UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM 10-Q
|
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September
30, 2014
or
|
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-32849
CASTLE BRANDS INC.
(Exact name of registrant as specified in
its charter)
Florida |
|
41-2103550 |
(State or other jurisdiction of |
|
(I.R.S. Employer |
incorporation or organization) |
|
Identification No.) |
|
|
|
122 East 42nd Street, Suite 4700, |
|
10168 |
New York, New York |
|
(Zip Code) |
(Address of principal executive offices) |
|
|
Registrant’s telephone number,
including area code: (646) 356-0200
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
|
¨ Large accelerated filer |
|
¨ Accelerated filer |
|
¨ Non-accelerated filer (Do not check if a smaller reporting company) |
|
þ Smaller reporting company |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨
No þ
The Company had 155,797,338
shares of $.01 par value common stock outstanding at November 12, 2014.
CASTLE BRANDS INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2014
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial
Statements
CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated
Balance Sheets
| |
September 30, 2014 | | |
March 31, 2014 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
Current Assets | |
| | | |
| | |
Cash and cash equivalents | |
$ | 1,380,847 | | |
$ | 908,501 | |
Accounts receivable — net of allowance for doubtful accounts of $112,962 and $204,418 at September 30 and March 31, 2014, respectively | |
| 6,458,988 | | |
| 8,858,146 | |
Due from shareholders and affiliates | |
| 141,656 | | |
| 115,288 | |
Inventories— net of allowance for obsolete and slow moving inventory of $293,381 and $266,473 at September 30 and March 31, 2014, respectively | |
| 21,449,808 | | |
| 14,650,029 | |
Deferred tax assets | |
| 26,330 | | |
| 473,330 | |
Prepaid expenses and other current assets | |
| 1,663,207 | | |
| 1,575,947 | |
| |
| | | |
| | |
Total Current Assets | |
| 31,120,836 | | |
| 26,581,241 | |
| |
| | | |
| | |
Equipment — net | |
| 673,809 | | |
| 568,395 | |
| |
| | | |
| | |
Intangible assets — net of accumulated amortization of $6,382,725 and $6,058,005 at September 30 and March 31, 2014, respectively | |
| 7,881,668 | | |
| 8,178,888 | |
Goodwill | |
| 496,226 | | |
| 496,226 | |
Restricted cash | |
| 384,789 | | |
| 416,565 | |
Other assets | |
| 396,849 | | |
| 280,195 | |
| |
| | | |
| | |
Total Assets | |
$ | 40,954,177 | | |
$ | 36,521,510 | |
| |
| | | |
| | |
LIABILITIES AND EQUITY | |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Foreign revolving credit facility | |
$ | 126,852 | | |
$ | 20,205 | |
Accounts payable | |
| 5,052,032 | | |
| 4,483,764 | |
Accrued expenses | |
| 546,623 | | |
| 1,073,188 | |
Due to shareholders and affiliates | |
| 2,976,849 | | |
| 1,936,241 | |
| |
| | | |
| | |
Total Current Liabilities | |
| 8,702,356 | | |
| 7,513,398 | |
| |
| | | |
| | |
Long-Term Liabilities | |
| | | |
| | |
Keltic facility | |
| 6,907,064 | | |
| 1,953,037 | |
Bourbon term loan (including $381,094 and $484,375 of related-party participation at September 30 and March 31, 2014, respectively) | |
| 1,585,350 | | |
| 2,015,000 | |
Notes payable - Junior loan (including $300,000 of related party participation at March 31, 2014) | |
| — | | |
| 1,250,000 | |
Notes payable – 5% Convertible notes (including $1,100,000 of related party participation at each of September 30 and March 31, 2014) | |
| 1,875,000 | | |
| 2,125,000 | |
Notes payable – GCP Note | |
| 216,869 | | |
| 211,580 | |
Deferred tax liability | |
| 1,444,228 | | |
| 1,518,304 | |
| |
| | | |
| | |
Total Liabilities | |
| 20,730,867 | | |
| 16,586,319 | |
| |
| | | |
| | |
Commitments and Contingencies (Note 12) | |
| | | |
| | |
| |
| | | |
| | |
Equity | |
| | | |
| | |
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued | |
| - | | |
| - | |
Common stock, $.01 par value, 300,000,000 shares authorized, 155,425,137
and 151,841,133 shares issued and outstanding at September 30 and March 31, 2014, respectively | |
| 1,554,252 | | |
| 1,518,411 | |
Additional paid-in capital | |
| 160,006,984 | | |
| 157,485,965 | |
Accumulated deficit | |
| (142,138,313 | ) | |
| (139,561,969 | ) |
Accumulated other comprehensive loss | |
| (1,933,698 | ) | |
| (1,724,916 | ) |
| |
| | | |
| | |
Total controlling shareholders’ equity | |
| 17,489,225 | | |
| 17,717,491 | |
| |
| | | |
| | |
Noncontrolling interests | |
| 2,734,085 | | |
| 2,217,700 | |
| |
| | | |
| | |
Total equity | |
| 20,223,310 | | |
| 19,935,191 | |
| |
| | | |
| | |
Total Liabilities and Equity | |
$ | 40,954,177 | | |
$ | 36,521,510 | |
See accompanying notes to the unaudited
condensed consolidated financial statements.
CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated
Statements of Operations
(Unaudited)
| |
Three months ended September 30, | | |
Six months ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
Sales, net* | |
$ | 13,381,704 | | |
$ | 11,659,707 | | |
$ | 25,363,903 | | |
$ | 22,078,324 | |
Cost of sales* | |
| 8,498,031 | | |
| 7,475,352 | | |
| 15,933,576 | | |
| 13,975,505 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 4,883,673 | | |
| 4,184,355 | | |
| 9,430,327 | | |
| 8,102,819 | |
| |
| | | |
| | | |
| | | |
| | |
Selling expense | |
| 3,591,823 | | |
| 2,933,150 | | |
| 6,831,149 | | |
| 5,828,533 | |
General and administrative expense | |
| 1,368,317 | | |
| 1,244,459 | | |
| 2,978,933 | | |
| 2,510,064 | |
Depreciation and amortization | |
| 215,873 | | |
| 214,638 | | |
| 431,971 | | |
| 427,762 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| (292,340 | ) | |
| (207,892 | ) | |
| (811,726 | ) | |
| (663,540 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense), net | |
| 64 | | |
| (174 | ) | |
| 17,006 | | |
| (174 | ) |
Loss from equity investment in non-consolidated affiliate | |
| — | | |
| (17,956 | ) | |
| — | | |
| (24,077 | ) |
Foreign exchange loss | |
| (29,011 | ) | |
| (171,863 | ) | |
| (265,458 | ) | |
| (111,523 | ) |
Interest expense, net | |
| (288,215 | ) | |
| (268,480 | ) | |
| (576,857 | ) | |
| (497,299 | ) |
Net change in fair value of warrant liability | |
| — | | |
| (3,519,164 | ) | |
| — | | |
| (3,966,415 | ) |
Income tax (expense) benefit, net | |
| (259,962 | ) | |
| 37,038 | | |
| (422,924 | ) | |
| 74,076 | |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
| (869,464 | ) | |
| (4,148,491 | ) | |
| (2,059,959 | ) | |
| (5,188,952 | ) |
Net income attributable to noncontrolling interests | |
| (211,049 | ) | |
| (278,044 | ) | |
| (516,385 | ) | |
| (530,416 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss attributable to controlling interests | |
| (1,080,513 | ) | |
| (4,426,535 | ) | |
| (2,576,344 | ) | |
| (5,719,368 | ) |
| |
| | | |
| | | |
| | | |
| | |
Dividend to preferred shareholders | |
| — | | |
| (187,978 | ) | |
| — | | |
| (377,910 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss attributable to common shareholders | |
$ | (1,080,513 | ) | |
$ | (4,614,513 | ) | |
$ | (2,576,344 | ) | |
$ | (6,097,278 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss per common share, basic and diluted, attributable to common shareholders | |
$ | (0.01 | ) | |
$ | (0.04 | ) | |
$ | (0.02 | ) | |
$ | (0.06 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average shares used in computation, basic and diluted, attributable to common shareholders | |
| 155,189,679 | | |
| 110,459,802 | | |
| 154,562,875 | | |
| 109,944,744 | |
* Sales, net and Cost of sales include excise taxes of $1,574,437
and $1,588,959 for the three months ended September 30, 2014 and 2013, respectively, and $3,058,951 and $3,013,179 for the six
months ended September 30, 2014 and 2013, respectively.
See accompanying notes to the unaudited
condensed consolidated financial statements.
CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated
Statements of Comprehensive Loss
(Unaudited)
| |
Three months ended September 30, | | |
Six months ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
Net loss | |
$ | (869,464 | ) | |
$ | (4,148,491 | ) | |
$ | (2,059,959 | ) | |
$ | (5,188,952 | ) |
Other comprehensive (loss) income: | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| (188,105 | ) | |
| 105,983 | | |
| (208,782 | ) | |
| 146,183 | |
| |
| | | |
| | | |
| | | |
| | |
Total other comprehensive (loss) income: | |
| (188,105 | ) | |
| 105,983 | | |
| (208,782 | ) | |
| 146,183 | |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive loss | |
$ | (1,057,569 | ) | |
$ | (4,042,508 | ) | |
$ | (2,268,741 | ) | |
$ | (5,042,769 | ) |
See accompanying notes to the unaudited
condensed consolidated financial statements.
CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated
Statement of Changes in Equity
(Unaudited)
| |
| | |
| | |
| | |
| | |
Accumulated | | |
| | |
| |
| |
| | |
| | |
Additional | | |
| | |
Other | | |
| | |
| |
| |
Common Stock | | |
Paid-in | | |
Accumulated | | |
Comprehensive | | |
Noncontrolling | | |
Total | |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Loss | | |
Interests | | |
Equity | |
BALANCE, MARCH 31, 2014 | |
| 151,841,133 | | |
$ | 1,518,411 | | |
$ | 157,485,965 | | |
$ | (139,561,969 | ) | |
$ | (1,724,916 | ) | |
$ | 2,217,700 | | |
$ | 19,935,191 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| | | |
| | | |
| | | |
| (2,576,344 | ) | |
| | | |
| 516,385 | | |
| (2,059,959 | ) |
Foreign currency translation adjustment | |
| | | |
| | | |
| | | |
| | | |
| (208,782 | ) | |
| | | |
| (208,782 | ) |
Issuance of common stock,
net of issuance costs | |
| 1,247,343 | | |
| 12,474 | | |
| 1,154,569 | | |
| | | |
| | | |
| | | |
| 1,167,043 | |
Exercise of common stock warrants | |
| 1,657,802 | | |
| 16,578 | | |
| 613,387 | | |
| | | |
| | | |
| | | |
| 629,965 | |
Surrender of common stock
in connection with exercise of common stock warrants | |
| (27,902 | ) | |
| (279 | ) | |
| (30,971 | ) | |
| | | |
| | | |
| | | |
| (31,250 | ) |
Conversion of 5% convertible note | |
| 277,778 | | |
| 2,778 | | |
| 247,222 | | |
| | | |
| | | |
| | | |
| 250,000 | |
Exercise of common stock options | |
| 428,983 | | |
| 4,290 | | |
| 136,548 | | |
| | | |
| | | |
| | | |
| 140,838 | |
Stock-based compensation | |
| | | |
| | | |
| 400,264 | | |
| | | |
| | | |
| | | |
| 400,264 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
BALANCE, SEPTEMBER 30, 2014 | |
| 155,425,137 | | |
$ | 1,554,252 | | |
$ | 160,006,984 | | |
$ | (142,138,313 | ) | |
$ | (1,933,698 | ) | |
$ | 2,734,085 | | |
$ | 20,223,310 | |
See accompanying notes to the unaudited
condensed consolidated financial statements.
