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 June 30, 2015
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 |
|
x Accelerated filer |
¨ Non-accelerated filer
(Do not check if a smaller reporting company) |
|
¨ 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 159,829,105 shares of $.01 par
value common stock outstanding at August 6, 2015.
CASTLE BRANDS INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2015
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial
Statements
CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
| |
June 30, 2015 | | |
March 31, 2015 | |
| |
(unaudited) | | |
| |
ASSETS | |
| | | |
| | |
Current Assets | |
| | | |
| | |
Cash and cash equivalents | |
$ | 2,307,788 | | |
$ | 1,191,603 | |
Accounts receivable — net of allowance for doubtful accounts of $191,108 and $154,434 at June 30 and March 31, 2015, respectively | |
| 9,529,114 | | |
| 10,550,990 | |
Due from shareholders and affiliates | |
| — | | |
| 138,750 | |
Inventories— net of allowance for obsolete and slow moving inventory of $329,384 and $266,473 at June 30 and March 31, 2015, respectively | |
| 19,967,481 | | |
| 21,068,241 | |
Deferred tax asset | |
| 54,000 | | |
| 37,000 | |
Prepaid expenses and other current assets | |
| 1,600,643 | | |
| 1,492,806 | |
| |
| | | |
| | |
Total Current Assets | |
| 33,459,026 | | |
| 34,479,390 | |
| |
| | | |
| | |
Equipment — net | |
| 715,574 | | |
| 665,373 | |
| |
| | | |
| | |
Intangible assets — net of accumulated amortization of $6,877,800 and $6,713,774 at June 30 and March 31, 2015, respectively | |
| 7,536,340 | | |
| 7,683,227 | |
Goodwill | |
| 496,226 | | |
| 496,226 | |
Investment in non-consolidated affiliate, at equity | |
| 500,000 | | |
| — | |
Restricted cash | |
| 336,981 | | |
| 329,471 | |
Other assets | |
| 347,274 | | |
| 385,253 | |
| |
| | | |
| | |
Total Assets | |
$ | 43,391,421 | | |
$ | 44,038,940 | |
| |
| | | |
| | |
LIABILITIES AND EQUITY | |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Foreign revolving credit facility | |
$ | — | | |
$ | 34,141 | |
Accounts payable | |
| 5,369,164 | | |
| 5,753,617 | |
Accrued expenses | |
| 1,577,583 | | |
| 1,067,460 | |
Due to shareholders and affiliates | |
| 1,835,168 | | |
| 1,963,883 | |
| |
| | | |
| | |
Total Current Liabilities | |
| 8,781,915 | | |
| 8,819,101 | |
| |
| | | |
| | |
Long-Term Liabilities | |
| | | |
| | |
Credit facility | |
| 7,643,627 | | |
| 10,123,544 | |
Bourbon term loan (including $179,063 of related-party participation at March 31, 2015) | |
| — | | |
| 744,900 | |
Notes payable – 5% Convertible notes (including $1,100,000 of related party participation at June 30 and March 31, 2015) | |
| 1,675,000 | | |
| 1,675,000 | |
Notes payable – GCP Note | |
| 214,225 | | |
| 211,580 | |
Deferred tax liability | |
| 1,333,114 | | |
| 1,370,152 | |
| |
| | | |
| | |
Total Liabilities | |
| 19,647,881 | | |
| 22,944,277 | |
| |
| | | |
| | |
Commitments and Contingencies (Note 12) | |
| | | |
| | |
| |
| | | |
| | |
Equity | |
| | | |
| | |
Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued and outstanding at June 30 and March 31, 2015 | |
| — | | |
| — | |
Common stock, $.01 par value, 300,000,000 shares authorized at June 30 and March 31, 2015, 159,356,940 and 157,187,658 shares issued and outstanding at June 30 and March 31, 2015, respectively | |
| 1,593,570 | | |
| 1,571,877 | |
Additional paid-in capital | |
| 166,057,219 | | |
| 162,626,893 | |
Accumulated deficit | |
| (144,485,373 | ) | |
| (143,361,711 | ) |
Accumulated other comprehensive loss | |
| (2,238,923 | ) | |
| (2,285,925 | ) |
| |
| | | |
| | |
Total controlling shareholders’ equity | |
| 20,926,493 | | |
| 18,551,134 | |
| |
| | | |
| | |
Noncontrolling interests | |
| 2,817,047 | | |
| 2,543,529 | |
| |
| | | |
| | |
Total equity | |
| 23,743,540 | | |
| 21,094,663 | |
| |
| | | |
| | |
Total Liabilities and Equity | |
$ | 43,391,421 | | |
$ | 44,038,940 | |
See accompanying notes to the unaudited condensed
consolidated financial statements.
CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
| |
Three months ended June 30, | |
| |
2015 | | |
2014 | |
Sales, net* | |
$ | 16,513,079 | | |
$ | 11,982,199 | |
Cost of sales* | |
| 9,885,765 | | |
| 7,435,545 | |
| |
| | | |
| | |
Gross profit | |
| 6,627,314 | | |
| 4,546,654 | |
| |
| | | |
| | |
Selling expense | |
| 4,351,945 | | |
| 3,239,326 | |
General and administrative expense | |
| 2,066,091 | | |
| 1,610,616 | |
Depreciation and amortization | |
| 228,256 | | |
| 216,098 | |
| |
| | | |
| | |
Loss from operations | |
| (18,978 | ) | |
| (519,386 | ) |
| |
| | | |
| | |
Other (expense) income, net | |
| (821 | ) | |
| 16,942 | |
Foreign exchange loss | |
| (49,219 | ) | |
| (236,447 | ) |
Interest expense, net | |
| (257,164 | ) | |
| (288,642 | ) |
Income tax expense, net | |
| (523,962 | ) | |
| (162,962 | ) |
| |
| | | |
| | |
Net loss | |
| (850,144 | ) | |
| (1,190,495 | ) |
Net income attributable to noncontrolling interests | |
| (273,518 | ) | |
| (305,336 | ) |
| |
| | | |
| | |
Net loss attributable to common shareholders | |
$ | (1,123,662 | ) | |
$ | (1,495,831 | ) |
| |
| | | |
| | |
Net loss per common share, basic and diluted, attributable to common shareholders | |
$ | (0.01 | ) | |
$ | (0.01 | ) |
| |
| | | |
| | |
Weighted average shares used in computation, basic and diluted, attributable to common shareholders | |
| 157,535,571 | | |
| 153,929,182 | |
* Sales, net and Cost of sales include excise taxes of $1,768,980
and $1,485,515 for the three months ended June 30, 2015 and 2014, 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 June 30, | |
| |
2015 | | |
2014 | |
Net loss | |
$ | (850,144 | ) | |
$ | (1,190,495 | ) |
| |
| | | |
| | |
Other comprehensive income (loss): | |
| | | |
| | |
Foreign currency translation adjustment | |
| 47,002 | | |
| (20,677 | ) |
| |
| | | |
| | |
Total other comprehensive income (loss): | |
| 47,002 | | |
| (20,677 | ) |
| |
| | | |
| | |
Comprehensive loss | |
$ | (803,142 | ) | |
$ | (1,211,172 | ) |
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, 2015 | |
| 157,187,658 | | |
$ | 1,571,877 | | |
$ | 162,626,893 | | |
$ | (143,361,711 | ) | |
$ | (2,285,925 | ) | |
$ | 2,543,529 | | |
$ | 21,094,663 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| | | |
| | | |
| | | |
| (1,123,662 | ) | |
| | | |
| 273,518 | | |
| (850,144 | ) |
Foreign currency translation adjustment | |
| | | |
| | | |
| | | |
| | | |
| 47,002 | | |
| | | |
| 47,002 | |
Issuance of common stock, net of issuance costs | |
| 2,119,282 | | |
| 21,193 | | |
| 3,165,636 | | |
| | | |
| | | |
| | | |
| 3,186,829 | |
Exercise of common stock options | |
| 50,000 | | |
| 500 | | |
| 24,750 | | |
| | | |
| | | |
| | | |
| 25,250 | |
Stock-based compensation | |
| | | |
| | | |
| 239,940 | | |
| | | |
| | | |
| | | |
| 239,940 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
BALANCE, JUNE 30, 2015 | |
| 159,356,940 | | |
$ | 1,593,570 | | |
$ | 166,057,219 | | |
$ | (144,485,373 | ) | |
$ | (2,238,923 | ) | |
$ | 2,817,047 | | |
$ | 23,743,540 | |
See accompanying notes to the unaudited condensed
consolidated financial statements.
