Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Our
objective is to continue building Castle Brands into a profitable international spirits company, with a distinctive portfolio
of premium and super premium spirits 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 and whiskeys 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 Whiskeys 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
Developments
Expansion
of our Credit Facility
On May 15, 2018, we, and
our wholly-owned subsidiary, Castle Brands (USA) Corp. (“CB-USA”), entered into a Fourth Amendment (the “Fourth
Amendment”) to the Amended and Restated Loan and Security Agreement, dated as of September 22, 2014, with ACF FinCo I LP
(“ACF”), to amend certain terms of the existing $21.0 million revolving credit facility (the “Facility”)
with ACF. Among other changes, the Fourth Amendment increased the maximum amount of the Facility from $21.0 million to $23.0 million
and amended the definition of borrowing base to increase the amount of borrowing that can be collateralized by inventory. We paid
ACF an aggregate $20,000 commitment fee in connection with the Fourth Amendment. In connection with the Fourth Amendment, we also
entered into an Amended and Restated Revolving Credit Note.
Extension
of our 11% Subordinated Note
On
April 17, 2018, we entered into a First Amendment (the “Note Amendment”) to the 11% Subordinated Note due 2019, dated
March 29, 2017, in the principal amount of $20.0 million with Frost Nevada Investments Trust (the “Frost Note”), an
entity affiliated with Phillip Frost, M.D., a director and a principal shareholder of ours. The purpose of the Note Amendment
was to extend the maturity date on the Frost Note from March 15, 2019 until September 15, 2020. No other provisions of the Frost
Note were amended.
Craft
Beverage Modernization and Tax Reform Act of 2017
We
expect to benefit from changes to excise tax rates resulting from the enactment of the Craft Beverage Modernization and Tax Reform
Act of 2017. The amount of such benefit cannot be quantified at this time. We are awaiting the announcement of, and establishment
of, appropriate procedures by the Alcohol and Tobacco Tax and Trade Bureau (TTB) and U.S. Customs and Border Protection (CBP)
regarding such excise tax changes.
Operations
overview
We
generate revenue through the sale of our products to our network of wholesale distributors or, in control states, state-operated
agencies, which, in turn, distribute our products to retail outlets. In the U.S., our sales price per case includes excise tax
and import duties, which are also reflected as a corresponding increase in our cost of sales. Most of our international sales
are sold “in bond”, with the excise taxes paid by our customers upon shipment, thereby resulting in lower relative
revenue as well as a lower relative cost of sales, although some of our United Kingdom sales are sold “tax paid”,
as in the U.S. The difference between sales and net sales principally reflects adjustments for various distributor incentives.
Our
gross profit is determined by the prices at which we sell our products, our ability to control our cost of sales, the relative
mix of our case sales by brand and geography and the impact of foreign currency fluctuations. Our cost of sales is principally
driven by our cost of procurement, bottling and packaging, which differs by brand, as well as freight and warehousing costs. We
purchase certain products, such as Goslings rums and ginger beer, Pallini liqueurs, Arran whiskeys, and Gozio amaretto,
as finished goods. For other products, such as Jefferson’s bourbons, we purchase the components, including the distilled
spirits, bottles and packaging materials, and have arrangements with third parties for bottling and packaging. Our U.S. sales
typically have a higher absolute gross margin than in other markets, as sales prices per case are generally higher in the U.S.
Selling
expense principally includes advertising and marketing expenditures and compensation paid to our marketing and sales personnel.
Our selling expense, as a percentage of sales and per case, is higher than that of our competitors because of our brand development
costs, level of marketing expenditures and established sales force versus our relatively small base of case sales and sales volumes.
However, we believe that maintaining an infrastructure capable of supporting future growth is the correct long-term approach for
us.
While
we expect the absolute level of selling expense to increase in the coming years, we expect selling expense as a percentage of
revenues and on a per case basis to decline or remain constant, as our volumes expand and our sales team sells a larger number
of brands.
General
and administrative expense relates to corporate and administrative functions that support our operations and includes administrative
payroll, occupancy and related expenses and professional services. We expect general and administrative expense in fiscal 2019
to be higher than fiscal 2018 due to costs associated with increased infrastructure to support our growth. However, we expect
our general and administrative expense as a percentage of sales to decline due to economies of scale.
We
expect to increase our case sales in the U.S. and internationally over the next several years through organic growth, and through
the introduction of product line extensions, acquisitions and distribution agreements. We will seek to maintain liquidity and
manage our working capital and overall capital resources during this period of anticipated growth to achieve our long-term objectives,
although there is no assurance that we will be able to do so.
We
continue to believe the following industry trends will create growth opportunities for us, including:
●
|
the
divestiture of smaller and emerging non-core brands by major spirits companies as they continue to consolidate;
|
|
|
●
|
increased
barriers to entry, particularly in the U.S., due to continued consolidation and the difficulty in establishing an extensive
distribution network, such as the one we maintain; and
|
|
|
●
|
the
trend by small private and family-owned spirits brand owners to partner with, or be acquired by, a company with global distribution.
We expect to be an attractive alternative to our larger competitors for these brand owners as one of the few modestly-sized
publicly-traded spirits companies.
|
Our
growth strategy is based upon growing existing brands, partnering with other brands and acquiring smaller and emerging brands.
To identify potential partner and acquisition candidates we plan to rely on our management’s industry experience and our
extensive network of industry contacts. We also plan to maintain and grow our U.S. and international distribution channels so
that we are more attractive to spirits companies who are looking for a route to market for their products. We expect to compete
for foreign and small private and family-owned spirits brands by offering flexible and creative structures, which present an alternative
to the larger spirits companies.
We
intend to finance any future brand acquisitions through a combination of our available cash resources, third party financing and,
in appropriate circumstances, the further issuance of equity and/or debt securities. Acquiring additional brands could have a
significant effect on our financial position, and could cause substantial fluctuations in our quarterly and yearly operating results.
Also, the pursuit of acquisitions and other new business relationships may require significant management attention. We may not
be able to successfully identify attractive acquisition candidates, obtain financing on favorable terms or complete these types
of transactions in a timely manner and on terms acceptable to us, if at all.
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):
|
|
Year
ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
351,233
|
|
|
|
341,256
|
|
|
|
340,782
|
|
International
|
|
|
85,499
|
|
|
|
75,113
|
|
|
|
85,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
436,732
|
|
|
|
416,369
|
|
|
|
426,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rum
|
|
|
179,155
|
|
|
|
180,914
|
|
|
|
180,698
|
|
Whiskey
|
|
|
123,469
|
|
|
|
109,223
|
|
|
|
109,990
|
|
Liqueur
|
|
|
106,806
|
|
|
|
93,201
|
|
|
|
91,010
|
|
Vodka
|
|
|
26,248
|
|
|
|
31,907
|
|
|
|
43,608
|
|
Tequila
|
|
|
1,054
|
|
|
|
1,124
|
|
|
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
436,732
|
|
|
|
416,369
|
|
|
|
426,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
80.4
|
%
|
|
|
82.0
|
%
|
|
|
79.9
|
%
|
International
|
|
|
19.6
|
%
|
|
|
18.0
|
%
|
|
|
20.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rum
|
|
|
41.0
|
%
|
|
|
43.4
|
%
|
|
|
42.5
|
%
|
Whiskey
|
|
|
28.3
|
%
|
|
|
26.2
|
%
|
|
|
25.8
|
%
|
Liqueur
|
|
|
24.5
|
%
|
|
|
22.4
|
%
|
|
|
21.3
|
%
|
Vodka
|
|
|
6.0
|
%
|
|
|
7.7
|
%
|
|
|
10.2
|
%
|
Tequila
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The
following table provides information regarding our case sales of related non-alcoholic beverage products, which primarily consists
of Goslings Stormy Ginger Beer, for the periods presented:
|
|
Year
ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
1,739,779
|
|
|
|
1,326,140
|
|
|
|
1,070,173
|
|
International
|
|
|
74,589
|
|
|
|
61,740
|
|
|
|
45,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,814,368
|
|
|
|
1,387,880
|
|
|
|
1,115,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
95.9
|
%
|
|
|
95.6
|
%
|
|
|
96.0
|
%
|
International
|
|
|
4.1
|
%
|
|
|
4.4
|
%
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Critical
accounting policies and estimates
A
number of estimates and assumptions affect our reported amounts of assets and liabilities, amounts of sales and expenses and disclosure
of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate these estimates and assumptions
based on historical experience and other factors and circumstances. We believe our estimates and assumptions are reasonable under
the circumstances; however, actual results may differ from these estimates.
We
believe that the estimates and assumptions discussed below are most important to the portrayal of our financial condition and
results of operations in that they require our most difficult, subjective or complex judgments and form the basis for the accounting
policies deemed to be most critical to our operations.
Revenue
recognition
We recognize revenue from product sales when the product is shipped to a customer (generally a distributor),
title and risk of loss has passed to the customer under the terms of sale (FOB shipping point) and collection is reasonably assured.
We do not offer a right of return but will accept returns if we shipped the wrong product or wrong quantity. Revenue is not recognized
on shipments to control states in the U.S. until such time as the product is sold through to the retail channel.
Accounts
receivable
We
record trade accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible
accounts to reflect any loss anticipated on the trade accounts receivable balances and charged to the allowance for doubtful accounts.
We calculate this allowance based on our history of write-offs, level of past due accounts based on contractual terms of the receivables
and our relationships with, and economic status of, our customers.
Inventory
valuation
Our
inventory, which consists of distilled spirits, non-beverage alcohol products, dry good raw materials (bottles, cans, labels and
caps), packaging, excise taxes, freight and finished goods, is valued at the lower of cost or net realizable value, using
the weighted average cost method. We assess the valuation of our inventories and reduce the carrying value of those inventories
that are obsolete or in excess of our forecasted usage to their estimated realizable value. We estimate the net realizable value
of such inventories based on analyses and assumptions including, but not limited to, historical usage, future demand and market
requirements. Reduction to the carrying value of inventories is recorded in cost of goods sold.
Goodwill
and other intangible assets
At
each of March 31, 2018 and 2017, we had $0.5 million of goodwill that arose from acquisitions. Goodwill represents the excess
of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses
acquired. Intangible assets with indefinite lives consist primarily of rights, trademarks, trade names and formulations. We are
required to analyze our goodwill and other intangible assets with indefinite lives for impairment on an annual basis as well as
when events and circumstances indicate that an impairment may have occurred. In testing goodwill for impairment, we have the option
to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that
it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount.
If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required
to perform a quantitative impairment test, otherwise no further analysis is required. We may also elect not to perform the qualitative
assessment and, instead, proceed direct to the quantitative impairment test. Under the goodwill qualitative assessment, various
events and circumstances that would affect the estimated fair value of a reporting unit are identified, including, but not limited
to: prior years’ impairment testing results, budget to actual results, Company-specific facts and circumstances, industry
developments, and the economic environment.
Under
the goodwill two-step quantitative impairment test we evaluate the recoverability of goodwill and indefinite lived intangible
assets at the reporting unit level. In the first step the fair value for the reporting unit is compared to its book value including
goodwill. If the fair value of the reporting unit is less than the book value, a second step is performed which compares the implied
fair value of the reporting unit’s goodwill to the book value of the goodwill. The fair value for the goodwill is determined
based on the difference between the fair values of the reporting units and the net fair values of the identifiable assets and
liabilities of such reporting units. If the fair value of the goodwill is less than the book value, the difference is recognized
as an impairment.
Under
the goodwill qualitative assessment at March 31, 2018 and 2017, various events and circumstances that would affect the estimated
fair value of each reporting unit were identified, including, but not limited to: prior years’ impairment testing results,
budget to actual results, Company-specific facts and circumstances, industry developments, and the economic environment. Based
on this assessment, we determined that no quantitative assessment was required. We did not record any impairment on goodwill or
other intangible assets for fiscal 2018, 2017 or 2016.
Intangible
assets with estimable useful lives are amortized over their respective estimated useful lives to the estimated residual values
and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
We are required to amortize intangible assets with estimable useful lives over their respective estimated useful lives to the
estimated residual values and to review intangible assets with estimable useful lives for impairment in accordance with the Financial
Accounting Standards Board Accounting Standards Codification (“ASC”) 310, “Accounting for the Impairment or
Disposal of Long-lived Assets.”
Stock-based
awards
We follow current authoritative guidance regarding stock-based compensation, which requires all share-based
payments, including grants of stock options and restricted stock, to be recognized in the income statement as an operating expense,
based on their fair values on the grant date. Stock-based compensation was $2.0 million, $1.6 million and $1.4 million for fiscal
2018, 2017 and 2016, respectively. We use the Black-Scholes option-pricing model to estimate the fair value of options granted.
The assumptions used in valuing the options granted during fiscal 2017 and 2016 are included in note 12 to our accompanying consolidated
financial statements.
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. We believe that there is no material difference between the fair value and the reported amounts of financial instruments
in the balance sheets due to the short-term maturity of these instruments, or with respect to the debt, as compared to the current
borrowing rates available to us.
