Item 1. Financial
Statements
CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
|
|
September 30,
2016
|
|
|
March 31,
2016
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
679,583
|
|
|
$
|
1,430,532
|
|
Accounts receivable — net of allowance for doubtful accounts of $304,492 and $245,238 at September 30 and March 31, 2016, respectively
|
|
|
11,621,916
|
|
|
|
10,410,571
|
|
Due from shareholders and affiliates
|
|
|
2,748
|
|
|
|
3,279
|
|
Inventories— net of allowance for obsolete and slow moving inventory of $364,705 and $331,008 at September 30 and March 31, 2016, respectively
|
|
|
28,017,837
|
|
|
|
27,233,322
|
|
Prepaid expenses and other current assets
|
|
|
1,962,486
|
|
|
|
1,611,797
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
42,284,570
|
|
|
|
40,689,501
|
|
|
|
|
|
|
|
|
|
|
Equipment — net
|
|
|
855,568
|
|
|
|
876,255
|
|
|
|
|
|
|
|
|
|
|
Intangible assets — net of accumulated amortization of $7,694,273 and $7,372,585 at September 30 and March 31, 2016, respectively
|
|
|
6,726,614
|
|
|
|
7,048,302
|
|
Goodwill
|
|
|
496,226
|
|
|
|
496,226
|
|
Investment in non-consolidated affiliate, at equity
|
|
|
541,987
|
|
|
|
518,667
|
|
Restricted cash
|
|
|
348,208
|
|
|
|
345,076
|
|
Other assets
|
|
|
116,606
|
|
|
|
129,486
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
51,369,779
|
|
|
$
|
50,103,513
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,521,695
|
|
|
$
|
5,652,260
|
|
Accrued expenses
|
|
|
4,179,591
|
|
|
|
4,352,170
|
|
Due to shareholders and affiliates
|
|
|
1,881,868
|
|
|
|
1,338,072
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
12,583,154
|
|
|
|
11,342,502
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
Credit facility, net (including $234,885 and $275,625 of related-party participation at September 30 and March 31, 2016, respectively)
|
|
|
12,192,610
|
|
|
|
11,917,694
|
|
Notes payable – 5% Convertible notes (including $1,100,000 of related party participation at September 30 and March 31, 2016)
|
|
|
1,675,000
|
|
|
|
1,675,000
|
|
Notes payable – GCP Note
|
|
|
216,869
|
|
|
|
211,580
|
|
Deferred tax liability
|
|
|
1,129,924
|
|
|
|
1,204,000
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
27,797,557
|
|
|
|
26,350,776
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued and outstanding at September 30 and March 31, 2016
|
|
|
—
|
|
|
|
—
|
|
Common stock, $.01 par value, 300,000,000 shares authorized at September 30 and March 31, 2016, 160,951,277 and 160,474,777 shares issued and outstanding at September 30 and March 31, 2016, respectively
|
|
|
1,609,513
|
|
|
|
1,604,748
|
|
Additional paid-in capital
|
|
|
167,791,293
|
|
|
|
166,866,671
|
|
Accumulated deficit
|
|
|
(147,344,608
|
)
|
|
|
(145,878,079
|
)
|
Accumulated other comprehensive loss
|
|
|
(2,218,139
|
)
|
|
|
(2,193,794
|
)
|
|
|
|
|
|
|
|
|
|
Total controlling shareholders’ equity
|
|
|
19,838,059
|
|
|
|
20,399,546
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
|
3,734,163
|
|
|
|
3,353,191
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
23,572,222
|
|
|
|
23,752,737
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
51,369,779
|
|
|
$
|
50,103,513
|
|
See accompanying notes to the unaudited
condensed consolidated financial statements.
CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated
Statements of Operations
(Unaudited)
|
|
Three months ended September 30,
|
|
|
Six months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Sales, net*
|
|
$
|
19,627,791
|
|
|
$
|
18,536,509
|
|
|
$
|
36,378,716
|
|
|
$
|
35,049,588
|
|
Cost of sales*
|
|
|
11,900,531
|
|
|
|
11,480,107
|
|
|
|
21,935,341
|
|
|
|
21,365,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,727,260
|
|
|
|
7,056,402
|
|
|
|
14,443,375
|
|
|
|
13,683,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expense
|
|
|
5,031,597
|
|
|
|
4,941,213
|
|
|
|
9,662,512
|
|
|
|
9,293,158
|
|
General and administrative expense
|
|
|
2,140,659
|
|
|
|
1,691,332
|
|
|
|
4,130,894
|
|
|
|
3,757,423
|
|
Depreciation and amortization
|
|
|
253,463
|
|
|
|
233,069
|
|
|
|
507,097
|
|
|
|
461,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
301,541
|
|
|
|
190,788
|
|
|
|
142,872
|
|
|
|
171,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net
|
|
|
(27
|
)
|
|
|
600
|
|
|
|
(333
|
)
|
|
|
(221
|
)
|
Income from equity investment in non-consolidated affiliate
|
|
|
18,837
|
|
|
|
4,513
|
|
|
|
23,320
|
|
|
|
4,513
|
|
Foreign exchange (loss) gain
|
|
|
(3,375
|
)
|
|
|
(40,360
|
)
|
|
|
76,488
|
|
|
|
(89,579
|
)
|
Interest expense, net
|
|
|
(328,868
|
)
|
|
|
(257,636
|
)
|
|
|
(639,129
|
)
|
|
|
(514,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(11,892
|
)
|
|
|
(102,095
|
)
|
|
|
(396,782
|
)
|
|
|
(428,277
|
)
|
Income tax expense, net
|
|
|
(477,962
|
)
|
|
|
(579,962
|
)
|
|
|
(688,775
|
)
|
|
|
(1,103,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(489,854
|
)
|
|
|
(682,057
|
)
|
|
|
(1,085,557
|
)
|
|
|
(1,532,201
|
)
|
Net income attributable to noncontrolling interests
|
|
|
(210,856
|
)
|
|
|
(329,214
|
)
|
|
|
(380,972
|
)
|
|
|
(602,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(700,710
|
)
|
|
$
|
(1,011,271
|
)
|
|
$
|
(1,466,529
|
)
|
|
$
|
(2,134,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted, attributable to common shareholders
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation, basic and diluted, attributable to common shareholders
|
|
|
160,698,696
|
|
|
|
159,774,811
|
|
|
|
160,610,804
|
|
|
|
158,661,309
|
|
* Sales, net and Cost of sales include excise taxes of $1,912,740
and $1,919,019 for the three months ended September 30, 2016 and 2015, respectively, and $3,628,701 and $3,687,999 for the six
months ended September 30, 2016 and 2015, respectively.
See accompanying notes to the unaudited
condensed consolidated financial statements.
CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated
Statements of Comprehensive Loss
(Unaudited)
|
|
Three months ended September 30,
|
|
|
Six months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net loss
|
|
$
|
(489,854
|
)
|
|
$
|
(682,057
|
)
|
|
$
|
(1,085,557
|
)
|
|
$
|
(1,532,201
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
19,627
|
|
|
|
27,199
|
|
|
|
(24,345
|
)
|
|
|
74,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss):
|
|
|
19,627
|
|
|
|
27,199
|
|
|
|
(24,345
|
)
|
|
|
74,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(470,227
|
)
|
|
$
|
(654,858
|
)
|
|
$
|
(1,109,902
|
)
|
|
$
|
(1,458,000
|
)
|
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, 2016
|
|
|
160,474,777
|
|
|
$
|
1,604,748
|
|
|
$
|
166,866,671
|
|
|
$
|
(145,878,079
|
)
|
|
$
|
(2,193,794
|
)
|
|
$
|
3,353,191
|
|
|
$
|
23,752,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,466,529
|
)
|
|
|
|
|
|
|
380,972
|
|
|
|
(1,085,557
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,345
|
)
|
|
|
|
|
|
|
(24,345
|
)
|
Common stock issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,355
|
)
|
Exercise of common stock options
|
|
|
476,500
|
|
|
|
4,765
|
|
|
|
176,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181,245
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
762,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
762,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, SEPTEMBER 30, 2016
|
|
|
160,951,277
|
|
|
$
|
1,609,513
|
|
|
$
|
167,791,293
|
|
|
$
|
(147,344,608
|
)
|
|
$
|
(2,218,139
|
)
|
|
$
|
3,734,163
|
|
|
$
|
23,572,222
|
|
See accompanying notes to the unaudited
condensed consolidated financial statements.
CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of
Cash Flows
(Unaudited)
|
|
Six months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,085,557
|
)
|
|
$
|
(1,532,201
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
507,097
|
|
|
|
461,325
|
|
Provision for doubtful accounts
|
|
|
23,100
|
|
|
|
43,000
|
|
Amortization of deferred financing costs
|
|
|
89,608
|
|
|
|
92,181
|
|
Deferred income tax expense, net
|
|
|
(74,076
|
)
|
|
|
(90,076
|
)
|
Net income from equity investment in non-consolidated affiliate
|
|
|
(23,320
|
)
|
|
|
(4,513
|
)
|
Effect of changes in foreign exchange
|
|
|
(76,488
|
)
|
|
|
89,579
|
|
Stock-based compensation expense
|
|
|
762,497
|
|
|
|
698,390
|
|
Addition to provision for obsolete inventory
|
|
|
100,000
|
|
|
|
100,000
|
|
Changes in operations, assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,235,903
|
)
|
|
|
264,416
|
|
Due from affiliates
|
|
|
531
|
|
|
|
137,283
|
|
Inventory
|
|
|
(828,416
|
)
|
|
|
(2,662,691
|
)
|
Prepaid expenses and supplies
|
|
|
(351,239
|
)
|
|
|
202,982
|
|
Other assets
|
|
|
(43,725
|
)
|
|
|
(86,667
|
)
|
Accounts payable and accrued expenses
|
|
|
700,370
|
|
|
|
1,648,871
|
|
Accrued interest
|
|
|
5,289
|
|
|
|
5,289
|
|
Due to shareholders and affiliates
|
|
|
543,796
|
|
|
|
(491,966
|
)
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
99,121
|
|
|
|
407,403
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(986,436
|
)
|
|
|
(1,124,798
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(164,840
|
)
|
|
|
(202,260
|
)
|
Acquisition of intangible assets
|
|
|
—
|
|
|
|
(17,138
|
)
|
Investment in non-consolidated affiliate, at equity
|
|
|
—
|
|
|
|
(500,000
|
)
|
Change in restricted cash
|
|
|
(7,190
|
)
|
|
|
(159
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(172,030
|
)
|
|
|
(719,557
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net proceeds from credit facility
|
|
|
241,913
|
|
|
|
384,074
|
|
Payments on Bourbon term loan
|
|
|
—
|
|
|
|
(744,900
|
)
|
Net payments on foreign revolving credit facility
|
|
|
—
|
|
|
|
(34,896
|
)
|
Proceeds from issuance of common stock
|
|
|
—
|
|
|
|
3,251,989
|
|
Payments for costs of stock issuance
|
|
|
(14,355
|
)
|
|
|
(95,344
|
)
|
Subsidiary dividend paid to non-controlling interests
|
|
|
—
|
|
|
|
(600,000
|
)
|
Proceeds from exercise of common stock options
|
|
|
181,245
|
|
|
|
234,088
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
408,803
|
|
|
|
2,395,011
|
|
|
|
|
|
|
|
|
|
|
EFFECTS OF FOREIGN CURRENCY TRANSLATION
|
|
|
(1,286
|
)
|
|
|
(3,019
|
)
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(750,949
|
)
|
|
|
547,637
|
|
CASH AND CASH EQUIVALENTS — BEGINNING
|
|
|
1,430,532
|
|
|
|
1,191,603
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS — ENDING
|
|
$
|
679,583
|
|
|
$
|
1,739,240
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
Schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Surrender of common stock in connection with exercise of common stock warrant
|
|
$
|
—
|
|
|
$
|
31,250
|
|
Conversion of 5% convertible note to common stock
|
|
$
|
—
|
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
551,428
|
|
|
$
|
485,685
|
|
Income taxes paid
|
|
$
|
1,010,780
|
|
|
$
|
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, 2016 is derived from the March 31, 2016 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, 2016 included in the Company’s annual report on Form 10-K for the year ended March 31,
2016, as amended (“2016 Form 10-K”). Please refer to the notes to the audited consolidated financial statements included
in the 2016 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.
|
Liquidity
– The Company believes that its current cash and working capital, the availability
under the Credit Facility (as defined in Note 7C) and the additional funds that may be
raised under the 2014 Distribution Agreement (as defined in Note 8) will enable it to
fund its obligations until it achieves profitability, ensure continuity of supply of
its brands and support new brand initiatives and marketing programs through at least
November 2017.
|
|
C.
|
Organization and operations
— The
Company is principally engaged in the importation, marketing and sale of premium and super premium rums, whiskeys, liqueurs,
vodka, tequila and related non-alcoholic beverage products in the United States, Canada, Europe and Asia.
|
|
D.
|
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.
|
|
E.
|
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.
|
|
F.
|
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.
|
|
G.
|
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.
|
|
H.
|
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 condensed consolidated statements of operations.
|
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
|
I.
|
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.
|
|
J.
|
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-month and
six-month periods ended September 30, 2016 and 2015 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 September 30, 2016 and 2015, the Company recognized ($477,962) and ($579,962) of income tax expense, net, respectively. For the six months ended September
30, 2016 and 2015, the Company recognized ($688,775) and ($1,103,924) of income tax expense, net, respectively.
|
|
K.
|
Recent accounting pronouncements
— In October 2016,
the Financial Accounting Standards Board (“FASB”) issued ASU 2016-16, “Income Taxes: Intra-Entity Transfers of
Assets Other than Inventory.” This ASU removes the prohibition against the immediate recognition of the current and deferred
income tax effects of intra-entity transfers of assets other than inventory. This guidance is effective for the Company as of April
1, 2018, with early adoption permitted. Entities must apply a modified retrospective basis through a cumulative-effect adjustment
to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the new guidance to determine
the impact the adoption of this guidance will have on the Company’s results of operations, cash flows and financial condition.
In August 2016, the FASB issued ASU No. 2016-15, “Statement
of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”, which provides guidance on eight cash flow classification
issues with the objective of reducing differences in practice. The new standard is effective for the Company as of April 1, 2018,
with early adoption permitted. Adoption is required to be on a retrospective basis, unless impracticable for any of the amendments,
in which case a prospective application is permitted. The Company 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 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 the Company as of April 1, 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.
|
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
|
|
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 the Company as of April 1, 2019. 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 the Company as of April 1, 2018, 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.
|
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
|
|
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 the Company as of 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 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 the Company as of April 1, 2018. The Company is currently evaluating the new guidance to determine
the impact the adoption of this guidance will have on the Company’s results of operations, cash flows and financial condition.
