CRVP Crystal Rock Holdings Class A

The accompanying unaudited consolidated financial statements have been prepared in accordance with Form 10-Q instructions and in the opinion of management contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial position, results of operations, and cash flows for the periods presented. The results have been determined on the basis of generally accepted accounting principles and practices of the United States of America (“GAAP”), applied consistently with the Annual Report on Form 10-K of Crystal Rock Holdings, Inc. (the “Company”) for the year ended October 31, 2017.

Certain information and footnote disclosures normally included in audited consolidated financial statements presented in accordance with GAAP have been condensed or omitted. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended October 31, 2017. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

The financial statements herewith reflect the consolidated operations and financial condition of Crystal Rock Holdings, Inc. and its wholly owned subsidiary Crystal Rock LLC.

Effective November 1, 2017, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (”ASU”) No. 2015-11, “Simplifying the Measurement of Inventory”. The ASU requires entities using the first-in, first-out (FIFO) inventory costing method to subsequently value inventory at the lower of cost and net realizable value. The ASU defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of this guidance by the Company did not have a material impact on its consolidated financial statements.

Effective November 1, 2017, we adopted FASB ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”. The ASU requires that deferred tax assets and liabilities be combined and be classified as non-current in a statement of financial position. The adoption of this guidance by the Company did not have a material impact on its consolidated financial statements.

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Amortization expense for the three month periods ending January 31, 2018 and 2017 was $142,412 and $170,337, respectively. There were no changes in the carrying amount of goodwill, $12,156,790, for the three months ending January 31, 2018.

The Company has a Credit Agreement (the “Agreement”) with Bank of America to provide a senior financing facility consisting of term debt and a revolving line of credit. Under the Agreement, as amended, the Company became obligated on $12,000,000 of debt in the form of a term note to refinance the previous senior term debt and to fund repayment of a portion of its outstanding subordinated debt. Additionally, the Agreement includes a $5,000,000 revolving line of credit that can be used for the purchase of fixed assets, to fund acquisitions, to collateralize letters of credit, and for operating capital.

The Agreement amortizes the term debt over a five year period with 59 equal monthly installments of $133,333 plus interest and a final payment of $4,133,333 due in May 2020. The revolving line of credit matures in May 2018. There are various restrictive covenants under the Agreement, and the Company is prohibited from entering into other debt agreements without the bank’s consent. The Agreement also prohibits the Company from paying dividends without the prior consent of the bank.

Effective September 12, 2016, the Company amended its Agreement with the Bank (the “Second Amendment”). Under the Second Amendment, interest is paid at a rate of one-month LIBOR plus a margin based on the achievement of a specified leverage ratio. As of January 31, 2018, the margin was 2.50% for the term note and 2.25% for the revolving line of credit. The Company fixed the interest rate on a portion of its term debt by entering into an interest rate swap. As of January 31, 2018, the Company had $3,867,000 of the term debt subject to variable interest rates. The one-month LIBOR was 1.56% on January 31, 2018 resulting in total variable interest rates of 4.06% and 3.81%, for the term note and the revolving line of credit, respectively, as of January 31, 2018.

The Second Amendment requires the Company to be in compliance with certain financial covenants as follows: (i) a maximum annual limit for capital expenditures of $4,000,000 each fiscal year, (ii) consolidated adjusted operating cash flows to consolidated total debt service ratio, as defined, to be no less than 1.5 to 1 for any reference period ending on or after October 31, 2016 and (iii) senior funded debt to consolidated adjusted EBITDA, as defined, to be no greater than 2.5 to 1 as of the end of any fiscal quarter ending on or after October 31, 2016. The Amendment also allows payments of interest on Subordinated Notes. As of January 31, 2018, the Company was not in compliance with (ii) and (iii) of the financial covenants. The Bank waived the covenant compliance requirements for (ii) and (iii) for the period ended January 31, 2018.

On June 13, 2017, the Company entered into a Third Amendment (the “Third Amendment”) to the Agreement. The Third Amendment increases the aggregate principal amount available under the revolving line of credit from $5,000,000 to $6,000,000. The Third Amendment allows the Company to use up to $2,000,000 of proceeds from the revolving line of credit to make payments on the Subordinated Debt. The Third Amendment also allows for prepayments on Subordinated Debt up to $4,500,000 in the aggregate. Subsequently, in fiscal 2017, the Company paid an aggregate of $4,500,000 of subordinated debt principal payments.

At January 31, 2018, there was a balance of $2,015,200 outstanding on the line of credit and a letter of credit issued for $1,327,000 to collateralize the Company’s liability insurance program as of that date. Consequently, as of January 31, 2018, there was $2,658,000 available to borrow from the revolving line of credit. The line of credit matures in May 2018. There was $7,733,000 outstanding on the term note as of January 31, 2018.

In addition to the senior debt, as of January 31, 2018, the Company had subordinated debt owed to Peter and John Baker in the aggregate principal amount of $4,500,000 that is due November 20, 2020. The interest rate on each of these notes is 12% per annum.

The notes are secured by all of the assets of the Company but specifically subordinated, with a separate agreement with the subordinated debt holders, to the senior financing facility (Credit Agreement) described above.