CASTLE BRANDS INC. and SUBSIDIARIES
Condensed Consolidated
Statements of Cash Flows
(Unaudited)
| |
Six months ended September 30, | |
| |
2014 | | |
2013 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net loss | |
$ | (2,059,959 | ) | |
$ | (5,188,952 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 431,971 | | |
| 427,762 | |
Provision for doubtful accounts | |
| (91,456 | ) | |
| 25,812 | |
Amortization of deferred financing costs | |
| 87,718 | | |
| 67,276 | |
Change in fair value of warrant liability | |
| — | | |
| 3,966,415 | |
Income tax expense (benefit), net | |
| 422,924 | | |
| (74,076 | ) |
Loss from equity investment in non-consolidated affiliate | |
| — | | |
| 24,077 | |
Effect of changes in foreign exchange | |
| 265,458 | | |
| 111,523 | |
Stock-based compensation expense | |
| 400,264 | | |
| 177,749 | |
Changes in operations, assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 2,477,799 | | |
| (666,064 | ) |
Due from affiliates | |
| (26,369 | ) | |
| (199,078 | ) |
Inventory | |
| (7,262,393 | ) | |
| 75,491 | |
Prepaid expenses and supplies | |
| (88,582 | ) | |
| (209,818 | ) |
Other assets | |
| (204,372 | ) | |
| (80,078 | ) |
Accounts payable and accrued expenses | |
| 21,625 | | |
| (500,955 | ) |
Accrued interest | |
| 5,289 | | |
| 1,090 | |
Due to related parties | |
| 1,040,608 | | |
| (29,014 | ) |
| |
| | | |
| | |
Total adjustments | |
| (2,519,516 | ) | |
| 3,118,112 | |
| |
| | | |
| | |
NET CASH USED IN OPERATING ACTIVITIES | |
| (4,579,475 | ) | |
| (2,070,840 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Purchase of equipment | |
| (214,960 | ) | |
| (86,610 | ) |
Acquisition of intangible assets | |
| (27,500 | ) | |
| (26,981 | ) |
Change in restricted cash | |
| (556 | ) | |
| 61,999 | |
Payments under contingent consideration agreements | |
| — | | |
| (5,940 | ) |
| |
| | | |
| | |
NET CASH USED IN INVESTING ACTIVITIES | |
| (243,016 | ) | |
| (57,532 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Net proceeds from Keltic facility | |
| 4,954,027 | | |
| 232,031 | |
Payments on Bourbon term loan | |
| (429,650 | ) | |
| (63,050 | ) |
(Payments on) proceeds from Junior loan | |
| (1,250,000 | ) | |
| 1,250,000 | |
Net proceeds from foreign revolving credit facility | |
| 115,079 | | |
| 122,344 | |
Proceeds from issuance of common stock | |
| 1,231,241 | | |
| — | |
Payments for costs of stock issuance | |
| (64,198 | ) | |
| — | |
Proceeds from exercise of common stock warrants | |
| 598,715 | | |
| 296,015 | |
Proceeds from exercise of common stock options | |
| 140,838 | | |
| — | |
| |
| | | |
| | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | |
| 5,296,052 | | |
| 1,837,340 | |
| |
| | | |
| | |
EFFECTS OF FOREIGN CURRENCY TRANSLATION | |
| (1,215 | ) | |
| 3,232 | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | |
| 472,346 | | |
| (287,800 | ) |
CASH AND CASH EQUIVALENTS — BEGINNING | |
| 908,501 | | |
| 439,323 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS — ENDING | |
$ | 1,380,847 | | |
$ | 151,523 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURES: | |
| | | |
| | |
Schedule of non-cash investing and financing activities: | |
| | | |
| | |
Conversion of series A preferred stock to common stock | |
$ | — | | |
$ | 518,234 | |
Conversion of 5% convertible note to common stock | |
$ | 250,000 | | |
$ | — | |
| |
| | | |
| | |
Interest paid | |
$ | 485,685 | | |
$ | 384,145 | |
Income taxes paid | |
$ | 35,000 | | |
$ | — | |
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, 2014 is derived from the March 31, 2014 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, 2014 included in the Company’s annual report on Form 10-K for the year ended March 31,
2014, as amended (“2014 Form 10-K”). Please refer to the notes to the audited consolidated financial statements included
in the 2014 Form 10-K for additional disclosures and a description of accounting policies.
|
A. |
Description of business — The consolidated
financial statements include the accounts of the Company, its wholly-owned domestic subsidiaries, Castle Brands (USA) Corp.
(“CB-USA”) and McLain & Kyne, Ltd. (“McLain & Kyne”), the Company’s wholly-owned foreign
subsidiaries, Castle Brands Spirits Group Limited (“CB-IRL”) and Castle Brands Spirits Marketing and Sales Company
Limited, and the Company’s 60% ownership interest in Gosling-Castle Partners, Inc. (“GCP”), with adjustments
for income or loss allocated based upon percentage of ownership. The accounts of the subsidiaries have been included as of
the date of acquisition. All significant intercompany transactions and balances have been eliminated. |
|
B. |
Organization and operations — The
Company is principally engaged in the importation, marketing and sale of premium and super premium brands of rums, whiskey,
liqueurs, vodka and tequila in the United States, Canada, Europe and Asia. |
|
C. |
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 non-consolidated affiliate equity investment as a component of net income or loss. |
|
D. |
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. |
|
E. |
Impairment of long-lived assets — Under Financial Accounting Standards Board ("FASB") 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. |
|
F. |
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 and then transferred out of “bond,” or sold by CB-IRL in Ireland “tax paid.” 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. |
|
G. |
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
|
H. |
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. |
|
I. |
Income taxes — Under ASC 740, “Income Taxes”, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. A valuation allowance is provided to the extent a deferred tax asset is not considered recoverable. |
|
|
|
|
|
The Company has not recognized any adjustments for
uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions in general and administrative
expense; however, no such provisions for accrued interest and penalties related to uncertain tax positions have been recorded by
the Company. |
|
|
|
|
|
The Company’s income tax (expense) benefit for
the three and six months ended September 30, 2014 and 2013 consists of federal, state and local taxes attributable to GCP, which
does not file a consolidated income tax return with the Company. In connection with the investment in GCP, the Company recorded
a deferred tax liability on the ascribed value of the acquired intangible assets of $2,222,222, increasing the value of the asset.
The difference between the book basis and tax basis created a deferred tax liability that is being amortized over
a period of 15 years (the life of the licensing agreement) on a straight-line basis. For the three and six months ended September
30, 2014, the Company recognized ($259,962) and ($422,924) of deferred tax expense, net, respectively, and for the three-month
and six-month periods ended September 30, 2013, the Company recognized $37,038 and $74,076 of deferred tax benefits, respectively. |
|
J. |
Recent accounting pronouncements — In
August 2014, the FASB issued Accounting Standards Update “ASU” 2014-15 on “Presentation of Financial Statements
Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”.
Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial
doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments
in this update provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of
footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by
incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments
(1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods,
(3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when
substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and
other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date
that the financial statements are issued (or available to be issued). The amendments in this update are effective for annual periods
ending after December 15, 2016. 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 or financial condition. |
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements – Continued
In June 2014, the FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718); Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The amendments in this ASU apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period must be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. For all entities, the amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier 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 or financial condition.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, to clarify the principles for recognizing revenue. This guidance includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for fiscal years and interim periods beginning after December 15, 2016. 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 or financial condition.
In April 2014, the FASB issued ASU No. 2014-08 which
provides final guidance to change the criteria for reporting discontinued operations while enhancing disclosures in this area.
Under the new guidance, only disposals representing a strategic shift, such as a major line of business, a major geographical
area or a major equity investment, should be presented as discontinued operations. The guidance will be applied prospectively
to new disposals and new classifications of disposal groups as held for sale after the effective date. The guidance is effective
for annual financial statements with fiscal years beginning on or after December 15, 2014 with early adoption permitted for disposals
or classifications as held for sale which have not been reported in financial statements previously issued or available for issuance.
The Company will adopt the guidance effective April 1, 2015 and the adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, cash flows or financial condition.
The Company does not believe that any other recently
issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the accompanying financial
statements.
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 and warrants or conversion of convertible
preferred stock outstanding and related accrued dividends or conversion of convertible notes outstanding. In computing diluted
net loss per share for the three and six months ended September 30, 2014 and 2013, no adjustment has been made to the weighted
average outstanding common shares as the assumed exercise of outstanding options and warrants and the assumed conversion of convertible
preferred stock and related accrued dividends or the assumed conversion of convertible notes is anti-dilutive.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements – Continued
Potential common shares not included in calculating diluted
net loss per share are as follows:
| |
Six months ended September 30, | |
| |
2014 | | |
2013 | |
Stock options | |
| 13,044,024 | | |
| 11,134,765 | |
Warrants to purchase common stock | |
| 120,000 | | |
| 11,095,139 | |
Convertible preferred stock and accrued dividends | |
| — | | |
| 25,352,339 | |
5% Convertible notes | |
| 2,083,333 | | |
| — | |
| |
| | | |
| | |
Total | |
| 15,247,357 | | |
| 47,582,243 | |
NOTE 3 — INVENTORIES
| |
September 30, | | |
March 31, | |
| |
2014 | | |
2014 | |
Raw materials | |
$ | 9,431,029 | | |
$ | 4,502,234 | |
Finished goods – net | |
| 12,018,779 | | |
| 10,147,795 | |
| |
| | | |
| | |
Total | |
$ | 21,449,808 | | |
$ | 14,650,029 | |
As of September 30 and March 31, 2014, 12% and 19%, respectively,
of raw materials and 7% and 5%, respectively, of finished goods were located outside of the United States.
In March and October 2013 and April and
September 2014, the Company acquired $2,496,000, $847,500, $4,237,500 and $196,263 of aged bourbon whiskey, respectively, in support
of its anticipated near and mid-term needs.
The Company estimates the allowance for obsolete and slow moving
inventory based on analyses and assumptions including, but not limited to, historical usage, expected future demand and market
requirements.
Inventories are stated at the lower of
weighted average cost or market.
NOTE 4 — EQUITY INVESTMENT
Investment in Gosling-Castle Partners Inc.
As referenced in Note 1I., GCP does not file
consolidated tax returns with the Company. For the three and six months ended September 30, 2014, GCP recognized $267,000 and
$447,000 of deferred tax expense, respectively, based on GCP’s estimated stand-alone taxable income. The Company
allocated 40% of this expense, or $178,800, to minority interest for the six months ended September 30,
2014.
Discontinuation of Investment in DP Castle Partners,
LLC
In August 2010, CB-USA formed DP Castle Partners, LLC (“DPCP”)
with Drink Pie, LLC to manage the manufacturing and marketing of Travis Hasse’s Original Apple Pie Liqueur, Cherry Pie Liqueur
and any future line extensions of the brand. In December 2013, CB-USA determined to cease marketing and selling these brands and
returned the remaining inventory to Drink Pie, LLC. For the six months ended September 30, 2013, CB-USA purchased $170,880 in finished
goods from DPCP under the distribution agreement. At September 30 and March 31, 2014, CB-USA owned 20% of now inactive DPCP.
CB-USA also earned a defined rate of interest on its capital contribution to DPCP, based on its ownership in DPCP. For the three-month
and six-month periods ended September 30, 2013, CB-USA earned $2,100 and $4,200, respectively, in interest income on its capital
contribution to DPCP. The Company accounted for this investment under the equity method of accounting.
NOTE 5 — GOODWILL AND INTANGIBLE ASSETS
The carrying amount of goodwill was $496,226 at each of September
30 and March 31, 2014.
Intangible assets consist of the following:
| |
September 30, 2014 | | |
March 31, 2014 | |
Definite life brands | |
$ | 170,000 | | |
$ | 170,000 | |
Trademarks | |
| 535,947 | | |
| 535,947 | |
Rights | |
| 8,271,555 | | |
| 8,271,555 | |
Product development | |
| 119,459 | | |
| 96,959 | |
Patents | |
| 994,000 | | |
| 994,000 | |
Other | |
| 60,460 | | |
| 55,460 | |
| |
| | | |
| | |
| |
| 10,151,421 | | |
| 10,123,921 | |
Less: accumulated amortization | |
| 6,382,725 | | |
| 6,058,005 | |
| |
| | | |
| | |
Net | |
| 3,768,696 | | |
| 4,065,916 | |
Other identifiable intangible assets — indefinite lived* | |
| 4,112,972 | | |
| 4,112,972 | |
| |
| | | |
| | |
| |
$ | 7,881,668 | | |
$ | 8,178,888 | |
* Other identifiable intangible assets — indefinite lived
consists of product formulations.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements – Continued
Accumulated amortization consists of the following:
| |
September 30, 2014 | | |
March 31, 2014 | |
Definite life brands | |
$ | 170,000 | | |
$ | 170,000 | |
Trademarks | |
| 277,710 | | |
| 262,098 | |
Rights | |
| 5,237,145 | | |
| 4,961,170 | |
Product development | |
| 20,350 | | |
| 20,350 | |
Patents | |
| 677,520 | | |
| 644,387 | |
Other | |
| - | | |
| - | |
| |
| | | |
| | |
Accumulated amortization | |
$ | 6,382,725 | | |
$ | 6,058,005 | |
NOTE 6 — RESTRICTED
CASH
At September 30 and March 31, 2014, the Company had €303,337
or $384,789 (translated at the September 30, 2014 exchange rate) and €302,920 or $416,565 (translated at the March 31,
2014 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.