The Company does not believe that any other recently issued,
but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying condensed consolidated
financial statements.
|
|
|
|
|
L.
|
Accounting standards adopted
— 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 became effective for the Company beginning April 1, 2016. The Company will apply the guidance
prospectively for all future business combinations.
In April 2015, the FASB issued ASU 2015-03,
“Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), 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 applied the new guidance on a
retrospective basis and adjusted the balance sheet of each individual period presented to reflect the period-specific
effects of applying the new guidance. This guidance became 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 adopted this guidance beginning with its Annual Report on Form
10-K for the fiscal year ended March 31, 2016. The Company determined that the adoption of this guidance did not have a material
effect on the Company’s results of operations, cash flows and financial condition.
|
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
NOTE 2 —
BASIC AND DILUTED NET LOSS
PER COMMON SHARE
Basic net loss per common share is computed by dividing net
loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed
giving effect to all potentially dilutive common shares that were outstanding during the period that are not anti-dilutive. Potentially
dilutive common shares consist of incremental shares issuable upon exercise of stock options and warrants or conversion of convertible
notes outstanding. In computing diluted net loss per share for the six months ended September 30, 2016 and 2015, 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:
|
|
Six months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Stock options
|
|
|
15,946,586
|
|
|
|
13,877,699
|
|
Warrants to purchase common stock
|
|
|
—
|
|
|
|
120,000
|
|
5% Convertible notes
|
|
|
1,861,111
|
|
|
|
1,861,111
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,807,697
|
|
|
|
15,858,810
|
|
NOTE 3 —
INVENTORIES
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2016
|
|
Raw materials
|
|
$
|
13,136,443
|
|
|
$
|
11,976,561
|
|
Finished goods – net
|
|
|
14,881,394
|
|
|
|
15,256,761
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,017,837
|
|
|
$
|
27,233,322
|
|
As of September 30 and March 31, 2016, 13% and 11%, respectively,
of raw materials and 6% and 5%, respectively, of finished goods were located outside of the United States.
In the six months ended September 30, 2016, the Company acquired
$1,853,670 of aged bourbon whiskey in support of its anticipated near and mid-term needs.
The Company estimates the allowance for obsolete and slow moving
inventory based on analyses and assumptions including, but not limited to, historical usage, expected future demand and market
requirements.
Inventories are stated at the lower of weighted average cost
or market.
NOTE 4 —
EQUITY INVESTMENT
Investment in Gosling-Castle Partners Inc., consolidated
For the three months ended September 30, 2016 and 2015, GCP
had pretax net income on a stand-alone basis of $1,005,101 and $1,440,035, respectively. The Company allocated 40% of this net
income, or $402,040 and $576,014, to non-controlling interest for the three-month periods ended September 30, 2016 and 2015, respectively.
For the six months ended September 30, 2016 and 2015, GCP had pretax net income on a stand-alone basis of $1,641,204 and $2,684,831,
respectively. The Company allocated 40% of this net income, or $656,482 and $1,073,932, to non-controlling interest for the six-month
periods ended September 30, 2016 and 2015, respectively. Combined with the effects of income tax expense, net, allocated to noncontrolling
interests as described in Note 1.J Income Taxes, the cumulative balance allocated to noncontrolling interests in GCP was $3,734,163
and $3,353,191 at September 30 and March 31, 2016, respectively, as shown on the accompanying condensed consolidated balance sheets.
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 three
months ended September 30, 2016 and 2015, the Company recognized $18,837 and $4,513 of income from this investment, respectively, and
for the six months ended September 30, 2016 and 2015, the Company recognized $23,320 and $4,513 of income from this investment,
respectively The investment balance was $541,987 and $518,667 at September 30 and March 31, 2016, respectively, as shown on the
accompanying condensed consolidated balance sheets.
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 September 30 and March 31, 2016.
Intangible assets consist of the following:
|
|
September 30,
2016
|
|
|
March 31,
2016
|
|
Definite life brands
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Trademarks
|
|
|
631,693
|
|
|
|
631,693
|
|
Rights
|
|
|
8,271,555
|
|
|
|
8,271,555
|
|
Product development
|
|
|
185,207
|
|
|
|
185,207
|
|
Patents
|
|
|
994,000
|
|
|
|
994,000
|
|
Other
|
|
|
55,460
|
|
|
|
55,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,307,915
|
|
|
|
10,307,915
|
|
Less: accumulated amortization
|
|
|
7,694,273
|
|
|
|
7,372,585
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
2,613,642
|
|
|
|
2,935,330
|
|
Other identifiable intangible assets — indefinite lived*
|
|
|
4,112,972
|
|
|
|
4,112,972
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,726,614
|
|
|
$
|
7,048,302
|
|
* Other identifiable intangible assets
— indefinite lived consists of product formulations and the Company’s relationships with its distillers.