CASTLE BRANDS INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash
Flows
(Unaudited)
| |
Three months ended June 30, | |
| |
2015 | | |
2014 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net loss | |
$ | (850,144 | ) | |
$ | (1,190,495 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 228,256 | | |
| 216,098 | |
Provision for doubtful accounts | |
| 36,674 | | |
| (92,165 | ) |
Amortization of deferred financing costs | |
| 43,459 | | |
| 48,050 | |
Deferred income tax (benefit) expense, net | |
| (54,038 | ) | |
| 162,962 | |
Effect of changes in foreign exchange | |
| 49,219 | | |
| 236,447 | |
Stock-based compensation expense | |
| 239,940 | | |
| 191,456 | |
Provision for obsolete inventories | |
| 100,000 | | |
| — | |
Changes in operations, assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 987,973 | | |
| 1,780,782 | |
Due from affiliates | |
| 138,750 | | |
| (26,555 | ) |
Inventory | |
| 982,293 | | |
| (5,150,717 | ) |
Prepaid expenses and supplies | |
| (107,240 | ) | |
| (345,426 | ) |
Other assets | |
| (5,480 | ) | |
| (5,813 | ) |
Accounts payable and accrued expenses | |
| 122,497 | | |
| (1,101,226 | ) |
Accrued interest | |
| 2,645 | | |
| 2,645 | |
Due to related parties | |
| (128,716 | ) | |
| 57,438 | |
| |
| | | |
| | |
Total adjustments | |
| 2,636,232 | | |
| (4,026,024 | ) |
| |
| | | |
| | |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | |
| 1,786,088 | | |
| (5,216,519 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Purchase of equipment | |
| (105,667 | ) | |
| (76,660 | ) |
Acquisition of intangible assets | |
| (17,138 | ) | |
| (5,000 | ) |
Investment in non-consolidated affiliate, at equity | |
| (500,000 | ) | |
| — | |
Change in restricted cash | |
| (92 | ) | |
| (282 | ) |
| |
| | | |
| | |
NET CASH USED IN INVESTING ACTIVITIES | |
| (622,897 | ) | |
| (81,942 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Net (payments on) proceeds from credit facility | |
| (2,479,917 | ) | |
| 3,461,388 | |
Payments on Bourbon term loan | |
| (744,900 | ) | |
| (261,300 | ) |
Net (payments on) proceeds from foreign revolving credit facility | |
| (34,795 | ) | |
| 106,347 | |
Proceeds from issuance of common stock | |
| 3,251,989 | | |
| 1,231,241 | |
Payments for costs of stock issuance | |
| (65,160 | ) | |
| (38,532 | ) |
Proceeds from exercise of common stock warrants | |
| — | | |
| 598,715 | |
Proceeds from exercise of common stock options | |
| 25,250 | | |
| 76,707 | |
| |
| | | |
| | |
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | |
| (47,533 | ) | |
| 5,174,566 | |
| |
| | | |
| | |
EFFECTS OF FOREIGN CURRENCY TRANSLATION | |
| 527 | | |
| (170 | ) |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | |
| 1,116,185 | | |
| (124,065 | ) |
CASH AND CASH EQUIVALENTS — BEGINNING | |
| 1,191,603 | | |
| 908,501 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS — ENDING | |
$ | 2,307,788 | | |
$ | 784,436 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURES: | |
| | | |
| | |
Schedule of non-cash investing and financing activities: | |
| | | |
| | |
Surrender of common stock in connection with exercise of common stock warrant | |
$ | — | | |
$ | 31,250 | |
| |
| | | |
| | |
Interest paid | |
$ | 224,093 | | |
$ | 219,765 | |
Income taxes paid | |
$ | 1,079,270 | | |
$ | 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,
2015 is derived from the March 31, 2015 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, 2015 included in the Company’s annual report on Form 10-K for the year ended March 31,
2015, as amended (“2015 Form 10-K”). Please refer to the notes to the audited consolidated financial statements included
in the 2015 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 equity investments 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 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 or other relevant jurisdiction and then transferred out of “bond.” Excise taxes and duty are recorded to inventory as a component of the cost of the underlying finished goods. When the underlying products are sold “ex warehouse”, the sales price reflects the taxes paid and the inventoried excise taxes and duties are charged to cost of sales. |
|
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 for the three months
ended June 30, 2015 and 2014 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 months ended June 30, 2015, the Company recognized ($523,962)
of income tax expense, net and for the three months ended June 30, 2014, the Company recognized ($162,962) of income tax expense,
net.
|
|
J. |
Recent accounting
pronouncements — In April 2015, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt
Issuance Costs, which requires that debt issuance costs related to a recognized debt liability
be presented in the balance sheet as a direct deduction from the carrying amount of that debt
liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance
costs are not affected. Upon adoption, the Company will apply the new guidance on a retrospective
basis and adjust the balance sheet of each individual period presented to reflect the
period-specific effects of applying the new guidance. This guidance is effective for the Company beginning
April 1, 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 and
financial condition.
In July 2015, the FASB issued ASU 2015-11, Inventory
(Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”) which changes the measurement principle for
inventory from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 defines net
realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for periods beginning
after December 15, 2016, with early adoption permitted. The Company is currently evaluating the new guidance to determine
the impact the adoption of this guidance will have on the Company’s results of operations, cash flows and financial condition.
In 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
and financial condition.
The Company does not believe that
any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the
accompanying financial statements. |
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
NOTE 2 — BASIC AND DILUTED NET LOSS PER
COMMON SHARE
Basic net loss per common share is computed by dividing net loss
by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed giving
effect to all potentially dilutive common shares that were outstanding during the period that are not anti-dilutive. Potentially
dilutive common shares consist of incremental shares issuable upon exercise of stock options and warrants or conversion of convertible
notes outstanding. In computing diluted net loss per share for the three months ended June 30, 2015 and 2014, 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.
Potential common shares not included in calculating diluted net
loss per share are as follows:
| |
Three months ended June 30, | |
| |
2015 | | |
2014 | |
Stock options | |
| 14,440,688 | | |
| 13,242,974 | |
Warrants to purchase common stock | |
| 120,000 | | |
| 120,000 | |
5% Convertible notes | |
| 1,861,111 | | |
| 2,361,111 | |
| |
| | | |
| | |
Total | |
| 16,421,799 | | |
| 15,724,085 | |
NOTE 3 — INVENTORIES
| |
June 30, | | |
March 31, | |
| |
2015 | | |
2015 | |
Raw materials | |
$ | 8,363,766 | | |
$ | 9,250,893 | |
Finished goods – net | |
| 11,603,715 | | |
| 11,817,348 | |
| |
| | | |
| | |
Total | |
$ | 19,967,481 | | |
$ | 21,068,241 | |
As of June 30 and March 31, 2015, 10% of
raw materials and 4% of finished goods were located outside of the United States.
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 1.I, GCP does not
file consolidated tax returns with the Company. For the three months ended June 30, 2015 and 2014, GCP recognized ($523,962)
and ($162,962) of income tax expense, net on GCP’s estimated stand-alone taxable income, respectively. The Company
allocated 40% of this expense, or ($209,585) and ($65,185), to non-controlling interest for the three months ended June 30, 2015
and 2014, respectively.
Investment in Copperhead Distillery Company
In June 2015, CB-USA purchased 20% of
Copperhead Distillery Company (“Copperhead”) for $500,000. Copperhead owns and operates the Kentucky Artisan
Distillery. The investment is part of an agreement to build a new warehouse to store Jefferson’s bourbons, provide
distilling capabilities using special mash-bills made from locally grown grains and create a visitor center and store to
enhance the consumer experience for the Jefferson’s brand. The investment will be used for the construction of a new
warehouse in Crestwood, Kentucky dedicated exclusively to the storage of Jefferson’s whiskies. The Company has
accounted for this investment under the equity method of accounting. This investment balance was $500,000 at June 30,
2015.
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
NOTE 5 — GOODWILL AND INTANGIBLE ASSETS
The carrying amount of goodwill was $496,226 at each of June 30
and March 31, 2015.
Intangible assets consist of the following:
| |
June 30, 2015 | | |
March 31, 2015 | |
Definite life brands | |
$ | 170,000 | | |
$ | 170,000 | |
Trademarks | |
| 631,693 | | |
| 631,693 | |
Rights | |
| 8,271,555 | | |
| 8,271,555 | |
Product development | |
| 178,460 | | |
| 161,321 | |
Patents | |
| 994,000 | | |
| 994,000 | |
Other | |
| 55,460 | | |
| 55,460 | |
| |
| | | |
| | |
| |
| 10,301,168 | | |
| 10,284,029 | |
Less: accumulated amortization | |
| 6,877,800 | | |
| 6,713,774 | |
| |
| | | |
| | |
Net | |
| 3,423,368 | | |
| 3,570,255 | |
Other identifiable intangible assets — indefinite lived* | |
| 4,112,972 | | |
| 4,112,972 | |
| |
| | | |
| | |
| |
$ | 7,536,340 | | |
$ | 7,683,227 | |
* Other identifiable intangible assets —
indefinite lived consists of product formulations and the Company’s relationships with its distillers.
Accumulated amortization consists of the following:
| |
June 30, 2015 | | |
March 31, 2015 | |
Definite life brands | |
$ | 170,000 | | |
$ | 170,000 | |
Trademarks | |
| 304,817 | | |
| 295,956 | |
Rights | |
| 5,651,148 | | |
| 5,513,162 | |
Product development | |
| 24,615 | | |
| 24,002 | |
Patents | |
| 727,220 | | |
| 710,654 | |
Other | |
| - | | |
| - | |
| |
| | | |
| | |
Accumulated amortization | |
$ | 6,877,800 | | |
$ | 6,713,774 | |
NOTE 6 —
RESTRICTED CASH
At June 30 and March 31, 2015, the Company had €303,740
or $336,981 (translated at the June 30, 2015 exchange rate) and €303,657 or $329,471 (translated at the March 31, 2015
exchange rate), respectively, of cash restricted from withdrawal and held by a bank in Ireland as collateral for overdraft coverage,
creditors’ insurance, customs and excise guaranty and a revolving credit facility as described in Note 7A below.