NOTE 7 — NOTES PAYABLE
| |
September 30, 2014 | | |
March 31, 2014 | |
Notes payable consist of the following: | |
| | | |
| | |
Foreign revolving credit facilities (A) | |
$ | 126,852 | | |
$ | 20,205 | |
Note payable – GCP note (B) | |
| 216,869 | | |
| 211,580 | |
Keltic facility (C) | |
| 6,907,064 | | |
| 1,953,037 | |
Bourbon term loan (D) | |
| 1,585,350 | | |
| 2,015,000 | |
Junior loan (E) | |
| — | | |
| 1,250,000 | |
5% Convertible notes (F) | |
| 1,875,000 | | |
| 2,125,000 | |
| |
| | | |
| | |
Total | |
$ | 10,711,135 | | |
$ | 7,574,822 | |
|
A. |
The Company has arranged various facilities aggregating €303,337 or $384,789 (translated at the September 30, 2014 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%. The balance on the credit facilities included in notes payable totaled €100,000, or $126,852 (translated at the September 30, 2014 exchange rate), and €14,693, or $20,205 (translated at the March 31, 2014 exchange rate), at September 30 and March 31, 2014, 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, 2014, $10,579 of accrued interest was converted to amounts due to affiliates. At September 30, 2014, $216,869, consisting of $211,580 of principal and $5,289 of accrued interest, due on the GCP Note is included in long-term liabilities. At March 31, 2014, $211,580 of principal due on the GCP Note is included in long-term liabilities. |
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements – Continued
|
C. |
In August 2011, the Company and CB-USA entered into the
Keltic Facility (“Keltic Facility”), a revolving loan agreement with ACF FinCo I LP (“ACF”), as
successor in interest to Keltic Financial Partners II, LP ("Keltic") providing for availability (subject to certain
terms and conditions) of a facility of up to $5,000,000 for the purpose of providing the Company and CB-USA with working
capital. In July 2012, the Keltic Facility was amended to increase availability to $7,000,000, among other changes. In March
2013, the Keltic Facility was amended to increase availability to $8,000,000, among other changes. In August 2013, the Keltic
Facility was amended to modify the borrowing base calculation and covenants with respect to the Keltic Facility and permit
the Company to make regularly scheduled payments of principal and interest and voluntary prepayments on the Junior Loan (as
defined below), subject to certain conditions set forth in the amendment, to modify certain aspects of the EBITDA
covenant contained in the loan agreement, permit the Company to incur indebtedness in an aggregate original principal amount
of $2,125,000 pursuant to the terms of the Note Purchase Agreement and Convertible Notes (as each term is defined below in
Note 7F), and permit the Company to make regularly scheduled payments of principal and interest and voluntary
prepayments on the Convertible Notes, subject to certain conditions set forth in the amendment. In November 2013, the Keltic
Facility was further amended, to, among other things, provide for the issuances of letters of credit thereunder. In
August 2014, the Keltic Facility was further amended to modify certain aspects of the EBITDA covenant contained in the
loan agreement for the period ending June 30, 2014.
In September 2014, the Company and CB-USA entered into
an Amended and Restated Loan and Security Agreement (the “Amended Agreement”)
with ACF in order to amend certain terms of the Keltic Facility and the Bourbon Term Loan
(defined below). Among other changes, the Amended Agreement modifies certain aspects of the existing
Keltic Facility, including increasing the maximum amount of the Keltic Facility from
$8,000,000 to $12,000,000 and increasing the inventory sub-limit from $4,000,000 to $6,000,000. In
addition, the term of the Keltic Facility was extended from December 31, 2016 to July 31, 2019. The
Keltic Facility interest rate was reduced to 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) 6.25%. As of September 30, 2014, the Keltic
Facility interest rate was 6.25%. The monthly facility fee was reduced from 1.00% per annum of the
maximum Keltic Facility amount to 0.75%. In addition, the Amended Agreement contains EBITDA
hurdles allowing for further interest rate reductions in the future. The Amended Agreement also modifies
certain aspects of the EBITDA covenant that was contained in the previously existing loan and security
agreement, dated as of August 19, 2011, as amended. The Company paid ACF an aggregate
$120,000 amendment fee in connection with the execution of the Amended Agreement.
In connection with the amendment, the Company and CB-USA entered
into the following ancillary agreements: (i) a Reaffirmation Agreement (the "Reaffirmation Agreement") with (a) certain
officers of the Company and CB-USA, including John Glover, the Company’s Chief Operating Officer, T. Kelley Spillane, the
Company’s Senior Vice President - Global Sales, and Alfred Small, the Company’s Senior Vice President, Chief Financial
Officer, Treasurer and Secretary, (b) certain participants in the Bourbon Term Loan and (c) certain junior lenders to the Company,
including Frost Gamma Investments Trust, an entity affiliated with Phillip Frost, M.D., a director and principal shareholder of
the Company, Mark E. Andrews, III, a director of the Company and the Company’s Chairman, an affiliate of Richard J. Lampen,
a director of the Company and the Company’s President and Chief Executive Officer, an affiliate of Glenn Halpryn, a director
of the Company, Dennis Scholl, a director of the Company, and Vector Group Ltd., a more than 5% shareholder of the Company, of
which Richard Lampen is an executive officer and Henry Beinstein, a director of the Company, is a director, which, among other
things, reaffirms the existing Validity and Support Agreements by and among each officer, the Company, CB-USA and ACF, as successor-in-interest
to Keltic; (ii) an Amended and Restated Term Note (the "Term Note") and (iii) an Amended and Restated Revolving Credit
Note (the "Revolving Note").
In connection with the Amended Agreement, on September 22, 2014,
ACF entered into an amendment to that certain Subordination Agreement, dated as of August 7, 2013 (as amended, the "Subordination
Agreement"), by and among ACF, as successor-in-interest to Keltic, and certain junior lenders to the Company; neither the
Company nor CB-USA is a party to the Subordination Agreement. |
|
|
|
|
|
The Company and CB-USA are referred to
individually and collectively as the Borrower. The Borrower may borrow up to the maximum amount of the Keltic Facility,
provided that the Borrower has a sufficient borrowing base (as defined under the loan agreement). For the three and six
months ended September 30, 2014, the Company paid interest at 6.5%, until such time as the interest was reduced to 6.25% in
connection with the September 2014 amendment. Interest is payable monthly in arrears, on the first day of every month on the
average daily unpaid principal amount of the Keltic Facility. After the occurrence and during the continuance of any
"Default" or "Event of Default" (as defined under the loan agreement), the Borrower is required to pay
interest at a rate that is 3.25% per annum above the then applicable Keltic Facility interest rate. There have been no Events
of Default under the Keltic Facility. In addition to the fee in connection with the Amended Agreement, the Company paid a
$40,000 commitment fee in connection with the first amendment, a $70,000 closing and commitment fee in connection with
the second amendment and a $25,000 closing and commitment fee in connection with the third amendment. Keltic 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). 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. At September 30, 2014, the Company
was in compliance, in all respects, with the covenants under the Amended Agreement. At September 30 and March 31,
2014, $6,907,064 and $1,953,037, respectively, due on the Keltic Facility is included in long-term liabilities. |
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements – Continued
|
D. |
In March 2013, the Company and CB-USA entered into an inventory term loan of $2,496,000 (the "Bourbon Term Loan") that was used to purchase bourbon inventory on March 11, 2013. Unless sooner terminated in accordance with its terms, the Bourbon Term Loan matures on July 31, 2019. The Bourbon Term Loan 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%. For the three and six months ended June 30, 2014, the Company paid interest of 7.5%. Interest is payable monthly in arrears, on the first day of every month on the average daily unpaid principal amount of the Bourbon Term Loan. 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 Bourbon Term Loan interest rate. The Borrower is required to pay down the principal balance of the Bourbon Term Loan within 15 banking days from the completion of a bottling run of bourbon from the bourbon inventory stock purchased on or about the date of the Bourbon Term Loan in an amount equal to the purchase price of such bourbon. The unpaid principal balance of the Bourbon Term Loan, all accrued and unpaid interest thereon, all fees, costs and expenses payable in connection with the Bourbon Term Loan are due and payable in full on July 31, 2019. |
|
|
|
|
|
Keltic required as a condition to funding the Bourbon
Term Loan that Keltic had entered into a participation agreement (the "Participation Agreement") providing for an initial
aggregate of $750,000 of the Bourbon Term Loan to be purchased by junior participants. Certain related parties of the Company purchased
a portion of these junior participations in the Bourbon Term Loan, including Frost Gamma Investments Trust ($500,000), an entity
affiliated with Phillip Frost, M.D., Mark E. Andrews, III ($50,000) and an affiliate of Richard J. Lampen ($50,000) (amounts shown
are initial purchase amounts). Under the terms of the Participation Agreement, the junior participants receive interest at the
rate of 11% per annum. Neither the Company nor CB-USA is a party to the Participation Agreement. However, the Borrower is party
to a fee letter (the "Fee Letter") with the junior participants (including the related party junior participants) pursuant
to which the Borrower is obligated to pay the junior participants an aggregate commitment fee of $45,000 in three equal annual
installments of $15,000. In August 2013, the Bourbon Term Loan was amended to provide the Company with the ability to increase
the maximum aggregate principal amount of the Bourbon Term Loan from $2,500,000 to up to $4,000,000 to finance the purchase of
aged whiskies following the identification of junior participants to purchase a portion of the increased Bourbon Term Loan amount.
The balance on the Bourbon Term Loan included in notes payable totaled $1,585,350 and $2,015,000 at September 30 and March 31,
2014, respectively. |
|
E. |
In August 2013, the Company entered into a Loan Agreement (the
"Junior Loan Agreement"), by and between the Company and the lending parties thereto (the "Junior Lenders"),
which provided for an aggregate $1,250,000 unsecured loan (the "Junior Loan") to the Company. The Junior Loan bore interest
at a rate of 11% per annum, payable quarterly in arrears commencing November 1, 2013, and was set to mature on October 15, 2015.
The Junior Loan Agreement provided for a funding fee of 2% per annum on the then outstanding Junior Loan balance (pro-rated for
any period of less than one year), payable pro rata among the Junior Lenders on the date of the Junior Loan Agreement and on the
first and second anniversaries thereof. The Junior Lenders included Frost Gamma Investments Trust ($200,000), Mark E. Andrews,
III ($50,000) and an affiliate of Richard J. Lampen ($50,000)
In September 2014, in connection with the Amended Agreement
described in Note 7C, the Company used proceeds from the Keltic Facility to repay the $1,250,000 principal amount outstanding under
the Junior Loan. At March 31, 2014, $1,250,000 of principal due on the Junior Loan is included in long-term liabilities. |
|
F. |
In October 2013, the Company entered into a 5% Convertible Subordinated Note Purchase Agreement (the "Note Purchase Agreement"), by and among the Company and the purchasers party thereto, which provided for the issuance of an aggregate initial principal amount of $2,125,000 unsecured subordinated notes (the "Convertible Notes") by the Company. The Convertible Notes bear interest at a rate of 5% per annum, payable quarterly beginning on December 15, 2013 until their maturity date of December 15, 2018. The Convertible Notes and accrued but unpaid interest thereon are convertible in whole or in part from time to time at the option of the holders thereof into shares of the Company’s common stock at a conversion price of $0.90 per share (the "Conversion Price"). The Convertible Notes may be prepaid in whole or in part at any time without penalty or premium, but with payment of accrued interest to the date of prepayment. The Convertible Notes contain customary events of default, which, if uncured, entitle each note holder to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the Convertible Notes. |
|
|
|
|
|
The purchasers of the Convertible Notes include certain
related parties of the Company, including an affiliate of Dr. Phillip Frost ($500,000), Mark E. Andrews, III ($50,000), an affiliate
of Richard J. Lampen ($50,000), an affiliate of Glenn Halpryn ($200,000), Dennis Scholl ($100,000) and Vector Group Ltd. ($200,000). |
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements – Continued
The Company may forcibly convert all or any
part of the Convertible Notes and all accrued but unpaid interest thereon if (i) the average daily volume of the
Company’s common stock (as reported on the principal market or exchange on which the common stock is listed or quoted
for trading) exceeds $50,000 per trading day and (ii) the volume weighted average price of the common stock for at least
twenty (20) trading days during any thirty (30) consecutive trading day period exceeds 250% of the then-current conversion
price. Any forced conversion will be applied ratably to the holders of all Convertible Notes issued pursuant to the Note
Purchase Agreement based on each holder’s then-current note holdings.
In connection with the Note Purchase Agreement, each purchaser
of the Convertible Notes was required to execute a joinder to the subordination agreement, by and among Keltic and certain other
junior lenders to the Company; the Company is not a party to the Subordination Agreement.
In September 2014, a Convertible Note
holder converted $250,000 of Convertible Notes into 277,778 shares of common stock. At September 30 and March 31, 2014,
$1,875,000 and $2,125,000 of principal due on the Convertible Notes is included in long-term liabilities, respectively.
NOTE 8 — EQUITY
Equity distribution agreement - In November 2013, the
Company entered into an Equity Distribution Agreement (the "Distribution Agreement") with Barrington Research Associates,
Inc. ("Barrington"), as sales agent, under which the Company could issue and sell over time and from time to time, to
or through Barrington, shares (the "Shares") of its common stock having a gross sales price of up to $6.0 million.
Sales of the Shares pursuant to the Distribution Agreement could
be effected by any method permitted by law deemed to be an "at-the-market" offering as defined in Rule 415 of the Securities
Act of 1933, as amended, including without limitation directly on the NYSE MKT LLC or any other existing trading market for the
common stock or through a market maker, up to the amount specified, and otherwise to or through Barrington in accordance with the
placement notices delivered by the Company to Barrington. Also, with the prior consent of the Company, some or all of the Shares
could be sold in privately negotiated transactions. Under the Distribution Agreement, Barrington was entitled to compensation of
2.0% of the gross proceeds from the sale of all of the Shares sold through Barrington, as sales agent, pursuant to the Distribution
Agreement. Also, the Company was required to reimburse Barrington for certain expenses incurred in connection with the matters
contemplated by the Distribution Agreement, up to an aggregate of $50,000, plus up to an additional $7,500 per calendar quarter
related to ongoing maintenance; provided, however, that such reimbursement amount shall not exceed 8% of the aggregate gross proceeds
received by the Company under the Distribution Agreement.
