Quarterly Report (10-q)
Form 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2011
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to___
Commission file number 000-53162
ICONIC BRANDS, INC.
(Exact name of registrant as specified in its charter)
NEVADA 13-4362274
State of Incorporation IRS Employment Authorization No.
c/o David Lubin & Associates, PLLC
10 Union Avenue
Suite 5
Lynbrook, New York 11563
(Address of principal executive offices) (Zip Code)
(516) 887-8200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting company x
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 49,555,062 shares of common stock, $0.0001 par value, issued and outstanding as of January 23, 2013
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 26
PART II – Other Information
Item 1. Legal Proceedings 27
Item 1A. Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Mine Safety Disclosures 27
Item 5. Other Information 27
Item 6. Exhibits 28
2
--------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Iconic Brands, Inc. and Subsidiary
Consolidated Balance Sheets
June 30, December 31,
2011 2010
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ - $ 225
Current assets of discontinued operations (see Note 8) - 784
Total current assets - 1,009
Total assets $ - $ 1,009
Liabilities and Stockholders' Deficiency
Current liabilities:
Current portion of debt $ 263,800 $ 223,250
Accounts payable 69,841 82,841
Accrued interest on Iconic Brands, Inc. debt 30,740 18,704
Current liabilities of discontinued operations (see Note 8) 3,440,469 3,407,444
Long term liabilities
Total current liabilities 3,804,850 3,732,239
Long term debt 47,137 38,893
Long term debt of discontinued operations (see Note 8) 1,610,858 1,604,572
Series B preferred stock, $2.00 per share stated value; designated 1,000,000 shares,
issued and outstanding, 916,603 and 916,603 shares, respectively 1,833,206 1,833,206
Total long term liabilities 3,491,201 3,476,671
Total liabilities 7,296,051 7,208,910
Stockholders' deficiency:
Preferred stock, $.00001 par value; authorized 100,000,000 shares,
Series A, designated 1 share, issued and outstanding 1 and 1 shares, respectively 1 1
Common stock, $.00001 par value; authorized 100,000,000 shares,
issued and committed to be issued and outstanding 54,361,412 and 52,519,307 shares, respectively 544 525
Additional paid-in capital 8,928,454 8,915,903
Accumulated deficit (16,225,050 ) (16,124,330 )
Total stockholders' deficiency (7,296,051 ) (7,207,901 )
Total liabilities and stockholders' deficiency $ - $ 1,009
3
--------------------------------------------------------------------------------
Iconic Brands, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
2011 2010 2011 2010
Continuing operations:
Sales $ - $ - $ - $ -
Expenses:
Professional fees 27,750 44,598 8,250 30,000
Other general and administrative expenses 13,379 2,401 4,535 709
Interest expense on Iconic Brands, Inc. debt 20,280 14,644 9,537 8,772
Total expenses 61,409 61,643 22,322 39,481
Loss from continuing operations (61,409 ) (61,643 ) (22,322 ) (39,481 )
Loss from discontinued operations (see Note 8) (39,311 ) (1,358,297 ) (19,746 ) (617,039 )
Net loss (100,720 ) (1,419,940 ) (42,068 ) (656,520 )
Net loss per common share - basic and diluted:
Continuing operations $ (0.00 ) $ (0.00 ) $ (0.00 ) $ (0.00 )
Discontinued operations $ (0.00 ) $ (0.03 ) $ (0.00 ) $ (0.01 )
Total $ (0.00 ) $ (0.03 ) $ (0.00 ) $ (0.01 )
Weighted average number of common shares outstanding - basic and diluted 54,188,397 48,684,334 54,361,412 51,568,601
4
--------------------------------------------------------------------------------
Iconic Brands, Inc. and Subsidiary
Consolidated Statement of Changes in Stockholders' Deficiency
Six Months Ended June 30, 2011
(Unaudited)
Series A
Preferred Stock, Common Stock, Additional
$.00001 par $.00001 par Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
Balance at December 31, 2010 1 $ 1 52,519,307 $ 525 $ 8,915,903 $ (16,124,330 ) $ (7,207,901 )
Partial conversion of 8% Promissory Note to common stock January 18, 2011 - - 1,842,105 19 3,481 - 3,500
Stock option expense - - - - 9,070 - 9,070
Net loss - - - - - (100,720 ) (100,720 )
Balance at June 30, 2011 1 $ 1 54,361,412 $ 544 $ 8,928,454 $ (16,225,050 ) $ (7,296,051 )
