Item
1. Financial Statements
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
|
|
September
30, 2017
|
|
|
March
31, 2017
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
322,529
|
|
|
$
|
611,048
|
|
Accounts
receivable — net of allowance for doubtful accounts of $302,855 and $302,275 at September 30 and March 31, 2017, respectively
|
|
|
10,735,309
|
|
|
|
11,460,432
|
|
Inventories—
net of allowance for obsolete and slow moving inventory of $348,010 and $312,711 at September 30 and March 31, 2017, respectively
|
|
|
34,178,071
|
|
|
|
29,801,080
|
|
Prepaid
expenses and other current assets
|
|
|
4,092,001
|
|
|
|
3,674,923
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
49,327,910
|
|
|
|
45,547,483
|
|
|
|
|
|
|
|
|
|
|
Equipment
— net
|
|
|
832,407
|
|
|
|
909,780
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets — net of accumulated amortization of $8,258,613 and $8,035,018 at September 30 and March 31, 2017, respectively
|
|
|
6,186,000
|
|
|
|
6,387,330
|
|
Goodwill
|
|
|
496,226
|
|
|
|
496,226
|
|
Investment
in non-consolidated affiliate, at equity
|
|
|
797,691
|
|
|
|
570,097
|
|
Restricted
cash
|
|
|
366,420
|
|
|
|
331,455
|
|
Other
assets
|
|
|
103,877
|
|
|
|
99,773
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
58,110,531
|
|
|
$
|
54,342,144
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
11,730,622
|
|
|
$
|
7,549,942
|
|
Accrued
expenses
|
|
|
3,396,087
|
|
|
|
4,668,708
|
|
Due
to shareholders and affiliates
|
|
|
2,459,762
|
|
|
|
2,158,318
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
17,586,471
|
|
|
|
14,376,968
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
|
Credit
facility, net (including $369,131 and $412,269 of related-party participation at September 30 and March 31, 2017, respectively)
|
|
|
12,848,829
|
|
|
|
13,033,075
|
|
Note
payable – 11% Subordinated note
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
Notes
payable – 5% Convertible notes (including $1,100,000 of related party participation at September 30 and March 31, 2017)
|
|
|
1,650,000
|
|
|
|
1,675,000
|
|
Notes
payable – GCP Note
|
|
|
216,869
|
|
|
|
211,580
|
|
Deferred
tax liability
|
|
|
559,436
|
|
|
|
558,766
|
|
Other
|
|
|
20,666
|
|
|
|
20,666
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
52,882,271
|
|
|
|
49,876,055
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 25,000,000 shares authorized, no shares issued and outstanding at September 30 and March 31, 2017
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $.01 par value, 300,000,000 shares authorized at September 30 and March 31, 2017, 164,305,883 and 162,945,805 shares
issued and outstanding at September 30 and March 31, 2017, respectively
|
|
|
1,643,059
|
|
|
|
1,629,458
|
|
Additional
paid-in capital
|
|
|
152,062,967
|
|
|
|
150,889,613
|
|
Accumulated
deficit
|
|
|
(149,171,900
|
)
|
|
|
(148,223,822
|
)
|
Accumulated
other comprehensive loss
|
|
|
(2,148,860
|
)
|
|
|
(2,308,672
|
)
|
|
|
|
|
|
|
|
|
|
Total
controlling shareholders’ equity
|
|
|
2,385,266
|
|
|
|
1,986,577
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interests
|
|
|
2,842,994
|
|
|
|
2,479,512
|
|
|
|
|
|
|
|
|
|
|
Total
Equity
|
|
|
5,228,260
|
|
|
|
4,466,089
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Equity
|
|
$
|
58,110,531
|
|
|
$
|
54,342,144
|
|
See
accompanying notes to the unaudited condensed consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
Three
months ended
September 30,
|
|
|
Six
months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Sales,
net*
|
|
$
|
20,894,150
|
|
|
$
|
19,627,791
|
|
|
$
|
41,746,437
|
|
|
$
|
36,378,716
|
|
Cost
of sales*
|
|
|
12,350,901
|
|
|
|
11,900,531
|
|
|
|
24,624,569
|
|
|
|
21,935,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
8,543,249
|
|
|
|
7,727,260
|
|
|
|
17,121,868
|
|
|
|
14,443,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expense
|
|
|
4,899,208
|
|
|
|
5,031,597
|
|
|
|
10,955,407
|
|
|
|
9,662,512
|
|
General
and administrative expense
|
|
|
2,298,882
|
|
|
|
2,140,659
|
|
|
|
4,561,879
|
|
|
|
4,130,894
|
|
Depreciation
and amortization
|
|
|
186,283
|
|
|
|
253,463
|
|
|
|
391,235
|
|
|
|
507,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,158,876
|
|
|
|
301,541
|
|
|
|
1,213,347
|
|
|
|
142,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
(59
|
)
|
|
|
(27
|
)
|
|
|
(59
|
)
|
|
|
(333
|
)
|
Income
from equity investment in non-consolidated affiliate
|
|
|
29,846
|
|
|
|
18,837
|
|
|
|
71,595
|
|
|
|
23,320
|
|
Foreign
exchange gain (loss)
|
|
|
18,853
|
|
|
|
(3,375
|
)
|
|
|
(32,308
|
)
|
|
|
76,488
|
|
Interest
expense, net
|
|
|
(901,559
|
)
|
|
|
(328,868
|
)
|
|
|
(1,793,423
|
)
|
|
|
(639,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes
|
|
|
305,957
|
|
|
|
(11,892
|
)
|
|
|
(540,848
|
)
|
|
|
(396,782
|
)
|
Income
tax expense, net
|
|
|
(25,335
|
)
|
|
|
(477,962
|
)
|
|
|
(43,748
|
)
|
|
|
(688,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
280,622
|
|
|
|
(489,854
|
)
|
|
|
(584,596
|
)
|
|
|
(1,085,557
|
)
|
Net
income attributable to noncontrolling interests
|
|
|
(282,303
|
)
|
|
|
(210,856
|
)
|
|
|
(363,482
|
)
|
|
|
(380,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(1,681
|
)
|
|
$
|
(700,710
|
)
|
|
$
|
(948,078
|
)
|
|
$
|
(1,466,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share, basic and diluted, attributable to common shareholders
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computation, basic and diluted, attributable to common shareholders
|
|
|
163,209,562
|
|
|
|
160,698,696
|
|
|
|
163,138,853
|
|
|
|
160,610,804
|
|
*
Sales, net and Cost of sales include excise taxes of $1,759,630 and $1,912,740 for the three months ended September 30, 2017 and
2016, respectively, and $3,399,385 and $3,628,701 for the six months ended September 30, 2017 and 2016, respectively.
See
accompanying notes to the unaudited condensed consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
|
|
Three
months ended
September 30,
|
|
|
Six
months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net
income (loss)
|
|
$
|
280,622
|
|
|
$
|
(489,854
|
)
|
|
$
|
(584,596
|
)
|
|
$
|
(1,085,557
|
)
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
55,697
|
|
|
|
19,627
|
|
|
|
159,812
|
|
|
|
(24,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss):
|
|
|
55,697
|
|
|
|
19,627
|
|
|
|
159,812
|
|
|
|
(24,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
336,319
|
|
|
$
|
(470,227
|
)
|
|
$
|
(424,784
|
)
|
|
$
|
(1,109,902
|
)
|
See
accompanying notes to the unaudited condensed consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Statement of Changes in Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Other
Comprehensive
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Interests
|
|
|
Equity
|
|
BALANCE,
MARCH 31, 2017
|
|
|
162,945,805
|
|
|
$
|
1,629,458
|
|
|
$
|
150,889,613
|
|
|
$
|
(148,223,822
|
)
|
|
$
|
(2,308,672
|
)
|
|
$
|
2,479,512
|
|
|
$
|
4,466,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(948,078
|
)
|
|
|
|
|
|
|
363,482
|
|
|
|
(584,596
|
)
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,812
|
|
|
|
|
|
|
|
159,812
|
|
Exercise of
common stock options
|
|
|
240,300
|
|
|
|
2,403
|
|
|
|
179,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,139
|
|
Restricted
share grants
|
|
|
1,092,000
|
|
|
|
10,920
|
|
|
|
(10,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Conversion
of 5% Convertible Notes to common stock
|
|
|
27,778
|
|
|
|
278
|
|
|
|
24,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
979,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
979,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
SEPTEMBER 30, 2017
|
|
|
164,305,883
|
|
|
$
|
1,643,059
|
|
|
$
|
152,062,967
|
|
|
$
|
(149,171,900
|
)
|
|
$
|
(2,148,860
|
)
|
|
$
|
2,842,994
|
|
|
$
|
5,228,260
|
|
See
accompanying notes to the unaudited condensed consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Six
months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(584,596
|
)
|
|
$
|
(1,085,557
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
391,235
|
|
|
|
507,097
|
|
Provision
for doubtful accounts
|
|
|
30,812
|
|
|
|
23,100
|
|
Amortization
of deferred financing costs
|
|
|
38,960
|
|
|
|
89,608
|
|
Deferred
income tax expense, net
|
|
|
670
|
|
|
|
(74,076
|
)
|
Net
income from equity investment in non-consolidated affiliate
|
|
|
(71,595
|
)
|
|
|
(23,320
|
)
|
Effect
of changes in foreign exchange
|
|
|
32,308
|
|
|
|
(76,488
|
)
|
Stock-based
compensation expense
|
|
|
979,816
|
|
|
|
762,497
|
|
Accrued
interest included in note payable balance
|
|
|
5,289
|
|
|
|
5,289
|
|
Addition
to provision for obsolete inventory
|
|
|
50,000
|
|
|
|
100,000
|
|
Changes
in operations, assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
712,811
|
|
|
|
(1,235,903
|
)
|
Due
from affiliates
|
|
|
—
|
|
|
|
531
|
|
Inventory
|
|
|
(4,363,236
|
)
|
|
|
(828,416
|
)
|
Prepaid
expenses and other current assets
|
|
|
(409,020
|
)
|
|
|
(351,239
|
)
|
Other
assets
|
|
|
(32,401
|
)
|
|
|
(43,725
|
)
|
Accounts
payable and accrued expenses
|
|
|
2,891,322
|
|
|
|
700,370
|
|
Due
to shareholders and affiliates
|
|
|
301,444
|
|
|
|
543,796
|
|
|
|
|
|
|
|
|
|
|
Total
adjustments
|
|
|
558,415
|
|
|
|
99,121
|
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(26,181
|
)
|
|
|
(986,436
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of
equipment
|
|
|
(84,251
|
)
|
|
|
(164,840
|
)
|
Acquisition
of intangible assets
|
|
|
(22,265
|
)
|
|
|
—
|
|
Investment
in non-consolidated affiliate, at equity
|
|
|
(156,000
|
)
|
|
|
—
|
|
Change
in restricted cash
|
|
|
(12
|
)
|
|
|
(7,190
|
)
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(262,528
|
)
|
|
|
(172,030
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
payments (borrowings) on credit facility
|
|
|
(194,909
|
)
|
|
|
241,913
|
|
Payments
for costs of stock issuance
|
|
|
—
|
|
|
|
(14,355
|
)
|
Proceeds
from exercise of common stock options
|
|
|
182,139
|
|
|
|
181,245
|
|
|
|
|
|
|
|
|
|
|
NET
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
|
|
|
(12,770
|
)
|
|
|
408,803
|
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF FOREIGN CURRENCY TRANSLATION
|
|
|
12,960
|
|
|
|
(1,286
|
)
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(288,519
|
)
|
|
|
(750,949
|
)
|
CASH
AND CASH EQUIVALENTS — BEGINNING
|
|
|
611,048
|
|
|
|
1,430,532
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS — ENDING
|
|
$
|
322,529
|
|
|
$
|
679,583
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
|
Schedule
of non-cash financing activities
|
|
|
|
|
|
|
|
|
Conversion
of 5% convertible note to common stock
|
|
$
|
25,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
1,685,662
|
|
|
$
|
551,428
|
|
Income
taxes paid
|
|
$
|
669,500
|
|
|
$
|
1,010,780
|
|
See
accompanying notes to the unaudited condensed consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements
NOTE
1 —
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements do not include all of the information and footnote disclosures
normally included in financial statements prepared in accordance with the rules and regulations of the Securities and Exchange
Commission (“SEC”) and U.S. generally accepted accounting principles (“GAAP”) and, in the opinion of management,
contain all adjustments (which consist of only normal recurring adjustments) necessary for a fair presentation of such financial
information. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal
years. The condensed consolidated balance sheet as of March 31, 2017 is derived from the March 31, 2017 audited financial statements.