Finished goods inventory consists of products that the Company sells such as, but not limited to, coffee, cups, soft drinks, and snack foods. Raw material inventory consists primarily of bottle caps. The amount of raw and bottled water on hand does not represent a material amount of inventory. Bottles are accounted for as fixed assets.

The Company reviews long-lived assets and certain identifiable intangible assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. Recoverability is assessed based on estimated undiscounted future cash flows. The Company’s policy is to record an impairment loss when it is determined that the carrying amount of the asset may not be recoverable.

During the quarter ended January 31, 2018, the Company recorded an impairment loss of $385,463, included in loss on disposal of property and equipment on the consolidated statements of operations, related to the abandonment of an ERP software implementation that was yet to be placed in service. There were no impairment charges recognized during the quarter ended January 31, 2017.

Derivative Financial Instruments

The Company has stand-alone derivative financial instruments in the form of interest rate swap agreements, which derive their value from underlying interest rates. These transactions involve both credit and market risk. The notional amount is an amount on which calculations, payments, and the value of the derivative are based. The notional amount does not represent direct credit exposure. Direct credit exposure is limited to the net difference between the calculated amount to be received and paid, if any. Such difference, which represents the fair value of the derivative instrument, is reflected on the Company’s consolidated balance sheet as an unrealized gain or loss on derivatives.

The Company is also exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and currently has no reason to believe that any counterparties will fail to fulfill their obligations.

This interest rate swap agreement is considered a cash flow hedge to hedge against the variability of interest rates on outstanding debt.  The net unrealized gain relating to interest rate swaps was recorded in current assets with an offset to other comprehensive income for the effective portion of the hedge. At January 31, 2018, these cash flow hedges were deemed 100% effective.  The portion of the net unrealized gain in current assets is the amount expected to be reclassified to income within the next twelve months.

The following information pertains to the Company's outstanding interest rate swap at January 31, 2018.  The interest rate swap matures in May 2018.The pay rate is fixed and the receive rate is one month LIBOR.

The table below details the adjustments to other comprehensive income (loss), on a before tax and net-of tax basis, for the fiscal quarters ended January 31, 2018 and 2017.

The reclassification adjustments of $1,692 represents savings in interest that would have been paid without the interest rate swap agreement during the quarter ended January 31, 2018, and $7,015 represent interest the Company paid in excess of the amount that would have been paid without the interest rate swap agreement during the quarter ended January 31, 2017. These amounts were reclassified from accumulated other comprehensive income (loss) and recorded in consolidated statements of operations as a charge or credit to interest expense. No other material amounts were reclassified during the quarters ended January 31, 2018 and 2017.

In determining the fair value, the Company uses a model that calculates a present value of the payments as they amortize through the life of the loan (float) based on the variable rate and compares them to the calculated value of the payment based on the fixed rate (fixed) defined in the swap. In calculating the present value, in addition to the term, the model relies on other data – the “rate” and the “discount factor.”

Payments are calculated by applying the rate to the notional amount and adjusting for the term. Then the present value is calculated by using the discount factor.

There were no assets or liabilities measured at fair value on a nonrecurring basis.

On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted. The Tax Reform Act made significant changes to U.S. federal income tax laws including permanently lowering the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. As the Company has an October 31 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory rate of 23% for the fiscal year ending October 31, 2018. The Company’s statutory federal tax rate will be 21% for fiscal years ending October 31, 2019 and beyond. U.S. GAAP requires the impact of tax legislation be recognized in the period in which the law was enacted. In December 2017, the SEC issued Staff Accounting Bulletin No. 118, which allows a company to report provisional numbers related to the Tax Reform Act and adjust those amounts during a measurement period not to extend beyond one year. For the three months ended January 31, 2018, the Company recorded a one-time tax benefit of $1,400,000 due to a remeasurement of deferred tax assets and liabilities. In addition, applying the reduced rate of 23% to our first fiscal quarter earnings resulted in an $1,400,000 reduction to tax expense. These tax benefits represent provisional amounts and the Company’s best estimate. The provisional amounts are based on estimates of underlying timing differences (primarily related to uncertainty in fixed assets) and the Company’s current interpretations of the Tax Reform Act. The ultimate impact of the Tax Reform Act may differ from our provisional amounts due to changes in interpretations and assumptions we made as well as any forthcoming legislative action or regulatory guidance.

The Company considers outstanding in-the-money stock options, if any, as potential common stock in its calculation of diluted earnings per share, unless the effect would be anti-dilutive, and uses the treasury stock method to calculate the applicable number of shares.

The following calculation provides the reconciliation of the denominators used in the calculation of basic and fully diluted earnings per share:

As of January 31, 2018 and 2017 there were no options outstanding.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of the ASU to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2016. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company plans to adopt the ASU effective the first quarter of fiscal year 2019 using a modified retrospective method. During fiscal year 2018 we will be conducting a review of contracts to identify gaps between our current revenue recognition policies and the new standard so that we can quantify any impact to our current consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases", which is intended to improve financial reporting about leasing transactions.  This ASU requires that leased assets be recognized as assets on the balance sheet and the liabilities for the obligations under the lease also be recognized on the balance sheet.  This ASU requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.  The required disclosures include qualitative and quantitative requirements.  This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years.  Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company is currently in the process of evaluating our adoption timing and cannot currently estimate the financial statement impact of the adoption, but the Company does not expect adoption until fiscal year 2020.

