cash stock compensation expense relating to employee stock warrants issued in 2012, new insurance and pre-launch activity at Panache Distillery in 2013. Net Loss The Company's net loss for stockholders was $4,582,669 and $3,267,065 for the years ended December 31, 2013 and 2012, respectively. The increase in the net loss of $1,215,604 was attributable to the increases in interest expense and in operating expenses, which included non-cash expenses of $1,228,500 resulting from the graded vesting of warrants granted primarily in 2012 to employees and external professionals for services rendered, as well as from issuing shares of common stock. The employee grants resulted in retaining cash and further incentive for a vested interest by employees. 18 -------------------------------------------------------------------------------- Liquidity and Capital Resources Cash flows used in operating activities were $5,058,813 and $3,738,579 for the years ended December 31, 2013 and 2012, respectively. Negative cash flows in 2013 were due primarily to the net loss of $4,582,669, the loss allocated to non-controlling interests of $716,382, and restrictions on cash stemming from loans from Consilium Corporate Recovery Master Fund, Ltd., which decreased cash flows from operations by $1,342,158. These uses of cash were offset by a decrease in accounts receivable of $1,210,493 and non-cash expenses of $1,228,500 related to the issuance of stock and warrants to employees and external professionals. Negative cash flows from operations in 2012 were due primarily to the net loss of $3,267,065, plus the loss allocated to non-controlling interests of $620,670 and changes in asset and liabilities of $1,330,073. These uses of cash were offset by non-cash expenses of $744,935 paid for by issuing stock and warrants to employees and external professionals for services rendered and other non-cash expenses of $734,294. Investing activities provided cash flows of $72,697 due to the sale of fixed assets offset by the purchase of property and equipment. Cash flows used in investing activities in 2012 were due to the purchase of equipment. Cash flows provided by financing activities were $4,321,788 and $4,311,208 during 2013 and 2012, respectively. Positive cash flows from financing activities in 2013 were due primarily due to the proceeds of $5,400,000 from the issuances of long term debt partially offset by the decrease in due to factor of $695,820. Positive cash flows from financing activities in 2012 were due primarily to proceeds of $1,147,500 from sales of common stock and net proceeds of $1,916,500 from long term debt financing. Positive cash flows also resulted from net proceeds of $691,027 from factoring accounts receivable, net proceeds of $417,062 from notes payable, and net proceeds of $239,119 from related party loans. As of December 31, 2013, there was cash on hand of $1,992,008, including restricted cash. In 2014, we may seek additional funding of up to $1,000,000 for working capital. The funds might be needed for: · Securing an ample supply of bulk spirits for Panache Distillery; · Launching production and marketing for our recently announced new brands: Old South Shine, Old Grumpy Bastard (OGB), Spirytus; · Covering possible earnings shortfall at Panache Distillery resulting from government shutdowns and delays in licensing and approvals; · Covering potential Alibi and Wodka revenue deficits caused by unanticipated delays in entering into distributor agreements as our own importer and unwinding short fallings of the prior importer of record; · Investing in human capital to facilitate revenue growth and increase visibility of our brands, services, and assets nationwide; and · Covering expenses stemming from past year's litigation (in case of revenue shortfall) In the past we have funded our cash needs with a series of debt and equity transactions, primarily with related parties. If we are unable to receive additional cash from our related parties, we may need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on operations and financial condition. For example, if we unable to raise sufficient capital to develop our business plan, we may need to: · Curtail launch of new products and lines of business · Forgo opportunities to secure supply of bulk spirits and to enter into certain agreements at Panache Distillery · Limit our future marketing efforts to areas that we believe would be the most profitable. 19-------------------------------------------------------------------------------- We specialize in production, development, global sales and marketing of spirits brands. Our success will be dependent upon implementing our plan of operations and risks associated with that business plan. The key element of the plan is to increase and diversify our revenue streams by strengthening overall market position of the Company as a cost-effective and efficient vertically-integrated distiller, supplier, and importer of its own and third-party brands. Demand for our products and services will be dependent on, among other things, market acceptance of our products and services, our brands' recognition, distilled spirits market in general, and general economic conditions, which are cyclical in nature. Inasmuch as a major portion of our activities is the receipt of revenues from the sales of our products and services, our business operations may be adversely affected by our competitors and prolonged recession periods. Timing of our achievement of revenue goals will determine whether there is a necessity for a capital infusion. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments. We believe that revenue recognition, the accounting methodology for advertising costs and the valuation allowance of deferred tax assets are the most critical areas where management's judgments and estimates most affect our reported results. While we believe our estimates are reasonable, misinterpretation of the conditions that affect the valuation of these assets could result in actual results varying from reported results, which are based on our estimates, assumptions and judgments as of the balance sheet date. Revenue recognition We recognize revenue when title and risk of loss pass to the customer, typically when the product is shipped. Some sales contracts contain customer acceptance provisions that grant a right of return. Under these provisions, customers can return products that are not merchantable and fit and suitable for their intended use, are not of the same premium quality as products currently in existence, or are defectively packaged, bottled or labeled. Customers may also return any product that does not comply with all applicable laws and regulations. We record revenue net of the estimated cost of sales returns and allowances. From time to time the Company provides incentives to its customers in the form of free product. The costs associated with producing this product is included as an expense in costs of goods sold. No revenue is recognized with respect to such product giveaways. Advertising Advertising costs are expensed as incurred. Inventory Inventory, consisting of finished goods and raw materials, is stated at the lower of cost of market, with cost determined by the first-in, first-out method. Inventory consists of cases of bottled spirits, dry goods and bulk citrus. 20 -------------------------------------------------------------------------------- Income taxes Income taxes are provided in accordance Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740 "Income Taxes". A deferred tax asset or liability is recorded for all temporary differences between financial and tax and net operating loss carry forwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or the entire deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment. No provision for income taxes has been made for the years ended December 31, 2013 and 2012 due to the Company's loss position. The Company has fully reserved its deferred tax assets due to the uncertainty of the Company's ability to generate net income in the future. The Company recognizes and measures its unrecognized tax benefits in accordance with generally accepted accounting principles concerning income taxes. Under the guidance, the Company assesses the likelihood, based on their technical merit, that tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period. The measurement of unrecognized tax benefits is adjusted when new information is available, or when an event occurs that requires a change. |