5
--------------------------------------------------------------------------------
Iconic Brands, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2011 2010
Cash flows from operating activities
Net loss $ (100,720 ) $ (1,419,940 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation - 2,129
Amortization of license agreement costs - 16,488
Amortization of debt discounts charged to interest expense 14,530 178,673
Stock -based compensation 9,070 263,565
Changes in operating assets and liabilities:
Accounts receivable, net - 146,338
Inventories - (25,590 )
Prepaid expenses and other current assets 784 85,208
Restricted cash and cash equivalents - 25,000
Accounts payable (13,000 ) 40,446
Accrued expenses and other current liabilities 45,061 334,433
Net cash provided by (used in) operating activities (44,275 ) (353,250 )
Cash flows from investing activities - -
Cash flows from financing activities:
Increases in debt 44,050 529,705
Repayment of debt - (199,061 )
Net cash provided by (used in) financing activities 44,050 330,644
Increase (decrease) in cash and cash equivalents (225 ) (22,606 )
Cash and cash equivalents, beginning of period 225 23,889
Cash and cash equivalents, end of period $ - $ 1,283
Supplemental disclosures of cash flow information:
Interest paid $ - $ -
Income taxes paid $ - $ -
Non-cash investing and financing activities:
Issuance of common stock and warrants in connection with $220,000 promissory notes $ - $ 78,930
Shares of common stock issued to noteholders in satisfaction of debt and accrued interest $ 3,500 $ 531,908
Issuance of common stock and warrants in connection with License Agreement with Tony Siragusa $ - $ 144,800
6
--------------------------------------------------------------------------------
1. ORGANIZATION AND NATURE OF BUSINESS
Iconic Brands, Inc., formerly Paw Spa, Inc. (“Iconic Brands”), was incorporated in the State of Nevada on October 21, 2005. Our plan was to provide mobile grooming and spa services for cats and dogs. Our services were going to include bathing, hair cutting and styling, brushing/combing, flea and tick treatments, nail maintenance and beautification, ear cleaning, teeth cleaning, hot oil treatments, and massage. We did not have any business operations and failed to generate any revenues. We abandoned this business, as we lacked sufficient capital resources. On June 10, 2009, the Company acquired Harbrew Imports, Ltd. (“Harbrew New York”), a New York corporation incorporated on September 8, 1999 which was a wholly owned subsidiary of Harbrew Imports, Ltd. Corp. (“Harbrew Florida”), a Florida corporation incorporated on January 4, 2007. On the Closing Date, pursuant to the terms of the Merger Agreement, the Company issued to the designees of Harbrew New York 27,352,301 shares of our Common Stock at the Closing, or approximately 64% of the 42,510,301 shares outstanding subsequent to the merger. After the merger, Harbrew New York continued as the surviving company under the laws of the state of New York and became the wholly owned subsidiary of the Company.
In anticipation of the merger between Iconic Brands, Inc. and Harbrew New York, on May 1, 2009 the Board of Directors and a majority of shareholders of Harbrew New York approved the amendment of its Articles of Incorporation changing its name to Iconic Imports, Inc. (“Iconic Imports”). On June 22, 2009, this action was filed with the New York State Department of State.
Prior to the merger on June 10, 2009, Iconic Brands had no assets, liabilities, or business operations. Accordingly, the merger has been treated for accounting purposes as a recapitalization by the accounting acquirer Harbrew New York/Iconic Imports and the financial statements reflect the assets, liabilities, and operations of Harbrew New York/Iconic Imports from its inception on September 8, 1999 to June 10, 2009 and are combined with Iconic Brands thereafter. Iconic Brands and its wholly-owned subsidiary Harbrew New York/Iconic Imports are hereafter referred to as the “Company”.
The Company was a brand owner of self-developed alcoholic beverages. Furthermore, the Company imported, marketed and sold these beverages throughout the United States and globally.
