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.
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A.
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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., 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.
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B.
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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 and positive cash flows from
operations, ensure continuity of supply of its brands and support new brand initiatives and marketing programs through
at least February 2019.
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C.
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Organization
and operations
— The Company is principally engaged in the importation, marketing and sale of premium and super
premium rums, whiskeys, liqueurs, vodka, tequila and related non-alcoholic beverage products in the United States, Canada,
Europe and Asia.
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D.
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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.
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E.
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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.
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F.
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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.
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G.
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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.
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H.
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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.
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CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
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I.
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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.
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The
Company’s investments are reported at fair value in accordance with authoritative guidance, which accomplishes the following
key objectives:
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-
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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;
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-
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Establishes
a three-level hierarchy (“valuation hierarchy”) for fair value measurements;
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-
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Requires
consideration of the Company’s creditworthiness when valuing liabilities; and
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-
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Expands
disclosures about instruments measured at fair value.
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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:
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Level
1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.
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-
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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.
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-
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Level
3 — inputs to the valuation methodology are unobservable and significant to the
fair value measurement.
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J.
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Income
taxes
— In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”)
was enacted. The 2017 Tax Act includes a number of changes to existing U.S. tax laws
that impact the Company, most notably a reduction of the U.S. corporate income tax rate
from 35 percent to 21 percent for tax years beginning after December 31, 2017 and the
recognition of tax net operating loss carryfowards. The 2017 Tax Act also provides for
a one-time transition tax on certain foreign earnings and the acceleration of depreciation
for certain assets placed into service after September 27, 2017 as well as prospective
changes beginning in 2018, including repeal of the domestic manufacturing deduction,
acceleration of tax revenue recognition, capitalization of research and development expenditures,
additional limitations on executive compensation and limitations on the deductibility
of interest.
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The
Company recognized the income tax effects of the 2017 Tax Act in its current financial statements in accordance with Staff Accounting
Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, “Income Taxes”, (“ASC
740”) in the reporting period in which the 2017 Tax Act was signed into law. As such, the Company’s financial results
reflect the income tax effects of the 2017 Tax Act for which the accounting under ASC 740 is complete. The Company did not identify
items for which the income tax effects of the 2017 Tax Act have not been completed and a reasonable estimate could not be determined
as of December 31, 2017.
The
2017 Tax Act reduced the U.S. federal corporate tax rate from 35.0% to 21.0% for all corporations effective January 1, 2018. For
fiscal year companies, the change in law requires the application of a blended rate for each quarter of the fiscal year, which
in the Company’s case is 31.5% for the fiscal year ending March 31, 2018. Thereafter, the applicable statutory rate is 21.0%.
ASC
740 requires all companies to reflect the effects of the new law in the period in which the law was enacted. Accordingly, the
Company reduced the statutory rate that applies to its year-to-date earnings from 35.0% to 31.5%. In addition,
the Company remeasured its deferred tax assets and liabilities based on the new rate. The combined result of the 2017 Tax Act
resulted in a tax benefit of $40,485 during the three months ended December 31, 2017.
Under
ASC 740, 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 December 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 December 31, 2017 and 2016 consists of federal, state and local
taxes. In connection with the Company’s 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 December
31, 2017 and 2016, the Company recognized $63,085 and $273,781 of income tax benefit, net, respectively. For the nine months
ended December 31, 2017, the Company recognized $19,337 of income tax benefit, net and for the nine months ended December 31,
2016, the Company recognized ($414,994) of income tax expense, net, respectively. GCP is currently under a tax audit by New
York State for the tax year ended March 31, 2016.
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K.
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Recent
accounting pronouncements
— In May 2017, the Financial Accounting Standards
Board (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.
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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
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
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”),
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 expects to transition to ASU 2014-09 using the
Modified-Retrospective Method
,
under which the prior years’ data is not recast; instead, a single adjustment is made to equity at the beginning of the
initial year of application. This single entry should adjust the beginning equity balance to what it would have been if the entity
had applied ASU 2014-09 to either (a) all unfinished contracts as of the beginning of the current period, or (b) all contracts
pertaining to the years presented. The Company is currently evaluating the new guidance but does not believe the adoption of this
guidance will have a material impact 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.
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L.