In the six months ended September 30, 2014, the Company sold
1,247,343 Shares pursuant to the Distribution Agreement, with total gross proceeds of $1,231,241, before deducting sales agent
and offering expenses of $64,198. No Shares were sold in the three months ended September 30, 2014.
The Distribution Agreement expired in August 2014 upon the expiration
of the Company’s Registration Statement on Form S-3 under which the shares were sold.
Preferred stock dividends – Holders of the Company’s
10% Series A Convertible Preferred Stock, par value $0.01 per share (“Series A Preferred Stock”) were entitled to receive
cumulative dividends at the rate per share (as a percentage of the stated value of $1,000 per share) of 10% per annum, whether
or not declared by the Company’s Board of Directors, which were only payable in shares of the Company’s common stock
upon conversion of the Series A Preferred Stock or upon a liquidation. For the three and six months ended September 30, 2013,
the Company recorded accrued dividends of $187,978 and $377,910, respectively, included as an increase in the accumulated deficit
and in additional paid-in capital on the accompanying condensed consolidated balance sheets.
On February 11, 2014, the Company’s Board of Directors
approved the mandatory conversion of all outstanding shares of the Series A Preferred Stock pursuant to their terms, effective
on or about February 24, 2014. Pursuant to the mandatory conversion, all 6,271 outstanding shares of Series A Preferred Stock,
and accrued dividends thereon, converted into 25,760,881 shares of common stock.
Preferred stock conversions – In the six months
ended September 30, 2013, holders of Series A Preferred Stock converted 430 shares of Series A Preferred Stock, and accrued dividends
thereon, into 1,704,729 shares of common stock.
Convertible Notes conversion - In September 2014, a Convertible
Note holder converted $250,000 of Convertible Notes into 277,778 shares of common stock.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements – Continued
NOTE 9 — WARRANTS
The warrants issued in connection with the Series A Preferred
Stock (the “2011 Warrants”) had an exercise price of $0.38 per share, subject to adjustment, and were exercisable
for a period of five years. The exercise price of the 2011 Warrants was equal to 125% of the conversion price of the Series
A Preferred Stock.
The Company accounted for the 2011 Warrants issued in June 2011
in the consolidated financial statements as a liability at their initial fair value of $487,022 and accounted for the 2011
Warrants issued in October 2011 as a liability at their initial fair value of $780,972. Changes in the fair value of the 2011
Warrants were recognized in earnings for each subsequent reporting period. In November 2013, in accordance with certain terms of
the 2011 Warrants, the down-round provisions included in the terms of the warrant ceased to be in force or effect as a result of
the historical volume weighted average price and trading volume of the Company’s common stock. The Company then reclassified
the fair value of the outstanding warrant liability of $6,187,968 to equity, resulting in an increase to additional paid-in capital.
Further, the Company is no longer required to recognize any change in fair value of the 2011 Warrants.
For the three and six months ended September 30, 2013 the Company
recorded a loss on the change in the value of the 2011 Warrants of $3,519,164 and $3,966,415, respectively.
The fair value of the warrants is a Level 3 fair value under
the valuation hierarchy and was estimated using the Black-Scholes option pricing model utilizing the following assumptions:
| |
At Conversion | | |
September 30,
2013 | |
Stock price | |
$ | 0.92 | | |
$ | 0.76 | |
Risk-free interest rate | |
| 0.61 | % | |
| 0.63 | % |
Expected option life in years | |
| 2.63 | | |
| 2.75 | |
Expected stock price volatility | |
| 55 | % | |
| 51 | % |
Expected dividend yield | |
| 0 | % | |
| 0 | % |
2011 Warrants exercised –
On April 2, 2014, the Company called for cancellation all 1,657,802 unexercised 2011 Warrants pursuant to the terms of such 2011
Warrants after satisfying applicable conditions. Pursuant to the call for cancellation, holders of all 1,657,802 unexercised 2011
Warrants exercised such 2011 Warrants and received 1,657,802 shares of common stock. The Company received $629,965 in cash upon
the exercise of these warrants. In the six months ended September 30, 2013, holders of 2011 Warrants exercised 778,948 2011 Warrants
and received shares of common stock. The Company received $296,015 in cash upon the exercise of such warrants in the six months
ended September 30, 2013.
NOTE 10 — FOREIGN CURRENCY FORWARD CONTRACTS
The Company enters into forward contracts from time to time
to reduce its exposure to foreign currency fluctuations. The Company recognizes in the balance sheet derivative contracts at fair
value, and reflects any net gains and losses currently in earnings. At September 30 and March 31, 2014, the Company had no forward
contracts outstanding. Gain or loss on foreign currency forward contracts, which was de minimis during the periods presented, is
included in other income and expense.
NOTE 11 — STOCK-BASED COMPENSATION
In May 2014, the Company granted to employees, directors and
certain consultants options to purchase an aggregate of 2,305,000 shares of the Company’s common stock at an exercise price
of $1.00 per share under the Company’s 2013 Incentive Compensation Plan. The options, which expire in June 2024, vest
25% on each of the first four anniversaries of the grant date. The Company has valued the options at $1,429,100 using the Black-Scholes
option pricing model.
Stock-based compensation expense for the three months
ended September 30, 2014 and 2013 and for the six months ended September 30, 2014 and 2013 amounted to $208,808 and $105,215,
respectively, and $400,264 and $177,749, respectively. At September 30, 2014, total unrecognized compensation cost amounted
to $1,967,053, representing 5,869,677 unvested options. This cost is expected to be recognized over a weighted-average
vesting period of 2.59 years. There were 428,983 options exercised during the six months ended September 30, 2014 and no
options exercised during the six months ended September 30, 2013. The Company did not recognize any related tax benefit for
the six months ended September 30, 2014 and 2013 from option exercises, as the option exercises were de minimis.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements – Continued
NOTE 12 — COMMITMENTS AND CONTINGENCIES
|
A. |
The Company has entered into a supply agreement
with Irish Distillers Limited (“IDL”), 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. IDL 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 IDL 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,
2015, the Company has contracted to purchase approximately €774,662 or $982,674 (translated at the September 30, 2014
exchange rate) in bulk Irish whiskey, of which €427,098 or $541,782 (translated at the September 30, 2014 exchange rate), has been purchased as of September 30, 2014. The
Company is not obligated to pay IDL for any product not yet received. During the term of this supply agreement, IDL has the
right to limit additional purchases above the commitment amount. |
|
B. |
The Company has also entered into a supply
agreement with IDL, 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. IDL 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 IDL 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, 2015, the
Company has contracted to purchase approximately €303,998 or $385,628 (translated at the September 30, 2014
exchange rate) in bulk Irish whiskey, of which €60,335, or $76,536 (translated at the September 30, 2014 exchange rate), has been purchased as of September 30, 2014. The
Company is not obligated to pay IDL for any product not yet received. During the term of this supply agreement, IDL has the
right to limit additional purchases above the commitment amount. |
|
C. |
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 April 30, 2016 and provides for monthly payments of $19,975. The Dublin lease commenced on March 1, 2009 and extends through October 31, 2016 and provides for monthly payments of €1,100 or $1,395 (translated at the September 30, 2014 exchange rate). The Houston, TX lease commenced on February 24, 2000 and extends through January 31, 2015 and provides for monthly payments of $1,875. The Company has also entered into non-cancelable operating leases for certain office equipment. |
|
D. |
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 13 — 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 exceeded the limits in effect at September 30, 2014 by approximately $1,050,000 and exceeded the limits in effect at March 31, 2014 by approximately $725,000. |
|
B. |
Customers — Sales to one customer, the Southern Wine and Spirits of America, Inc. family of companies (“SWS”), accounted for approximately 26.2% and 29.1% of the Company’s revenues for the three months ended September 30, 2014 and 2013, respectively. Sales to SWS accounted for approximately 27.7% and 29.9% of the Company’s revenues for the six months ended September 30, 2014 and 2013, respectively, and approximately 18.8% of accounts receivable at September 30, 2014. |
NOTE 14 — GEOGRAPHIC INFORMATION
The Company operates in one reportable segment — the sale
of premium beverage alcohol. The Company’s product categories are rum and related products, liqueur, whiskey, vodka and tequila.
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 revenue, consolidated results from operations, consolidated net loss attributable to common shareholders, consolidated
income tax (expense) benefit and consolidated assets from the U.S. and foreign countries and consolidated revenue by category.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements – Continued
| |
Three Months ended September 30, | |
| |
2014 | | |
2013 | |
Consolidated Revenue: | |
| | | |
| | | |
| | | |
| | |
International | |
$ | 2,124,759 | | |
| 15.9 | % | |
$ | 1,456,514 | | |
| 12.5 | % |
United States | |
| 11,256,945 | | |
| 84.1 | % | |
| 10,203,193 | | |
| 87.5 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Consolidated Revenue | |
$ | 13,381,704 | | |
| 100.0 | % | |
$ | 11,659,707 | | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Consolidated (Loss) Income from Operations: | |
| | | |
| | | |
| | | |
| | |
International | |
$ | (28,466 | ) | |
| 9.7 | % | |
$ | 2,262 | | |
| (1.1 | )% |
United States | |
| (263,874 | ) | |
| 90.3 | % | |
| (210,154 | ) | |
| 101.1 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Consolidated Loss from Operations | |
$ | (292,340 | ) | |
| 100.0 | % | |
$ | (207,892 | ) | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Consolidated Net (Loss) Income Attributable to Controlling Interests: | |
| | | |
| | | |
| | | |
| | |
International | |
$ | (80,566 | ) | |
| 7.5 | % | |
$ | 11,128 | | |
| (0.3 | )% |
United States | |
| (999,947 | ) | |
| 92.5 | % | |
| (4,437,663 | ) | |
| 100.3 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Consolidated Net Loss Attributable to Controlling Interests | |
$ | (1,080,513 | ) | |
| 100.0 | % | |
$ | (4,426,535 | ) | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Income tax (expense) benefit: | |
| | | |
| | | |
| | | |
| | |
United States | |
| (259,962 | ) | |
| 100.0 | % | |
| 37,038 | | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Consolidated Revenue by category: | |
| | | |
| | | |
| | | |
| | |
Rum | |
$ | 4,286,319 | | |
| 32.0 | % | |
$ | 4,285,230 | | |
| 36.7 | % |
Liqueur | |
| 2,476,026 | | |
| 18.5 | % | |
| 2,609,505 | | |
| 22.4 | % |
Whiskey | |
| 3,139,233 | | |
| 23.5 | % | |
| 2,294,165 | | |
| 19.7 | % |
Vodka | |
| 639,819 | | |
| 4.8 | % | |
| 743,328 | | |
| 6.4 | % |
Tequila | |
| 41,885 | | |
| 0.3 | % | |
| 34,946 | | |
| 0.3 | % |
Wine | |
| — | | |
| 0.0 | % | |
| 178,878 | | |
| 1.5 | % |
Related Non-Alcoholic Beverage Products | |
| 2,798,422 | | |
| 20.9 | % | |
| 1,513,655 | | |
| 13.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Consolidated Revenue | |
$ | 13,381,704 | | |
| 100.0 | % | |
$ | 11,659,707 | | |
| 100.0 | % |
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements – Continued
| |
Six Months ended September 30, | |
| |
2014 | | |
2013 | |
Consolidated Revenue: | |
| | | |
| | | |
| | | |
| | |
International | |
$ | 3,479,777 | | |
| 13.7 | % | |
$ | 2,867,861 | | |
| 13.0 | % |
United States | |
| 21,884,126 | | |
| 86.3 | % | |
| 19,210,463 | | |
| 87.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Consolidated Revenue | |
$ | 25,363,903 | | |
| 100.0 | % | |
$ | 22,078,324 | | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Consolidated (Loss) Income from Operations: | |
| | | |
| | | |
| | | |
| | |
International | |
$ | (55,483 | ) | |
| 6.8 | % | |
$ | 42,943 | | |
| (6.5 | )% |
United States | |
| (756,243 | ) | |
| 93.2 | % | |
| (706,483 | ) | |
| 106.5 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Consolidated Loss from Operations | |
$ | (811,726 | ) | |
| 100.0 | % | |
$ | (663,540 | ) | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Consolidated Net (Loss) Income Attributable to Controlling Interests: | |
| | | |
| | | |
| | | |
| | |
International | |
$ | (141,199 | ) | |
| 5.5 | % | |
$ | 27,744 | | |
| (0.5 | )% |
United States | |
| (2,435,145 | ) | |
| 94.5 | % | |
| (5,747,112 | ) | |
| 100.5 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Consolidated Net Loss Attributable to
Controlling Interests | |
$ | (2,576,344 | ) | |
| 100.0 | % | |
$ | (5,719,368 | ) | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Income tax (expense) benefit: | |
| | | |
| | | |
| | | |
| | |
United States | |
| (422,924 | ) | |
| 100.0 | % | |
| 74,076 | | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Consolidated Revenue by category: | |
| | | |
| | | |
| | | |
| | |
Rum | |
$ | 8,578,512 | | |
| 33.8 | % | |
$ | 8,499,000 | | |
| 38.5 | % |
Liqueur | |
| 4,378,469 | | |
| 17.3 | % | |
| 4,480,311 | | |
| 20.3 | % |
Whiskey | |
| 6,151,312 | | |
| 24.3 | % | |
| 4,589,392 | | |
| 20.8 | % |
Vodka | |
| 1,160,402 | | |
| 4.6 | % | |
| 1,332,978 | | |
| 6.0 | % |
Tequila | |
| 127,214 | | |
| 0.5 | % | |
| 94,848 | | |
| 0.4 | % |
Wine | |
| — | | |
| 0.0 | % | |
| 293,488 | | |
| 1.3 | % |
Related Non-Alcoholic Beverage Products | |
| 4,967,994 | | |
| 19.6 | % | |
| 2,788,307 | | |
| 12.7 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Consolidated Revenue | |
$ | 25,363,903 | | |
| 100.0 | % | |
$ | 22,078,324 | | |
| 100.0 | % |
| |
As of September 30, 2014 | | |
As of March 31, 2014 | |
Consolidated Assets: | |
| | | |
| | | |
| | | |
| | |
International | |
$ | 2,780,299 | | |
| 6.8 | % | |
| 2,201,343 | | |
| 6.0 | % |
United States | |
| 38,173,878 | | |
| 93.2 | % | |
| 34,320,167 | | |
| 94.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Consolidated Assets | |
$ | 40,954,177 | | |
| 100.0 | % | |
| 36,521,510 | | |
| 100.0 | % |
NOTE 15 — SUBSEQUENT EVENTS
Convertible Notes conversion - In November 2014,
two Convertible Note holders each converted $100,000 of Convertible Notes and $787 of accrued interest thereon into 111,898
shares of common stock each.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Overview
We develop and market premium and super premium brands in the
following beverage alcohol categories: rum, whiskey, liqueurs, vodka and tequila. We distribute our products in all 50 U.S. states
and the District of Columbia, in thirteen primary international markets, including Ireland, Great Britain, Northern Ireland, Germany,
Canada, Israel, Bulgaria, France, Russia, Finland, Norway, Sweden, China and the Duty Free markets, and in a number of other countries
in continental Europe and Latin America. We market the following brands, among others, Gosling’s Rum®, Gosling’s
Stormy Ginger Beer, Gosling’s Dark ‘n Stormy® ready-to-drink cocktail, Jefferson’s®,
Jefferson’s Reserve®, Jefferson’s Ocean Aged-at-Sea and Jefferson's Presidential SelectTM
bourbons, Jefferson’s Rye whiskey, Pallini® liqueurs, Clontarf® Irish whiskey, Knappogue Castle
Whiskey®, Brady's® Irish Cream, Boru® vodka, TierrasTM tequila, Celtic
Honey® liqueur, Castello Mio® sambucas and Gozio® amaretto.