Effective June 10, 2009, prior to the merger, Harbrew Florida affected a 1-for-1,000 reverse stock split of its common stock, reducing the issued and outstanding shares of common stock from 24,592,160 to 24,909, which includes a total of 317 shares resulting from the rounding of fractional shares. All share information has been retroactively adjusted to reflect this reverse stock split.
On August 20, 2010 (see Note 6), the Company and Seven Cellos LLC terminated the License Agreement relating to the distribution of an alcoholic beverage known as “Danny DeVito’s Premium Limoncello”. In the year ended December 31, 2010, this brand accounted for approximately 96% of total sales.
On August 20, 2010, Capstone Capital Group I, LLC, a holder of a Promissory Note with a then remaining balance of approximately $233,000, delivered a Formal Notice of Default to the Company demanding payment of the balance on or before September 1, 2010. On September 16, 2010, Capstone delivered a Notification of Disposition of Collateral to the Company notifying the Company of its attachment of the Collateral (including cash, accounts receivable, inventories, equipment, and contract rights) and its intent to sell the Collateral to the highest qualified bidder in a public sale on September 28, 2010. On September 28, 2010, Capstone acquired the Collateral in exchange for the Promissory Note at the public auction sale; there were no other bidders.
On September 14, 2010 (see Note 6), the Second District Court of Suffolk County New York issued a Warrant of Eviction removing the Company from its Lindenhurst, New York office and the Company ceased its business operations.
On September 23, 2011, Iconic Imports, Inc. (“Imports”), a wholly owned subsidiary of Iconic Brands, Inc., filed a voluntary petition for relief under Chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of New York. The Bankruptcy case is being administered under case No. 8-11-76814. The petition indicated that Imports had no assets and had liabilities of approximately $3,354,000. The case is still pending before the court.
7
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements have been prepared on a “going concern” basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, as of June 30, 2011, the Company had negative working capital of $3,804,850 and a stockholders’ deficiency of $7,296,051. Further, from inception to June 30, 2011, the Company incurred losses of $16,225,050. These factors create substantial doubt as to the Company’s ability to continue as a going concern. The Company plans to improve its financial condition by reorganizing and acquiring a new business. However, there is no assurance that the Company will be successful in accomplishing this objective. The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
(b) Interim Financial Statements
The unaudited financial statements as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments necessary to present fairly the financial position as of June 30, 2011 and the results of operations and cash flows for the periods ended June 30, 2011 and 2010. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the six months ended June 30, 2011 are not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending December 31, 2011. The balance sheet at December 31, 2010 has been derived from the audited financial statements at that date.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2010 included in our Form 10-K/A filed November 6, 2012.
(c) Net Income (Loss) per Share
Basic net income (loss) per common share is computed on the basis of the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per common share is computed on the basis of the weighted average number of common shares and dilutive securities (such as stock options, warrants, and convertible securities) outstanding. Dilutive securities having an anti-dilutive effect on diluted net income (loss) per share are excluded from the calculation.
8
--------------------------------------------------------------------------------
For the six months ended June 30, 2011 and 2010, diluted common shares outstanding excluded the following dilutive securities as the effect of their inclusion was anti-dilutive:
Six Months Ended June 30,
2011 2010
7% convertible notes and accrued interest 633,202 598,296
6% convertible notes and accrued interest 3,217,500,000 -
12% convertible notes and accrued interest 8,014,800,000 -
10% convertible notes and accrued interest 221,934 206,972
8% convertible note and accrued interest 44,561,333 605,790
Series B preferred stock owned by Capstone Capital Group I, LLC 529,063,781 83,327,545
Stock Options - 300,000
Warrants 19,522,184 19,522,184
Total 11,826,302,434 104,560,787
(d) Recently Issued Accounting Pronouncements
Certain accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material.