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
NOTE 7 — NOTES PAYABLE
| |
June 30, 2015 | | |
March 31, 2015 | |
Notes payable consist of the following: | |
| | | |
| | |
Foreign revolving credit facilities (A) | |
$ | — | | |
$ | 34,141 | |
Note payable – GCP note (B) | |
| 214,225 | | |
| 211,580 | |
Credit facility (C) | |
| 7,643,627 | | |
| 10,123,544 | |
Bourbon term loan (D) | |
| — | | |
| 744,900 | |
5% Convertible notes (E) | |
| 1,675,000 | | |
| 1,675,000 | |
| |
| | | |
| | |
Total | |
$ | 9,532,852 | | |
$ | 12,789,165 | |
|
A. |
The Company has arranged various facilities aggregating €303,740 or $336,981 (translated at the June 30, 2015 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 €0 and €31,466 or $34,141 (translated at the March 31, 2015 exchange rate), at June 30 and March 31, 2015, 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, 2015, $10,579 of accrued interest was converted to amounts due to affiliates. At June 30, 2015, $214,225, consisting of $211,580 of principal and $2,645 of accrued interest, due on the GCP Note is included in long-term liabilities. At March 31, 2015, $211,580 of principal due on the GCP Note is included in long-term liabilities. |
|
C. |
In August 2011, the Company and CB-USA entered into a loan agreement
with Keltic Financial Partners II, LP (“Keltic”), which, as amended, provides for availability (subject to certain
terms and conditions) of a facility of up to $12.0 million (the “Credit Facility”) for the purpose of providing the
Company with working capital.
In September 2014, the Company and CB-USA entered into an Amended
and Restated Loan and Security Agreement (the “Amended Agreement”) with ACF FinCo I LP (“ACF”), as successor
in interest to Keltic, in order to amend certain terms of the Credit Facility and the Bourbon Term Loan (defined below). Among
other changes, the Amended Agreement modified certain aspects of the existing Credit Facility, including increasing the maximum
amount of the Credit Facility from $8,000,000 to $12,000,000 and increasing the inventory sub-limit from $4,000,000 to $6,000,000.
In addition, the term of the Credit Facility was extended from December 31, 2016 to July 31, 2019. The Credit Facility interest
rate 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) 6.00%. As of June 30, 2015, the Credit Facility interest rate was 6.00%. The monthly facility fee was reduced from 1.00%
per annum of the maximum Credit Facility amount to 0.75%. In addition, the Amended Agreement contains EBITDA targets 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 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 former director
of the Company, and Vector Group Ltd., a more than 5% shareholder of the Company, of which Richard Lampen is an executive officer,
Henry Beinstein, a director of the Company, is a director and Phillip Frost M.D. is a principal shareholder, which, among other
things, reaffirms the existing Validity and Support Agreements by and among each officer, the Company, CB-USA and ACF, as successor-in-interest
to Keltic; (ii) an Amended and Restated Term Note (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. |
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
|
|
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 Credit Facility, provided that the Borrower has a sufficient
borrowing base (as defined under the Amended Agreement). For the three months ended June 30, 2015 and 2014, the Company paid interest
at 6.0% and 6.5%, respectively. Interest is payable monthly in arrears, on the first day of every month on the average daily unpaid
principal amount of the Credit Facility. After the occurrence and during the continuance of any "Default" or "Event
of Default" (as defined under the Amended Agreement), the Borrower is required to pay interest at a rate that is 3.25% per
annum above the then applicable Credit Facility interest rate. There have been no Events of Default under the Credit Facility. ACF also receives a collateral management fee of $1,000 per month (increased to $2,000
after the occurrence of and during the continuance of an Event of Default). 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 June 30, 2015, the Company was in compliance, in
all respects, with the covenants under the Amended Agreement. At June 30 and March 31, 2015, $7,643,627 and $10,123,544, respectively,
due on the Credit Facility was included in long-term liabilities. |
|
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. 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 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%. As of March 31, 2015, the Company paid interest of 7.5%. The balance on the Bourbon Term Loan included in notes
payable totaled $744,900 at March 31, 2015. In May 2015, the Bourbon Term Loan was paid in full in accordance with its terms. |
|
|
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 amount 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),
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 received interest at the rate of 11% per annum. Neither the Company
nor CB-USA was a party to the Participation Agreement. However, the Borrower was party to a fee letter with the junior participants (including the related party junior participants) pursuant to which the Borrower was obligated to pay
the junior participants an aggregate commitment fee of $45,000 in three equal annual installments of $15,000. |
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
|
E. |
In October 2013, the Company entered into a 5% Convertible Subordinated
Note Purchase Agreement (the "Note Purchase Agreement") with the purchasers party thereto, under which the Company issued
an aggregate initial principal amount of $2,125,000 of unsecured subordinated notes (the "Convertible Notes"). The Convertible
Notes bear interest at a rate of 5% per annum, payable quarterly, until their maturity date of December 15, 2018. The Convertible
Notes, and accrued but unpaid interest thereon, are convertible in whole or in part from time to time at the option of the holders
thereof into shares of the Company’s common stock at a conversion price of $0.90 per share (the "Conversion Price").
The Convertible Notes may be prepaid in whole or in part at any time without penalty or premium, but with payment of accrued interest
to the date of prepayment. The Convertible Notes contain customary events of default, which, if uncured, entitle each note holder
to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the Convertible Notes.
The purchasers of the Convertible Notes included related parties
of the Company, including an affiliate of Dr. Phillip Frost ($500,000), Mark E. Andrews, III ($50,000), an affiliate of Richard
J. Lampen ($50,000), an affiliate of Glenn Halpryn ($200,000), a director, Dennis Scholl ($100,000), a former director, and Vector
Group Ltd. ($200,000).
The Company may forcibly convert all or any part of the Convertible
Notes and all accrued but unpaid interest thereon if (i) the average daily volume of the Company’s common stock (as reported
on the principal market or exchange on which the common stock is listed or quoted for trading) exceeds $50,000 per trading day
and (ii) the volume weighted average price of the common stock for at least twenty (20) trading days during any thirty (30) consecutive
trading day period exceeds 250% of the then-current Conversion Price. Any forced conversion will be applied ratably to the holders
of all Convertible Notes issued pursuant to the Note Purchase Agreement based on each holder’s then-current note holdings.
In connection with the Note Purchase Agreement, each purchaser
of the Convertible Notes was required to execute a joinder to the subordination agreement, by and among Keltic and certain other
junior lenders to the Company; the Company is not a party to the Subordination Agreement.
At each of June 30 and March 31, 2015, $1,675,000 of principal
due on the Convertible Notes was included in long-term liabilities, respectively. |
NOTE 8 — EQUITY
Equity distribution agreement - In November 2014, the
Company entered into an Equity Distribution Agreement (the "2014 Distribution Agreement") with Barrington Research Associates,
Inc. ("Barrington"), as sales agent, under which the Company may issue and sell over time and from time to time, to or
through Barrington, shares (the "Shares") of its common stock having a gross sales price of up to $10,000,000.
Sales of the Shares pursuant to the 2014 Distribution Agreement,
if any, may 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 of the Shares
may be sold in privately negotiated transactions. Under the 2014 Distribution Agreement, Barrington will be 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 2014
Distribution Agreement. Also, the Company will reimburse Barrington for certain expenses incurred in connection with the matters
contemplated by the 2014 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 2014 Distribution Agreement.
In the three months ended June 30, 2015, the Company sold 2,119,282
Shares pursuant to the 2014 Distribution Agreement, with total gross proceeds of $3,251,989, before deducting sales agent and offering
expenses of $65,160.
In November 2013, the Company entered into an Equity Distribution
Agreement (the "2013 Distribution Agreement") with Barrington, as sales agent, under which the Company could issue and
sell over time and from time to time, to or through Barrington, Shares of its common stock having a gross sales price of up
to $6,000,000.
In the three months ended June 30, 2014, the Company sold 1,247,343
Shares pursuant to the 2013 Distribution Agreement, with total gross proceeds of $1,231,241, before deducting sales agent and offering
expenses of $38,532.
The 2013 Distribution Agreement expired in August
2014 upon the expiration of the primary portion of the Company’s Registration Statement on Form S-3 under which the
Shares were sold.
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
NOTE 9 — WARRANTS
2011 Warrants exercised – On April 2,
2014, the Company called for cancellation all 1,657,802 unexercised warrants issued in connection with the Company’s
2011 private placement (the “2011 Warrants”) pursuant to the terms of such 2011 Warrants after satisfying
applicable conditions. Holders of the 2011 Warrants had until 6:30 p.m. New York City time on April 21, 2014 to exercise such
2011 Warrants at $0.38 per share in cash. Pursuant to the call for cancellation, holders of all 1,657,802 unexercised
2011 Warrants exercised and received 1,657,802 shares of common stock. The Company received $629,965 in cash upon the
exercise of these warrants.
