*Sales, net and Cost of sales include excise taxes of $7,451,569,
$6,754,453 and $6,420,730 for the years ended March 31, 2016, 2015 and 2014, respectively.
Notes to Consolidated Financial Statements
NOTE 1 —
ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
A.
|
Description of business
—
The consolidated financial statements include the accounts of Castle Brands Inc. (“the Company”), its wholly-owned domestic
subsidiaries,
Castle
Brands
(USA) Corp. (“CB-USA”) and McLain & Kyne, Ltd. (“McLain & Kyne”), the
Company’s wholly-owned foreign subsidiaries, Castle Brands Spirits Group Limited (“CB-IRL”) and Castle
Brands Spirits Marketing and Sales Company Limited, and the Company’s 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
rums, whiskey, liqueurs, vodka, tequila and related non-alcoholic beverage products in the United States, Canada, Europe and Asia.
|
|
C.
|
Brands
—
Rum and Ginger Beer
— Goslings rums, a family of premium rums with a 200-year history, including
the award-winning Goslings Black Seal rum, for which the Company is, through its export venture GCP, the exclusive marketer outside
of Bermuda, and Goslings Stormy Ginger Beer, an essential non-alcoholic ingredient in Goslings trademarked Dark ‘n Stormy
®
rum cocktail.
|
Whiskey
—Premium small batch bourbons:
Jefferson’s, Jefferson’s Reserve, Jefferson’s Chef’s Collaboration, Jefferson’s Ocean Aged at Sea,
Jefferson’s Wine Finish Collection, Jefferson’s Wood Experiments and Jefferson’s Presidential Select, Jefferson’s
Rye, an aged rye whiskey, and Jefferson’s The Manhattan: Barrel Finished Cocktail, a ready-to-drink cocktail; the Clontarf
Irish whiskeys, a family of premium Irish whiskeys, available in single malt and classic pure grain versions; Knappogue Castle
Whiskey, a vintage-dated premium single-malt Irish whiskey; Knappogue Castle 1951, a pure pot-still whiskey that has been aged
for 36 years, and Knappogue Twin Wood, the first Sherry Finished Knappogue Castle Whiskey.
Liqueur
— Pallini Limoncello, Raspicello
and Peachcello premium Italian liqueurs, pursuant to an exclusive U.S. marketing arrangement; Brady’s Irish Cream, a premium
Irish cream liqueur; Celtic Honey, a premium Irish liqueur; and Gozio amaretto, a premium Italian liqueur, pursuant to a U.S. distribution
agreement.
Vodka
— Boru vodka, an ultra-pure, five-times
distilled and specially filtered premium vodka. Boru is produced in Ireland.
Tequila
— a USDA certified organic, super-premium
tequila, Tequila Tierras Autenticas de Jalisco or Tierras. The Company is the exclusive U.S. importer and marketer of Tierras,
which is available as blanco, reposado and añejo.
|
D.
|
Cash and cash equivalents
— The Company considers all highly liquid instruments with a maturity at date of acquisition
of three months or less to be cash equivalents.
|
|
E.
|
Equity investments
- Equity investments are carried at original cost adjusted for the Company’s proportionate
share of the investees’ income, losses and distributions. The Company assesses the carrying value of its equity investments
when an indicator of a loss in value is present and records a loss in value of the investment when the assessment indicates that
an other-than-temporary decline in the investment exists. The Company classifies its equity earnings of equity investments as a
component of net income or loss.
|
|
F.
|
Trade accounts receivable
— The Company records trade accounts receivable at net realizable value. This
value includes an appropriate allowance for estimated uncollectible accounts to reflect anticipated losses on the trade
accounts receivable balances. The Company calculates this allowance based on its history of write-offs, level of past due
accounts based on contractual terms of the receivables and its relationships with and economic status of its customers. For
the years ended March 31, 2016, 2015 and 2014, the Company recorded an addition to allowances for doubtful accounts of
$61,000, $236,000
and $403,409, respectively.
|
|
G.
|
Revenue recognition
— Revenue from product sales is recognized when the product is shipped to a customer (generally
a distributor), title and risk of loss has passed to the customer in accordance with the terms of sale (FOB shipping point or FOB
destination), and collection is reasonably assured. Revenue is not recognized on shipments to control states in the United States
until such time as product is sold through to the retail channel.
|
|
H.
|
Inventories
— Inventories are comprised of distilled spirits, bulk wine, dry good raw materials (bottles, labels,
corks and caps), packaging and finished goods, and are valued at the lower of cost or market, using the weighted average cost method.
The Company assesses the valuation of its inventories and reduces the carrying value of those inventories that are obsolete or
in excess of the Company’s forecasted usage to their estimated net realizable value. The Company estimates the net realizable
value of such inventories based on analyses and assumptions including, but not limited to, historical usage, expected future demand
and market requirements. A change to the carrying value of inventories is recorded in cost of goods sold. See Note 3.
|
During the years ended March 31, 2016, 2015
and 2014, the Company recorded an addition to allowances for obsolete and slow moving inventory of $200,000, $281,000 and
$200,000, respectively. The Company recorded these allowances on both raw materials and finished goods, primarily in
connection with the disposition of wine brands, label and packaging changes made to certain brands, as well as wine spoilage
and certain cost variances. The charges have been recorded as increases to Cost of Sales in the respective years.
|
I.
|
Equipment
— Equipment consists of office equipment, computers and software and furniture and fixtures. When assets
are retired or otherwise disposed of, the cost and related depreciation is removed from the accounts, and any resulting gain or
loss is recognized in the statement of operations. Equipment is depreciated using the straight-line method over the estimated useful
lives of the assets ranging from three to five years.
|
|
J.
|
Goodwill and other intangible assets
— Goodwill represents the excess of purchase price including related costs
over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill and other identifiable
intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually, or more frequently if
circumstances indicate a possible impairment may exist. Intangible assets with estimable useful lives are amortized over their
respective estimated useful lives, generally on a straight-line basis, and are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying value may not be recoverable.
|
Under Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 350, “Intangibles - Goodwill and
Other”, impairment of goodwill must be tested at least annually by comparing the fair values of the applicable
reporting units with the carrying amount of their net assets, including goodwill. An entity may first assess qualitative
factors to determine whether it is necessary to perform the two-step goodwill impairment test. If determined to be necessary,
the two-step impairment test shall be used. The required two-step approach uses accounting judgments and estimates of future
operating results. Changes in estimates or the application of alternative assumptions could produce significantly different
results. The estimates that most significantly affect the fair value calculation are related to revenue growth, cost of
sales, selling and marketing expenses and discount rates. Impairment testing is done at the reporting level. If the carrying
amount of the reporting unit’s net assets exceeds the unit’s fair value, an impairment loss is recognized in an
amount equal to the excess of the carrying amount of goodwill over its implied fair value. The implied fair value of goodwill
is determined in the same manner as the amount of goodwill recognized in a business combination with the fair value of the
reporting unit deemed to be the purchase price paid. Rights, trademarks, trade names and formulations are indefinite lived
intangible assets not subject to amortization and are tested for impairment at least annually. The impairment test consists
of a comparison of the fair value of the asset group allocated to each reporting unit with its allocated carrying amount.