Accumulated amortization consists of the following:
|
|
September 30,
2016
|
|
|
March 31,
2016
|
|
Definite life brands
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Trademarks
|
|
|
343,945
|
|
|
|
331,366
|
|
Rights
|
|
|
6,341,087
|
|
|
|
6,065,111
|
|
Product development
|
|
|
29,188
|
|
|
|
29,188
|
|
Patents
|
|
|
810,053
|
|
|
|
776,920
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
$
|
7,694,273
|
|
|
$
|
7,372,585
|
|
NOTE 6 —
RESTRICTED
CASH
At September 30 and March 31, 2016, the Company had €310,296
or $348,208 (translated at the September 30, 2016 exchange rate) and €303,890 or $345,076 (translated at the March 31,
2016 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
|
|
September 30,
2016
|
|
|
March 31,
2016
|
|
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
Foreign revolving credit facilities (A)
|
|
$
|
—
|
|
|
$
|
—
|
|
Note payable – GCP note (B)
|
|
|
216,869
|
|
|
|
211,580
|
|
Credit facility, net (C)
|
|
|
12,192,610
|
|
|
|
11,917,694
|
|
5% Convertible notes (D)
|
|
|
1,675,000
|
|
|
|
1,675,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,084,479
|
|
|
$
|
13,804,274
|
|
|
A.
|
The
Company has arranged various facilities aggregating €310,296 or $348,208 (translated at the September 30, 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 was
€0 at September 30 and March 31, 2016, 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, $10,579 of accrued interest was converted to amounts due to affiliates. At September 30, 2016, $216,869, consisting of $211,580 of principal and $5,289 of accrued interest, due on the GCP Note is included in long-term liabilities. At March 31, 2016, $211,580 of principal due on the GCP Note is included in long-term liabilities.
|
|
C.
|
The Company and CB-USA are parties to an Amended and Restated Loan and Security Agreement (as amended, the “Loan Agreement”) with ACF FinCo I LP (“ACF”), which provides for availability (subject to certain terms and conditions) of a facility (the “Credit Facility”) to provide working capital, including capital to finance purchases of aged whiskeys in support of the growth of the Jefferson’s bourbons, in the amount of $19.0 million, including a sublimit in the maximum principal amount of $7.0 million to permit the Company to acquire aged whiskey inventory (the “Purchased Inventory Sublimit”) subject to certain conditions set forth in the Loan Agreement. The Credit Facility matures on July 31, 2019 (the “Maturity Date”). The monthly facility fee is 0.75% per annum of the maximum Credit Facility amount (excluding the Purchased Inventory Sublimit).
|
Pursuant to the Loan Agreement, the Company and CB-USA
may borrow up to the lesser of (x) $19.0 million and (y) the sum of the borrowing base calculated in accordance with the Loan Agreement
and the Purchased Inventory Sublimit. The Company and CB-USA may prepay the Credit Facility in whole or the Purchased Inventory
Sublimit, in whole or in part, subject to certain prepayment penalties as set forth in the Loan Agreement. The Purchased Inventory
Sublimit replaced the bourbon term loan (the “Bourbon Term Loan”), which was paid in full in the normal course of business
in May 2015.
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
In connection with the Loan Agreement, the Company
entered into a Reaffirmation Agreement with (i) certain of its officers, including John Glover, Chief Operating Officer, T. Kelley
Spillane, Senior Vice President - Global Sales, and Alfred J. Small, Senior Vice President, Chief Financial Officer, Treasurer
& Secretary and (ii) certain junior lenders, including Frost Gamma Investments Trust, an entity affiliated with Phillip Frost,
M.D., a director and a principal shareholder of the Company, Mark E. Andrews, III, the Company’s Chairman, an affiliate of
Richard J. Lampen, a director and the Company’s President and Chief Executive Officer, an affiliate of Glenn Halpryn, a former
director, Dennis Scholl, a former director, 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
and ACF.
ACF also required as a condition to entering into
an amendment to the Loan Agreement in August 2015 that ACF enter into a participation agreement with certain related parties of
the Company, including Frost Gamma Investments Trust ($150,000), Mark E. Andrews, III ($50,000), Richard J. Lampen ($100,000),
and Alfred J. Small ($15,000), to allow for the sale of participation interests in the Purchased Inventory Sublimit and the inventory
purchased with the proceeds thereof. The participation agreement provides that ACF’s commitment to fund each advance of the
Purchased Inventory Sublimit shall be limited to seventy percent (70%), up to an aggregate maximum principal amount for all advances
equal to $4.9 million. Under the terms of the participation agreement, the participants receive interest at the rate of 11% per
annum. The Company is not 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 First Amendment to the Loan Agreement and
are obligated to pay a commitment fee of $18,000 on each anniversary of the effective date until the junior participants’
obligations are terminated pursuant to the participation agreement.
