Item
1. Financial Statements
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
|
|
December
31, 2018
|
|
|
March
31, 2018
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
647,817
|
|
|
$
|
376,987
|
|
Accounts
receivable - net of allowance for doubtful accounts of $460,078 and $390,939 at December 31 and March 31, 2018, respectively
|
|
|
12,616,791
|
|
|
|
13,083,487
|
|
Inventories
- net of allowance for obsolete and slow-moving inventory of $401,147 and $346,344 at December 31 and March 31, 2018, respectively
|
|
|
43,164,250
|
|
|
|
34,555,553
|
|
Prepaid
expenses and other current assets
|
|
|
3,835,310
|
|
|
|
3,724,759
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
60,264,168
|
|
|
|
51,740,786
|
|
|
|
|
|
|
|
|
|
|
Equipment
- net
|
|
|
741,804
|
|
|
|
839,409
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets - net of accumulated amortization of $8,818,073 and $8,485,253 at December 31 and March 31, 2018, respectively
|
|
|
5,636,125
|
|
|
|
5,968,945
|
|
Goodwill
|
|
|
496,226
|
|
|
|
496,226
|
|
Investment
in non-consolidated affiliate, at equity
|
|
|
928,175
|
|
|
|
813,926
|
|
Restricted
cash
|
|
|
356,246
|
|
|
|
382,279
|
|
Other
assets
|
|
|
167,321
|
|
|
|
91,789
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
68,590,065
|
|
|
$
|
60,333,360
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Current
maturities of notes payable
|
|
$
|
69,645
|
|
|
$
|
176,148
|
|
Accounts
payable
|
|
|
11,469,990
|
|
|
|
7,674,858
|
|
Accrued
expenses
|
|
|
2,705,377
|
|
|
|
2,497,001
|
|
Due
to shareholders and affiliates
|
|
|
2,315,190
|
|
|
|
2,785,910
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
16,560,202
|
|
|
|
13,133,917
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
|
Credit
facility, net (including $718,700 and $576,546 of related-party participation at December 31 and March 31, 2018, respectively)
|
|
|
23,672,003
|
|
|
|
18,505,897
|
|
Notes
payable - 11% Subordinated note
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
Notes
payable - GCP Note
|
|
|
219,514
|
|
|
|
211,580
|
|
Deferred
tax liability
|
|
|
485,664
|
|
|
|
485,484
|
|
Other
|
|
|
6,778
|
|
|
|
6,778
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
60,944,161
|
|
|
|
52,343,656
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 10)
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 25,000,000 shares authorized, no shares issued and outstanding at December 31 and March 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $.01 par value, 300,000,000 shares authorized at December 31 and March 31, 2018,
168,917,996 and 166,330,733 shares issued and outstanding at December 31 and March
31, 2018, respectively
|
|
|
1,689,180
|
|
|
|
1,663,307
|
|
Additional
paid-in capital
|
|
|
156,834,225
|
|
|
|
154,731,044
|
|
Accumulated
deficit
|
|
|
(152,976,273
|
)
|
|
|
(149,891,272
|
)
|
Accumulated
other comprehensive loss
|
|
|
(2,184,817
|
)
|
|
|
(2,082,011
|
)
|
|
|
|
|
|
|
|
|
|
Total
controlling shareholders’ equity
|
|
|
3,362,315
|
|
|
|
4,421,068
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interests
|
|
|
4,283,589
|
|
|
|
3,568,636
|
|
|
|
|
|
|
|
|
|
|
Total
Equity, including noncontrolling interests
|
|
|
7,645,904
|
|
|
|
7,989,704
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Equity
|
|
$
|
68,590,065
|
|
|
$
|
60,333,360
|
|
See
accompanying notes to the unaudited condensed consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
Three
months ended December 31,
|
|
|
Nine
months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Sales,
net*
|
|
$
|
22,535,242
|
|
|
$
|
24,079,623
|
|
|
$
|
68,949,793
|
|
|
$
|
65,826,060
|
|
Cost
of sales*
|
|
|
14,397,207
|
|
|
|
14,401,686
|
|
|
|
42,412,711
|
|
|
|
39,026,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
8,138,035
|
|
|
|
9,677,937
|
|
|
|
26,537,082
|
|
|
|
26,799,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expense
|
|
|
5,800,828
|
|
|
|
5,438,815
|
|
|
|
16,945,148
|
|
|
|
16,394,222
|
|
General
and administrative expense
|
|
|
3,095,470
|
|
|
|
2,458,528
|
|
|
|
8,176,982
|
|
|
|
7,020,407
|
|
Depreciation
and amortization
|
|
|
197,134
|
|
|
|
208,388
|
|
|
|
637,306
|
|
|
|
599,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(955,397
|
)
|
|
|
1,572,206
|
|
|
|
777,646
|
|
|
|
2,785,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expense) income, net
|
|
|
(1,455
|
)
|
|
|
931
|
|
|
|
(10,366
|
)
|
|
|
872
|
|
Income
(loss) from equity investment in non-consolidated affiliate
|
|
|
25,108
|
|
|
|
(20,806
|
)
|
|
|
114,249
|
|
|
|
50,789
|
|
Foreign
exchange gain (loss)
|
|
|
86,381
|
|
|
|
25,204
|
|
|
|
133,763
|
|
|
|
(7,104
|
)
|
Interest
expense, net
|
|
|
(1,210,707
|
)
|
|
|
(976,017
|
)
|
|
|
(3,362,154
|
)
|
|
|
(2,769,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before provision for income taxes
|
|
|
(2,056,070
|
)
|
|
|
601,518
|
|
|
|
(2,346,862
|
)
|
|
|
60,670
|
|
Income
tax (expense) benefit, net
|
|
|
(5,288
|
)
|
|
|
63,085
|
|
|
|
(23,186
|
)
|
|
|
19,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
(2,061,358
|
)
|
|
|
664,603
|
|
|
|
(2,370,048
|
)
|
|
|
80,007
|
|
Net
income attributable to noncontrolling interests
|
|
|
(116,800
|
)
|
|
|
(199,023
|
)
|
|
|
(714,953
|
)
|
|
|
(562,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income attributable to common shareholders
|
|
$
|
(2,178,158
|
)
|
|
$
|
465,580
|
|
|
$
|
(3,085,001
|
)
|
|
$
|
(482,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share, basic, attributable to common shareholders
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computation, basic, attributable to common shareholders
|
|
|
166,766,352
|
|
|
|
163,470,150
|
|
|
|
166,264,144
|
|
|
|
163,249,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share, diluted, attributable to common shareholders
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computation, diluted, attributable to common shareholders
|
|
|
166,766,352
|
|
|
|
171,121,927
|
|
|
|
166,264,144
|
|
|
|
163,249,687
|
|
*
Sales, net and Cost of sales include excise taxes of $1,818,697 and $1,938,739 for the three months ended December 31, 2018 and
2017, respectively, and $5,405,867 and $5,338,124 for the nine months ended December 31, 2018 and 2017, respectively.
See
accompanying notes to the unaudited condensed consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
|
|
Three
months ended December 31,
|
|
|
Nine
months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net
(loss) income
|
|
$
|
(2,061,358
|
)
|
|
$
|
664,603
|
|
|
$
|
(2,370,048
|
)
|
|
$
|
80,007
|
|
Other
comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(17,545
|
)
|
|
|
22,221
|
|
|
|
(102,806
|
)
|
|
|
182,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive (loss) income:
|
|
|
(17,545
|
)
|
|
|
22,221
|
|
|
|
(102,806
|
)
|
|
|
182,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
(loss) income
|
|
$
|
(2,078,903
|
)
|
|
$
|
686,824
|
|
|
$
|
(2,472,854
|
)
|
|
$
|
262,040
|
|
See
accompanying notes to the unaudited condensed consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Statement of Changes in Equity
(Unaudited)
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Interests
|
|
|
Equity
|
|
BALANCE,
MARCH 31, 2018
|
|
|
166,330,733
|
|
|
$
|
1,663,307
|
|
|
$
|
154,731,044
|
|
|
$
|
(149,891,272
|
)
|
|
$
|
(2,082,011
|
)
|
|
$
|
3,568,636
|
|
|
$
|
7,989,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(690,707
|
)
|
|
|
|
|
|
|
383,341
|
|
|
|
(307,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,329
|
)
|
|
|
|
|
|
|
(76,329
|
)
|
Exercise of
common stock options
|
|
|
503,166
|
|
|
|
5,032
|
|
|
|
210,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,016
|
|
Restricted
common stock grants
|
|
|
1,100,000
|
|
|
|
11,000
|
|
|
|
(11,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock purchased under employee stock purchase plan
|
|
|
41,902
|
|
|
|
419
|
|
|
|
40,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,959
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
490,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
490,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
JUNE 30, 2018
|
|
|
167,975,801
|
|
|
$
|
1,679,758
|
|
|
$
|
155,462,053
|
|
|
$
|
(150,581,979
|
)
|
|
$
|
(2,158,340
|
)
|
|
$
|
3,951,977
|
|
|
$
|
8,353,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(216,136
|
)
|
|
|
|
|
|
|
214,812
|
|
|
|
(1,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,932
|
)
|
|
|
|
|
|
|
(8,932
|
)
|
Exercise of
common stock options
|
|
|
626,000
|
|
|
|
6,260
|
|
|
|
227,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233,401
|
|
Restricted
common stock forfeited
|
|
|
(47,809
|
)
|
|
|
(478
|
)
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
497,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
497,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
SEPTEMBER 30, 2018
|
|
|
168,553,992
|
|
|
$
|
1,685,540
|
|
|
$
|
156,186,891
|
|
|
$
|
(150,798,115
|
)
|
|
$
|
(2,167,272
|
)
|
|
$
|
4,166,789
|
|
|
$
|
9,073,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,178,158
|
)
|
|
|
|
|
|
|
116,800
|
|
|
|
(2,061,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,545
|
)
|
|
|
|
|
|
|
(17,545
|
)
|
Exercise of
common stock options
|
|
|
330,367
|
|
|
|
3,304
|
|
|
|
113,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,601
|
|
Restricted
shares forfeited
|
|
|
(13,500
|
)
|
|
|
(135
|
)
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Common
stock purchased under employee stock purchase plan
|
|
|
47,137
|
|
|
|
471
|
|
|
|
37,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
496,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
496,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
DECEMBER 31, 2018
|
|
|
168,917,996
|
|
|
$
|
1,689,180
|
|
|
$
|
156,834,225
|
|
|
$
|
(152,976,273
|
)
|
|
$
|
(2,184,817
|
)
|
|
$
|
4,283,589
|
|
|
$
|
7,645,904
|
|
See
accompanying notes to the unaudited condensed consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine
months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(2,370,048
|
)
|
|
$
|
80,007
|
|
Adjustments
to reconcile net (loss) income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
637,306
|
|
|
|
599,623
|
|
Provision
for doubtful accounts
|
|
|
43,677
|
|
|
|
44,912
|
|
Amortization
of deferred financing costs
|
|
|
133,907
|
|
|
|
65,492
|
|
Deferred
income tax benefit (expense), net
|
|
|
180
|
|
|
|
(81,899
|
)
|
Net
income from equity investment in non-consolidated affiliate
|
|
|
(114,249
|
)
|
|
|
(50,789
|
)
|
Effect
of foreign currency transactions (gain) loss
|
|
|
(133,763
|
)
|
|
|
7,104
|
|
Stock-based
compensation expense
|
|
|
1,484,059
|
|
|
|
1,484,306
|
|
Addition
to provision for obsolete inventories
|
|
|
475,000
|
|
|
|
100,000
|
|
Changes
in operations, assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
410,060
|
|
|
|
(2,168,286
|
)
|
Due
from affiliates
|
|
|
—
|
|
|
|
(2,173
|
)
|
Inventory
|
|
|
(9,042,583
|
)
|
|
|
(4,983,428
|
)
|
Prepaid
expenses and supplies
|
|
|
(115,216
|
)
|
|
|
(172,666
|
)
|
Other
assets
|
|
|
(177,582
|
)
|
|
|
(44,259
|
)
|
Accounts