Our objective is to continue building Castle
Brands into a profitable international spirits company, with a distinctive portfolio of premium and super premium spirits brands.
To achieve this, we continue to seek to:
|
· |
focus on our more profitable brands and markets. We continue to focus our distribution efforts, sales expertise and targeted marketing activities on our more profitable brands and markets; |
|
· |
grow organically. We believe that continued organic growth will enable us to achieve long-term profitability. We focus on brands that have profitable growth potential and staying power, such as our rums and whiskies, sales of which have grown approximately 40% over the past two fiscal years; |
|
· |
build consumer awareness. We use our existing assets, expertise and resources to build consumer awareness and market penetration for our brands; |
|
· |
leverage our distribution network. Our established distribution network in all 50 U.S. states enables us to promote our brands nationally and makes us an attractive strategic partner for smaller companies seeking U.S. distribution; and |
|
· |
selectively add new brand extensions and brands to our portfolio. We intend to continue to introduce new brand extensions and expressions. We continue to explore strategic relationships, joint ventures and acquisitions to selectively expand our premium spirits portfolio. We expect that future acquisitions or agency relations, if any, would involve some combination of cash, debt and the issuance of our stock. |
Recent Events
Accelerated Filer
On September 30, 2014, we exceeded
the $75.0 million public float threshold to trigger accelerated filer status with the SEC beginning in fiscal year 2016.
Consequently, as of April 1, 2015, we will no longer be a “smaller reporting company” as such term is defined in
Rule 405 of the Securities Act of 1933, as amended, and accelerated filer disclosures will commence in our Form 10-Q for the
quarter ending June 30, 2015. Further, we will need to comply with the auditor attestaion requirements of Section 404(b) of
the Sarbanes-Oxley Act of 2002 and accelerated reporting deadlines in our Form 10-K for the fiscal year ending March 31,
2015.
Keltic Facility
In September 2014, we entered into an Amended
and Restated Loan and Security Agreement (the "Agreement") with ACF FinCo I LP, a Delaware limited partnership (“ACF”),
as successor-in-interest to Keltic Financial Partners II, LP ("Keltic"), in order to amend certain terms of the Company’s
existing $8.0 million revolving facility (the "Keltic Facility") and $4.0 million term loan (the "Term Loan")
with ACF.
Among other changes, the Agreement
modifies certain aspects of the existing Keltic Facility, including increasing the maximum amount of the Keltic Facility from
$8.0 million to $12.0 million and increasing the inventory sub-limit from $4.0 million to $6.0 million. In addition, the term
of the Keltic Facility was extended from December 31, 2016 to July 31, 2019. The Keltic Facility interest rate was reduced to
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)
6.25%. As of the closing date, the Keltic Facility interest rate was 6.25%. The monthly facility fee was reduced from 1.00%
per annum of the maximum Keltic Facility amount to 0.75%. In addition, the Agreement contains EBITDA hurdles allowing for
further interest rate reductions in the future. The Agreement also modifies certain aspects of the EBITDA covenant that was
contained in the previously existing Loan and Security Agreement, dated as of August 19, 2011, as amended. We paid ACF an
aggregate $120,000 amendment fee in connection with the execution of the Agreement.
Junior Notes
Also in September 2014, in connection with
our entry into the Agreement described above, we repaid all our obligations under that certain Loan Agreement, dated as of August
7, 2013, by and among us and the lending parties thereto (the "Junior Loan Agreement"), under which we had $1.25 million
principal amount outstanding. Pursuant to the terms of the Junior Loan Agreement, we had the option to repay this indebtedness
at any time prior to the maturity date without penalty, but with payment of accrued interest to the date of prepayment. We used
proceeds from the Keltic Facility to repay such obligations.
Currency Translation
The functional currencies for our foreign
operations are the Euro in Ireland and the British Pound in the United Kingdom. With respect to our consolidated financial statements,
the translation from the applicable foreign currencies to U.S. Dollars is performed for balance sheet accounts using exchange rates
in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period.
The resulting translation adjustments are recorded as a component of other comprehensive income.
Where in this report we refer to amounts
in Euros or British Pounds, we have for your convenience also in certain cases provided a conversion of those amounts to U.S. Dollars
in parentheses. Where the numbers refer to a specific balance sheet account date or financial statement account period, we have
used the exchange rate that was used to perform the conversions in connection with the applicable financial statement. In all other
instances, unless otherwise indicated, the conversions have been made using the exchange rates as of September 30, 2014, each as
calculated from the Interbank exchange rates as reported by Oanda.com. On September 30, 2014, the exchange rate of the Euro and
the British Pound in exchange for U.S. Dollars was €1.00 = U.S. $1.26852 (equivalent to U.S. $1.00 = €0.78832) and £1.00
= U.S. $1.62388 (equivalent to U.S. $1.00 = £0.61581).
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, 2014, as amended, which we
refer to as our 2014 Annual Report. Please refer to that section for disclosures regarding the critical accounting policies related
to our business.
Financial performance overview
The following table provides information
regarding our spirits case sales for the periods presented based on nine-liter equivalent cases, which is a standard spirits industry
metric (table excludes related non-alcoholic beverage products):
| |
Three months ended | | |
Six months ended | |
| |
September 30, | | |
September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
Cases | |
| | | |
| | | |
| | | |
| | |
United States | |
| 73,942 | | |
| 79,033 | | |
| 142,486 | | |
| 146,723 | |
International | |
| 20,040 | | |
| 20,298 | | |
| 38,609 | | |
| 40,951 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
| 93,982 | | |
| 99,331 | | |
| 181,095 | | |
| 187,674 | |
| |
| | | |
| | | |
| | | |
| | |
Rum | |
| 43,745 | | |
| 43,146 | | |
| 84,658 | | |
| 87,126 | |
Vodka | |
| 12,266 | | |
| 14,231 | | |
| 21,856 | | |
| 24,925 | |
Liqueur | |
| 22,944 | | |
| 25,244 | | |
| 42,384 | | |
| 43,313 | |
Whiskey | |
| 14,803 | | |
| 13,973 | | |
| 31,526 | | |
| 28,096 | |
Tequila | |
| 210 | | |
| 183 | | |
| 657 | | |
| 502 | |
Wine | |
| — | | |
| 2,554 | | |
| — | | |
| 3,709 | |
Other Spirits | |
| 14 | | |
| — | | |
| 14 | | |
| 3 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
| 93,982 | | |
| 99,331 | | |
| 181,095 | | |
| 187,674 | |
| |
| | | |
| | | |
| | | |
| | |
Percentage of Cases | |
| | | |
| | | |
| | | |
| | |
United States | |
| 78.7 | % | |
| 79.6 | % | |
| 78.7 | % | |
| 78.2 | % |
International | |
| 21.3 | % | |
| 20.4 | % | |
| 21.3 | % | |
| 21.8 | % |
| |
| | | |
| | | |
| | | |
| | |
Total | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Rum | |
| 46.5 | % | |
| 43.4 | % | |
| 46.7 | % | |
| 46.4 | % |
Vodka | |
| 13.1 | % | |
| 14.3 | % | |
| 12.1 | % | |
| 13.3 | % |
Liqueur | |
| 24.4 | % | |
| 25.4 | % | |
| 23.4 | % | |
| 23.1 | % |
Whiskey | |
| 15.8 | % | |
| 14.1 | % | |
| 17.4 | % | |
| 15.0 | % |
Tequila | |
| 0.2 | % | |
| 0.2 | % | |
| 0.4 | % | |
| 0.2 | % |
Wine | |
| 0.0 | % | |
| 2.6 | % | |
| 0.0 | % | |
| 2.0 | % |
Other Spirits | |
| 0.0 | % | |
| 0.0 | % | |
| 0.0 | % | |
| 0.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Total | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % |
The following table provides information
regarding our case sales of related non-alcoholic beverage products for the periods presented:
| |
Three months ended | | |
Six months ended | |
| |
September 30, | | |
September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
Cases | |
| | | |
| | | |
| | | |
| | |
United States | |
| 189,702 | | |
| 108,037 | | |
| 338,357 | | |
| 205,719 | |
International | |
| 2,400 | | |
| 3,566 | | |
| 16,124 | | |
| 10,173 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
| 192,102 | | |
| 111,603 | | |
| 354,481 | | |
| 215,892 | |
| |
| | | |
| | | |
| | | |
| | |
Percentage of Cases | |
| | | |
| | | |
| | | |
| | |
United States | |
| 98.8 | % | |
| 96.8 | % | |
| 95.5 | % | |
| 95.3 | % |
International | |
| 1.2 | % | |
| 3.2 | % | |
| 4.5 | % | |
| 4.7 | % |
| |
| | | |
| | | |
| | | |
| | |
Total | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % |
Results of operations
The table below provides, for the periods
indicated, the percentage of net sales of certain items in our consolidated financial statements:
| |
Three months ended September 30, | | |
Six months ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
Sales, net | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % |
Cost of sales | |
| 63.5 | % | |
| 64.1 | % | |
| 62.8 | % | |
| 63.3 | % |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 36.5 | % | |
| 35.9 | % | |
| 37.2 | % | |
| 36.7 | % |
| |
| | | |
| | | |
| | | |
| | |
Selling expense | |
| 26.8 | % | |
| 25.2 | % | |
| 26.9 | % | |
| 26.4 | % |
General and administrative expense | |
| 10.2 | % | |
| 10.7 | % | |
| 11.7 | % | |
| 11.4 | % |
Depreciation and amortization | |
| 1.6 | % | |
| 1.8 | % | |
| 1.7 | % | |
| 1.9 | % |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| (2.2 | )% | |
| (1.8 | )% | |
| (3.2 | )% | |
| (3.0 | )% |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense), net | |
| 0.0 | % | |
| 0.0 | % | |
| 0.1 | % | |
| 0.0 | % |
Loss from equity investment in non-consolidated affiliate | |
| (0.0 | )% | |
| (0.2 | )% | |
| (0.0 | )% | |
| (0.1 | )% |
Foreign exchange loss | |
| (0.2 | )% | |
| (1.5 | )% | |
| (1.0 | )% | |
| (0.5 | )% |
Interest expense, net | |
| (2.2 | )% | |
| (2.3 | )% | |
| (2.3 | )% | |
| (2.3 | )% |
Net change in fair value of warrant liability | |
| 0.0 | % | |
| (30.2 | )% | |
| 0.0 | % | |
| (18.0 | )% |
Income tax (expense) benefit, net | |
| (1.9 | )% | |
| 0.3 | % | |
| (1.7 | )% | |
| 0.3 | % |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
| (6.5 | )% | |
| (35.7 | )% | |
| (8.1 | )% | |
| (23.5 | )% |
Net income attributable to noncontrolling interests | |
| (1.6 | )% | |
| (2.4 | )% | |
| (2.0 | )% | |
| (2.4 | )% |
| |
| | | |
| | | |
| | | |
| | |
Net loss attributable to controlling interests | |
| (8.1 | )% | |
| (38.1 | )% | |
| (10.2 | )% | |
| (25.9 | )% |
| |
| | | |
| | | |
| | | |
| | |
Dividend to preferred shareholders | |
| 0.0 | % | |
| (1.6 | )% | |
| 0.0 | % | |
| (1.7 | )% |
| |
| | | |
| | | |
| | | |
| | |
Net loss attributable to common shareholders | |
| (8.1 | )% | |
| (39.7 | )% | |
| (10.2 | )% | |
| (27.6 | )% |
The following is a reconciliation of net
loss attributable to common shareholders to EBITDA, as adjusted:
| |
Three months ended | | |
Six months ended | |
| |
September 30, | | |
September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
Net loss attributable to common shareholders | |
$ | (1,080,513 | ) | |
$ | (4,614,513 | ) | |
$ | (2,576,344 | ) | |
$ | (6,097,278 | ) |
Adjustments: | |
| | | |
| | | |
| | | |
| | |
Interest expense, net | |
| 288,215 | | |
| 268,480 | | |
| 576,857 | | |
| 497,299 | |
Income tax expense (benefit), net | |
