Iconic Brands, Inc. - Quarter Report: 2010 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION  

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

 

FOR THE QUARTERLY PERIOD ENDED September 30, 2010 

 

OR

 

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-53162

 

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 last 90 days. Yes x No o

 

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 o

 

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,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 52,519,307 as of September 30, 2010.

 

 

 ICONIC BRANDS INC.

 

FORM 10-Q

 

September 30, 2010 

TABLE OF CONTENTS

 

 

 

 

PART I: FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS.

 

 

  See notes to consolidated financial statements.

---

 

 

 

 

Iconic Brands, Inc. and Subsidiary

Consolidated Statements of Operations

(Unaudited)

 

 

  See notes to consolidated financial statements.

 

 

Iconic Brands, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders' Equity (Deficiency)  

Nine Months Ended September 30, 2010

(Unaudited)

 

 

  See notes to consolidated financial statements.

 

 

 

Iconic Brands, Inc. and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

 

 

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 is a brand owner of self-developed alcoholic beverages.  Furthermore, the Company imports, markets and sells 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 11), 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 nine months ended September 30, 2010, this brand accounted for approximately 96% of total sales.

 

On August 20, 2010 (see Notes 3 and 8), Capstone Capital Group I, LLC, a holder of a Promissory Note with a then remaining balance of approximately $190,000, 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 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 14, 2010 (see Note 11), the Second District Court of Suffolk County New York issued a Warrant of Eviction removing the Company from its Lindenhurst, New York office.

 

 

 

 

Iconic Brands, Inc. and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a)  Basis of Presentation

 

The 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 September 30, 2010, the Company’s wholly owned subsidiary Iconic Imports had its assets taken by the secured lender Capstone Capital Group I, LLC in satisfaction of their promissory note which had been defaulted on by Iconic Imports, Inc., leaving negative working capital of $3,662,227 and a stockholders’ deficiency of $5,248,427.  Further, from inception to September 30, 2010, the Company incurred losses of $15,883,684.  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 introducing new products.  Additionally, the Company intends to obtain new financing which will primarily be used to market and promote other new products.  However, there is no assurance that the Company will be successful in accomplishing these objectives.  The 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 September 30, 2010 and for the nine months ended September 30, 2010 and 2009 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 September 30, 2010 and the results of operations and cash flows for the periods ended September 30, 2010 and 2009.  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 three and nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending December 31, 2010.  The balance sheet at December 31, 2009 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, 2009 included in our Form 10-K.

 

 

 

 

Iconic Brands, Inc. and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

 

(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.

 

For the nine months ended September 30, 2010 and 2009, diluted common shares outstanding excluded the following dilutive securities as the effect of their inclusion was anti-dilutive:

 

 

(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.

 

 

 

 

Iconic Brands, Inc. and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

 

3. LOSS ON WRITEOFF OF ASSETS ATTACHED BY LENDER ON DEFAULTED PROMISSORY NOTE

 

On September 16, 2010 (see Notes 1 and 8), Capstone Capital Group I, LLC, delivered a Notification of Disposition of Collateral to the Company notifying the Company of its attachment of the Collateral securing the defaulted promissory Note and its intent to sell the Collateral to the highest qualified bidder in a public sale on September 28, 2010. To date, Capstone has not notified the Company of the proceeds of such sale, if any, that may reduce the outstanding balance due Capstone of $190,411 at September 30, 2010.  Accordingly, the Company has recognized a default loss of $816,793 in the three months ended September 30, 2010, equal to the carrying value of the respective Collateral assets at September 16, 2010, as follows:

 

 

At such time as the amount of the offsettable proceeds from the disposition of the collateral becomes known, the Company will decrease the debt due Capstone and will decrease the default loss recorded.

 

4.  INVENTORIES

 

 

5.  PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

 

 

 

 

 

6.  PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment, net, consist of:

 

 On September 16, 2010, the Company wrote off property, plant, and equipment, net of $4,240 pursuant to the attachment of Collateral (see Note 3).