The Company may borrow up to the maximum amount of
the Credit Facility, provided that the Company has a sufficient borrowing base (as defined in the Loan Agreement). The Credit Facility
interest rate (other than with respect to the Purchased Inventory Sublimit) is the rate that, when annualized, is the greatest
of (a) the Prime Rate plus 3.00%, (b) the LIBOR Rate plus 5.50% and (c) 6.0%. The interest rate applicable to the Purchased Inventory
Sublimit is the rate, that when annualized, is the greatest of (a) the Prime Rate plus 4.25%, (b) the LIBOR Rate plus 6.75% and
(c) 7.50%. Interest is payable monthly in arrears, on the first day of every month on the average daily unpaid principal amount
of the Credit Facility. After the occurrence and during the continuance of any “Default” or “Event of Default”
(as defined under the Loan Agreement), the Company is 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% (reflecting a discount for achieving one such EBITDA target)
and the Purchased Inventory Sublimit currently bears interest at 7.75%. The Company is 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 the bourbon inventory
stock purchased with funds borrowed under the Purchased Inventory Sublimit in an amount equal to the purchase price of such bourbon.
The unpaid principal balance of the Credit Facility, all accrued and unpaid interest thereon, and all fees, costs and expenses
payable in connection with the Credit Facility, are due and payable in full on the Maturity Date. In addition to closing fees,
ACF receives facility fees and a collateral management fee (each as set forth in the Loan Agreement). The Company’s obligations
under the Loan Agreement are secured by the grant of a pledge and a security interest in all of its assets.
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 the Company’s ability to create additional indebtedness,
dispose of properties, incur liens, and make distributions or cash dividends. At September 30, 2016, the Company was in compliance,
in all material respects, with the covenants under the Loan Agreement.
At September 30 and March 31, 2016, $12,192,610 and
$11,917,694, respectively, due on the Credit Facility, net, was included in long-term liabilities, including $2,237,000 and $2,625,000
outstanding under the Purchased Inventory Sublimit, respectively. At September 30 and March 31, 2016, there was $6,669,493 and
$7,082,306, respectively, in potential availability under the Credit Facility, net.
In connection with the adoption of ASU
2015-03, the Company included $137,897 and $170,895 of debt issuance costs at September 30 and March 31, 2016, respectively,
as direct deductions from the carrying amount of the related debt liability.
In October 2016, the Company acquired $1,553,400
in aged bulk bourbon, including $1,440,000 purchased under the Purchased Inventory Sublimit, with certain related parties
of the Company, including Frost Gamma Investments Trust ($72,000), Richard J. Lampen
($48,000), Mark E. Andrews, III ($24,000), and Alfred J. Small ($7,200), as junior participants in the Purchased Inventory Sublimit with respect to such
purchase.
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
|
D.
|
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.
At each of September 30 and March 31, 2016, $1,675,000
of principal due on the Convertible Notes was included in long-term liabilities.
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.
The Company did not sell any Shares pursuant to the 2014 Distribution
Agreement during the six months ended September 30, 2016, but incurred $14,355 of issuance costs related to the 2014 Distribution
Agreement.
During the six months ended September 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 issuance costs of $95,344.
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
NOTE 9 —
FOREIGN CURRENCY FORWARD CONTRACTS
The Company enters into forward contracts from time to time
to reduce its exposure to foreign currency fluctuations. The Company recognizes in the balance sheet derivative contracts at fair
value, and reflects any net gains and losses currently in earnings. At September 30 and March 31, 2016, 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 10 —
STOCK-BASED COMPENSATION
In June 2016, the Company granted to employees, directors and
certain consultants options to purchase an aggregate of 3,170,000 shares of the Company’s common stock at an exercise price
of $0.90 per share under the Company’s 2013 Incentive Compensation Plan. The options, which expire in June 2026, vest
25% on each of the first four anniversaries of the grant date. The Company has valued the options at $1,806,900 using the Black-Scholes
option pricing model.
Stock-based compensation expense for the three months ended
September 30, 2016 and 2015 and for the six months ended September 30, 2016 and 2015 amounted to $410,097 and $458,450, respectively,
and $762,497 and $698,390, respectively. At September 30, 2016, total unrecognized compensation cost amounted to $4,112,900, representing
6,635,125 unvested options. This cost is expected to be recognized over a weighted-average vesting period of 2.83 years. There
were 476,500 options exercised during the six months ended September 30, 2016 and 612,989 options exercised during the six months
ended September 30, 2015. The Company did not recognize any related tax benefit for the six months ended September 30, 2016 and 2015
from option exercises, as the effects were de minimis.
