NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 1 – Interim Condensed Financial Statements
The accompanying unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the financial information for the interim periods reported have been made. Results of operations for the three-months ended March 31, 2017 are not necessarily indicative of the results for the year ending December 31, 2017 or any period thereafter. These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements and related notes included in our annual report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission.
Note 2 - Organization and Business
Vodka Brands Corp (the “Company”) was incorporated on April 17, 2014 (Inception) as a Pennsylvania corporation with a year-end of December 31. The Company is primarily engaged in the import and distribution of alcoholic beverages. From Inception through March of 2015, the Company imported its alcoholic beverages through a related party. The Company obtained its own import license in April 2015. The Company distributes in the United States. Its products are primarily sold to wholesale distributors as well as state alcohol beverage control agencies.
Note 3 - Going Concern
These accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America applicable to a going concern, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. For the three months ended March 31, 2017, the Company had a net loss of $31,896. As of March 31, 2017, the Company has an accumulated deficit of $607,773. Due to the start-up nature of the Company, the Company expects to incur additional operating losses in the immediate future. Given the operating loss and expected future operating losses, the Company’s ability to realize its assets and discharge its liabilities depends on its ability to generate cash from capital financing and generate future profitable operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company is planning on obtaining additional financing through the issuance of equity or debt. To the extent that the funds generated from any private placements, public offerings and/or bank financing are insufficient, the Company will have to raise additional working capital through other channels.
Note 4 - Summary of Significant Accounting Policies
Basis of Presentation
These financial statements are presented in U.S. dollars and are prepared in accordance with U.S. GAAP.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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 revenues and expenses during the reporting period. The Company's significant accounting policies are those that are both most important to the Company's financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because of the uncertainty of factors surrounding the estimates or judgments used in the preparation of the financial statements, actual results may materially vary from these estimates. Significant estimates include the allowance for doubtful accounts and valuation of trademarks.
F-6
Revenue Recognition
The Company recognizes revenue when the customer takes ownership of the applicable goods and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of a sale exists and the sales price is fixed or determinable. For the Company, title passes when delivery has occurred. Provisions for discounts and rebates to customers are provided for in the same period the related sales are recorded. We account for rebates as a reduction of revenue and accrue for the estimated amounts to be paid. We recognized a reduction to revenue of $369 and $415 during the three months ended March 31, 2017 and 2016. At March 31, 2017 and December 31, 2016, $350 were accrued for customer programs.
Shipping and Handling
Shipping and handling costs relating to the delivery of the applicable goods are recorded in costs of sales.
Concentrations of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, accounts receivable, accounts payable, and accrued expenses and approximate their fair value due to the short maturities of those instruments.
Cash
The Company maintains its cash in non-interest bearing accounts at various banking institutions that are insured by the Federal Deposit Insurance Company up to $250,000. The Company’s deposits may, from time to time, exceed the $250,000 limit; however, management believes that there is no unusual risk present, as the Company places its cash with financial institutions which management considers being of high quality.
Accounts Receivable
The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on management’s experience. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is remote. The allowance for doubtful accounts was $0 as of March 31, 2017 and December 31, 2016. The Company does not have any off-balance-sheet credit exposure related to its customers. Collections on accounts receivable previously written-off are included in income as received.
Inventory
Inventories are stated at the lower of cost, as determined on a weighted average basis, or market. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. Management writes down the inventories to market value if it is below cost. Management regularly evaluates the composition of the Company’s inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required. The allowance for slow-moving and obsolete inventories was $0 as of March 31, 2017 and December 31, 2016.
Property, plant and equipment
Property, plant and equipment, are stated at cost less depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized.
Depreciation of property, plant and equipment is calculated based on cost, less their estimated residual value, if any, using the straight-line method over their estimated useful lives.
Trademarks
Trademarks represent the trade names contributed by the founder through his wholly owned company Trademark Holdings, LLC. The four trademarks are Blue Diamond, Diamond Girl, Blue Crystal and White Crystal. Trademarks were initially measured at the carryover basis of the founder. Amortization of the trademarks is calculated based upon cost using a straight-line method over their estimated useful lives from registration and are stated at a historical cost.