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 June 30 and March 31, 2015, 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 June 2015, the Company granted to employees, directors and
certain consultants options to purchase an aggregate of 2,502,500 shares of the Company’s common stock at an exercise price
of $1.67 per share under the Company’s 2013 Incentive Compensation Plan. The options, which expire in June 2025, vest
25% on each of the first four anniversaries of the grant date. The Company has valued the options at $2,752,750 using the Black-Scholes
option pricing model.
Stock-based compensation expense for the three months ended
June 30, 2015 and 2014 amounted to $239,940 and $191,456, respectively. At June 30, 2015, total unrecognized compensation cost
amounted to $4,121,329, representing 5,644,750 unvested options. This cost is expected to be recognized over a weighted-average
vesting period of 3.03 years. There were 50,000 options exercised during the three months ended June 30, 2015 and 230,033 options
exercised during the three months ended June 30, 2014. The Company did not recognize any related tax benefit for the three months
ended June 30, 2015 and 2014 from option exercises, as the effects were de minimis.
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, 2016, the Company has contracted to purchase approximately €833,673 or $924,910 (translated at the June 30, 2015 exchange rate) in bulk Irish whiskey. 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, 2016,
the Company has contracted to purchase approximately €343,787 or $381,411 (translated at the June 30, 2015
exchange rate) in bulk Irish whiskey. 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 $1,220 (translated at the June 30, 2015 exchange rate). The Houston, TX lease commenced on April 27, 2015 and extends through June 26, 2018 and provides for monthly payments of $3,440. The Company has also entered into non-cancelable operating leases for certain office equipment. |
|
D. |
As described in Note 7C, in August 2011, the Company
and CB-USA entered into the Credit Facility, as amended in July 2012, March 2013, August 2013, November 2013, August 2014 and
September 2014. |
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
|
E. |
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 has not experienced any losses in such accounts and believes it
is not exposed to any significant credit risk. |
|
B. |
Customers — Sales to one customer, the
Southern Wine and Spirits of America, Inc. family of companies, accounted for approximately 30.0% and 29.3% of the Company’s
revenues for the three months ended June 30, 2015 and 2014, respectively, and approximately 27.1% of accounts receivable at June
30, 2015. |
NOTE 14 — GEOGRAPHIC INFORMATION
The Company operates in one reportable segment — the sale
of premium beverage alcohol. The Company’s product categories are rum, whiskey, liqueurs, vodka, tequila and related non-alcoholic
beverage products. The Company reports its operations in two geographic areas: International and United States.
The consolidated financial statements include revenues and assets
generated in or held in the U.S. and foreign countries. The following table sets forth the amounts and percentage of consolidated
sales, net, consolidated income (loss) from operations, consolidated net income (loss) attributable to controlling interests, consolidated
income tax expense and consolidated assets from the U.S. and foreign countries and consolidated sales, net by category.
| |
Three months ended June 30, | |
| |
2015 | | |
2014 | |
Consolidated Sales, net: | |
| | | |
| | | |
| | | |
| | |
International | |
$ | 2,105,422 | | |
| 12.8 | % | |
$ | 1,578,730 | | |
| 13.2 | % |
United States | |
| 14,407,657 | | |
| 87.2 | % | |
| 10,403,469 | | |
| 86.8 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Consolidated Sales, net | |
$ | 16,513,079 | | |
| 100.0 | % | |
$ | 11,982,199 | | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Consolidated Income (Loss) from Operations: | |
| | | |
| | | |
| | | |
| | |
International | |
$ | 55,023 | | |
| (289.9 | )% | |
$ | (27,017 | ) | |
| 5.2 | % |
United States | |
| (74,001 | ) | |
| 389.9 | % | |
| (492,369 | ) | |
| 94.8 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Consolidated Loss from Operations | |
$ | (18,978 | ) | |
| 100.0 | % | |
$ | (519,386 | ) | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Consolidated Net Income (Loss) Attributable to Controlling Interests: | |
| | | |
| | | |
| | | |
| | |
International | |
$ | 64,876 | | |
| (5.8 | )% | |
$ | (60,633 | ) | |
| 4.1 | % |
United States | |
| (1,188,538 | ) | |
| 105.8 | % | |
| (1,435,198 | ) | |
| 95.9 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Consolidated Net Loss Attributable to Controlling Interests | |
$ | (1,123,662 | ) | |
| 100.0 | % | |
$ | (1,495,831 | ) | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Income tax expense, net: | |
| | | |
| | | |
| | | |
| | |
United States | |
$ | (523,962 | ) | |
| 100.0 | % | |
$ | (162,962 | ) | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Consolidated Sales, net by category: | |
| | | |
| | | |
| | | |
| | |
Rum | |
$ | 4,563,506 | | |
| 27.6 | % | |
$ | 4,292,195 | | |
| 35.8 | % |
Whiskey | |
| 6,191,059 | | |
| 37.6 | % | |
| 3,012,079 | | |
| 25.1 | % |
Liqueurs | |
| 1,824,515 | | |
| 11.0 | % | |
| 1,902,443 | | |
| 15.9 | % |
Vodka | |
| 524,224 | | |
| 3.2 | % | |
| 520,583 | | |
| 4.3 | % |
Tequila | |
| 73,906 | | |
| 0.4 | % | |
| 85,329 | | |
| 0.7 | % |
Related Non-Alcoholic Beverage Products | |
| 3,335,869 | | |
| 20.2 | % | |
| 2,169,570 | | |
| 18.2 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Consolidated Sales, net | |
$ | 16,513,079 | | |
| 100.0 | % | |
$ | 11,982,199 | | |
| 100.0 | % |
| |
As of June 30, 2015 | | |
As of March 31, 2015 | |
Consolidated Assets: | |
| | | |
| | | |
| | | |
| | |
International | |
$ | 2,069,395 | | |
| 4.8 | % | |
| 2,052,583 | | |
| 4.7 | % |
United States | |
| 41,322,026 | | |
| 95.2 | % | |
| 41,986,357 | | |
| 95.3 | % |
| |
| | | |
| | | |
| | | |
| | |
Total Consolidated Assets | |
$ | 43,391,421 | | |
| 100.0 | % | |
| 44,038,940 | | |
| 100.0 | % |
*Includes related non-beverage alcohol
products.
NOTE 15 — SUBSEQUENT
EVENTS
In August 2015, the Company and CB-USA
entered into a First Amendment (the “Loan Agreement Amendment”) to the Amended Agreement. Among other changes, the
Loan Agreement Amendment increases the amount of the Credit Facility from $12,000,000 to $19,000,000, including a sublimit in the
maximum principal amount of $7,000,000 to permit the Company to acquire aged whisky inventory (the “Purchased Inventory Sublimit”)
subject to certain conditions set forth in the Amended Agreement. Pursuant to the Loan Agreement Amendment, the Company and CB-USA
may borrow up to the lesser of (x) $19,000,000 and (y) the sum of the borrowing base calculated in accordance with the Amended
Agreement and the Purchased Inventory Sublimit. The Company and CB-USA are permitted to prepay the Credit Facility in whole or
the Purchased Inventory Sublimit, in whole or in part, subject to certain prepayment penalties as set forth in the Loan Agreement
Amendment. The Purchased Inventory Sublimit replaces the Bourbon Term Loan, which was paid in full in the normal course of business.
The monthly facility fee remains 0.75% per annum of the maximum principal amount of the Credit Facility (excluding the Purchased
Inventory Sublimit). Also, the Company must pay a monthly facility fee of $2,000 with respect to the Purchased Inventory Sublimit
until all obligations with respect thereof are fully paid and performed. The Company paid ACF an aggregate $45,000 commitment fee
in connection with the Loan Agreement Amendment.
In connection with the Loan Agreement Amendment,
the Company and CB-USA entered into the following ancillary agreements: (i) a Reaffirmation Agreement (the “Reaffirmation
Agreement”) with (a) certain officers of the Company and CB-USA, including John Glover, T. Kelley Spillane and Alfred J.
Small and (b) certain junior lenders to the Company, including Frost Gamma Investments Trust, Mark E. Andrews, III, an affiliate
of Richard J. Lampen, an affiliate of Glenn Halpryn, Dennis Scholl and Vector Group Ltd., which, among other things, reaffirms
the existing Validity and Support Agreements by and among each officer, the Company, CB-USA and ACF and (ii) and Amended and Restated
Revolving Credit Note.
ACF also required as a condition to
entering into the Loan Agreement Amendment that ACF enter into a participation agreement with certain related parties of the
Company, including Frost Gamma Investments Trust, Mark E. Andrews, III, Richard J. Lampen and Alfred J. Small, to allow for
the sale of participation interests in the Purchased Inventory Sublimit and the inventory purchased with the proceeds
thereof. The participation agreement provides that ACF’s commitment to fund each advance of the Purchased Inventory
Sublimit shall be limited to seventy percent (70%), up to an aggregate maximum principal amount for all advances equal to
$4,900,000. Neither the Company nor CB-USA is a party to the participation agreement. However, the Company and CB-USA are
party to a fee letter with the junior participants (including the related party junior participants) pursuant to which the
Company and CB-USA were obligated to pay the junior participants a closing fee of $18,000 on the effective date of the Loan
Agreement Amendment and are obligated to pay a commitment fee of $18,000 on each anniversary of the effective date until the
junior participants’ obligations are terminated pursuant to the participation agreement.