These unaudited condensed consolidated financial statements should be read in conjunction with Castle Brands Inc.’s (the
“Company”) audited consolidated financial statements for the fiscal year ended March 31, 2017 included in the Company’s
annual report on Form 10-K for the year ended March 31, 2017, as amended (“2017 Form 10-K”). Please refer to the notes
to the audited consolidated financial statements included in the 2017 Form 10-K for additional disclosures and a description of
accounting policies.
|
A.
|
Description
of business
— The consolidated financial statements include the accounts of the Company, its wholly-owned domestic
subsidiaries, Castle Brands (USA) Corp. (“CB-USA”) and McLain & Kyne, Ltd. (“McLain & Kyne”),
the Company’s wholly-owned foreign subsidiaries, Castle Brands Spirits Group Limited (“CB-IRL”) and Castle
Brands Spirits Marketing and Sales Company Limited, and the Company’s 80.1% ownership interest in Gosling-Castle Partners
Inc. (“GCP”), with adjustments for income or loss allocated based upon percentage of ownership. The accounts of
the subsidiaries have been included as of the date of acquisition. All significant intercompany transactions and balances
have been eliminated.
|
|
|
|
|
B.
|
Liquidity
– The Company believes that its current cash and working capital and the availability under the Credit Facility
(as defined in Note 7C) will enable it to fund its obligations until it achieves profitability, ensure continuity of supply
of its brands and support new brand initiatives and marketing programs through at least November 2018.
|
|
|
|
|
C.
|
Organization
and operations
— The Company is principally engaged in the importation, marketing and sale of premium and super
premium rums, whiskey, liqueurs, vodka, tequila and related non-alcoholic beverage products in the United States, Canada,
Europe and Asia.
|
|
|
|
|
D.
|
Equity
investments
— Equity investments are carried at original cost adjusted for the Company’s proportionate share
of the investees’ income, losses and distributions. The Company assesses the carrying value of its equity investments
when an indicator of a loss in value is present and records a loss in value of the investment when the assessment indicates
that an other-than-temporary decline in the investment exists. The Company classifies its equity earnings of equity investments
as a component of net income or loss.
|
|
|
|
|
E.
|
Goodwill
and other intangible assets
— Goodwill represents the excess of purchase price including related costs over the
value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill and other identifiable
intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually, or more frequently
if circumstances indicate a possible impairment may exist. Intangible assets with estimable useful lives are amortized over
their respective estimated useful lives, generally on a straight-line basis, and are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying value may not be recoverable.
|
|
|
|
|
F.
|
Impairment
of long-lived assets
— Under Accounting Standards Codification (“ASC”) 310, “Accounting for the
Impairment or Disposal of Long-lived Assets”, the Company periodically reviews whether changes have occurred that would
require revisions to the carrying amounts of its definite lived, long-lived assets. When the sum of the expected future cash
flows is less than the carrying amount of the asset, an impairment loss is recognized based on the fair value of the asset.
|
|
|
|
|
G.
|
Excise
taxes and duty
— Excise taxes and duty are computed at standard rates based on alcohol proof per gallon/liter and
are paid after finished goods are imported into the United States or other relevant jurisdiction and then transferred out
of “bond.” Excise taxes and duty are recorded to inventory as a component of the cost of the underlying finished
goods. When the underlying products are sold “ex warehouse”, the sales price reflects the taxes paid and the inventoried
excise taxes and duties are charged to cost of sales.
|
|
|
|
|
H.
|
Foreign
currency
— The functional currency for the Company’s foreign operations is the Euro in Ireland and the British
Pound in the United Kingdom. Under ASC 830, “Foreign Currency Matters”, the translation from the applicable foreign
currencies to U.S. Dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date
and for revenue and expense accounts using a weighted average exchange rate during the period. The resulting translation adjustments
are recorded as a component of other comprehensive income. Gains or losses resulting from foreign currency transactions are
shown as a separate line item in the consolidated statements of operations.
|
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
|
I.
|
Fair
value of financial instruments
— ASC 825, “Financial Instruments”, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties and requires
disclosure of the fair value of certain financial instruments. The Company believes that there is no material difference between
the fair-value and the reported amounts of financial instruments in the Company’s balance sheets due to the short term
maturity of these instruments, or with respect to the Company’s debt, as compared to the current borrowing rates available
to the Company.
|
The
Company’s investments are reported at fair value in accordance with authoritative guidance, which accomplishes the following
key objectives:
|
-
|
Defines
fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date;
|
|
-
|
Establishes
a three-level hierarchy (“valuation hierarchy”) for fair value measurements;
|
|
-
|
Requires
consideration of the Company’s creditworthiness when valuing liabilities; and
|
|
-
|
Expands
disclosures about instruments measured at fair value.
|
The
valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. The three levels of the valuation hierarchy are as follows:
|
-
|
Level
1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active
markets.
|
|
-
|
Level
2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets,
and inputs that are directly or indirectly observable for the asset or liability for substantially the full term of the financial
instrument.
|
|
-
|
Level
3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
|
J.
|
Income
taxes
— Under ASC 740, “Income Taxes”, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. A valuation allowance is provided to the extent a deferred tax asset is not considered recoverable.
|
|
|
|
|
|
The
Company has adopted the provisions of ASC 740 and as of March 31, 2017, the Company had
reserves for uncertain tax positions (including related interest and penalties) for various
state and local tax issues of $20,666. The Company recognizes interest and penalties
related to uncertain tax positions in general and administrative expense.
The
Company’s income tax expense for the three months ended September 30, 2017 and 2016 consists of federal, state and
local taxes. In connection with the investment in GCP, the Company recorded a deferred tax liability on the ascribed value
of the acquired intangible assets of $2,222,222, increasing the value of the asset. For the three months ended September
30, 2017 and September 30, 2016, the Company recognized ($25,335) and ($477,962) of income tax expense, net, respectively,
and ($43,748) and ($688,775) of income tax expense, net, respectively for the six months ended September 30, 2017 and
September 30, 2016. GCP is currently under a tax audit by New York State for the tax year ended March 31, 2016.
|
|
|
|
|
K.
|
Recent
accounting pronouncements
— In May 2017, the FASB issued ASU 2017-09, “Compensation — Stock Compensation
(Topic 718): Scope of Modification Accounting.” ASU 2017-09 provides guidance about which changes to the terms or conditions
of a share-based payment award require an entity to apply modification accounting. This guidance is effective for the Company
as of April 1, 2018, with early adoption permitted. The Company is currently evaluating the new guidance to determine the
impact the adoption of this guidance will have on the Company’s results of operations, cash flows and financial condition.
|
|
|
|
|
|
In
February 2017, the FASB issued ASU 2017-05, “Other Income — Gains and Losses from the Derecognition of Nonfinancial
Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial
Assets.” ASU 2017-05 clarifies the scope and accounting of a financial asset that meets the definition of an “in-substance
nonfinancial asset” and defines the term “in-substance nonfinancial asset.” ASU 2017-05 also adds guidance
for partial sales of nonfinancial assets. This guidance is effective for the Company as of April 1, 2018, with early adoption
permitted. The Company is currently evaluating the new guidance to determine the impact the adoption of this guidance will
have on the Company’s results of operations, cash flows and financial condition.
|
|
|
|
|
|
In
January 2017, the FASB issued ASU 2017-04, “Intangibles — Goodwill and Other: Simplifying the Test for Goodwill
Impairment (Topic 350).” ASU 2017-04 removes Step 2 from the goodwill impairment test. This guidance is effective for
the Company as of April 1, 2020, with early adoption permitted. The Company is currently evaluating the new guidance to determine
the impact the adoption of this guidance will have on the Company’s results of operations, cash flows and financial
condition.
|
|
|
In
January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.”
This ASU, which must be applied prospectively, provides a narrower framework to be used to determine if a set of assets and activities
constitutes a business than under current guidance and is generally expected to result in greater consistency in the application
of ASC Topic 805, Business Combinations. This guidance is effective for the Company as of April 1, 2018, with early adoption permitted.
The Company is currently evaluating the new guidance to determine the impact the adoption of this guidance will have on the Company’s
results of operations, cash flows and financial condition.
In
November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the
FASB’s Emerging Issues Task Force (the “Task Force”).” The new standard requires that the statement of
cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted
cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and
disclose the nature of the restrictions. This guidance is effective for the Company as of April 1, 2018, with early adoption permitted.
The Company is currently evaluating the new guidance to determine the impact the adoption of this guidance will have on the Company’s
results of operations, cash flows and financial condition.
In
October 2016, the FASB issued ASU 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other than Inventory.”
This ASU removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity
transfers of assets other than inventory. This guidance is effective for the Company as of April 1, 2018, with early adoption
permitted. Entities must apply a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of
the beginning of the period of adoption. The Company is currently evaluating the new guidance to determine the impact the adoption
of this guidance will have on the Company’s results of operations, cash flows and financial condition.
In
August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash
Payments”, which provides guidance on eight cash flow classification issues with the objective of reducing differences in
practice. The new standard is effective for the Company as of April 1, 2018, with early adoption permitted. Adoption is required
to be on a retrospective basis, unless impracticable for any of the amendments, in which case a prospective application is permitted.
The Company is currently evaluating the new guidance to determine the impact the adoption of this guidance will have on the Company’s
results of operations, cash flows and financial condition.
In
March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which simplifies
several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes and
statutory tax withholding requirements, as well as classification in the statement of cash flows. The new standard is effective
for the Company as of April 1, 2017. The Company is currently evaluating the new guidance to determine the impact the adoption
of this guidance will have on the Company’s results of operations, cash flows and financial condition.
In
February 2016, the FASB issued ASU 2016-02, “Leases.” 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 the Company as of April 1, 2019. 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. The Company is currently evaluating
the new guidance to determine the impact the adoption of this guidance will have on the Company’s results of operations,
cash flows and financial condition.
In
January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities”, which amends the guidance in U.S. GAAP on the classification and measurement
of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities
under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU
clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized
losses on available-for-sale debt securities. The new standard is effective for the Company as of April 1, 2018, and upon adoption,
an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the
first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record
fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other
comprehensive income. The Company is currently evaluating the new guidance to determine the impact the adoption of this guidance
will have on the Company’s results of operations, cash flows and financial condition.
In
July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”, which changes
the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Net realizable
value is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for the Company as of April
1, 2017, with early adoption permitted. The Company determined that the adoption of this guidance did not have a material effect
on the Company’s results of operations, cash flows and financial condition.
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, to clarify the principles for
recognizing revenue. This guidance includes the required steps to achieve the core principle that an entity should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. This guidance is effective for the Company as of April 1, 2018.
The Company is currently evaluating the new guidance to determine the impact the adoption of this guidance will have on the Company’s
results of operations, cash flows and financial condition.
The Company does not believe that any other recently issued, but not yet effective, accounting standards,
if currently adopted, would have a material effect on the accompanying condensed consolidated financial statements.
|
|
|
|
|
L.
|
Accounting
standards adopted
— In March 2016, the Financial Accounting Standards Board
(“FASB”) issued ASU 2016-09, “Improvements to Employee Share-Based
Payment Accounting”, which simplifies several aspects of the accounting for employee
share-based payment transactions, including the accounting for income taxes and statutory
tax withholding requirements, as well as classification in the statement of cash flows.
The guidance became effective for the Company beginning April 1, 2017. The Company determined
that the adoption of this guidance did not have a material effect on the Company’s
results of operations, cash flows and financial condition.
In
July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”,
which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable
value. Net realizable value is defined as estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation. The new guidance has been applied on a prospective
basis and became effective for the Company as of April 1, 2017. The Company determined that the adoption of this guidance
did not have a material effect on the Company’s results of operations, cash flows and financial condition.
|
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
NOTE
2 —
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic
net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during
the period. Diluted net loss per common share is computed giving effect to all potentially dilutive common shares that were outstanding
during the period that are not anti-dilutive. Potentially dilutive common shares consist of incremental shares issuable upon exercise
of stock options, vesting of restricted shares or conversion of convertible notes outstanding. In computing diluted net loss per
share for the three months ended September 30, 2017 and 2016, no adjustment has been made to the weighted average outstanding
common shares as the assumed exercise of outstanding options and warrants, the assumed vesting of restricted shares and the assumed
conversion of convertible notes is anti-dilutive.
Potential
common shares not included in calculating diluted net loss per share are as follows:
|
|
Three
months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Stock
options
|
|
|
15,523,008
|
|
|
|
16,339,086
|
|
Unvested
restricted stock
|
|
|
1,092,000
|
|
|
|
—
|
|
5%
Convertible notes
|
|
|
1,833,333
|
|
|
|
1,861,111
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,448,341
|
|
|
|
18,200,197
|
|
NOTE
3 —
INVENTORIES
|
|
September
30, 2017
|
|
|
March
31, 2017
|
|
Raw
materials
|
|
$
|
18,543,553
|
|
|
$
|
16,714,225
|
|
Finished
goods – net
|
|
|
15,634,518
|
|
|
|
13,086,855
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,178,071
|
|
|
$
|
29,801,080
|
|
As
of September 30, and March 31, 2017, 8% and 9%, respectively, of raw materials and 5% and 7%, respectively, of finished goods
were located outside of the United States.
In
the six months ended September 30, 2017, the Company acquired $3,583,686 of bulk bourbon whiskey in support of its anticipated
near and mid-term needs.
The
Company estimates the allowance for obsolete and slow-moving inventory based on analyses and assumptions including, but not limited
to, historical usage, expected future demand and market requirements.
Inventories
are stated at the lower of weighted average cost or market.
NOTE
4 —
EQUITY INVESTMENT
Investment
in Gosling-Castle Partners Inc., consolidated
In
March 2017, the Company entered into a Stock Purchase Agreement (“Purchase Agreement”) with Gosling’s Limited
(“GL”) and E. Malcolm B. Gosling (“Gosling,” and together with GL, the “Sellers”). Pursuant
to the terms of the Purchase Agreement, the Company acquired an additional 201,000 shares (the “GCP Share Acquisition”)
of the common stock of GCP, representing a 20.1% equity interest in GCP. GCP is a strategic global export venture between the
Company and the Gosling family. As a result of the completion of the GCP Share Acquisition, the Company’s total equity interest
in GCP increased to 80.1%. The consideration for the GCP Share Acquisition was (i) $20,000,000 in cash and (ii) 1,800,000 shares
of common stock of the Company.
The
Company accounted for this transaction in accordance with ASC 810 “Consolidation,” and in particular section 810-10-45.
Under the relevant guidance, a parent accounts for such changes in its ownership interest in a subsidiary as equity transactions.
The parent cannot recognize a gain or loss in consolidated net income or comprehensive income for such transactions and is not
permitted to step up a portion of the subsidiary’s net assets to fair value for the additional interests acquired. Any difference
between the fair value of the consideration paid and the amount by which the noncontrolling interest is adjusted shall be recognized
in equity attributable to the parent. As a result, the Company reduced the carrying amount of the noncontrolling interest by $2,232,824,
with the $20,215,176 excess of the cash and stock paid over the adjustment to the carrying amount of the noncontrolling interest
recognized as a decrease in the Company’s additional paid-in capital.