(e) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
3. DEBT
Debt relating to continuing operations:
Debt relating to Iconic Brands, Inc. consisted of the following at June 30, 2011 and December 31, 2010:
9
--------------------------------------------------------------------------------
2011 2010
Convertible promissory note, interest of 7%, due September 13, 2014, net of
unamortized discount of $52,863 and $61,107, respectively (A) $ 47,137 $ 38,893
Loans payable, interest at 0%, due on demand (see Note 9) 107,300 63,250
Convertible promissory note, interest at 6%, due June 30, 2010 (see Note 9) (B) 30,000 30,000
Convertible promissory notes, interest at 12%, due June 30, 2010 (see Note 9) (B) 70,000 70,000
Convertible promissory note, interest at 8% (default rate of 22%), due February 7, 2011 (in default) (A) 56,500 60,000
Total 310,937 262,143
Less current portion of debt (263,800 ) (223,250 )
Long term debt $ 47,137 $ 38,893
(A) The $100,000 face value of the 7% convertible note outstanding at June 30, 2011 is convertible into shares of the Company’s common stock at a price of $0.50 per share. The $56,500 face value of the 8% convertible note outstanding at June 30, 2011 is convertible into shares of the Company’s common stock at a variable conversion price equal to 60% of the Market Price, as defined.
(B) These promissory notes were issued to the same entity lender on April 15, 2010. The notes provide that upon an event of default that is not cured within the allotted time, the holder shall have the option to convert the outstanding principal and interest into shares of common stock at a conversion price of $0.00001 per share. The Company has defaulted on all three notes and has failed to cure the defaults within the time allotted specified in the note default provisions.
While the Company has not received any notice or indication from the lender of its intention to convert the $100,000 debt (or a portion thereof), if the lender does elect to convert the $100,000 of debt and related accrued interest at June 30, 2011 at the $0.00001 per share conversion rate it would require the Company to issue 11,232,300,000 common shares to this lender (or over 99% of the 11,286,661,412 shares of Company Common Stock outstanding after this lender’s conversion. However, by virtue of his ownership of the 1 share of Series A Preferred Stock, Mr. DeCicco would retain voting control of the Company.
Also, the notes provided for the grant of a total of 1,200,000 warrants exercisable at an exercise price of $0.20 per share for 3 years. The $51,600 fair value of the warrants (valued using the Black-Scholes option pricing model and the following assumptions: stock price of $0.092 per share, exercise price of $0.20 per share, term of 3 years, risk-free interest rate of 1.62%, and expected volatility of 100%) and the remaining $45,400 intrinsic value of the beneficial conversion feature arising from the default provisions in the three promissory notes due to this lender described in the two preceding paragraphs (the total debt discounts are limited to the amount of proceeds allocated to the convertible instrument) were recorded initially as a debt discount and amortized as interest expense over the term of the notes ended June 30, 2010.
10
--------------------------------------------------------------------------------
At June 30, 2011, the debt relating to Iconic Brands, Inc. is due as follows:
Past due $ 156,500
Year ending June 30, 2012 107,300
Year ending June 30, 2013 -
Year Ending June 30, 2014 -
Year Ending June 30, 2015 100,000
Total 363,800
Less debt discounts (52,863 )
Net $ 310,937
Accrued interest payable on debt relating to Iconic Brands, Inc. consisted of:
June 30, 2011 December 31, 2010
Convertible note, interest at 7% $ 12,542 $ 9,071
Convertible note, interest at 6% 2,175 1,282
Convertible notes, interest at 12% 10,149 5,984
Convertible note, interest at 8% (default rate of 22%) 5,874 2,367
Total $ 30,740 $ 18,704
11
--------------------------------------------------------------------------------
Debt relating to discontinued operations:
Debt relating to the Company’s wholly-owned subsidiary Iconic Imports consisted of the following at June 30, 2011 and December 31, 2010:
2011 2010
Promissory note, interest at 20%, due January 29, 2009 (in default) $ 100,000 $ 100,000
Convertible promissory notes, interest at 10%, due October 25, 2007 to November 27, 2007 (in default) (A) 75,000 75,000
Promissory notes, interest at 13%, due May 31, 2010 (in default) (B) 220,000 220,000
Due Donald Chadwell (5% stockholder at June 30, 2011), interest at 0%, no repayment terms 763,000 763,000
Due Richard DeCicco (officer, director and 30% stockholder at June 30, 2011) and affiliates, interest at 0%, no repayment terms 714,338 714,338
Convertible notes, interest at 7% (default rate of 14%), due August 27, 2012 to November 27, 2012, net of unamortized discounts of $16,480 and $22,766, respectively (A) 133,520 127,234
Total 2,005,858 1,999,572
Less current portion of debt (395,000 ) (395,000 )
Long term debt $ 1,610,858 $ 1,604,572
(A) $225,000 total face value of convertible notes outstanding at June 30, 2011 is convertible into shares of the Company’s common stock at a price of $0.50 per share.