| 259,962 | | |
| (37,038 | ) | |
| 422,924 | | |
| (74,076 | ) |
Depreciation and amortization | |
| 215,873 | | |
| 214,638 | | |
| 431,971 | | |
| 427,762 | |
EBITDA (loss) | |
| (316,463 | ) | |
| (4,168,433 | ) | |
| (1,144,592 | ) | |
| (5,246,293 | ) |
Allowance for doubtful accounts | |
| 9,000 | | |
| 15,312 | | |
| 68,000 | | |
| 25,812 | |
Stock-based compensation expense | |
| 208,808 | | |
| 105,216 | | |
| 400,264 | | |
| 177,749 | |
Other (income) expense, net | |
| (64 | ) | |
| 174 | | |
| (17,006 | ) | |
| 174 | |
Loss from equity investment in non-consolidated affiliate | |
| — | | |
| 17,956 | | |
| — | | |
| 24,077 | |
Foreign exchange loss | |
| 29,011 | | |
| 171,863 | | |
| 265,458 | | |
| 111,523 | |
Net change in fair value of warrant liability | |
| — | | |
| 3,519,164 | | |
| — | | |
| 3,966,415 | |
Net income attributable to noncontrolling interests | |
| 211,049 | | |
| 278,044 | | |
| 516,385 | | |
| 530,416 | |
Dividend to preferred shareholders | |
| — | | |
| 187,978 | | |
| — | | |
| 377,910 | |
EBITDA, as adjusted | |
| 141,341 | | |
| 127,274 | | |
| 88,509 | | |
| (32,217 | ) |
Earnings before interest, taxes, depreciation
and amortization, or EBITDA, adjusted for allowance for doubtful accounts, other (income) expense, net, stock-based compensation
expense, loss from equity investment in non-consolidated affiliate, foreign exchange loss, net change in fair value of warrant
liability, net income attributable to noncontrolling interests and dividend to preferred shareholders 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 fair value of warrant liability, or do not involve a cash outlay,
such as stock-based compensation expense. Our presentation of EBITDA, as adjusted, should not be construed as an inference that
our future results will be unaffected by unusual or non-recurring items or by non-cash items, such as stock-based compensation,
which is expected to remain a key element in our long-term incentive compensation program. EBITDA, as adjusted, should be
considered in addition to, rather than as a substitute for, income from operations, net income and cash flows from operating activities.
Our EBITDA, as adjusted, improved to $0.14
million for the three months ended September 30, 2014, as compared to $0.13 million for the comparable prior-year period, primarily
as a result of increased sales and gross profit. Our EBITDA, as adjusted, improved to $0.09 million for the six months ended September
30, 2014, as compared to ($0.03) million for the comparable prior-year period, primarily as a result of increased sales and gross
profit.
Three months ended September 30, 2014 compared
with three months ended September 30, 2013
Net sales. Net sales
increased 14.8% to $13.4 million for the three months ended September 30, 2014, as compared to $11.7 million for the
comparable prior-year period, due to the overall growth of our Gosling's Stormy Ginger Beer, Jefferson's and
Jefferson’s Reserve, Clontarf Irish whiskey and Pallini liqueurs. Our international spirits case sales as a percentage of
total spirits case sales was 21.3% for the three months ended September 30, 2014 as compared to 20.4% for the comparable
prior-year period. Our overall spirits sales volume was negatively impacted by the elimination of the Hasse Apple Pie
Liqueurs and our wines, as well as our inability to source supply for Jefferson’s Rye in the current year, all of which
had sales in the three months ended September 30, 2013, but not the three months ended September 30, 2014. These
shortfalls were partially offset by increases in sales of our Jefferson’s and Jefferson’s Reserve bourbons and
our Irish whiskey portfolio. In addition, sales of our Gosling’s Stormy Ginger Beer increased by 80,577 cases, or
72.3%, overall, including a 81,743 case increase, or 75.7%, in U.S. case sales. We anticipate continued growth of
Gosling’s Stormy Ginger Beer in the near term as compared to comparable prior-year periods, although there is no
assurance that we will attain such results. We continue to focus on our faster growing brands and markets, both in the U.S.
and internationally.
The table below presents the increase or
decrease, as applicable, in case sales by spirits product category for the three months ended September 30, 2014 as compared to
the three months ended September 30, 2013:
| |
Increase/(decrease) | | |
Percentage | |
| |
in case sales | | |
increase/(decrease) | |
| |
Overall | | |
U.S. | | |
Overall | | |
U.S. | |
Rum | |
| 599 | | |
| (176 | ) | |
| 1.4 | % | |
| (0.5 | )% |
Whiskey | |
| 830 | | |
| 289 | | |
| 5.9 | % | |
| 3.6 | % |
Liqueur | |
| (2,300 | ) | |
| (1,603 | ) | |
| (9.1 | )% | |
| (6.7 | )% |
Vodka | |
| (1,965 | ) | |
| (1,088 | ) | |
| (13.8 | )% | |
| (8.9 | )% |
Tequila | |
| 27 | | |
| 27 | | |
| 14.8 | % | |
| 14.8 | % |
Wine | |
| (2,554 | ) | |
| (2,554 | ) | |
| (100.0 | )% | |
| (100.0 | )% |
Other Spirits | |
| 14 | | |
| 14 | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
| (5,349 | ) | |
| (5,091 | ) | |
| (5.4 | ) | |
| (6.4 | )% |
Gross profit. Gross profit
increased 16.7% to $4.9 million for the three months ended September 30, 2014 from $4.2 million for the comparable prior-year
period, and our gross margin increased to 36.5% for the three months ended September 30, 2014 compared to 35.9% for the
comparable prior-year period. The increase in gross profit was primarily due to increased revenue in the current period,
while the increase in gross margin was due to an increase in sales of our more profitable brands, in particular the
Jefferson’s bourbons and our Irish whiskey brands.
Selling expense. Selling expense
increased 22.5% to $3.6 million for the three months ended September 30, 2014 from $2.9 million for the comparable prior-year period,
primarily due to a $0.2 million increase in each of employee costs and shipping costs, associated with increased sales volume,
combined with a $0.2 million increase in advertising, marketing and promotion expense related to the timing of certain sales and
marketing programs. These increases resulted in selling expense as a percentage of net sales increasing to 26.8% for the three
months ended September 30, 2014 as compared to 25.2% for the comparable prior-year period.
General and administrative expense.
General and administrative expense increased 10.0% to $1.4 million for the three months ended September 30, 2014 from $1.2 million
for the comparable prior-year period, primarily due to a combined $0.1 million increase in professional fees, employee expense
and non-cash stock-based compensation expense. The increase in sales resulted in general and administrative expense as a percentage
of net sales decreasing to 10.2% for the three months ended September 30, 2014 as compared to 10.7% for the comparable prior-year
period. Due to the increase in our stock price, our market capitalization at the end of our second fiscal quarter exceeded the
levels for a smaller reporting company. Accordingly, we will be an accelerated filer in future periods and expect to incur additional
general and administrative expense to comply with the additional requirements of an accelerated filer company.
Depreciation and amortization. Depreciation
and amortization was $0.2 million for each of the three-month periods ended September 30, 2014 and 2013.
Loss from operations. As a result
of the foregoing, loss from operations increased to ($0.3) million for the three months ended September 30, 2014 from ($0.2) 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 comparable
prior-year periods, although there is no assurance that we will attain such results.
Net change in fair value of warrant
liability. We recorded the fair market value of the 2011 Warrants at their initial fair value. Changes in the
fair value of the 2011 Warrants were recognized in earnings for each reporting period. In November 2013, in accordance with certain
terms of the 2011 Warrants, the down-round provisions included in the terms of the warrant ceased to be in effect due
to the historical VWAP and trading volume of our Common Stock. As a result, the then outstanding warrant liability of $6.2 million
was eliminated and recognized as an increase to additional paid-in capital. In April 2014, we called for cancellation all remaining
1.7 million unexercised 2011 Warrants pursuant to their terms after satisfying applicable conditions. Pursuant to the call for
cancellation, holders of all 1.7 million unexercised 2011 Warrants exercised such warrants and received 1.7 million shares of Common
Stock. We received $0.6 million in cash upon the exercise of these 2011 Warrants. As a result, no 2011 Warrants were outstanding
as of September 30, 2014. Accordingly, we are no longer required to recognize any changes in fair value of the 2011 Warrants. For
the three months ended September 30, 2013, we recorded a non-cash charge for loss on the change in the value of the warrants
of ($3.5) million, primarily due to the effects of our increased share price on the Black-Scholes valuation.
Income tax (expense) benefit, net.
Income tax (expense) benefit, net is the estimated tax expense attributable to the net taxable income recorded by our 60% owned
subsidiary, Gosling-Castle Partners, Inc., adjusted for changes in the deferred tax asset and deferred tax liability during the
periods, and was net expense of ($0.3) million for the three months ended September 30, 2014 as compared to a benefit of $0.04
million for the comparable prior-year period.
Foreign exchange loss. Foreign
exchange loss for the three months ended September 30, 2014 was ($0.03) million as compared to a loss of ($0.2) 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. Interest
expense, net was ($0.3) million for each of the three-month periods ended September 30, 2014 and 2013. Due to expected borrowings
under the Keltic Facility to support additional inventory purchases and other working capital needs, we expect interest expense,
net to increase in the near term as compared to prior-year periods.
Net income attributable to
noncontrolling interests. Net income attributable to noncontrolling interests for the three months ended September 30,
2014 was ($0.2) million as compared to ($0.3) million for the comparable prior-year period, both the result of allocated net
income recorded by our 60% owned subsidiary, Gosling-Castle Partners, Inc.
Dividend to preferred shareholders.
Pursuant to the mandatory conversion of our Series A Preferred Stock, in February 2014, all outstanding shares of Series A Preferred
Stock, and accrued dividends thereon, converted into Common Stock. Accordingly, after February 2014, we no longer recognize a dividend
to preferred shareholders. For the three months ended September 30, 2013, we recognized a dividend on our Series A Preferred Stock
of $0.2 million.
Net loss attributable to common shareholders.
As a result of the net effects of the foregoing, including the non-cash charge for loss on the net change in fair value of warrant
liability and the dividend accrual in the prior year, offset by the income tax expense, net in the current year, net loss attributable
to common shareholders improved to ($1.1) million for the three months ended September 30, 2014 as compared to a loss of ($4.6)
million for the comparable prior-year period. Net loss per common share, basic and diluted, was ($0.01) per share for the three
months ended September 30, 2014 as compared to ($0.04) per share for the comparable prior-year period. Net loss per common share,
basic and diluted, as reported in the current period benefited from an increase in the weighted-average shares outstanding in the
three months ended September 30, 2014 as compared to the prior-year period.