Results
of operations
The
following table sets forth, for the periods indicated, the percentage of net sales of certain items in our consolidated financial
statements.
|
|
Year
ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Sales,
net
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
59.7
|
%
|
|
|
59.0
|
%
|
|
|
60.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
40.3
|
%
|
|
|
41.0
|
%
|
|
|
39.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expense
|
|
|
24.2
|
%
|
|
|
26.0
|
%
|
|
|
26.6
|
%
|
General
and administrative expense
|
|
|
10.5
|
%
|
|
|
11.2
|
%
|
|
|
10.2
|
%
|
Depreciation
and amortization
|
|
|
0.9
|
%
|
|
|
1.3
|
%
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
4.7
|
%
|
|
|
2.5
|
%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from equity investment in non-consolidated affiliate
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
Foreign
exchange (loss) gain
|
|
|
(0.1
|
)%
|
|
|
0.1
|
%
|
|
|
(0.3
|
)%
|
Interest
expense, net
|
|
|
(4.2
|
)%
|
|
|
(1.7
|
)%
|
|
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes
|
|
|
0.5
|
%
|
|
|
0.9
|
%
|
|
|
(0.4
|
)%
|
Income
tax expense, net
|
|
|
(0.2
|
)%
|
|
|
(0.2
|
)%
|
|
|
(2.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
0.3
|
%
|
|
|
0.7
|
%
|
|
|
(2.4
|
)%
|
Net
income attributable to noncontrolling interests
|
|
|
(1.2
|
)%
|
|
|
(1.8
|
)%
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
|
(0.9
|
)%
|
|
|
(1.1
|
)%
|
|
|
(3.5
|
)%
|
The
following is a reconciliation of net loss attributable to common shareholders to EBITDA, as adjusted:
|
|
Year ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net loss attributable to common shareholders
|
|
$
|
(818,934
|
)
|
|
$
|
(852,613
|
)
|
|
$
|
(2,516,368
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
3,794,144
|
|
|
|
1,335,241
|
|
|
|
1,088,539
|
|
Income tax expense, net
|
|
|
140,370
|
|
|
|
187,702
|
|
|
|
1,450,848
|
|
Depreciation and amortization
|
|
|
809,395
|
|
|
|
1,030,093
|
|
|
|
939,513
|
|
EBITDA, attributable to common shareholders
|
|
|
3,924,975
|
|
|
|
1,700,423
|
|
|
|
962,532
|
|
Allowance for doubtful accounts
|
|
|
59,012
|
|
|
|
123,200
|
|
|
|
61,000
|
|
Allowance for obsolete inventory
|
|
|
376,611
|
|
|
|
240,000
|
|
|
|
200,000
|
|
Stock-based compensation expense
|
|
|
1,974,745
|
|
|
|
1,577,994
|
|
|
|
1,370,556
|
|
Transaction fees
|
|
|
-
|
|
|
|
346,704
|
|
|
|
-
|
|
Other expense (income), net
|
|
|
215
|
|
|
|
10,660
|
|
|
|
666
|
|
Income from equity investment in non-consolidated affiliate
|
|
|
(87,829
|
)
|
|
|
(51,430
|
)
|
|
|
(18,667
|
)
|
Foreign exchange loss (income)
|
|
|
77,127
|
|
|
|
(83,707
|
)
|
|
|
190,867
|
|
Net income attributable to noncontrolling interests
|
|
|
1,089,124
|
|
|
|
1,359,145
|
|
|
|
809,662
|
|
EBITDA, as adjusted
|
|
$
|
7,404,980
|
|
|
$
|
5,222,989
|
|
|
$
|
3,576,616
|
|
Earnings
before interest, taxes, depreciation and amortization, or EBITDA, adjusted for allowances for doubtful accounts and obsolete inventory,
stock-based compensation expense, transaction fees, other expense (income), net, income from equity investment in non-consolidated
affiliate, foreign exchange loss (income) 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, improved to $7.3 million for the year ended March 31, 2018, as compared to $5.2 million for the prior fiscal
year, primarily as a result of our increased sales and gross profit. Our EBITDA, as adjusted, improved to $5.2 million for the
year ended March 31, 2017, as compared to $3.6 million for the prior year, primarily as a result of our increased sales and gross
profit.
Fiscal
2018 compared with fiscal 2017
Net sales.
Net
sales increased 16.3% to $89.9 million for the year ended March 31, 2018, as compared to $77.3 million for the prior fiscal year,
primarily due to U.S. sales growth of our whiskey portfolio, Goslings Stormy Ginger Beer and certain liqueur brands, partially
offset by decreases in vodka and rum sales. For the year ended March 31, 2018, sales of our Goslings Stormy Ginger Beer increased
32.7% to $26.5 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 whiskeys during the year
ended March 31, 2018 contributed $1.2 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 year ended March
31, 2018 as compared to the year ended March 31, 2017:
|
|
Increase/(decrease)
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
increase/(decrease)
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Rum
|
|
|
(1,759
|
)
|
|
|
(9,537
|
)
|
|
|
(1.0
|
)%
|
|
|
(7.0
|
)%
|
Whiskey
|
|
|
14,246
|
|
|
|
10,666
|
|
|
|
13.0
|
%
|
|
|
13.0
|
%
|
Liqueurs
|
|
|
13,605
|
|
|
|
13,386
|
|
|
|
14.6
|
%
|
|
|
14.4
|
%
|
Vodka
|
|
|
(5,659
|
)
|
|
|
(4,469
|
)
|
|
|
(17.7
|
)%
|
|
|
(15.6
|
)%
|
Tequila
|
|
|
(70
|
)
|
|
|
(70
|
)
|
|
|
(6.2
|
)%
|
|
|
(6.2
|
)%
|
Total
|
|
|
20,363
|
|
|
|
9,976
|
|
|
|
4.9
|
%
|
|
|
2.9
|
%
|
Our international spirits case sales as a
percentage of total spirits case sales increased to 19.6% for the year ended March 31, 2018 as compared to 18.0% for the
prior fiscal year, 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 year ended March 31, 2018 as compared to the
year ended March 31, 2017:
|
|
Increase
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
Increase
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Ginger
Beer Products
|
|
|
426,488
|
|
|
|
413,639
|
|
|
|
30.7
|
%
|
|
|
31.2
|
%
|
Gross profit.
Gross profit increased 14.2% to $36.2 million for the year ended March 31, 2018 from $31.7 million for the prior fiscal year,
while gross margin decreased to 40.4% for the year ended March 31, 2018 as compared to 41.0% for the prior fiscal year. 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 small decrease in gross margin was primarily due to pricing of some of our ancillary brands. We expect that
gross margin in the near term will be impacted negatively by a temporary increase in our bulk bourbon costs, but positively
impacted by the Craft Beverage Modernization and Tax Reform Act 2017. During the year ended March 31, 2018, we recorded an
addition to the allowance for obsolete and slow-moving inventory of $0.4 million as compared to $0.2 million for the prior
fiscal year. 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 8.2% to $21.8 million for the year ended March 31, 2018 from $20.1 million for the prior
fiscal year, primarily due to a $1.3 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, a $0.5 million increase
in shipping costs and a $0.3 million increase in commission expense from increased sales volume, partially offset by a $0.5 million
decrease in employee expense. Selling expense as a percentage of net sales decreased to 24.2% for the year ended March 31, 2018
as compared to 26.0% for the prior fiscal year.
General
and administrative expense.
General and administrative expense increased 9.1% to $9.4 million for the year ended March 31,
2018 from $8.6 million for the prior fiscal year, primarily due to a $0.3 million increase in professional fees and a $0.5 million
increase in compensation costs. General and administrative expense as a percentage of net sales decreased to 10.5% for the year
ended March 31, 2018 as compared to 11.2% for the prior fiscal year.
Depreciation
and amortization.
Depreciation and amortization was $0.8 million for the year ended March 31, 2018 as compared to $1.0 million
for the prior fiscal year.
Income
from operations
. As a result of the foregoing, we had income from operations of $4.2 million for the year ended March 31,
2018 as compared to $1.9 million for the prior fiscal year. 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
benefit or 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 a net expense of ($0.1)
million for the year ended March 31, 2018 as compared to a net expense of ($0.2) million for the prior fiscal year.
Foreign
exchange (loss) gain.
Foreign exchange loss for the year ended March 31, 2018 was $0.1 million as compared to a gain of $0.1
million for the prior fiscal year 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 ($3.8) million
for the year ended March 31, 2018 as compared to ($1.3) million for the prior fiscal year 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 whiskeys in support of the growth of our Jefferson’s whiskeys
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 ($1.1) million for the year ended March
31, 2018 as compared to ($1.4) million for the comparable prior year period, both as a result of net income allocated to the 19.9%
noncontrolling interests in GCP in the year ended March 31, 2018 and the 40.0% noncontrolling interests in GCP in the year ended
March 31, 2017. 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 ($0.8) million for the year ended March 31, 2018 as compared to ($0.9) million for the prior fiscal year. Net loss per
common share, basic and diluted, was ($0.01) per share for the each of the years ended March 31, 2018 and 2017.
Fiscal
2017 compared with fiscal 2016
Net
sales.
Net sales increased 7.0% to $77.3 million for the year ended March 31, 2017, as compared to $72.2 million for the prior
fiscal year, primarily due to U.S. sales growth of Jefferson’s bourbons and Goslings Stormy Ginger Beer, partially offset
by decreases in vodka and international Irish whiskey sales. For the year ended March 31, 2017, sales of our Goslings Stormy Ginger
Beer increased 23.3% to $20.0 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. 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 year ended March
31, 2017 as compared to the year ended March 31, 2016:
|
|
Increase/(decrease)
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
increase/(decrease)
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Rum
|
|
|
216
|
|
|
|
2,046
|
|
|
|
0.1
|
%
|
|
|
1.5
|
%
|
Whiskey
|
|
|
(767
|
)
|
|
|
7,356
|
|
|
|
(0.7
|
)%
|
|
|
9.8
|
%
|
Liqueur
|
|
|
2,191
|
|
|
|
2,213
|
|
|
|
2.4
|
%
|
|
|
2.4
|
%
|
Vodka
|
|
|
(11,701
|
)
|
|
|
(11,231
|
)
|
|
|
(26.8
|
)%
|
|
|
(28.1
|
)%
|
Tequila
|
|
|
90
|
|
|
|
90
|
|
|
|
8.7
|
%
|
|
|
8.7
|
%
|
Total
|
|
|
(9,971
|
)
|
|
|
474
|
|
|
|
(2.3
|
)%
|
|
|
0.1
|
%
|
Our
international spirits case sales as a percentage of total spirits case sales decreased to 18.0% for the year ended March 31, 2017
as compared to 20.1% for the prior fiscal year, primarily due to decreased Irish whiskey and rum sales in certain international
markets resulting in part from the timing of shipments to large retailers in Great Britain and Scandinavia.
The
following table presents the increase in case sales of related non-alcoholic beverage products for the year ended March 31, 2017
as compared to the year ended March 31, 2016:
|
|
Increase
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
Increase
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Related
Non-Alcoholic Beverage Products
|
|
|
272,606
|
|
|
|
255,967
|
|
|
|
24.4
|
%
|
|
|
23.9
|
%
|
Gross
profit.
Gross profit increased 11.0% to $31.7 million for the year ended March 31, 2017 from $28.6 million for the prior fiscal
year, while gross margin increased to 41.0% for the year ended March 31, 2017 as compared to 39.5% for the prior fiscal year.
The increase in gross profit was primarily due to increased aggregate revenue in the current period. During each of the years
ended March 31, 2017 and 2016, we recorded additions to allowance for obsolete and slow moving inventory of $0.2 million. 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. Net of the allowances for obsolete inventories, gross margin for the year ended March 31,
2017 was 41.2% as compared to 39.8% for the prior-year period.
Selling
expense
. Selling expense increased 4.7% to $20.1 million for the year ended March 31, 2017 from $19.2 million for the prior
fiscal year, primarily due to a $0.3 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 $0.9 million
increase in salaries and personnel expense due to increased staff and compensation costs, including a $0.2 million increase in
travel and entertainment expense, partially offset by a $0.3 million decrease in shipping costs from lower sales volume. Selling
expense as a percentage of net sales decreased to 26.0% for the year ended March 31, 2017 as compared to 26.6% for the prior fiscal
year due to increased sales.
General
and administrative expense
. General and administrative expense increased 17.0% to $8.6 million for the year ended March 31,
2017 from $7.4 million for the prior fiscal year, primarily due to a $0.5 million increase in salaries and personnel expense due
to increased staff and compensation costs, $0.3 million increase in professional fees due to the GCP Share Acquisition, and a
$0.1 million increase each in insurance costs, occupancy expense and stock compensation expense for our Board of Directors. Increased
revenue for the year partially offset the increase in general and administrative expenses, which resulted in general and administrative
expense as a percentage of net sales increasing to 11.2% for the year ended March 31, 2017 as compared to 10.2% for the prior
fiscal year.
Depreciation
and amortization.
Depreciation and amortization was $1.0 million for the year ended March 31, 2017 as compared to $0.9 million
for the prior fiscal year.
Income
from operations
. As a result of the foregoing, we had income from operations of $1.9 million for the year ended March 31,
2017 as compared to income from operations of $1.0 million for the prior fiscal year. As a result of our focus on our stronger
growth markets and better performing brands, and expected growth from our existing 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 our GCP subsidiary, adjusted for changes in the deferred tax asset and deferred tax liability during the periods, and was net
expense of ($0.2) million for the year ended March 31, 2017 as compared to net expense of ($1.5) million for the prior fiscal
year. The net tax expense for the year ended March 31, 2017 is net of a $0.4 million tax benefit from the change in our deferred
tax liability.
Foreign
exchange gain (loss).
Foreign exchange gain for the year ended March 31, 2017 was $0.1 million as compared to a loss of ($0.2)
million for the prior fiscal year 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 ($1.3) million for the year ended March 31, 2017 as compared to ($1.1) million
for the prior fiscal year due to balances outstanding under our credit facilities. Due to expected borrowings under credit facilities
to finance additional purchases of aged whiskeys 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 $1.4 million for
the year ended March 31, 2017 as compared to $0.8 million for the prior fiscal year, both the result of net income allocated to
the 40.0% noncontrolling interests in GCP. The change in noncontrolling interests from our acquisition of an additional 20.1%
of GCP occurred at the end of March 2017 and was immaterial on our results.
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 year ended March 31, 2017 as compared to ($2.5) million for the prior fiscal year.
Net loss per common share, basic and diluted, was ($0.01) per share for the year ended March 31, 2017 as compared to ($0.02) for
the prior fiscal year.
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 year ended March 31, 2018, we had net income of $0.3 million, and used cash of $5.6 million in operating activities.
As of March 31, 2018, we had cash and cash equivalents of $0.4 million and had an accumulated deficit of $149.9 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 June 2019. The Company can continue to meet its operating needs through additional mechanisms
including additional or expanded debt financings, potential equity offerings and limiting or adjusting the timing of additional
inventory purchases based on available resources.