 

 

 

Iconic Brands, Inc. and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

 

7.    LICENSE AGREEMENT COSTS, NET

 

License agreement costs, net, changed in the nine months ended September 30, 2010 as follows:

 

 

 

 

Fair value of 250,000 shares of common stock,
500,000 5 year warrants exercisable at $1.00 per share, and
500,000 5 year warrants exercisable at $1.50 per share
Issued in connection with license agreement with
Tony Siragusa dated January 15, 2010.	$  144,800
Amortization for the period January 15, 2010 to September 16, 2010	(25,538)
Write-off of balance pursuant to the attachment of Collateral on September 16, 2010 (see Note 3)	(119,262)
Balance, September 30, 2010	$      -

 

                                                                                                                             

                                                                                                       

As more fully described in Note 11, the Company entered into a four year License Agreement with Tony Siragusa on January 15, 2010 in connection with the use of Tony Siragusa’s name relating to the sale of YO Vodka.  The fair value of the common stock ($50,000) and warrants ($94,800) at January 15, 2007 was capitalized and was being amortized over the four year term of the License Agreement as selling, marketing and promotion expenses.  The warrants were valued using the Black-Scholes option pricing model and the following assumptions: risk free interest rate of 2.44%, volatility of 100%, and term of five years.

 

8.    DEBT

 

Debt consists of:

 

 

 

 

Iconic Brands, Inc. and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

 

 

At September 30, 2010, the debt is due as follows:

 

 

(A)  On January 22, 2007 the company entered into a Purchase order Financing Agreement with a term of two years that provided for advances of credit from Capstone Capital Group I, LLC (the "Secured Party") to the company.  Among other things, the agreement provided for fees to the Secured Party equal to 2.5% for the first 30 days (or part thereof) that each advance was outstanding and 1.25% for every 14 days (or part thereof) that such advance remained outstanding. On June 10, 2009, the Company entered into a termination agreement with Capstone (the “Termination Agreement”) whereby Capstone agreed to forgive the $2,833,205 balance owed it under the Purchase Order Financing Agreement in exchange for: (i) a $500,000 7% unsecured promissory note (the “Promissory Note”); (ii) 1,000,000 shares of Common Stock; (iii) $1,833,205 worth of Series B Preferred Stock; and (iv) a 3-year warrant to purchase up to 1,000,000 shares of Common Stock at an exercise price of $0.50 per share.  The Promissory Note was payable in 24 monthly installments of $10,000 commencing July 10, 2009, $100,000 on or before June 10, 2010, and the remaining $160,000 on or before June 10, 2011.  If the Company closes a financing prior to maturity of the Promissory Note, up to 50% of the proceeds are to be used to prepay the remaining balance of the Promissory Note. The Discount Factoring Agreement was dated January 22, 2007 and provides for financing of certain Company accounts receivable by Capstone Business Credit, LLC (the “Factor”).  Among other things, the agreement provides for commissions to the Factor equal to 2% for the first 30 days (or part thereof) that each such account receivable is outstanding and 1% for every 14 days (or part thereof) thereafter that such account receivable remains outstanding. Fees and commissions charged pursuant to the Purchase Order Financing Agreement and the Discount Factoring Agreement are included in interest expense in the accompanying consolidated statements of operations.

 

At September 30, 2010, Capstone holds 916,603 shares of Series B Preferred Stock which, based on the volume weighted average price per share for the preceding 20 trading days, are convertible into 294,775,044 shares of the company common stock. 

 

On August 20, 2010 (see Notes 1 and 3), the secured Party delivered a Formal Notice of Default to the Company demanding payment of the $190,411 balance on or before September 1, 2010. On September 16, 2010, the Secured Party delivered a Notification of Disposition of Collateral to the Company notifying the Company of its attachment of the Collateral (including accounts receivable, inventories, equipment, and contract rights) and intent to sell the Collateral to the highest qualified bidder in a public sale on September 28, 2010. To date, the Secured Party has not notified the Company of the proceeds of such sale, if any, that may reduce the outstanding balance due the Secured Party. At such time as the amount of the offsettable proceeds from the disposition of the Collateral becomes known, the Company will decrease the debt due Capstone.