(B) The 13% promissory notes specify that the loan proceeds were for the purpose of purchasing containers of Danny DeVito’s Premium Limoncello and that the holder will be repaid the principal from the receivables of the sales of the Danny DeVito Premium Limoncello product as they are collected by the Company.
12
--------------------------------------------------------------------------------
At June 30, 2011 the debt relating to Iconic Imports, Inc. is due as follows:
Past due $ 395,000
Year ending June 30, 2012 -
Year ending June 30, 2013 150,000
No repayment terms (due two significant stockholders) 1,477,338
Total 2,022,338
Less debt discounts (16,480 )
Net $ 2,005,858
Accrued interest payable on debt relating to Iconic Imports, Inc (included in current liabilities of discontinued operations in the accompanying consolidated balance sheets) consisted of:
June 30, 2011 December 31, 2010
Convertible note, interest at 7% $ 54,059 $ 48,852
Promissory note, interest at 20% 39,944 30,027
Promissory notes, interest at 13% 44,640 30,458
Convertible promissory notes, interest at 10% 35,966 32,247
Total $ 174,609 $ 141,584
4. STOCKHOLDERS’ EQUITY
On June 10, 2009, pursuant to the terms of the Merger Agreement, the Company issued to the designees of Harbrew New York 27,352,301 shares of Common Stock at the Closing. Of this amount:
1) 24,909 shares were issued to Harbrew Florida stockholders,
2) 19,634,112 shares valued at $1,963,411 were issued to Company management and employees for services, including 15,972,359 shares to the Company’s Chief Executive Officer, 100,000 shares to the Company’s Chief Financial Officer, and 2,586,753 shares to Donald Chadwell,
3) 2,086,973 shares valued at $208,697 were issued to Danny DeVito and affiliates for services,
4) 4,606,307 shares were issued to noteholders in satisfaction of $2,125,625 of debt and $177,529 of accrued interest, and
5) 1,000,000 shares were issued to Capstone as part of the Termination Agreement.
13
--------------------------------------------------------------------------------
Also, pursuant to the terms of the Merger Agreement, the Company issued 1 share of Series A Preferred Stock valued at $100,000 to the Company’s Chief Executive Officer for services and 916,603 shares of Series B Preferred Stock valued at $1,833,206 to Capstone as part of the Termination Agreement.
The one share of Series A Preferred Stock entitles the holder to two votes for every share of Common Stock Deemed Outstanding and has no conversion or dividend rights. Each share of the Series B Preferred Stock has a liquidation preference of $2.00 per share, has no voting rights, and is convertible into Common Stock at the lower of (1) $2.00 per share or, (2) the volume weighted average price per share (“VWAP”) for the 20 trading days immediately prior to the Conversion Date. T he Series B Preferred Stock has been classified as a liability (pursuant to ASC 480-10-25-14(a)) since it embodies a conditional obligation that the Company may settle by issuing a variable number of equity shares and the monetary value of the obligation is based on a fixed monetary amount known at inception.
On January 6 and 13, 2010, the Company issued a total of 200,000 shares of common stock, 100,000 five year warrants exercisable at $0.22 per share, and 100,000 five year warrants exercisable at $0.23 per share, along with two promissory notes in the amount of $110,000 each (one due March 31, 2010 and one due May 31, 2010), to an investor in exchange for a $200,000 loan. The fair value of the common stock ($45,000) and warrants ($33,930), along with the $20,000 discount, were recorded as debt discounts, which are being amortized over the terms of the notes as interest expense. The warrants were valued using the Black-Scholes option pricing model and the following assumptions: risk free interest rates of 2.6% and 2.55%, volatility of 100%, and terms of five years.