F-7
Impairment of Long-Lived Assets
In accordance with Financial Accounting Standards Board (“FASB”) ASC 360, Long-Lived Assets, such as property, plant and equipment and intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company determined that there was no impairment at March 31, 2017 and December 31, 2016.
Advertising and Promotional Costs
The Company expenses advertising and promotional costs as incurred or the first time the advertising or promotion takes place, whichever is earlier, in accordance with the FASB ASC 720, Other Expenses.
Research and Development Costs
The Company charges research and development costs to expense when incurred in accordance with the FASB ASC 730, Research and Development. Research and development costs for the three months ended March 31, 2017 and 2016 was $0.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, (ASC 740) which requires that deferred tax assets and liabilities be recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, ASC 740 requires recognition of future tax benefits, such as carry forwards, to the extent that realization of such benefits is more likely than not and that a valuation allowance be provided when it is more likely than not that some portion of the deferred tax asset will not be realized.
The Company has an accumulated deficit and a loss from operations. Realization of the net deferred tax asset is dependent upon taxable income, if any, the amount and timing of which are uncertain. Accordingly, the net deferred asset has been offset by a full valuation allowance.
The Company accounts for income taxes in interim periods in accordance with FASB ASC 740-270, Income Taxes-Interim Reporting. The Company has determined an estimated annual effective tax rate which will be revised, if necessary, as of the end of each successive interim period during the Company’s fiscal year to its best current estimate. The estimated annual effective tax rate is applied to the year-to-date ordinary income (or loss) at the end of the interim period.
Basic and Diluted Loss per Share
The Company reports loss per share in accordance with FASB ASC 260, Earnings per share. The Company’s basic earnings per share are computed using the weighted average number of shares outstanding for the periods presented.
Diluted earnings per share are computed based on the assumption that any dilutive options or warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, the Company’s outstanding stock options are assumed to be exercised, and funds thus obtained were assumed to be used to purchase common stock at the average market price during the period. There were no dilutive instruments outstanding during the three months ended March 31, 2017 and 2016.
Comprehensive Income
Net loss is the Company’s only component of comprehensive income or loss for the three months ended March 31, 2017 and 2016.
F-8
Stock-Based Compensation
The Company accounts for stock-based compensation using the fair value provisions of ASC 718, Compensation — Stock Compensation that requires the recognition of compensation expense, using a fair-value based method, for costs related to all stock-based payments including stock options and restricted stock. This topic requires companies to estimate the fair value of the stock-based awards on the date of grant for options are issued to employees and directors. The Company uses a Black-Scholes valuation model as the most appropriate valuation method for pricing these options. Awards for consultants are accounted for under ASC 505-50, Equity Based Payments to Non-Employees. Any compensation expense related to consultants is marked-to-market over the applicable vesting period as they vest. There are customary limitations on the sale or transfer of the stock.
The fair value of the common stock for compensation was the following:
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|
|
Three
months ended
|
|
|
|
|
March 31,
|
|
|
|
|
2017
|
|
2016
|
|
Shares issued for compensation
|
|
|
9,000
|
|
9,000
|
|
Fair value per share
|
|
|
$
0.30
|
|
$
0.30
|
|
Stock–based compensation expense
|
|
$
2,700
|
|
$
2,700
|
Related Parties
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions.
All transactions shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to related party.
Recent Accounting Pronouncements
During March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which amends ASC Topic 718,
Compensation - Stock Compensation
. The objective of this update is part of the FASB’s Simplification Initiative as it applies to several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The effective date of the update is for fiscal years beginning after December 15, 2016 and interim periods within that reporting period Early adoption was permitted. We adopted this standard effective January 1, 2017. The adoption did not have a material impact on the presentation of our financial statements, financial position, results of operations, cash flows or related disclosures.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating what impact, if any, the adoption will have to the presentation of our financial statements and related disclosures, but do not expect it to have a material impact on our financial position, results of operations, or cash flows.
F-9
In January 2016, the FASB issued ASU 2016-01, which revises the guidance in ASC 825-10, Recognition and Measurement of Financial Assets and Financial Liabilities, and provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. The guidance is effective for reporting periods (interim and annual) beginning after December 15, 2017, for public companies. We are currently assessing the potential impact of this ASU on our financial position and results of operations.