payable and accrued expenses
|
|
|
4,031,011
|
|
|
|
614,171
|
|
Accrued
interest
|
|
|
7,934
|
|
|
|
7,934
|
|
Due
to related parties
|
|
|
(470,720
|
)
|
|
|
(331,136
|
)
|
|
|
|
|
|
|
|
|
|
Total
adjustments
|
|
|
(2,830,979
|
)
|
|
|
(4,911,094
|
)
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(5,201,027
|
)
|
|
|
(4,831,087
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(207,346
|
)
|
|
|
(224,792
|
)
|
Acquisition
of intangible assets
|
|
|
-
|
|
|
|
(24,603
|
)
|
Investment
in non-consolidated affiliate, at equity
|
|
|
-
|
|
|
|
(156,000
|
)
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(207,346
|
)
|
|
|
(405,395
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
borrowings on credit facility
|
|
|
5,134,249
|
|
|
|
5,357,334
|
|
Net
payments on foreign revolving credit facility
|
|
|
(48,405
|
)
|
|
|
-
|
|
Repayment
of 5% convertible note
|
|
|
(50,000
|
)
|
|
|
-
|
|
Proceeds
from issuance of common stock under employee stock purchase plan
|
|
|
78,977
|
|
|
|
-
|
|
Proceeds
from exercise of common stock options
|
|
|
566,018
|
|
|
|
204,768
|
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
5,680,839
|
|
|
|
5,562,102
|
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF FOREIGN CURRENCY TRANSLATION
|
|
|
(27,669
|
)
|
|
|
49,963
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
244,797
|
|
|
|
375,583
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS INCLUDING RESTRICTED CASH - BEGINNING
|
|
|
759,266
|
|
|
|
942,503
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS
|
|
|
647,817
|
|
|
|
946,367
|
|
RESTRICTED
CASH
|
|
|
356,246
|
|
|
|
371,719
|
|
CASH
AND CASH EQUIVALENTS INCLUDING RESTRICTED CASH – ENDING
|
|
$
|
1,004,063
|
|
|
$
|
1,318,086
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
|
Schedule
of non-cash financing activities
|
|
|
|
|
|
|
|
|
Conversion
of 5% convertible notes to common stock
|
|
$
|
-
|
|
|
$
|
928,167
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
3,158,194
|
|
|
$
|
2,601,139
|
|
Income
taxes paid
|
|
$
|
108,885
|
|
|
$
|
669,500
|
|
See
accompanying notes to the unaudited condensed consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements
NOTE
1 -
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements do not include all of the information and footnote disclosures
normally included in financial statements prepared in accordance with the rules and regulations of the Securities and Exchange
Commission (“SEC”) and U.S. generally accepted accounting principles (“GAAP”) and, in the opinion of management,
contain all adjustments (which consist of only normal recurring adjustments) necessary for a fair presentation of such financial
information. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal
years. The condensed consolidated balance sheet as of March 31, 2018 is derived from the March 31, 2018 audited financial statements.
These unaudited condensed consolidated financial statements should be read in conjunction with Castle Brands Inc.’s (the
“Company”) audited consolidated financial statements for the fiscal year ended March 31, 2018 included in the Company’s
annual report on Form 10-K for the year ended March 31, 2018, as amended (“2018 Form 10-K”). Please refer to the notes
to the audited consolidated financial statements included in the 2018 Form 10-K for additional disclosures and a description of
accounting policies.
A.
|
Description
of business
- The consolidated financial statements include the accounts of the Company, its wholly-owned domestic subsidiaries,
Castle Brands (USA) Corp. (“CB-USA”) and McLain & Kyne, Ltd., the Company’s wholly-owned foreign subsidiaries,
Castle Brands Spirits Group Limited and Castle Brands Spirits Marketing and Sales Company Limited, and the Company’s
80.1% ownership interest in Gosling-Castle Partners Inc. (“GCP”), with adjustments for income or loss allocated
based upon percentage of ownership. The accounts of the subsidiaries have been included as of the date of acquisition. All
significant intercompany transactions and balances have been eliminated.
|
|
|
B.
|
Liquidity
- In November 2018, the Company extended the term of the loan and security agreement (as amended and restated) to July
31, 2020 (as described in Note 7C). The Company believes that its current cash and working capital and the availability under
the Credit Facility (as defined in Note 7C) will enable it to fund its obligations, meet its working capital needs, maturing
debt obligations and whiskey purchase commitments until it achieves profitability, ensure continuity of supply of its brands
and support new brand initiatives and marketing programs through at least February 2020. The Company believes it can continue
to meet its operating needs through additional mechanisms, if necessary, including additional or expanded debt financings,
potential equity offerings and limiting or adjusting the timing of additional inventory purchases based on available resources.
|
|
|
C.
|
Organization
and operations
- The Company is principally engaged in the importation, marketing and sale of premium and super premium
rums, whiskeys, liqueurs, vodka and related non-alcoholic beverage products, including ginger beer, in the United States,
Canada, Europe and Asia.
|
|
|
D.
|
Revenue
s
- The Company operates in one reportable segment and derives substantially all of its revenue from the sale and delivery of
premium beverage alcohol and related non-beverage alcohol products. In the U.S., the Company is required by law to use state-licensed
distributors or, in the control states, state-owned agencies performing this function, to sell its brands to retail outlets.
In its international markets, the Company relies primarily on established spirits distributors in much the same way as in
the U.S. Revenue from product sales is recognized when the product is shipped to a customer (generally a distributor) and
title and risk of loss has passed to the customer in accordance with the terms of sale 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.
|
|
|
|
The
Company does not ship product unless it has received an order or other documentation authorizing delivery to its customers.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The
Company generally does not provide post-delivery services and does not offer a right-of-return except in the case of an error.
Uncollectable accounts receivable are estimated by using a combination of historical customer experience and a customer-by-customer
analysis. The Company’s payment terms vary by customer and, in certain cases, the products offered. The term between
invoicing and when payment is due is not significant. As permitted under U.S. GAAP, the Company has elected not to assess
whether a contract has a significant financing component if the expectation at contract inception is such that the period
between payment by the customer and the transfer of the promised goods to the customer will be one year or less. As permitted
under U.S. GAAP, the Company has elected to recognize the incremental costs of obtaining a contract as an expense when incurred
as the amortization period of the asset that the Company otherwise would have recognized will be one year or less. As permitted
under U.S. GAAP, the Company has elected to exclude from the measurement of the transaction price all taxes assessed by a
governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected
by the Company from a customer, i.e excise taxes (see note 1H). As permitted under U.S. GAAP, the Company has elected to account
for any shipping and handling activities that occur after a customer obtains control of any goods as activities to fulfill
the promise to transfer the goods, and the Company is not required to evaluate whether such shipping and handling activities
are promised services to its customers.
|
|
See
Note 12 for disaggregation of revenue by segment and product as the Company believes this best depicts how the nature, amount,
timing and uncertainty of its revenues and cash flows are affected by economic factors.
|
|
|
|
The
Company does not have any customer contracts that meet the definition of unsatisfied performance obligations in accordance
with U.S. GAAP.
|
|
|
E.
|
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.
|
|
|
F.
|
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.
|
|
|
G.
|
Impairment
of long-lived assets
- Under Accounting Standards Codification (“ASC”) 310, “Accounting for the Impairment
or Disposal of Long-lived Assets”, the Company periodically reviews whether changes have occurred that would require
revisions to the carrying amounts of its definite lived, long-lived assets. When the sum of the expected future cash flows
is less than the carrying amount of the asset, an impairment loss is recognized based on the fair value of the asset.
|
|
|
H.
|
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.
|
|
|
I.
|
Foreign
currency
- The functional currency for the Company’s foreign operations is the Euro in Ireland and the British Pound
in the United Kingdom. Under ASC 830, “Foreign Currency Matters”, the translation from the applicable foreign
currencies to U.S. Dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date
and for revenue and expense accounts using a weighted average exchange rate during the period. The resulting translation adjustments
are recorded as a component of other comprehensive income. Gains or losses resulting from foreign currency transactions are
shown as a separate line item in the consolidated statements of operations.
|
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
J.
|
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.
|
K.
|
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% to 21% for tax years beginning after December 31, 2017. 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. In addition, the Company completed its assessment of income tax effects of the 2017 Tax Act
on its financials as of December 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%.
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 at each of December 31 and March 31, 2018, the Company had reserves
for uncertain tax positions (including related interest and penalties) for various state and local taxes of $6,778.
The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expense.
|
L.
|
Recent
accounting pronouncements
– In August 2018, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2018-15, Intangibles - Goodwill and Other Internal Use Software (Subtopic
350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting
arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or
obtain internal-use software. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the new guidance to determine
the impact the adoption of this guidance will have on the Company’s results of operations, cash flows and financial
condition.
|
|
|
|
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement.” This ASU adds, modifies and removes several disclosure requirements
relative to the three levels of inputs used to measure fair value in accordance with Topic 820, “Fair Value Measurement.”