Financing
In May 2018, we,
and our wholly-owned subsidiary, CB-USA, entered into a Fourth Amendment (the “Fourth Amendment”) to the Amended
and Restated Loan and Security Agreement, dated as of September 22, 2014, with ACF FinCo I LP (“ACF”), to amend
certain terms of the existing $21.0 million revolving credit facility (the “Credit Facility”) with ACF.
Among other changes, the Fourth Amendment increased the maximum amount of the Facility from $21.0 million to $23.0 million
and amended the definition of borrowing base to increase the amount of borrowing that can be collateralized by inventory. We
paid ACF an aggregate $20,000 commitment fee in connection with the Fourth Amendment. In connection with the Fourth
Amendment, we also entered into an Amended and Restated Revolving Credit Note.
In April 2018,
we entered into a First Amendment (the “Note Amendment”) to the 11% Subordinated Note due 2019, dated March 29, 2017,
in the principal amount of $20.0 million with Frost Nevada Investments Trust (the “Subordinated Note”), an entity affiliated
with Phillip Frost, M.D., a director and a principal shareholder of ours. The purpose of the Note Amendment was to extend the
maturity date on the Subordinated Note from March 15, 2019 until September 15, 2020. No other provisions of the Subordinated Note were amended.
We and our wholly-owned subsidiary, CB-USA, are parties to an Amended and Restated Loan and Security Agreement
(as amended, the “Loan Agreement”) with ACF, which provides for availability (subject to certain terms and conditions)
of a facility to provide us with working capital, including capital to finance purchases of
aged whiskeys in support of the growth of our Jefferson’s whiskeys, in the amount of $23.0 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) $23.0 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.
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, an entity affiliated with Phillip Frost,
M.D., a director of ours and a principal shareholder of ours ($150,000), Mark E. Andrews, III, a director of ours and our Chairman
($50,000), Richard J. Lampen, a director of ours and our President and Chief Executive Officer ($100,000), Brian L. Heller, our
General Counsel and Assistant Secretary ($42,500), and Alfred J. Small, our Senior Vice President, Chief Financial Officer, Treasurer
& Secretary
($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 7.358050% (reflecting a discount for achieving
one such EBITDA target) and the Purchased Inventory Sublimit currently bears interest at 9.10805%. 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
December 2017, we acquired $1.0 million in aged bulk bourbon purchased under the Purchased Inventory Sublimit. Certain related
parties, 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), were junior participants in the Purchased Inventory Sublimit with respect to
such purchase.
In
April 2018, we acquired $2.0 million in aged bulk bourbon purchased under the Purchased Inventory Sublimit. Certain related parties,
including Frost Gamma Investments Trust ($100,050), Richard J. Lampen ($66,700), Mark E. Andrews, III ($33,350), Brian L. Heller
($28,348) and Alfred J. Small ($10,005), were junior participants in the Purchased Inventory Sublimit with respect to such purchase.
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 March
31, 2018, we were in compliance, in all material respects, with the covenants under the Loan Agreement.
In March 2017, we issued the Subordinated Note. In April 2018, we entered into a first amendment to the Subordinated
Note to extend the maturity date on the Subordinated Note from March 15, 2019 until September 15, 2020. No other provisions of
the Subordinated Note were amended. The purpose of the Subordinated Note was to finance the GCP Share Acquisition. The Subordinated
Note, as amended, bears interest quarterly at the rate of 11% per annum. The principal and interest accrued thereon is due and
payable in full on September 15, 2020. All claims of the holder of the Subordinated Note 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 March 31, 2018 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 March 31, 2018 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”).
As of March 31, 2018, we had $50,000 of Convertible Notes outstanding. 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, 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., 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
($200,000), all of whom converted the outstanding principal and interest balances of their Convertible Notes into shares of our
common stock in the year ended March 31, 2018.
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 the year ended March
31, 2018, certain holders of the Convertible Notes, including the related party holders described above, converted an aggregate
$1,632,000 of the outstanding principal and interest balances of their Convertible Notes into 1,813,334 shares of our common stock,
pursuant to the terms of the Convertible Notes.
Liquidity
As of March 31, 2018,
we had shareholders’ equity of $8.0 million as compared to $3.6 million at March 31, 2017. This increase in
shareholders’ equity was due to the exercise of stock options and stock-based compensation expense of $2.2 million, the
issuance of $1.6 million of common stock upon the conversion of the Convertible Notes and by our $0.5 million total comprehensive
income for the year ended March 31, 2018.
We had working capital
of $38.6 million at March 31, 2018 as compared to $31.2 million at March 31, 2017, primarily due to net income of $0.5
million, a $5.8 million increase in inventory, a $2.1 million decrease in accounts payable and accrued expenses and a $1.7
million increase in accounts receivable.
As
of March 31, 2018, we had cash and cash equivalents of approximately $0.4 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 March 31, 2018 and
2017, we also had approximately $0.4 million (translated at the March 31, 2018 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
currently intend to restructure all or a portion of our debt, including the 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 Subordinated
Note, 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 March 31, 2018, we had borrowed $18.6 million of the $21.0 million then available under the Credit Facility, including $4.8
million of the $7.0 million available under the Purchased Inventory Sublimit, leaving $0.2 million in potential availability for
working capital needs under the Credit Facility and $2.2 million available for aged whiskey inventory purchases. As of June 7,
2018, we had borrowed $20.0 million of the $23.0 million then available under the amended Credit Facility, including $6.1
million of the $7.0 million available under the Purchased Inventory Sublimit, leaving $2.1 million in potential availability for
working capital needs under the amended Credit Facility and $0.9 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 June 2019. The Company can continue to meet its operating needs through additional mechanisms including additional
or expanded debt financings, potential equity offerings and limiting or adjusting the timing of additional inventory purchases
based on available resources.
Cash
flows
The
following table summarizes our primary sources and uses of cash during the periods presented:
|
|
Year
ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(in
thousands)
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(5,641
|
)
|
|
$
|
(1,723
|
)
|
|
$
|
(2,854
|
)
|
Investing
activities
|
|
|
(465
|
)
|
|
|
(20,374
|
)
|
|
|
(990
|
)
|
Financing
activities
|
|
|
5,860
|
|
|
|
21,281
|
|
|
|
4,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency translation
|
|
|
12
|
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
$
|
(234
|
)
|
|
$
|
(819
|
)
|
|
$
|
239
|
|
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 the purchase of 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 whiskeys 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 March 31, 2018 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 year ended
March 31, 2018, net cash used in operating activities was $5.6 million, consisting primarily of a $5.8 million increase in inventory,
a $2.1 million decrease in accounts payable and accrued expenses and a $1.7 million increase in accounts receivable. These
uses of cash were partially offset by $0.5 million in net income, a $0.6 million increase in due to related parties, stock based
compensation expense of $2.0 million, and depreciation and amortization expense of $0.8 million
During
the year ended March 31, 2017, net cash used in operating activities was $1.7 million, consisting primarily of a $4.3 million
increase in inventory, a $2.1 million increase in prepaid expenses and a $1.2 million increase in accounts receivable. These uses
of cash were partially offset by $0.5 million in net income, a $2.2 million increase in accounts payable and accrued expenses,
stock based compensation expense of $1.6 million, a $0.8 million increase in due to related parties and depreciation and amortization
expense of $1.0 million.
During
the year ended March 31, 2016, net cash used in operating activities was $2.9 million, consisting primarily of a net loss of $1.7
million, a $6.5 million increase in inventory, a $0.6 million decrease in due to related parties and a $0.1 million increase in
prepaid expenses and supplies. These uses of cash were partially offset by a $3.2 million increase in accounts payable and accrued
expense, a $0.1 million increase in due from affiliates, stock based compensation expense of $1.4 million and depreciation and
amortization expense of $0.9 million.
Investing
Activities.
Net cash used in investing activities was $0.5 million for the year ended March 31, 2018, representing a $0.2
million investment in non-consolidated affiliate and $0.3 million used in the acquisition of fixed and intangible assets.
Net
cash used in investing activities was $20.4 million for the year ended March 31, 2017, consisting of the $20.0 million cash consideration
used in the GCP Share Acquisition, and $0.4 million used in the acquisition of fixed and intangible assets.
Net
cash used in investing activities was $1.0 million for the year ended March 31, 2016, representing a $0.5 million investment in
Copperhead Distillery and $0.5 million used in the acquisition of fixed and intangible assets.
Financing
activities.
Net cash provided by financing activities for the year ended March 31, 2018 was $5.9 million, consisting primarily
of $5.6 million in net borrowings on the credit facilities and $0.2 million from the exercise of stock options.
Net
cash provided by financing activities for the year ended March 31, 2017 was $21.3 million, consisting of $20.0 million in proceeds
from the issuance of the 11% Subordinated Note, $1.0 million in net proceeds from the Credit Facility and $0.3 million from the
exercise of stock options.
Net
cash provided by financing activities for the year ended March 31, 2016 was $4.1 million, consisting primarily of $3.1 million
in net proceeds from the issuance of common stock pursuant to our at-the-market distribution agreement, $2.0 million
in net proceeds from the Credit Facility and $0.4 million from the exercise of common stock options, partially offset by
$0.7 million paid on our bourbon term loan and $0.6 million in dividends paid to non-controlling interests of GCP.
Obligations
and commitments
The
table sets forth our contractual commitments as of March 31, 2018:
|
|
Payments due by period
|
|
Contractual Obligations
|
|
Less than 1 year
|
|
|
1 - 3 years
|
|
|
4 - 5 years
|
|
|
After 5 years
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Long-term debt obligations (1)
|
|
$
|
3,777
|
|
|
$
|
40,298
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
44,075
|
|
Supply agreements (2)
|
|
|
5,971
|
|
|
|
5,016
|
|
|
|
4,189
|
|
|
|
13,182
|
|
|
|
28,358
|
|
Operating leases (3)
|
|
|
407
|
|
|
|
430
|
|
|
|
11
|
|
|
|
-
|
|
|
|
848
|
|
Total
|
|
$
|
10,155
|
|
|
$
|
45,744
|
|
|
$
|
4,200
|
|
|
$
|
13,182
|
|
|
$
|
73,281
|
|
Interest
payments are based on current interest rates at March 31, 2018. Debt principal and debt interest represent principal and interest
to be paid on our revolving credit facility based on the balance outstanding as of March 31, 2018. Interest on the revolving credit
facility is calculated using the prevailing rates as of March 31, 2018. Our estimate assumes that we will maintain the same levels
of indebtedness and financial performance through the credit facility’s maturity in July 2019.
(1)
|
Long-term
debt obligations.
For more information concerning our long-term debt, see “Liquidity and Capital Resources”
above and note 8 to our accompanying consolidated financial statements.
|
|
|
(2)
|
Supply
agreements.
For a discussion of our supply agreements, see note 14 to our accompanying consolidated financial statements.
|
|
|
(3)
|
Operating
leases.
For a discussion of our operating leases, see note 14 to our accompanying consolidated financial statements.
|
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 annual 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 March 31, 2018, each as calculated from the Interbank exchange rates as reported by Oanda.com. On March 31,
2018, the exchange rate of the Euro and the British Pound in exchange for U.S. Dollars was €1.00 = U.S. $1.23187 (equivalent
to U.S.$1.00 = €0.81177) and £1.00 = U.S. $1.40313 (equivalent to U.S.$1.00 = £0.71269).
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.
Impact
of inflation
We
believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing
prices did not have a material impact on our operations during fiscal 2018, 2017 or 2016. Severe increases in inflation, however,
could affect the global and U.S. economies and could have an adverse impact on our business, financial condition and results of
operations.
Recent
accounting pronouncements
We
discuss recently issued and adopted accounting standards in the “Accounting standards adopted” and “Recent accounting
pronouncements” sections of note 1 to our accompanying 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” and as follows:
●
|
our
history of losses;
|
●
|
worldwide and domestic economic trends and financial
market conditions could adversely impact our financial performance;
|
●
|
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;
|
●
|
our
brands could fail to achieve more widespread consumer acceptance, which may limit our growth;
|
●
|
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;
|
●
|
our
annual purchase obligations with certain suppliers;
|
●
|
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;
|
●
|
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;
|
●
|
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;
|
●
|
currency
exchange rate fluctuations and devaluations may significantly adversely affect our revenues, sales, costs of goods and overall
financial results;
|
●
|
we have identified a material
weakness in our internal control over financial reporting, and our business and stock
price may be adversely affected if we have other material weaknesses or significant deficiencies
in our internal control over financial reporting;
|
●
|
a failure of one or more
of our key IT systems, networks, processes, associated sites or service providers could
have a material adverse impact on our business;
|
●
|
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;
|
●
|
the
possibility that we cannot secure and maintain listings in control states, which could cause the sales of our products to
decrease significantly;
|
●
|
an
impairment in the carrying value of our goodwill or other acquired intangible assets could negatively affect our operating
results and shareholders’ equity;
|
●
|
changes
in consumer preferences and trends could adversely affect demand for our products;
|
●
|
there
is substantial competition in our industry and the many factors that may prevent us from competing successfully;
|
●
|
adverse
changes in public opinion about alcohol could reduce demand for our products;
|
●
|
class
action or other litigation relating to alcohol misuse or abuse could adversely affect our business; and
|
●
|
adverse
regulatory decisions and legal, regulatory or tax changes could limit our business activities, increase our operating costs
and reduce our margins.
|
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.
Item
8. Financial Statements and Supplementary Data
Index
to Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders
Castle
Brands Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Castle Brands Inc. and Subsidiaries (the “Company”) as
of March 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, stockholders’ equity,
and cash flows for each of the years in the three-year period ended March 31, 2018, and the related notes (collectively referred
to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects,
the consolidated financial position of the Company as of March 31, 2018 and 2017, and the consolidated results of its operations
and its cash flows for each of the years in the three-year period ended March 31, 2018, in conformity with accounting principles
generally accepted in the United States of America.