NOTE 11 —
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, 2017, the Company has contracted to purchase approximately
€900,386 or $1,010,395 (translated at the September 30, 2016 exchange rate) in bulk Irish whiskey, of which €338,508
or $379,867 (translated at the September 30, 2016 exchange rate), has been purchased as of September 30, 2016. 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 year ending June 30, 2017, the
Company has contracted to purchase approximately €394,961 or $443,217 (translated at the September 30, 2016 exchange rate)
in bulk Irish whiskey, of which €138,364 or $155,269 (translated at the September 30, 2016 exchange rate), has been purchased
as of September 30, 2016. 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, $964,725 of which had been purchased as of September 30, 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 leases office space in New York, NY, Dublin, Ireland and Houston, TX. The New York, NY lease began on May 1, 2010 and
expires on February 29, 2020 and provides for monthly payments of $26,255. The Dublin lease commenced on March 1, 2009 and extends
through October 31, 2019 and provides for monthly payments of €1,500 or $1,683 (translated at the September 30, 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.
|
|
E.
|
As
described in Note 7C, in August 2011, the Company and CB-USA entered into the Credit Facility, as amended in July 2012, March
2013, August 2013, November 2013, August 2014, September 2014 and August 2015.
|
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
|
F.
|
Except
as set forth below, the Company believes that neither it, nor any of its subsidiaries, is currently subject to litigation which,
in the opinion of management after consultation with counsel, is likely to have a material adverse effect on the Company.
|
The
Company may become involved in litigation from time to time relating to claims arising in the ordinary course of its business.
These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
NOTE 12 —
CONCENTRATIONS
|
A.
|
Credit Risk
— The Company maintains its cash and cash equivalents balances at various large financial institutions that, at times, may exceed federally and internationally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.
|
|
B.
|
Customers
— Sales to one customer, the Southern Glazer’s Wine & Spirits (“SWS”) family of companies,
accounted for approximately 35.7% and 40.9% of the Company’s net sales for the three months ended September
30, 2016 and 2015, respectively. Sales to SWS accounted for approximately 34.5% and 39.5% of the Company’s
revenues for the six months ended September 30, 2016 and 2015, respectively, and approximately 33.2% and
27.7% of accounts receivable at September 30 and March 31, 2016,
respectively.
|
NOTE 13 —
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 from operations, consolidated net loss attributable to common shareholders, consolidated income
tax expense and consolidated assets from the U.S. and foreign countries and consolidated sales, net by category.
|
|
Three Months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Consolidated Sales, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
2,060,044
|
|
|
|
10.5
|
%
|
|
$
|
1,692,542
|
|
|
|
9.1
|
%
|
United States
|
|
|
17,567,747
|
|
|
|
89.5
|
%
|
|
|
16,843,967
|
|
|
|
90.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Sales, net
|
|
$
|
19,627,791
|
|
|
|
100.0
|
%
|
|
$
|
18,536,509
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Income (Loss) from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
(6,843
|
)
|
|
|
(2.3
|
)%
|
|
$
|
(17,990
|
)
|
|
|
(9.4
|
)%
|
United States
|
|
|
308,384
|
|
|
|
102.3
|
%
|
|
|
208,778
|
|
|
|
109.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Income
from Operations
|
|
$
|
301,541
|
|
|
|
100.0
|
%
|
|
$
|
190,788
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Income (Loss) Attributable to Common Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
17,871
|
|
|
|
2.6
|
%
|
|
$
|
(10,420
|
)
|
|
|
1.0
|
%
|
United States
|
|
|
(718,581
|
)
|
|
|
(102.6
|
)%
|
|
|
(1,000,851
|
)
|
|
|
99.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Net Loss Attributable to Common Shareholders
|
|
$
|
(700,710
|
)
|
|
|
100.0
|
%
|
|
$
|
(1,011,271
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(477,962
|
)
|
|
|
100.0
|
%
|
|
$
|
(579,962
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Sales, net by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whiskey
|
|
$
|
6,486,287
|
|
|
|
33.0
|
%
|
|
$
|
5,442,195
|
|
|
|
29.4
|
%
|
Rum
|
|
|
4,837,653
|
|
|
|
24.7
|
%
|
|
|
4,827,273
|
|
|
|
26.0
|
%
|
Liqueur
|
|
|
2,560,819
|
|
|
|
13.0
|
%
|
|
|
2,916,310
|
|
|
|
15.7
|
%
|
Vodka
|
|
|
414,052
|
|
|
|
2.1
|
%
|
|
|
606,317
|
|
|