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, Finland, Norway, Sweden, Denmark, China and the Duty Free markets,
and in a number of other countries. 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® bourbon |
|
· |
Jefferson’s Reserve® |
|
· |
Jefferson’s Ocean Aged at Sea® |
|
· |
Jefferson’s The Manhattan: Barrel Finished Cocktail |
|
· |
Jefferson’s Chef’s Collaboration |
|
· |
Jefferson’s Reserve Groth Cask Finish |
|
· |
Jefferson's Presidential Select™ |
|
· |
Jefferson’s Rye whiskey |
|
· |
Pallini® liqueurs |
|
· |
Clontarf® Irish whiskey |
|
· |
Knappogue Castle Whiskey® |
|
· |
Brady's® Irish Cream |
|
· |
Boru® vodka |
|
· |
Tierras™ tequila |
|
· |
Celtic Honey® liqueur |
|
· |
Castello Mio® sambuca |
|
· |
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 46% 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. For example, we have leveraged our successful Jefferson’s portfolio by introducing a number of brand extensions. We continue to explore strategic relationships, joint ventures and acquisitions to selectively expand our premium spirits portfolio. We expect that future acquisitions or agency relations, if any, would involve some combination of cash, debt and the issuance of our stock. |
Recent developments
Credit Facility
In August 2015, we entered into a First
Amendment (the “Loan Agreement Amendment”) to the Loan Agreement (as defined below in Existing Financing). Among
other changes, the Loan Agreement Amendment increases the amount of the Credit Facility (as defined below in Existing Financing)
from $12.0 million to $19.0 million, including a sublimit in the maximum principal amount of $7.0 million to permit us to acquire
aged whisky inventory (the “Purchased Inventory Sublimit”) subject to certain conditions set forth in the Loan Agreement.
Pursuant to the Loan Agreement Amendment, we and our subsidiary Castle Brands (USA) Corp. (“CB-USA”) may borrow up
to the lesser of (x) $19,000,000 and (y) the sum of the borrowing base calculated in accordance with the Loan Agreement and the
Purchased Inventory Sublimit. We and CB-USA are permitted to prepay the Credit Facility in whole or the Purchased Inventory Sublimit,
in whole or in part, subject to certain prepayment penalties as set forth in the Loan Agreement Amendment. The Purchased Inventory
Sublimit replaces the Bourbon Term Loan, which was paid in full in the normal course of business. The monthly facility fee remains
0.75% per annum of the maximum principal amount of the Credit Facility (excluding the Purchased Inventory Sublimit). Also, we must
pay a monthly facility fee of $2,000 with respect to the Purchased Inventory Sublimit until all obligations with respect thereof
are fully paid and performed. We paid ACF FinCo I LP (“ACF”) an aggregate $45,000 commitment fee in connection with
the Loan Agreement Amendment.
In connection with the Loan Agreement Amendment,
we entered into the following ancillary agreements: (i) a Reaffirmation Agreement (the “Reaffirmation Agreement”) with
(a) certain of our officers, including John Glover, our Chief Operating Officer, T. Kelley Spillane, our Senior Vice President
- Global Sales, and Alfred J. Small, our Senior Vice President, Chief Financial Officer, Treasurer & Secretary and (b) certain
junior lenders of ours, including Frost Gamma Investments Trust, an entity affiliated with Phillip Frost, M.D., a director of ours
and a principal shareholder of ours, Mark E. Andrews, III, a director of ours and our Chairman, an affiliate of Richard J. Lampen,
a director of ours and our President and Chief Executive Officer, an affiliate of Glenn Halpryn, a director of ours, Dennis Scholl,
a former director of ours, and Vector Group Ltd., a more than 5% shareholder of ours, of which Richard Lampen is an executive officer,
Henry Beinstein, a director of ours, is a director and Phillip Frost, M.D. is a principal shareholder, which, among other things,
reaffirms the existing Validity and Support Agreements by and among each officer, us and ACF and (ii) and Amended and Restated
Revolving Credit Note.
ACF also required as a condition to
entering into the Loan Agreement Amendment that ACF enter into a participation agreement with certain related parties of
ours, including Frost Gamma Investments Trust, Mark E. Andrews, III, Richard J. Lampen, and Alfred J. Small, to allow for the
sale of participation interests in the Purchased Inventory Sublimit and the inventory purchased with the proceeds thereof.
The participation agreement provides that ACF’s commitment to fund each advance of the Purchased Inventory Sublimit
shall be limited to seventy percent (70%), up to an aggregate maximum principal amount for all advances equal to $4.9
million. We are not a party to the participation agreement. However, we and CB-USA are party to a fee letter with the junior
participants (including the related party junior participants) pursuant to which we and CB-USA were obligated to pay the
junior participants a closing fee of $18,000 on the effective date of the Loan Agreement Amendment and are obligated to pay a
commitment fee of $18,000 on each anniversary of the effective date until the junior participants’ obligations are
terminated pursuant to the participation agreement.
35th America’s Cup Sponsorship
In July 2015, Gosling’s entered
into an agreement to become the Official Rum and Official Ginger Beer of the 35th America’s Cup, one of the most famous
regattas in the sport of sailing, as well as the oldest active trophy in international sport. As part of the agreement,
Gosling’s will be a sponsor for two years of Louis Vuitton America’s Cup World Series events, building up to the
final races to be staged in Bermuda in 2017. The Dark ‘n Stormy® will be introduced to America’s Cup fans
during two years of international events. As an Official Partner of America’s Cup, all Gosling’s products will be
available at official America’s Cup events and functions around the world.
Investment in Copperhead Distillery Company
In June 2015, we purchased 20% of Copperhead Distillery Company (“Copperhead”) for $0.5 million. Copperhead owns and operates the Kentucky Artisan
Distillery. The investment is part of a wide-reaching agreement to build a new warehouse to store Jefferson’s bourbons, provide
distilling capabilities using special mash-bills made from locally grown grains, and create a visitor center and store to enhance
the consumer experience for the Jefferson’s brand.
Our investment will be used for the construction
of a new warehouse in Crestwood, Kentucky dedicated exclusively to Jefferson’s. The warehouse will have the capacity to store
up to 10,000 barrels, with room for expansion, and will facilitate the continued growth of Jefferson’s wood finishes and
barrel-aged cocktails.
A Jefferson’s visitor center, including
a tasting room and store, which will showcase the Jefferson’s brand opened in the summer of 2015.
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 June 30, 2015, each as calculated
from the Interbank exchange rates as reported by Oanda.com. On June 30, 2015, the exchange rate of the Euro and the British Pound
in exchange for U.S. Dollars was €1.00 = U.S. $1.10944 (equivalent to U.S. $1.00 = €0.90119) and £1.00 = U.S.
$1.57174 (equivalent to U.S. $1.00 = £0.63611).