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
July 2018, the FASB issued ASU 2018-09, “Codification Improvements.” This ASU makes amendments to a wide variety
of codification topics in the FASB’s Accounting Standards Codification. The transition and effective date guidance is
based on the facts and circumstances of each amendment. Some of the amendments in this ASU do not require transition guidance
and will be effective upon issuance of this ASU. However, many of the amendments in this ASU do have transition guidance with
effective dates for annual periods beginning after December 15, 2018. The Company is currently evaluating the new guidance
to determine the impact the adoption of this guidance will have on the Company’s results of operations, cash flows and
financial condition.
|
|
|
|
In
June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting.” This ASU expands the scope of Topic 718 to include share-based payments to non-employees
for goods or services. This ASU also clarifies that Topic 718 does not apply to share-based payments used to effectively
provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part
of a contract accounted for under Revenue from Contracts with Customers (Topic 606). This guidance is effective for the Company
as of April 1, 2019, 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
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments. This ASU amends the requirement on the measurement and recognition of expected credit losses for financial
assets held. The ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual
periods. Early adoption is permitted, but not earlier than annual and interim periods beginning after December 15, 2018. This
amendment should be applied on a modified retrospective basis with a cumulative effect adjustment to retained earnings as
of the beginning of the period of adoption. The Company is currently evaluating the new guidance to determine the impact the
adoption of this guidance will have on the Company’s results of operations, cash flows and financial condition.
|
|
|
|
In
February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which provides guidance for accounting for
leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use
asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The
lease classification will determine whether the lease expense is recognized based on an effective interest rate method or
on a straight-line basis over the term of the lease. For leases with a term of 12 months or less for which there is
not an option to purchase the underlying asset that the lessee is reasonably certain to exercise, a lessee is permitted to
make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities and should
recognize lease expense for such leases generally on a straight-line basis over the lease term. Certain qualitative disclosures
along with specific quantitative disclosures will be required so that users are able to understand more about the nature of
an entity’s leasing activities. Accounting for lessors remains largely unchanged from current U.S. GAAP. In July 2018,
the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11 “Leases (Topic 842): Targeted
Improvements” (ASU 2018-11). ASU 2018-10 clarifies certain areas within ASU 2016-02. Prior to ASU 2018-11, a modified
retrospective transition was required for financing or operating leases existing at or entered into after the beginning of
the earliest comparative period presented in the financial statements. ASU 2018-11 allows entities an additional transition
method to the existing requirements whereby an entity could adopt the provisions of ASU 2016-02 by recognizing a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements
for periods prior to adoption. ASU 2018-11 also allows a practical expedient that permits lessors to not separate non-lease
components from the associated lease component if certain conditions are present. An entity that elects to use the practical
expedients will, in effect, continue to account for leases that commenced before the effective date in accordance with previous
GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability
for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were
tracked and disclosed under previous GAAP. ASU 2016-02, ASU 2018-10 and ASU 2018-11 will be effective for the Company’s
fiscal year beginning April 1, 2019 and subsequent interim periods. The Company’s current lease arrangements have terms
that expire through 2021 and the Company is currently evaluating the impact the adoption of these ASUs will have on the Company’s
condensed consolidated financial statements.
|
|
|
|
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.
|
|
|
M.
|
Accounting
standards adopted
- In February 2018, 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 became effective for the Company as of April 1, 2018. The Company determined that the
adoption of this guidance did not have a material effect on the Company’s results of operations, cash flows and financial
condition.
|
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
|
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 became effective for the Company as of April 1, 2018. 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
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 became effective for the Company as of April 1, 2018.
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
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. The Company adopted the new standard on April 1, 2018 using a retrospective
adoption method, which resulted in an adjustment to “Cash and cash equivalents including restricted cash” on the
accompanying condensed consolidated statement of cashflows. 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
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 became effective for the Company as of April 1, 2018. 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 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
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 became effective for the Company as of April 1, 2018. 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 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
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 standard issued in ASU 2014-09. In May 2014, the FASB issued ASU 2014-09. The
new 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 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. The
Company adopted the new standard on April 1, 2018 by applying the modified retrospective method, which did not result in a
transition adjustment nor an adjustment to opening retained earnings. 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
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 Company adopted the new standard on April 1, 2018, which did
not result in a cumulative-effect adjustment to the balance sheet. The Company determined that the adoption of this guidance
did not have a material effect on the Company’s results of operations, cash flows and financial condition.
|
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
NOTE
2 -
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic
net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during
the period. Diluted net loss per common share is computed giving effect to all potentially dilutive common shares that were outstanding
during the period that are not anti-dilutive. Potentially dilutive common shares consist of incremental shares issuable upon exercise
of stock options, vesting of restricted shares or conversion of convertible notes outstanding. In computing diluted net income
per share for the three months ended December 31, 2018 and 2017, no adjustment has been made to the weighted average outstanding
common shares for the assumed exercise of stock options, vesting of restricted shares or conversion of convertible notes as the
assumed exercise, vesting or conversion of these securities is anti-dilutive.
Potential
common shares not included in calculating diluted net loss per share are as follows:
|
|
Three
months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Stock
options
|
|
|
13,815,575
|
|
|
|
15,523,008
|
|
Unvested
restricted stock
|
|
|
1,984,250
|
|
|
|
1,092,000
|
|
5%
Convertible notes
|
|
|
—
|
|
|
|
1,833,333
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,799,825
|
|
|
|
18,448,341
|
|
NOTE
3 -
INVENTORIES
|
|
December
31, 2018
|
|
|
March
31, 2018
|
|
Raw
materials
|
|
$
|
29,000,790
|
|
|
$
|
21,015,172
|
|
Finished
goods - net
|
|
|
14,163,460
|
|
|
|
13,540,381
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,164,250
|
|
|
$
|
34,555,553
|
|
As
of December 31 and March 31, 2018, 8% and 9%, respectively, of raw materials and 7% and 3%, respectively, of finished goods were
located outside of the United States.
In
the nine months ended December 31, 2018, the Company acquired $11,575,139 of bulk bourbon whiskey in support of its anticipated
near and mid-term needs.
The
Company estimates the allowance for obsolete and slow-moving inventory based on analyses and assumptions including, but not limited
to, historical usage, expected future demand and market requirements.
Inventories
are stated at the lower of weighted average cost or net realizable value.
NOTE
4 -
EQUITY INVESTMENT
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.
For
the three months ended December 31, 2018 and 2017, GCP had pretax net income on a stand-alone basis of $1,352,426 and $994,600,
respectively. The Company allocated a portion of this net income, or $269,133 and $199,915, to non-controlling interest
for the three months ended December 31, 2018 and 2017, respectively. For the nine months ended December 31, 2018 and 2017, GCP
had pretax net income on a stand-alone basis of $4,694,362 and $2,846,141, respectively. The Company allocated a portion
of this net income, or $934,178 and $572,074, to non-controlling interest for the nine months ended December 31, 2018 and
2017, respectively. The cumulative balance allocated to noncontrolling interests in GCP was $4,283,589 and $3,568,636 at
December 31 and March 31, 2018, respectively, as shown on the accompanying condensed consolidated balance sheets.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
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 in Crestwood, Kentucky
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. In September 2017, CB-USA
purchased an additional 5% of Copperhead for $156,000 from an existing shareholder. The Company has accounted for this investment
under the equity method of accounting. For the three months ended December 31, 2018, the Company recognized income of $25,108
from this investment. For the three months ended December 31, 2017, the Company recognized a loss of ($20,806) from this investment.
For the nine months ended December 31, 2018 and 2017, the Company recognized $114,249 and $50,789 of income from this investment,
respectively. The investment balance was $928,175 and $813,926 at December 31 and March 31, 2018, respectively.
NOTE
5 -
GOODWILL AND INTANGIBLE ASSETS
The
carrying amount of goodwill was $496,226 at each of December 31 and March 31, 2018.
Intangible
assets consist of the following:
|
|
December
31, 2018
|
|
|
March
31, 2018
|
|
Definite
life brands
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Trademarks
|
|
|
641,693
|
|
|
|
641,693
|
|
Rights
|
|
|
8,271,555
|
|
|
|
8,271,555
|
|
Product
development
|
|
|
208,518
|
|
|
|
208,518
|
|
Patents
|
|
|
994,000
|
|
|
|
994,000
|
|
Other
|
|
|
55,460
|
|
|
|
55,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,341,226
|
|
|
|
10,341,226
|
|
Less:
accumulated amortization
|
|
|
8,818,073
|
|
|
|
8,485,253
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
1,523,153
|
|
|
|
1,855,973
|
|
Other
identifiable intangible assets - indefinite lived*
|
|
|
4,112,972
|
|
|
|
4,112,972
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,636,125
|
|
|
$
|
5,968,945
|
|
*
Other identifiable intangible assets - indefinite lived consists of product formulations and the Company’s relationships
with its distillers.
Accumulated
amortization consists of the following:
|
|
December
31, 2018
|
|
|
March
31, 2018
|
|
Definite
life brands
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Trademarks
|
|
|
430,946
|
|
|
|
403,617
|
|
Rights
|
|
|
7,207,235
|
|
|
|
6,954,303
|
|
Product
development
|
|
|
55,321
|
|
|
|
47,880
|
|
Patents
|
|
|
954,571
|
|
|
|
909,453
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
$
|
8,818,073
|
|
|
$
|
8,485,253
|
|
NOTE
6 -
RESTRICTED CASH
At
December 31 and March 31, 2018, the Company had €311,299 or $356,246 (translated at the December 31, 2018 exchange rate)
and €310,324 or $382,279 (translated at the March 31, 2018 exchange rate), respectively, of cash restricted from withdrawal
and held by a bank in Ireland as collateral for overdraft coverage, creditors’ insurance, customs and excise guaranty and
a revolving credit facility as described in Note 7A below.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
NOTE
7 -
NOTES PAYABLE
|
|
December
31, 2018
|
|
|
March
31, 2018
|
|
Notes
payable consist of the following:
|
|
|
|
|
|
|
|
|
Foreign
revolving credit facilities (A)
|
|
$
|
69,645
|
|
|
$
|
126,148
|
|
Note
payable - GCP note (B)
|
|
|
219,514
|
|
|
|
211,580
|
|
Credit
facility (C)
|
|
|
23,672,003
|
|
|
|
18,505,897
|
|
5%
Convertible notes (D)
|
|
|
—
|
|
|
|
50,000
|
|
11%
Subordinated note (E)
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,961,162
|
|
|
$
|
38,893,625
|
|
A.
|
The
Company has arranged various credit facilities aggregating €311,299 or $356,246 (translated at the December 31, 2018
exchange rate) and €310,324 or $382,279 (translated at the March 31, 2018 exchange rate) at December 31 and March 31,
2018, respectively, 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 December
31 and March 31, 2018, there was €60,858 or $69,645 (translated at the December 31, 2018 exchange rate) and €102,404
or $126,148 (translated at the March 31, 2018 exchange rate) of principal due on the foreign revolving credit facilities included
in current maturities of notes payable, respectively.
|
|
|
B.
|
In
December 2009, GCP issued a promissory note (the “GCP Note”) in the aggregate principal amount of $211,580 to
Gosling’s Export (Bermuda) Limited in exchange for credits issued on certain inventory purchases. The GCP Note matures
on April 1, 2020, is payable at maturity, subject to certain acceleration events, and calls for annual interest of 5%, to
be accrued and paid at maturity. At March 31, 2018, $10,579 of accrued interest was converted to amounts due to affiliates.