Under the goodwill qualitative assessment at
March 31, 2016 and 2015, various events and circumstances that would affect the estimated fair value of each reporting unit were
identified, including, but not limited to: prior years’ impairment testing results, budget to actual results,
Company-specific facts and circumstances, industry developments, and the economic environment. Based on this assessment, the
Company determined that no quantitative assessment was required.
|
K.
|
Impairment and disposal of long-lived assets
— Under ASC 310, “Accounting for the Impairment or Disposal
of Long-lived Assets”, the Company periodically reviews whether changes have occurred that would require revisions to the
carrying amounts of its definite lived, long-lived assets. When the sum of the expected future cash flows is less than the carrying
amount of the asset, an impairment loss is recognized based on the fair value of the asset. There were no impairments recorded
during the years ended March 31, 2016, 2015 and 2014.
|
|
L.
|
Shipping and handling
— The Company reflects as inventory costs freight-in and related external handling charges
relating to the purchase of raw materials and finished goods. These costs are charged to cost of sales at the time the underlying
product is sold. The Company also incurs shipping costs in connection with its various marketing activities, including the shipment
of point of sale materials to the Company’s regional sales managers and customers, and the costs of shipping product in connection
with its various marketing programs and promotions. These shipping charges are included in selling expense and were $2,635,430,
$2,574,471 and $1,879,881 for the years ended March 31, 2016, 2015 and 2014, respectively.
|
|
M.
|
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.
|
|
N.
|
Distributor charges and promotional goods
— The Company incurs charges from its distributors for a variety of
transactions and services rendered by the distributor, including product depletions, product samples for various promotional purposes,
in-store tastings and training where legal, and local advertising where legal. Such charges are reflected as selling expense as
incurred. Also, the Company has entered into arrangements with certain of its distributors whereby the purchase of a particular
product or products by a distributor is accompanied by a percentage of the sale being composed of promotional goods or as a predetermined
discount percentage of dollars off invoice. In such cases, the cost of the promotional goods is charged to cost of sales and dollars
off invoice are a reduction to revenue.
|
|
O.
|
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.
|
|
P.
|
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.
|
|
Q.
|
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 adopted the provisions of ASC 740
and has recognized no adjustment for uncertain tax provisions. The Company recognizes interest and penalties related to uncertain
tax positions in general and administrative expense.
|
R.
|
Research and development costs
— The costs of research, development and product improvement are charged to expense
as incurred and are included in selling expense.
|
|
S.
|
Advertising
— Advertising costs are expensed when the advertising first appears in its respective medium. Advertising
expense, which is included in selling expense, was $4,960,301, $3,184,392 and $2,052,819 for the years ended March 31, 2016, 2015
and 2014, respectively.
|
|
T.
|
Use of estimates
— The preparation of financial statements in conformity with U.S. Generally Accepted Accounting
Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates include the accounting
for items such as evaluating annual impairment tests, derivative instruments and equity issuances, warrant valuation, stock-based
compensation, allowances for doubtful accounts and inventory obsolescence, depreciation, amortization and expense accruals.
|
|
U.
|
Recent accounting pronouncements
— In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based
Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including
the accounting for income taxes and statutory tax withholding requirements, as well as classification in the statement of cash
flows. The new standard is effective for fiscal years 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.
|
In February 2016, the FASB issued ASU 2016-02, Leases.
The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the
balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required
for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the new
guidance to determine the impact the adoption of this guidance will have on the Company’s results of operations, cash flows
and financial condition.
In
January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial
instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under
the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies
guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on
available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December
15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet
at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the
provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific
credit risk in other comprehensive income.
The
Company 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 September 2015, the FASB issued ASU 2015-16, Business
Combination (Topic 805): Simplifying the Accounting for Measurement Period Adjustments, which requires adjustments to provisional
amounts initially recorded in a business combination that are identified during the measurement period to be recognized in the
reporting period in which the adjustment amounts are determined. This includes any effect on earnings of changes in depreciation,
amortization, or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had
been completed at the acquisition date. ASU 2015-16 also requires the disclosure of the nature and amount of measurement-period
adjustments recognized in the current period, including separately the amounts in current-period income statement line items that
would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the
acquisition date. The guidance is effective for the Company beginning April 1, 2016. The Company will apply the guidance prospectively
for all business combinations that occur subsequent to the adoption date.
In July 2015, the FASB issued ASU 2015-11, Inventory
(Topic 330): Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of
cost or market to the lower of cost and net realizable value. Net realizable value is defined as estimated selling prices in the
ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance must
be applied on a prospective basis and is effective for periods beginning after April 1, 2017, 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 April 2015, the FASB issued 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. In June, 2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30):
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to
SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This update addresses presentation and
subsequent measurement of debt issuance costs related to line-of credit arrangements. Commitment fees paid to the lender
represent the benefit of being able to access capital over the contractual term, and therefore, are not in the scope of the
new guidance and it is appropriate to present such fees as an asset on the balance sheet, regardless of whether or not there
are outstanding borrowings under the revolver. 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 beginning after December 15, 2017. 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.
|
V.
|
Accounting standards adopted
— In November 2015, the FASB issued ASU 2015-17—Balance Sheet Classification
of Deferred Taxes. As part of the FASB's accounting simplification initiative, ASU 2015-17 removes the requirement to separate
deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position.
Instead, the update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of
financial position. ASU 2015-17 is effective for entities for fiscal years beginning after December 15, 2016, with retrospective
application to all periods presented. Early adoption is permitted, and the Company adopted this guidance beginning with its Annual
Report on Form 10-K for the fiscal year ending March 31, 2016. The adoption of this guidance did not have a material impact on
the Company’s results of operations, cash flows or financial condition.
|
NOTE 2 —
BASIC AND DILUTED NET LOSS PER COMMON
SHARE
Basic net loss per common share is computed by dividing net
loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed
giving effect to all potentially dilutive common shares that were outstanding during the period that are not anti-dilutive. Potentially
dilutive common shares consist of incremental shares issuable upon exercise of stock options and warrants or conversion of convertible
notes outstanding. In computing diluted net loss per share for the years ended March 31, 2016, 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 notes is anti-dilutive.
Potential common shares not included in calculating diluted
net loss per share are as follows:
|
|
Years ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Stock options
|
|
|
13,508,086
|
|
|
|
11,988,188
|
|
|
|
11,174,007
|
|
Warrants to purchase common stock
|
|
|
—
|
|
|
|
120,000
|
|
|
|
1,777,802
|
|
5% Convertible notes
|
|
|
1,861,111
|
|
|
|
1,861,111
|
|
|
|
2,361,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,369,197
|
|
|
|
13,969,299
|
|
|
|
15,312,920
|
|
NOTE 3 —
INVENTORIES
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials – net
|
|
$
|
11,976,561
|
|
|
$
|
9,250,893
|
|
Finished goods – net
|
|
|
15,256,761
|
|
|
|
11,817,348
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,233,322
|
|
|
$
|
21,068,241
|
|
As of March 31, 2016 and 2015, 11% and 10%, respectively, of
raw materials and 5% and 4%, respectively, of finished goods were located outside of the United States.
In the years ended March 31, 2016, 2015
and 2014, the Company acquired $5,441,432, $5,333,763 and $3,343,500 of aged bourbon whiskey, respectively, in support of its anticipated
near and mid-term needs.
The Company estimates the allowance for obsolete and slow moving
inventory based on analyses and assumptions including, but not limited to, historical usage, expected future demand and market
requirements.
Inventories are stated at the lower of weighted average cost
or market.
NOTE 4 —
EQUITY INVESTMENT
Investment in Gosling-Castle Partners Inc., consolidated
For the years ended March 31, 2016, 2015 and 2014, GCP had pretax
net income on a stand-alone basis of $3,475,006, $814,573 and $2,337,759, respectively. The Company allocated 40% of this net income,
or $1,390,002, $325,829 and $935,035, to non-controlling interest for the years ended March 31, 2016, 2015 and 2014, respectively.
Combined with the effects of income tax expense, net, allocated to noncontrolling interests as described in Note 1.Q Income Taxes,
the cumulative balance allocated to noncontrolling interests in GCP was $3,353,191 and $2,543,529 at March 31, 2016 and 2015, respectively,
as shown on the accompanying consolidated balance sheets.
