Three Months Ended July 31, 2012 Compared to Three Months Ended July 31, 2011
Net Sales: Net sales were approximately $1,290,000 for the three months ended July 31, 2012 compared to net sales of approximately $148,000 for the same period last year, an increase of 771% as a result of the Company’s sales of products from the Drinks WBI transaction and the companies access to production credit that arises from the deal whereby the company is no longer impeded from production limited by access to capital. The company’s KAH Tequila is the primary driver of revenue growth for the company.
Gross Margin: Gross margin was $293,157, or 22.7% of net sales for the three months ended July 31, 2012 compared to gross margin of $15,298, or 10.3% of net sales for the three months ended July 31, 2011.
Selling, General and Administrative Expenses: Selling, general and administrative expenses totaled approximately $701,000 for the three months ended July 31, 2012, compared to $514,000 for the three months ended July 31, 2011, an increase of approximately $187,000, or 36.4%, attributable to additional selling costs due increased sales volumes.
Interest expense: Interest expense for the three months ended July 31, 2012 was approximately $30,000 compared to $112,000 for the same period last year, a net decrease of $82,000 or 73%. This decrease is predominantly due to our access to production through our WBI transaction and a reduction in the cost of financing our outstanding liabilities as compared to prior year.
Loss on change in fair value of derivative: During the three months ended July 31, 2011, we were required to bifurcate the conversion option embedded in certain convertible promissory notes and record at fair value each reporting period as a liability. During the three months ended July 31, 2011, we recorded a loss on change in fair value of $29,384 as compared to Nil the same period current year.
Loss (gain) on settlement of debt: During the three months ended July 31, 2012, we negotiated and settled outstanding debt, primarily trade vendors. As such, we recognized a loss on settlement of debt of approximately $500 for the three months ended July 31, 2012 compared to a gain of approximately $18,000 the same period last year.
Gain on disposal of product line: During the three months ended July 31, 2011, we exchanged 42% of our interest in Olifant U.S.A, Inc. for the cancellation of our remaining outstanding debt obligation and related accrued interest. With the exchange, we reduced our ownership to 48% and realized a gain on sale of the product line of approximately $280,478 compared to Nil for the three months ended July 31, 2012.
Financial Liquidity and Capital Resources
Our accompanying consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern. As of July 31, 2012, the Company has shareholders' equity of approximately $1,690,000 applicable to controlling interests compared with $2,108,000 applicable to controlling interests at April 30, 2012, and working capital deficiency of approximately $3,650,000 as of July 31, 2012 and has incurred significant operating losses and negative cash flows since inception. For the three months ended July 31, 2012, the Company sustained an operating loss of approximately $408,000 compared to an operating loss of $499,000 for the three months ended July 31, 2011 and used cash of approximately $38,000 in operating activities for the three months ended July 31, 2012 compared with approximately $238,000 for the three months ended July 31, 2011. We have converted certain liabilities into equity. The accompanying consolidated financial statements do not include any adjustments relating to the classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the company be unable to continue in existence.