At December 31, 2018, $219,514, consisting of $211,580 of principal and $7,934 of accrued interest, due on the GCP Note is
included in long-term liabilities. At March 31, 2018, $211,580 of principal due on the GCP Note is included in long-term liabilities.
|
|
|
C.
|
In
August 2011, the Company and CB-USA entered into a loan and security agreement (as amended
and restated, and further amended, the “Amended Agreement”) with a third-party
lender ACF FinCo I LP (“ACF,”) as successor in interest, which, as amended,
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.
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.
The
Credit Facility interest rate is the rate that, when annualized, is the greatest of (a) the Prime Rate plus 3.00%, (b)
the LIBOR Rate plus 5.50% and (c) 6.00%. As of December 31, 2018, the Credit Facility interest rate was 7.75%.
The
Purchased Inventory Sublimit interest rate is the rate that, when annualized, is the greatest of (a) the Prime Rate plus
4.25%, (b) the LIBOR Rate plus 6.75% and (c) 7.50%. As of December 31, 2018, the interest rate applicable to the Purchased
Inventory Sublimit was 9.5%. 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.
|
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
|
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 nine months ended December 31, 2018, the
Company paid interest at 7.31175% through April 30, 2018, then 7.35805% through May 31, 2018, then 7.30031% through June 30,
2018, then 7.5% through September 27, 2018, then 7.75% through December 19, 2018, then 8.0% through December 31, 2018 on the
Amended Agreement. For the nine months ended December 31, 2018, the Company paid interest at 9.06175% through April 30, 2018,
then 9.10805% through May 31, 2018, then 9.05031% through June 30, 2018, then 9.25% through September 27, 2018, then 9.5%
through December 19, 2018, then 9.75% through December 31, 2018 on the Purchased Inventory Sublimit. For the nine months ended
December 31, 2017, the Company paid interest at 8.25% through June 14, 2017, then at 8.5% through December 13, 2017, and then
8.75% through December 31, 2017 on the Purchased Inventory Sublimit. Interest is payable monthly in arrears, on the first
day of every month on the average daily unpaid principal amount of the Credit Facility. After the occurrence and during the
continuance of any “Default” or “Event of Default” (as defined under the Amended Agreement), the Borrower
is required to pay interest at a rate that is 3.25% per annum above the then applicable Credit Facility interest rate. There
have been no Events of Default under the Credit Facility. ACF also receives a collateral management fee of $1,000 per month
(increased to $2,000 after the occurrence of and during the continuance of an Event of Default) in addition to the facility
fee with respect to the Purchased Inventory Sublimit. The Amended Agreement contains standard borrower representations and
warranties for asset-based borrowing and a number of reporting obligations and affirmative and negative covenants. The Amended
Agreement includes negative covenants that, among other things, restrict the Borrower’s ability to create additional
indebtedness, dispose of properties, incur liens and make distributions or cash dividends. The obligations of the Borrower
under the Amended Amendment are secured by the grant of a pledge and security interest in all of the assets of the Borrower.
At December 31, 2018, the Company was in compliance, in all respects, with the covenants under the Amended Agreement. The
Credit Facility matures on July 31, 2020.
|
|
|
|
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. In April 2018, the Company acquired $2,001,000
in aged bulk bourbon under the Purchased Inventory Sublimit with additional borrowings from certain related parties of the
Company, including Frost Gamma Investments Trust ($100,050), Richard J. Lampen ($66,700), Mark E. Andrews, III ($33,350),
Brian L. Heller ($28,348), and Alfred J. Small ($10,005), as junior participants in the Purchased Inventory Sublimit with
respect to such purchase. In June 2018, the Company acquired $1,035,000 in aged bulk bourbon under the Purchased Inventory
Sublimit with additional borrowings from certain related parties of the Company, including Frost Gamma Investments Trust ($51,750),
Richard J. Lampen ($34,500), Mark E. Andrews, III ($17,250), Brian L. Heller ($14,663), and Alfred J. Small ($5,175), as junior
participants in the Purchased Inventory Sublimit with respect to such purchase. Under the terms of the participation agreement,
the participants receive interest at the rate of 11% per annum.
|
|
|
|
At
December 31 and March 31, 2018, $23,739,211 and $18,604,962, respectively, due on the Credit Facility was included in long-term
liabilities. At December 31 and March 31, 2018, there was $1,260,789 and $2,395,038, respectively, in potential availability
under the Credit Facility. In connection with the adoption of ASU 2015-03, the Company included $67,208 and $99,065 of debt
issuance costs at December 31 and March 31, 2018, respectively, as direct deductions from the carrying amount of the related
debt liability.
|
|
|
|
In
October 2018, the Company and CB-USA entered into a Fifth Amendment (the “Fifth Amendment”) to the Amended Agreement
to amend certain terms of the Company’s existing Credit Facility with ACF. Among other changes, the Fifth Amendment
increased the maximum amount of the Credit Facility from $23,000,000 to $25,000,000 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
$50,000 commitment fee in connection with the Amendment. In connection with the Amendment, the Company and CB-USA also entered
into an Amended and Restated Revolving Credit Note.
|
|
|
|
In
November 2018, the Company and CB-USA entered into a Sixth Amendment (the “Sixth Amendment”) to the Amended Agreement
to amend certain terms of the Company’s existing Credit Facility with ACF. Among other changes, the Sixth Amendment
extends the term of the Credit Facility to July 31, 2020 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 $57,500 commitment fee
in connection with the Amendment.
|
|
|
|
In
January 2019, the Company and CB-USA entered into a Seventh Amendment (the “Seventh Amendment”) to the Amended
Agreement to amend certain terms of the Company’s existing Credit Facility with ACF. Among other changes, the Seventh
Amendment increased the maximum amount of the Credit Facility from $25,000,000 to $27,000,000 and amended the definition
of borrowing base to increase the amount of borrowing that can be collateralized by inventory. The Seventh Amendment also
contains a fixed charge coverage ratio covenant requiring the Company to maintain a fixed charge coverage ratio of not less
than 1.1 to 1.0. The Company and CB-USA paid ACF an aggregate $20,000 commitment fee in connection with the Seventh Amendment.
In connection with the Seventh Amendment, the Company and CB-USA also entered into an Amended and Restated Revolving Credit
Note.
|
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
D.
|
In
October 2013, the Company issued an aggregate initial principal amount of $2,125,000
of unsecured 5% subordinated notes (the “Convertible Notes”). The Convertible
Notes bore interest at a rate of 5% per annum, until their maturity date of December
15, 2018. The Convertible Notes, and accrued but unpaid interest thereon, were 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
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).
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.
The
remaining Convertible Note in the aggregate principal amount of $50,000 matured and was repaid on December 15, 2018. At
March 31, 2018, $50,000 of principal due on the Convertible Notes was included in current maturities of notes payable.
|
|
|
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. 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.
|
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
NOTE
8 -
FOREIGN CURRENCY FORWARD CONTRACTS
The
Company enters into forward contracts from time to time to reduce its exposure to foreign currency fluctuations. The Company recognizes
in the balance sheet derivative contracts at fair value and reflects any net gains and losses currently in earnings. At December
31 and March 31, 2018, the Company had no forward contracts outstanding.
NOTE
9 -
STOCK-BASED COMPENSATION
In
April 2018, the Company granted to employees, directors and certain consultants an aggregate of 1,100,000 restricted shares of
the Company’s common stock under the Company’s 2013 Incentive Compensation Plan. The restricted shares vest 25% on
each of the first four anniversaries of the grant date, subject to earlier vesting in certain circumstances. The Company has valued
the shares at $1,342,000.
Stock-based
compensation expense for the three months ended December 31, 2018 and 2017 amounted to $496,355 and $504,490, respectively. Stock-based
compensation expense for the nine months ended December 31, 2018 and 2017 amounted to $1,484,059 and $1,484,306, respectively.
At December 31, 2018, total unrecognized compensation cost amounted to $3,150,347, representing 2,146,875 unvested options and
1,984,250 unvested shares of restricted stock. This cost is expected to be recognized over a weighted-average vesting period of
1.91 years. There were 1,459,533 options exercised during the nine months ended December 31, 2018 and 269,200 options exercised
during the nine months ended December 31, 2017. The Company did not recognize any related tax benefit for the three and nine months
ended December 31, 2018 and 2017 from option exercises, as the effects were de minimis.
NOTE
10 -
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, 2019, the Company has contracted to purchase
approximately €1,105,572 or $1,265,199 (translated at the December 31, 2018 exchange rate) in bulk Irish whiskey, of
which €489,787, or $560,504 (translated at the December 31, 2018 exchange rate), has been purchased as of December 31,
2018. 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, 2019, the Company has contracted to purchase approximately
€575,791 or $658,926 (translated at the December 31, 2018 exchange rate) in bulk Irish whiskey, of which €370,790,
or $424,327 (translated at the December 31, 2018 exchange rate), has been purchased as of December 31, 2018. The Company is
not obligated to pay the Irish Distillery for any product not yet received. During the term of this supply agreement, the
Irish Distillery has the right to limit additional purchases above the commitment amount.
|
|
|
C.
|
The
Company has entered into a supply agreement with a bourbon distiller, which provides for the production of newly-distilled
bourbon whiskey. 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, of which $3,963,700 was
purchased as of December 31, 2018. The Company is not obligated to pay the distiller for any product not yet received.
|
|
|
D.
|
The
Company leases office space in New York, NY, Dublin, Ireland and Houston, TX. The New York, NY lease began on May 1, 2010
and expires on February 29, 2020 and provides for monthly payments of $26,255. The Dublin lease commenced on March 1, 2009
and extends through October 31, 2019 and provides for monthly payments of €1,500 or $1,717 (translated at the December
31, 2018 exchange rate). The Houston, TX lease commenced on April 27, 2015 and extends through June 26, 2021 and provides
for monthly payments of $3,581. The Company has also entered into non-cancelable operating leases for certain office equipment.
|
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
E.
|
As
described in Note 7C, in August 2011, the Company and CB-USA entered into the Credit Facility, as amended in July 2012, March
2013, August 2013, November 2013, August 2014, September 2014, August 2015, October 2017, May 2018, October 2018, November
2018 and January 2019.
|
|
|
F.
|
Except
as set forth below, the Company believes that neither it, nor any of its subsidiaries, is currently subject to litigation
which, in the opinion of management after consultation with counsel, is likely to have a material adverse effect on the Company.
|
The
Company may become involved in litigation from time to time relating to claims arising in the ordinary course of its business.