In September 2015, GCP declared and paid a $1,500,000 cash dividend
to its shareholders. The Company recorded 60% of this dividend, or $900,000, as a return of capital and a reduction of its investment
in GCP, and allocated 40% of this dividend, or $600,000, to noncontrolling interests and a reduction in the additional paid-in
capital of GCP.
Investment in Copperhead Distillery
Company, equity method
In June 2015, CB-USA purchased 20% of Copperhead
Distillery Company (“Copperhead”) for $500,000. Copperhead owns and operates the Kentucky Artisan Distillery. The investment
was part of an agreement to build a new warehouse to store Jefferson’s bourbons, provide distilling capabilities using special
mash-bills made from locally grown grains and create a visitor center and store to enhance the consumer experience for the Jefferson’s
brand. The investment has been used for the construction of a new warehouse in Crestwood, Kentucky dedicated to the storage of
Jefferson’s whiskies. The Company has accounted for this investment under the equity method of accounting. For the initial
period ended March 31, 2016, the Company recognized $18,667 of income from this investment. The investment balance was $518,667
at March 31, 2016.
NOTE 5 —
EQUIPMENT, NET
Equipment consists of the following:
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Equipment and software
|
|
$
|
2,796,064
|
|
|
$
|
2,434,340
|
|
Furniture and fixtures
|
|
|
112,676
|
|
|
|
40,898
|
|
Leasehold improvements
|
|
|
42,730
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,951,470
|
|
|
|
2,475,238
|
|
Less: accumulated depreciation
|
|
|
2,075,215
|
|
|
|
1,809,865
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
876,255
|
|
|
$
|
665,373
|
|
Depreciation expense for the years ended March 31, 2016, 2015
and 2014 totaled $280,702, $249,683 and $204,180, respectively.
NOTE 6 —
GOODWILL AND INTANGIBLE ASSETS
The carrying amount of goodwill was $496,226 at each of March
31, 2016 and 2015.
Intangible assets consist of the following:
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Definite life brands
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Trademarks
|
|
|
631,693
|
|
|
|
631,693
|
|
Rights
|
|
|
8,271,555
|
|
|
|
8,271,555
|
|
Product development
|
|
|
185,207
|
|
|
|
161,321
|
|
Patents
|
|
|
994,000
|
|
|
|
994,000
|
|
Other
|
|
|
55,460
|
|
|
|
55,460
|
|
|
|
|
10,307,915
|
|
|
|
10,284,029
|
|
Less: accumulated amortization
|
|
|
7,372,585
|
|
|
|
6,713,774
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
2,935,330
|
|
|
|
3,570,255
|
|
Other identifiable intangible assets — indefinite lived*
|
|
|
4,112,972
|
|
|
|
4,112,972
|
|
|
|
$
|
7,048,302
|
|
|
$
|
7,683,227
|
|
Accumulated amortization consists of the following:
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Definite life brands
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Trademarks
|
|
|
331,366
|
|
|
|
295,956
|
|
Rights
|
|
|
6,065,111
|
|
|
|
5,513,162
|
|
Product development
|
|
|
29,188
|
|
|
|
24,002
|
|
Patents
|
|
|
776,920
|
|
|
|
710,654
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
Accumulated amortization
|
|
$
|
7,372,585
|
|
|
$
|
6,713,774
|
|
* Other identifiable intangible assets
— indefinite lived consists of product formulations and the Company’s relationships with its distillers.
Amortization expense for the years ended March 31, 2016, 2015
and 2014 totaled $658,811, $655,769 and $654,005, respectively.
Estimated aggregate amortization expense for each of the next
five fiscal years is as follows:
Years ending March 31,
|
|
Amount
|
|
2017
|
|
$
|
660,690
|
|
2018
|
|
|
660,566
|
|
2019
|
|
|
642,233
|
|
2020
|
|
|
602,578
|
|
2021
|
|
|
49,585
|
|
|
|
|
|
|
Total
|
|
$
|
2,615,652
|
|
NOTE 7 —
RESTRICTED CASH
At March 31, 2016 and 2015, the Company had €303,890 or
$345,076 (translated at the March 31, 2016 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 8A below.
NOTE 8 —
NOTES PAYABLE AND CAPITAL LEASE
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
Foreign revolving credit facilities (A)
|
|
$
|
—
|
|
|
$
|
34,141
|
|
Note payable – GCP note (B)
|
|
|
211,580
|
|
|
|
211,580
|
|
Credit facility (C)
|
|
|
12,088,594
|
|
|
|
10,123,544
|
|
Bourbon term loan (D)
|
|
|
—
|
|
|
|
744,900
|
|
5% Convertible notes (E)
|
|
|
1,675,000
|
|
|
|
1,675,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,975,174
|
|
|
$
|
12,789,165
|
|
|
A.
|
The Company has arranged various facilities aggregating €303,890 or $345,076 (translated at the March 31, 2016 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 March 31, 2016 and 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, 2016 and 2015, $10,579 of accrued interest was converted to amounts due to affiliates. At March
31, 2016 and 2015, $211,580 of principal due on the GCP Note was included in long-term liabilities.
|
|
C.
|
In August 2011, the Company and CB-USA entered into a loan 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 $19.0 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 (as amended, 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 is the rate that, when annualized, is the greatest of (a) the Prime Rate plus 3.00%, (b) the
LIBOR Rate plus 5.50% and (c) 6.00%. As of March 31, 2016, the Credit Facility interest rate was 6.00%. The monthly facility fee
is 0.75% per annum of the maximum Credit Facility. The Amended Agreement contains EBITDA targets allowing for further interest
rate reductions in the future. 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 J. 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 former 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; and (iii) an
Amended and Restated Revolving Credit 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.
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 increased 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 whiskey inventory (the “Purchased Inventory Sublimit”) subject
to certain conditions set forth in the Amended Agreement. The maturity date remained unchanged at July 31, 2019. 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 Purchased Inventory Sublimit interest rate is the rate
that, when annualized, is the greatest of (a) the Prime Rate plus 4.25%, (b) the LIBOR Rate plus 6.75% and (c) 7.50%. As of March
31, 2016, the interest rate applicable to the Purchased Inventory Sublimit was 7.75%. 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 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) an 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.
The Company and CB-USA are referred to individually
and collectively as the Borrower. Pursuant to the Loan Agreement Amendment, the Company and CB-USA may borrow up to the lesser
of (x) $19,000,000 and (y) the sum of the borrowing base calculated in accordance with the Amended Agreement and the Purchased
Inventory Sublimit. For the year ended March 31, 2016, the Company paid interest at 6% through August 9, 2015, then 5.75% through
December 15, 2015, then 6% through March 31, 2016. For the year ended March 31, 2015, the Company paid interest at 6.0%. For the
year ended March 31, 2016, the Company paid interest at 7.5% through December 15, 2015, and then at 7.75% through March 31, 2016
on the Purchased Inventory Sublimit. Interest is payable monthly in arrears, on the first day of every month on the average daily
unpaid principal amount of the Credit Facility. After the occurrence and during the continuance of any “Default” or
“Event of Default” (as defined under the Amended Agreement), the Borrower is required to pay interest at a rate that
is 3.25% per annum above the then applicable Credit Facility interest rate. There have been no Events of Default under the Credit
Facility. ACF also receives a collateral management fee of $1,000 per month (increased to $2,000 after the occurrence of and during
the continuance of an Event of Default) in addition to the facility fee with respect to the Purchased Inventory Sublimit. The Amended
Agreement contains standard borrower representations and warranties for asset-based borrowing and a number of reporting obligations
and affirmative and negative covenants. The Amended Agreement includes negative covenants that, among other things, restrict the
Borrower’s ability to create additional indebtedness, dispose of properties, incur liens and make distributions or cash dividends.
The obligations of the Borrower under the Loan Agreement Amendment are secured by the grant of a pledge and security interest in
all of the assets of the Borrower. At March 31, 2016, the Company was in compliance, in all respects, with the covenants under
the Amended Agreement.