In July 2015, the FASB issued ASU No. 2015-11,
Inventory, Simplifying the Measurement of Inventory
. The amended guidance requires that inventory be measured at the lower of cost and net realizable value. The amended guidance is limited to inventory measured using the first-in, first-out (“FIFO”) or average cost methods and excludes inventory measured using last-in, first-out (“LIFO”) or retail inventory methods. ASU 2015-11 is effective for fiscal years, and interim periods, beginning after December 15, 2016
, or January 1, 2017 for the Company
. Early adoption is permitted. The adoption of ASU 2015-11 did not have a material impact on the Company’s financial position or results of operations
In August 2014, FASB issued ASU No. 2014-15,
Presentation of Financial Statements— Going Concern (Subtopic 205-40)
. This standard is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments contained in this ASU apply to all companies and not-for-profit organizations. The amendments are effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. The Company adopted this guidance on December 31, 2016 and management assessed the entity’s ability to continue as a going concern. After considering the Company’s historical negative cash flow from operating activities, recurring losses and accumulated deficit management concluded that there is substantial doubt about the entities ability to continue as a going concern. Certain disclosures were added to comply with the disclosure requirements of the ASU.
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In July 2015, the FASB finalized a one-year delay in the effective date of this standard, which will now be effective for the Company on January 1, 2018, however early adoption is permitted any time after the original effective date, which for us is January 1, 2017. We are evaluating the effect that ASU 2014-09 will have on our financial statements and related disclosures, but do not expect it to have a material impact on our financial position, results of operations, or cash flows.
The Company believes that there were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations
Reclassification
Certain reclassifications have been made to prior year amounts to conform with the current year presentation.
Note 5 - Common Stock
The Articles of Incorporation authorized Vodka Brands Corp to issue 100,000,000 shares of common stock with no par value.
Each share of our common stock entitles the holder to one (1) vote, either in person or by proxy, at meetings of shareholders. The shareholders are not permitted to vote their shares cumulatively. Accordingly, the holders of more than fifty percent (50%) of the total voting rights on matters presented to our common stockholders can elect all of our directors and, in such event, the holders of the remaining minority shares will not be able to elect any such directors. The vote of the holders of a majority of the holders entitled to vote on matters submitted to our common stockholders including of our preferred stock described below is sufficient to authorize, affirm, ratify, or consent to such act or action, except as otherwise provided by law.
From January 2017 through March 31, 2017, 35,000 shares of the Company’s common stock were issued for cash of $10,500 at $0.30 per share.
From January 2017 through March 31, 2017, 112,500 shares of the Company’s common stock were issued for cash of $45,000 at $0.40 per share.
F-10
From January 2017 through March 31, 2017, 9,000 shares of the Company’s common stock were issued as stock-based compensation. These shares were valued at $2,700 of compensation at $0.30 per share in connection with the employment agreement with the Company’s CEO.
Note 6 - Income Tax
The Company has operating losses that may be applied against future taxable income. The potential tax benefits arising from these loss carry forwards, which expire beginning in the year 2034, are offset by a valuation allowance due to the uncertainty of profitable operations in the future. The U.S. federal statutory tax rate is 35.00%. The Company’s effective tax rate for the three months ended March 31, 2017 and 2016 was 0%.
The Company’s tax years open to examination will begin with the 2014 federal and state income tax returns. The Company’s policy is to record estimated interest and penalty related to the underpayment of income taxes or unrecognized tax benefits as a component of its income tax provision. The Company has not recognized any interest or penalties for the underpayment of income taxes or unrecognized tax benefits. The change in the valuation allowance is a result of loss carry forwards which will begin to expire in 2034.
Note 7 - Related Party Transactions
BBI paid third parties for storage and administrative services on behalf of the Company. These amounts were charged to cost of sales. The total amount paid was $1,225 and $750 for the three months ended March 31, 2017 and 2016.
The Company owes $10,473 and $11,481 to this related party and these amounts are included in accounts payable - related party at March 31, 2017 and December 31, 2016, respectively.
Effective April 28, 2015 the Company executed a consulting agreement with a consultant who is an affiliate with BBI. The Company compensates $1,000 per month to the consultant and requires a minimum of fifty hours of services per month. The agreement may terminate, at any time, by written notice of the Company. The total fees incurred related to this consultant were $4,000 and $3,000 for the three months ended March 31, 2017 and 2016. The fees are included in consulting fees.