These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
NOTE
11 -
CONCENTRATIONS
A.
|
Credit
Risk
- The Company maintains its cash and cash equivalents balances at various large financial institutions that, at times,
may exceed federally and internationally insured limits. The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant credit risk.
|
|
|
B.
|
Customers
- Sales to one customer, the Southern Glazer’s Wine and Spirits of America, Inc. family of companies (“SGWS”)
accounted for approximately 36.8% and 38.4% of the Company’s net sales for the three months ended December 31, 2018
and 2017, respectively. Sales to SGWS accounted for approximately 36.9% and 38.2% of the Company’s net sales for the
nine months ended December 31, 2018 and 2017, respectively, and approximately 35.3% and 35.9% of accounts receivable
at December 31 and March 31, 2018, respectively.
|
NOTE
12 -
GEOGRAPHIC INFORMATION
The
Company operates in one reportable segment - the sale of premium beverage alcohol. The Company’s product categories are
whiskeys, rum, 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
loss attributable to common shareholders, consolidated income tax expense and consolidated assets from the U.S. and foreign countries
and consolidated sales, net by category.
|
|
Three
months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Consolidated
Sales, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
2,219,385
|
|
|
|
9.8
|
%
|
|
$
|
2,390,478
|
|
|
|
9.9
|
%
|
U.S.
- control states
|
|
|
5,164,987
|
|
|
|
25.4
|
%
|
|
|
4,965,065
|
|
|
|
22.9
|
%
|
U.S.
- open states
|
|
|
15,150,870
|
|
|
|
74.6
|
%
|
|
|
16,724,080
|
|
|
|
77.1
|
%
|
United
States
|
|
|
20,315,857
|
|
|
|
90.2
|
%
|
|
|
21,689,145
|
|
|
|
90.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Sales, net
|
|
$
|
22,535,242
|
|
|
|
100.0
|
%
|
|
$
|
24,079,623
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
(Loss) Income from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
(31,388
|
)
|
|
|
3.3
|
%
|
|
$
|
(7,228
|
)
|
|
|
(0.5
|
)%
|
United
States
|
|
|
(924,009
|
)
|
|
|
96.97
|
%
|
|
|
1,579,434
|
|
|
|
100.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated (Loss) Income from Operations
|
|
$
|
(955,397
|
)
|
|
|
100.0
|
%
|
|
$
|
1,572,206
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Net (Loss) Income Attributable to Common Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
(405
|
)
|
|
|
0.0
|
%
|
|
$
|
36,186
|
|
|
|
7.8
|
%
|
United
States
|
|
|
(2,177,753
|
)
|
|
|
100.0
|
%
|
|
|
429,394
|
|
|
|
92.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Net (Loss) Income Attributable to Common Shareholders
|
|
$
|
(2,178,158
|
)
|
|
|
100.0
|
%
|
|
$
|
465,580
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
(5,288
|
)
|
|
|
100.0
|
%
|
|
$
|
63,085
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Sales, net by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whiskey
|
|
$
|
9,943,114
|
|
|
|
44.1
|
%
|
|
$
|
10,811,701
|
|
|
|
44.9
|
%
|
Rum
|
|
|
4,042,545
|
|
|
|
17.9
|
%
|
|
$
|
3,758,793
|
|
|
|
15.6
|
%
|
Liqueurs
|
|
|
2,268,816
|
|
|
|
10.1
|
%
|
|
|
2,723,578
|
|
|
|
11.3
|
%
|
Vodka
|
|
|
235,276
|
|
|
|
1.0
|
%
|
|
|
377,999
|
|
|
|
1.6
|
%
|
Tequila
|
|
|
56
|
|
|
|
0.0
|
%
|
|
|
26,565
|
|
|
|
0.1
|
%
|
Ginger
beer
|
|
|
6,045,435
|
|
|
|
26.9
|
%
|
|
|
6,380,987
|
|
|
|
26.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Sales, net
|
|
$
|
22,535,242
|
|
|
|
100.0
|
%
|
|
$
|
24,079,623
|
|
|
|
100.0
|
%
|
|
|
Nine
months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Consolidated
Sales, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
6,761,194
|
|
|
|
9.8
|
%
|
|
$
|
6,832,624
|
|
|
|
10.4
|
%
|
U.S.
- control states
|
|
|
14,996,293
|
|
|
|
24.1
|
%
|
|
|
13,609,868
|
|
|
|
23.1
|
%
|
U.S.
- open states
|
|
|
47,192,306
|
|
|
|
75.9
|
%
|
|
|
45,383,568
|
|
|
|
76.9
|
%
|
United
States
|
|
|
62,188,599
|
|
|
|
90.2
|
%
|
|
|
58,993,436
|
|
|
|
89.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Sales, net
|
|
$
|
68,949,793
|
|
|
|
100.0
|
%
|
|
$
|
65,826,060
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
(Loss) Income from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
(85,083
|
)
|
|
|
(10.9
|
)%
|
|
$
|
(20,489
|
)
|
|
|
(0.7
|
)%
|
United
States
|
|
|
862,729
|
|
|
|
110.9
|
%
|
|
|
2,806,042
|
|
|
|
100.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Income from Operations
|
|
$
|
777,646
|
|
|
|
100.0
|
%
|
|
$
|
2,785,553
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Net (Loss) Income Attributable to Common Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
(1,271
|
)
|
|
|
0.0
|
%
|
|
$
|
78,447
|
|
|
|
(16.3
|
)%
|
United
States
|
|
|
(3,083,730
|
)
|
|
|
100.0
|
%
|
|
|
(560,945
|
)
|
|
|
116.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Net Loss Attributable to Common Shareholders
|
|
$
|
(3,085,001
|
)
|
|
|
100.0
|
%
|
|
$
|
(482,498
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
(23,186
|
)
|
|
|
100.0
|
%
|
|
$
|
19,337
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Sales, net by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whiskey
|
|
$
|
28,425,936
|
|
|
|
41.2
|
%
|
|
$
|
25,317,480
|
|
|
|
38.5
|
%
|
Rum
|
|
|
12,776,043
|
|
|
|
18.5
|
%
|
|
$
|
12,380,558
|
|
|
|
18.8
|
%
|
Liqueurs
|
|
|
6,792,602
|
|
|
|
9.9
|
%
|
|
|
7,361,924
|
|
|
|
11.2
|
%
|
Vodka
|
|
|
892,016
|
|
|
|
1.3
|
%
|
|
|
1,021,253
|
|
|
|
1.5
|
%
|
Tequila
|
|
|
85,218
|
|
|
|
0.1
|
%
|
|
|
156,301
|
|
|
|
0.2
|
%
|
Ginger
beer
|
|
|
19,977,978
|
|
|
|
29.0
|
%
|
|
|
19,588,544
|
|
|
|
29.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Sales, net
|
|
$
|
68,949,793
|
|
|
|
100.0
|
%
|
|
$
|
65,826,060
|
|
|
|
100.0
|
%
|
|
|
As
of December 31, 2018
|
|
|
As
of March 31, 2018
|
|
Consolidated
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
3,884,332
|
|
|
|
5.7
|
%
|
|
$
|
2,886,735
|
|
|
|
4.8
|
%
|
United
States
|
|
|
64,705,733
|
|
|
|
94.3
|
%
|
|
|
57,446,625
|
|
|
|
95.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Assets
|
|
$
|
68,590,065
|
|
|
|
100.0
|
%
|
|
$
|
60,333,360
|
|
|
|
100.0
|
%
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We
develop and market premium and super premium brands in the following beverage alcohol categories: rum, whiskey, liqueurs and vodka.
We also develop and market related non-alcoholic beverage products, including Goslings Stormy Ginger Beer. We distribute our products
in all 50 U.S. states and the District of Columbia and in thirteen primary international markets, including Ireland, Great Britain,
Northern Ireland, Germany, Canada, France, Finland, Norway, Sweden, Denmark, and the Duty Free markets. We market the following
brands, among others:
●
|
Goslings
rum
®
|
●
|
Goslings
Stormy Ginger Beer
|
●
|
Goslings
Dark’n Stormy
®
ready-to-drink cocktail
|
●
|
Jefferson’s
®
bourbon
|
●
|
Jefferson’s
Reserve
®
|
●
|
Jefferson’s
Ocean Aged at Sea
®
|
●
|
Jefferson’s
Wine Finish Collection
|
●
|
Jefferson’s
The Manhattan: Barrel Finished Cocktail
|
●
|
Jefferson’s
Chef’s Collaboration
|
●
|
Jefferson’s
Wood Experiment
|
●
|
Jefferson’s
Presidential Select
|
●
|
Jefferson’s
Straight Rye whiskey
|
●
|
Pallini
®
liqueurs
|
●
|
Clontarf
®
Irish whiskey
|
●
|
Knappogue
Castle Whiskey
®
|
●
|
Brady’s
®
Irish Cream
|
●
|
Boru
®
vodka
|
●
|
Celtic
Honey
®
liqueur
|
●
|
Gozio
®
amaretto
|
●
|
The
Arran Malt
®
Single Malt Scotch Whisky
|
●
|
The
Robert Burns Scotch Whiskeys
|
●
|
Machrie
Moor Scotch Whiskeys
|
Our
objective is to continue building Castle Brands into a profitable international spirits company, with a distinctive portfolio
of premium and super premium 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, whiskeys and ginger beer, sales of which
have grown substantially in recent years;
|
●
|
focus
on innovation.
We continue to innovate in our portfolio by developing new brand extensions, expressions, blends and
processes, such as our Ocean Aged at Sea bourbons and our wine-finishes for our bourbons and Irish whiskeys. We believe that
continued focus on innovation will drive sales growth, build brand loyalty, and open new markets;
|
●
|
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;
|
●
|
selectively
add new brand brands to our portfolio.
We continue to explore strategic relationships, joint ventures and acquisitions
to selectively expand our premium spirits portfolio. For example, we added the Arran Scotch whiskeys to our portfolio as agency
brands. We expect that future acquisitions or agency relations, if any, would involve some combination of cash, debt and the
issuance of our stock; and
|
●
|
build
consumer awareness.
We use our existing assets, expertise and resources to build consumer awareness and market penetration
for our brands.
|
Currency
Translation
The
functional currencies for our foreign operations are the Euro in Ireland and the British Pound in the United Kingdom. With respect
to our consolidated financial statements, the translation from the applicable foreign currencies to U.S. Dollars is performed
for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using
a weighted average exchange rate during the period. The resulting translation adjustments are recorded as a component of other
comprehensive income.