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Accounting
standards adopted
— In August 2017, the FASB issued Accounting Standards Update
2017-12, “Derivatives and Hedging (Topic 815) - Targeted Improvements to
Accounting for Hedging Activities” (“ASU 2017-12”), which improves
the financial reporting of hedging relationships to better portray the economic results
of an entity’s risk management activities in its financial statements and makes
certain targeted improvements to simplify the qualification and application of the hedge
accounting compared to current GAAP. This update is effective for fiscal years beginning
after December 15, 2018, with early adoption permitted. The Company adopted this guidance
in the current period and determined that its adoption of this guidance did not have
a material effect on the Company’s results of operations, cash flows and financial
condition.
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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 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 INCOME (LOSS) PER COMMON
SHARE
Basic
net income/(loss) per common share is computed by dividing net income/(loss) by the weighted average number of common shares outstanding
during the period. Diluted net income/(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 income per share for the three months ended December 31, 2017 and 2016, no adjustment has been made to the
weighted average outstanding common shares for the assumed conversion of convertible notes as assumed conversion of these securities
is anti-dilutive.
Potential
common shares not included in calculating diluted net income per share are as follows:
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|
Three
months ended December 31,
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2017
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2016
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Stock
options
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—
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—
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Unvested
restricted stock
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|
|
—
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|
|
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—
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5%
Convertible notes
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833,333
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|
|
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1,861,111
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|
|
|
|
|
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|
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Total
|
|
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833,333
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|
|
|
1,861,111
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In
computing diluted net (loss) per share for the nine months ended December 31, 2017 and 2016, no adjustment has been made to the
weighted average outstanding common shares for the assumed conversion of exercise of stock options, vesting of restricted shares
and convertible notes is anti-dilutive.
Potential
common shares not included in calculating diluted net loss per share are as follows:
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Nine
months ended December 31,
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2017
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|
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2016
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|
Stock
options
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|
|
15,494,108
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|
|
|
15,907,696
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Unvested
restricted stock
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|
|
1,092,000
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|
|
|
—
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5%
Convertible notes
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833,333
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|
|
|
1,861,111
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|
|
|
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Total
|
|
|
17,419,441
|
|
|
|
17,768,807
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NOTE
3 —
INVENTORIES
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December
31, 2017
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|
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March
31, 2017
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Raw
materials
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$
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20,755,116
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|
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$
|
16,714,225
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Finished
goods – net
|
|
|
14,027,696
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|
|
|
13,086,855
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|
|
|
|
|
|
|
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Total
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$
|
34,782,812
|
|
|
$
|
29,801,080
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As
of December 31, and March 31, 2017, 9% of raw materials and 4% and 7%, respectively, of finished goods were located outside of
the United States.
In
the nine months ended December 31, 2017, the Company acquired $6,634,271 of bulk 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 net realizable value.
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 December 31, 2017 and 2016, GCP had pretax net income on a stand-alone basis of $994,600 and $1,016,217,
respectively. The Company allocated a portion of this net income, or $199,915 and $406,487, to non-controlling interest
for the three months ended December 31, 2017 and 2016, respectively. For the nine months ended December 31, 2017 and 2016, GCP
had pretax net income on a stand-alone basis of $2,846,141 and $2,657,241, respectively. The Company allocated a portion
of this net income, or $572,074 and $1,062,896, to non-controlling interest for the nine months ended December 31, 2017
and 2016, respectively. The cumulative balance allocated to noncontrolling interests in GCP was $3,042,017 and $2,479,512
at December 31 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. The Company has accounted for this investment under
the equity method of accounting. For the three months ended December 31, 2017, the Company recognized a loss of ($20,806) from
this investment. For the three months ended December 31, 2016, the Company recognized income of $26,362 from this investment.
For the nine months ended December 31, 2017 and 2016, the Company recognized $50,789 and $49,362 of income from this investment,
respectively. The investment balance was $776,886 and $570,097 at December 31 and March 31, 2017, respectively.
NOTE
5 —
GOODWILL AND INTANGIBLE ASSETS
The
carrying amount of goodwill was $496,226 at each of December 31 and March 31, 2017.