During 2016, the Company entered into an informal, interest free, unsecured advance from its CEO. As of March 31, 2017 and December 31, 2016 $58,703 and $55,053 is reflected in advance – related party in the accompanying balance sheets, respectively.
See additional transactions with related parties in Note 5 and Note 9.
Note 8 - Concentrations
The Company’s revenues include two major customers, the Commonwealth of Pennsylvania and the Mississippi Department of Revenue, which account for 100% of revenues for the three months ended March 31, 2017 and 2016. Outstanding accounts receivable from these customers amounted to the following:
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March 31, 2017
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|
December 31, 2016
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|
|
(unaudited)
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Accounts receivable
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|
$
33,390
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|
$
24,071
|
The Company imports and distributes alcoholic beverages from one supplier which accounted for 100% of the Company’s purchases for the three months ended March 31, 2017 and 2016. All purchases require prepayment terms. Accounts payable to this vendor amounted to $394 as of March 31, 2017 and December 31, 2016.
Note 9 - Commitments and Contingencies
Control by principal stockholder and CEO
The CEO owns beneficially and in the aggregate, the majority of the common shares of the Company. Accordingly, the CEO has the ability to control the approval of most corporate actions, including approving significant expenses, increasing the authorized capital stock and the dissolution, merger or sale of the Company's assets.
F-11
Reliance on other parties and related parties
The Company currently is primarily engaged in the business of importing and distributing alcoholic beverages in the United States. However, from April 17, 2014 (Inception) through March 2015, the Company did not have a permit to import and distribute alcoholic beverages in the United States, nor did it have a permit to distribute alcoholic beverages within the United States.
The Company contracted with BBI, to import alcoholic beverages from Europe to the U.S. under BBI’s federal importing permit. Once imported, the inventory is stored in a bonded warehouse operated by a third party licensed by the federal government.
When the Company sells alcoholic beverages to its customer, the Pennsylvania Liquor Control Board, it uses a third party who has an alcoholic beverage sale permit in the U.S., to enter into purchase orders with the customer. The third party would not transact with the Company until the federal importing permit was obtained. Therefore, BBI acted as a conduit between the Company and the third party. There were no fees or expenses paid to or retained by BBI with regards to this arrangement.
In April 2015, the Company obtained its own federal importing permit.
When the Company sells alcoholic beverages to certain of its customers, specifically the Mississippi Department of Revenue and the West Virginia Alcohol Beverage Control Administration, the alcoholic beverages are sent to a bailment warehouse, operated by the Mississippi Department of Revenue and the West Virginia Alcohol Beverage Control Administration. The Company maintains ownership of the alcoholic beverages while in the bailment warehouse, without fee, until final withdraw by the Mississippi Department of Revenue or and the West Virginia Alcohol Beverage Control Administration.
When the alcoholic beverage leaves the bonded warehouse, the Company retains a third party as a customer broker to process the paper work with United States Customs and advance the federal tax payment for the alcoholic beverages sold. Payment of the tax is due as the product leaves the bonded warehouse.
Note 10 – Property, plant and equipment
The net book value related to this property, plant and equipment was the following:
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|
|
|
|
March 31, 2017
|
|
December 31, 2016
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|
|
(unaudited)
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|
|
Cost
|
|
$
931
|
|
$
931
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|
Accumulated depreciation
|
|
(376)
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|
(329)
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|
Property, plant and equipment, net
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|
$
555
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|
$
602
|
Depreciation of these assets for the three months ended March 31, 2017 and 2016 was $47.
The estimated useful lives of the assets are as follows:
Office equipment and furniture 3-5 years
Note 11 – Trademarks
The net book value related to these trademarks was the following:
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|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
|
(unaudited)
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|
|
Cost
|
|
$
1,125
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|
$
1,125
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|
Accumulated amortization
|
|
(1,097)
|
|
(1,069)
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|
Trademarks, net
|
|
$
28
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|
$
56
|
Amortization expense related to these trademarks for the three months ended March 31, 2017 and 2016 was $28.
F-12
The Company did not incur costs to renew or extend the term of the trademarks during the three months ended March 31, 2017 and 2016. The future cash flows of the Company are significantly affected by the Company’s ability to renew the trademarks with the United States Patent and Trademark Office.