On January 15 and 25, 2010, the Company issued a total of 152,546 shares of common stock to three investors in satisfaction of a total of $62,500 of convertible debt and approximately $13,773 of accrued interest.
On February 8, 2010, the Company issued 250,000 shares of common stock and 1,000,000 warrants to Tony Siragusa pursuant to the License Agreement described in Note 7 above.
On February 24, 2010, the Company issued 300,000 shares of common stock to CorProminence pursuant to a 45 day consulting agreement dated January 4, 2010. The $69,000 fair value of the common stock at date of issuance was expensed in full in the three months ended March 31, 2010 and included in professional fees.
On March 16, 2010, the Company issued 2,000,000 shares of common stock and 2,000,000 five year warrants exercisable at $0.25 per share to Cresta Capital Strategies pursuant to a one year extension of a consulting agreement. The fair value of the common stock ($350,000) and warrants ($246,000) at date of issuance was capitalized as a prepaid expense (see note 5) and is being amortized over the one year term as professional fees. The warrants were valued using the Black-Scholes option pricing model and the following assumptions: risk free interest rate of 2.37%, volatility of 100%, and term of five years.
On April 19, 2010, the Company satisfied debt totaling $455,635 through its commitment to issue to the respective 5 creditors a total of 4,556,350 shares of its common stock and 4,556,350 three year warrants exercisable at $0.20 per share. The Company expects to issue these shares and warrants in the near future.
On April 19, 2010, the Company agreed to issue to a note holder 250,000 shares of its common stock in consideration of the note holder’s extension of the due date (from March 31, 2010 to May 31, 2010) of a $110,000 promissory note. The $21,400 fair value of the common stock at date of commitment was expensed in the three months ended June 30, 2010 and included in interest expense. The Company expects to issue these shares in the near future.
On January 18, 2011, the Company issued 1,842,105 shares of Iconic common stock to Asher Enterprises, Inc. (“Asher”) pursuant to Asher’s Notice of Conversion to convert $3,500 debt at a price of $0.0019 per share, resulting in the reduction of debt due to Asher from $60,000 to $56,500.
14
--------------------------------------------------------------------------------
5. INCOME TAXES
No provision for income taxes was recorded in the six months ended June 30, 2011 and 2010 since the Company incurred net losses in these periods.
Based on management’s present assessment, the Company has not yet determined it to be more likely than not that a deferred tax asset attributable to the future utilization of the net operating loss carryforward as of June 30, 2011 will be realized. Accordingly, the Company has maintained a 100% valuation allowance against the deferred tax asset in the consolidated financial statements at June 30, 2011. The Company will continue to review this valuation allowance and make adjustments as appropriate.
Current United States income tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited.
6. COMMITMENTS AND CONTINGENCIES
Lease – Company Evicted from Facility
The Company occupied its facilities in Freeport, New York up until March 2009 under a month to month agreement at a monthly rent of $14,350. In March 2009, the Company moved its facilities to Lindenhurst, New York pursuant to a three year lease agreement providing for annual rentals ranging from $85,100 to $90,283. Provided certain conditions were met, the Company had an option to renew the lease for an additional two years at annual rentals ranging from $92,991 to $95,781. On September 14, 2010, the Second District Court of Suffolk County issued a Warrant of Eviction removing the Company from its facilities. At June 30, 2011 and December 31, 2010, accounts payable of Iconic Imports, Inc. (discontinued operations) includes $22,913 of unpaid rent due to the former Lindenhurst landlord and $450,021 of unpaid rent and penalties due the Freeport landlord.
For the six months ended June 30, 2011 and 2010, rent expense was $0 and $46,726, respectively.