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, 2015, as amended, which we
refer to as our 2015 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 | |
| |
June 30, | |
| |
2015 | | |
2014 | |
Cases: | |
| | | |
| | |
United States | |
| 78,275 | | |
| 68,544 | |
International | |
| 21,894 | | |
| 18,569 | |
| |
| | | |
| | |
Total | |
| 100,169 | | |
| 87,113 | |
| |
| | | |
| | |
Rum | |
| 45,725 | | |
| 40,913 | |
Whiskey | |
| 25,837 | | |
| 16,723 | |
Liqueurs | |
| 18,840 | | |
| 19,440 | |
Vodka | |
| 9,394 | | |
| 9,590 | |
Tequila | |
| 373 | | |
| 447 | |
| |
| | | |
| | |
Total | |
| 100,169 | | |
| 87,113 | |
| |
| | | |
| | |
Percentage of Cases: | |
| | | |
| | |
United States | |
| 78.1 | % | |
| 78.7 | % |
International | |
| 21.9 | % | |
| 21.3 | % |
| |
| | | |
| | |
Total | |
| 100.0 | % | |
| 100.0 | % |
| |
| | | |
| | |
Rum | |
| 45.6 | % | |
| 47.0 | % |
Whiskey | |
| 25.8 | % | |
| 19.2 | % |
Liqueurs | |
| 18.8 | % | |
| 22.3 | % |
Vodka | |
| 9.4 | % | |
| 11.0 | % |
Tequila | |
| 0.4 | % | |
| 0.5 | % |
| |
| | | |
| | |
Total | |
| 100.0 | % | |
| 100.0 | % |
The following table provides information
regarding our case sales of related non-alcoholic beverage products, which primarily consists of Gosling’s Stormy Ginger
Beer, for the periods presented:
| |
Three months ended June 30, | |
| |
2015 | | |
2014 | |
Cases: | |
| | | |
| | |
United States | |
| 223,435 | | |
| 148,606 | |
International | |
| 4,620 | | |
| 13,773 | |
| |
| | | |
| | |
Total | |
| 228,055 | | |
| 162,379 | |
| |
| | | |
| | |
United States | |
| 98.0 | % | |
| 91.5 | % |
International | |
| 2.0 | % | |
| 8.5 | % |
| |
| | | |
| | |
Total | |
| 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 June 30, | |
| |
2015 | | |
2014 | |
Sales, net | |
| 100.0 | % | |
| 100.0 | % |
Cost of sales | |
| 59.9 | % | |
| 62.1 | % |
| |
| | | |
| | |
Gross profit | |
| 40.1 | % | |
| 37.9 | % |
| |
| | | |
| | |
Selling expense | |
| 26.3 | % | |
| 27.0 | % |
General and administrative expense | |
| 12.5 | % | |
| 13.4 | % |
Depreciation and amortization | |
| 1.4 | % | |
| 1.8 | % |
| |
| | | |
| | |
Loss from operations | |
| (0.1 | )% | |
| (4.3 | )% |
| |
| | | |
| | |
Other (expense) income, net | |
| 0.0 | % | |
| 0.1 | % |
Foreign exchange loss | |
| (0.3 | )% | |
| (2.0 | )% |
Interest expense, net | |
| (1.6 | )% | |
| (2.4 | )% |
Income tax expense, net | |
| (3.2 | )% | |
| (1.4 | )% |
| |
| | | |
| | |
Net loss | |
| (5.2 | )% | |
| (10.0 | )% |
Net income attributable to noncontrolling interests | |
| (1.7 | )% | |
| (2.5 | )% |
| |
| | | |
| | |
Net loss attributable to common shareholders | |
| (6.9 | )% | |
| (12.5 | )% |
The following is a reconciliation of net
loss attributable to common shareholders to EBITDA, as adjusted:
| |
Three months ended June 30, | |
| |
2015 | | |
2014 | |
Net loss attributable to common shareholders | |
$ | (1,123,662 | ) | |
$ | (1,495,831 | ) |
Adjustments: | |
| | | |
| | |
Interest expense, net | |
| 257,164 | | |
| 288,642 | |
Income tax expense, net | |
| 523,962 | | |
| 162,962 | |
Depreciation and amortization | |
| 228,256 | | |
| 216,098 | |
EBITDA (loss) | |
| (114,280 | ) | |
| (828,129 | ) |
Allowance for doubtful accounts | |
| 34,000 | | |
| 59,000 | |
Allowance for obsolete inventory | |
| 100,000 | | |
| — | |
Stock-based compensation expense | |
| 239,940 | | |
| 191,456 | |
Other expense (income), net | |
| 821 | | |
| (16,942 | ) |
Foreign exchange loss | |
| 49,219 | | |
| 236,447 | |
Net income attributable to noncontrolling interests | |
| 273,518 | | |
| 305,336 | |
EBITDA, as adjusted | |
| 583,218 | | |
| (52,832 | ) |
Earnings before interest, taxes, depreciation
and amortization, or EBITDA, adjusted for allowances for doubtful accounts and obsolete inventory, stock-based compensation expense, other
income, net, foreign exchange loss and net income attributable to noncontrolling interests is a key metric we use in evaluating
our financial performance. EBITDA, as adjusted, is considered a non-GAAP financial measure as defined by Regulation G promulgated
by the SEC under the Securities Act of 1933, as amended. We consider EBITDA, as adjusted, important in evaluating our performance
on a consistent basis across various periods. Due to the significance of non-cash and non-recurring items, EBITDA, as adjusted,
enables our Board of Directors and management to monitor and evaluate the business on a consistent basis. We use EBITDA, as adjusted,
as a primary measure, among others, to analyze and evaluate financial and strategic planning decisions regarding future operating
investments and allocation of capital resources. We believe that EBITDA, as adjusted, eliminates items that are not indicative
of our core operating performance or are based on management’s estimates, such as allowance accounts, are due to changes
in valuation, such as the effects of changes in foreign exchange, or do not involve a cash outlay, such as stock-based compensation
expense. Our presentation of EBITDA, as adjusted, should not be construed as an inference that our future results will be unaffected
by unusual or non-recurring items or by non-cash items, such as stock-based compensation, which is expected to remain a key element
in our long-term incentive compensation program. EBITDA, as adjusted, should be considered in addition to, rather than as
a substitute for, income from operations, net income and cash flows from operating activities.
Our EBITDA, as adjusted, improved to income
of $0.6 million for the three months ended June 30, 2015, as compared to a loss of ($0.05) million for the comparable prior-year
period, primarily as a result of increased sales.
Three months ended June 30, 2015 compared with
three months ended June 30, 2014
Net sales. Net sales increased
37.8% to $16.5 million for the three months ended June 30, 2015, as compared to $12.0 million for the comparable prior-year
period, due to the overall growth of our Jefferson's portfolio and our Gosling's Stormy Ginger Beer. Our international
spirits case sales as a percentage of total spirits case sales were flat at 21.9% for the three months ended June 30, 2015 as
compared to 21.3% for the comparable prior-year period. Our overall spirits sales volume for the three months ended June 30,
2015 was positively impacted by increases in sales of our Jefferson’s, Jefferson’s Reserve and Jefferson’s
Ocean Aged at Sea bourbons. Also, for the three months ended June 30, 2015, sales of our Gosling’s Stormy Ginger Beer
increased by 65,676 cases, or 40.8%, overall, including a 75,193 case increase, or 50.7%, in U.S. case sales as compared to
the comparable prior-year period. 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 June 30, 2015 as compared to the
three months ended June 30, 2014:
| |
Increase/(decrease) | | |
Percentage | |
| |
in case sales | | |
increase/(decrease) | |
| |
Overall | | |
U.S. | | |
Overall | | |
U.S. | |
Rum | |
| 4,812 | | |
| 700 | | |
| 11.8 | % | |
| 2.2 | % |
Whiskey | |
| 9,114 | | |
| 9,118 | | |
| 54.5 | % | |
| 102.8 | % |
Liqueur | |
| (600 | ) | |
| 173 | | |
| (3.1 | )% | |
| 0.9 | % |
Vodka | |
| (196 | ) | |
| (187 | ) | |
| (2.0 | )% | |
| (2.1 | )% |
Tequila | |
| (74 | ) | |
| (74 | ) | |
| (16.6 | )% | |
| (16.6 | )% |
| |
| | | |
| | | |
| | | |
| | |
Total | |
| 13,056 | | |
| 9,730 | | |
| 15.0 | % | |
| 14.2 | % |
The following table presents the increase
in case sales of related non-alcoholic beverage products for the three months ended June 30, 2015 as compared to the three months
ended June 30, 2014:
| |
Increase | | |
Percentage | |
| |
in case sales | | |
increase | |
| |
Overall | | |
U.S. | | |
Overall | | |
U.S. | |
Related Non-Alcoholic Beverage Products | |
| 65,676 | | |
| 75,193 | | |
| 40.4 | % | |
| 50.7 | % |
Gross profit. Gross profit increased
45.8% to $6.6 million for the three months ended June 30, 2015 from $4.5 million for the comparable prior-year period, and our
gross margin increased to 40.1% for the three months ended June 30, 2015 compared to 37.9% for the comparable prior-year period.
The increase in gross profit was primarily due to increased sales volume and 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. During
the three months ended June 30, 2015, we recorded a net allowance for obsolete and slow moving inventory of $0.1 million, as compared
to $0 for the comparable prior-year period. We recorded this allowance on both raw materials and finished goods, primarily
in connection with label and packaging changes made to certain brands, as well as certain cost variances. The net charges have
been recorded as an increase to cost of sales in the current period. Net of the allowance for obsolete inventory, our gross margin
for the three months ended June 30, 2015 was 40.7% as compared to 37.9% for the comparable prior-year period.
Selling expense. Selling expense
increased 34.3% to $4.4 million for the three months ended June 30, 2015 from $3.2 million for the comparable prior-year period,
primarily due to a $0.2 million increase in shipping costs, a $0.5 million increase in advertising, marketing and promotion
expense related to increased sales volume and the timing of certain sales and marketing programs and a $0.5 million increase in
employee costs. The increase in sales resulted in selling expense as a percentage of net sales remaining consistent at
26.4% for the three months ended June 30, 2015 as compared to 27.0% for the comparable prior-year period.
General and administrative expense.
General and administrative expense increased 28.3% to $2.1 million for the three months ended June 30, 2015 from $1.6 million for
the comparable prior-year period, primarily due to a $0.2 million increase in each of 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 12.5% for the three months ended June 30, 2015 as compared to 13.4% for the comparable prior-year period. However,
as a result of our becoming an accelerated filer, we expect general and administrative expense to increase due to the costs and
fees associated with the additional regulatory requirements.
Depreciation and amortization. Depreciation
and amortization was $0.2 million for each of the three-month periods ended June 30, 2015 and 2014.
Loss from operations. As a result
of the foregoing, loss from operations improved to ($0.02) million for the three months ended June 30, 2015 from ($0.5) 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.
Income tax expense, net.
Income tax expense, 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 ($0.5) million for the three months ended June 30, 2015 as compared to net expense of
($0.2) million for the comparable prior-year period.
Foreign exchange loss. Foreign
exchange loss for the three months ended June 30, 2015 was ($0.05) 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. We had
interest expense, net of ($0.3) million for each of the three-month periods ended June 30, 2015 and 2014 due to balances
outstanding under our credit facilities. Due to expected borrowings under credit facilities to finance additional purchases
of aged whiskies in support of the growth of our Jefferson’s bourbons and other working capital needs, we
expect interest expense, net to increase in the near term as compared to comparable prior-year periods.
Net income attributable to
noncontrolling interests. Net income attributable to noncontrolling interests
was ($0.3) million for each of the three-month periods ended June 30, 2015 and 2014, both the result of allocated net
income recorded by our 60% owned subsidiary, Gosling-Castle Partners, Inc.