In August 2015, the Company used $3,000,000 of
the Purchased Inventory Sublimit to acquire aged bourbon inventory. Frost Gamma Investments Trust ($150,000), Mark E.
Andrews, III ($50,000), Richard J. Lampen ($100,000) and Alfred J. Small ($15,000) each acquired participation interests in
the Purchased Inventory Sublimit and the inventory purchased with the proceeds thereof. Under the terms of the participation
agreement, the participants receive interest at the rate of 11% per annum. At March 31, 2016 and 2015, $12,088,594 and
$10,123,544, respectively, due on the Credit Facility was included in long-term liabilities. At March 31, 2016 and 2015,
there was $6,911,406 and $1,876,456, respectively, in potential availability under the Credit Facility.
|
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 was the rate that, when annualized, was 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%.
|
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.
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.
|
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), Dennis Scholl ($100,000), 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 ACF and certain
other junior lenders to the Company; the Company is not a party to the Subordination Agreement.
In the year ended March 31, 2015, Convertible Note
holders converted $450,000 of Convertible Notes and $1,417 of accrued interest thereon into 501,574 shares of common stock. At each
of March 31, 2016 and 2015, $1,675,000 of principal due on the Convertible Notes was included in long-term liabilities, respectively.
Payments due on notes payable are as follows:
Years ending March 31,
|
|
Amount
|
|
2017
|
|
$
|
—
|
|
2018
|
|
|
—
|
|
2019
|
|
|
1,675,000
|
|
2020
|
|
|
12,088,594
|
|
2021
|
|
|
211,580
|
|
Thereafter
|
|
|
—
|
|
|
|
|
|
|
Total
|
|
$
|
13,975,174
|
|
NOTE 9 —
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.
During the year ended March 31, 2016, 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 issuance costs of $124,876.
From November 2014 through March 31, 2015, the Company sold
1,290,581 Shares pursuant to the 2014 Distribution Agreement, with total gross proceeds of $2,088,674, before deducting sales agent
and offering expenses of $122,149.
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 $6.0 million.
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 $64,198. No Shares were sold in the nine-month period from July 1, 2014 through March 31, 2015 under the 2013 Distribution
Agreement.
The 2013 Distribution Agreement expired in August 2014 upon
the expiration of the Company’s Registration Statement on Form S-3 under which the shares were sold.
Preferred stock dividends
– Holders of the Company’s
10% Series A Convertible Preferred Stock, par value $0.01 per share (“Series A Preferred Stock”) were entitled to receive
cumulative dividends at the rate per share (as a percentage of the stated value of $1,000 per share) of 10% per annum, whether
or not declared by the Company’s Board of Directors, which were only payable in shares of the Company’s common stock
upon conversion of the Series A Preferred Stock or upon a liquidation. For the year ended March 31, 2014, the Company recorded
accrued dividends of $384,599, included as an increase in the accumulated deficit and in additional paid-in capital on the accompanying
consolidated balance sheets.
On February 11, 2014, the Company’s Board of Directors
approved the mandatory conversion of all outstanding shares of the Series A Preferred Stock pursuant to their terms, effective
on or about February 24, 2014. Pursuant to the mandatory conversion, all 6,271 outstanding shares of Series A Preferred Stock,
and accrued dividends thereon, converted into 25,760,881 shares of common stock.
Preferred stock conversions
— In the period prior
to the February 11, 2014 mandatory conversion, holders of Series A Preferred Stock converted 430 shares of Series A Preferred Stock,
and accrued dividends thereon, into 1,704,729 shares of common stock.
Convertible Notes conversion
- In the year ended March
31, 2015, Convertible Note holders converted $450,000 of Convertible Notes and $1417 of accrued interest thereon into 501,574 shares
of common stock.
Subsidiary dividend
- In September 2015, GCP declared
and paid a $1,500,000 cash dividend to its shareholders. The Company allocated 40% of this dividend, or $600,000, to non-controlling
interests. No dividends were declared or paid in the year ended March 31, 2015.
NOTE 10 —
FOREIGN CURRENCY FORWARD CONTRACTS
The Company enters into forward contracts from time to time
to reduce its exposure to foreign currency fluctuations. The Company recognizes in the balance sheet derivative contracts at fair
value, and reflects any net gains and losses currently in earnings. At March 31, 2016 and 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 —
PROVISION FOR INCOME TAXES
The Company accounts for taxes in accordance with ASC 740, “Income
Taxes”, which requires the recognition of tax benefits or expense on the temporary differences between the tax basis and
book basis of its assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected
to apply to taxable income in the years in which those differences are expected to be recovered or settled.
Tax years 2013 through 2016 remain open to examination by federal
and state tax jurisdictions. The Company has various foreign subsidiaries for which tax years 2010 through 2016 remain open to
examination in certain foreign tax jurisdictions.
The Company’s income tax expense for the years ended March
31, 2016 and 2015 and the Company’s income tax benefit for the year ended March 31, 2014 consist of federal, state and local
taxes attributable to GCP, which does not file a consolidated income tax return with the Company, and foreign taxes. As of March
31, 2016, the Company had federal net operating loss carryforwards of approximately $83,960,000 for U.S. tax purposes, which expire
through 2036, and foreign net operating loss carryforwards of approximately $20,100,000, which carry forward without limit of time.
Utilization of the U.S. tax losses may be limited by the “change of ownership” rules as set forth in section 382 of
the Internal Revenue Code.
The pre-tax income, on a financial statement basis, from foreign
sources totaled $129,814 for the year ended March 31, 2016, $90,466 for the year ended March 31, 2015 and $168,233 for the year
ended March 31, 2014.
The Company did not have any undistributed earnings from foreign
subsidiaries at March 31, 2016 and 2015.
Provision for (benefit from) income taxes consist of the
following:
|
|
Federal
|
|
|
State and Local
|
|
|
Total
|
|
March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,183,000
|
|
|
$
|
397,000
|
|
|
$
|
1,580,000
|
|
Deferred
|
|
|
(148,152
|
)
|
|
|
19,000
|
|
|
|
(129,152
|
)
|
Total
|
|
$
|
1,034,848
|
|
|
$
|
416,000
|
|
|
$
|
1,450,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
608,589
|
|
|
$
|
382,232
|
|
|
$
|
990,821
|
|
Deferred
|
|
|
214,958
|
|
|
|
73,220
|
|
|
|
288,178
|
|
Total
|
|
$
|
823,547
|
|
|
$
|
455,452
|
|
|
$
|
1,278,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
31,068
|
|
|
$
|
31,068
|
|
Deferred
|
|
|
(550,482
|
)
|
|
|
(71,000
|
)
|
|
|
(621,482
|
)
|
Total
|
|
$
|
(550,482
|
)
|
|
$
|
(39,932
|
)
|
|
$
|
(590,414
|
)
|
For the year ended March 31, 2015 the Company incurred $19,501
in interest and penalties which has been included in general and administrative expense on the accompanying consolidated statements
of operations.
The following table reconciles the effective income tax rate
and the federal statutory rate of 34%.
|
|
Years ended March 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
%
|
|
%
|
|
%
|
Computed expected tax benefit, at 34%
|
|
(34.00)
|
|
(34.00)
|
|
(34.00)
|
Permanent items
|
|
176.0
|
|
3.10
|
|
0.80
|
Change in valuation allowance
|
|
371.5
|
|
81.8
|
|
5.80
|
Net change in fair value of warrant liability
|
|
0.00
|
|
0.00
|
|
25.20
|
Effect of foreign rate differential
|
|
12.20
|
|
1.80
|
|
0.50
|
Intercompany profit
|
|
13.90
|
|
2.60
|
|
(0.50)
|
Other
|
|
0.0
|
|
0.0
|
|
3.10
|
State and local taxes, net of federal benefit
|
|
27.5
|
|
3.0
|
|
(7.76)
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
567.10
|
|
58.30
|
|
(6.86)
|
The Company revised its prior years presentation of
the reconciliation of the effective income tax rate to conform to the current year presentation.