For
the three months ended September 30, 2017 and 2016, GCP had pretax net income on a stand-alone basis of $1,425,534 and $1,005,101,
respectively. The Company allocated a portion of this net income, or $283,681 and $402,040, to non-controlling interest for the
three months ended September 30, 2017 and 2016, respectively. For the six months ended September 30, 2017 and 2016, GCP had pretax
net income on a stand-alone basis of $1,851,541 and $1,641,204, respectively. The Company allocated a portion of this net income,
or $368,457 and $656,482, to non-controlling interest for the three months ended September 30, 2017 and 2016, respectively. The
cumulative balance allocated to noncontrolling interests in GCP was $2,842,994 and $2,479,512 at September 30 and March 31, 2017,
respectively, as shown on the accompanying condensed consolidated balance sheets.
Investment
in Copperhead Distillery Company, equity method
In
June 2015, CB-USA purchased 20% of Copperhead Distillery Company (“Copperhead”) for $500,000. Copperhead owns and
operates the Kentucky Artisan Distillery. The investment was part of an agreement to build a new warehouse to store Jefferson’s
bourbons, provide distilling capabilities using special mash-bills made from locally grown grains and create a visitor center
and store to enhance the consumer experience for the Jefferson’s brand. The investment has been used for the construction
of a new warehouse in Crestwood, Kentucky dedicated to the storage of Jefferson’s whiskies. In September 2017, CB-USA purchased
an additional 5% of Copperhead for $156,000 from an existing shareholder. Copperhead owns and operates the Kentucky Artisan Distillery.
The Company has accounted for this investment under the equity method of accounting. For the three months ended September 30,
2017 and 2016, the Company recognized $29,846 and $18,837 of income from this investment, respectively. For the six months ended
September 30, 2017 and 2016, the Company recognized $71,595 and $23,320 of income from this investment, respectively. The investment
balance was $797,691 and $570,097 at September 30 and March 31, 2017, respectively.
NOTE
5 —
GOODWILL AND INTANGIBLE ASSETS
The
carrying amount of goodwill was $496,226 at each of September 30 and March 31, 2017.
Intangible
assets consist of the following:
|
|
September
30, 2017
|
|
|
March
31, 2017
|
|
Definite
life brands
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Trademarks
|
|
|
641,693
|
|
|
|
631,693
|
|
Rights
|
|
|
8,271,555
|
|
|
|
8,271,555
|
|
Product
development
|
|
|
198,933
|
|
|
|
186,668
|
|
Patents
|
|
|
994,000
|
|
|
|
994,000
|
|
Other
|
|
|
55,460
|
|
|
|
55,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,331,641
|
|
|
|
10,309,376
|
|
Less:
accumulated amortization
|
|
|
8,258,613
|
|
|
|
8,035,018
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
2,073,028
|
|
|
|
2,274,358
|
|
Other
identifiable intangible assets — indefinite lived*
|
|
|
4,112,972
|
|
|
|
4,112,972
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,186,000
|
|
|
$
|
6,387,330
|
|
*
Other identifiable intangible assets — indefinite lived consists of product formulations and the Company’s relationships
with its distillers.
Accumulated
amortization consists of the following:
|
|
September
30, 2017
|
|
|
March
31, 2017
|
|
Definite
life brands
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Trademarks
|
|
|
385,160
|
|
|
|
367,294
|
|
Rights
|
|
|
6,785,683
|
|
|
|
6,617,062
|
|
Product
development
|
|
|
41,150
|
|
|
|
34,478
|
|
Patents
|
|
|
876,320
|
|
|
|
843,184
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
$
|
8,258,613
|
|
|
$
|
8,035,018
|
|
NOTE
6 —
RESTRICTED CASH
At
September 30 and March 31, 2017, the Company had €310,315 or $366,420 (translated at the September 30, 2017 exchange rate)
and €310,305 or $331,455 (translated at the March 31, 2017 exchange rate), respectively, of cash restricted from withdrawal
and held by a bank in Ireland as collateral for overdraft coverage, creditors’ insurance, customs and excise guaranty and
a revolving credit facility as described in Note 7A below.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
NOTE
7 —
NOTES PAYABLE
|
|
September
30, 2017
|
|
|
March
31, 2017
|
|
Notes
payable consist of the following:
|
|
|
|
|
|
|
|
|
Foreign
revolving credit facilities (A)
|
|
$
|
—
|
|
|
$
|
—
|
|
Note
payable – GCP note (B)
|
|
|
216,869
|
|
|
|
211,580
|
|
Credit
facility (C)
|
|
|
12,938,215
|
|
|
|
13,133,124
|
|
5%
Convertible notes (D)
|
|
|
1,650,000
|
|
|
|
1,675,000
|
|
11%
Subordinated Note (E)
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,805,084
|
|
|
$
|
35,019,704
|
|
|
A.
|
The
Company has arranged various credit facilities aggregating €310,315 or $366,420 (translated at the September 30, 2017
exchange rate) with an Irish bank, including overdraft coverage, creditors’ insurance, customs and excise guaranty,
a revolving credit facility and Company credit cards. These credit facilities are payable on demand, continue until terminated
by either party, are subject to annual review, and call for interest at the lender’s AA1 Rate minus 1.70%. The balance
on the credit facilities included in notes payable totaled €0 at each of September 30 and March 31, 2017.
|
|
|
|
|
B.
|
In
December 2009, GCP issued a promissory note (the “GCP Note”) in the aggregate principal amount of $211,580 to
Gosling’s Export (Bermuda) Limited in exchange for credits issued on certain inventory purchases. The GCP Note matures
on April 1, 2020, is payable at maturity, subject to certain acceleration events, and calls for annual interest of 5%, to
be accrued and paid at maturity. At March 31, 2017, $10,579 of accrued interest was converted to amounts due to affiliates.
At September 30, 2017, $216,869, consisting of $211,580 of principal and $5,289 of accrued interest, due on the GCP Note is
included in long-term liabilities. At March 31, 2017, $211,580 of principal due on the GCP Note is included in long-term liabilities.
|
|
|
|
|
C.
|
In
August 2011, the Company and CB-USA entered into a loan agreement with Keltic Financial Partners II, LP (“Keltic”),
which, as amended, provides for availability (subject to certain terms and conditions) of a facility of up to $19.0 million
(the “Credit Facility”) for the purpose of providing the Company with working capital.
|
In
September 2014, the Company and CB-USA entered into an Amended and Restated Loan and Security Agreement (as amended, the “Amended
Agreement”) with ACF FinCo I LP (“ACF”), as successor in interest to Keltic, in order to amend certain terms
of the Credit Facility and the Bourbon Term Loan (defined below). Among other changes, the Amended Agreement modified certain
aspects of the existing Credit Facility, including increasing the maximum amount of the Credit Facility from $8,000,000 to $12,000,000
and increasing the inventory sub-limit from $4,000,000 to $6,000,000. In addition, the term of the Credit Facility was extended
from December 31, 2016 to July 31, 2019. The Credit Facility interest rate is the rate that, when annualized, is the greatest
of (a) the Prime Rate plus 3.00%, (b) the LIBOR Rate plus 5.50% and (c) 6.00%. As of September 30, 2017, the Credit Facility interest
rate was 6.75%. The monthly facility fee is 0.75% per annum of the maximum Credit Facility. The Amended Agreement contains EBITDA
targets allowing for further interest rate reductions in the future. The Company paid ACF an aggregate $120,000 amendment fee
in connection with the execution of the Amended Agreement.
In
connection with the amendment, the Company and CB-USA entered into the following ancillary agreements: (i) a Reaffirmation Agreement
with (a) certain officers of the Company and CB-USA, including John Glover, the Company’s Chief Operating Officer, T. Kelley
Spillane, the Company’s Senior Vice President - Global Sales, and Alfred J. Small, the Company’s Senior Vice President,
Chief Financial Officer, Treasurer and Secretary, (b) certain participants in the Bourbon Term Loan and (c) certain junior lenders
to the Company, including Frost Gamma Investments Trust, an entity affiliated with Phillip Frost, M.D., a director and principal
shareholder of the Company, Mark E. Andrews, III, a director of the Company and the Company’s Chairman, an affiliate of
Richard J. Lampen, a director of the Company and the Company’s President and Chief Executive Officer, an affiliate of Glenn
Halpryn, a former director of the Company, Dennis Scholl, a former director of the Company, and Vector Group Ltd., a more than
5% shareholder of the Company, of which Richard Lampen is an executive officer, Henry Beinstein, a director of the Company, and
Phillip Frost M.D., a principal shareholder and director, which, among other things, reaffirms the existing Validity and Support
Agreements by and among each officer, the Company, CB-USA and ACF, as successor-in-interest to Keltic; (ii) an Amended and Restated
Term Note; and (iii) an Amended and Restated Revolving Credit Note.
In
connection with the Amended Agreement, on September 22, 2014, ACF entered into an amendment to that certain Subordination Agreement,
dated as of August 7, 2013 (as amended, the “Subordination Agreement”), by and among ACF, as successor-in-interest
to Keltic, and certain junior lenders to the Company; neither the Company nor CB-USA is a party to the Subordination Agreement.
In
August 2015, the Company and CB-USA entered into a First Amendment (the “Loan Agreement Amendment”) to the Amended
Agreement. Among other changes, the Loan Agreement Amendment increased the amount of the Credit Facility from $12,000,000 to $19,000,000,
including a sublimit in the maximum principal amount of $7,000,000 to permit the Company to acquire aged whiskey inventory (the
“Purchased Inventory Sublimit”) subject to certain conditions set forth in the Amended Agreement. The maturity date
remained unchanged at July 31, 2019. The Company and CB-USA are permitted to prepay the Credit Facility in whole or the Purchased
Inventory Sublimit, in whole or in part, subject to certain prepayment penalties as set forth in the Loan Agreement Amendment.
The Purchased Inventory Sublimit replaces the Bourbon Term Loan, which was paid in full in the normal course of business. The
Purchased Inventory Sublimit interest rate is the rate that, when annualized, is the greatest of (a) the Prime Rate plus 4.25%,
(b) the LIBOR Rate plus 6.75% and (c) 7.50%. As of September 30, 2017, the interest rate applicable to the Purchased Inventory
Sublimit was 8.5%. The monthly facility fee remains 0.75% per annum of the maximum principal amount of the Credit Facility (excluding
the Purchased Inventory Sublimit). Also, the Company must pay a monthly facility fee of $2,000 with respect to the Purchased Inventory
Sublimit until all obligations with respect thereof are fully paid and performed. The Company paid ACF an aggregate $45,000 commitment
fee in connection with the Loan Agreement Amendment.
In
connection with the Loan Agreement Amendment, the Company and CB-USA entered into the following ancillary agreements: (i) a Reaffirmation
Agreement with (a) certain officers of the Company and CB-USA, including John Glover, T. Kelley Spillane and Alfred J. Small and
(b) certain junior lenders to the Company, including Frost Gamma Investments Trust, Mark E. Andrews, III, an affiliate of Richard
J. Lampen, an affiliate of Glenn Halpryn, Dennis Scholl and Vector Group Ltd., which, among other things, reaffirms the existing
Validity and Support Agreements by and among each officer, the Company, CB-USA and ACF and (ii) an Amended and Restated Revolving
Credit Note.
ACF
also required as a condition to entering into the Loan Agreement Amendment that ACF enter into a participation agreement with
certain related parties of the Company, including Frost Gamma Investments Trust, Mark E. Andrews, III, Richard J. Lampen and Alfred
J. Small, to allow for the sale of participation interests in the Purchased Inventory Sublimit and the inventory purchased with
the proceeds thereof. The participation agreement provides that ACF’s commitment to fund each advance of the Purchased Inventory
Sublimit shall be limited to seventy percent (70%), up to an aggregate maximum principal amount for all advances equal to $4,900,000.
Neither the Company nor CB-USA is a party to the participation agreement. However, the Company and CB-USA are party to a fee letter
with the junior participants (including the related party junior participants) pursuant to which the Company and CB-USA were obligated
to pay the junior participants a closing fee of $18,000 on the effective date of the Loan Agreement Amendment and are obligated
to pay a commitment fee of $18,000 on each anniversary of the effective date until the junior participants’ obligations
are terminated pursuant to the participation agreement.
The
Company and CB-USA are referred to individually and collectively as the Borrower. Pursuant to the Loan Agreement Amendment, the
Company and CB-USA may borrow up to the lesser of (x) $19,000,000 and (y) the sum of the borrowing base calculated in accordance
with the Amended Agreement and the Purchased Inventory Sublimit. For the six months ended September 30, 2017, the Company paid
interest at 6.5% through June 14, 2017, then 6.75% through September 30, 2017 on the Amended Agreement. For the six months ended
September 30, 2017, the Company paid interest at 8.25% through June 14, 2017, and then at 8.5% through September 30, 2017 on the
Purchased Inventory Sublimit. Interest is payable monthly in arrears, on the first day of every month on the average daily unpaid
principal amount of the Credit Facility. After the occurrence and during the continuance of any “Default” or “Event
of Default” (as defined under the Amended Agreement), the Borrower is required to pay interest at a rate that is 3.25% per
annum above the then applicable Credit Facility interest rate. There have been no Events of Default under the Credit Facility.
ACF also receives a collateral management fee of $1,000 per month (increased to $2,000 after the occurrence of and during the
continuance of an Event of Default) in addition to the facility fee with respect to the Purchased Inventory Sublimit. The Amended
Agreement contains standard borrower representations and warranties for asset-based borrowing and a number of reporting obligations
and affirmative and negative covenants. The Amended Agreement includes negative covenants that, among other things, restrict the
Borrower’s ability to create additional indebtedness, dispose of properties, incur liens and make distributions or cash
dividends. The obligations of the Borrower under the Loan Agreement Amendment are secured by the grant of a pledge and security
interest in all of the assets of the Borrower. At September 30, 2017, the Company was in compliance, in all respects, with the
covenants under the Amended Agreement.