Where
in this report we refer to amounts in Euros or British Pounds, we have for your convenience also in certain cases provided a conversion
of those amounts to U.S. Dollars in parentheses. Where the numbers refer to a specific balance sheet account date or financial
statement account period, we have used the exchange rate that was used to perform the conversions in connection with the applicable
financial statement. In all other instances, unless otherwise indicated, the conversions have been made using the exchange rates
as of December 31, 2018, each as calculated from the Interbank exchange rates as reported by Oanda.com. On December 31, 2018,
the exchange rate of the Euro and the British Pound in exchange for U.S. Dollars was €1.00 = U.S. $1.14438 (equivalent to
U.S. $1.00 = €0.87383) and £1.00 = U.S. $1.27343 (equivalent to U.S. $1.00 = £0.78528).
These
conversions should not be construed as representations that the Euro and British Pound amounts actually represent U.S. Dollar
amounts or could be converted into U.S. Dollars at the rates indicated.
Critical
Accounting Policies
There
are no material changes from the critical accounting policies set forth in Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended March 31, 2018, as
amended, which we refer to as our 2018 Annual Report. Please refer to that section for disclosures regarding the critical accounting
policies related to our business.
Financial
performance overview
The
following table provides information regarding our spirits case sales for the periods presented based on nine-liter equivalent
cases, which is a standard spirits industry metric (table excludes related non-alcoholic beverage products):
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
86,620
|
|
|
|
90,815
|
|
|
|
251,837
|
|
|
|
248,058
|
|
International
|
|
|
21,502
|
|
|
|
20,215
|
|
|
|
61,169
|
|
|
|
63,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
108,122
|
|
|
|
111,030
|
|
|
|
313,006
|
|
|
|
311,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rum
|
|
|
37,289
|
|
|
|
35,361
|
|
|
|
118,342
|
|
|
|
119,719
|
|
Whiskey
|
|
|
36,779
|
|
|
|
36,477
|
|
|
|
98,914
|
|
|
|
90,146
|
|
Liqueur
|
|
|
29,121
|
|
|
|
31,561
|
|
|
|
77,651
|
|
|
|
80,959
|
|
Vodka
|
|
|
4,919
|
|
|
|
7,484
|
|
|
|
17,625
|
|
|
|
19,563
|
|
Tequila
|
|
|
14
|
|
|
|
147
|
|
|
|
474
|
|
|
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
108,122
|
|
|
|
111,030
|
|
|
|
313,006
|
|
|
|
311,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
80.1
|
%
|
|
|
81.8
|
%
|
|
|
80.5
|
%
|
|
|
79.7
|
%
|
International
|
|
|
19.9
|
%
|
|
|
18.2
|
%
|
|
|
19.5
|
%
|
|
|
20.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rum
|
|
|
34.5
|
%
|
|
|
31.9
|
%
|
|
|
37.8
|
%
|
|
|
38.4
|
%
|
Whiskey
|
|
|
34.1
|
%
|
|
|
32.9
|
%
|
|
|
31.6
|
%
|
|
|
29.0
|
%
|
Liqueur
|
|
|
26.9
|
%
|
|
|
28.4
|
%
|
|
|
24.8
|
%
|
|
|
26.0
|
%
|
Vodka
|
|
|
4.5
|
%
|
|
|
6.7
|
%
|
|
|
5.6
|
%
|
|
|
6.3
|
%
|
Tequila
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The
following table provides information regarding our case sales of Goslings Stormy Ginger Beer, for the periods presented:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
405,325
|
|
|
|
412,146
|
|
|
|
1,325,136
|
|
|
|
1,289,575
|
|
International
|
|
|
11,204
|
|
|
|
22,955
|
|
|
|
60,304
|
|
|
|
52,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
416,529
|
|
|
|
435,101
|
|
|
|
1,385,440
|
|
|
|
1,341,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
97.3
|
%
|
|
|
94.7
|
%
|
|
|
95.6
|
%
|
|
|
96.1
|
%
|
International
|
|
|
2.7
|
%
|
|
|
5.3
|
%
|
|
|
4.4
|
%
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Results
of operations
The
table below provides, for the periods indicated, the percentage of net sales of certain items in our consolidated financial statements:
|
|
Three
months ended December 31,
|
|
|
Nine
months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Sales,
net
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
63.9
|
%
|
|
|
59.8
|
%
|
|
|
61.5
|
%
|
|
|
59.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
36.1
|
%
|
|
|
40.2
|
%
|
|
|
38.5
|
%
|
|
|
40.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expense
|
|
|
25.7
|
%
|
|
|
22.6
|
%
|
|
|
24.6
|
%
|
|
|
24.9
|
%
|
General
and administrative expense
|
|
|
13.7
|
%
|
|
|
10.2
|
%
|
|
|
11.9
|
%
|
|
|
10.7
|
%
|
Depreciation
and amortization
|
|
|
0.9
|
%
|
|
|
0.9
|
%
|
|
|
0.9
|
%
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
(4.2
|
)%
|
|
|
6.5
|
%
|
|
|
1.1
|
%
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expense) income, net
|
|
|
(0.0
|
)%
|
|
|
0.0
|
%
|
|
|
(0.0
|
)%
|
|
|
0.0
|
%
|
Foreign
exchange gain (loss)
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
(0.0
|
)%
|
Income
(loss) from equity investment in non-consolidated affiliate
|
|
|
0.1
|
%
|
|
|
(0.1
|
)%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
Interest
expense, net
|
|
|
(5.4
|
)%
|
|
|
(4.1
|
)%
|
|
|
(4.9
|
)%
|
|
|
(4.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before provision for income taxes
|
|
|
(9.1
|
)%
|
|
|
2.4
|
%
|
|
|
(3.4
|
)%
|
|
|
0.1
|
%
|
Income
tax benefit (expense), net
|
|
|
0.0
|
%
|
|
|
0.3
|
%
|
|
|
(0.0
|
)%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
(9.1
|
)%
|
|
|
2.7
|
%
|
|
|
(3.4
|
)%
|
|
|
0.1
|
%
|
Net
income attributable to noncontrolling interests
|
|
|
(0.5
|
)%
|
|
|
(0.8
|
)%
|
|
|
(1.0
|
)%
|
|
|
(0.9
|
)%
|
Net
(loss) income attributable to common shareholders
|
|
|
(9.6
|
)%
|
|
|
1.9
|
%
|
|
|
(4.4
|
)%
|
|
|
(0.8
|
)%
|
The
following is a reconciliation of net loss (income) attributable to common shareholders to EBITDA, as adjusted:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net
(loss) income attributable to common shareholders
|
|
$
|
(2,178,158
|
)
|
|
$
|
465,580
|
|
|
$
|
(3,085,001
|
)
|
|
$
|
(482,498
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
1,210,707
|
|
|
|
976,017
|
|
|
|
3,362,154
|
|
|
|
2,769,440
|
|
Income
tax expense (benefit), net
|
|
|
5,288
|
|
|
|
(63,085
|
)
|
|
|
23,186
|
|
|
|
(19,337
|
)
|
Depreciation
and amortization
|
|
|
240,245
|
|
|
|
208,388
|
|
|
|
637,306
|
|
|
|
599,623
|
|
EBITDA
(loss) income
|
|
|
(765,029
|
)
|
|
|
1,586,900
|
|
|
|
937,645
|
|
|
|
2,867,228
|
|
Allowance
for doubtful accounts
|
|
|
14,559
|
|
|
|
14,100
|
|
|
|
43,677
|
|
|
|
44,912
|
|
Allowance
for obsolete inventory
|
|
|
315,000
|
|
|
|
50,000
|
|
|
|
475,000
|
|
|
|
100,000
|
|
Stock-based
compensation expense
|
|
|
496,355
|
|
|
|
504,490
|
|
|
|
1,484,059
|
|
|
|
1,484,386
|
|
Transaction
fees
|
|
|
985,543
|
|
|
|
—
|
|
|
|
985,543
|
|
|
|
—
|
|
Other
expense (income), net
|
|
|
1,455
|
|
|
|
(931
|
)
|
|
|
10,366
|
|
|
|
(872
|
)
|
(Income)
loss from equity investments in non-consolidated affiliate
|
|
|
(25,108
|
)
|
|
|
20,806
|
|
|
|
(114,249
|
)
|
|
|
(50,789
|
)
|
Foreign
exchange (gain) loss
|
|
|
(86,381
|
)
|
|
|
(25,204
|
)
|
|
|
(133,763
|
)
|
|
|
7,104
|
|
Net
income attributable to noncontrolling interests
|
|
|
116,800
|
|
|
|
199,023
|
|
|
|
714,953
|
|
|
|
562,505
|
|
EBITDA,
as adjusted
|
|
$
|
1,053,194
|
|
|
$
|
2,349,184
|
|
|
$
|
4,403,232
|
|
|
$
|
5,014,474
|
|
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 (gain) 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 and in the three and nine months ended December 31, 2018, a non-recurring $1.0 million charge to professional fees.
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, decreased to $1.1 million for the three months ended December 31, 2018, as compared to $2.3 million for the
comparable prior-year period and decreased to $4.4 million for the nine months ended December 31, 2018, as compared to $5.0 million
for the comparable prior-year period, both primarily the result of our lower revenues and increased costs.
Three
months ended December 31, 2018 compared with three months ended December 31, 2017
Net
sales.
Net sales decreased 6.4% to $22.5 million for the three months ended December 31, 2018, as compared to $24.1 million
for the comparable prior-year period, primarily due to the release of high revenue specialty releases of our Jefferson’s
bourbon in the prior fiscal year quarter ended December 31, 2017 and sales decreases in Clontarf, vodka and certain of
our liqueurs for the three months ended December 31, 2018. This was partially offset by the increased U.S. sales growth
of certain of our Jefferson’s bourbons and Goslings rums for the three months ended December 31, 2018. We expect
to continue to focus on our faster growing brands and markets, both in the U.S. and internationally, including the release of
additional high revenue specialty releases of our Jefferson’s bourbons in future periods.