Licensing Agreements
Danny DeVito Brand
On April 26, 2007 and as amended November 1, 2007, the Company entered into an exclusive License Agreement with Seven Cellos, LLC (“DDV”), pursuant to which the Company was granted a limited license of certain rights in and to Danny DeVito’s name, likeness and biography for use by the Company in connection with the Danny DeVito Premium Limoncello brand. The term of the Agreement was to continue through perpetuity unless otherwise terminated. In consideration for the license, the Company agreed to pay royalties as follows: a) 5% of Net Profits (as defined) to Behr Abrahamson & Kaller, LLP (“BAK”), (b) a payment of 50% of the remaining Net Profits to DDV after the payment described above; and (c) a payment of 2% of Net Profits to Sichenzia Ross Friedman Ference LLP after payment of 50% of Net Profits to DDV.
15
--------------------------------------------------------------------------------
On August 20, 2010, the Company and DDV terminated the License Agreement.
For the periods presented, the Company calculated agreement defined cumulative “Net Profits” from the brand to be negative and thus did not pay or accrue any royalty expense under the License Agreement. The Termination Agreement provides that DDV has not waived or otherwise prejudiced any of its rights with respect to the Company’s past conduct with respect to the brand, including DDV’s right to accrued and unpaid royalties based upon its right to inspect Company records and conduct an audit of the Company reported agreement defined net profit.
Godfather Brand
On June 12, 2009, Iconic Imports, Inc., the wholly-owned subsidiary of the Company, entered into a merchandising license agreement (the “License Agreement”) with Paramount Licensing Inc. (“PLI”) granting Iconic Imports the non-exclusive right to use the title of the theatrical motion picture “The Godfather” in connection with the development, importation, marketing, and distribution of an Italian organic vodka and Scotch whiskey throughout the United States. Under the terms of the License Agreement, which had a term of 5 years ending on June 30, 2014 and could have been extended to June 30, 2019 upon certain conditions unless it was sooner terminated, the Company agreed to pay PLI a royalty fee of five percent (5%) and guaranteed a total of $400,000 in royalties due as follows; (1) $60,000 as an advance payment due upon signing of the License Agreement, (2) $100,000 due on or before November 1, 2010, (3) $100,000 due on or before November 1, 2011, and (4) $140,000 due on or before November 1, 2012. In addition, PLI was granted warrants to purchase shares of the Company’s common stock in substantially the same form as other warrants previously issued, which is (a) a five-year warrant to purchase 1,000,000 shares of our common stock at an exercise price of $1.00 per share; and (b) a five-year warrant to purchase 1,333,334 shares of our common stock at an exercise price of $1.50 per share. On August 12, 2009, the Company paid $60,000 to PLI as the advance royalty due under the License Agreement. The License Agreement became effective on this date as the advance payment was a condition precedent to the effectiveness of the License Agreement.
The Company never commenced sales of the product named “The Godfather”. The second royalty payment of $100,000 due on November 1, 2010 was not paid. On February 23, 2011, PLI terminated the License Agreement due to nonpayment.
Tony Siragusa Brand
On January 15, 2010, we entered into an exclusive License Agreement with Tony Siragusa, pursuant to which we were granted a limited license to certain rights in and to Tony Siragusa’s name, likeness and biography for use by us in connection with Tony Siragusa’s YO Vodka. The term of the agreement was four (4) years. In consideration for the license, we agreed to distribute net profits of the venture as follows: 42.5% to the Company, 42.5% to the licensor, 10% to William Morris Endeavor Entertainment, LLC and 5% to Brian Hughes. In addition, we issued 250,000 shares of the Company’s common stock, 5 year warrants to purchase 500,000 shares of our Common Stock at a price of $1.00 per share, and 5 year warrants to purchase 500,000 shares of our Common Stock at a price of $1.50 per share. Tony Siragusa agreed to use reasonable efforts to be available for a reasonable number of promotional appearances during each consecutive 12 months period, the duration of each will not exceed six days. On September 28, 2010 (see Note 1), Capstone acquired the License Agreement rights.
For the periods presented, the Company calculated agreement defined net profits from the brand to be negative and thus did not pay or accrue any royalty expense under the License Agreement. The product was never introduced to the market.
16
--------------------------------------------------------------------------------
Under the License Agreement, Tony Siragusa had the right to terminate the agreement, upon 10 days written notice to the
Company, if the Company fails to launch the distribution of and secure availability to the general public of the beverage throughout the United States prior to June 1, 2010. The License Agreement did not provide for financial penalties that would be accruable by the Company in the event of a default.