Intangible
assets consist of the following:
|
|
December
31, 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
|
|
|
201,270
|
|
|
|
186,668
|
|
Patents
|
|
|
994,000
|
|
|
|
994,000
|
|
Other
|
|
|
55,460
|
|
|
|
55,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,333,979
|
|
|
|
10,309,376
|
|
Less:
accumulated amortization
|
|
|
8,370,986
|
|
|
|
8,035,018
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
1,962,993
|
|
|
|
2,274,358
|
|
Other
identifiable intangible assets — indefinite lived*
|
|
|
4,112,972
|
|
|
|
4,112,972
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,075,965
|
|
|
$
|
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:
|
|
December
31, 2017
|
|
|
March
31, 2017
|
|
Definite
life brands
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Trademarks
|
|
|
394,266
|
|
|
|
367,294
|
|
Rights
|
|
|
6,869,993
|
|
|
|
6,617,062
|
|
Product
development
|
|
|
43,840
|
|
|
|
34,478
|
|
Patents
|
|
|
892,887
|
|
|
|
843,184
|
|
Accumulated
amortization
|
|
$
|
8,370,986
|
|
|
$
|
8,035,018
|
|
NOTE
6 —
RESTRICTED CASH
At
December 31 and March 31, 2017, the Company had €310,319 or $371,719 (translated at the December 31, 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
|
|
December
31, 2017
|
|
|
March
31, 2017
|
|
Notes
payable consist of the following:
|
|
|
|
|
|
|
|
|
Foreign
revolving credit facilities (A)
|
|
$
|
—
|
|
|
$
|
—
|
|
Note
payable – GCP note (B)
|
|
|
219,514
|
|
|
|
211,580
|
|
Credit
facility (C)
|
|
|
18,490,458
|
|
|
|
13,133,124
|
|
5%
Convertible notes (D)
|
|
|
750,000
|
|
|
|
1,675,000
|
|
11%
Subordinated Note (E)
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39,459,972
|
|
|
$
|
35,019,704
|
|
|
A.
|
The
Company has arranged various credit facilities aggregating €310,319 or $371,719
(translated at the December 31, 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%. There was no balance on the credit facilities
included in notes payable at each of December 31 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 December 31, 2017, $219,514,
consisting of $211,580 of principal and $7,934 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 $21.0 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 December 31, 2017, the Credit Facility interest
rate was 7.0%. 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 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, 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 December 31, 2017, the interest rate applicable to the Purchased Inventory
Sublimit was 8.75%. 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, Brian
L. Heller, our General Counsel and Assistant Secretary, 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) $21,000,000 and (y) the sum of the borrowing base calculated in accordance
with the Amended Agreement and the Purchased Inventory Sublimit. For the nine months ended December 31, 2017, the Company paid
interest at 6.5% through June 14, 2017, then 6.75% through December 13, 2017, and then 7.0% through December 31, 2017 on the Amended
Agreement. For the nine months ended December 31, 2017, the Company paid interest at 8.25% through June 14, 2017, then at 8.5%
through December 13, 2017, and then 8.75% through December 31, 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 December 31, 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), Brian L. Heller ($42,500) 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. In October 2017, the Company acquired $1,308,125 in aged bulk bourbon under
the Purchased Inventory Sublimit with additional borrowings from certain related parties of the Company, 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), as junior participants in the Purchased Inventory Sublimit with respect to such purchase. In December 2017,
the Company acquired $900,425 in aged bulk bourbon under the Purchased Inventory Sublimit with additional borrowings from certain
related parties of the Company, including Frost Gamma Investments Trust ($45,021), Richard J. Lampen ($30,014), Mark E. Andrews,
III ($15,007), Brian L. Heller ($12,756), and Alfred J. Small ($4,502), 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.
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 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. 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.
At
December 31 and March 31, 2017, $18,490,458 and $13,133,124, respectively, due on the Credit Facility was included in long-term
liabilities. At December 31 and March 31, 2017, there was $2,509,542 and $5,866,876, respectively, in potential availability under
the Credit Facility. In connection with the adoption of ASU 2015-03, the Company included $94,109 and $100,049 of debt issuance
costs at December 31 and March 31, 2017, respectively, as direct deductions from the carrying amount of the related debt liability.
|
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.
During
the nine months ended
December 31, 2017, certain holders of the Convertible Notes converted an aggregate $928,167 of the outstanding principal
and interest balances of their Convertible Notes into 1,031,297 shares of the Company’s common stock, pursuant to
the terms of the Convertible Notes. The converting holders included Mark E. Andrews, III and an affiliate of Richard J. Lampen.