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 deferred tax liability is being reversed over the amortization period of the intangible asset (15 years).
The tax effects of temporary differences that give rise to deferred
tax assets and deferred tax liabilities are presented below.
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Foreign currency transactions
|
|
$
|
144,000
|
|
|
$
|
74,000
|
|
Accounts receivable
|
|
|
103,000
|
|
|
|
67,000
|
|
Inventory
|
|
|
857,000
|
|
|
|
588,000
|
|
Stock based compensation
|
|
|
679,000
|
|
|
|
522,000
|
|
Net operating loss carryforwards — U.S.
|
|
|
33,585,000
|
|
|
|
32,676,000
|
|
Net operating loss carryforwards — foreign
|
|
|
2,003,000
|
|
|
|
1,990,000
|
|
Other
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
Total gross assets
|
|
|
37,373,000
|
|
|
|
35,919,000
|
|
Less: Valuation allowance
|
|
|
(37,355,000
|
)
|
|
|
(35,882,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred asset
|
|
$
|
18,000
|
|
|
$
|
37,000
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liability:
|
|
|
|
|
|
|
|
|
Intangible assets acquired in acquisition of subsidiary
|
|
$
|
(629,444
|
)
|
|
$
|
(629,444
|
)
|
Intangible assets acquired in investment in GCP
|
|
|
(592,556
|
)
|
|
|
(740,708
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
$
|
(1,222,000
|
)
|
|
$
|
(1,370,152
|
)
|
The Company revised its schedule of tax effects of
temporary differences that give rise to deferred
tax assets and deferred tax liabilities to conform to the current year presentation.
Through March 31, 2013, the Company recorded a full valuation
allowance against its deferred tax assets as it believed it was more likely than not that such deferred tax assets would not be
realized. The Company released its deferred tax asset valuation allowance allocated to GCP as of March 31, 2014 due to management’s
determination that it was “more likely than not” that the GCP’s deferred tax assets would be realized. “More
likely than not” is defined as greater than 50% probability of occurrence. Management considered the guidance in paragraphs
21-23 of ASC 740-10-30 in forming its conclusion. A determination as to the ultimate realization of the deferred tax assets is
dependent upon management’s judgment and evaluation of both positive and negative evidence, forecasts of future taxable income,
applicable tax planning strategies, and an assessment of current and future economic and business conditions. In 2014, GCP was
in a position of cumulative profitability on a pre-tax basis, considering its operating results for the three years ended March
31, 2014. Management concluded that this record of cumulative profitability in recent years, in addition to a long range forecast
showing continued profitability for GCP, provided sufficient positive evidence that the net U.S. federal tax benefits more likely
than not would be realized. Accordingly, in the year ended March 31, 2014, the Company released the valuation allowance against
GCP’s net federal deferred assets, resulting in a $473,330 benefit in provision for income taxes for the year ended March
31, 2014. The Company recognized the $473,330 benefit in provision for income taxes as an expense for the year ended March 31,
2015. In addition, at March 31, 2014, the Company changed its estimate of the cumulative deferred tax asset allocated to the amortization
of intangibles. The Company’s income tax benefit and effective tax rate for the years ended March 31, 2016, 2015 and 2014
reflect the impact of this valuation allowance reversal and change in estimate.
The valuation allowance for deferred tax assets as of March
31, 2016 and 2015 was approximately $37,355,000 and $35,882,000, respectively. The net change in the total valuation allowance
for the years ended March 31, 2016 and 2015 was $1,473,000 and $1,163,000, respectively. The Company does not offset its deferred
tax assets and liabilities because its deferred tax assets and liabilities are in different taxable entities which do not file
consolidated returns.
NOTE 12 —
STOCK-BASED COMPENSATION
|
A.
|
Stock Incentive Plan
— In July 2003, the Company implemented the 2003 Stock Incentive Plan (the “2003
Plan”), which provides for awards of incentive and non-qualified stock options, restricted stock and stock appreciation rights
for its officers, employees, consultants and directors to attract and retain such individuals. Stock option grants under the Plan
are granted with an exercise price at or above the fair market value of the underlying common stock at the date of grant, generally
vest over a three to five year period and expire ten years after the grant date.
|
As established, there were 2,000,000 shares of common
stock available for distribution under the 2003 Plan. In January 2009, the Company’s shareholders approved an amendment
to the 2003 Plan to increase the number of shares available under the 2003 Plan from 2,000,000 to 12,000,000 and to establish the
maximum number of shares issuable to any one individual in any particular year. As of August 2013, no new awards may be issued
under the 2003 Plan.
In October 2012, the Company’s
shareholders approved the 2013 Incentive Compensation Plan (“2013 Plan”) which provides for an aggregate of
10,000,000 shares of the Company’s stock for awards of incentive and non-qualified stock options, restricted stock and
stock appreciation rights for its officers, employees, consultants and directors to attract and retain such individuals. As
of March 31, 2016, 5,233,000 shares had been issued under the 2013 Plan, with 4,767,000 shares remaining available
for issuance.
Stock-based compensation expense for the years ended
March 31, 2016, 2015 and 2014 amounted to $1,370,556, $787,710 and $393,914, respectively, of which $493,666, $178,137 and $81,567,
respectively, is included in selling expense and $876,890, $609,573 and $312,347, respectively, is included in general and administrative
expense for the years ended March 31, 2016, 2015 and 2014, respectively. At March 31, 2016, total unrecognized compensation cost
amounted to approximately $3,199,593, representing 5,576,273 unvested options. This cost is expected to be recognized over a weighted-average
period of 2.25 years. There were 1,079,602, 677,127 options and 80,758 options exercised during the years ended March 31,
2016, 2015 and 2014, respectively. The Company did not recognize any related tax benefit for the years ended March 31, 2016, 2015
and 2014, as the effects were de minimis.
Stock Options
— A summary of the options
outstanding under the 2003 and 2013 Plans is as follows:
|
|
|
|
|
|
|
|
Years ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Outstanding at beginning of year
|
|
|
11,988,188
|
|
|
$
|
0.58
|
|
|
|
11,174,007
|
|
|
$
|
0.51
|
|
|
|
8,120,765
|
|
|
$
|
0.64
|
|
Granted
|
|
|
2,622,500
|
|
|
|
1.63
|
|
|
|
2,525,000
|
|
|
|
1.04
|
|
|
|
3,300,000
|
|
|
|
0.43
|
|
Exercised
|
|
|
(1,079,602
|
)
|
|
|
0.35
|
|
|
|
(677,127
|
)
|
|
|
0.33
|
|
|
|
(80,758
|
)
|
|
|
0.32
|
|
Forfeited
|
|
|
(23,000
|
)
|
|
|
4.30
|
|
|
|
(1,033,692
|
)
|
|
|
1.10
|
|
|
|
(166,000
|
)
|
|
|
5.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest at end of period
|
|
|
13,508,086
|
|
|
$
|
0.79
|
|
|
|
11,988,188
|
|
|
$
|
0.58
|
|
|
|
11,174,007
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at period end
|
|
|
7,931,813
|
|
|
$
|
0.53
|
|
|
|
7,064,133
|
|
|
$
|
0.49
|
|
|
|
5,511,447
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of grants during the period
|
|
|
|
|
|
$
|
1.07
|
|
|
|
|
|
|
$
|
0.65
|
|
|
|
|
|
|
$
|
0.26
|
|
The following table summarizes activity pertaining
to options outstanding and exercisable at March 31, 2016:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
Range of
|
|
|
|
|
Life in
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Exercise Prices
|
|
Shares
|
|
|
Years
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
$0.01 — $0.25
|
|
|
326,900
|
|
|
|
2.49
|
|
|
|
326,900
|
|
|
$
|
0.22
|
|
|
$
|
235,437
|
|
$0.26 — $0.40
|
|
|
7,757,186
|
|
|
|
5.24
|
|
|
|
6,549,913
|
|
|
|
0.34
|
|
|
|
3,954,614
|
|
$0.41 — $1.00
|
|
|
2,273,500
|
|
|
|
8.26
|
|
|
|
529,000
|
|
|
|
1.00
|
|
|
|
—
|
|
$1.01 — $2.00
|
|
|
3,027,500
|
|
|
|
8.90
|
|
|
|
403,000
|
|
|
|
1.34
|
|
|
|
—
|
|
$6.01 — $7.00
|
|
|
17,000
|
|
|
|
0.98
|
|
|
|
17,000
|
|
|
|
6.36
|
|
|
|
—
|
|
$7.01 — $8.00
|
|
|
98,500
|
|
|
|
0.28
|
|
|
|
98,500
|
|
|
|
7.21
|
|
|
|
—
|
|
$8.01 — $9.00
|
|
|
7,500
|
|
|
|
0.85
|
|
|
|
7,500
|
|
|
|
9.00
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,508,086
|
|
|
|
6.46
|
|
|
|
7,931,813
|
|
|
$
|
0.53
|
|
|
$
|
4,190,051
|
|
Total stock options exercisable as of March 31, 2016
were 7,931,813. The weighted average exercise price of these options was $0.53. The weighted average remaining life of the options
outstanding was 6.46 years and of the options exercisable was 5.10 years.