The estimated useful lives of the assets are as follows:
Trademarks 10 years
The estimated amortization expense is as follows:
For the year ending December 31, 2017 $ 57
Note 12 – Operating expenses
Selling expenses consisted of the following:
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Three months ended
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|
|
|
March 31,
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|
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2017
|
|
2016
|
|
Promotional
|
|
5,400
|
|
-
|
|
Advertising
|
|
9,638
|
|
3,652
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|
Total
|
|
$
15,038
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|
$
3,652
|
General and administrative expenses consisted of the following:
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|
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|
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Three months ended
March 31,
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2017
|
|
2016
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
Depreciation and amortization
|
|
$
75
|
|
$
75
|
|
Stock-based compensation
|
|
2,700
|
|
2,700
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|
Professional fees
|
|
-
|
|
37,674
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|
Consulting fees
|
|
10,809
|
|
20,225
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|
Office rent
|
|
950
|
|
2,250
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|
Other general and administrative
|
|
6,415
|
|
4,841
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|
Total
|
|
$
20,949
|
|
$
67,765
|
F-13
Note 13 – Inventories
Inventories consist of the following:
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March 31, 2017
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December 31, 2016
|
|
|
|
|
(unaudited)
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|
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Finished goods
|
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|
$
70,653
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|
$
77,050
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Excise taxes
|
|
|
2,912
|
|
1,721
|
|
Total
|
|
|
73,565
|
|
78,771
|
|
Allowance
|
|
|
-
|
|
-
|
|
Total
|
|
|
$
73,565
|
|
$
78,771
|
Capitalized excise taxes represents taxes paid for the removal of finished goods from the bonded warehouse and transported to the West Virginia Alcohol Beverage Control Administration and the Mississippi Department of Revenue’s bailment warehouses. These costs are recognized as cost of sales once the inventory is sold to the ultimate customer by the West Virginia Alcohol Beverage Control Administration and the Mississippi Department of Revenue.
Note 14 - Subsequent Events
Subsequent events have been evaluated through May 22, 2017 which is the date the financial statements were available to be issued. Management did not identify any events requiring recording or disclosure in the financial statements for the three-month period January 1, 2017 through March 31, 2017.
F-14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of the financial condition and results of operations of Vodka Brands Corp (“Vodka Brands”, the “Company”, “we”, and “our”) for three months ended March 31, 2017 and 2016. The following information should be read in conjunction with the financial statements for the years ended December 31, 2016 and 2015 and notes thereto appearing elsewhere in this Annual Report on Form 10-K (this “Report”). Our financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
Our Business
We began operations on April 17, 2014 (Inception) and operate within the alcoholic spirit industry. We oversee the manufacturing of our trademarked Blue Diamond and Diamond Girl Vodkas. We introduced our Diamond Girl Vodka in the fourth quarter of 2016 as our second vodka product. We sell our products in the United States with hopes of expanding internationally. We have a federal permit to import alcoholic beverages. Currently, our customers include the Pennsylvania Liquor Control Board the Alcoholic Beverage Control of Mississippi and a distributor in Tennessee. We are also licensed in West Virginia. We had our first purchase order for the State of Tennessee in mid-2016.. We plan to continue to develop our trademarked products as well as our other trademarked brands.
Our cash on hand as of March 31, 2017, was $12,879.
RESULTS OF OPERATIONS
Sales
We generated sales of $11,052 for the three months ended March 31, 2017 and $10,481 in same prior year period. The increase was primarily due to higher order volumes. During the quarter we shipped 924 bottles compared to 828 in the prior year quarter.
The most significant variable in product cost in the future is expected to be currency exchange rates between the Euro and the US Dollar. Our European suppliers invoice in Euros. We do not believe that inflation had any material impact on us during the quarters ended March 31, 2017 and 2016, respectively.
We recognize revenue when four basic criteria have been met: (1) persuasive evidence of an arrangement exists; (2) shipment has occurred; (3) the fee is fixed or determinable; and (4) collection is reasonably assured.
With the introduction of Blue Diamond Vodka as a shelf item in the State of Pennsylvania, and with the addition of our Diamond Girl in late 2016, our sales are comprised largely to the Pennsylvania Liquor Control Board and can be found in roughly forty-five of their stores. If we were to lose this customer, our operations would be materially impacted. However, we have the possibility to increase the number of stores in Pennsylvania, and much greater potential nationally, and internationally. To this end, we continued to generate sales to the Mississippi Department of Revenue during the quarter ended March 31, 2017. Our product is sold in approximately forty stores in Mississippi.