In
January 2018, an affiliate of Dr. Phillip Frost and Vector Group Ltd. converted an aggregate $703,833 of the outstanding
principal and interest balance of their Convertible Notes of into 782,037 shares of the Company’s common stock,
pursuant to the terms of the Convertible Notes.
At
December 31, 2017, $750,000 of principal due on the Convertible Notes was included in current liabilities and at March 31, 2017,
$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 nine months ended December 31, 2017. The
Company did not sell any Shares pursuant to the 2014 Distribution Agreement during the nine months ended December 31, 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 nine months ended December 31, 2017, Convertible Note holders converted $928,167 of Convertible
Notes and interest accrued thereon into 1,031,297 shares of common stock. The converting holders included Mark E.
Andrews, III and an affiliate of Richard J. Lampen.
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 December
31 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 December 31, 2017 and 2016 amounted to $504,490 and $409,511, respectively. Stock-based
compensation expense for the nine months ended December 31, 2017 and 2016 amounted to $1,484,306 and $1,172,008, respectively.
At December 31, 2017, total unrecognized compensation cost amounted to $6,694,517, 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
2.12 years. There were 269,200 options exercised during the nine months ended December 31, 2017 and 612,989 options exercised
during the nine months ended December 31, 2016. The Company did not recognize any related tax benefit for the three and nine months
ended December 31, 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 $1,218,450 (translated at the December 31, 2017 exchange rate) in bulk Irish whiskey, of
which €694,043, or $831,366 (translated at the December 31, 2017 exchange rate), has been purchased as of December 31,
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 $529,783 (translated at the December 31, 2017 exchange rate) in bulk Irish whiskey, of which €338,632, or $405,634
(translated at the December 31, 2017 exchange rate), has been purchased as of December 31, 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 entered into a supply agreement with a bourbon distiller, which provided for
the production of newly-distilled bourbon whiskey through December 31, 2019. Under this
agreement, the distiller was to provide 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 ended December
31, 2017, the Company originally contracted to purchase approximately $2,464,500 in newly
distilled bourbon, $1,959,801 of which had been purchased as of December 31, 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 had 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 no more than
the 2016 contract year amount.
|
In
October 2017, the Company entered into a new supply agreement with a different bourbon distiller. Under this agreement, the distiller
will provide 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 ending December 31, 2018, the Company has contracted to purchase approximately $3,900,000
in newly distilled bourbon, none of which had been purchased as of December 31, 2017. The Company is not obligated to pay the
distiller for any product not yet received.
|
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 $1,797 (translated at the December
31, 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 38.4% and 42.3%
of the Company’s net sales for the three months ended December 31, 2017 and 2016,
respectively. Sales to SGWS accounted for approximately 38.2% and 37.1% of the
Company’s net sales for the nine months ended December 31, 2017 and 2016, respectively,
and approximately 40.6% and 33.2% of accounts receivable at December 31 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, whiskeys, 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 December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Consolidated
Sales, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
2,390,478
|
|
|
|
9.9
|
%
|
|
$
|
2,062,991
|
|
|
|
11.3
|
%
|
United
States
|
|
|
21,689,145
|
|
|
|
90.1
|
%
|
|
|
16,246,548
|
|
|