The following summarizes activity pertaining to the
Company’s unvested options for the years ended March 31, 2016, 2015 and 2014:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
Unvested at March 31, 2013
|
|
|
3,871,807
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,300,000
|
|
|
|
0.43
|
|
Canceled or expired
|
|
|
(10,000
|
)
|
|
|
0.32
|
|
Vested
|
|
|
(1,499,247
|
)
|
|
|
0.32
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2014
|
|
|
5,662,560
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,525,000
|
|
|
|
1.04
|
|
Canceled or expired
|
|
|
(954,083
|
)
|
|
|
0.44
|
|
Vested
|
|
|
(2,309,422
|
)
|
|
|
0.41
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2015
|
|
|
4,924,055
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,622,500
|
|
|
|
1.63
|
|
Canceled or expired
|
|
|
(12,000
|
)
|
|
|
0.97
|
|
Vested
|
|
|
(1,958,282
|
)
|
|
|
0.70
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2016
|
|
|
5,576,273
|
|
|
$
|
1.17
|
|
The fair value of each award under the 2003 and 2013
Plans is estimated on the grant date using the Black-Scholes option pricing model and is affected by assumptions regarding a number
of complex and subjective variables. The use of an option pricing model also requires the use of a number of complex assumptions
including expected volatility, risk-free interest rate, expected dividends, and expected term. Expected volatility is based on
the Company’s historical volatility and the volatility of a peer group of companies over the expected life of the option.
The expected term and vesting of the options represents the estimated period of time until exercise. The expected term was determined
using the simplified method available under current guidance. The risk-free interest rate is based on the U.S. Treasury yield curve
in effect at the time of grant for the expected term of the option. The Company has not paid dividends on its common stock in the
past and does not plan to pay any dividends on its common stock in the near future. Current authoritative guidance also requires
the Company to estimate forfeitures at the time of grant and revise these estimates, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The Company estimates forfeitures based on its expectation of future experience while
considering its historical experience.
The fair value of options at grant date was estimated using
the Black-Scholes option pricing model utilizing the following weighted average assumptions:
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Risk-free interest rate
|
|
|
1.39%
- 1.81
|
%
|
|
|
1.47%
- 1.76
|
%
|
|
|
0.86% - 1.85
|
%
|
Expected option life in years
|
|
|
5.5 - 6.25
|
|
|
|
5.5 - 6.25
|
|
|
|
5.5 - 6.25
|
|
Expected stock price volatility
|
|
|
70% - 73
|
%
|
|
|
74% - 77
|
%
|
|
|
65%
- 76
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
B.
|
Warrants
— The Company has entered into various warrant agreements.
|
2011 Warrants issued in connection
with the Series A Preferred Stock
The warrants issued in connection with the Series A
Preferred Stock (the “2011 Warrants”) had an exercise price of $0.38 per share, subject to adjustment, and were
exercisable for a period of five years. The exercise price of the 2011 Warrants was equal to 125% of the conversion price
of the Series A Preferred Stock.
The Company accounted for the 2011 Warrants issued
in June 2011 in the consolidated financial statements as a liability at their initial fair value of $487,022 and accounted
for the 2011 Warrants issued in October 2011 as a liability at their initial fair value of $780,972. Changes in the fair value
of the 2011 Warrants were recognized in earnings for each subsequent reporting period. In November 2013, in accordance with certain
terms of the 2011 Warrants, the down-round provisions included in the terms of the warrant ceased to be in force or effect as a
result of the historical volume weighted average price and trading volume of the Company’s common stock. The Company then
reclassed the fair value of the outstanding warrant liability of $6,187,968 to equity, resulting in an increase to additional paid-in
capital.
For the year ended March 31, 2014 the Company recorded
a loss on the change in the value of the 2011 Warrants of $5,392,594.
The fair value of the warrants is a Level 3 fair value
under the valuation hierarchy and was estimated using the Black-Scholes option pricing model utilizing the following assumptions:
|
|
At Conversion
|
|
Stock price
|
|
$
|
0.92
|
|
Risk-free interest rate
|
|
|
0.61
|
%
|
Expected option life in years
|
|
|
2.63
|
|
Expected stock price volatility
|
|
|
55
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
2011 Warrants exercised
– On April 2,
2014, the Company called for the cancellation of all 1,657,802 unexercised 2011 Warrants pursuant to the terms of such 2011 Warrants
after satisfying applicable conditions. Pursuant to the call for cancellation, holders of all 1,657,802 unexercised 2011 Warrants
exercised such 2011 Warrants and received 1,657,802 shares of common stock. The Company received $629,965 in cash upon the exercise
of these warrants. In the year ended March 31, 2014, holders of 2011 Warrants exercised 10,127,123 2011 Warrants and received shares
of common stock. The Company received $3,848,332 in cash upon the exercise of these warrants. These exercised warrants had a weighted
average fair market value of $0.50 at exercise date.
For the year ended March 31, 2016, 120,000 warrant
shares expired unexercised.
The following is a summary of the Company’s outstanding
warrants for the periods presented:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Price
|
|
|
|
Warrants
|
|
|
Per Warrant
|
|
Warrants outstanding and exercisable, March 31, 2013
|
|
|
11,904,925
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(10,127,123
|
)
|
|
|
0.38
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable, March 31, 2014
|
|
|
1,777,802
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(1,657,802
|
)
|
|
|
0.38
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable, March 31, 2015
|
|
|
120,000
|
|
|
$
|
8.00
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(120,000
|
)
|
|
|
8.00
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable, March 31, 2016
|
|
|
—
|
|
|
$
|
—
|
|
NOTE 13 —
RELATED PARTY TRANSACTIONS
|
A.
|
Pallini S.p.A. (“Pallini”), as successor in interest to I.L.A.R. S.p.A., is a shareholder in the Company and one
of the officers of Pallini served as a director of the Company until March 26, 2015. In January 2011, CB-USA entered into an agreement
("New Agreement") with Pallini regarding the importation and distribution of certain Pallini brand products. The terms
of the New Agreement were effective as of April 1, 2010.
|
Pallini is no longer a related party effective April
1, 2015.