In
August 2015, the Company used $3,000,000 of the Purchased Inventory Sublimit to acquire aged bourbon inventory. Frost Gamma Investments
Trust ($150,000), Mark E. Andrews, III ($50,000), Richard J. Lampen ($100,000) and Alfred J. Small ($15,000) each acquired participation
interests in the Purchased Inventory Sublimit and the inventory purchased with the proceeds thereof. In January 2017, the Company
acquired $1,030,000 in aged bulk bourbon under the Purchased Inventory Sublimit with additional borrowings from certain related
parties of the Company, including Frost Gamma Investments Trust ($51,500), Richard J. Lampen ($34,333), Mark E. Andrews, III ($17,167),
Brian L. Heller ($14,592), and Alfred J. Small ($5,150), as junior participants in the Purchased Inventory Sublimit with respect
to such purchase. Under the terms of the participation agreement, the participants receive interest at the rate of 11% per annum.
At
September 30 and March 31, 2017, $12,938,215 and $13,133,124, respectively, due on the Credit Facility was included in long-term
liabilities. At September 30 and March 31, 2017, there was $6,061,785 and $5,866,876, respectively, in potential availability
under the Credit Facility. In connection with the adoption of ASU 2015-03, the Company included $89,386 and $100,049 of debt issuance
costs at September 30 and March 31, 2017, respectively, as direct deductions from the carrying amount of the related debt liability.
In
October 2017, the Company and CB-USA entered into a Third Amendment (the “Third Amendment”) to the Amended Agreement
to amend certain terms of the Company’s existing Credit Facility with ACF. Among other changes, the Third Amendment increases
the maximum amount of the Credit Facility from $19,000,000 to $21,000,000, and amends the definition of borrowing base to increase
the amount of borrowing that can be collateralized by inventory. The Company and CB-USA paid ACF an aggregate $20,000 commitment
fee in connection with the Amendment. In connection with the Amendment, the Company and CB-USA also entered into an Amended and
Restated Revolving Credit Note.
|
D.
|
In
October 2013, the Company entered into a 5% Convertible Subordinated Note Purchase Agreement (the “Note Purchase Agreement”)
with the purchasers party thereto, under which the Company issued an aggregate initial principal amount of $2,125,000 of unsecured
subordinated notes (the “Convertible Notes”). The Convertible Notes bear interest at a rate of 5% per annum, payable
quarterly, until their maturity date of December 15, 2018. The Convertible Notes, and accrued but unpaid interest thereon,
are convertible in whole or in part from time to time at the option of the holders thereof into shares of the Company’s
common stock at a conversion price of $0.90 per share (the “Conversion Price”). The Convertible Notes may be prepaid
in whole or in part at any time without penalty or premium, but with payment of accrued interest to the date of prepayment.
The Convertible Notes contain customary events of default, which, if uncured, entitle each note holder to accelerate the due
date of the unpaid principal amount of, and all accrued and unpaid interest on, the Convertible Notes.
|
The
purchasers of the Convertible Notes included related parties of the Company, including an affiliate of Dr. Phillip Frost ($500,000),
Mark E. Andrews, III ($50,000), an affiliate of Richard J. Lampen ($50,000), an affiliate of Glenn Halpryn ($200,000), Dennis
Scholl ($100,000), and Vector Group Ltd. ($200,000).
The
Company may forcibly convert all or any part of the Convertible Notes and all accrued but unpaid interest thereon if (i) the average
daily volume of the Company’s common stock (as reported on the principal market or exchange on which the common stock is
listed or quoted for trading) exceeds $50,000 per trading day and (ii) the volume weighted average price of the common stock for
at least twenty (20) trading days during any thirty (30) consecutive trading day period exceeds 250% of the then-current Conversion
Price. Any forced conversion will be applied ratably to the holders of all Convertible Notes issued pursuant to the Note Purchase
Agreement based on each holder’s then-current note holdings.
In
connection with the Note Purchase Agreement, each purchaser of the Convertible Notes was required to execute a joinder to the
subordination agreement, by and among ACF and certain other junior lenders to the Company; the Company is not a party to the Subordination
Agreement.
At
September 30, and March 31, 2017, $1,650,000 and $1,675,000 of principal due on the Convertible Notes was included in long-term
liabilities, respectively.
|
E.
|
In
March 2017, the Company issued a promissory note to Frost Nevada Investments Trust (the “Holder”), an entity affiliated
with Phillip Frost, M.D., in the aggregate principal amount of $20,000,000 (the “Subordinated Note”). The purpose
of Company’s issuance of the Subordinated Note was to finance the GCP Share Acquisition. The Subordinated Note bears
interest quarterly at the rate of 11% per annum. The principal and interest incurred thereon shall be due and payable in full
on March 15, 2019. All claims of the Holder to principal, interest and any other amounts owed under the Subordinated Note
are subordinated in right of payment to all indebtedness of the Company existing as of the date of the Subordinated Note.
The Subordinated Note contains customary events of default and may be prepaid by the Company, in whole or in part, without
penalty, at any time.
|
NOTE
8 —
EQUITY
Equity
distribution agreement
- In November 2014, the Company entered into an Equity Distribution Agreement (the “2014 Distribution
Agreement”) with Barrington Research Associates, Inc. (“Barrington”), as sales agent, under which the Company
could issue and sell over time and from time to time, to or through Barrington, shares (the “Shares”) of its common
stock having a gross sales price of up to $10,000,000.
The
Company did not sell any Shares pursuant to the 2014 Distribution Agreement during the six months ended September 30, 2017.
The Company did not sell any Shares pursuant to the 2014 Distribution Agreement during the six months ended September 30,
2016, but incurred $12,000 of issuance costs related to the 2014 Distribution Agreement.
The
2014 Distribution Agreement expired in August 2017 upon the expiration of the Company’s Registration Statement on Form S-3
under which the Shares were sold.
Convertible
Notes conversion
- In the six months ended September 30, 2017, a Convertible Note holder converted $25,000 of Convertible
Notes into 27,778 shares of Common Stock.
GCP
Acquisition
- As described in Note 4, in March 2017, the Company issued 1,800,000 shares of Common Stock to the Sellers in
connection with the GCP Acquisition.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
NOTE
9 —
FOREIGN CURRENCY FORWARD CONTRACTS
The
Company enters into forward contracts from time to time to reduce its exposure to foreign currency fluctuations. The Company recognizes
in the balance sheet derivative contracts at fair value, and reflects any net gains and losses currently in earnings. At September
30 and March 31, 2017, the Company had no forward contracts outstanding.
NOTE
10 —
STOCK-BASED COMPENSATION
In
April 2017, the Company granted to employees, directors and certain consultants an aggregate of 1,092,000 restricted shares of
the Company’s common stock under the Company’s 2013 Incentive Compensation Plan. The restricted shares vest 25% on
each of the first four anniversaries of the grant date. The Company has valued the shares at $1,843,078.
Stock-based
compensation expense for the three months ended September 30, 2017 and 2016 amounted to $504,490 and $410,097, respectively. Stock-based
compensation expense for the six months ended September 30, 2017 and 2016 amounted to $979,816 and $762,497, respectively. At
September 30, 2017, total unrecognized compensation cost amounted to $4,199,077, representing 4,226,500 unvested options
and 1,092,000 unvested shares of restricted stock. This cost is expected to be recognized over a weighted-average vesting period
of 2.32 years. There were 240,300 options exercised during the six months ended September 30, 2017 and 476,500 options exercised
during the six months ended September 30, 2016. The Company did not recognize any related tax benefit for the three and six months
ended September 30, 2017 and 2016 from option exercises, as the effects were de minimis.
NOTE
11 —
COMMITMENTS AND CONTINGENCIES
|
A.
|
The
Company has entered into a supply agreement with an Irish distiller (“Irish Distillery”), which provides for the
production of blended Irish whiskeys for the Company until the contract is terminated by either party in accordance with the
terms of the agreement. The Irish Distillery may terminate the contract if it provides at least six years prior notice to
the Company, except for breach. Under this agreement, the Company provides the Irish Distillery with a forecast of the estimated
amount of liters of pure alcohol it requires for the next four fiscal contract years and agrees to purchase 90% of that amount,
subject to certain annual adjustments. For the contract year ending June 30, 2018, the Company has contracted to purchase
approximately €1,017,189 or $1,201,097 (translated at the September 30, 2017 exchange rate) in bulk Irish whiskey, of
which €355,700, or $420,010 (translated at the September 30, 2017 exchange rate), has been purchased as of September
30, 2017. The Company is not obligated to pay the Irish Distillery for any product not yet received. During the term of this
supply agreement, the Irish Distillery has the right to limit additional purchases above the commitment amount.
|
|
|
|
|
B.
|
The
Company has also entered into a supply agreement with the Irish Distillery, which provides for the production of single malt
Irish whiskeys for the Company until the contract is terminated by either party in accordance with the terms of the agreement.
The Irish Distillery may terminate the contract if it provides at least thirteen years prior notice to the Company, except
for breach. Under this agreement, the Company provides the Irish Distillery with a forecast of the estimated amount of liters
of pure alcohol it requires for the next twelve fiscal contract years and agrees to purchase 80% of that amount, subject to
certain annual adjustments. For the year ending June 30, 2018, the Company has contracted to purchase approximately
€442,274 or $522,238 (translated at the September 30, 2017 exchange rate) in bulk Irish whiskey, of which €124,421,
or $146,916 (translated at the September 30, 2017 exchange rate), has been purchased as of September 30, 2017. The Company
is not obligated to pay the Irish Distillery for any product not yet received. During the term of this supply agreement, the
Irish Distillery has the right to limit additional purchases above the commitment amount.
|
|
|
|
|
C.
|
The
Company has entered into a supply agreement with a bourbon distiller, which provides for the production of newly distilled
bourbon whiskey through December 31, 2019. Under this agreement, the distiller provides the Company with an agreed upon amount
of original proof gallons of newly distilled bourbon whiskey, subject to certain annual adjustments. For the contract year
ended December 31, 2016, the Company contracted and purchased approximately $2,053,750 in newly distilled bourbon. For the
contract year ending December 31, 2017, the Company originally contracted to purchase approximately $2,464,500 in newly distilled
bourbon, $1,014,028 of which had been purchased as of September 30, 2017. The Company is not obligated to pay the distiller
for any product not yet received. During the term of this supply agreement, the distiller has the right to limit additional
purchases to ten percent above the commitment amount. In March 2017, the distiller notified the Company of its intent to terminate
the contract under its terms after the 2017 contract year, and to limit the purchase amount for the 2017 contract year to
the 2016 contract year amount. In October 2017, the Company entered into a new supply agreement with a different bourbon distiller.
|
|
|
|
|
D.
|
The
Company leases office space in New York, NY, Dublin, Ireland and Houston, TX. The New York, NY lease began on May 1, 2010
and expires on February 29, 2020 and provides for monthly payments of $26,255. The Dublin lease commenced on March 1, 2009
and extends through October 31, 2019 and provides for monthly payments of €1,500 or $1,771 (translated at the September
30, 2017 exchange rate). The Houston, TX lease commenced on April 27, 2015 and extends through June 26, 2018 and provides
for monthly payments of $3,440. The Company has also entered into non-cancelable operating leases for certain office equipment.
|
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
|
E.
|
As
described in Note 7C, in August 2011, the Company and CB-USA entered into the Credit
Facility, as amended in July 2012, March 2013, August 2013, November 2013, August 2014,
September 2014, August 2015 and October 2017.
|
|
|
|
|
F.
|
Except
as set forth below, the Company believes that neither it, nor any of its subsidiaries, is currently subject to litigation
which, in the opinion of management after consultation with counsel, is likely to have a material adverse effect on the Company.
|
The
Company may become involved in litigation from time to time relating to claims arising in the ordinary course of its business.
These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
NOTE
12 —
CONCENTRATIONS
|
A.
|
Credit
Risk
— The Company maintains its cash and cash equivalents balances at various large financial institutions that,
at times, may exceed federally and internationally insured limits. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk.
|
|
|
|
|
B.
|
Customers
— Sales to one customer, the Southern Glazer’s Wine and Spirits of America, Inc. family of companies (“SGWS”)
accounted for approximately 36.3% and 35.7% of the Company’s net sales for the three months ended September 30, 2017
and 2016, respectively. Sales to SGWS accounted for approximately 38.0% and 34.5% of the Company’s net sales for the
six months ended September 30, 2017 and 2016, respectively, and approximately 35.1% and 33.2% of accounts receivable at September
30 and March 31, 2017, respectively.
|
NOTE
13 —
GEOGRAPHIC INFORMATION
The
Company operates in one reportable segment — the sale of premium beverage alcohol. The Company’s product categories
are rum, whiskey, liqueurs, vodka, tequila and ginger beer, a related non-alcoholic beverage product. The Company reports its
operations in two geographic areas: International and United States.