|
88.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Sales, net
|
|
$
|
24,079,623
|
|
|
|
100.0
|
%
|
|
$
|
18,309,539
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Income (Loss) from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
(7,228
|
)
|
|
|
(0.5
|
)%
|
|
$
|
15,988
|
|
|
|
1.9
|
%
|
United
States
|
|
|
1,579,434
|
|
|
|
100.5
|
%
|
|
|
837,748
|
|
|
|
98.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Income from Operations
|
|
$
|
1,572,206
|
|
|
|
100.0
|
%
|
|
$
|
853,736
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Net Income Attributable to Common Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
36,186
|
|
|
|
7.8
|
%
|
|
$
|
16,250
|
|
|
|
3.8
|
%
|
United
States
|
|
|
429,394
|
|
|
|
92.2
|
%
|
|
|
406,316
|
|
|
|
96.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Net Income Attributable to Common Shareholders
|
|
$
|
465,580
|
|
|
|
100.0
|
%
|
|
$
|
422,566
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
63,085
|
|
|
|
100.0
|
%
|
|
$
|
273,781
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Sales, net by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whiskey
|
|
$
|
10,811,701
|
|
|
|
44.9
|
%
|
|
$
|
7,656,767
|
|
|
|
41.8
|
%
|
Rum
|
|
|
3,758,793
|
|
|
|
15.6
|
%
|
|
|
3,392,725
|
|
|
|
18.5
|
%
|
Liqueur
|
|
|
2,723,578
|
|
|
|
11.3
|
%
|
|
|
1,871,683
|
|
|
|
10.2
|
%
|
Vodka
|
|
|
377,999
|
|
|
|
1.6
|
%
|
|
|
354,884
|
|
|
|
1.9
|
%
|
Tequila
|
|
|
26,565
|
|
|
|
0.1
|
%
|
|
|
53,788
|
|
|
|
0.3
|
%
|
Ginger
beer
|
|
|
6,380,987
|
|
|
|
26.4
|
%
|
|
|
4,979,692
|
|
|
|
27.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Sales, net
|
|
$
|
24,079,623
|
|
|
|
100.0
|
%
|
|
$
|
18,309,539
|
|
|
|
100.0
|
%
|
|
|
Nine
months ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Consolidated
Sales, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
6,832,624
|
|
|
|
10.4
|
%
|
|
$
|
5,862,534
|
|
|
|
10.7
|
%
|
United
States
|
|
|
58,993,436
|
|
|
|
89.6
|
%
|
|
|
48,825,721
|
|
|
|
89.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Sales, net
|
|
$
|
65,826,060
|
|
|
|
100.0
|
%
|
|
$
|
54,688,255
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Income (Loss) from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
(20,489
|
)
|
|
|
(0.7
|
)%
|
|
$
|
(89,079
|
)
|
|
|
(8.9
|
)%
|
United
States
|
|
|
2,806,042
|
|
|
|
100.7
|
%
|
|
|
1,085,687
|
|
|
|
108.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Income from Operations
|
|
$
|
2,785,553
|
|
|
|
100.0
|
%
|
|
$
|
996,608
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Net Income (Loss) Attributable to Common Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
78,447
|
|
|
|
(16.3
|
)%
|
|
$
|
(45,884
|
)
|
|
|
4.4
|
%
|
United
States
|
|
|
(560,945
|
)
|
|
|
116.3
|
%
|
|
|
(998,079
|
)
|
|
|
95.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Net Loss Attributable to Common Shareholders
|
|
$
|
(482,498
|
)
|
|
|
100.0
|
%
|
|
$
|
(1,043,963
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
19,337
|
|
|
|
100.0
|
%
|
|
$
|
(414,994
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Sales, net by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whiskey
|
|
$
|
25,317,480
|
|
|
|
38.5
|
%
|
|
$
|
19,642,471
|
|
|
|
35.9
|
%
|
Rum
|
|
|
12,380,558
|
|
|
|
18.8
|
%
|
|
|
12,842,295
|
|
|
|
23.5
|
%
|
Liqueur
|
|
|
7,361,924
|
|
|
|
11.2
|
%
|
|
|
6,377,875
|
|
|
|
11.7
|
%
|
Vodka
|
|
|
1,021,253
|
|
|
|
1.5
|
%
|
|
|
1,146,521
|
|
|
|
2.1
|
%
|
Tequila
|
|
|
156,301
|
|
|
|
0.2
|
%
|
|
|
181,127
|
|
|
|
0.3
|
%
|
Ginger
beer
|
|
|
19,588,544
|
|
|
|
29.8
|
%
|
|
|
14,497,966
|
|
|
|
26.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Sales, net
|
|
$
|
65,826,060
|
|
|
|
100.0
|
%
|
|
$
|
54,688,255
|
|
|
|
100.0
|
%
|
|
|
As
of December 31, 2017
|
|
|
As
of March 31, 2017
|
|
Consolidated
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
3,028,366
|
|
|
|
4.9
|
%
|
|
$
|
3,234,536
|
|
|
|
6.0
|
%
|
United
States
|
|
|
58,856,554
|
|
|
|
95.1
|
%
|
|
|
51,107,608
|
|
|
|
94.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Assets
|
|
$
|
61,884,920
|
|
|
|
100.0
|
%
|
|
$
|
54,342,144
|
|
|
|
100.0
|
%
|
*Includes
related non-beverage alcohol products.