Six months ended September 30, 2014 compared
with six months ended September 30, 2013
Net sales. Net sales
increased 14.9% to $25.4 million for the six months ended September 30, 2014, as compared to $22.1 million for the
comparable prior-year period, due to the overall growth of our Gosling's Stormy Ginger Beer, Jefferson's and
Jefferson’s Reserve, Clontarf Irish whiskey and Pallini liqueurs. Our international spirits case sales as a
percentage of total spirits case sales was 21.3% for the six months ended September 30, 2014 as compared to 21.8% for the
comparable prior-year period. Our overall spirits sales volume was negatively impacted by the elimination of the Hasse Apple
Pie Liqueurs and our wines, as well as our inability to source supply for Jefferson’s Rye in the current year, all of
which had sales in the six months ended September 30, 2013, but not the six months ended September 30, 2014. These
shortfalls were partially offset by increases in sales of our Jefferson’s and Jefferson’s Reserve bourbons and
our Irish whiskey portfolio. In addition, sales of our Gosling’s Stormy Ginger Beer increased by 138,551 cases, or
64.3%, overall, including a 132,600 case increase, or 64.6%, in U.S. case sales. We anticipate continued growth of
Gosling’s Stormy Ginger Beer in the near term as compared to comparable prior-year periods, although there is no
assurance that we will attain such results. We continue to focus on our faster growing brands and markets, both in the U.S.
and internationally.
The table below presents the increase or
decrease, as applicable, in case sales by spirits product category for the six months ended September 30, 2014 as compared to the
six months ended September 30, 2013:
| |
Increase/(decrease) | | |
Percentage | |
| |
in case sales | | |
increase/(decrease) | |
| |
Overall | | |
U.S. | | |
Overall | | |
U.S. | |
Rum | |
| (2,468 | ) | |
| 797 | | |
| (2.8 | )% | |
| 1.3 | % |
Whiskey | |
| 3,430 | | |
| 1,176 | | |
| 12.2 | % | |
| 7.4 | % |
Liqueur | |
| (929 | ) | |
| (994 | ) | |
| (2.1 | )% | |
| (2.4 | )% |
Vodka | |
| (3,069 | ) | |
| (1,672 | ) | |
| (12.3 | )% | |
| (7.7 | )% |
Tequila | |
| 155 | | |
| 155 | | |
| 30.9 | % | |
| 30.9 | % |
Wine | |
| (3,709 | ) | |
| (3,709 | ) | |
| (100.0 | )% | |
| (100.0 | )% |
Other Spirits | |
| 11 | | |
| 11 | | |
| 329.2 | % | |
| 329.2 | % |
| |
| | | |
| | | |
| | | |
| | |
Total | |
| (6,579 | ) | |
| (4,237 | ) | |
| (3.5 | )% | |
| (2.9 | )% |
Gross profit. Gross profit
increased 16.4% to $9.4 million for the six months ended September 30, 2014 from $8.1 million for the comparable prior-year
period, and our gross margin increased to 37.2% for the six months ended September 30, 2014 compared to 36.7% for the
comparable prior-year period. The increase in gross profit was primarily due to increased revenue in the current period,
while the increase in gross margin was due to an increase in sales of our more profitable brands, in particular the
Jefferson’s bourbons and our Irish whiskey brands.
Selling expense. Selling
expense increased 17.2% to $6.8 million for the six months ended September 30, 2014 from $5.8 million for the comparable
prior-year period, primarily due to a $0.5 million increase in shipping costs and a $0.1 million increase in
commissions, associated with increased sales volume, and a $0.5 million increase in employee costs, partially offset by a
$0.1 million decrease in advertising, marketing and promotion expense related to the timing of certain sales and marketing
programs. The increase in sales resulted in selling expense as a percentage of net sales remaining relatively constant at
26.9% for the six months ended September 30, 2014 as compared to 26.4% for the comparable prior-year period.
General and administrative expense.
General and administrative expense increased 18.7% to $3.0 million for the six months ended September 30, 2014 from $2.5 million
for the comparable prior-year period, primarily due to a $0.1 million increase in each of professional fees, insurance, employee
expense and non-cash stock-based compensation expense. The increase in sales resulted in general and administrative expense as
a percentage of net sales remaining relatively constant at 11.7% for the six months ended September 30, 2014 as compared to
11.4% for the comparable prior-year period.
Depreciation and amortization. Depreciation
and amortization was $0.4 million for each of the six-month periods ended September 30, 2014 and 2013.
Loss from operations. As a result
of the foregoing, loss from operations increased to ($0.8) million for the six months ended September 30, 2014 from ($0.7) 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 comparable
prior-year periods, although there is no assurance that we will attain such results.
Net change in fair value of warrant
liability. We recorded the fair market value of the 2011 Warrants at their initial fair value. Changes in the
fair value of the 2011 Warrants were recognized in earnings for each reporting period. In November 2013, in accordance with certain
terms of the 2011 Warrants, the down-round provisions included in the terms of the warrant ceased to be in effect due
to the historical VWAP and trading volume of our Common Stock. As a result, the then outstanding warrant liability of $6.2 million
was eliminated and recognized as an increase to additional paid-in capital. In April 2014, we called for cancellation all remaining
1.7 million unexercised 2011 Warrants pursuant to their terms after satisfying applicable conditions. Pursuant to the call for
cancellation, holders of all 1.7 million unexercised 2011 Warrants exercised such warrants and received 1.7 million shares of Common
Stock. We received $0.6 million in cash upon the exercise of these 2011 Warrants. As a result, no 2011 Warrants were outstanding
as of September 30, 2014. Accordingly, we are no longer required to recognize any changes in fair value of the 2011 Warrants. For
the six months ended September 30, 2013, we recorded a non-cash charge for loss on the change in the value of the warrants
of ($4.0) million, primarily due to the effects of our increased share price on the Black-Scholes valuation.
Income tax (expense) benefit, net.
Income tax (expense) benefit, net is the estimated tax expense attributable to the net taxable income recorded by our 60% owned
subsidiary, Gosling-Castle Partners, Inc., adjusted for changes in the deferred tax asset and deferred tax liability during the
periods, and was net expense of ($0.4) million for the six months ended September 30, 2014 as compared to a benefit of $0.1 million
for the comparable prior-year period.
Foreign exchange loss. Foreign
exchange loss for the six months ended September 30, 2014 was ($0.3) million as compared to a loss of ($0.1) million for the comparable
prior-year period due to the net effects of fluctuations of the U.S. dollar against the Euro and its impact on our Euro-denominated
intercompany balances due to our foreign subsidiaries for inventory purchases.
Interest expense, net. We had interest
expense, net of ($0.6) million for the six months ended September 30, 2014 as compared to ($0.5) million for the comparable prior-year
period due to increased balances outstanding under our credit facilities. Due to expected borrowings under the Keltic Facility
to support additional inventory purchases and other working capital needs, we expect interest expense, net to increase in the near
term as compared to prior-year periods.
Net income attributable to noncontrolling
interests. Net income attributable to noncontrolling interests during the each of the six-month periods ended September 30,
2014 and 2013 was ($0.5) million, both the result of allocated net income recorded by our 60% owned subsidiary, Gosling-Castle
Partners, Inc.
Dividend to preferred shareholders.
Pursuant to the mandatory conversion of our Series A Preferred Stock, in February 2014, all outstanding shares of Series A Preferred
Stock, and accrued dividends thereon, converted into Common Stock. Accordingly, after February 2014, we no longer recognize a dividend
to preferred shareholders. For the six months ended September 30, 2013, we recognized a dividend on our Series A Preferred Stock
of $0.4 million.
Net loss attributable to common shareholders.
As a result of the net effects of the foregoing, including the non-cash charge for loss on the net change in fair value of warrant
liability and the dividend accrual in the prior year, offset by the income tax expense, net in the current year, net loss attributable
to common shareholders improved to ($2.6) million for the six months ended September 30, 2014 as compared to a loss of ($6.1)
million for the comparable prior-year period. Net loss per common share, basic and diluted, was ($0.02) per share for the six months
ended September 30, 2014 as compared to ($0.06) per share for the comparable prior-year period. Net loss per common share, basic
and diluted, as reported in the current period benefited from an increase in the weighted-average shares outstanding in the six
months ended September 30, 2014 as compared to the prior-year period.
Liquidity and capital resources
Overview
Since our inception, we have incurred
significant operating and net losses and have not generated positive cash flows from operations. For the six months ended
September 30, 2014, we had a net loss of $2.1 million, and used cash of $4.6 million in operating activities. As of September
30, 2014, we had cash and cash equivalents of $1.4 million and had an accumulated deficit of $142.1 million.
We believe our current cash and working
capital, and the availability under the Keltic 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.
Existing Financing
See Management's Discussion and Analysis
of Financial Condition and Results of Operations – Recent Events for a discussion of our recent financing activities.
In August 2011, we entered into a loan
agreement with ACF, as successor in interest to Keltic, which, as amended, provides for availability (subject to certain terms
and conditions) of a facility of up to $8.0 million for the purpose of providing us with working capital and a term loan to finance
purchases of aged whiskies (the “Bourbon Term Loan”) in the initial aggregate principal amount of $2.5 million, which
was used for the purchase of bourbon inventory on March 11, 2013. In August 2013, the Bourbon Term Loan was amended to provide
us with the ability to increase the maximum aggregate principal amount of the Bourbon Term Loan from $2.5 million to up to $4.0
million to finance the purchase of aged whiskies following the identification of junior participants to purchase a portion of the
increased Bourbon Term Loan amount.
In September 2014, we entered into the
Agreement, pursuant to which the Keltic Facility was further amended to modify certain aspects of the existing Keltic Facility,
including increasing the maximum amount of the Keltic Facility from $8.0 million to $12.0 million and increasing the inventory
sub-limit from $4.0 million to $6.0 million. In addition, the term of the Keltic Facility was extended from December 31, 2016 to
July 31, 2019 (the "Maturity Date"). The Keltic Facility interest rate was reduced to 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) 6.25%. The monthly facility fee was reduced
from 1.00% per annum of the maximum Keltic Facility amount to 0.75%. In addition, the Agreement contains EBITDA hurdles allowing
for further interest rate reductions in the future. The Agreement also modifies certain aspects of the EBITDA covenant that was
contained in the previously existing loan and security agreement, dated as of August 19, 2011, as amended. We paid Keltic an aggregate
$120,000 amendment fee in connection with the execution of the Agreement.
We may borrow up to the maximum amount
of the Keltic Facility, provided that we have a sufficient borrowing base (as defined in the Agreement). The Keltic 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)
6.25%. The Bourbon Term Loan 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%. Interest is payable monthly in arrears, on the first day of every month on the average
daily unpaid principal amount of the Keltic Facility and the Bourbon Term Loan. After the occurrence and during the continuance
of any "Default" or "Event of Default" (as defined under the Agreement) we are required to pay interest at
a rate that is 3.25% per annum above the then applicable Keltic Facility or Bourbon Term Loan, as applicable, interest rate. The
Keltic Facility currently bears interest at 6.25% and the Bourbon Term Loan currently bears interest at 7.50%. We are required
to pay down the principal balance of the Bourbon Term Loan within 15 banking days from the completion of a bottling run of bourbon
from our bourbon inventory stock purchased on or about the date of the Bourbon Term Loan in an amount equal to the purchase price
of such bourbon. The unpaid principal balance of the Bourbon Term Loan, all accrued and unpaid interest thereon, all fees, costs
and expenses payable in connection with the Bourbon Term Loan are due and payable in full on the Maturity Date. In addition
to closing fees, Keltic receives an annual facility fee and a collateral management fee (each as set forth in the Agreement).
The Agreement contains standard borrower
representations and warranties for asset-based borrowing and a number of reporting obligations and affirmative and negative covenants.
The Agreement includes negative covenants that, among other things, restrict our ability to create additional indebtedness, dispose
of properties, incur liens, and make distributions or cash dividends. At September 30, 2014, we were in compliance, in all material
respects, with the covenants under the Agreement.
Keltic required as a condition
to funding the Bourbon Term Loan that Keltic had entered into a participation agreement providing for an aggregate of
$750,000 of the initial $2.5 million principal amount of the Bourbon Term Loan to be purchased by junior participants.
Certain related parties of ours purchased a portion of these junior participations in the Bourbon Term Loan, including Frost
Gamma Investments Trust ($500,000), an entity affiliated with Phillip Frost, M.D., a director and principal shareholder of
ours, Mark E. Andrews, III ($50,000), a director of ours and our Chairman, and an affiliate of Richard J. Lampen ($50,000), a
director of ours and our President and CEO, (amounts shown are initial purchase amounts). Under the terms of the participation
agreement, the junior participants receive interest at the rate of 11% per annum. We are not a party to the participation
agreement. However, we are party to a fee letter with the junior participants (including the related party junior
participants) pursuant to which we pay the junior participants an aggregate commitment fee of $45,000 paid in three equal
annual installments of $15,000.
In August 2014, we entered into a Sixth
Amendment in order to modify certain aspects of the EBITDA covenant contained in the Keltic Facility for the period ending
June 30, 2014.
In August 2013, we entered into a Loan
Agreement (the "Junior Loan Agreement"), by and between us and the lending parties thereto (the "Junior Lenders"),
which provided for an aggregate $1.25 million unsecured loan (the "Junior Loan") to us. The Junior Loan bore interest
at a rate of 11% per annum, payable quarterly in arrears commencing November 1, 2013, and was set to mature on October 15, 2015.