In January 2016, we began issuing customer incentives on our Diamond Vodka through the use of mail-in rebate coupons. Revenues for the quarter ended March 31, 2017 were reduced by estimated rebate costs of $369.
Cost of Goods Sold
Our cost of sales was $6,961 in the three months ended March 31, 2017 compared to $8,399 in the same prior year period.
3
Gross profit
We expect to be able to maintain a gross profit margin over 25% on our product. For the quarter ended March 31, 2017 and 2016 our gross profit margin was 37%, and 20%, respectively. We expect that our 2017 profit margin will remain in line with our aforementioned expectations, however we have flexibility to adjust prices if necessary to gain market share. We implemented a $5.00 mail-in rebate in 2016 to increase sales.
Selling, general administrative and other expenses (SG&A)
Our most significant selling costs are promotional and advertising expenses as we continue to develop brand recognition. The most significant general and administrative costs were legal and accounting expenses.
The market for spirits and vodka is large. We have the potential to expand sales dramatically. This will be determined in large part by our success in attracting distributors. Although, we believe the market is large, we are uncertain if our product will obtain significant demand. Additionally, we are uncertain with regards to industry trends or events that will materially impact our operational condition whether beneficial or detrimental.
To this objective, we are in the early stages of identifying an individual with industry experience and relationships with national and international distributors to become part of our management team.
Net loss
We incurred a net loss of $31,896 for the quarter ended March 31, 2017 compared to a net loss of $69,335 in the first quarter of 2016.
We expect we will require additional capital to meet our long term operating requirements. We expect to raise additional capital through the sale of equity or debt securities.
Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation.
Deferred Tax Asset and Valuation Allowance
We recorded a deferred tax asset, but recorded a full valuation allowance against this asset as it is uncertain if we will be able to realize any of this benefit.
Related Parties
During the period April 17, 2014 (Inception) through March 31, 2014, we purchased all of our inventory from Beverage Brands, Inc (“BBI”), a wholly owned company of our CEO. The purchase price was recorded at the price BBI paid for the product from a third party manufacturer. Additionally, BBI acted as a conduit with a third party to facilitate sales to the Pennsylvania Liquor Control Board as we did not have our federal import license. We obtained our federal import license in April of 2015. There were no fees or expenses paid to or retained by BBI with regards to this arrangement.
During April 2014, Trademark Holdings, LLC, a wholly owned company of our CEO, contributed the trademarks Blue Diamond, Diamond Girl, Blue Crystal and White Crystal. We recorded the trademarks at carryover basis and will continue to amortize these trademarks in accordance with their useful life from the date of registration.
Effective April 28, 2015 we executed a consulting agreement with a consultant who is an affiliate with BBI. The Company compensates $1,000 per month to the consultant and requires a minimum of fifty hours of services per month. The agreement may terminate, at any time, by written notice of the Company.
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LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2017, our total assets were $128,145 and our liabilities were $100,763 and as of December 31, 2016, our total assets were $120,869 and our liabilities were $119,791.
Our stockholders’ equity totaled $27,382 at March 31, 2017 compared to total stockholders’ equity of $1,078 at December 31, 2016.
As of March 31, 2017, and December 31, 2016, we had 12,498,833 and 12,342,333 common shares outstanding, respectively.
Cash Flows from Operating Activities
We have not generated positive cash flows from operating activities. For the quarter ended March 31, 2017, net cash used in operating activities was $56,845 compared to $20,061 in the same prior year period.
Cash Flows from Financing Activities
We have financed our operations primarily from the issuance of shares of our common stock. For the three months ended March 31, 2017, net cash provided by financing activity was $59,150 and for the three months ended March 31, 2016, net cash provided by financing activities was $9,200. Proceeds received from issuance of our common stock to investors was $55,500 in 2017 compared to $8,100 received in 2016. In addition to the common stock proceeds received in 2017, we also received $3,650 in proceeds from related party loans in 2017 and $1,100 in 2016.