 

(B)  $325,000 total face value of convertible notes outstanding at September 30, 2010 is convertible into shares of the Company’s common stock at a price of $0.50 per share. The other $60,000 face value of convertible notes outstanding at September 30, 2010 is convertible into shares of the Company’s common stock at a variable conversion price equal to 60% of the Market Price, as defined.

 

 

 

 

 

Accrued interest payable on debt (included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets) consisted of:

 

 

 

 

 

 

9. 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.

 

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 one share of 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.

 

 

 

 

Iconic Brands, Inc. and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

 

In the three months ended September 30, 2009, a total of $122,500 of debt and $28,147 of accrued interest was converted into a total of 300,110 shares of Company common stock.

 

On August 19, 2009, the Company sold 1,000,000 shares of its common stock at $.50 per share, including 1,000,000 five year warrants with an exercise price of $1.00 per share (which was reduced to $0.01 per share on December 14, 2009 in connection with a $100,000 loan from the investor) and 1,000,000 five year warrants with an exercise price of $1.50 per share, to an investor for total proceeds of $500,000.

 

On October 6, 2009, the Company issued 1,000,000 shares of its common stock to a consultant pursuant to a one month consulting agreement for financial services. The Company included this issuance in its consolidated statement of operations for the year ended December 31, 2009 in professional fees at the $200,000 estimated fair value of the shares.

 

 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.

 

 

 

 

Iconic Brands, Inc. and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

 

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 of its common stock and 4,556,350 three year warrants exercisable t $0.20 per share. The Company expects to issue these shares and warrants once it pays its liability to its transfer agent.

 

On April 19, 2010, the Company agreed to issue to a noteholders 250,000 shares of its common stock in consideration of the noteholders 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 interest expense. The Company expects to issue these shares once it pays its liability to its transfer agent.

 

On June 22, 2010, 8 shareholders representing a majority of the issued and outstanding shares of common stock approved an amendment to the Company’s Articles of Incorporation to increase the number of authorized shares of common stock from 100,000,000 shares to 2,500,000,000 shares.

 

10. INCOME TAXES

 

No provision for income taxes was recorded in the nine months ended September 30, 2010 and 2009 since the Company incurred a net loss 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 September 30, 2010 will be realized. Accordingly, the Company has provided a 100% allowance against the deferred tax asset in the financial statements at September 30, 2010. The Company will continue to review this valuation allowance and make adjustments as appropriate.

 

Current 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.

 

11. 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.

 

For the nine months ended September 30, 2010 and 2009, rent expense was $69,639and $99,115, 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: 9a) 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.

 

On August 20, 2010, the Company and DDV terminated the License Agreement. In the nine months ended September 30, 2010, the Danny DeVito Premium Limoncello brand accounted for approximately 96% of total sales.

 

For the periods presented, the Company calculated 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 has a term of 5 years ending on June 30, 2014 and may be extended to June 30, 2019 upon certain conditions unless it is sooner terminated, the Company agreed to pay PLI a royalty fee of five percent (5%) and guarantee 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.

 

 

 

Iconic Brands, Inc. and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

 

At September 30, 2010, the Company has not yet commenced sales of the product named “The Godfather”.  For the nine months ended September 30, 2010 and 2009, the Company expensed $60,000 and $20,000, respectively (included in selling, marketing and promotion expenses in the consolidated statement of operations) to provide for the ratable accrual of the $400,000 minimum royalties over the 5 year term of the License Agreement. The second royalty payment of $100,000 due on November 1, 2010 has not been paid.  At September 30, 2010, the Company has included $40,000 of accrued minimum royalties ($100,000 minimum royalties accrued for the 15 months from July 2009 to September 2010 less the $60,000 advance royalty paid August 12, 2009) in accrued expenses and the other current liabilities in the consolidated balance sheet.

 

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 is 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.  A condition precedent to Tony Siragusa’s performance under the agreement is our applying for a trademark for the brand name “YO Vodka”, with Licensor being designated as a 50% co-owner of such trademark.  We applied for the trademark on March 9, 2010 (trademark application number 77747523), which application is currently being reviewed by the U.S. Patent and Trademark Office.