For the years ended March 31, 2015 and 2014, the Company
purchased goods from Pallini for $3,840,446 and $3,467,812, respectively. As of March 31, 2015 and 2014, Pallini owed the Company
$138,750 and $115,288, respectively, for its share of marketing expense, which is included in due from shareholders and affiliates
on the consolidated balance sheet. As of March 31, 2015 and 2014, the Company was indebted to Pallini for $511,146 and $229,557,
respectively, which is included in due to shareholders and affiliates on the consolidated balance sheet.
|
B.
|
In November 2008, the Company entered into a management services agreement with Vector Group Ltd., a more than 5% shareholder,
under which Vector Group agreed to make available to the Company the services of Richard J. Lampen, Vector Group’s executive
vice president, effective October 11, 2008 to serve as the Company’s president and chief executive officer and to provide
certain other financial and accounting services, including assistance with complying with Section 404 of the Sarbanes-Oxley
Act of 2002. In consideration for such services, the Company agreed to pay Vector Group an annual fee of $100,000, plus any direct,
out-of-pocket costs, fees and other expenses incurred by Vector Group or Mr. Lampen in connection with providing such services,
and to indemnify Vector Group for any liabilities arising out of the provision of the services. The agreement is terminable by
either party upon 30 days’ prior written notice. For the years ended March 31, 2016, 2015 and 2014, Vector Group was
paid $85,396, $135,475 and $104,746, respectively, under this agreement. These charges have been included in general and administrative
expense.
|
|
C.
|
In November 2008, the Company entered into an agreement to reimburse Ladenburg Thalmann Financial Services Inc. (“LTS”)
for its costs in providing certain administrative, legal and financial services to the Company. For the years ended March 31, 2016,
2015 and 2014, LTS was paid $131,054, $210,875 and $126,000, respectively, under this agreement. Mr. Lampen, the Company’s
president and chief executive officer and a director, is the president and chief executive officer and a director of LTS and four
other directors of the Company serve as directors of LTS, including Phillip Frost, M.D. who is the Chairman and principal shareholder
of LTS.
|
|
D.
|
As described in Note 8C, in March 2013, the Company entered into a Participation Agreement with certain related parties. As
described in Notes 8D and 8E, in August and October 2013, the Company entered into various notes with certain related parties.
|
NOTE 14 —
COMMITMENTS AND CONTINGENCIES
|
A.
|
The Company has entered into a supply agreement with an Irish distiller (“Irish Distillery”), which
provides for
the production of blended Irish whiskeys for the Company
until the contract is terminated by either party in accordance with
the terms of the agreement. The Irish Distillery may terminate the contract if it provides at least six years prior
notice to the Company,
except for breach. Under this agreement, the Company
provides the Irish Distillery with a forecast of the
estimated amount of liters of pure
alcohol it requires for the next four fiscal contract years and agrees to purchase 90% of that amount, subject to certain
annual adjustments. For the contract year ending June 30, 2016, the Company has contracted to purchase approximately
€883,673 or $946,661 (translated at the March 31, 2016 exchange rate) in bulk Irish whiskey, of which
€783,469, or $889,653, has been purchased as of March 31, 2016. For the contract year ending June 30, 2017,
the Company has contracted to purchase approximately €900,386 or $1,022,415 (translated at the March 31, 2016 exchange
rate) in bulk Irish whiskey. The Company is not obligated to pay the Irish Distillery for any product not yet received.
During the term of this supply agreement, the Irish
Distillery has the right to limit additional purchases above
the commitment amount.
|
|
B.
|
The Company has also entered into a supply agreement with the Irish Distillery, which provides for the production of single malt Irish whiskeys
for the Company until the contract is terminated by either party in accordance with the terms of the agreement. The Irish Distillery may terminate
the contract if it provides at least thirteen years prior notice to the Company, except for breach. Under this agreement, the Company
provides the Irish Distillery with a forecast of the estimated amount of liters of pure alcohol it requires for the next twelve fiscal contract
years and agrees to purchase 80% of that amount, subject to certain annual adjustments. For the contract year ending June 30, 2016,
the Company has contracted to purchase approximately €343,787 or $390,380 (translated at the March 31, 2016 exchange
rate) in bulk Irish whiskey, of which €288,781, or $327,920, has been purchased as of March 31, 2016. For the year
ending June 30, 2017, the Company has contracted to purchase approximately €394,961 or $448,490 (translated at the March 31,
2016 exchange rate) in bulk Irish whiskey. The Company is not obligated to pay the Irish Distillery for any product not yet received. During the
term of this supply agreement, the Irish Distillery has the right to limit additional purchases above the commitment amount.
|
|
C.
|
The Company has entered into a supply agreement with a bourbon distiller, which provides for the production of newly
distilled bourbon whiskey through December 31, 2019. Under this agreement, the distiller provides the Company with an agreed
upon amount of original proof gallons of newly distilled bourbon whiskey, subject to certain annual adjustments. For the
contract year ended December 31, 2015, the Company contracted and purchased approximately $1,643,000 in newly distilled
bourbon. For the contract year ending December 31, 2016, the Company contracted to purchase approximately $2,053,750 in
newly distilled bourbon, none of which had been purchased as
of March 31, 2016. The Company
is not
obligated to
pay the distiller for any product not yet received.
During the term of
this supply agreement, the distiller has the right to limit additional purchases to ten percent above the commitment
amount.
|
|
D.
|
The Company has a distribution agreement with an international supplier to be the sole-producer
of Celtic Honey, one of the Company’s products, for an indefinite period.
|
|
E.
|
The Company leases office space in New York, NY, Dublin, Ireland and Houston, TX. The New York, NY lease began on May 1, 2010
and expires on February 29, 2020 and provides for monthly payments of $26,255. The Dublin lease commenced on March 1, 2009 and
extends through October 31, 2016 and provides for monthly payments of €1,100 or $1,249 (translated at the March 31, 2016 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.
|
Future minimum lease payments for leases with initial or remaining
terms in excess of one year are as follows:
Years ending March 31,
|
|
Amount
|
|
2017
|
|
$
|
365,089
|
|
2018
|
|
|
364,829
|
|
2019
|
|
|
341,079
|
|
2020
|
|
|
310,322
|
|
|
|
|
|
|
Total
|
|
$
|
1,381,319
|
|
In addition to the above annual rental payments, the
Company is obligated to pay its pro-rata share of utility and maintenance expenses on the leased premises. Rent expense under operating
leases amounted to approximately $335,047, $359,714 and $356,280 for the years ended March 31, 2016, 2015 and 2014, respectively,
and is included in general and administrative expense.
|
F.
|
Under the amended terms of the agreement under which the Company purchased McLain & Kyne, the Company was obligated to
pay an earn-out to the sellers based on the financial performance of the acquired business. As of June 30, 2013, the Company had
reached the specified case sale threshold for contingent consideration under the agreement. Accordingly, no further contingent
consideration will be due. For the years ended March 31, 2016, 2015 and 2014, the sellers earned $0, $0 and $5,940, respectively,
under this agreement.
|
|
G.
|
As described in Note 8C, in August 2011, the Company and CB-USA entered into the Credit Facility, as amended in July 2012,
March 2013, August 2013, November 2013, August 2014, September 2014 and August 2015.
|
|
H.
|
Except as set forth below, the Company believes that neither it nor any of its subsidiaries is currently subject to litigation
which, in the opinion of management after consultation with counsel, is likely to have a material adverse effect on the Company.
|
The Company may become involved
in litigation from time to time relating to claims arising in the ordinary course of its business. These claims, even if not meritorious,
could result in the expenditure of significant financial and managerial resources.