The
consolidated financial statements include revenues and assets generated in or held in the U.S. and foreign countries. The following
table sets forth the amounts and percentage of consolidated sales, net, consolidated income from operations, consolidated net
income (loss) attributable to common shareholders, consolidated income tax expense and consolidated assets from the U.S. and foreign
countries and consolidated sales, net by category.
|
|
Three
months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Consolidated
Sales, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
2,177,367
|
|
|
|
10.4
|
%
|
|
$
|
2,060,044
|
|
|
|
10.5
|
%
|
United
States
|
|
|
18,716,783
|
|
|
|
89.6
|
%
|
|
|
17,567,747
|
|
|
|
89.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Sales, net
|
|
$
|
20,894,150
|
|
|
|
100.0
|
%
|
|
$
|
19,627,791
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Income (Loss) from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
15,737
|
|
|
|
1.4
|
%
|
|
$
|
(6,843
|
)
|
|
|
(2.3
|
)%
|
United
States
|
|
|
1,143,139
|
|
|
|
98.6
|
%
|
|
|
308,384
|
|
|
|
102.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Income from Operations
|
|
$
|
1,158,876
|
|
|
|
100.0
|
%
|
|
$
|
301,541
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Net Income (Loss) Attributable to Common Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
47,470
|
|
|
|
2,822.9
|
%
|
|
$
|
17,871
|
|
|
|
2.6
|
%
|
United
States
|
|
|
(49,151
|
)
|
|
|
(2,922.9
|
)%
|
|
|
(718,581
|
)
|
|
|
(102.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Net Loss Attributable to Common Shareholders
|
|
$
|
(1,681
|
)
|
|
|
100.0
|
%
|
|
$
|
(700,710
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
25,335
|
|
|
|
100.0
|
%
|
|
$
|
(477,962
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Sales, net by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whiskey
|
|
$
|
7,335,290
|
|
|
|
35.2
|
%
|
|
$
|
6,486,287
|
|
|
|
24.7
|
%
|
Rum
|
|
|
4,168,262
|
|
|
|
19.9
|
%
|
|
|
4,837,653
|
|
|
|
33.0
|
%
|
Liqueurs
|
|
|
2,579,437
|
|
|
|
12.3
|
%
|
|
|
2,560,819
|
|
|
|
13.0
|
%
|
Vodka
|
|
|
353,792
|
|
|
|
1.7
|
%
|
|
|
414,052
|
|
|
|
2.1
|
%
|
Tequila
|
|
|
84,560
|
|
|
|
0.4
|
%
|
|
|
68,731
|
|
|
|
0.4
|
%
|
Ginger
beer
|
|
|
6,372,809
|
|
|
|
30.5
|
%
|
|
|
5,260,249
|
|
|
|
26.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Sales, net
|
|
$
|
20,894,150
|
|
|
|
100.0
|
%
|
|
$
|
19,627,791
|
|
|
|
100.0
|
%
|
|
|
Six
Months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Consolidated
Sales, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
4,442,146
|
|
|
|
10.6
|
%
|
|
$
|
3,799,543
|
|
|
|
10.4
|
%
|
United
States
|
|
|
37,304,291
|
|
|
|
89.4
|
%
|
|
|
32,579,173
|
|
|
|
89.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Sales, net
|
|
$
|
41,746,437
|
|
|
|
100.0
|
%
|
|
$
|
36,378,716
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Income (Loss) from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
(13,261
|
)
|
|
|
(1.1
|
)%
|
|
$
|
(105,068
|
)
|
|
|
(73.5
|
)%
|
United
States
|
|
|
1,226,608
|
|
|
|
101.1
|
%
|
|
|
247,940
|
|
|
|
173.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Income from Operations
|
|
$
|
1,213,347
|
|
|
|
100.0
|
%
|
|
$
|
142,872
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Net Income (Loss) Attributable to Common Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
42,262
|
|
|
|
4.5
|
%
|
|
$
|
(62,134
|
)
|
|
|
4.2
|
%
|
United
States
|
|
|
(990,340
|
)
|
|
|
(104.5
|
)%
|
|
|
(1,404,395
|
)
|
|
|
95.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Net Loss Attributable to Common Shareholders
|
|
$
|
(948,078
|
)
|
|
|
100.0
|
%
|
|
$
|
(1,466,529
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
(43,748
|
)
|
|
|
100.0
|
%
|
|
|
(688,775
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Sales, net by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whiskey
|
|
$
|
14,505,777
|
|
|
|
34.8
|
%
|
|
$
|
11,985,706
|
|
|
|
32.8
|
%
|
Rum
|
|
|
8,621,765
|
|
|
|
20.7
|
%
|
|
|
9,449,569
|
|
|
|
26.0
|
%
|
Liqueur
|
|
|
4,638,346
|
|
|
|
11.1
|
%
|
|
|
4,506,191
|
|
|
|
12.4
|
%
|
Vodka
|
|
|
643,255
|
|
|
|
1.5
|
%
|
|
|
791,637
|
|
|
|
2.2
|
%
|
Tequila
|
|
|
129,736
|
|
|
|
0.3
|
%
|
|
|
127,339
|
|
|
|
0.4
|
%
|
Ginger
beer
|
|
|
13,207,558
|
|
|
|
31.6
|
%
|
|
|
9,518,274
|
|
|
|
26.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Sales, net
|
|
$
|
41,746,437
|
|
|
|
100.0
|
%
|
|
$
|
36,378,716
|
|
|
|
100.0
|
%
|
|
|
As
of September 30, 2017
|
|
|
As
of March 31, 2017
|
|
Consolidated
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
2,994,097
|
|
|
|
5.2
|
%
|
|
$
|
3,234,536
|
|
|
|
6.0
|
%
|
United
States
|
|
|
55,116,434
|
|
|
|
94.8
|
%
|
|
|
51,107,608
|
|
|
|
94.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Assets
|
|
$
|
58,110,531
|
|
|
|
100.0
|
%
|
|
$
|
54,342,144
|
|
|
|
100.0
|
%
|
*Includes
related non-beverage alcohol products.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We
develop and market premium and super premium brands in the following beverage alcohol categories: rum, whiskey, liqueurs, vodka
and tequila. We also develop and market our related non-alcoholic beverage product, Goslings Stormy Ginger Beer. We distribute
our products in all 50 U.S. states and the District of Columbia and in thirteen primary international markets, including Ireland,
Great Britain, Northern Ireland, Germany, Canada, France, Finland, Norway, Sweden, Denmark, and the Duty-Free markets. We market
the following brands, among others:
|
●
|
Goslings
rum
®
|
|
●
|
Goslings
Stormy Ginger Beer
|
|
●
|
Goslings
Dark ‘n Stormy
®
ready-to-drink cocktail
|
|
●
|
Jefferson’s
®
bourbon
|
|
●
|
Jefferson’s
Reserve
®
|
|
●
|
Jefferson’s
Ocean Aged at Sea
®
|
|
●
|
Jefferson’s
Wine Finish Collection
|
|
●
|
Jefferson’s
The Manhattan: Barrel Finished Cocktail
|
|
●
|
Jefferson’s
Chef’s Collaboration
|
|
●
|
Jefferson’s
Wood Experiment
|
|
●
|
Jefferson’s
Presidential Select™
|
|
●
|
Jefferson’s
Straight Rye whiskey
|
|
●
|
Pallini
®
liqueurs
|
|
●
|
Clontarf
®
Irish whiskey
|
|
●
|
Knappogue
Castle Whiskey
®
|
|
●
|
Brady’s
®
Irish Cream
|
|
●
|
Boru
®
vodka
|
|
●
|
Tierras™
tequila
|
|
●
|
Celtic
Honey
®
liqueur
|
|
●
|
Gozio
®
amaretto
|
|
●
|
The
Arran Malt
®
Single Malt Scotch Whisky
|
|
●
|
The
Robert Burns Scotch Whiskeys
|
|
●
|
Machrie
Moor Scotch Whiskeys
|
Our
objective is to continue building Castle Brands into a profitable international spirits company, with a distinctive portfolio
of premium and super premium brands. To achieve this, we continue to seek to:
|
●
|
focus
on our more profitable brands and markets.
We continue to focus our distribution efforts, sales expertise and targeted
marketing activities on our more profitable brands and markets;
|
|
●
|
grow
organically.
We believe that continued organic growth will enable us to achieve long-term profitability. We focus
on brands that have profitable growth potential and staying power, such as our rums, whiskies and ginger beer, sales
of which have grown substantially in recent years;
|
|
●
|
build
consumer awareness.
We use our existing assets, expertise and resources to build consumer awareness and market penetration
for our brands;
|
|
●
|
leverage
our distribution network.
Our established distribution network in all 50 U.S. states enables us to promote our brands
nationally and makes us an attractive strategic partner for smaller companies seeking U.S. distribution; and
|
|
●
|
selectively
add new brand extensions and brands to our portfolio.
We intend to continue to introduce new brand extensions and
expressions. For example, we have leveraged our successful Jefferson’s portfolio by introducing a number of brand extensions.
Additionally, we recently added the Arran Scotch whiskies to our portfolio as agency brands. We continue to explore strategic
relationships, joint ventures and acquisitions to selectively expand our premium spirits portfolio. We expect that future
acquisitions or agency relations, if any, would involve some combination of cash, debt and the issuance of our stock.
|
Recent
Events
Additional
Investment in Copperhead Distillery Company
In
October, we purchased an additional 5% of Copperhead Distillery Company, which owns and operates the Kentucky Artisan Distillery,
for $0.2 million. The additional investment brings our ownership of Copperhead Distillery Company to 25%. The Kentucky
Artisan Distillery currently has three warehouses storing Jefferson’s bourbons, provides distilling using special mash-bills
made from locally grown grains for Jefferson’s brands and houses the Jefferson’s Visitor Center and store, showcasing
the Jefferson’s brand.
Expanded
Credit Facility
In
October, we entered into a Third Amendment to our existing Credit Facility with ACF FinCo I LP. Among other changes, the Third
Amendment increased the maximum amount of the Credit Facility from $19,000,000 to $21,000,000, and amended the definition of borrowing
base to increase the amount of borrowing that can be collateralized by inventory.
Currency
Translation
The
functional currencies for our foreign operations are the Euro in Ireland and the British Pound in the United Kingdom. With respect
to our consolidated financial statements, the translation from the applicable foreign currencies to U.S. Dollars is performed
for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using
a weighted average exchange rate during the period. The resulting translation adjustments are recorded as a component of other
comprehensive income.
Where
in this report we refer to amounts in Euros or British Pounds, we have for your convenience also in certain cases provided a conversion
of those amounts to U.S. Dollars in parentheses. Where the numbers refer to a specific balance sheet account date or financial
statement account period, we have used the exchange rate that was used to perform the conversions in connection with the applicable
financial statement. In all other instances, unless otherwise indicated, the conversions have been made using the exchange rates
as of September 30, 2017, each as calculated from the Interbank exchange rates as reported by Oanda.com. On September 30, 2017,
the exchange rate of the Euro and the British Pound in exchange for U.S. Dollars was €1.00 = U.S. $1.18080 (equivalent to
U.S. $1.00 = €0.84722) and £1.00 = U.S. $1.33983 (equivalent to U.S. $1.00 = £0.74614).
These
conversions should not be construed as representations that the Euro and British Pound amounts actually represent U.S. Dollar
amounts or could be converted into U.S. Dollars at the rates indicated.
Critical
Accounting Policies
There
are no material changes from the critical accounting policies set forth in Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended March 31, 2017, as
amended, which we refer to as our 2017 Annual Report. Please refer to that section for disclosures regarding the critical accounting
policies related to our business.