We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the Company’s internal control over financial reporting as of March 31, 2018, based on criteria established in the Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”),
and our report dated June 14, 2018 expressed an adverse opinion.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/
EisnerAmper LLP
We
have served as the Company’s auditor since 2004.
EISNERAMPER
LLP
New
York, New York
June
14, 2018
CASTLE
BRANDS INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
376,987
|
|
|
$
|
611,048
|
|
Accounts receivable - net of allowance for doubtful accounts
of $390,939 and $302,275 at March 31, 2018 and 2017, respectively
|
|
|
13,083,487
|
|
|
|
11,460,432
|
|
Inventories- net of allowance for obsolete and slow-moving inventory of $346,344 and $312,711 at March 31, 2018 and 2017, respectively
|
|
|
34,555,553
|
|
|
|
28,952,562
|
|
Prepaid expenses and other current assets
|
|
|
3,724,759
|
|
|
|
3,674,923
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
51,740,786
|
|
|
|
44,698,965
|
|
|
|
|
|
|
|
|
|
|
Equipment - net
|
|
|
839,409
|
|
|
|
909,780
|
|
|
|
|
|
|
|
|
|
|
Intangible assets - net of accumulated amortization of $8,485,253 and $8,035,018 at March 31, 2018 and 2017, respectively
|
|
|
5,968,945
|
|
|
|
6,387,330
|
|
Goodwill
|
|
|
496,226
|
|
|
|
496,226
|
|
Investment in non-consolidated affiliate, at equity
|
|
|
813,926
|
|
|
|
570,097
|
|
Restricted cash
|
|
|
382,279
|
|
|
|
331,455
|
|
Other assets
|
|
|
91,789
|
|
|
|
99,773
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
60,333,360
|
|
|
$
|
53,493,626
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Current maturities of notes payable
|
|
$
|
176,148
|
|
|
$
|
-
|
|
Accounts payable
|
|
|
7,674,858
|
|
|
|
7,549,944
|
|
Accrued expenses
|
|
|
2,497,001
|
|
|
|
4,668,706
|
|
Due to shareholders and affiliates
|
|
|
2,785,910
|
|
|
|
2,158,318
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
13,133,917
|
|
|
|
14,376,968
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
Credit facility, net (including $576,546 and $412,269 of related-party participation at March 31, 2018 and 2017, respectively)
|
|
|
18,505,897
|
|
|
|
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 March 31, 2017)
|
|
|
-
|
|
|
|
1,675,000
|
|
Notes payable - GCP Note
|
|
|
211,580
|
|
|
|
211,580
|
|
Deferred tax liability
|
|
|
485,484
|
|
|
|
558,766
|
|
Other
|
|
|
6,778
|
|
|
|
20,666
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
52,343,656
|
|
|
|
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 March 31, 2018 and 2017
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.01 par value, 300,000,000 shares authorized at March 31, 2018 and 2017, 166,330,733 and 162,945,805 shares issued and outstanding at March 31, 2018 and 2017, respectively
|
|
|
1,663,307
|
|
|
|
1,629,458
|
|
Additional paid-in capital
|
|
|
154,731,044
|
|
|
|
150,889,613
|
|
Accumulated deficit
|
|
|
(149,891,272
|
)
|
|
|
(149,072,340
|
)
|
Accumulated other comprehensive loss
|
|
|
(2,082,011
|
)
|
|
|
(2,308,672
|
)
|
|
|
|
|
|
|
|
|
|
Total controlling shareholders’ equity
|
|
|
4,421,068
|
|
|
|
1,138,059
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
|
3,568,636
|
|
|
|
2,479,512
|
|
|
|
|
|
|
|
|
|
|
Total Equity, including noncontrolling
interests
|
|
|
7,989,704
|
|
|
|
3,617,571
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
60,333,360
|
|
|
$
|
53,493,626
|
|
See
accompanying notes to the consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Sales, net*
|
|
$
|
89,897,517
|
|
|
$
|
77,269,131
|
|
|
$
|
72,220,368
|
|
Cost of sales*
|
|
|
53,690,565
|
|
|
|
45,568,774
|
|
|
|
43,666,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
36,206,952
|
|
|
|
31,700,357
|
|
|
|
28,553,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expense
|
|
|
21,780,495
|
|
|
|
20,122,490
|
|
|
|
19,222,659
|
|
General and administrative expense
|
|
|
9,422,845
|
|
|
|
8,642,775
|
|
|
|
7,385,851
|
|
Depreciation and amortization
|
|
|
809,395
|
|
|
|
1,030,093
|
|
|
|
939,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4,194,217
|
|
|
|
1,904,999
|
|
|
|
1,005,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(215
|
)
|
|
|
(10,660
|
)
|
|
|
(666
|
)
|
Income from equity investment in non-consolidated affiliate
|
|
|
87,829
|
|
|
|
51,430
|
|
|
|
18,667
|
|
Foreign exchange (loss) gain
|
|
|
(77,125
|
)
|
|
|
83,706
|
|
|
|
(190,867
|
)
|
Interest expense, net
|
|
|
(3,794,144
|
)
|
|
|
(1,335,241
|
)
|
|
|
(1,088,539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
410,562
|
|
|
|
694,234
|
|
|
|
(255,858
|
)
|
Income tax expense, net
|
|
|
(140,370
|
)
|
|
|
(187,702
|
)
|
|
|
(1,450,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
270,192
|
|
|
|
506,532
|
|
|
|
(1,706,706
|
)
|
Net income attributable to noncontrolling interests
|
|
|
(1,089,124
|
)
|
|
|
(1,359,145
|
)
|
|
|
(809,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(818,932
|
)
|
|
$
|
(852,613
|
)
|
|
$
|
(2,516,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted, attributable to common shareholders
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation, basic and diluted, attributable to common shareholders
|
|
|
163,661,927
|
|
|
|
160,811,957
|
|
|
|
159,380,223
|
|
*Sales,
net and Cost of sales include excise taxes of $7,648,626, $7,645,789 and $7,451,569 for the years ended March 31, 2018, 2017 and
2016, respectively.
See
accompanying notes to the consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Income (Loss)
|
|
Years
ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net
income (loss)
|
|
$
|
270,192
|
|
|
$
|
506,532
|
|
|
$
|
(1,706,706
|
)
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
226,661
|
|
|
|
(114,878
|
)
|
|
|
92,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss):
|
|
|
226,661
|
|
|
|
(114,878
|
)
|
|
|
92,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
496,853
|
|
|
$
|
391,654
|
|
|
$
|
(1,614,575
|
)
|
See
accompanying notes to the consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss) Income
|
|
|
Interests
|
|
|
Equity
|
|
BALANCE,
MARCH 31, 2015, as previously recorded
|
|
|
157,187,658
|
|
|
$
|
1,571,877
|
|
|
$
|
162,626,893
|
|
|
$
|
(143,361,711
|
)
|
|
$
|
(2,285,925
|
)
|
|
$
|
2,543,529
|
|
|
$
|
21,094,663
|
|
Prior-period revision to inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,341,648
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,341,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, MARCH 31, 2015, revised
|
|
|
157,187,658
|
|
|
$
|
1,571,877
|
|
|
$
|
162,626,893
|
|
|
$
|
(145,703.359
|
)
|
|
$
|
(2,285,925
|
)
|
|
$
|
2,543,529
|
|
|
$
|
18,753,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,516,368
|
)
|
|
|
|
|
|
|
809,662
|
|
|
|
(1,706,706
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,131
|
|
|
|
|
|
|
|
92,131
|
|
Issuance of common stock, net of issuance costs of $124,876
|
|
|
2,119,282
|
|
|
|
21,193
|
|
|
|
3,105,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,127,113
|
|
Exercise of common stock options
|
|
|
1,079,602
|
|
|
|
10,796
|
|
|
|
364,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374,980
|
|
Common stock issued under 2013 incentive compensation plan
|
|
|
88,235
|
|
|
|
882
|
|
|
|
119,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,000
|
|
Subsidiary dividend paid to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
(600,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(600,000
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,250,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,250,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, MARCH 31, 2016
|
|
|
160,474,777
|
|
|
$
|
1,604,748
|
|
|
$
|
166,866,671
|
|
|
$
|
(148,219,727
|
)
|
|
$
|
(2,193,794
|
)
|
|
$
|
3,353,191
|
|
|
$
|
21,411,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(852,613
|
)
|
|
|
|
|
|
|
1,359,145
|
|
|
|
506,532
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(114,878
|
)
|
|
|
|
|
|
|
(114,878
|
)
|
Common stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
(14,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,355
|
)
|
Exercise of common stock options
|
|
|
671,028
|
|
|
|
6,710
|
|
|
|
244,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,189
|
|
Common stock issued in connection with the acquisition of an additional 20.1% of noncontrolling interests
|
|
|
1,800,000
|
|
|
|
18,000
|
|
|
|
2,430,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,448,000
|
|
Effect of acquisition of an additional 20.1% of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
(20,215,176
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,232,824
|
)
|
|
|
(22,448,000
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,577,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,577,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, MARCH 31, 2017
|
|
|
162,945,805
|
|
|
$
|
1,629,458
|
|
|
$
|
150,889,613
|
|
|
$
|
(149,072,340
|
)
|
|
$
|
(2,308,672
|
)
|
|
$
|
2,479,512
|
|
|
$
|
3,617,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(818,932
|
)
|
|
|
|
|
|
|
1,089,124
|
|
|
|
270,192
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226,661
|
|
|
|
|
|
|
|
226,661
|
|
Exercise of common stock options
|
|
|
356,700
|
|
|
|
3,567
|
|
|
|
231,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235,263
|
|
Common stock purchased under employee stock purchase plan
|
|
|
32,894
|
|
|
|
329
|
|
|
|
32,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,272
|
|
Restricted share
Grants
|
|
|
1,182,000
|
|
|
|
11,820
|
|
|
|
(11,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Conversion of 5%
Convertible Notes to common stock
|
|
|
1,813,334
|
|
|
|
18,133
|
|
|
|
1,613,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,632,000
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,974,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,974,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, MARCH 31, 2018
|
|
|
166,330,733
|
|
|
$
|
1,663,307
|
|
|
$
|
154,731,044
|
|
|
$
|
(149,891,272
|
)
|
|
$
|
(2,082,011
|
)
|
|
$
|
3,568,636
|
|
|
$
|
7,989,703
|
|
See
accompanying notes to the consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
|
|
Years ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
270,192
|
|
|
$
|
506,532
|
|
|
$
|
(1,706,706
|
)
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
809,395
|
|
|
|
1,030,093
|
|
|
|
939,513
|
|
Provision for doubtful accounts
|
|
|
59,012
|
|
|
|
123,200
|
|
|
|
61,000
|
|
Amortization of deferred financing costs
|
|
|
112,696
|
|
|
|
160,681
|
|
|
|
177,127
|
|
Deferred income tax (benefit) expense, net
|
|
|
(73,282
|
)
|
|
|
(645,235
|
)
|
|
|
(129,152
|
)
|
Net income from equity investment in non-consolidated affiliate
|
|
|
(87,829
|
)
|
|
|
(51,430
|
)
|
|
|
(18,667
|
)
|
Effect of changes in foreign currency translation
|
|
|
77,125
|
|
|
|
(83,706
|
)
|
|
|
190,867
|
|
Stock-based compensation expense
|
|
|
1,974,745
|
|
|
|
1,577,994
|
|
|
|
1,370,556
|
|
Addition to provision for obsolete inventories
|
|
|
376,611
|
|
|
|
240,000
|
|
|
|
200,000
|
|
Changes in operations, assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,656,482
|
)
|
|
|
(1,182,011
|
)
|
|
|
85,040
|
|
Due from affiliates
|
|
|
-
|
|
|
|
3,279
|
|
|
|
135,471
|
|
Inventory
|
|
|
(5,898,746
|
)
|
|
|
(4,344,791
|
)
|
|
|
(6,498,338
|
)
|
Prepaid expenses and supplies
|
|
|
(39,297
|
)
|
|
|
(2,066,856
|
)
|
|
|
(117,258
|
)
|
Other assets
|
|
|
(103,728
|
)
|
|
|
(60,117
|
)
|
|
|
(92,260
|
)
|
Accounts payable and accrued expenses
|
|
|
(2,085,822
|
)
|
|
|
2,217,652
|
|
|
|
3,163,818
|
|
Accrued interest
|
|
|
10,579
|
|
|
|
10,579
|
|
|
|
10,579
|
|
Due to related parties
|
|
|
627,591
|
|
|
|
820,247
|
|
|
|
(625,812
|
)
|
Other liabilities
|
|
|
(13,888
|
)
|
|
|
20,666
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(5,911,320
|
)
|
|
|
(2,229,755
|
)
|
|
|
(1,147,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(5,641,128
|
)
|
|
|
(1,723,223
|
)
|
|
|
(2,854,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(294,304
|
)
|
|
|
(364,740
|
)
|
|
|
(466,462
|
)
|
Acquisition of intangible assets
|
|
|
(14,602
|
)
|
|
|
(2,740
|
)
|
|
|
(23,885
|
)
|
Investment in consolidated entity
|
|
|
-
|
|
|
|
(20,000,000
|
)
|
|
|
-
|
|
Investment in non-consolidated affiliate, at equity
|
|
|
(156,000
|
)
|
|
|
-
|
|
|
|
(500,000
|
)
|
Change in restricted cash
|
|
|
(22
|
)
|
|
|
(7,040
|
)
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(464,928
|
)
|
|
|
(20,374,520
|
)
|
|
|
(990,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from (payments on) credit facility
|
|
|
5,471,837
|
|
|
|
1,044,531
|
|
|
|
1,965,050
|
|
Proceeds from 11% Subordinated note
|
|
|
-
|
|
|
|
20,000,000
|
|
|
|
-
|
|
Payments on Bourbon term loan
|
|
|
-
|
|
|
|
-
|
|
|
|
(744,900
|
)
|
Net proceeds from (payments on) foreign revolving credit facility
|
|
|
119,835
|
|
|
|
-
|
|
|
|
(34,743
|
)
|
Proceeds from issuance of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
3,251,989
|
|
Proceeds from issuance of common stock under employee stock purchase plan
|
|
|
33,272
|
|
|
|
-
|
|
|
|
-
|
|
Payments for costs of stock issuance
|
|
|
-
|
|
|
|
(14,355
|
)
|
|
|
(124,876
|
)
|
Subsidiary dividend paid to non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
(600,000
|
)
|
Proceeds from exercise of common stock options
|
|
|
235,263
|
|
|
|
251,189
|
|
|
|
374,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
5,860,207
|
|
|
|
21,281,365
|
|
|
|
4,087,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECTS OF FOREIGN CURRENCY TRANSLATION
|
|
|
11,788
|
|
|
|
(3,106
|
)
|
|
|
(3,745
|
)
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(234,061
|
)
|
|
|
(819,484
|
)
|
|
|
238,929
|
|
CASH AND CASH EQUIVALENTS - BEGINNING
|
|
|
611,048
|
|
|
|
1,430,532
|
|
|
|
1,191,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS - ENDING
|
|
$
|
376,987
|
|
|
$
|
611,048
|
|
|
$
|
1,430,532
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of 5% convertible note to common stock
|
|
$
|
1,632,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuance of common stock in connection with acquisition of additional 20.1% of noncontrolling interests
|
|
$
|
-
|
|
|
$
|
2,448,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
3,554,030
|
|
|
$
|
1,159,667
|
|
|
$
|
894,099
|
|
Income taxes paid
|
|
$
|
1,904,211
|
|
|
$
|
1,553,377
|
|
|
$
|
1,079,387
|
|
See
accompanying notes to the consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A.