The
table below presents the increase or decrease, as applicable, in case sales by spirits product category for the three months ended
December 31, 2018 as compared to the three months ended December 31, 2017:
|
|
Increase/(decrease)
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
Increase/(decrease)
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Rum
|
|
|
1,928
|
|
|
|
(97
|
)
|
|
|
5.5
|
%
|
|
|
(0.4
|
)%
|
Whiskey
|
|
|
302
|
|
|
|
1,116
|
|
|
|
0.8
|
%
|
|
|
4.1
|
%
|
Liqueur
|
|
|
(2,440
|
)
|
|
|
(2,804
|
)
|
|
|
(7.7
|
)%
|
|
|
(8.9
|
)%
|
Vodka
|
|
|
(2,565
|
)
|
|
|
(2,277
|
)
|
|
|
(34.3
|
)%
|
|
|
(34.0
|
)%
|
Tequila
|
|
|
(133
|
)
|
|
|
(133
|
)
|
|
|
(90.5
|
)%
|
|
|
(90.5
|
)%
|
Total
|
|
|
(2,908
|
)
|
|
|
(4,195
|
)
|
|
|
(2.6
|
)%
|
|
|
(4.6
|
)%
|
Our
international spirits case sales as a percentage of total spirits case sales increased to 19.9% for the three months ended December
31, 2018 as compared to 18.2% for the comparable prior-year period, primarily due to decreased sales in the U.S.
The
following table presents the decrease in case sales of ginger beer products for the three months ended December 31, 2018 as compared
to the three months ended December 31, 2017:
|
|
Decrease
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
Decrease
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Ginger
Beer Products
|
|
|
(18,572
|
)
|
|
|
(6,821
|
)
|
|
|
(4.1
|
)%
|
|
|
(1.6
|
)%
|
Gross
profit.
Gross profit decreased 15.9% to $8.1 million for the three months ended December 31, 2018 from $9.7 million for the
comparable prior-year period, while gross margin decreased to 36.1% for the three months ended December 31, 2018 as compared to
40.2% for the comparable prior-year period. The decrease in gross profit was primarily due to decreased aggregate revenue in the
current period and to the release of high margin specialty releases of our Jefferson’s bourbon in the comparable
prior fiscal year quarter. We expect gross margin will improve over the long-term as our lower-cost new-fill bourbon ages and
becomes available for use across all of our Jefferson’s expressions. We also expect gross profit to be positively impacted
by an expected rebate of up to $1.1 million on excise taxes to be recognized under the Craft Beverage Modernization and Tax Reform
Act of 2017 in each of the current and next fiscal years. The timing and amount of such rebate remains subject the review and
approval of the U.S. Customs and Border Protection Agency. During the three months ended December 31, 2018, we recorded additions
to allowance for obsolete and slow-moving inventory of $0.3 million. We recorded this write-off and allowance on both raw materials
and finished goods, primarily in connection with label and packaging changes made to certain brands, as well as certain cost estimates
and variances. The net charge has been recorded as an increase to cost of sales in the relevant period.
Selling
expense
. Selling expense increased 6.7% to $5.8 million for the three months ended December 31, 2018 from $5.4 million for
the comparable prior-year period, primarily due to a $0.3 million increase in advertising, marketing and promotion expense related
to the timing of certain sales and marketing programs. Selling expense as a percentage of net sales increased to 25.7% for the
three months ended December 31, 2018 as compared to 22.6% for the comparable prior-year period due to decreased revenues and increased
expenses in the current period.
General
and administrative expense
. General and administrative expense increased 25.9% to $3.1 million for the three months ended
December 31, 2018 from $2.5 million for the comparable prior-year period, primarily due to a one-time $1.0 million increase in
professional fees. General and administrative expense as a percentage of net sales increased to 13.7% for the three months ended
December 31, 2018 as compared to 10.2% for the comparable prior-year period due to decreased revenues and increased expenses in
the current period.
Depreciation
and amortization.
Depreciation and amortization was $0.2 million for each of the three-month periods ended December 31, 2018
and 2017.
(Loss)
income from operations
. As a result of the foregoing, we had a loss from operations of ($1.0) million for the three months
ended December 31, 2018 as compared to income from operations of $1.6 million for the comparable prior-year period. 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 Gosling-Castle Partners, Inc. (“GCP”), our 80.1% owned subsidiary, adjusted for changes in the deferred tax asset
and deferred tax liability during the periods, was an immaterial net expense for the three months ended December 31, 2018 as
compared to a net benefit of $0.1 million for the comparable prior-year period.
The
Company’s provision for income taxes consists principally of state and local taxes in amounts necessary to align the Company’s
year-to-date tax provision with the effective rate that it expects to achieve for the full year.
For
the three months ended December 31, 2018, the Company recorded an income tax expense of $5,288. The effective tax
rate for the three months ended December 31, 2018 was 0.26%. The effective tax rate differs from the statutory rate of
21% as the Company has concluded that its deferred tax assets are not realizable on a more-likely-than-not basis.
As
of December 31, 2018, our conclusion regarding the realizability of our US deferred tax assets did not change and we have recorded
a full valuation allowance against them.
Foreign
exchange.
Foreign exchange gain for the three months ended December 31, 2018 was $0.1 million as compared to a gain of $0.03
million for the comparable prior-year period due to the net effects of fluctuations of the U.S. dollar against the Euro and
its impact on our Euro-denominated intercompany balances due to our foreign subsidiaries for inventory purchases.
Interest
expense, net.
We had interest expense, net of ($1.2) million for the three months ended December 31, 2018 as compared to ($1.0)
million for the comparable prior-year period due to balances outstanding under our credit facilities and long-term debt. Due to
the expected borrowings under our credit facilities to finance additional purchases of aged whiskies in support of the growth
of our Jefferson’s bourbons and other working capital needs, we expect interest expense, net to increase in the near term
as compared to prior years.
Net
income attributable to noncontrolling interests.
Net income attributable to noncontrolling interests was $0.1 million for
the three months ended December 31, 2018 as compared to $0.2 million for the comparable prior-year period, as a result of net
income allocated to the 19.9% noncontrolling interests in GCP.
Net
loss attributable to common shareholders.
As a result of the net effects of the foregoing, net loss attributable to common
shareholders was ($2.2) million for the three months ended December 31, 2018 as compared to net income of $0.5 million for the
comparable prior-year period. Net loss per common share, basic and diluted, was ($0.01) per share for the three-month period ended
December 31, 2018 as compared to income of $0.0 per share for the comparable prior year period.
Nine
months ended December 31, 2018 compared with nine months ended December 31, 2017
Net
sales.
Net sales increased 4.7% to $68.9 million for the nine months ended December 31, 2018,
as compared to $65.8 million for the comparable prior-year period, primarily due to U.S. sales growth of Jefferson’s bourbons,
Knappogue Castle Irish whiskey and Goslings Stormy Ginger Beer, partially offset by impact of the release of high revenue
specialty releases of our Jefferson’s bourbon in the prior fiscal year quarter ended December 31, 2017 and decreases
in Clontarf and Arran whiskey sales and certain of our liqueurs in the nine-month period ended December 31, 2018. We expect
to continue to focus on our faster growing brands and markets, both in the U.S. and internationally, including the release of
high revenue specialty releases of our Jefferson’s bourbons in future periods.
The
table below presents the increase or decrease, as applicable, in case sales by spirits product category for the nine months ended
December 31, 2018 as compared to the nine months ended December 31, 2017:
|
|
Increase/(decrease)
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
Increase/(decrease)
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Rum
|
|
|
(1,377
|
)
|
|
|
597
|
|
|
|
(1.2
|
)%
|
|
|
0.7
|
%
|
Whiskey
|
|
|
8,768
|
|
|
|
9,592
|
|
|
|
9.7
|
%
|
|
|
14.3
|
%
|
Liqueur
|
|
|
(3,308
|
)
|
|
|
(3,719
|
)
|
|
|
(4.1
|
)%
|
|
|
(4.6
|
)%
|
Vodka
|
|
|
(1,938
|
)
|
|
|
(2,361
|
)
|
|
|
(9.9
|
)%
|
|
|
(13.1
|
)%
|
Tequila
|
|
|
(330
|
)
|
|
|
(330
|
)
|
|
|
(41.1
|
)%
|
|
|
(41.1
|
)%
|
Total
|
|
|
1,815
|
|
|
|
3,778
|
|
|
|
0.6
|
%
|
|
|
1.5
|
%
|
Our
international spirits case sales as a percentage of total spirits case sales decreased to 19.5% for the nine months ended December
31, 2018 as compared to 20.3% for the comparable prior-year period, 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 Ireland and Scandinavia.
The
following table presents the increase in case sales of ginger beer products for the nine months ended December 31, 2018 as compared
to the nine months ended December 31, 2017:
|
|
Increase
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
Increase
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Ginger
Beer Products
|
|
|
43,461
|
|
|
|
35,561
|
|
|
|
3.2
|
%
|
|
|
2.8
|
%
|
Gross
profit.
Gross profit decreased 1.0% to $26.5 million for the nine months ended December 31, 2018 from $26.8 million for the
comparable prior-year period, while gross margin decreased to 38.5% for the nine months ended December 31, 2018 as compared to
40.7% for the comparable prior-year period. The decrease in gross profit was primarily due to increased aggregate costs in the
current period and to the impact of the release of high margin specialty releases of our Jefferson’s bourbon in the
prior fiscal year. We expect gross margin will improve over the long-term as our lower-cost new-fill bourbon ages and becomes
available for use across all of our Jefferson’s expressions. We also expect gross profit to be positively impacted by an
expected rebate of up to $1.1 million on excise taxes to be recognized under the Craft Beverage Modernization and Tax Reform Act
of 2017 in each of the current and next fiscal years. The timing and amount of such rebate remains subject the review and approval
of the U.S. Customs and Border Protection Agency. During the nine months ended December 31, 2018, we recorded additions to allowance
for obsolete and slow-moving inventory of $0.5 million. We recorded this write-off and allowance on both raw materials and finished
goods, primarily in connection with label and packaging changes made to certain brands, as well as certain cost estimates and
variances. The net charge has been recorded as an increase to cost of sales in the relevant period.
Selling
expense
. Selling expense increased 3.4% to $16.9 million for the nine months ended December 31, 2018 from $16.4 million for
the comparable prior-year period, primarily due to an $0.8 million increase in employee costs and a $0.4 million increase in shipping
costs, partially offset by a $0.7 million decrease 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, in the prior fiscal year.
Selling expense as a percentage of net sales decreased to 24.6% for the nine months ended December 31, 2018 as compared to 24.9%
for the comparable prior-year period due to increased revenues in the current period.
General
and administrative expense
. General and administrative expense increased 16.5% to $8.2 million for the nine months ended December
31, 2018 from $7.0 million for the comparable prior-year period, primarily due to a one-time $1.0 million increase in professional
fees in the quarter ended December 31, 2018 and a $0.5 million increase in employee costs. General and administrative expense
as a percentage of net sales increased to 11.9% for the nine months ended December 31, 2018 as compared to 10.7% for the comparable
prior-year period.
Depreciation
and amortization.
Depreciation and amortization was $0.6 million for each of the nine-month periods ended December 31,
2018 and 2017.