 

For the nine months ended September 30, 2010, the Company calculated net profits from the brand to be negative and thus did not pay or accrue any royalty expense under the License Agreement. As of this date, the product has not been introduced to the market.  Under the License Agreement, Tony Siragusa has 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 does 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 provides for a term of 5 years, commencing on January 1, 2008.  The term can be extended by a written agreement of the parties.  The agreement provides for annual compensation ranging from $265,000 to $350,000.  In addition, if the Company enters into an agreement and further sells any brand in the Company’s portfolio, Mr. DeCicco will receive 5% of such sale.  Mr. DeCicco is also entitled to incentive bonus compensation, stock and/or options in accordance with Company policies established by the Board of Directors.  The agreement provides 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 has 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 is 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 may terminate the agreement upon 30 days written notice.  The agreement also provides that the agreement may be terminated upon 90 days notice to Mr. DeCicco if: (A) there is a sale of substantially all of the Company’s assets to a single purchaser or group of associated purchasers; (B) there is a sale, exchange or disposition of 50% of the outstanding shares of the Company’s outstanding stock; (C) the Company terminates its business or liquidates its assets; or (D) there is a merger or consolidation of the Company in which the Company’s shareholders receive less than 50% of the outstanding voting shares of the new or continuing corporation. Mr. DeCicco shall be 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.

 

 

 

 

Iconic Brands, Inc. and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

 

Former Chief Financial Officer Employment Agreement - On October 1, 2007, the Company entered into an employment agreement with its chief financial officer William Blacker.  The agreement provides for a term of 3 years, commencing on October 1, 2007.  The term can 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 is to receive an annual salary of $150,000.  Mr. Blacker has the right to terminate the agreement upon 60 days notice to the Company for any reason.  The agreement further provides that if the agreement is terminated for any reason other than willful malfeasance by Mr. Blacker, Mr. Blacker shall be entitled to receive severance pay in the amount of 6 months or the balance of the agreement’s term of existence, whichever is greater, and shall 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) is being amortized over the 3 year term of the employment agreement as administrative compensation and benefits.

 

Litigation – The Company is party to a variety of legal proceedings that arise in the normal course of business.  We accrue for these items as losses become probable and can be reasonably estimated.  While the results of these legal proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will have a material adverse effect on the Company’s consolidated results of operations and financial position.

 

 Unless otherwise noted, the following legal actions pertain to Iconic Imports, Inc, (formally Harbrew Imports, Ltd.,) 

On February 14, 2008, Chester Stewart, an individual, initiated a lawsuit, against Iconic Imports, Inc. in the State of Connecticut Superior Court (Docket No. D.N. HHD CV08-5018180S) alleging breach of a promissory note in the amount of $100,000. A Judgment was entered in Connecticut, and will be defended when the action is entered in New York. 

 

 On or about July 24, 2008, Elite Marketing Concepts, a wholesale distributor of wine, initiated litigation against Iconic Imports Ltd. in the Supreme Court of New York in Nassau County (Docket No. 08-009338).  The plaintiff has demanded payment in the amount of $32,270 for goods sold and delivered to us by the plaintiff.  On August 15, 2008, we reached an agreement to pay Elite $29,000 in two equal payments.  We paid the first $14,500 and due to non-payment a judgment was issued against us on June 5, 2009 in the amount of $9,679. On May 6, 2009 a payment of $4,129.12 was made bringing the balance to $2,549.88, as of this date, the final payment has not been rendered.

 

On October 23, 2008, Thermo Plastic Tech, Inc., a manufacturer of thermo plastic material, initiated litigation against Iconic Imports, Ltd. in the Superior Court of New Jersey Law Division, Civil Part, Union County (Docket No. UNN-L-3062-08). The plaintiff has demanded payment in the amount of $30,292 for goods sold and delivered to us by the plaintiff. The court issued a judgment against us in the amount of $30,292. A settlement agreement was reached in the amount of $12,500; final releases will be given with the last payment of $2,500 due June 1, 2010. To date, the final payment has not been rendered.