|
Description
of business
- The consolidated financial statements include the accounts of Castle Brands Inc. (“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.
|
Organization
and operations
- The Company is principally engaged in the importation, marketing
and sale of premium and super premium rums, whiskey, liqueurs, vodka and related
non-alcoholic beverage products in the United States, Canada, Europe and Asia.
|
C.
|
Prior Period Adjustment
-
The Company
has revised its accumulated deficit and inventory balance at March 31, 2015 to properly
state the historical carrying value of inventory. The Company determined that ending
inventory at March 31, 2015 was overstated by $2,341,648, which represent the cumulative
impact of errors related to the changes in estimated freight costs, excise taxes, certain
cost variances in prior years, and accounting for intra-company inventory transfers between
different locations. The Company assessed the materiality of these errors on previously
issued consolidated financial statements and concluded that the error was immaterial
to any single or cumulative period. As a result, inventory was decreased by $2,341,648
and accumulated deficit increased by $2,341,648 at March 31, 2015.
|
|
|
D.
|
Liquidity
–
In April 2018, the Company extended the term of the $20,000,000 11% subordinated note to September
15, 2020 (as described in Note 18). The Company believes that its current cash and working
capital and the availability under the Credit Facility (as defined in Note 8C) 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
June 2019. The Company can continue to meet its operating needs through additional mechanisms
including additional or expanded debt financings, potential equity offerings and limiting
or adjusting the timing of additional inventory purchases based on available resources.
|
|
|
E.
|
Brands
-
Rum and Ginger Beer
- Goslings rums, a family of premium rums with a 200-year history, including the award-winning
Goslings Black Seal rum, for which the Company is, through its export venture GCP, the exclusive marketer outside of Bermuda,
and Goslings Stormy Ginger Beer, an essential non-alcoholic ingredient in Goslings trademarked Dark ‘n Stormy
®
rum cocktail.
|
Whiskey
-Premium small batch bourbons: Jefferson’s, Jefferson’s Reserve, Jefferson’s Chef’s Collaboration,
Jefferson’s Ocean Aged at Sea, Jefferson’s Wine Finish Collection, Jefferson’s Wood Experiments and Jefferson’s
Presidential Select, Jefferson’s Rye, an aged rye whiskey, and Jefferson’s The Manhattan: Barrel Finished Cocktail,
a ready-to-drink cocktail; the Clontarf Irish whiskeys, a family of premium Irish whiskeys, available in single malt and classic
pure grain versions; Knappogue Castle Whiskey, a vintage-dated premium single-malt Irish whiskey; Knappogue Castle 1951, a pure
pot-still whiskey that has been aged for 36 years, Knappogue Twin Wood, the first Sherry Finished Knappogue Castle Whiskey; and
the Arran Scotch Whiskeys: the single malts, including the 10 Years Old, the 18 Years Old and special finishes, as well as the
official Robert Burns whiskeys.
Liqueur
- Pallini Limoncello, Raspicello and Peachcello premium Italian liqueurs; Brady’s Irish Cream, a premium Irish cream
liqueur; Celtic Honey, a premium Irish liqueur; and Gozio amaretto, a premium Italian liqueur.
Vodka
- Boru vodka, an ultra-pure, five-times distilled and specially filtered premium vodka. Boru is produced in Ireland.
F.
|
Cash
and cash equivalents
- The Company considers all highly liquid instruments with a maturity at date of acquisition of three
months or less to be cash equivalents.
|
|
|
G.
|
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.
|
|
|
H.
|
Trade
accounts receivable
- The Company records trade accounts receivable at net realizable value. This value includes an appropriate
allowance for estimated uncollectible accounts to reflect anticipated losses on the trade accounts receivable balances. The
Company calculates this allowance based on its history of write-offs, level of past due accounts based on contractual terms
of the receivables and its relationships with and economic status of its customers. For the years ended March 31, 2018, 2017
and 2016, the Company recorded an addition to allowances for doubtful accounts of $59,012, $123,200 and $61,000, respectively.
|
|
|
I
.
|
Revenue
recognition
– Revenue from product sales is recognized when the product is shipped to a customer (generally a distributor),
title and risk of loss has passed to the customer in accordance with the terms of sale (FOB shipping point or FOB destination),
and collection is reasonably assured. Revenue is not recognized on shipments to control states in the United States until
such time as product is sold through to the retail channel.
|
J.
|
Inventories
- Inventories are comprised of distilled spirits, dry good raw materials (bottles, labels, corks and caps), packaging,
finished goods, excise taxes and freight and are valued at the lower of cost or market, using the weighted average cost method.
The Company assesses the valuation of its inventories and reduces the carrying value of those inventories that are obsolete
or in excess of the Company’s forecasted usage to their estimated net realizable value. The Company estimates the net
realizable value of such inventories based on analyses and assumptions including, but not limited to, historical usage, expected
future demand and market requirements. A change to the carrying value of inventories is recorded in cost of goods sold. See
Note 3.
|
During
the years ended March 31, 2018, 2017 and 2016, the Company recorded an addition to allowances for obsolete and slow-moving inventory
of $376,611, $240,000 and $200,000, respectively. The Company recorded these allowances and write-offs on both raw materials
and finished goods, primarily in connection with spoilage and slow-moving inventory, label and packaging changes made to certain
brands, as well as adjustments to estimated freight costs and excise taxes and certain cost variances. The charges have been recorded
as increases to Cost of Sales in the respective years.
K.
|
Equipment
- Equipment consists of office equipment, computers and software and furniture and fixtures. When assets are retired or
otherwise disposed of, the cost and related depreciation is removed from the accounts, and any resulting gain or loss is recognized
in the statement of operations. Equipment is depreciated using the straight-line method over the estimated useful lives of
the assets ranging from three to five years.
|
|
|
L.
|
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.
|
Under
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, “Intangibles
- Goodwill and Other”, impairment of goodwill must be tested at least annually by comparing the fair values of the applicable
reporting units with the carrying amount of their net assets, including goodwill. An entity may first assess qualitative factors
to determine whether it is necessary to perform the two-step goodwill impairment test. If determined to be necessary, the two-step
impairment test shall be used. The required two-step approach uses accounting judgments and estimates of future operating results.
Changes in estimates or the application of alternative assumptions could produce significantly different results. The estimates
that most significantly affect the fair value calculation are related to revenue growth, cost of sales, selling and marketing
expenses and discount rates. Impairment testing is done at the reporting level. If the carrying amount of the reporting unit’s
net assets exceeds the unit’s fair value, an impairment loss is recognized in an amount equal to the excess of the carrying
amount of goodwill over its implied fair value. The implied fair value of goodwill is determined in the same manner as the amount
of goodwill recognized in a business combination with the fair value of the reporting unit deemed to be the purchase price paid.
Rights, trademarks, trade names and formulations are indefinite lived intangible assets not subject to amortization and are tested
for impairment at least annually. The impairment test consists of a comparison of the fair value of the asset group allocated
to each reporting unit with its allocated carrying amount.
Under
the goodwill qualitative assessment at March 31, 2018 and 2017, various events and circumstances that would affect the estimated
fair value of each reporting unit were identified, including, but not limited to: prior years’ impairment testing results,
budget to actual results, Company-specific facts and circumstances, industry developments, and the economic environment. Based
on this assessment, the Company determined that no quantitative assessment was required.
M.
|
Impairment
and disposal of long-lived assets
- Under 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. There were no impairments recorded during the years ended March 31, 2018, 2017
and 2016.
|
N
|
Shipping
and handling
- The Company reflects as inventory costs freight-in and related external handling charges relating to the
purchase of raw materials and finished goods. These costs are charged to cost of sales at the time the underlying product
is sold. The Company also incurs shipping costs in connection with its various marketing activities, including the shipment
of point of sale materials to the Company’s regional sales managers and customers, and the costs of shipping product
in connection with its various marketing programs and promotions. These shipping charges are included in selling expense and
were $2,797,701, $2,347,121 and $2,635,430 for the years ended March 31, 2018, 2017 and 2016, respectively.
|
|
|
O.
|
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.
|
|
|
P.
|
Distributor
charges and promotional goods
- The Company incurs charges from its distributors for a variety of transactions and services
rendered by the distributor, including product depletions, product samples for various promotional purposes, in-store tastings
and training where legal, and local advertising where legal. Such charges are reflected as selling expense as incurred. Also,
the Company has entered into arrangements with certain of its distributors whereby the purchase of a particular product or
products by a distributor is accompanied by a percentage of the sale being composed of promotional goods or as a predetermined
discount percentage of dollars off invoice. In such cases, the cost of the promotional goods is charged to cost of sales and
dollars off invoice are a reduction to revenue.
|
Q.
|
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.
|
|
|
R.
|
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.
|
S.
|
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.
|
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 March 31, 2018.
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 30.79% for the fiscal year ended March 31, 2018. Thereafter, the applicable statutory rate
is 21.0%.
ASC 740 requires all companies
to reflect the effects of the 2017 Tax Act in the period in which the 2017 Tax Act was enacted. Accordingly, the
Company reduced the statutory rate that applies to its year-to-date fiscal 2018 earnings from 34.0% to 30.79%. 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 March 31, 2018, the Company had reserves for uncertain tax positions (including related interest and
penalties) for various state and local tax issues of $6,778. The Company recognizes interest and penalties related to uncertain
tax positions in general and administrative expense.
T.
|
Research
and development costs
- The costs of research, development and product improvement are charged to expense as incurred
and are included in selling expense.
|
|
|
U.
|
Advertising
- Advertising and marketing costs are expensed when the advertising first appears in its respective medium. Advertising
expense, which is included in selling expense, was $5,013,523, $4,486,796 and $4,960,301 for the years ended March 31, 2018,
2017 and 2016, respectively.
|
|
|
V.
|
Use
of estimates
- The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles
(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates
include the accounting for items such as evaluating annual impairment tests, derivative instruments and equity issuances,
warrant valuation, stock-based compensation, allowances for doubtful accounts and inventory obsolescence, depreciation, amortization
and expense accruals.
|
|
|
W.
|
Recent
accounting pronouncements
– In February 2018, the FASB issued ASU No. 2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”),
which allows for stranded tax effects in accumulated other comprehensive income resulting
from the 2017 Tax Act to be reclassified to retained earnings. This guidance is
effective for the Company as of April 1, 2018, with early adoption permitted. The
Company has evaluated the new guidance and has determined that the adoption of this guidance
will not have a material impact on the Company’s results of operations, cash flows
and financial condition.
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
has evaluated the new guidance and has determined that the adoption of this guidance will not have a material impact 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 has evaluated
the new guidance and has determined that the adoption of this guidance will not have a material impact 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 has evaluated the new guidance and has determined that the adoption of this guidance will not have a material impact 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
has evaluated the new guidance and has determined that the adoption of this guidance will not have a material impact 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 has evaluated the new guidance and has determined that the adoption of
this guidance will not have a material impact 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 has evaluated
the new guidance and has determined that the adoption of this guidance will not have a material impact on the Company’s
results of operations, cash flows and financial condition.
In March 2016, the FASB issued
ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross
versus Net) (“ASU 2016-08”). ASU 2016-08 does not change the core principle of the guidance stated in ASU 2014-09,
Revenue from Contracts with Customers (Topic 606), (“ASU 2014-9”), instead, the amendments in this ASU are intended
to improve the operability and understandability of the implementation guidance on principal versus agent considerations and whether
an entity reports revenue on a gross or net basis. ASU 2016-08 will have the same effective date and transition requirements as
the new revenue standard issued in ASU 2014-09. In May 2014, the FASB issued ASU 2014-09. The new revenue standard outlines a
new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes
most current revenue recognition guidance, including industry-specific guidance. The new revenue standard contains principles
to determine the measurement of revenue and timing of when it is recognized. The guidance provides a five-step analysis of transactions
to determine when and how revenue is recognized. Under the new model, recognition of revenue occurs when a customer obtains control
of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing,
and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for the Company as
of April 1, 2018. The Company expects to transition to ASU 2016-08 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. The Company has evaluated the new guidance and has determined that the adoption of this guidance will not
have a material impact 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. Also, 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 has evaluated
the new guidance and has determined that the adoption of this guidance will not 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
X
|
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.