The Junior Loan was able to be prepaid in whole or in part without penalty or premium but with payment of accrued interest to the
date of prepayment. The Junior Loan Agreement contained customary events of default, which, if uncured, entitled each Junior Lender
to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the portion of the Junior
Loan made by such Junior Lender. The Junior Loan Agreement provided for a funding fee of 2% per annum on the then outstanding Junior
Loan balance (pro-rated for any period of less than one year), payable pro rata among the Junior Lenders on the date of the Junior
Loan Agreement and on the first and second anniversaries thereof. The Junior Lenders included Frost Gamma Investments Trust ($200,000),
Mark E. Andrews, III ($50,000) and an affiliate of Richard J. Lampen ($50,000).
In September 2014, in connection with the
amendment to the Keltic Facility described above, we used proceeds from the Keltic Facility to repay the $1.25 million principal
amount outstanding to the Junior Loans.
In December 2009, Gosling-Castle Partners,
Inc., a 60% owned subsidiary, 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 €0.4 million or $0.5 million (translated at the September 30, 2014 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%.
Liquidity Discussion
As of September 30, 2014, we had shareholders’
equity of $20.2 million as compared to $19.9 million at March 31, 2014. This increase is primarily due to the net issuance
of $1.2 million of Common Stock under the Equity Distribution Agreement (the "Distribution Agreement") with Barrington
Research Associates, Inc. and the exercise of $0.6 million of our 2011 Warrants, partially offset by our total comprehensive loss
for the six months ended September 30, 2014.
We had working capital of $22.4 million
at September 30, 2014 as compared to $19.1 million at March 31, 2014. This increase is primarily due to a $6.8 million increase
in inventory and a $0.1 million increase in prepaid expenses, partially offset by a $2.4 million decrease in accounts receivable
and a net $1.1 million increase in accounts payable, accrued expenses and due to related parties.
As of September 30, 2014, we had cash and
cash equivalents of approximately $1.4 million, as compared to $0.9 million as of March 31, 2014. This increase is primarily attributable
to the equity issued and debt used, partially offset by the funding of our operations and working capital needs for the six months
ended September 30, 2014. At September 30, 2014, 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 significant levels of 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 a plan to support
the growth of existing brands through sales and marketing initiatives that we expect will generate cash flows from operations in
the next few years. As part of this plan, 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 bourbon to meet growing demand. While we are seeking
solutions to our long-term bourbon supply needs, we are required to purchase and hold several years’ worth of aged bourbon
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 are also seeking additional brands and
agency relationships to leverage our existing distribution platform. We intend to finance our 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 seek ways to control expenses,
improve routes to market and contain production costs to improve cash flows.
As of September 30, 2014, we had borrowed
$6.9 million of the $12.0 million available under the Keltic Facility, leaving $5.1 million in then potential availability for
working capital needs. As of the date of this report, we had borrowed $8.8 million of the $12.0 million available under the Keltic
Facility, leaving $3.2 million in potential availability for working capital needs. We believe our current cash and working capital
and the availability under the Keltic 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 September 2015.
Cash flows
The following table summarizes our primary
sources and uses of cash during the periods presented:
| |
Six months ended September 30, | |
| |
2014 | | |
2013 | |
| |
(in thousands) | |
Net cash provided by (used in): | |
| | | |
| | |
Operating activities | |
$ | (4,579 | ) | |
$ | (2,071 | ) |
Investing activities | |
| (243 | ) | |
| (57 | ) |
Financing activities | |
| 5,296 | | |
| 1,837 | |
| |
| | | |
| | |
Effect of foreign currency translation | |
| (1 | ) | |
| 3 | |
| |
| | | |
| | |
Net increase (decrease) in cash and cash equivalents | |
$ | 473 | | |
$ | (288 | ) |
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 operating losses, driven chiefly by the costs in maintaining our distribution system and our sales and marketing activities.
We have also utilized cash to fund our inventories. In general, these cash outlays for inventories are only partially offset by
increases in our accounts payable to our suppliers.
On average, the production cycle for our
owned brands is up to three months from the time we obtain the distilled spirits and other materials needed to bottle and package
our products to the time we receive products available for sale, in part due to the international nature of our business. We do
not produce Gosling’s rums, Pallini liqueurs, Tierras tequila or Gozio amaretto. Instead, we receive the finished product
directly from the owners of such brands. From the time we have products available for sale, an additional two to three months may
be required before we sell our inventory and collect payment from customers. Further, our inventory at September 30, 2014 included
significant additional stores of aged bourbon purchased in advance of forecasted production requirements. We expect to reduce the
aged bourbon in the normal course of future sales, generating positive cash flows in future periods.
During the six months ended September
30, 2014, net cash used in operating activities was $4.6 million, consisting primarily of a $7.3 million increase in
inventory, a net loss of $2.1 million, a $0.2 million increase in other assets, a $0.1 million increase in prepaid expenses
and $0.4 million in income tax expense, net. These uses of cash were partially offset by a $2.5 million decrease in accounts
receivable, stock based compensation expense of $0.4 million, and depreciation and amortization expense of $0.4 million.
During the six months ended September 30,
2013, net cash used in operating activities was $2.1 million, consisting primarily of a net loss of $5.2 million, a $0.7 million
increase in accounts receivable, a $0.5 million decrease in accounts payable and accrued expenses, a $0.2 million increase in prepaid
expenses and a $0.2 million increase in due from affiliates. These uses of cash were partially offset by a change in fair value
of warrant liability of $4.0 million, stock based compensation expense of $0.2 million and depreciation and amortization expense
of $0.4 million.
Investing Activities. Net
cash used in investing activities was $0.2 million for the six months ended September 30, 2014, representing $0.2 million used
in the acquisition of fixed and intangible assets.
Net cash used in investing activities
was $0.06 million for the six months ended September 30, 2013, representing $0.1 million used in the acquisition of fixed and
intangible assets and $6,000 in payments under contingent consideration agreements, partially offset by $0.06 million from a
change in restricted cash.
Financing activities.
Net cash provided by financing activities for the six months ended September 30, 2014 was $5.3 million, consisting of $5.0
million in net proceeds from the Keltic Facility, $1.2 million in net proceeds from the issuance of Common Stock pursuant to
the Distribution Agreement, $0.6 million in proceeds from the exercise of 2011 Warrants, $0.1 million in proceeds from the
foreign revolving credit facilities and $0.1 million in proceeds from the exercise of stock options, partially offset by the
$1.25 million paid on the Junior Loan and the $0.4 million paid on the Bourbon Term Loan.
Net cash used in financing activities for
the six months ended September 30, 2013 was $1.8 million, consisting of $1.25 million from issuance of the Junior Notes, $0.3 million
in proceeds from the exercise of June 2011 Warrants, $0.2 million drawn on the Keltic Facility and $0.1 million drawn on the foreign
revolving credit facilities, partially offset by the $0.06 million paid on the Bourbon Term Loan.
Recent accounting standards issued and adopted.
We discuss recently issued and adopted
accounting standards in the “Accounting standards adopted” and “Recent accounting pronouncements” sections
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 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”, “expects”, “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, 2014, as amended, and as follows:
|
• |
recent 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; |
|
• |
the possibility that we cannot secure and maintain listings in control states, which could cause the sales of our products to decrease significantly; |
|
• |
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; |
|
• |
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 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; |
|
• |
an impairment in the carrying value of our goodwill or other acquired intangible assets could negatively affect our operating results and shareholders’ equity; |
|
• |
changes in consumer preferences and trends could adversely affect demand for our products; |
|
• |
there is substantial competition in our industry and the many factors that may prevent us from competing successfully; |
|
• |
adverse changes in public opinion about alcohol could reduce demand for our products; |
|
• |
class action or other litigation relating to alcohol misuse or abuse could adversely affect our business; and |
|
• |
adverse regulatory decisions and legal, regulatory or tax changes could limit our business activities, increase our operating costs and reduce our margins. |
We assume no obligation to publicly update
or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from
those anticipated in, or implied by, these forward-looking statements, even if new information becomes available in the future.
Item 4. Controls and Procedures
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under
the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act
of 1934, as amended, is accumulated and communicated to our management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding disclosure.
Under the supervision and with the participation
of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a—15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended) as of the end of the period covered by this report, and, based on that evaluation, our principal executive
officer and principal financial officer have concluded that these controls and procedures are effective as of such date.
Changes in Internal Control over Financial
Reporting
There were no changes in our internal control
over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 under
the Securities Exchange Act of 1934, as amended, that occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please see Note 12 D. to our unaudited
condensed consolidated financial statements elsewhere in this Quarterly Report on Form 10-Q.
Item 6. Exhibits
Exhibit |
|
|
Number |
|
Description |
|
|
|
4.1 |
|
Amended and Restated Loan and Security Agreement, dated
as of September 22, 2014, by and among ACF FinCo I LP, the Company and Castle Brands (USA) Corp. (incorporated by reference to
Exhibit 4.1 to our current report on Form 8-K filed with the SEC on September 24, 2014). |
|
|
|
4.2 |
|
Amended and Restated Term Note, dated as of September 22,
2014, in favor of ACF FinCo I LP (incorporated by reference to Exhibit 4.2 to our current report on Form 8-K filed with
the SEC on September 24, 2014). |
|
|
|
4.3 |
|
Amended and Restated Revolving Credit Note, dated as of
September 22, 2014, in favor of ACF FinCo I LP (incorporated by reference to Exhibit 4.3 to our current report on Form
8-K filed with the SEC on September 24, 2014). |
|
|
|
10.1 |
|
Reaffirmation Agreement, dated as of September 22, 2014,
by and among the Company, Castle Brands (USA) Corp., the officers signatory thereto, certain term loan participants
and certain junior lenders to the Company (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed
with the SEC on September 24, 2014). |
|
|
|
31.1 * |
|
Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 * |
|
Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1 * |
|
Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS* |
|
XBRL Instance Document. |
|
|
|
101.SCH* |
|
XBRL Taxonomy Extension Schema Document. |
|
|
|
101.CAL* |
|
XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
|
101.DEF* |
|
XBRL Taxonomy Extension Definition Linkbase Document. |
|
|
|
101.LAB* |
|
XBRL Taxonomy Extension Label Linkbase Document. |
|
|
|
101.PRE* |
|
XBRL Taxonomy Extension Presentation Linkbase Document. |
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
CASTLE BRANDS INC. |
|
|
|
|
By: |
/s/ Alfred J. Small |
|
|
Alfred J. Small |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer and |
|
|
Principal Accounting Officer) |
November 14, 2014
EXHIBIT INDEX
Exhibit |
|
|
Number |
|
Description |
|
|
|
4.1 |
|
Amended and Restated Loan and Security Agreement, dated as of
September 22, 2014, by and among ACF FinCo I LP, the Company and Castle Brands (USA) Corp. (incorporated by reference to Exhibit
4.1 to our current report on Form 8-K filed
with the SEC on September 24, 2014). |
|
|
|
4.2 |
|
Amended and Restated Term Note, dated as of September 22, 2014,
in favor of ACF FinCo I LP (incorporated by reference
to Exhibit 4.2 to our current report on Form 8-K filed with
the SEC on September 24, 2014). |
|
|
|
4.3 |
|
Amended and Restated Revolving Credit Note, dated as of September
22, 2014, in favor of ACF FinCo I LP (incorporated
by reference to Exhibit 4.3 to our current report on Form 8-K
filed with the SEC on September 24, 2014). |
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10.1 |
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Reaffirmation Agreement, dated as of September 22, 2014, by
and among the Company, Castle Brands (USA) Corp., the
officers signatory thereto, certain term loan participants and
certain junior lenders to the Company (incorporated by reference
to Exhibit 10.1 to our current report on Form 8-K filed with
the SEC on September 24, 2014).
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31.1 * |
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Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 * |
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Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 * |
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Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS* |
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XBRL Instance Document. |
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101.SCH* |
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XBRL Taxonomy Extension Schema Document. |
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101.CAL* |
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XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF* |
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XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB* |
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XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE* |
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XBRL Taxonomy Extension Presentation Linkbase Document. |
* Filed herewith
EXHIBIT 31.1
SECTION 302 CERTIFICATION
I, Richard J. Lampen, certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Castle Brands Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this
report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 14, 2014
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/s/ Richard J. Lampen |
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Richard J. Lampen |
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Chief Executive Officer |
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(Principal Executive Officer) |
EXHIBIT 31.2
SECTION 302 CERTIFICATION
I, Alfred J. Small, certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Castle Brands Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report
any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 14, 2014
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/s/ Alfred J. Small |
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Alfred J. Small |
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Chief Financial Officer |
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(Principal Financial Officer and Principal Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
In accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, Richard J. Lampen, the President and Chief Executive Officer of Castle Brands Inc. (the “Registrant”),
and Alfred J. Small, Chief Financial Officer of the Registrant, each hereby certifies that:
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1. |
The Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2014 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and |
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2. |
The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
Date: November 14, 2014
/s/ Richard J. Lampen |
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/s/ Alfred J. Small |
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Richard J. Lampen |
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Alfred J. Small |
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Chief Executive Officer |
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Chief Financial Officer |
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(Principal Executive Officer) |
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(Principal Financial Officer and Principal |
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Accounting Officer) |
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Castle Brands (AMEX:ROX)
過去 株価チャート
から 6 2024 まで 7 2024
Castle Brands (AMEX:ROX)
過去 株価チャート
から 7 2023 まで 7 2024