NOTE 15 —
CONCENTRATIONS
|
A.
|
Credit Risk
— The Company maintains its cash and cash equivalents balances at various large financial institutions
that, at times, may exceed federally and internationally insured limits. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk.
|
|
B.
|
Customers
— Sales to one customer, the Southern Wine and Spirits of America, Inc. family of companies, accounted
for approximately, 31.4%, 29.7% and 31.9% of the Company’s net sales for the years ended March 31, 2016, 2015 and 2014, respectively,
and approximately 27.7% and 30.1% of accounts receivable at March 31, 2016 and 2015, respectively.
|
NOTE 16 —
GEOGRAPHIC INFORMATION
The Company operates in one reportable
segment — the sale of premium beverage alcohol. The Company’s product categories are rum, 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 loss
attributable to controlling interests, consolidated income tax (expense) benefit and consolidated assets from the U.S. and
foreign countries and consolidated sales, net by category.
|
|
Years ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Consolidated Sales, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
9,302,134
|
|
|
|
12.9
|
%
|
|
$
|
7,938,393
|
|
|
|
13.8
|
%
|
|
$
|
7,305,516
|
|
|
|
15.2
|
%
|
United States
|
|
|
62,918,234
|
|
|
|
87.1
|
%
|
|
|
49,519,028
|
|
|
|
86.2
|
%
|
|
|
40,834,967
|
|
|
|
84.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Sales, net
|
|
$
|
72,220,368
|
|
|
|
100.0
|
%
|
|
$
|
57,457,421
|
|
|
|
100.0
|
%
|
|
$
|
48,140,483
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Income (Loss) from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
(34,268
|
)
|
|
|
(3.4
|
)%
|
|
$
|
17,172
|
|
|
|
(1.6
|
)%
|
|
$
|
(266
|
)
|
|
|
0.0
|
%
|
United States
|
|
|
1,039,815
|
|
|
|
103.4
|
%
|
|
|
(1,095,077
|
)
|
|
|
101.6
|
%
|
|
|
(1,319,567
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Income (Loss) from Operations
|
|
$
|
1,005,547
|
|
|
|
100.0
|
%
|
|
$
|
(1,077,905
|
)
|
|
|
100.0
|
%
|
|
$
|
(1,319,833
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Loss Attributable to Controlling Interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
11,490
|
|
|
|
(0.5
|
)%
|
|
$
|
(101,453
|
)
|
|
|
2.7
|
%
|
|
$
|
(153,419
|
)
|
|
|
1.7
|
%
|
United States
|
|
|
(2,527,858
|
)
|
|
|
100.5
|
%
|
|
|
(3,698,289
|
)
|
|
|
97.3
|
%
|
|
|
(8,753,328
|
)
|
|
|
98.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Net Loss Attributable to Controlling Interests
|
|
$
|
(2,516,368
|
)
|
|
|
100.0
|
%
|
|
$
|
(3,799,742
|
)
|
|
|
100.0
|
%
|
|
$
|
(8,906,747
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(1,450,848
|
)
|
|
|
100.0
|
%
|
|
$
|
(1,278,999
|
)
|
|
|
100.0
|
%
|
|
$
|
590,414
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Sales, net by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rum
|
|
$
|
18,858,554
|
|
|
|
26.1
|
%
|
|
$
|
16,998,034
|
|
|
|
29.6
|
%
|
|
$
|
16,643,640
|
|
|
|
34.6
|
%
|
Whiskey
|
|
|
26,009,839
|
|
|
|
36.0
|
%
|
|
|
19,147,028
|
|
|
|
33.3
|
%
|
|
|
13,521,875
|
|
|
|
28.1
|
%
|
Liqueurs
|
|
|
8,567,121
|
|
|
|
11.9
|
%
|
|
|
8,756,376
|
|
|
|
15.2
|
%
|
|
|
8,992,277
|
|
|
|
18.7
|
%
|
Vodka
|
|
|
2,364,429
|
|
|
|
3.3
|
%
|
|
|
2,413,994
|
|
|
|
4.2
|
%
|
|
|
2,852,956
|
|
|
|
5.9
|
%
|
Tequila
|
|
|
198,330
|
|
|
|
0.3
|
%
|
|
|
208,845
|
|
|
|
0.4
|
%
|
|
|
218,552
|
|
|
|
0.5
|
%
|
Wine
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
284,806
|
|
|
|
0.6
|
%
|
Related Non-Alcoholic Beverage Products
|
|
|
16,222,095
|
|
|
|
22.5
|
%
|
|
|
9,933,144
|
|
|
|
17.3
|
%
|
|
|
5,626,377
|
|
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Sales, net
|
|
$
|
72,220,368
|
|
|
|
100.0
|
%
|
|
$
|
57,457,421
|
|
|
|
100.0
|
%
|
|
$
|
48,140,483
|
|
|
|
100.0
|
%
|
|
|
As of March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Consolidated Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
2,786,333
|
|
|
|
5.5
|
%
|
|
$
|
2,052,583
|
|
|
|
4.7
|
%
|
United States
|
|
|
47,506,080
|
|
|
|
94.5
|
%
|
|
|
41,986,357
|
|
|
|
95.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Assets
|
|
$
|
50,292,413
|
|
|
|
100.0
|
%
|
|
$
|
44,038,940
|
|
|
|
100.0
|
%
|
NOTE 17 —
QUARTERLY FINANCIAL DATA
(unaudited)
|
|
|
1st
|
|
|
|
2nd
|
|
|
|
3rd
|
|
|
|
4th
|
|
Fiscal 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
16,513,079
|
|
|
$
|
18,536,509
|
|
|
$
|
17,207,372
|
|
|
$
|
19,963,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,627,314
|
|
|
|
7,056,402
|
|
|
|
6,702,095
|
|
|
|
8,167,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(850,144
|
)
|
|
$
|
(682,057
|
)
|
|
$
|
(595,911
|
)
|
|
$
|
421,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) loss attributable to noncontrolling interests
|
|
|
(273,518
|
)
|
|
|
(329,214
|
)
|
|
|
(211,792
|
)
|
|
|
4,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to controlling interests
|
|
|
(1,123,662
|
)
|
|
|
(1,011,271
|
)
|
|
|
(807,703
|
)
|
|
|
426,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders
|
|
$
|
(1,123,662
|
)
|
|
$
|
(1,011,271
|
)
|
|
$
|
(807,703
|
)
|
|
$
|
426,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share, basic,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
attributable to common shareholders
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
Net (loss)
income per common share, diluted,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
attributable to common shareholders
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
Weighted average shares used in computation,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic, attributable to common shareholders
|
|
|
157,535,571
|
|
|
|
159,774,811
|
|
|
|
160,031,891
|
|
|
|
160,167,121
|
|
Weighted average shares used in computation,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted, attributable to common shareholders
|
|
|
157,535,571
|
|
|
|
159,774,811
|
|
|
|
160,031,891
|
|
|
|
167,331,808
|
|
|
|
|
1st
|
|
|
|
2nd
|
|
|
|
3rd
|
|
|
|
4th
|
|
Fiscal 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
11,982,199
|
|
|
$
|
13,381,704
|
|
|
$
|
15,936,514
|
|
|
$
|
16,157,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,546,654
|
|
|
|
4,883,673
|
|
|
|
5,994,860
|
|
|
|
6,147,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,190,495
|
)
|
|
$
|
(869,464
|
)
|
|
$
|
(311,886
|
)
|
|
$
|
(1,102,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) loss attributable to noncontrolling interests
|
|
|
(305,336
|
)
|
|
|
(211,049
|
)
|
|
|
(279,110
|
)
|
|
|
469,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to controlling interests
|
|
|
(1,495,831
|
)
|
|
|
(1,080,513
|
)
|
|
|
(590,996
|
)
|
|
|
(632,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders
|
|
$
|
(1,495,831
|
)
|
|
$
|
(1,080,513
|
)
|
|
$
|
(590,996
|
)
|
|
$
|
(632,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
attributable to common shareholders
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic and diluted, attributable to common shareholders
|
|
|
153,929,182
|
|
|
|
155,189,679
|
|
|
|
155,838,146
|
|
|
|
156,882,587
|
|