Net loss attributable to
common shareholders. As a result of the net effects of the foregoing, net loss attributable to common shareholders
improved to ($1.1) million for the three months ended June 30, 2015 as compared to a loss of ($1.5) million for the
comparable prior-year period. Net loss per common share, basic and diluted, was ($0.01) per share for each of the three-month
periods ended June 30, 2015 and 2014. 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 June 30, 2015 as compared to the comparable prior-year period.
Liquidity and capital resources
Overview
Since our inception, we have incurred significant
operating and net losses and have not generated cumulative positive cash flows from operations. For the three months ended June
30, 2015, we had a net loss of $0.9 million, while cash provided by operating activities was $1.8 million. As of June 30, 2015,
we had cash and cash equivalents of $2.3 million and had an accumulated deficit of $144.5 million.
We believe our current cash and
working capital, the availability under the Credit Facility (as defined below) and additional funds to be raised under our
2014 distribution agreement (the “2014 Distribution Agreement”) with Barrington Research Associates,
Inc. ("Barrington") will enable us to fund our losses until we achieve profitability, ensure continuity of supply
of our brands, and support new brand initiatives and marketing programs through at least June 2016.
Existing Financing
In August 2011, we and our
wholly-owned subsidiary Castle Brands (USA) Corp. entered into a loan agreement, which provides for availability (subject to
certain terms and conditions) of a facility (the “Credit Facility”) to provide us with working capital, including
capital to finance purchases of aged whiskies in support of the growth of our Jefferson’s bourbons.
In September 2014, we entered into an
Amended and Restated Loan and Security Agreement (the “Loan Agreement”) with ACF FinCo I LP (“ACF”), pursuant to which the Credit Facility was amended to modify certain aspects, including increasing the maximum amount of the Credit 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 Credit
Facility was extended from December 31, 2016 to July 31, 2019 (the "Maturity Date"). The monthly facility fee was
reduced from 1.00% per annum of the maximum Credit Facility amount to 0.75%. The Loan Agreement also modified 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 Loan Agreement.
As described above in Management's Discussion
and Analysis of Financial Condition and Results of Operations – Recent developments, in August 2015, we and CB-USA entered
into the Loan Agreement Amendment which, among other changes, increases the amount of the Credit Facility from $12,000,000 to $19,000,000,
including the Purchased Inventory Sublimit in the maximum principal amount of $7,000,000 to permit us to acquire aged whisky inventory,
subject to certain conditions set forth in the Loan Agreement.
We may borrow up to the maximum amount
of the Credit Facility, provided that we have a sufficient borrowing base (as defined in the Loan Agreement). The Credit
Facility interest rate is the rate that, when annualized, is the greatest of (a) the Prime Rate plus 3.00%, (b) the LIBOR
Rate plus 5.50% and (c) 6.0%. Interest is payable monthly in arrears, on the first day of every month on the average daily
unpaid principal amount of the Credit Facility. After the occurrence and during the continuance of any "Default" or
"Event of Default" (as defined under the Loan Agreement) we are required to pay interest at a rate that is 3.25%
per annum above the then applicable Credit Facility interest rate. The Loan Agreement contains EBITDA targets allowing for
further interest rate reductions in the future. The Credit Facility currently bears interest at 6.0%. We are required to pay
down the principal balance of the Purchased Inventory Sublimit within 15 banking days from the completion of a bottling run
of bourbon from our bourbon inventory stock purchased on or about the date of the Loan Agreement Amendment in an amount equal
to the purchase price of such bourbon. The unpaid principal balance of the Credit Facility all accrued and unpaid interest
thereon, and all fees, costs and expenses payable in connection with the Credit Facility are due and payable in full on the
maturity date. In addition to closing fees, ACF receives an annual facility fee and a collateral management fee
(each as set forth in the Loan Agreement).
The Loan Agreement contains standard borrower
representations and warranties for asset-based borrowing and a number of reporting obligations and affirmative and negative covenants.
The Loan Agreement includes negative covenants that, among other things, restrict our ability to create additional indebtedness,
dispose of properties, incur liens, and make distributions or cash dividends. At March 31, 2015, we were in compliance with the covenants under the Loan Agreement.
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 €0.3 million or $0.3 million (translated at the June 30, 2015 exchange rate) with an Irish bank, including overdraft
coverage, creditors’ insurance, customs and excise guaranty, and a revolving credit facility. These facilities are payable
on demand, continue until terminated by either party, are subject to annual review, and call for interest at the lender’s
AA1 Rate minus 1.70%. We have deposited €0.3 million or $0.3 million (translated at the June 30, 2015 exchange rate) with
the bank to secure these borrowings. We are in compliance in all material respects with the covenants of our Irish bank facilities
as of June 30, 2015.
In October 2013, we entered into a 5% Convertible
Subordinated Note Purchase Agreement (the "Note Purchase Agreement"), with the purchasers party thereto (the "Purchasers"),
which provides for the issuance of an aggregate initial principal amount of $2.1 million unsecured subordinated notes (the "Convertible
Notes"). We used a portion of the proceeds to finance the acquisition of additional bourbon inventory in support of the growth
of our Jefferson's bourbon brand.
The Convertible Notes bear interest at
a rate of 5% per annum and mature on December 15, 2018. The Convertible Notes and accrued but unpaid interest thereon
are convertible in whole or in part from time to time at the option of the holders thereof into shares of our common stock,
par value $0.01 per share (“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 noteholder to accelerate the due date of the unpaid principal amount of, and all
accrued and unpaid interest on, the Convertible Notes. We issued the Convertible Notes on October 31, 2013. The
Purchasers included certain related parties of ours, including an affiliate of Dr. Phillip Frost ($500,000), a director of
ours and a principal shareholder, Mark E. Andrews, III ($50,000), a director of ours and our Chairman, an affiliate of
Richard J. Lampen ($50,000), a director of ours and our President and Chief Executive Officer, an affiliate of Glenn Halpryn
($200,000), a director of ours, Dennis Scholl ($100,000), a former director of ours, and Vector Group Ltd. ($200,000), a more
than 5% shareholder of ours, of which Richard Lampen is an executive officer, Henry Beinstein, a director of ours, is a
director and Dr. Phillip Frost is a principal shareholder.
In November 2014, we entered into
the 2014 Distribution Agreement with Barrington as sales agent, under which we may issue and sell over time and from time
to time, to or through Barrington, shares (the "Shares") of our Common Stock having a gross sales price of up to
$10.0 million. The 2014 Distribution Agreement replaced the prior equity distribution agreement entered into with Barrington
in November 2013 (the “2013 Distribution Agreement” and, together with the 2014 Distribution Agreement, the
“Distribution Agreement”), under which we could offer and sell Shares of our Common Stock having a gross sale
price of up to $6.0 million.
Sales of the Shares pursuant to the 2014
Distribution Agreement may 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 us to Barrington. Also, with our prior consent, some of the Shares issued
pursuant to the 2014 Distribution Agreement may be sold in privately negotiated transactions.
During the three months ended June
30, 2015, we sold 2,119,282 Shares pursuant to the 2014 Distribution Agreement, with total gross proceeds of $3,251,989,
before deducting sales agent and offering expenses of $65,160. We used a portion of the proceeds to finance our investment in
Copperhead Distillery Company and intend to use the remaining proceeds for general corporate purposes. As of August 6,
2015, approximately $4.7 million remained available for issuance pursuant to the 2014 Distribution Agreement.
Liquidity Discussion
As of June 30, 2015, we had shareholders’
equity of $23.7 million as compared to $21.1 million at March 31, 2015. This increase is primarily due to the net issuance
of $3.2 million of Common Stock under the 2014 Distribution Agreement, partially offset by our total comprehensive loss for the
three months ended June 30, 2015.
We had working capital of $25.2 million
at June 30, 2015 as compared to $25.7 million at March 31, 2015. This decrease is primarily due to a $1.1 million increase
in cash and cash equivalents,
partially offset by a $1.0 million decrease in inventory and a $1.0 million decrease in accounts receivable.
As of June 30, 2015, we had cash and cash
equivalents of approximately $2.3 million, as compared to $1.2 million as of March 31, 2015. The increase is primarily attributable
to the equity issued offset by the funding of our operations and working capital needs for the three months ended June 30, 2015
and debt repaid. At June 30, 2015, we also had approximately $0.3 million of cash restricted from withdrawal and held by a bank
in Ireland as collateral for overdraft coverage, creditors’ insurance, revolving credit and other working capital purposes.
The following may materially affect our
liquidity over the near-to-mid term:
|
• |
continued cash losses from operations; |
|
• |
our ability to obtain additional debt or equity financing should it be required; |
|
• |
an increase in working capital requirements to finance higher levels of inventories and accounts receivable; |
|
• |
our ability to maintain and improve our relationships with our distributors and our routes to market; |
|
• |
our ability to procure raw materials at a favorable price to support our level of sales; |
|
• |
potential acquisitions of additional brands; and |
|
• |
expansion into new markets and within existing markets in the U.S. and internationally. |
We continue to implement 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 look to control expenses, seek
improvements in routes to market and contain production costs to improve cash flows.