Income
from operations
. As a result of the foregoing, we had income from operations of $0.8 million for the nine months ended
December 31, 2018 as compared to income from operations of $2.8 million for the comparable prior-year period. 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 GCP, our 80.1% owned subsidiary, adjusted for changes in the deferred tax asset and deferred tax liability during the periods,
was an immaterial net expense for each of the nine-month periods ended December 31, 2018 and 2017.
The
Company’s provision for income taxes consists principally of state and local taxes in amounts necessary to align the Company’s
year-to-date tax provision with the effective rate that it expects to achieve for the full year.
For
the nine months ended December 31, 2018, the Company recorded income tax expense of $0.02 million. The effective tax rate
for the nine months ended December 31, 2018 was 0.99%. The effective tax rate differs from the statutory rate of 21% as
the Company has concluded that its deferred tax assets are not realizable on a more-likely-than-not basis.
As
of December 31, 2018, our conclusion regarding the realizability of our US deferred tax assets did not change and we have recorded
a full valuation allowance against them.
Foreign
exchange.
Foreign exchange gain for the nine months ended December 31, 2018 was $0.1 million as compared to an immaterial
net expense for the comparable prior-year period due to the net effects of fluctuations of the U.S. dollar against the Euro and
its impact on our Euro-denominated intercompany balances due to our foreign subsidiaries for inventory purchases.
Interest
expense, net.
We had interest expense, net of ($3.4) million for the nine months ended December 31, 2018 as compared
to ($2.8) million for the comparable prior-year period due to balances outstanding under our credit facilities and long-term debt.
Due to the expected borrowings under our credit facilities to finance additional purchases of aged whiskies in support of the
growth of our Jefferson’s bourbons and other working capital needs, we expect interest expense, net to increase in the near
term as compared to prior years.
Net
income attributable to noncontrolling interests.
Net income attributable to noncontrolling interests was $0.7 million for
the nine months ended December 31, 2018 as compared to $0.6 million for the comparable prior-year period, as a result of net income
allocated to the 19.9% noncontrolling interests in GCP.
Net
loss attributable to common shareholders.
As a result of the net effects of the foregoing, net loss attributable to common
shareholders was ($3.1) million for the nine months ended December 31, 2018 as compared to a net loss of ($0.5) million for the
comparable prior-year period. Net loss per common share, basic and diluted, was ($0.02) per share for the three-month period ended
December 31, 2018 as compared to ($0.0) per share for the comparable prior year period.
Liquidity
and capital resources
Overview
Since
our inception, we have incurred significant net losses and have not generated positive cash flows from operations. For the nine
months ended December 31, 2018, we had a net loss of ($2.4) million, and used cash of $5.2 million in operating activities. As
of December 31, 2018, we had cash and cash equivalents of $0.6 million and had an accumulated deficit of $153.0 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 February 2020. We believe we can continue to meet our operating needs through additional
mechanisms, if necessary, including additional or expanded debt financings, potential equity offerings and limiting or adjusting
the timing of additional inventory purchases based on available resources.
Financing
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 FinCo I LP (“ACF”), which provides for availability (subject to certain terms and
conditions) of a facility (the “Credit Facility”) to provide us with working capital, including capital to
finance purchases of aged whiskeys in support of the growth of our Jefferson’s whiskeys, We and CB-USA entered into four
amendments to the Loan Agreement during our 2019 fiscal year which increased the maximum amount of the Credit Facility from $21.0
million to $27.0 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, 2020 (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) $27.0 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 7.75% (reflecting a discount for achieving
one such EBITDA target) and the Purchased Inventory Sublimit currently bears interest at 9.5%. We are required to pay down the
principal balance of the Purchased Inventory Sublimit within 15 banking days from the completion of a bottling run of bourbon
from our bourbon inventory stock purchased with funds borrowed under the Purchased Inventory Sublimit in an amount equal to the
purchase price of such bourbon. The unpaid principal balance of the Credit Facility, all accrued and unpaid interest thereon,
and all fees, costs and expenses payable in connection with the Credit Facility, are due and payable in full on the Maturity Date.
In addition to closing fees, ACF receives facility fees and a collateral management fee (each as set forth in the Loan Agreement).
Our obligations under the Loan Agreement are secured by the grant of a pledge and a security interest in all of our assets. The
Loan Amendment also contains a fixed charge coverage ratio covenant requiring us to maintain a fixed charge coverage ratio of
not less than 1.1 to 1.0.
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.
In
June 2018, we acquired $1.0 million in aged bulk bourbon under the Purchased Inventory Sublimit. Certain related parties, including
Frost Gamma Investments Trust ($51,750), Richard J. Lampen ($34,500), Mark E. Andrews, III ($17,250), Brian L. Heller ($14,663),
and Alfred J. Small ($5,175), 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 December
31, 2018, we were in compliance, in all material respects, with the covenants under the Loan Agreement.
In
March 2017, we issued an 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. 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 our indebtedness existing as of the date of the Subordinated
Note. The Subordinated Note contains customary events of default and may be prepaid by us, 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 December 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 December 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”). 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 matured on December 15, 2018. The Convertible Notes, and
accrued but unpaid interest thereon, were 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 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.
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.
The
remaining Convertible Note of $50,000 matured and was repaid on December 15, 2018 in the normal course.
Liquidity
Discussion
As
of December 31, 2018, we had shareholders’ equity of $7.7 million as compared to $8.0 million at March 31, 2018. This decrease
in shareholders’ equity was due to our ($2.5) million total comprehensive loss for the nine months ended December
31, 2018, partially offset by the exercise of stock options and stock-based compensation expense of $2.1 million.
We
had working capital of $43.7 million at December 31, 2018 as compared to $38.6 million at March 31, 2018, primarily due to a $9.0
million increase in inventory, a $0.5 million decrease in due to related parties and a net loss of $2.4 million, which was
partially offset by a $4.0 million increase in accounts payable and accrued expenses and a $0.4 million decrease in accounts receivable.
As
of December 31, 2018, we had cash and cash equivalents of approximately $0.6 million, as compared to $0.4 million as of March
31, 2018. Changes in our cash and cash equivalents are primarily attributable to the net borrowings on our credit facilities to
fund our operations and working capital needs. At December 31 and March 31, 2018, we also had approximately $0.4 million 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. We must 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
may seek 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 December 31, 2018, we had borrowed $23.8 million of the $25.0 million then available under the Credit Facility, including $6.1
million of the $7.0 million available under the Purchased Inventory Sublimit, leaving $0.3 million in potential availability for
working capital needs under the Credit Facility and $0.9 million available for aged whiskey inventory purchases. As of February
7, 2019, we had borrowed $24.5 million of the $27.0 million then available under the amended Credit Facility, including $7.0 million
of the $7.0 million available under the Purchased Inventory Sublimit, leaving $2.5 million in potential availability for working
capital needs under the amended Credit Facility and $0.0 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 February 2020. We believe we can continue to meet our operating needs through additional mechanisms, if necessary, 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:
|
|
Nine
months ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in
thousands)
|
|
Net
cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(5,201
|
)
|
|
$
|
(4,831
|
)
|
Investing
activities
|
|
|
(207
|
)
|
|
|
(405
|
)
|
Financing
activities
|
|
|
5,681
|
|
|
|
5,562
|
|
Subtotal
|
|
|
273
|
|
|
|
326
|
|
Effect
of foreign currency translation
|
|
|
(28
|
)
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents including restricted cash
|
|
$
|
245
|
|
|
$
|
376
|
|
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 December 31, 2018 included significant additional stores of aged bourbon purchased in advance of forecasted production
requirements. In October 2017, we entered into a supply agreement with a bourbon distiller, which provides for the production
of newly-distilled bourbon whiskey. Under this agreement, the distiller will provide us 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, we contracted to purchase approximately $3,900,000 in newly distilled bourbon, all of which had been purchased as of
December 31, 2018. We are not obligated to pay the distiller for any product not yet received. We expect to use the aged bourbon
in the normal course of future sales, generating positive cash flows in future periods.
During
the nine months ended December 31, 2018, net cash used in operating activities was $5.2 million, consisting primarily of a $9.0
million increase in inventory, a $0.5 million decrease in due to related parties and a net loss of $2.4 million. These uses
of cash were partially offset by a $4.0 million increase in accounts payable and accrued expenses, a $0.4 million decrease in
accounts receivable, stock-based compensation expense of $1.5 million and depreciation and amortization expense of $0.7 million.
During
the nine months ended December 31, 2017, net cash used in operating activities was $4.8 million, consisting primarily of a $5.0
million increase in inventory, a $2.2 million increase in accounts receivable, a $0.3 million decrease in due to related parties
and a $0.2 million increase in prepaid expenses. These uses of cash were partially offset by a $0.6 million increase in accounts
payable and accrued expenses, stock-based compensation expense of $1.5 million, and depreciation and amortization expense of $0.6
million.
Investing
Activities.
Net cash used in investing activities was $0.2 million for the nine months ended December 31, 2018, representing
$0.2 million used in the acquisition of fixed and intangible assets.
Net
cash used in investing activities was $0.4 million for the nine months ended December 31, 2017, representing a $0.2 million investment
in non-consolidated affiliate and $0.2 million used in the acquisition of fixed and intangible assets.
Financing
activities.
Net cash provided by financing activities for the nine months ended December 31, 2018 was $5.7 million, consisting
primarily of $5.1 million in net proceeds from the Credit Facility and $0.6 million from the exercise of stock options and $0.1
million from the issuance of common stock under the employee stock purchase plan.
Net
cash provided by financing activities for the nine months ended December 31, 2017 was $5.6 million, consisting primarily of $5.4
million in net borrowings on the Credit Facility and $0.2 million from the exercise of stock options
Recent
accounting standards issued and adopted
We
discuss recently issued and adopted accounting standards in the “Recent accounting pronouncements” section of Note
1 of the “Notes to Unaudited Condensed Consolidated Financial Statements” in the accompanying unaudited condensed
consolidated financial statements.
Cautionary
Note Regarding Forward Looking Statements
This
annual report includes certain “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements, which involve risks and uncertainties, relate to the discussion of our business strategies
and our expectations concerning future operations, margins, profitability, liquidity and capital resources and to analyses and
other information that are based on forecasts of future results and estimates of amounts not yet determinable. We use words such
as “may”, “will”, “should”, “expects”, “intends”, “plans”,
“anticipates”, “believes”, “estimates”, “seeks”, “predicts”, “could”,
“projects”, “potential” and similar terms and phrases, including references to assumptions, in this report
to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning
future events affecting us and are subject to uncertainties, risks and factors relating to our operations and business environments,
all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ
materially from those matters expressed or implied by these forward-looking statements. These risks and other factors include
those listed under “Risk Factors” in our annual report on Form 10-K for the year ended March 31, 2018, as amended,
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.