Chief Executive Officer Employment Agreement
On January 23, 2008, the Company entered into an employment agreement with its chief executive officer Richard DeCicco. The agreement provided for a term of 5 years, commencing on January 1, 2008. The term could be extended by a written agreement of the parties. The agreement provided for annual compensation ranging from $265,000 to $350,000. In addition, if the Company enters into an agreement and further sold any brand in the Company’s portfolio, Mr. DeCicco would receive 5% of such sale. Mr. DeCicco was also entitled to incentive bonus compensation, stock and/or options in accordance with Company policies established by the Board of Directors. The agreement provided for the grant of a non-qualified ten year option to purchase up to 1,000,000 shares of common stock of the Company at an exercise price which shall represent a discount to the market price. Mr. DeCicco had the right to terminate the agreement upon 60 days notice to the Company for any reason. Pursuant to the terms of the agreement, if Mr. DeCicco was absent from work because of illness or incapacity cumulatively for more than 2 months in addition to vacation time in any calendar year, the Company could terminate the agreement upon 30 days written notice. The agreement also provided that the agreement could be terminated upon 90 days notice to Mr. DeCicco if: (A) there was a sale of substantially all of the Company’s assets to a single purchaser or group of associated purchasers; (B) there was a sale, exchange or disposition of 50% of the outstanding shares of the Company’s outstanding stock; (C) the Company terminated its business or liquidated its assets; or (D) there was a merger or consolidation of the Company in which the Company’s shareholders received less than 50% of the outstanding voting shares of the new or continuing corporation. Mr. DeCicco was entitled to severance pay in the amount of 2 years compensation and medical and other benefits in the event of a termination of the agreement under certain circumstances.
At June 30, 2011 and December 31, 2010, accrued expenses and other current liabilities of Iconic Imports, Inc. (discontinued operations) includes approximately $528,000 in unpaid compensation due the Chief Executive Officer. For the six months ended June 30, 2011 and 2010, selling, general and administrative expenses of Iconic Imports, Inc. (discontinued operations) includes approximately $0 and $132,500 in compensation for the Chief Executive Officer.
Former Chief Financial Officer Employment Agreement
On October 1, 2007, the Company entered into an employment agreement with its then chief financial officer William Blacker. The agreement provided for a term of 3 years, commencing on October 1, 2007. The term could be extended by a written agreement of the parties. The Company agreed to issue options to purchase shares of its common stock to Mr. Blacker if and when the common stock becomes publicly traded, as follows: (A) upon execution of the agreement, 100,000 options at an exercise price of $0.05 per share; (B) on October 1, 2008, 100,000 options at an exercise price of $0.15 per share; and (C) on October 1, 2009, 100,000 options at an exercise price of $0.75 per share. Pursuant to the terms of the agreement, Mr. Blacker was to receive an annual salary of $150,000. Mr. Blacker had the right to terminate the agreement upon 60 days notice to the Company for any reason. The agreement further provided that if the agreement was terminated for any reason other than willful malfeasance by Mr. Blacker, Mr. Blacker was entitled to receive severance pay in the amount of 6 months or the balance of the agreement’s term of existence, whichever was greater, and was to receive all benefits under the agreement. Mr. Blacker resigned September 15, 2010.
The $16,850 estimated fair value of the 300,000 options (using the Black-Scholes option pricing model and the following assumptions: $0.10 stock price, 4% risk free interest rate, 100% volatility, and term of 3.5 years) was amortized over the 3 year term of the employment agreement.
17
--------------------------------------------------------------------------------
At June 30, 2011 and December 31, 2010, accrued expenses and other current liabilities of Iconic Imports, Inc. (discontinued operations) includes approximately $233,000 in unpaid compensation due the Chief Financial Officer. For the six months ended June 30, 2011 and 2010, selling, general and administrative expenses of Iconic Imports, Inc. (discontinued operations) includes approximately $0 and $75,000 in compensation for the former Chief Financial Officer.
Litigation
The Company is party to a variety of legal proceedings brought by suppliers and creditors. We accrue for these items as losses become probable and can be reasonably estimated. Most of the amounts sought have already been