As of June 30, 2015, we had borrowed
$7.6 million of the $12.0 million available under the Credit Facility, leaving $4.4 million in then potential availability
for working capital needs. As of the date of this report, we had borrowed $6.0 million of the $12.0 million available under
the Credit Facility (excluding the $7.0 million Purchased Inventory Sublimit), leaving $6.0 million in potential availability for working capital needs. We expect to draw down $3.0
million of the Purchased Inventory Sublimit in August 2015 to finance aged whiskey purchases. We believe our current cash and
working capital, the availability under the Credit Facility and the
additional funds that may be raised under the 2014 Distribution Agreement will enable us to fund our losses until we
achieve profitability, ensure continuity of supply of our brands, and support new brand initiatives and marketing programs
through at least June 2016.
Cash flows
The following table summarizes our primary
sources and uses of cash during the periods presented:
| |
Three months ended June 30, | |
| |
2015 | | |
2014 | |
| |
(in thousands) | |
Net cash provided by (used in): | |
| | | |
| | |
Operating activities | |
$ | 1,786 | | |
$ | (5,217 | ) |
Investing activities | |
| (623 | ) | |
| (82 | ) |
Financing activities | |
| (48 | ) | |
| 5,175 | |
Subtotal | |
| 1,115 | | |
| (124 | ) |
Effect of foreign currency translation | |
| 1 | | |
| (0 | ) |
| |
| | | |
| | |
Net increase (decrease) in cash and cash equivalents | |
$ | 1,116 | | |
$ | (124 | ) |
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 or ginger beer, 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 June
30, 2015 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 three months ended June 30,
2015, net cash provided by operating activities was $1.8 million, consisting primarily of a $1.0 million decrease
in inventory, a $1.0 million decrease in accounts receivable, a $0.1 million increase in accounts payable and accrued
expense, stock based compensation expense of $0.2 million and depreciation and amortization expense of $0.2 million. These
sources of cash were partially offset by a net loss of $0.9 million, a $0.1 million decrease in due to related parties and a $0.1 million increase in prepaid expenses.
During the three months ended June 30,
2014, net cash used in operating activities was $5.2 million, consisting primarily of a $5.2 million increase in inventory, a net
loss of $1.2 million, a $1.1 million decrease in accounts payable and accrued expenses, a $0.3 million increase in prepaid expenses
and $0.2 million in income tax expense, net. These uses of cash were partially offset by a $1.8 million decrease in accounts receivable,
stock based compensation expense of $0.2 million and depreciation and amortization expense of $0.2 million.
Investing Activities. Net
cash used in investing activities was $0.6 million for the three months ended June 30, 2015, representing a $0.5 million investment
in Copperhead Distillery and $0.1 million used in the acquisition of fixed and intangible assets.
Net cash used in investing activities was
$0.08 million for the three months ended June 30, 2014, representing $0.08 million used in the acquisition of fixed and intangible
assets.
Financing activities.
Net cash used in financing activities for the three months ended June 30, 2015 was $0.05 million, consisting of $2.5 million
in net payments on the Credit Facility and $0.7 million paid on the Bourbon Term Loan, partially offset by $3.2 million in net
proceeds from the issuance of Common Stock pursuant to the 2014 Distribution Agreement.
Net cash provided by
financing activities for the three months ended June 30, 2014 was $5.2 million, consisting of $3.5 million in net proceeds
from the Credit Facility, $1.2 million in net proceeds from the issuance of Common Stock pursuant to the 2013 Distribution
Agreement, $0.6 million in proceeds from the exercise of warrants issued in connection with our 2011 private placement, $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 $0.3 million paid on the Bourbon Term Loan.
Recent accounting standards issued and adopted.
We discuss recently issued and adopted
accounting standards in the “Recent accounting pronouncements” section of Note 1 of the “Notes to Unaudited Condensed
Consolidated Financial Statements” in the accompanying unaudited condensed consolidated financial statements.
Cautionary Note Regarding Forward Looking Statements
This annual report includes certain “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which involve risks
and uncertainties, relate to the discussion of our business strategies and our expectations concerning future operations, margins,
profitability, liquidity and capital resources and to analyses and other information that are based on forecasts of future results
and estimates of amounts not yet determinable. We use words such as “may”, “will”, “should”,
“expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”,
“seeks”, “predicts”, “could”, “projects”, “potential” and similar terms
and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking
statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties, risks
and factors relating to our operations and business environments, all of which are difficult to predict and many of which are beyond
our control, that could cause our actual results to differ materially from those matters expressed or implied by these forward-looking
statements. These risks and other factors include those listed under “Risk Factors” in our annual report on Form 10-K
for the year ended March 31, 2015, as amended, and as follows:
|
• |
our history of losses; |
|
• |
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 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; |
|
• |
the possibility that we cannot secure and maintain listings in control states, which could cause the sales of our products to decrease significantly; |
|
• |
an impairment in the carrying value of our goodwill or other acquired intangible assets could negatively affect our operating results and shareholders’ equity; |
|
• |
changes in consumer preferences and trends could adversely affect demand for our products; |
|
• |
there is substantial competition in our industry and the many factors that may prevent us from competing successfully; |
|
• |
adverse changes in public opinion about alcohol could reduce demand for our products; |
|
• |
class action or other litigation relating to alcohol misuse or abuse could adversely affect our business; and |
|
• |
adverse regulatory decisions and legal, regulatory or tax changes could limit our business activities, increase our operating costs and reduce our margins. |
We assume no obligation to publicly update
or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from
those anticipated in, or implied by, these forward-looking statements, even if new information becomes available in the future.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Market risk
We are exposed to market risks arising
from changes in market rates and prices, including movements in interest rates and foreign currency exchange rates. We do not enter
into derivatives or other financial instruments for trading or speculative purposes. In the future, we may enter into financial
instruments to manage and reduce the impact of changes in interest rates and foreign currency exchange rates, although we do not
currently have any such instruments in place. The following is additional information about the market risks we are exposed to
and how we manage these risks:
Interest rate risk
Interest on our Credit Facility is charged
at the rate that, when annualized, is the greatest of (a) the Prime Rate plus 3.00%, (b) the LIBOR Rate plus 5.50% and (c) 6.00%.
As of June 30, 2015, we had $7,643,627 outstanding under the Credit Facility, none of which is currently being hedged. Interest
on our foreign revolving credit facilities is charged at the lender’s AA1 Rate minus 1.70%. As of June 30, 2015, we had €0
outstanding under our foreign revolving credit facilities, none of which is currently being hedged.
A hypothetical one percentage point (100
basis points) increase in the interest rate being charged on the $7,643,627 of unhedged debt outstanding under our Credit Facility
and our foreign revolving credit facilities at June 30, 2015 would have an impact of approximately $6,370 on our interest expense for
the quarter.
Foreign exchange rate risk
The majority of our sales, net and expenses
are transacted in U.S. dollars. However, in the three months ended June 30, 2015, Euro denominated sales accounted for approximately
12.2% of our sales, net. We also incur expenses in foreign currencies, primarily the Euro. In the three months ended June 30, 2015,
Euro denominated expenses accounted for approximately 6% of our expenses. A substantial change in the rate of exchange between
the U.S. dollar and the Euro could have a significant adverse effect on our financial results. A hypothetical 10% change in the
value of the U.S. dollar in relation to the Euro would have had an impact of approximately $101,118 on our loss from operations
for the three months ended June 30, 2015.
If we do not enter into hedging
arrangements, the more we expand our business outside the United States, the more our financial results will be exposed to
exchange rate fluctuations. In the past, we have entered into forward contracts from time to time to reduce our exposure to
foreign currency fluctuations. We recognize derivative contracts in the balance sheet at fair value, and reflect any net
gains and losses currently in earnings. At June 30 and March 31, 2015, we 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.
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. The effect of foreign
currency translation was income of $47,002 for the three months ended June 30, 2015 and a loss of ($20,677) for the three months
ended June 30, 2014. A hypothetical 10% change in the value of the U.S. dollar in relation to the Euro would have had an impact
of approximately $5,000 for the three months ended June 30, 2015 as a result of foreign currency translation.
Commodity price risk
We currently are not exposed to commodity
price risks. We do not purchase the basic ingredients such as grain, sugar cane or agave that are converted into alcohol through
distillation. Instead, we have relationships with various companies to provide distillation, bottling or other production services
for us. These relationships vary on a brand-by-brand basis.
As of June 30, 2015, we did not have any
hedging arrangements in place to protect our exposure to commodity price fluctuations.
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 E. to our unaudited
condensed consolidated financial statements elsewhere in this Quarterly Report on Form 10-Q.
Item 6. Exhibits
Exhibit |
|
|
Number |
|
Description |
|
|
|
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.
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CASTLE BRANDS INC. |
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By: |
/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 |
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Principal Accounting Officer) |
August 10, 2015
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. |
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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: August 10, 2015
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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; |
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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. |
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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: August 10, 2015
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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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The Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2015 (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: August 10, 2015
/s/ Richard J. Lampen |
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/s/ Alfred J. Small |
Richard J. Lampen |
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Alfred J. Small |
Chief Executive Officer |
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Chief Financial Officer |
(Principal Executive Officer) |
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(Principal Financial Officer and Principal |
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Accounting Officer) |
Castle Brands (AMEX:ROX)
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Castle Brands (AMEX:ROX)
過去 株価チャート
から 7 2023 まで 7 2024