Financial
performance overview
The
following table provides information regarding our spirits case sales for the periods presented based on nine-liter equivalent
cases, which is a standard spirits industry metric (table excludes related non-alcoholic beverage products):
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
80,777
|
|
|
|
88,181
|
|
|
|
157,243
|
|
|
|
165,021
|
|
International
|
|
|
20,990
|
|
|
|
19,843
|
|
|
|
42,918
|
|
|
|
36,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
101,767
|
|
|
|
108,024
|
|
|
|
200,161
|
|
|
|
201,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rum
|
|
|
41,718
|
|
|
|
46,510
|
|
|
|
84,358
|
|
|
|
90,793
|
|
Whiskey
|
|
|
25,904
|
|
|
|
27,111
|
|
|
|
53,669
|
|
|
|
48,255
|
|
Liqueur
|
|
|
27,695
|
|
|
|
25,950
|
|
|
|
49,398
|
|
|
|
46,388
|
|
Vodka
|
|
|
6,027
|
|
|
|
8,084
|
|
|
|
12,079
|
|
|
|
15,849
|
|
Tequila
|
|
|
423
|
|
|
|
369
|
|
|
|
657
|
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
101,767
|
|
|
|
108,024
|
|
|
|
200,161
|
|
|
|
201,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
79.4
|
%
|
|
|
81.6
|
%
|
|
|
78.6
|
%
|
|
|
81.7
|
%
|
International
|
|
|
20.6
|
%
|
|
|
18.4
|
%
|
|
|
21.4
|
%
|
|
|
18.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rum
|
|
|
41.0
|
%
|
|
|
43.1
|
%
|
|
|
42.2
|
%
|
|
|
45.0
|
%
|
Whiskey
|
|
|
25.5
|
%
|
|
|
25.1
|
%
|
|
|
26.8
|
%
|
|
|
23.9
|
%
|
Liqueur
|
|
|
27.2
|
%
|
|
|
24.0
|
%
|
|
|
24.7
|
%
|
|
|
23.0
|
%
|
Vodka
|
|
|
5.9
|
%
|
|
|
7.5
|
%
|
|
|
6.0
|
%
|
|
|
7.8
|
%
|
Tequila
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The
following table provides information regarding our case sales of our related non-alcoholic beverage products, Goslings
Stormy Ginger Beer, for the periods presented:
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
439,075
|
|
|
|
344,132
|
|
|
|
877,429
|
|
|
|
620,297
|
|
International
|
|
|
10,520
|
|
|
|
15,915
|
|
|
|
29,449
|
|
|
|
40,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
449,595
|
|
|
|
360,047
|
|
|
|
906,878
|
|
|
|
661,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
97.7
|
%
|
|
|
95.6
|
%
|
|
|
96.8
|
%
|
|
|
93.8
|
%
|
International
|
|
|
2.3
|
%
|
|
|
4.4
|
%
|
|
|
3.2
|
%
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Results
of operations
The
table below provides, for the periods indicated, the percentage of net sales of certain items in our consolidated financial statements:
|
|
Three
months ended
September 30,
|
|
|
Six
months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Sales,
net
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
59.1
|
%
|
|
|
60.6
|
%
|
|
|
59.0
|
%
|
|
|
60.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
40.9
|
%
|
|
|
39.4
|
%
|
|
|
41.0
|
%
|
|
|
39.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expense
|
|
|
23.4
|
%
|
|
|
25.7
|
%
|
|
|
26.2
|
%
|
|
|
26.6
|
%
|
General
and administrative expense
|
|
|
11.0
|
%
|
|
|
10.9
|
%
|
|
|
10.9
|
%
|
|
|
11.4
|
%
|
Depreciation
and amortization
|
|
|
0.9
|
%
|
|
|
1.3
|
%
|
|
|
1.0
|
%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
5.6
|
%
|
|
|
1.5
|
%
|
|
|
2.9
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
(0.0
|
)%
|
|
|
(0.0
|
)%
|
|
|
(0.0
|
)%
|
|
|
(0.0
|
)%
|
Foreign
exchange gain (loss)
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
(0.1
|
)%
|
|
|
0.2
|
%
|
Income
from equity investment in non-consolidated affiliate
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
Interest
expense, net
|
|
|
(4.3
|
)%
|
|
|
(1.7
|
)%
|
|
|
(4.3
|
)%
|
|
|
(1.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes
|
|
|
1.5
|
%
|
|
|
(0.1
|
)%
|
|
|
(1.3
|
)%
|
|
|
(1.1
|
)%
|
Income
tax expense, net
|
|
|
(0.1
|
)%
|
|
|
(2.4
|
)%
|
|
|
(0.1
|
)%
|
|
|
(1.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
1.4
|
%
|
|
|
(2.5
|
)%
|
|
|
(1.4
|
)%
|
|
|
(3.0
|
)%
|
Net
income attributable to noncontrolling interests
|
|
|
(1.4
|
)%
|
|
|
(1.1
|
)%
|
|
|
(0.9
|
)%
|
|
|
(1.0
|
)%
|
Net
loss attributable to common shareholders
|
|
|
0.0
|
%
|
|
|
(3.6
|
)%
|
|
|
(2.3
|
)%
|
|
|
(4.0
|
)%
|
The
following is a reconciliation of net loss attributable to common shareholders to EBITDA, as adjusted:
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net
loss attributable to common shareholders
|
|
$
|
(1,681
|
)
|
|
$
|
(700,710
|
)
|
|
$
|
(948,078
|
)
|
|
$
|
(1,466,529
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
901,559
|
|
|
|
328,868
|
|
|
|
1,793,423
|
|
|
|
639,129
|
|
Income
tax expense, net
|
|
|
25,335
|
|
|
|
477,962
|
|
|
|
43,748
|
|
|
|
688,775
|
|
Depreciation
and amortization
|
|
|
186,283
|
|
|
|
253,463
|
|
|
|
391,235
|
|
|
|
507,097
|
|
EBITDA
income
|
|
|
1,111,496
|
|
|
|
359,583
|
|
|
|
1,280,329
|
|
|
|
368,472
|
|
Allowance
for doubtful accounts
|
|
|
16,712
|
|
|
|
11,550
|
|
|
|
30,812
|
|
|
|
23,100
|
|
Allowance
for obsolete inventory
|
|
|
—
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
100,000
|
|
Stock-based
compensation expense
|
|
|
504,490
|
|
|
|
410,097
|
|
|
|
979,816
|
|
|
|
762,497
|
|
Other
expense, net
|
|
|
59
|
|
|
|
27
|
|
|
|
59
|
|
|
|
333
|
|
Income
from equity investments in non-consolidated affiliate
|
|
|
(29,846
|
)
|
|
|
(18,837
|
)
|
|
|
(71,595
|
)
|
|
|
(23,320
|
)
|
Foreign
exchange loss (gain)
|
|
|
(18,853
|
)
|
|
|
3,375
|
|
|
|
32,308
|
|
|
|
(76,488
|
)
|
Net
income attributable to noncontrolling interests
|
|
|
282,303
|
|
|
|
210,856
|
|
|
|
363,482
|
|
|
|
380,972
|
|
EBITDA,
as adjusted
|
|
$
|
1,866,362
|
|
|
$
|
1,026,651
|
|
|
$
|
2,665,210
|
|
|
$
|
1,535,566
|
|
Earnings
before interest, taxes, depreciation and amortization, or EBITDA, adjusted for allowances for doubtful accounts and obsolete inventory,
stock-based compensation expense, other expense (income), net, income from equity investment in non-consolidated affiliate, foreign
exchange and net income attributable to noncontrolling interests is a key metric we use in evaluating our financial performance.
EBITDA, as adjusted, is considered a non-GAAP financial measure as defined by Regulation G promulgated by the SEC under the Securities
Act of 1933, as amended. We consider EBITDA, as adjusted, important in evaluating our performance on a consistent basis across
various periods. Due to the significance of non-cash and non-recurring items, EBITDA, as adjusted, enables our Board of Directors
and management to monitor and evaluate the business on a consistent basis. We use EBITDA, as adjusted, as a primary measure, among
others, to analyze and evaluate financial and strategic planning decisions regarding future operating investments and allocation
of capital resources. We believe that EBITDA, as adjusted, eliminates items that are not indicative of our core operating performance
or are based on management’s estimates, such as allowance accounts, are due to changes in valuation, such as the effects
of changes in foreign exchange or do not involve a cash outlay, such as stock-based compensation expense. Our presentation of
EBITDA, as adjusted, should not be construed as an inference that our future results will be unaffected by unusual or non-recurring
items or by non-cash items, such as stock-based compensation, which is expected to remain a key element in our long-term incentive
compensation program. EBITDA, as adjusted, should be considered in addition to, rather than as a substitute for, income from operations,
net income and cash flows from operating activities.
Our
EBITDA, as adjusted, increased to $1.9 million for the three months ended September 30, 2017, as compared to $1.0 million for
the comparable prior-year period and increased to $2.7 million for the six months ended September 30, 2017, as compared to $1.5
million for the comparable prior-year period.
Three
months ended September 30, 2017 compared with three months ended September 30, 2016
Net
sales.
Net sales increased 6.5% to $20.9 million for the three months ended September 30, 2017, as compared to $19.6 million
for the comparable prior-year period, primarily due to U.S. sales growth of Jefferson’s bourbons and Goslings Stormy Ginger
Beer, partially offset by decreases in rum and vodka sales. For the three months ended September 30, 2017, sales of our Goslings
Stormy Ginger Beer increased 21.1% to $6.4 million. We anticipate continued growth of Goslings Stormy Ginger Beer in the
near term due to the popularity of cocktails containing ginger beer, Goslings brand awareness and the distribution to large national
and regional retailers and on-premise accounts, although there is no assurance that we will attain such results. Net sales during
the three months ended September 30, 2017 included $0.2 million in sales of Arran whiskies, which was launched in the first quarter
of our current fiscal year. We continue to focus on our faster growing brands and markets, both in the U.S. and internationally.
The
table below presents the increase or decrease, as applicable, in case sales by spirits product category for the three months ended
September 30, 2017 as compared to the three months ended September 30, 2016:
|
|
Increase/(decrease)
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
increase/(decrease)
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Rum
|
|
|
(4,792
|
)
|
|
|
(7,652
|
)
|
|
|
(10.3
|
)%
|
|
|
(21.8
|
)%
|
Whiskey
|
|
|
(1,207
|
)
|
|
|
564
|
|
|
|
(4.5
|
)%
|
|
|
3.0
|
%
|
Liqueur
|
|
|
1,745
|
|
|
|
1,419
|
|
|
|
6.7
|
%
|
|
|
5.5
|
%
|
Vodka
|
|
|
(2,057
|
)
|
|
|
(1,789
|
)
|
|
|
(25.4
|
)%
|
|
|
(23.1
|
)%
|
Tequila
|
|
|
54
|
|
|
|
54
|
|
|
|
14.6
|
%
|
|
|
14.6
|
%
|
Total
|
|
|
(6,257
|
)
|
|
|
(7,404
|
)
|
|
|
(5.8
|
)%
|
|
|
(8.4
|
)%
|
Our
international spirits case sales as a percentage of total spirits case sales increased to 20.6% for the three months ended September
30, 2017 as compared to 18.4% for the comparable prior-year period, primarily due to increased rum sales in certain international
markets resulting in part from the timing of shipments to large retailers in Ireland and Scandinavia.
The
following table presents the increase in case sales of ginger beer products for the three months ended September 30, 2017 as compared
to the three months ended September 30, 2016:
|
|
Increase
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
Increase
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Ginger
Beer Products
|
|
|
89,548
|
|
|
|
94,943
|
|
|
|
24.9
|
%
|
|
|
27.6
|
%
|
Gross
profit.
Gross profit increased 10.6% to $8.5 million for the three months ended September 30, 2017 from $7.7 million for the
comparable prior-year period, while gross margin increased to 40.9% for the three months ended September 30, 2017 as compared
to 39.4% for the comparable prior-year period. The increase in gross profit was due to increased aggregate revenue in the current
period, partially offset by increased cost of sales in the current period. The increase in gross margin was primarily due to increased
sales of our more profitable brands and in our more profitable markets. During the three months ended September 30, 2016, we recorded
an addition to allowance for obsolete and slow moving inventory of $0.05 million. We recorded this write-off and allowance on
both raw materials and finished goods, primarily in connection with label and packaging changes made to certain brands, as well
as certain cost estimates and variances. The net charges have been recorded as an increase to cost of sales in the relevant period.
Selling
expense
. Selling expense decreased 2.6% to $4.9 million for the three months ended September 30, 2017 from $5.0 million for
the comparable prior-year period, primarily due to a $0.2 million decrease in employee expense. Selling expense as a percentage
of net sales decreased to 23.4% for the three months ended September 30, 2017 as compared to 25.7% for the comparable prior-year
period.
General
and administrative expense
. General and administrative expense increased 7.4% to $2.3 million for the three months ended September
30, 2017 from $2.1 million for the comparable prior-year period, primarily due to a $0.1 million increase in professional fees
and a $0.1 million increase in employee compensation costs. General and administrative expense as a percentage of net sales increased
to 11.0% for the three months ended September 30, 2017 as compared to 10.9% for the comparable prior-year period.
Depreciation
and amortization.
Depreciation and amortization was $0.2 million for the three months ended September 30, 2017 as compared
to $0.3 million for the comparable prior-year period.
Income
from operations
. As a result of the foregoing, we had income from operations of $1.2 million for the three months ended September
30, 2017 as compared to $0.3 million for the comparable prior-year period. As a result of our focus on our stronger growth markets
and better performing brands, we anticipate improved results of operations in the near term as compared to prior years, although
there is no assurance that we will attain such results.
Income
tax expense, net.
Income tax expense, net is the estimated tax expense primarily attributable to the net taxable income recorded
by Gosling-Castle Partners, Inc. (“GCP”), our 80.1% owned subsidiary, adjusted for changes in the deferred tax asset
and deferred tax liability during the periods, and was net expense of ($0.025) million for the three months ended September 30,
2017 as compared to net expense of ($0.5) million for the comparable prior-year period.
Foreign
exchange gain (loss).
Foreign exchange gain for the three months ended September 30, 2017 was $0.02 million as compared to
an immaterial loss for the comparable prior-year period due to the net effects of fluctuations of the U.S. dollar against the
Euro and its impact on our Euro-denominated intercompany balances due to our foreign subsidiaries for inventory purchases.
Interest
expense, net.
We had interest expense, net of ($0.9) million for the three months ended September 30, 2017 as compared to
($0.3) million for the comparable prior-year period due to balances outstanding under our credit facilities and long-term debt.
Due to the debt incurred to finance the purchase of an additional 20% of GCP the (“GCP Share Acquisition”), and expected
borrowings under credit facilities to finance additional purchases of aged whiskies in support of the growth of our Jefferson’s
bourbons and other working capital needs, we expect interest expense, net to increase in the near term as compared to prior years.
Net
income attributable to noncontrolling interests.
Net income attributable to noncontrolling interests was $0.3 million for
the three months ended September 30, 2017 as compared to $0.2 million for the comparable prior-year period, as a result of net
income allocated to the 19.9% noncontrolling interests in GCP in the quarter ended September 30, 2017 and the 40.0% noncontrolling
interests in GCP in the quarter ended September 30, 2016. The change in noncontrolling interests from our acquisition of an additional
20.1% of GCP occurred in March 2017.
Net loss attributable
to common shareholders.
As a result of the net effects of the foregoing, net loss attributable to common shareholders improved
to ($0.0) million for the three months ended September 30, 2017 as compared to ($0.7) million for the comparable prior-year period.
Net loss per common share, basic and diluted, was ($0.00) per share for each of the three months ended September 30, 2017 and 2016.
Six
months ended September 30, 2017 compared with six months ended September 30, 2016
Net
sales.
Net sales increased 14.8% to $41.7 million for the six months ended September 30, 2017, as compared to $36.4
million for the comparable prior-year period, primarily due to U.S. sales growth of Jefferson’s bourbons, Clontarf Irish
whiskey and Goslings Stormy Ginger Beer, partially offset by decreases in vodka and rum sales. For the six months ended September
30, 2017, sales of our Goslings Stormy Ginger Beer increased 38.7% to $13.2 million. We anticipate continued growth of
Goslings Stormy Ginger Beer in the near term due to the popularity of cocktails containing ginger beer, Goslings brand awareness
and the distribution to large national and regional retailers and on-premise accounts, although there is no assurance that we
will attain such results. The launch of Arran whiskies during the six months ended September 30, 2017 contributed $0.6 million
in sales. We continue to focus on our faster growing brands and markets, both in the U.S. and internationally.