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.
|
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 income
per share for the years ended March 31, 2018, 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 loss per share are as follows:
|
|
Years
ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Stock
options
|
|
|
15,346,608
|
|
|
|
15,798,558
|
|
|
|
13,508,086
|
|
Unvested
restricted shares
|
|
|
1,182,000
|
|
|
|
-
|
|
|
|
-
|
|
5%
Convertible notes
|
|
|
55,556
|
|
|
|
1,861,111
|
|
|
|
1,861,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,584,164
|
|
|
|
17,659,669
|
|
|
|
15,369,197
|
|
NOTE
3 -
INVENTORIES
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw
materials – net
|
|
$
|
21,015,172
|
|
|
$
|
16,714,225
|
|
Finished
goods – net
|
|
|
13,540,381
|
|
|
|
13,086,855
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,555,553
|
|
|
$
|
29,801,080
|
|
As of each of March 31, 2018 and 2017,
9% of raw materials and 3% and 7%, respectively, of finished goods were located outside of the United States.
In
the years ended March 31, 2018, 2017 and 2016, the Company acquired $7,945,841, $6,900,819 and $5,441,432 of aged bourbon whiskey,
respectively, 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 - INVESTMENT
S
Investment
in Gosling-Castle Partners Inc., consolidated
In
March 2017, 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 years ended March 31, 2018, 2017 and
2016, GCP had pretax net income on a stand-alone basis of $5,613,355, $3,762,130 and $3,475,006, respectively. The Company
allocated a portion of this net income, or $1,104,608, $1,359,145 and $809,662, to non-controlling interest for the years ended
March 31, 2018, 2017 and 2016, respectively. The cumulative balance allocated to noncontrolling interests in GCP was $3,568,636
and $2,479,512 at March 31, 2018 and 2017, respectively, as shown on the accompanying condensed consolidated balance sheets.
In
September 2015, GCP declared and paid a $1,500,000 cash dividend to its shareholders. The Company recorded 60% of this dividend,
or $900,000, as a return of capital and a reduction of its investment in GCP, and allocated 40% of this dividend, or $600,000,
to noncontrolling interests and a reduction in the additional paid-in capital of GCP. GCP did not pay a dividend in the years
ended March 31, 2018 and 2017.
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 whiskeys. 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 years
ended March 31, 2018 and 2017, the Company recognized $87,829 and $51,430 of income from this investment, respectively; for the
initial period ended March 31, 2016, the Company recognized $18,667 of income from this investment. The investment balance was
$813,926 and $570,097 at March 31, 2018 and 2017, respectively.
NOTE
5 -
EQUIPMENT, NET
Equipment
consists of the following:
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
Equipment
and software
|
|
$
|
2,837,036
|
|
|
$
|
2,536,064
|
|
Furniture
and fixtures
|
|
|
112,397
|
|
|
|
112,397
|
|
Leasehold
improvements
|
|
|
42,730
|
|
|
|
42,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,992,163
|
|
|
|
2,691,191
|
|
Less:
accumulated depreciation
|
|
|
2,152,754
|
|
|
|
1,781,411
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
839,409
|
|
|
$
|
909,780
|
|
Depreciation
expense for the years ended March 31, 2018, 2017 and 2016 totaled $359,161, $366,381 and $280,702, respectively.
NOTE
6 -
GOODWILL AND INTANGIBLE ASSETS
The
carrying amount of goodwill was $496,226 at each of March 31, 2018 and 2017.
Intangible
assets consist of the following:
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
Definite
life brands
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Trademarks
|
|
|
641,693
|
|
|
|
631,693
|
|
Rights
|
|
|
8,271,555
|
|
|
|
8,271,555
|
|
Product
development
|
|
|
208,518
|
|
|
|
186,668
|
|
Patents
|
|
|
994,000
|
|
|
|
994,000
|
|
Other
|
|
|
55,460
|
|
|
|
55,460
|
|
|
|
|
10,341,226
|
|
|
|
10,309,376
|
|
Less:
accumulated amortization
|
|
|
8,485,253
|
|
|
|
8,035,018
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
1,855,973
|
|
|
|
2,274,358
|
|
Other
identifiable intangible assets - indefinite lived*
|
|
|
4,112,972
|
|
|
|
4,112,972
|
|
|
|
$
|
5,968,945
|
|
|
$
|
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:
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
Definite
life brands
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Trademarks
|
|
|
403,617
|
|
|
|
367,294
|
|
Rights
|
|
|
6,954,303
|
|
|
|
6,617,062
|
|
Product
development
|
|
|
47,880
|
|
|
|
37,478
|
|
Patents
|
|
|
909,453
|
|
|
|
843,184
|
|
Accumulated
amortization
|
|
$
|
8,485,253
|
|
|
$
|
8,035,018
|
|
Amortization
expense for the years ended March 31, 2018, 2017 and 2016 totaled $450,234, $663,712 and $658,811, respectively.
Estimated
aggregate amortization expense for each of the next five fiscal years is as follows:
Years
ending March 31,
|
|
Amount
|
|
2019
|
|
$
|
231,596
|
|
2020
|
|
|
193,431
|
|
2021
|
|
|
191,289
|
|
2022
|
|
|
186,806
|
|
2023
|
|
|
166,823
|
|
|
|
|
|
|
Total
|
|
$
|
969,945
|
|
NOTE
7 -
RESTRICTED CASH
At
March 31, 2018 and 2017, the Company had €310,324 or $382,279 (translated at the March 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 8A below.
NOTE
8 -
NOTES PAYABLE AND CAPITAL LEASE
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
Notes
payable consist of the following:
|
|
|
|
|
|
|
|
|
Foreign
revolving credit facilities (A)
|
|
$
|
126,148
|
|
|
$
|
-
|
|
Note
payable - GCP note (B)
|
|
|
211,580
|
|
|
|
211,580
|
|
Credit
facility (C)
|
|
|
18,505,897
|
|
|
|
13,033,075
|
|
5%
Convertible notes (D)
|
|
|
50,000
|
|
|
|
1,675,000
|
|
11%
Subordinated Note (E)
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,893,625
|
|
|
$
|
34,919,655
|
|
A.
|
The
Company has arranged various credit facilities aggregating €310,324 or $382,279 (translated at the March 31, 2018 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%. At March 31, 2018,
there was €102,404 or $126,148 (translated at the March 31, 2018 exchange rate) of principal due on the foreign revolving
credit facilities include in current maturities of notes payable and no balance on the credit facilities included in notes
payable at 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 each of March 31, 2018 and 2017, $10,579 of accrued interest was converted to amounts
due to affiliates. At each of March 31, 2018 and 2017, $211,580 of principal due on the GCP Note was included in long-term
liabilities.
|
|
|
C.
|
In August 2011, the Company and CB-USA entered
into a loan and security agreement (as amended and restated, and further amended, the “Amended Agreement”) with
Keltic Financial Partners II, LP (“Keltic, succeeded to be ACF FinCo I LP (“ACF”), which, as amended, through
March 31, 2018, provided 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., 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 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.
|
|
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 March 31, 2018, the Credit Facility interest rate was 7.00625%.
|
|
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 March 31, 2018, the interest rate applicable to the Purchased
Inventory Sublimit was 8.75625%. The monthly facility fee is 0.75% per annum of the maximum Credit Facility. 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 Amended Agreement contains
EBITDA targets allowing for further interest rate reductions in the future. 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. For the year ended March 31, 2018, the Company paid interest at 6.5% through June
14, 2018, then 6.75% through December 13, 2017, then 7.0% through February 28, 2018, and then 7.06250% through March 31, 2018
on the Amended Agreement. For the year ended March 31, 2017, the Company paid interest at 6% through December 14, 2016, then 6.25%
through March 15, 2017, then 6.5% through March 31, 2017 on the Amended Agreement. For the year ended March 31, 2016, the Company
paid interest at 6% through August 9, 2015, then 5.75% through December 15, 2015, then 6% through March 31, 2016 on the Amended
Agreement. For the year ended March 31, 2018, the Company paid interest at 8.25% through June 14, 2018, then at 8.5% through December
13, 2017, then 8.75% through February 28, 2018, and then 8.75625% through March 31, 2018 on the Purchased Inventory Sublimit For
the year ended March 31, 2017, the Company paid interest at 7.75% through December 14, 2016, and then at 8.0% through March 15,
2017, then 8.25% through March 31, 2017 on the Purchased Inventory Sublimit. For the year ended March 31, 2016, the Company paid
interest at 7.5% through December 15, 2015, and then at 7.75% through March 31, 2016 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 Amended
Amendment are secured by the grant of a pledge and security interest in all of the assets of the Borrower. At March 31, 2018,
the Company was in compliance, in all respects, with the covenants under the Amended Agreement. The Credit Facility matures
on July 31, 2019.
ACF required as a condition
to entering into an amendment to the Amended Agreement in August 2015 that ACF enter into a participation agreement with certain
related parties of 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, Richard
J. Lampen, a director of the Company and the Company’s President and Chief Executive Officer, Brian L. Heller, the Company’s
General Counsel and Assistant Secretary, and Alfred J. Small, the Company’s Senior Vice President, Chief Financial Officer,
Treasurer and Secretary, 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.
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 May 2018, the Company and CB-USA entered into a Fourth Amendment (the “Fourth Amendment”) to
the Amended Agreement to amend certain terms of the Credit Facility. Among other changes, the Fourth Amendment increased the maximum
amount of the Credit Facility from $21,000,000 to $23,000,000, and amended the definition of borrowing base to increase the amount
of borrowing that can be collateralized by inventory.
At
March 31, 2018 and 2017, $18,604,962 and $13,133,124, respectively, due on the Credit Facility was included in long-term liabilities.
At March 31, 2018 and 2017, there was $2,395,038 and $5,866,876, respectively, in potential availability under the Credit Facility.
In connection with the adoption of ASU 2015-03, the Company included $99,065 and $94,109 of debt issuance costs at March 31, 2018
and 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., 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 ($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 year ended March 31, 2018, certain holders of the Convertible Notes converted an aggregate $1,632,000 of the outstanding principal
and interest balances of their Convertible Notes into 1,813,334 shares of the Company’s common stock, pursuant to the terms
of the Convertible Notes. The converting holders included an affiliate of Dr. Phillip Frost, Mark E. Andrews, III an affiliate
of Richard J. Lampen, and Vector Group Ltd.
At
March 31, 2018, $50,000 of principal due on the Convertible Notes was included in current maturities of notes payable, 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 were 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
April 2018, the Company entered into a First Amendment to the Subordinated Note to extend the maturity date on the Subordinated
Note from March 15, 2019 until September 15, 2020. No other provisions of the Subordinated Note were amended.
|
Payments due on notes payable after giving
effect to the extensions and modifications noted above are as follows:
Years ending March 31,
|
|
Amount
|
|
2019
|
|
$
|
176,148
|
|
2020
|
|
|
38,604,962
|
|
2021
|
|
|
211,580
|
|
|
|
|
|
|
Total
|
|
$
|
38,992,690
|
|
NOTE
9 -
EQUITY
Employee
Stock Purchase Plan
- In February 2017, the Company’s shareholders approved the 2017 Employee Stock Purchase Plan (“2017
ESPP”) which provides for an aggregate of 3,000,000 shares of the Company’s stock reserved for issuance over the term
of the 2017 ESPP. The purpose of the 2017 ESPP is to provide incentives for present and future employees of the Company and any
designated subsidiary to acquire a proprietary interest in the Company through the purchase of shares of the Company’s common
stock. As of March 31, 2018, 32,894 shares had been acquired under the 2017 ESPP; as of March 31, 2017, no shares had been acquired
under the 2017 ESPP.
Convertible Notes conversion
-
In the year ended March 31, 2018, certain holders of the Convertible Notes converted an aggregate of $1,632,000 of the outstanding
principal and interest balances of their Convertible Notes into 1,813,334 shares of the Company’s common stock, pursuant
to the terms of the Convertible Notes. The converting holders included an affiliate of Dr. Phillip Frost, Mark E. Andrews, III
an affiliate of Richard J. Lampen, and Vector Group Ltd.
Subsidiary
dividend
- In September 2015, GCP declared and paid a $1,500,000 cash dividend to its shareholders. The Company allocated
40% of this dividend, or $600,000, to non-controlling interests. No dividends were declared or paid in the years ended March 31,
2018 or 2017.
GCP
Acquisition
- As described in Note 4, in March 2017, the Company issued 1,800,000 shares of Common Stock as consideration
in connection with the GCP Acquisition.
NOTE
10 -
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 March
31, 2018 and 2017, the Company had no forward contracts outstanding. Gain or loss on foreign currency forward contracts, which
was de minimis during the periods presented, is included in other income and expense.
NOTE
11 -
PROVISION FOR INCOME TAXES
The
Company accounts for taxes in accordance with ASC 740, “Income Taxes”, which requires the recognition of tax benefits
or expense on the temporary differences between the tax basis and book basis of its assets and liabilities. Deferred tax assets
and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those differences
are expected to be recovered or settled.
The
Company’s income tax expense for the years ended March 31, 2018, 2017 and 2016 consists primarily of federal and state and
local taxes. Effective with the acquisition of the additional 20.1% of GCP as described in Note 4, GCP will file as part of the
U.S. federal consolidated income tax group beginning in the year-ended March 31, 2018.