In August 2017, FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.  The targeted amendments help simplify certain aspects of hedge accounting and result in a more accurate portrayal of the economics of an entity’s risk management activities in its financial statements.  For cash flow and net investment hedges as of the adoption date, the guidance requires a modified retrospective approach. The amended presentation and disclosure guidance is required only prospectively. The amendments are effective for the Company’s fiscal year beginning November 1, 2019, with early adoption permitted.  The Company is currently evaluating the accounting, transition, and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

Trade Accounts Receivable - Uncollectible individual accounts receivable are written off when deemed uncollectible, with any future recoveries recorded as income when received.

For more details regarding the Company’s accounts receivable polices refer to Note 2, Significant Accounting Policies, in the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended October 31, 2017.

On February 12, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cott Corporation, a Canadian corporation (“Cott”), and CR Merger Sub, Inc., a wholly owned indirect subsidiary of Cott (“Purchaser”). Pursuant to the terms of the Merger Agreement, Purchaser commenced a tender offer (the “Offer”) on February 20, 2018 to purchase all of the outstanding shares of common stock, par value $0.001 per share, of the Company (the “Company Common Stock”), at a price per share of $0.97, net to the seller in cash, without interest (the “Offer Price”), and subject to deduction for any required withholding of taxes. The Offer is scheduled to expire on March 20, 2018, subject to extension in accordance with the terms of the Merger Agreement.

The consummation of the Offer is subject to customary closing conditions, including, among other things, the valid tender of shares of Company Common Stock representing a majority of the total outstanding shares of Company Common Stock, calculated on a fully diluted basis, and other conditions to the Offer set forth in Annex I to the Merger Agreement. The consummation of the Offer is not subject to any financing condition.

Upon the completion of the Offer, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Purchaser will be merged with and into the Company, with the Company surviving as a wholly owned indirect subsidiary of Cott (the “Merger”). The Merger Agreement provides that the Merger will be governed by Section 251(h) of the Delaware General Corporation Law and shall be effected by Purchaser and the Company as soon as practicable following the consummation of the Offer without a stockholder meeting.

At the effective time of the Merger (the “Effective Time”), each outstanding share of Company Common Stock, other than shares of Company Common Stock owned by the Company, Cott or Purchaser immediately prior to the Effective Time, or by stockholders who have validly exercised their appraisal rights under Delaware law will be canceled and converted into the right to receive an amount in cash equal to the Offer Price, payable to the holder thereof on the terms and subject to the conditions set forth in the Merger Agreement.

On February 12, 2018, in connection with the entry into the Merger Agreement, each of Peter Baker and John Baker (the “Executives”) entered into a Separation and General Release Agreement with the Company (the “Separation Agreements”). Pursuant to the Separation Agreements, the employment of each Executive with the Company will terminate immediately prior to the closing of the Merger, and the Company will provide each Executive with the compensation and benefits set forth in the Employment Agreement between the Company and each Executive dated November 1, 2016 (the “Employment Agreements”) for “Termination by Company Without Cause” pursuant to Section 2.2.5 of each Employment Agreement. Pursuant to the Separation Agreements, each Executive has agreed to release the Company and Purchaser from claims arising out of or in connection with the Executive’s employment with or termination from the Company. The Separation Agreements also amend the non-competition provisions of the Employment Agreements, such that, during the 12-month period immediately following the closing date of the Merger, each Executive will be subject to certain restrictive covenants regarding non-competition and non-solicitation with respect to the Company.

On March 14, 2018, David Jurasek, the Company’s Chief Financial Officer, entered into an Employment Agreement with the Company (the “Jurasek Employment Agreement”). The Jurasek Employment Agreement provides Mr. Jurasek with an annual salary of $200,000. The Jurasek Employment Agreement provides Mr. Jurasek with payment of one year’s base salary in case of termination without cause or termination of employment following a change of control, as defined, plus an aggregate allowance of up to $25,000 per year to reimburse Mr. Jurasek for (1) the actual cost of premiums incurred by him for disability insurance he obtains, if any, (2) the actual cost of premiums incurred by him for any other insurance which would not be available to him under the Company’s customary benefit plans, and (3) the actual cost of leasing and operating an automobile for use by him during his employment with the Company. The Jurasek Employment Agreement further provides that if Mr. Jurasek continues his employment with the surviving company in the Merger for six months post-closing, the surviving company would pay him a lump-sum cash retention bonus equal to three months’ salary (in addition to salary earned during such six month period). The Jurasek Employment Agreement also provides that the “change of control” severance referred to above would be payable if Mr. Jurasek’s employment is terminated for any reason or he elects to discontinue employment with the surviving company within 30 days of the end of the six-month period following the closing of the Merger.

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