The
table below presents the increase or decrease, as applicable, in case sales by spirits product category for the six months ended
September 30, 2017 as compared to the six months ended September 30, 2016:
|
|
Increase/(decrease)
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
increase/(decrease)
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Rum
|
|
|
(6,435
|
)
|
|
|
(11,879
|
)
|
|
|
(7.1
|
)%
|
|
|
(17.3
|
)%
|
Whiskey
|
|
|
5,414
|
|
|
|
4,915
|
|
|
|
11.2
|
%
|
|
|
14.1
|
%
|
Liqueur
|
|
|
3,010
|
|
|
|
2,745
|
|
|
|
6.5
|
%
|
|
|
5.9
|
%
|
Vodka
|
|
|
(3,770
|
)
|
|
|
(3,536
|
)
|
|
|
(23.8
|
)%
|
|
|
(23.8
|
)%
|
Tequila
|
|
|
(24
|
)
|
|
|
(24
|
)
|
|
|
(3.5
|
)%
|
|
|
(3.5
|
)%
|
Total
|
|
|
(1,805
|
)
|
|
|
(7,778
|
)
|
|
|
(0.9
|
)%
|
|
|
(4.7
|
)%
|
Our
international spirits case sales as a percentage of total spirits case sales increased to 21.4% for the six months ended September
30, 2017 as compared to 18.3% for the comparable prior-year period, primarily due to increased Irish whiskey and rum sales in
certain international markets resulting in part from the timing of shipments to large retailers in Ireland and Scandinavia.
The
following table presents the increase in case sales of ginger beer products for the six months ended September 30, 2017 as compared
to the six months ended September 30, 2016:
|
|
Increase
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
Increase
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Ginger
Beer Products
|
|
|
245,849
|
|
|
|
257,132
|
|
|
|
37.2
|
%
|
|
|
41.5
|
%
|
Gross
profit.
Gross profit increased 18.5% to $17.1 million for the six months ended September 30, 2017 from $14.4 million for the
comparable prior-year period, while gross margin increased to 41.0% for the six months ended September 30, 2017 as compared to
39.7% for the comparable prior-year period. The increase in gross profit was due to increased aggregate revenue in the current
period, partially offset by increased cost of sales in the current period. The increase in gross margin was primarily due to increased
sales of our more profitable brands and in our more profitable markets. During the six months ended September 30, 2017, we recorded
additions to allowance for obsolete and slow moving inventory of $0.05 million as compared to $0.1 million in the comparable prior-year
period. We recorded these write-offs and allowances on both raw materials and finished goods, primarily in connection with label
and packaging changes made to certain brands, as well as certain cost estimates and variances. The net charges have been recorded
as an increase to cost of sales in the relevant period.
Selling
expense
. Selling expense increased 13.4% to $11.0 million for the six months ended September 30, 2017 from $9.7 million for
the comparable prior-year period, primarily due to a $1.2 million increase in advertising, marketing and promotion expense related
to the timing of certain sales and marketing programs, including Goslings’ sponsorship of the 35th America’s Cup,
and a $0.2 million increase in shipping costs from increased sales volume. Selling expense as a percentage of net sales decreased
to 26.2% for the six months ended September 30, 2017 as compared to 26.6% for the comparable prior-year period.
General
and administrative expense
. General and administrative expense increased 10.4% to $4.6 million for the six months ended September
30, 2017 from $4.1 million for the comparable prior-year period, primarily due to a $0.3 million increase in professional fees
and a $0.2 million increase in compensation costs. General and administrative expense as a percentage of net sales decreased to
10.9% for the six months ended September 30, 2017 as compared to 11.4% for the comparable prior-year period.
Depreciation
and amortization.
Depreciation and amortization was $0.4 million for the six months ended September 30, 2017 as compared to
$0.5 million for the comparable prior-year period.
Income
from operations
. As a result of the foregoing, we had income from operations of $1.2 million for the six months ended September
30, 2017 as compared to $0.1 million for the comparable prior-year period. As a result of our focus on our stronger growth markets
and better performing brands, we anticipate improved results of operations in the near term as compared to prior years, although
there is no assurance that we will attain such results.
Income
tax expense, net.
Income tax expense, net is the estimated tax expense primarily attributable to the net taxable income recorded
by GCP, our 80.1% owned subsidiary, adjusted for changes in the deferred tax asset and deferred tax liability during the periods,
and was net expense of ($0.05) million for the six months ended September 30, 2017 as compared to net expense of ($0.7) million
for the comparable prior-year period.
Foreign
exchange (loss) gain.
Foreign exchange loss for the six months ended September 30, 2017 was ($0.03) million as compared to
income of $0.1 million for the comparable prior-year period due to the net effects of fluctuations of the U.S. dollar against
the Euro and its impact on our Euro-denominated intercompany balances due to our foreign subsidiaries for inventory purchases.
Interest
expense, net.
We had interest expense, net of ($1.8) million for the six months ended September 30, 2017 as compared to ($0.6)
million for the comparable prior-year period due to balances outstanding under our credit facilities and long-term debt. Due to
the debt incurred to finance the GCP Share Acquisition, and expected borrowings under credit facilities to finance additional
purchases of aged whiskies in support of the growth of our Jefferson’s bourbons and other working capital needs, we expect
interest expense, net to increase in the near term as compared to prior years.
Net
income attributable to noncontrolling interests.
Net income attributable to noncontrolling interests was $0.4 million for
each of the six-month periods ended September 30, 2017 and 2016, as a result of net income allocated to the 19.9% noncontrolling
interests in GCP in the quarter ended September 30, 2017 and the 40.0% noncontrolling interests in GCP in the quarter ended September
30, 2016. The change in noncontrolling interests from our acquisition of an additional 20.1% of GCP occurred in March 2017.
Net
loss attributable to common shareholders.
As a result of the net effects of the foregoing, net loss attributable to common
shareholders improved to ($0.9) million for the six months ended September 30, 2017 as compared to ($1.5) million for the comparable
prior-year period. Net loss per common share, basic and diluted, was ($0.01) per share for both the six months ended September
30, 2017 and 2016.
Liquidity
and capital resources
Overview
Since
our inception, we have incurred significant operating and net losses and have not generated positive cash flows from operations.
For the six months ended September 30, 2017, we had net income of $0.6 million, and used cash of $0.03 million in operating
activities. As of September 30, 2017, we had cash and cash equivalents of $0.3 million and had an accumulated deficit of $149.2
million.
We
believe our current cash and working capital and the availability under the Credit Facility (as defined below) will enable us
to fund our losses until we achieve profitability, ensure continuity of supply of our brands, and support new brand initiatives
and marketing programs through at least November 2018.
Existing
Financing
We
and our wholly-owned subsidiary, Castle Brands (USA) Corp. (“CB-USA”), are parties to an Amended and Restated Loan
and Security Agreement (as amended, the “Loan Agreement”) with ACF FinCo I LP (“ACF”), which provides
for availability (subject to certain terms and conditions) of a facility (the “Credit Facility”) to provide us with
working capital, including capital to finance purchases of aged whiskeys in support of the growth of our Jefferson’s bourbons,
in the amount of $21.0 million, including a sublimit in the maximum principal amount of $7.0 million to permit us to acquire aged
whiskey inventory (the “Purchased Inventory Sublimit”) subject to certain conditions set forth in the Loan Agreement.
The Credit Facility matures on July 31, 2019 (the “Maturity Date”). The monthly facility fee is 0.75% per annum of
the maximum Credit Facility amount (excluding the Purchased Inventory Sublimit).
Pursuant
to the Loan Agreement, we and CB-USA may borrow up to the lesser of (x) $21.0 million and (y) the sum of the borrowing base calculated
in accordance with the Loan Agreement and the Purchased Inventory Sublimit. We and CB-USA may prepay the Credit Facility in whole
or the Purchased Inventory Sublimit, in whole or in part, subject to certain prepayment penalties as set forth in the Loan Agreement.
In
connection with the Loan Agreement, we entered into a Reaffirmation Agreement with (i) certain of our officers, including John
Glover, our Executive Vice President and Chief Operating Officer, T. Kelley Spillane, our Senior Vice President - Global
Sales, and Alfred J. Small, our Senior Vice President, Chief Financial Officer, Treasurer & Secretary and (ii) certain junior
lenders of ours, including Frost Gamma Investments Trust, an entity affiliated with Phillip Frost, M.D., a director of ours and
a principal shareholder of ours, Mark E. Andrews, III, a director of ours and our Chairman, an affiliate of Richard J. Lampen,
a director of ours and our President and Chief Executive Officer, an affiliate of Glenn Halpryn, a former director of ours, Dennis
Scholl, a former director of ours, and Vector Group Ltd., a more than 5% shareholder of ours, of which Richard Lampen is an executive
officer, Henry Beinstein, a director of ours, is a director and Phillip Frost, M.D. is a principal shareholder, which, among other
things, reaffirms the existing Validity and Support Agreements by and among each officer, us and ACF.
ACF required as a condition
to entering into an amendment to the Loan Agreement in August 2015 that ACF enter into a participation agreement with certain
related parties of ours, including Frost Gamma Investments Trust ($150,000), Mark E. Andrews, III ($50,000), Richard J. Lampen
($100,000), Brian L. Heller, our General Counsel and Assistant Secretary ($42,500), and Alfred J. Small ($15,000), to allow for
the sale of participation interests in the Purchased Inventory Sublimit and the inventory purchased with the proceeds thereof.
The participation agreement provides that ACF’s commitment to fund each advance of the Purchased Inventory Sublimit shall
be limited to seventy percent (70%), up to an aggregate maximum principal amount for all advances equal to $4.9 million. Under
the terms of the participation agreement, the participants receive interest at the rate of 11% per annum. We are not a party to
the participation agreement. However, we and CB-USA are party to a fee letter with the junior participants (including the related
party junior participants) pursuant to which we and CB-USA were obligated to pay the junior participants a closing fee of $18,000
on the effective date of the amendment to the Loan Agreement and are obligated to pay a commitment fee of $18,000 on each anniversary
of the effective date until the junior participants’ obligations are terminated pursuant to the participation agreement.
We
may borrow up to the maximum amount of the Credit Facility, provided that we have a sufficient borrowing base (as defined in the
Loan Agreement). The Credit Facility interest rate (other than with respect to the Purchased Inventory Sublimit) is the rate that,
when annualized, is the greatest of (a) the Prime Rate plus 3.00%, (b) the LIBOR Rate plus 5.50% and (c) 6.0%. The interest rate
applicable to the Purchased Inventory Sublimit is the rate, that when annualized, is the greatest of (a) the Prime Rate plus 4.25%,
(b) the LIBOR Rate plus 6.75% and (c) 7.50%. Interest is payable monthly in arrears, on the first day of every month on the average
daily unpaid principal amount of the Credit Facility. After the occurrence and during the continuance of any “Default”
or “Event of Default” (as defined under the Loan Agreement) we are required to pay interest at a rate that is 3.25%
per annum above the then applicable Credit Facility interest rate. The Loan Agreement contains EBITDA targets allowing for further
interest rate reductions in the future. The Credit Facility currently bears interest at 6.75% (reflecting a discount for
achieving one such EBITDA target) and the Purchased Inventory Sublimit currently bears interest at 8.5%. We are required to pay
down the principal balance of the Purchased Inventory Sublimit within 15 banking days from the completion of a bottling run of
bourbon from our bourbon inventory stock purchased with funds borrowed under the Purchased Inventory Sublimit in an amount equal
to the purchase price of such bourbon. The unpaid principal balance of the Credit Facility, all accrued and unpaid interest thereon,
and all fees, costs and expenses payable in connection with the Credit Facility, are due and payable in full on the Maturity Date.
In addition to closing fees, ACF receives facility fees and a collateral management fee (each as set forth in the Loan Agreement).
Our obligations under the Loan Agreement are secured by the grant of a pledge and a security interest in all of our assets.
In January 2017, we acquired
$1.0 million in aged bulk bourbon purchased under the Purchased Inventory Sublimit. Certain related parties, including Frost Gamma
Investments Trust ($65,406), Richard J. Lampen ($43,604), Mark E. Andrews, III ($21,802), Brian L. Heller ($18,532) and Alfred
J. Small ($6,541), were junior participants in the Purchased Inventory Sublimit with respect to such purchase.
In October 2017, we acquired
$1.3 million in aged bulk bourbon purchased under the Purchased Inventory Sublimit. Certain related parties, including Frost Gamma
Investments Trust ($51,500), Richard J. Lampen ($34,333), Mark E. Andrews, III ($17,167), Brian L. Heller ($14,592) and Alfred
J. Small ($5,150), were junior participants in the Purchased Inventory Sublimit with respect to such purchase.
In October 2017, we and
CB-USA entered into a Third Amendment (the “Third Amendment”) to the Amended Agreement to amend certain terms of the
existing Credit Facility with ACF. Among other changes, the Third Amendment increases the maximum amount of the Credit Facility
from $19,000,000 to $21,000,000, and amends the definition of borrowing base to increase the amount of borrowing that can be collateralized
by inventory. We and CB-USA paid ACF an aggregate $20,000 commitment fee in connection with the Amendment. In connection with
the Amendment, we and CB-USA also entered into an Amended and Restated Revolving Credit Note.
The Loan Agreement contains
standard borrower representations and warranties for asset-based borrowing and a number of reporting obligations and affirmative
and negative covenants. The Loan Agreement includes negative covenants that, among other things, restrict our ability to create
additional indebtedness, dispose of properties, incur liens, and make distributions or cash dividends. At September 30, 2017,
we were in compliance, in all material respects, with the covenants under the Loan Agreement.
In March 2017, we issued
a promissory note to Frost Nevada Investments Trust (the “Holder”), an entity affiliated with Phillip Frost, M.D.,
in the aggregate principal amount of $20.0 million (the “Subordinated Note”). The purpose of the Subordinated Note
was to finance the GCP Share Acquisition. The Subordinated Note bears interest quarterly at the rate of 11% per annum. The principal
and interest accrued thereon is due and payable in full on March 15, 2019. All claims of the Holder to principal, interest and
any other amounts owed under the Subordinated Note are subordinated in right of payment to all indebtedness of the Company existing
as of the date of the Subordinated Note. The Subordinated Note contains customary events of default and may be prepaid by the
Company, in whole or in part, without penalty, at any time.