In April 2015, we entered into an arrangement to repurchase 363,167 shares of common stock issued for legal services. We paid $20,000 for these shares. In August 2015, we entered into an arrangement to repurchase the remaining 100,000 shares of common stock issued for legal services. We paid $10,000 for these shares. In September 2015, we executed a cancellation resolution of the 463,167 of the repurchased shares. The cancelation is reflected as a reduction common stock at the price paid of $35,000.
PLAN OF OPERATION AND FUNDING
Operations
Our overriding objective is to produce high quality vodka products with recognizable brand names and to expand distribution nationally and internationally. We plan to increase sales of our Blue Diamond Vodka brand and to develop our other brand names. Increase in sales of our existing brand can be achieved through the improvement in product packaging which has been ongoing, promotional activities, and forming relationships with distributors. We can develop one or more of our other brand names in the next six to twelve months. An important component of success will be to add an individual to our management team who has industry experience and relationships with national and international distributors.
Product Development
Our Blue Diamond Vodka bottle is produced in France and shipped to Northern Europe to the country of Estonia to complete production. Current production of Blue Diamond Vodka includes some noticeable improvements in product packaging. For example, the bottle closure will utilize an up-scale synthetic cork with logo embossed on the top. A PVC capsule with logo will complement the long neck bottle. There will be a clear portion surrounding the diamond in martini glass design on the frosted bottle and other slight modifications. These modest but noticeable changes should give our product a cleaner, more professional and appealing appearance. We anticipate further development of other brands within six to twelve months.
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Funding
We expect that working capital requirements will continue to be funded through a combination of our existing funds and further issuances of securities. Our working capital requirements are expected to increase in line with the growth of our business.
We have paid for the second production run of 1,229 cases of Blue Diamond Vodka and we received the product in September 2015. Existing working capital and anticipated cash flow are expected to be adequate to fund our operations over the next three months. We have no lines of credit or other bank financing arrangements. Generally, we have financed operations to date through the proceeds of the sale of our common stock to investors. In connection with our business plan, management anticipates additional increases in operating expenses and capital expenditures relating to: (i) developmental expenses associated with a start-up business and (ii) marketing expenses. We intend to finance these expenses with further issuances of equity or debt securities. Thereafter, we expect we will need to raise additional capital and generate revenues to meet long-term operating requirements. Additional issuances of equity or convertible debt securities will result in dilution to our current shareholders. Further, such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict our business operations.
Material Commitments
As of the date of this Annual Report, we do not have any material commitments.
Purchase of Significant Equipment
We do not intend to purchase any significant equipment during the next twelve months.
Off-Balance Sheet Arrangements
As of the date of this Annual Report, we do not have any off-balance sheet arrangements 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 are material to investors.
Going Concern
The report of the independent registered public accounting firm accompanying our December 31, 2016 financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements have been prepared "assuming that we will continue as a going concern," which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Smaller reporting companies are not required to provide the information required by this item.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
The design of the internal controls over the segregation of duties and financial reporting close process constitute a material weakness. Specifically, we do not have a formal written process to perform monthly close procedures nor a detailed review of such information. Further, our transactions are initiated and processed by a single individual. Accordingly, the lack of these controls results in the possibility that a material misstatement could occur and would not be prevented or detected on a timely basis.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the three month period ending March 31, 2017, or in other factors that could significantly affect these controls, that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business. To the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on the Company.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business. To the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on the Company.
Item 1A. Risk Factors
Smaller reporting companies are not required to provide the information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three (3) month period ending March 31, 2017 and through the filing of this Form 10-Q report, we offered and sold securities below. None of the issuances involved underwriters, underwriting discounts or commissions. We relied upon Sections 4(2) of the Securities Act, and Rule 506 of the Securities Act of 1933, as amended for the offer and sale of the securities. We believed these exemptions from registration were available because:
·
We are not a blank check company;
·
Sales were not made by general solicitation or advertising;
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All certificates had restrictive legends; and
·
Sales were made to persons with a pre-existing relationship to Mark T. Lucero, our President, Chief Executive Officer and Director.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits
Exhibit No.
Description
31.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of Sarbanes Oxley Act of 2002*
32.1Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes Oxley Act of 2002*
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
Vodka Brands, Corp
/s/ Mark T. Lucero
Name: Mark T. Lucero
Position: President, Chief Executive Officer,
Director, Acting Chief Financial Officer
May 22, 2017
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