The
components of income before the provision (benefit) for income taxes are as follows:
|
|
Year Ended
March 31, 2018
|
|
|
Year Ended
March 31, 2017
|
|
|
Year Ended
March 31, 2016
|
|
Domestic Operations
|
|
$
|
577,902
|
|
|
$
|
945,985
|
|
|
$
|
(385,672
|
)
|
Foreign Operations
|
|
|
(169,527
|
)
|
|
|
(251,661
|
)
|
|
|
129,814
|
|
Total
|
|
$
|
408,375
|
|
|
$
|
694,324
|
|
|
$
|
(255,858
|
)
|
The
provision (benefit) for income taxes is comprised of the following:
|
|
Year
Ended
March
31, 2018
|
|
|
Year
Ended
March
31, 2017
|
|
|
Year
Ended
March
31, 2016
|
|
Current
provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
182,891
|
|
|
$
|
1,617,000
|
|
|
$
|
1,183,000
|
|
State
|
|
|
30,761
|
|
|
|
(784,000
|
)
|
|
|
397,000
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
current provision (benefit)
|
|
$
|
213,652
|
|
|
$
|
833,000
|
|
|
$
|
1,580,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(74,135
|
)
|
|
$
|
(540,000
|
)
|
|
$
|
(148,152
|
)
|
State
|
|
|
853
|
|
|
|
9,702
|
|
|
|
19,000
|
|
Foreign
|
|
|
-
|
|
|
|
(115,000
|
)
|
|
|
-
|
|
Total
deferred provision (benefit)
|
|
$
|
(73,282
|
)
|
|
$
|
(645,298
|
)
|
|
$
|
(129,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
108,756
|
|
|
$
|
1,077,000
|
|
|
$
|
1,034,848
|
|
State
|
|
|
31,614
|
|
|
|
(774,298
|
)
|
|
|
416,000
|
|
Foreign
|
|
|
-
|
|
|
|
(115,000
|
)
|
|
|
-
|
|
Total
provision (benefit)
|
|
$
|
140,370
|
|
|
$
|
187,702
|
|
|
$
|
1,450,848
|
|
The
effective income tax rate varies from the current blended statutory federal income tax rate of 30.79% for the year ended
March 31, 2018 and the statutory rate of 34% for the years ended March 31, 2017 and 2016 as follows:
|
|
Years
ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
Computed
expected tax benefit, at federal statutory rate
|
|
|
(30.79
|
)
|
|
|
(34.00
|
)
|
|
|
(34.00
|
)
|
Permanent
items
|
|
|
(32.58
|
)
|
|
|
(29.70
|
)
|
|
|
176.00
|
|
Share based compensation
|
|
|
(52.93
|
)
|
|
|
(48.46
|
)
|
|
|
0.00
|
|
Impact of 2017 Tax Act
|
|
|
(2,714.39
|
)
|
|
|
0.00
|
|
|
|
0.00
|
|
Change
in valuation allowance
|
|
|
2,776.47
|
|
|
|
73.68
|
|
|
|
371.5
|
|
Effect
of foreign operations
|
|
|
51.90
|
|
|
|
(67.87
|
)
|
|
|
12.20
|
|
Increase
in unrecognized tax benefit
|
|
|
2.88
|
|
|
|
(1.65
|
)
|
|
|
0.00
|
|
Intercompany
profit
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
13.90
|
|
Other
|
|
|
(1.98
|
)
|
|
|
(2.34
|
)
|
|
|
0.00
|
|
State
and local taxes, net of federal benefit
|
|
|
(32.94
|
)
|
|
|
83.31
|
|
|
|
27.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
(34.37
|
)%
|
|
|
(27.03
|
)%
|
|
|
567.10
|
%
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting and tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
99,000
|
|
|
$
|
112,000
|
|
Inventory
|
|
|
988,000
|
|
|
|
1,204,000
|
|
Share
based compensation
|
|
|
669,000
|
|
|
|
665,000
|
|
U.S.
federal and state net operating losses
|
|
|
18,134,000
|
|
|
|
29,374,000
|
|
Foreign
net operating losses
|
|
|
1,776,000
|
|
|
|
1,511,000
|
|
Other
|
|
|
73,000
|
|
|
|
245,000
|
|
|
|
|
|
|
|
|
|
|
Total
gross assets
|
|
|
21,739,000
|
|
|
|
33,111,000
|
|
Less:
Valuation allowance
|
|
|
(21,341,000
|
)
|
|
|
(32,621,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
deferred tax asset
|
|
$
|
398,000
|
|
|
$
|
490,000
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax liability:
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
$
|
(790,000
|
)
|
|
$
|
(994,000
|
)
|
Fixed
assets
|
|
|
(56,000
|
)
|
|
|
(6,000
|
)
|
Other
|
|
|
(37,484
|
)
|
|
|
(48,766
|
)
|
|
|
|
|
|
|
|
|
|
Total
deferred tax liability
|
|
|
(883,484
|
)
|
|
|
(1,048,766
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax liability
|
|
$
|
(485,484
|
)
|
|
$
|
(558,766
|
)
|
In assessing the realizability of deferred
tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in
those periods in which temporary differences become deductible and/or net operating loss carryforwards can be utilized. The Company
considers the level of historical taxable income, scheduled reversal of temporary differences, tax planning strategies and projected
future taxable income in determining whether a valuation allowance is warranted. Based on historic operating losses and projected
future income, the Company concluded that its net deferred tax assets are not realizable on a more-likely-than-not basis. As such,
the Company maintained a full valuation allowance against its net deferred tax assets. The Company’s valuation allowance
decreased by $11,280,000 during fiscal 2018 primarily related to the remeasurement of its U.S. deferred tax assets and
liabilities at the reduced federal corporate tax rate of 21% enacted with the 2017 Tax Act.
In
accordance with ASC 350-10, the Company does not amortize indefinite lived-intangible assets for financial reporting purposes.
The deferred tax liability of $485,000 relates to the tax effects of differences between the financial reporting and tax basis
of intangible assets.
As of March 31, 2018, the Company had U.S.
federal net operating loss carryforwards of approximately $80,818,000 for U.S. tax purposes, which expire in fiscal 2023
through 2036, if not utilized. The annual utilization of the net operating loss carryforwards may be limited in future years due
to the “change in ownership provisions” set forth in Section 382 of the Internal Revenue Code. The Company also has
Irish net operating loss carryforwards of approximately $14,205,000, which have an indefinite life.
As
of March 31, 2018, the Company has not provided for U.S. federal and foreign withholding taxes on any excess of financial reporting
over the tax basis of investments in foreign subsidiaries, as such earnings are indefinitely reinvested overseas. Generally, such
amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. Due to the complexities
of the tax laws and assumptions that would have to be made, it is not practicable to estimate the amounts of income tax provisions
that may be required.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:
Balance
at March 31, 2016
|
|
$
|
-
|
|
Additions
based on tax positions taken in the current and prior years
|
|
|
18,000
|
|
Settlements
|
|
|
-
|
|
Decreases
based on tax positions taken in prior years
|
|
|
-
|
|
Other
|
|
|
-
|
|
Balance
at March 31, 2017
|
|
$
|
18,000
|
|
Additions
based on tax positions taken in the current and prior years
|
|
|
6,000
|
|
Settlements
|
|
|
-
|
|
Decreases
based on tax positions taken in prior years
|
|
|
(18,000
|
)
|
Other
|
|
|
-
|
|
Balance
at March 31, 2018
|
|
$
|
6,000
|
|
Of the amounts reflected above at March 31,
2018, the entire amount would reduce the Company’s effective tax rate if recognized. The Company records accrued
interest and penalties related to income tax matters in general and administrative expenses. For the year ended March 31, 2018
and 2017, interest and penalties on unrecognized tax benefits were $1,000 and $2,000, respectively. The Company does not believe
that the amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.
Tax
years 2014 through 2018 remain open to examination by federal and state tax jurisdictions. The Company has various foreign subsidiaries
for which tax years 2012 through 2018 remain open to examination in certain foreign tax jurisdictions.
NOTE
12 -
STOCK-BASED COMPENSATION
Stock
Incentive Plan
- In July 2003, the Company implemented the 2003 Stock Incentive Plan (the “2003 Plan”), which
provides for awards of incentive and non-qualified stock options, restricted stock and stock appreciation rights for its officers,
employees, consultants and directors to attract and retain such individuals. Stock option grants under the Plan are granted with
an exercise price at or above the fair market value of the underlying common stock at the date of grant, generally vest over a
three to five-year period and expire ten years after the grant date.
As
established, there were 2,000,000 shares of common stock available for distribution under the 2003 Plan. In January 2009, the
Company’s shareholders approved an amendment to the 2003 Plan to increase the number of shares available under the 2003
Plan from 2,000,000 to 12,000,000 and to establish the maximum number of shares issuable to any one individual in any particular
year. As of August 2013, no new awards may be issued under the 2003 Plan.
In
October 2012, the Company’s shareholders approved the 2013 Incentive Compensation Plan (“2013 Plan”) which provides
for an aggregate of 10,000,000 shares of the Company’s stock for awards of incentive and non-qualified stock options, restricted
stock and stock appreciation rights for its officers, employees, consultants and directors to attract and retain such individuals.
In February 2017, the Company’s shareholders approved an amendment to the 2013 Plan to increase the number of shares available
under the 2013 Plan from 10,000,000 to 20,000,000. As of March 31, 2018, 9,277,500 shares had been issued under the 2013 Plan,
with 10,722,500 shares remaining available for issuance.
Stock-based
compensation expense for the years ended March 31, 2018, 2017 and 2016 amounted to $1,974,745, $1,577,994 and $1,370,556, respectively,
of which $704,772, $495,775 and $493,666, respectively, is included in selling expense and $1,269,973, $1,082,219 and $876,890,
respectively, is included in general and administrative expense for the years ended March 31, 2018, 2017 and 2016, respectively.
At March 31, 2018, total unrecognized compensation cost amounted to approximately $3,311,178, representing 4,021,500 unvested
options and 1,182,000 unvested restricted shares. This cost is expected to be recognized over a weighted-average period of 1.63
years for the unvested options and 2.98 years for the unvested restricted shares. There were 356,700, 671,028 and 1,079,602 options
exercised during the years ended March 31, 2018, 2017 and 2016, respectively. The Company did not recognize any related tax benefit
for the years ended March 31, 2018, 2017 and 2016, as the effects were de minimis.
Stock
Options
- A summary of the options outstanding under the 2003 and 2013 Plans is as follows:
|
|
Years
ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Outstanding
at beginning of year
|
|
|
15,798,558
|
|
|
$
|
0.78
|
|
|
|
13,508,086
|
|
|
$
|
0.79
|
|
|
|
11,988,188
|
|
|
$
|
0.58
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
3,280,000
|
|
|
|
0.91
|
|
|
|
2,622,500
|
|
|
|
1.63
|
|
Exercised
|
|
|
(356,700
|
)
|
|
|
0.66
|
|
|
|
(671,028
|
)
|
|
|
0.37
|
|
|
|
(1,079,602
|
)
|
|
|
0.35
|
|
Forfeited
|
|
|
(95,250
|
)
|
|
|
2.01
|
|
|
|
(318,500
|
)
|
|
|
3.44
|
|
|
|
(23,000
|
)
|
|
|
4.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and expected to vest at end of period
|
|
|
15,346,608
|
|
|
$
|
0.78
|
|
|
|
15,798,558
|
|
|
$
|
0.78
|
|
|
|
13,508,086
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at period end
|
|
|
11,325,108
|
|
|
$
|
0.65
|
|
|
|
9,285,121
|
|
|
$
|
0.55
|
|
|
|
7,931,813
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of grants during the period
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
0.57
|
|
|
|
|
|
|
$
|
1.07
|
|
The
following table summarizes activity pertaining to options outstanding and exercisable at March 31, 2018:
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
Range
of
|
|
|
|
|
Life
in
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Exercise
Prices
|
|
Shares
|
|
|
Years
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
$0.01
- $0.25
|
|
|
273,200
|
|
|
|
0.51
|
|
|
|
273,200
|
|
|
$
|
0.22
|
|
|
$
|
278,596
|
|
$0.26
- $0.40
|
|
|
6,977,908
|
|
|
|
3.32
|
|
|
|
6,977,908
|
|
|
|
0.34
|
|
|
|
6,276,104
|
|
$0.41
- $1.00
|
|
|
5,153,500
|
|
|
|
7.42
|
|
|
|
2,348,000
|
|
|
|
0.96
|
|
|
|
660,076
|
|
$1.01
- $1.50
|
|
|
560,000
|
|
|
|
6.99
|
|
|
|
535,000
|
|
|
|
1.21
|
|
|
|
61,400
|
|
$1.51
- $2.00
|
|
|
2,382,000
|
|
|
|
7.18
|
|
|
|
1,191,000
|
|
|
|
1.67
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,346,608
|
|
|
|
5.38
|
|
|
|
11,325,108
|
|
|
$
|
0.65
|
|
|
$
|
7,276,177
|
|
Total
stock options exercisable as of March 31, 2018 were 11,325,108. The weighted average exercise price of these options was
$0.65. The weighted average remaining life of the options outstanding was 5.38 years and of the options exercisable was 4.58
years.
The following summarizes activity pertaining
to the Company’s unvested options for the years ended March 31, 2018, 2017 and 2016:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
Unvested
at March 31, 2015
|
|
|
4,924,055
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,622,500
|
|
|
|
1.63
|
|
Canceled
or expired
|
|
|
(12,000
|
)
|
|
|
0.97
|
|
Vested
|
|
|
(1,958,282
|
)
|
|
|
0.70
|
|
|
|
|
|
|
|
|
|
|
Unvested
at March 31, 2016
|
|
|
5,576,273
|
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,280,000
|
|
|
|
0.91
|
|
Canceled
or expired
|
|
|
(138,250
|
)
|
|
|
0.55
|
|
Vested
|
|
|
(2,171,648
|
)
|
|
|
0.94
|
|
|
|
|
|
|
|
|
|
|
Unvested
at March 31, 2017
|
|
|
6,546,375
|
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Canceled
or expired
|
|
|
(56,000
|
)
|
|
|
0.94
|
|
Vested
|
|
|
(2,433,875
|
)
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
|
Unvested
at March 31, 2018
|
|
|
4,056,500
|
|
|
$
|
1.14
|
|
Restricted
Share Grants
— In April 2017, the Company’s Compensation Committee approved the grant of 1,092,000 restricted
common shares to certain directors, officers, employees and related parties. The restricted shares vest in four equal annual installments.
In March 2018, the Company’s Compensation Committee approved the grant of 90,000 restricted common shares to certain directors.
The restricted shares vest in two equal installments.