In December 2009, GCP
issued a promissory note in the aggregate principal amount of $0.2 million to Gosling’s Export (Bermuda) Limited in exchange
for credits issued on certain inventory purchases. This note matures on April 1, 2020, is payable at maturity, subject to certain
acceleration events, and calls for annual interest of 5%, to be accrued and paid at maturity.
We have arranged various
credit facilities aggregating €0.3 million or $0.4 million (translated at the September 30, 2017 exchange rate) with an Irish
bank, including overdraft coverage, creditors’ insurance, customs and excise guaranty and a revolving credit facility. These
facilities are payable on demand, continue until terminated by either party, are subject to annual review, and call for interest
at the lender’s AA1 Rate minus 1.70%. We have deposited €0.3 million or $0.4 million (translated at the September 30,
2017 exchange rate) with the bank to secure these borrowings.
In October 2013, we issued
an aggregate principal amount of $2.1 million of unsecured 5% convertible subordinated notes (the “Convertible Notes”).
We used a portion of the proceeds to finance the acquisition of additional bourbon inventory in support of the growth of our Jefferson’s
bourbon brand. The Convertible Notes bear interest at a rate of 5% per annum and mature on December 15, 2018. The Convertible
Notes, and accrued but unpaid interest thereon, are convertible in whole or in part from time to time at the option of the holders
thereof into shares of our common stock, par value $0.01 per share (“Common Stock”), at a conversion price of $0.90
per share (the “Conversion Price”). The Convertible Notes may be prepaid in whole or in part at any time without penalty
or premium, but with payment of accrued interest to the date of prepayment. The Convertible Notes contain customary events of
default, which, if uncured, entitle each noteholder to accelerate the due date of the unpaid principal amount of, and all accrued
and unpaid interest on, the Convertible Notes. The Convertible Note purchasers included certain related parties of ours, including
an affiliate of Dr. Phillip Frost ($500,000), Mark E. Andrews, III ($50,000), an affiliate of Richard J. Lampen ($50,000) and
Vector Group Ltd. ($200,000).
We may forcibly convert
all or any part of the Convertible Notes and all accrued but unpaid interest thereon if (i) the average daily volume of the Common
Stock (as reported on the principal market or exchange on which the Common Stock is listed or quoted for trading) exceeds $50,000
per trading day and (ii) the volume weighted average price of the Common Stock for at least twenty (20) trading days during any
thirty (30) consecutive trading day period exceeds 250% of the then-current Conversion Price. Any forced conversion will be applied
ratably to the holders of all Convertible Notes based on each holder’s then-current note holdings.
In November 2014, we entered
into a distribution agreement (the “2014 Distribution Agreement”) with Barrington Research Associates, Inc. (“Barrington”)
as sales agent, under which we were able to issue and sell over time and from time to time, to or through Barrington, shares (the
“Shares”) of our Common Stock having a gross sales price of up to $10.0 million. No Shares were issued in the six
months ended September 30, 2017 under the 2014 Distribution Agreement. The 2014 Distribution Agreement expired in August 2017
upon the expiration of the Company’s Registration Statement on Form S-3 under which the shares were sold.
Liquidity
Discussion
As
of September 30, 2017, we had shareholders’ equity of $5.3 million as compared to $4.5 million at March 31, 2017. This increase
in shareholders’ equity was due to the exercise of stock options and stock-based compensation expense of $1.0 million, partially
offset by our ($0.4) million total comprehensive loss for the three months ended September 30, 2017.
We
had working capital of $31.7 million at September 30, 2017 as compared to $31.2 million at March 31, 2017, primarily due
to a net loss of $0.9 million, a $4.4 million increase in inventory and a $0.4 million increase in prepaid expenses, which was
partially offset by a $2.9 million increase in accounts payable and accrued expenses and a $0.7 million decrease in accounts
receivable.
As
of September 30, 2017, we had cash and cash equivalents of approximately $0.3 million, as compared to $0.6 million as of March
31, 2017. The decrease is primarily attributable to the funding of our operations and working capital needs. At September 30 and
March 31, 2017, we also had approximately $0.4 million (translated at the September 30, 2017 exchange rate) and $0.3 million (translated
at the March 31, 2017 exchange rate), respectively, of cash restricted from withdrawal and held by a bank in Ireland as collateral
for overdraft coverage, creditors’ insurance, revolving credit and other working capital purposes.
The
following may materially affect our liquidity over the near-to-mid term:
|
●
|
continued
cash losses from operations;
|
|
|
|
|
●
|
our
ability to obtain additional debt or equity financing should it be required;
|
|
|
|
|
●
|
an
increase in working capital requirements to finance higher levels of inventories and accounts receivable;
|
|
|
|
|
●
|
our
ability to maintain and improve our relationships with our distributors and our routes to market;
|
|
|
|
|
●
|
our
ability to procure raw materials at a favorable price to support our level of sales;
|
|
|
|
|
●
|
potential
acquisitions of additional brands; and
|
|
|
|
|
●
|
expansion
into new markets and within existing markets in the U.S. and internationally.
|
We
continue to implement sales and marketing initiatives that we expect will generate cash flows from operations in the next few
years. We seek to grow our business through expansion to new markets, growth in existing markets and strengthened distributor
relationships. As our brands continue to grow, our working capital requirements will increase. In particular, the growth of our
Jefferson’s brands requires a significant amount of working capital relative to our other brands, as we are required to
purchase and hold ever increasing amounts of aged whiskey to meet growing demand. While we are seeking solutions to our
long-term whiskey supply needs, we are required to purchase and hold several years’ worth of aged whiskey
in inventory until such time as it is aged to our specific brand taste profiles, increasing our working capital requirements and
negatively impacting cash flows.
We
may also seek additional brands and agency relationships to leverage our existing distribution platform. We intend to finance
any such brand acquisitions through a combination of our available cash resources, borrowings and, in appropriate circumstances,
additional issuances of equity and/or debt securities. Acquiring additional brands could have a significant effect on our financial
position, could materially reduce our liquidity and could cause substantial fluctuations in our quarterly and yearly operating
results. We continue to control expenses, seek improvements in routes to market and contain production costs to improve cash flows.
We
intend to restructure all or a portion of our debt, including the Convertible Notes and Subordinated Note. This restructuring
may consist of a combination of expanding and extending the Loan Agreement and Credit Facility with ACF, extending the term of
the existing notes, converting some or all of the debt to equity or paying down the debt with funds that may be raised from future
equity offerings, although there is no assurance that we will be successful in such restructuring. If we are unable to restructure
or refinance our debt, or are unable to raise equity on terms that are acceptable to us, it could have a significant effect on
our financial position, could materially reduce our liquidity and could cause substantial fluctuations in our quarterly and yearly
operating results.
As
of September 30, 2017, we had borrowed $12.9 million of the $19.0 million then available under the Credit Facility, including
$3.1 million of the $7.0 million available under the Purchased Inventory Sublimit, leaving $2.2 million in potential availability
for working capital needs under the Credit Facility and $3.9 million available for aged whiskey inventory purchases. As of November
7, 2017, we had borrowed $16.0 million of the $21.0 million available under the amended Credit Facility, including $4.3 million
of the $7.0 million available under the Purchased Inventory Sublimit, leaving $2.3 million in potential availability for working
capital needs under the Credit Facility and $2.7 million available for aged whiskey inventory purchases. We believe our current
cash and working capital and the availability under the Credit Facility will enable us to fund our losses until we achieve profitability,
ensure continuity of supply of our brands, and support new brand initiatives and marketing programs through at least November
2018.
Cash
flows
The
following table summarizes our primary sources and uses of cash during the periods presented:
|
|
Six
months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in
thousands)
|
|
Net
cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(26
|
)
|
|
$
|
(987
|
)
|
Investing
activities
|
|
|
(263
|
)
|
|
|
(172
|
)
|
Financing
activities
|
|
|
(13
|
)
|
|
|
409
|
|
Subtotal
|
|
|
(301
|
)
|
|
|
(749
|
)
|
Effect
of foreign currency translation
|
|
|
13
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
$
|
(289
|
)
|
|
$
|
(751
|
)
|
Operating
activities.
A substantial portion of available cash has been used to fund our operating activities. In general,
these cash funding requirements are based on the costs in maintaining our distribution system and our sales and marketing activities.
We have also utilized cash to fund our inventories. In general, these cash outlays for inventories are only partially offset by
increases in our accounts payable to our suppliers.
On
average, the production cycle for our owned brands is up to three months from the time we obtain the distilled spirits and other
materials needed to bottle and package our products to the time we receive products available for sale, in part due to the international
nature of our business. We do not produce Goslings rums or ginger beer, Pallini liqueurs, Arran Scotch whiskies, Tierras tequila
or Gozio amaretto. Instead, we receive the finished product directly from the owners of such brands. From the time we have products
available for sale, an additional two to three months may be required before we sell our inventory and collect payment from customers.
Further, our inventory at September 30, 2017 included significant additional stores of aged bourbon purchased in advance of forecasted
production requirements. We expect to use the aged bourbon in the normal course of future sales, generating positive cash flows
in future periods.
During
the six months ended September 30, 2017, net cash used in operating activities was $0.03 million, consisting primarily of a $4.4
million increase in inventory, a net loss of $0.6 million and a $0.4 million increase in prepaid expenses. These uses of cash
were partially offset by a $2.9 million increase in accounts payable and accrued expenses, a $0.7 million decrease in accounts
receivable, stock based compensation expense of $1.0 million, a $0.3 million increase in due to related parties and depreciation
and amortization expense of $0.4 million
During
the six months ended September 30, 2016, net cash used in operating activities was $1.0 million, consisting primarily of a $1.2
million increase in accounts receivable, an $0.8 million increase in inventory, a net loss of $0.6 million and a $0.4 million
increase in prepaid expenses. These uses of cash were partially offset by a $0.7 million increase in accounts payable and accrued
expenses, a $0.5 million increase in due to related parties, stock based compensation expense of $0.8 million and depreciation
and amortization expense of $0.5 million.
Investing
Activities.
Net cash used in investing activities was $0.3 million for the six months ended September 30, 2017, representing
a $0.2 million investment in non-consolidated affiliate and $0.1 million used in the acquisition of fixed and intangible assets.
Net
cash used in investing activities was $0.2 million for the six months ended September 30, 2016, representing $0.2 million used
in the acquisition of fixed and intangible assets.
Financing
activities.
Net cash used in financing activities for the six months ended September 30, 2017 was $0.01 million, consisting
primarily of $0.2 million in net payments on the Credit Facility partially offset by $0.2 million from the exercise of stock options.
Net
cash provided by financing activities for the six months ended September 30, 2016 was $0.4 million, consisting of $0.2 million
in net proceeds from the Credit Facility and $0.2 million from the exercise of stock options.
Recent
accounting standards issued and adopted
We
discuss recently issued and adopted accounting standards in the “Recent accounting pronouncements” section of Note
1 of the “Notes to Unaudited Condensed Consolidated Financial Statements” in the accompanying unaudited condensed
consolidated financial statements.
Cautionary
Note Regarding Forward Looking Statements
This
annual report includes certain “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements, which involve risks and uncertainties, relate to the discussion of our business strategies
and our expectations concerning future operations, margins, profitability, liquidity and capital resources and to analyses and
other information that are based on forecasts of future results and estimates of amounts not yet determinable. We use words such
as “may”, “will”, “should”, “expects”, “intends”, “plans”,
“anticipates”, “believes”, “estimates”, “seeks”, “predicts”, “could”,
“projects”, “potential” and similar terms and phrases, including references to assumptions, in this report
to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning
future events affecting us and are subject to uncertainties, risks and factors relating to our operations and business environments,
all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ
materially from those matters expressed or implied by these forward-looking statements. These risks and other factors include
those listed under “Risk Factors” in our annual report on Form 10-K for the year ended March 31, 2017, as amended,
and as follows:
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our
history of losses;
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recent
worldwide and domestic economic trends and financial market conditions could adversely impact our financial performance;
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our
potential need for additional capital, which, if not available on acceptable terms or at all, could restrict our future growth
and severely limit our operations;
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our
brands could fail to achieve more widespread consumer acceptance, which may limit our growth;
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our
dependence on a limited number of suppliers, who may not perform satisfactorily or may end their relationships with us, which
could result in lost sales, incurrence of additional costs or lost credibility in the marketplace;
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our
annual purchase obligations with certain suppliers;
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the
failure of even a few of our independent wholesale distributors to adequately distribute our products within their territories
could harm our sales and result in a decline in our results of operations;
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our
need to maintain a relatively large inventory of our products to support customer delivery requirements, which could negatively
impact our operations if such inventory is lost due to theft, fire or other damage;
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the
potential limitation to our growth if we are unable to identify and successfully acquire additional brands that are complementary
to our existing portfolio, or integrate such brands after acquisitions;
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currency
exchange rate fluctuations and devaluations may significantly adversely affect our revenues, sales, costs of goods and overall
financial results;
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our
business and stock price may be adversely affected if we have material weaknesses or significant deficiencies in our internal
control over financial reporting;
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the
possibility that we or our strategic partners will fail to protect our respective trademarks and trade secrets, which could
compromise our competitive position and decrease the value of our brand portfolio;
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the
possibility that we cannot secure and maintain listings in control states, which could cause the sales of our products to
decrease significantly;
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an
impairment in the carrying value of our goodwill or other acquired intangible assets could negatively affect our operating
results and shareholders’ equity;
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changes
in consumer preferences and trends could adversely affect demand for our products;
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there
is substantial competition in our industry and the many factors that may prevent us from competing successfully;
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adverse
changes in public opinion about alcohol could reduce demand for our products;
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class
action or other litigation relating to alcohol misuse or abuse could adversely affect our business; and
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adverse
regulatory decisions and legal, regulatory or tax changes could limit our business activities, increase our operating costs
and reduce our margins.
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We
assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual
results could differ materially from those anticipated in, or implied by, these forward-looking statements, even if new information
becomes available in the future.