 

On August 5, 2009, the Estate of Mercer K Ellington initiated litigation, against both Iconic Brands, Inc. and Iconic Imports Inc. claiming the company used the name Duke Ellington without permission. The company has retained counsel, answered all the accusations, and has initiated a counter claim against the estate.

 

On August 12, 2009, Christina Hsu, a former employee, initiated an action claiming Iconic Imports, Inc. owed wages and consulting services in the amount of $20,000. The company has retained counsel and answered all the pleadings.

 

On October 28, 2009, Contri Spumanti S.P.A., a producer of wine, initiated litigation against Iconic Imports, Inc. in the Supreme Court of the State of New York County of Suffolk (index # 09-43045). The plaintiff has demanded payment in the amount of $37,516.14 for goods sold by the company. The Court issued a judgment in the amount of the claim. A settlement agreement was reached for the amount claimed for 8 payments of a similar amount commencing April 1, 2010; payments have not been made for the months of May and June. A levy has been placed against the checking account in the name of Iconic Imports, Ltd in the amount of $68,000 (twice the amount of judgment).

 

On October 29, 2009, Fred and Joseph Scalamandre Real Estate initiated litigation against Iconic Imports, Inc. claiming non payment of rent in the amount of $238,000 plus interest, fees, and real estate taxes for a specific time period. The company has recognized the total obligation on its books as of September 30, 2010, and has retained counsel.

 

 

 

On November 4, 2009, Toyota Motor Credit Corporation initiated litigation against Iconic Imports, Inc. in the amount of $17,104.09 claiming a default on the lease of an automobile. The company has retained counsel, and has answered all the pleadings.

 

On August 5, 2010, Coachman Luxury Transport initiated an action against Iconic Brands, Inc in the amount of $5,000 claiming non payment of monies due for rental of a bus. The company is not contesting the amount due.

 

On July 19, 2010, Sherwood Suffolk Co initiated an action against Iconic Brands, Inc in the amount of $7,518.56 for non payment of rent for the month of July. As today, the company owes Sherwood Suffolk Co, additional rent for the month of August in the amount of $7,518.56.

 

On September 14, 2010, Sherwood Suffolk was given a warrant of eviction by the Second District Court of Suffolk County, and Sherwood Suffolk presented the warrant to the Sheriff of Suffolk County to enforce. In addition to the warrant of eviction, the court awarded a judgment in the amount of $16,256.73 to Sherwood Suffolk Co.

 

On September 16, 2010, Capstone Capital Group LLC notified the Company that in accordance with the Formal Notice of Default dated August 20, 2010 , Capstone is exercising its right to attach and sell all the collateral referred to in the promissory note between the parties. The collateral consists of: all inventory, all equipment, machinery, fixtures, vehicles, furnishings, general intangibles, including trademarks, trade names, and anything else owned by Harbrew Imports Ltd, the predecessor name of Iconic Imports, Inc.

 

We believe that these matters will have a material adverse effect on our financial condition and operations.

 

 Apart from the legal proceedings noted in the previous paragraphs, we are not party to any legal proceedings, nor are we aware of any other contemplated or pending legal proceedings against us.

 

 

 

 

 

 

Iconic Brands, Inc. and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

 

 

 

12.   STOCK OPTIONS AND WARRANTS

 

A summary of stock option and warrant activity for the year ended December 31, 2009 and for the nine months ended September 30, 2010 follows:

Stock options outstanding at September 30, 2010 consist of:

 

 

 

(a)       Estimated since exercise price is to be determined based on future stock price.

 

 As of September 30, 2010, there was $40,817of total unrecognized compensation cost relating to unexpired stock options.  That cost is expected to be recognized $4,535 in 2010, $18,140 in 2011, and $18,142 in 2012.

 

 

 

 

Iconic Brands, Inc. and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

 

Warrants outstanding at September 30, 2010 consist of:

 

As of September 30, 2010, there was $68,004 of total unrecognized marketing cost relating to 2,333,334 of the unexpired warrants.  That cost is expected to be recognized $4,597 in 2010, $18,388 in 2011, $18,388 in 2012, $18,388 in 2013, and $8,243 in 2014.