A
summary of the restricted stock outstanding under the 2013 Plan is as follows:
|
|
Shares
|
|
Restricted
stock outstanding at March 31, 2017
|
|
|
—
|
|
Granted
|
|
|
1,182,000
|
|
Canceled
or expired
|
|
|
—
|
|
|
|
|
|
|
Restricted
stock outstanding at March 31, 2018
|
|
|
1,182,000
|
|
|
|
|
|
|
Weighted
average fair value per restricted share at grant date
|
|
$
|
1.65
|
|
Weighted
average share price at grant date
|
|
$
|
1.65
|
|
The
fair value of each option award under the 2003 and 2013 Plans was estimated on the grant date using the Black-Scholes option pricing
model and is affected by assumptions regarding a number of complex and subjective variables. The use of an option pricing model
also requires the use of a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends,
and expected term. Expected volatility is based on the Company’s historical volatility and the volatility of a peer group
of companies over the expected life of the option. The expected term and vesting of the options represents the estimated period
of time until exercise. The expected term was determined using the simplified method available under current guidance. The risk-free
interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The
Company has not paid dividends on its common stock in the past and does not plan to pay any dividends on its common stock in the
near future. Current authoritative guidance also requires the Company to estimate forfeitures at the time of grant and revise
these estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates
forfeitures based on its expectation of future experience while considering its historical experience.
The
fair value of options at grant date was estimated using the Black-Scholes option pricing model utilizing the following weighted
average assumptions:
|
|
March
31,
2017
|
|
|
March
31,
2016
|
|
Risk-free
interest rate
|
|
|
1.37%
- 1.89
|
%
|
|
|
1.39%
- 1.81
|
%
|
Expected
option life in years
|
|
|
5.5
- 6.25
|
|
|
|
5.5
- 6.25
|
|
Expected
stock price volatility
|
|
|
68%
- 69
|
%
|
|
|
70%
- 73
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
NOTE
13 -
RELATED PARTY TRANSACTIONS
A.
|
In
November 2008, the Company entered into a management services agreement with Vector Group Ltd., a more than 5% shareholder,
under which Vector Group agreed to make available to the Company the services of Richard J. Lampen, Vector Group’s executive
vice president, effective October 11, 2008 to serve as the Company’s president and chief executive officer and to provide
certain other financial and accounting services, including assistance with complying with Section 404 of the Sarbanes-Oxley
Act of 2002. In consideration for such services, the Company agreed to pay Vector Group an annual fee of $100,000, plus any
direct, out-of-pocket costs, fees and other expenses incurred by Vector Group or Mr. Lampen in connection with providing such
services, and to indemnify Vector Group for any liabilities arising out of the provision of the services. The agreement is
terminable by either party upon 30 days’ prior written notice. For the years ended March 31, 2018, 2017 and 2016, Vector
Group was paid $108,928, $110,846 and $85,396, respectively, under this agreement. These charges have been included in general
and administrative expense.
|
|
|
B.
|
In
November 2008, the Company entered into an agreement to reimburse Ladenburg Thalmann Financial Services Inc. (“LTS”)
for its costs in providing certain administrative, legal and financial services to the Company. For the years ended March
31, 2018, 2017 and 2016, LTS was paid $182,875, $128,625 and $131,054, respectively, under this agreement. Mr. Lampen, the
Company’s president and chief executive officer and a director, is the president and chief executive officer and a director
of LTS and four other directors of the Company serve as directors of LTS, including Phillip Frost, M.D. who is the Chairman
and principal shareholder of LTS.
|
|
|
C.
|
As
described in Note 8C, in March 2013, the Company entered into a Participation Agreement with certain related parties. As described
in Notes 8D and 8E, in October 2013 and March 2017, the Company entered into various notes with certain related parties.
|
|
|
D.
|
As described in Note 4 in March
2017, the Company issued 1,800,000 shares of common stock to the Sellers
and paid $20,000,000 to the Sellers in connection with the GCP Acquisition.
|
NOTE
14 -
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 $1,253,044 (translated at the March 31, 2018 exchange rate) in bulk Irish whiskey, of which
€694,043, or $854,971, has been purchased as of March 31, 2018. For the contract year ending June 30, 2019, the Company
has contracted to purchase approximately €1,105,572 or $1,361,921 (translated at the March 31, 2018 exchange rate) in
bulk Irish whiskey. 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 contract year ending June 30, 2018, the Company has contracted to purchase approximately
€442,274 or $544,825 (translated at the March 31, 2018 exchange rate) in bulk Irish whiskey, of which €338,632,
or $417,151, has been purchased as of March 31, 2018. For the year ending June 30, 2019, the Company has contracted to purchase
approximately €575,791 or $709,300 (translated at the March 31, 2018 exchange rate) in bulk Irish whiskey. 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 March 31, 2018.
The Company is not obligated to pay the distiller for any product not yet received.
|
|
|
D.
|
The
Company has a distribution agreement with an international supplier to be the sole-producer of Celtic Honey, one of the Company’s
products, for an indefinite period.
|
|
|
E.
|
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 $1,848 (translated at the March 31,
2018 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. In May 2018, the Houston lease was extended through June 26, 2021 The Company has also entered
into non-cancelable operating leases for certain office equipment.
|
Future
minimum lease payments for leases with initial or remaining terms in excess of one year are as follows:
Years
ending March 31,
|
|
Amount
|
|
2019
|
|
$
|
406,896
|
|
2020
|
|
|
385,395
|
|
2021
|
|
|
44,231
|
|
2022
|
|
|
11,163
|
|
|
|
|
|
|
Total
|
|
$
|
847,685
|
|
In
addition to the above annual rental payments, the Company is obligated to pay its pro-rata share of utility and maintenance expenses
on the leased premises. Rent expense under operating leases amounted to approximately $444,117, $477,460 and $335,047 for the
years ended March 31, 2018, 2017 and 2016, respectively, and is included in general and administrative expense.
F.
|
As
described in Note 8C, 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, October 2017 and May 2018.
|
G.
|
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
15 -
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, accounted
for approximately, 37.2%, 36.6% and 39.9% of the Company’s net sales for the years ended March 31, 2018, 2017 and 2016,
respectively, and approximately 28.6% and 29.3% of accounts receivable at March 31, 2018 and 2017, respectively.
|
NOTE
16 -
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.
|
|
Years ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Consolidated Sales, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
8,926,378
|
|
|
|
9.9
|
%
|
|
$
|
7,528,766
|
|
|
|
9.7
|
%
|
|
$
|
9,302,134
|
|
|
|
12.9
|
%
|
United States
|
|
|
80,971,139
|
|
|
|
90.1
|
%
|
|
|
69,740,365
|
|
|
|
90.3
|
%
|
|
|
62,918,234
|
|
|
|
87.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Sales, net
|
|
$
|
89,897,517
|
|
|
|
100.0
|
%
|
|
$
|
77,269,131
|
|
|
|
100.0
|
%
|
|
$
|
72,220,368
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Income (Loss) from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
(94,066
|
)
|
|
|
(2.2
|
)%
|
|
$
|
(210,100
|
)
|
|
|
(11.0
|
)%
|
|
$
|
(34,268
|
)
|
|
|
(3.4
|
)%
|
United States
|
|
|
4,288,283
|
|
|
|
102.2
|
%
|
|
|
2,115,099
|
|
|
|
111.0
|
%
|
|
|
1,039,815
|
|
|
|
103.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Income (Loss) from Operations
|
|
$
|
4,194,217
|
|
|
|
100.0
|
%
|
|
$
|
1,904,999
|
|
|
|
100.0
|
%
|
|
$
|
1,005,547
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Loss Attributable to Common Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
35,272
|
|
|
|
(4.3
|
)%
|
|
$
|
(109,164
|
)
|
|
|
12.8
|
%
|
|
$
|
11,490
|
|
|
|
(0.5
|
)%
|
United States
|
|
|
(854,204
|
)
|
|
|
104.3
|
%
|
|
|
(743,449
|
)
|
|
|
87.2
|
%
|
|
|
(2,527,858
|
)
|
|
|
100.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Net Loss Attributable to Common Shareholders
|
|
$
|
(818,932
|
)
|
|
|
100.0
|
%
|
|
$
|
(852,613
|
)
|
|
|
100.0
|
%
|
|
$
|
(2,516,368
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(140,370
|
)
|
|
|
100.0
|
%
|
|
$
|
(187,702
|
)
|
|
|
100.0
|
%
|
|
$
|
(1,450,848
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Sales, net by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whiskey
|
|
$
|
33,931,832
|
|
|
|
37.8
|
%
|
|
$
|
28,339,770
|
|
|
|
36.7
|
%
|
|
$
|
26,009,839
|
|
|
|
36.0
|
%
|
Rum
|
|
|
18,518,450
|
|
|
|
20.6
|
%
|
|
|
18,759,610
|
|
|
|
24.3
|
%
|
|
|
18,858,554
|
|
|
|
26.1
|
%
|
Liqueurs
|
|
|
9,339,246
|
|
|
|
10.4
|
%
|
|
|
8,386,705
|
|
|
|
10.9
|
%
|
|
|
8,567,121
|
|
|
|
11.9
|
%
|
Vodka
|
|
|
1,365,764
|
|
|
|
1.5
|
%
|
|
|
1,569,004
|
|
|
|
2.0
|
%
|
|
|
2,364,429
|
|
|
|
3.3
|
%
|
Tequila
|
|
|
202,215
|
|
|
|
0.2
|
%
|
|
|
210,012
|
|
|
|
0.3
|
%
|
|
|
198,330
|
|
|
|
0.3
|
%
|
Ginger beer
|
|
|
26,540,010
|
|
|
|
29.5
|
%
|
|
|
20,004,029
|
|
|
|
25.9
|
%
|
|
|
16,222,095
|
|
|
|
22.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Sales, net
|
|
$
|
89,897,517
|
|
|
|
100.0
|
%
|
|
$
|
77,269,131
|
|
|
|
100.0
|
%
|
|
$
|
72,220,368
|
|
|
|
100.0
|
%
|
|
|
As
of March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Consolidated
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
2,886,735
|
|
|
|
4.8
|
%
|
|
$
|
3,234,536
|
|
|
|
6.0
|
%
|
United
States
|
|
|
57,446,625
|
|
|
|
95.2
|
%
|
|
|
51,107,608
|
|
|
|
94.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Assets
|
|
$
|
60,333,360
|
|
|
|
100.0
|
%
|
|
$
|
54,342,144
|
|
|
|
100.0
|
%
|
NOTE
17 -
QUARTERLY FINANCIAL DATA
(unaudited)
|
|
|
1st
|
|
|
|
2nd
|
|
|
|
3rd
|
|
|
|
4th
|
|
Fiscal
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
|
$
|
20,852,287
|
|
|
$
|
20,894,150
|
|
|
$
|
24,079,623
|
|
|
$
|
24,071,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
8,578,619
|
|
|
|
8,534,249
|
|
|
|
9,677,937
|
|
|
|
9,407,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(865,218
|
)
|
|
$
|
280,622
|
|
|
$
|
664,603
|
|
|
$
|
190,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(income) attributable to noncontrolling interests
|
|
|
(81,178
|
)
|
|
|
(282,304
|
)
|
|
|
(199,023
|
)
|
|
|
(526,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income attributable to common Stockholders
|
|
$
|
(946,396
|
)
|
|
$
|
(1,682
|
)
|
|
$
|
465,580
|
|
|
$
|
(336,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share, basic, attributable to common shareholders
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
Net
(loss) income per common share, diluted, attributable to common shareholders
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
Weighted
average shares used in computation, basic, attributable to common shareholders
|
|
|
163,072,642
|
|
|
|
163,209,562
|
|
|
|
163,470,150
|
|
|
|
164,899,255
|
|
Weighted
average shares used in computation, diluted, attributable to common shareholders
|
|
|
163,072,642
|
|
|
|
163,209,562
|
|
|
|
171,121,927
|
|
|
|
164,899,255
|
|
|
|
|
1st
|
|
|
|
2nd
|
|
|
|
3rd
|
|
|
|
4th
|
|
Fiscal
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
|
$
|
16,750,925
|
|
|
$
|
19,627,791
|
|
|
$
|
18,309,539
|
|
|
$
|
22,580,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
6,716,115
|
|
|
|
7,727,260
|
|
|
|
7,670,240
|
|
|
|
9,586,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(595,703
|
)
|
|
$
|
(489,854
|
)
|
|
$
|
892,364
|
|
|
$
|
699,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(income) loss attributable to noncontrolling interests
|
|
|
(170,116
|
)
|
|
|
(210,856
|
)
|
|
|
(469,798
|
)
|
|
|
(508,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income attributable to common stockholders
|
|
$
|
(765,819
|
)
|
|
$
|
(700,710
|
)
|
|
$
|
422,566
|
|
|
$
|
191,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share, basic, attributable to common shareholders
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Net
(loss) income per common share, diluted, attributable to common shareholders
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Weighted
average shares used in computation, basic, attributable to common shareholders
|
|
|
160,521,947
|
|
|
|
160,698,696
|
|
|
|
160,963,862
|
|
|
|
161,065,685
|
|
Weighted
average shares used in computation, diluted, attributable to common shareholders
|
|
|
160,521,947
|
|
|
|
160,698,696
|
|
|
|
165,245,935
|
|
|
|
165,878,218
|
|
NOTE
18 –
SUBSEQUENT EVENTS
Subordinated
Note Amendment
- In April 2018, the Company entered into a First Amendment to the Subordinated Note to extend the maturity
date on the Subordinated Note from March 15, 2019 until September 15, 2020. No other provisions of the Subordinated Note were
amended.
Credit
Facility Amendment
- In May 2018, the Company and CB-USA entered into a Fourth Amendment (the “Fourth Amendment”)
to the Amended Agreement to amend certain terms of the Company’s existing Credit Facility with ACF. Among other changes,
the Fourth Amendment increased the maximum amount of the Credit Facility from $21,000,000 to $23,000,000, 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 Fourth Amendment. In connection with the Fourth Amendment, the Company
and CB-USA also entered into an Amended and Restated Revolving Credit Note.