|
3.3
|
%
|
Tequila
|
|
|
68,731
|
|
|
|
0.4
|
%
|
|
|
50,130
|
|
|
|
0.3
|
%
|
Related Non-Alcoholic Beverage Products
|
|
|
5,260,249
|
|
|
|
26.8
|
%
|
|
|
4,694,285
|
|
|
|
25.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Sales, net
|
|
$
|
19,627,791
|
|
|
|
100.0
|
%
|
|
$
|
18,536,509
|
|
|
|
100.0
|
%
|
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
|
|
Six Months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Consolidated Sales, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
3,799,543
|
|
|
|
10.4
|
%
|
|
$
|
3,797,964
|
|
|
|
10.8
|
%
|
United States
|
|
|
32,579,173
|
|
|
|
89.6
|
%
|
|
|
31,251,624
|
|
|
|
89.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Sales, net
|
|
$
|
36,378,716
|
|
|
|
100.0
|
%
|
|
$
|
35,049,588
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Income (Loss) from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
(105,068
|
)
|
|
|
(73.5
|
)%
|
|
$
|
37,033
|
|
|
|
21.6
|
%
|
United States
|
|
|
247,940
|
|
|
|
173.5
|
%
|
|
|
134,767
|
|
|
|
78.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Income from Operations
|
|
$
|
142,872
|
|
|
|
100.0
|
%
|
|
$
|
171,810
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Income (Loss) Attributable to Common Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
(62,134
|
)
|
|
|
4.2
|
%
|
|
$
|
54,456
|
|
|
|
2.6
|
%
|
United States
|
|
|
(1,404,395
|
)
|
|
|
95.8
|
%
|
|
|
(2,189,389
|
)
|
|
|
(102.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Net Loss Attributable to Common Shareholders
|
|
$
|
(1,466,529
|
)
|
|
|
100.0
|
%
|
|
$
|
(2,134,933
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
(688,775
|
)
|
|
|
100.0
|
%
|
|
|
(1,103,924
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Sales, net by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whiskey
|
|
$
|
11,985,706
|
|
|
|
32.8
|
%
|
|
$
|
11,633,254
|
|
|
|
33.2
|
%
|
Rum
|
|
|
9,449,569
|
|
|
|
26.0
|
%
|
|
|
9,390,780
|
|
|
|
26.8
|
%
|
Liqueur
|
|
|
4,506,191
|
|
|
|
12.4
|
%
|
|
|
4,740,824
|
|
|
|
13.5
|
%
|
Vodka
|
|
|
791,637
|
|
|
|
2.2
|
%
|
|
|
1,130,541
|
|
|
|
3.2
|
%
|
Tequila
|
|
|
127,339
|
|
|
|
0.4
|
%
|
|
|
124,036
|
|
|
|
0.4
|
%
|
Related Non-Alcoholic Beverage Products
|
|
|
9,518,274
|
|
|
|
26.2
|
%
|
|
|
8,030,153
|
|
|
|
22.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Sales, net
|
|
$
|
36,378,716
|
|
|
|
100.0
|
%
|
|
$
|
35,049,588
|
|
|
|
100.0
|
%
|
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated
Financial Statements - Continued
|
|
As of September 30, 2016
|
|
|
As of March 31, 2016
|
|
Consolidated Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
3,328,967
|
|
|
|
6.5
|
%
|
|
$
|
2,786,333
|
|
|
|
5.6
|
%
|
United States
|
|
|
48,040,812
|
|
|
|
93.5
|
%
|
|
|
47,317,180
|
|
|
|
94.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Assets
|
|
$
|
51,369,779
|
|
|
|
100.0
|
%
|
|
$
|
50,103,513
|
|
|
|
100.0
|
%
|
*Includes related non-beverage alcohol products.
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 also develop and market
related non-alcoholic beverage products, including Goslings Stormy Ginger Beer. We distribute our products in all 50 U.S. states
and the District of Columbia, in thirteen primary international markets, including Ireland, Great Britain, Northern Ireland, Germany,
Canada, Israel, France, Finland, Norway, Sweden, Denmark, United Arab Emirates, Australia and the Duty Free markets, and in a number
of other countries. We market the following brands, among others:
|
·
|
Goslings Stormy Ginger Beer
|
|
·
|
Goslings Dark ‘n Stormy® ready-to-drink cocktail
|
|
·
|
Jefferson’s Ocean Aged at Sea®
|
|
·
|
Jefferson’s Wine Finish Collection
|
|
·
|
Jefferson’s The Manhattan: Barrel Finished Cocktail
|
|
·
|
Jefferson’s Chef’s Collaboration
|
|
·
|
Jefferson’s Wood Experiment
|
|
·
|
Jefferson’s Presidential Select™
|
|
·
|
Jefferson’s Rye whiskey
|
|
·
|
Clontarf® Irish whiskey
|
|
·
|
Knappogue Castle Whiskey®
|
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 whiskeys, sales of which have grown substantially in recent 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
Bourbon Purchase
In October 2016, we acquired an
additional $1.6 million in aging bulk bourbon in support of our current and near term needs for the Jefferson’s brand.
We paid for $1.4 million of this purchase using funds from the Purchased Inventory Sublimit of our Credit Facility, each
as defined below under “Liquidity and capital resources – Existing Financing.”
Currency Translation
The functional currencies for our foreign
operations are the Euro in Ireland and the British Pound in the United Kingdom. With respect to our consolidated financial statements,
the translation from the applicable foreign currencies to U.S. Dollars is performed for balance sheet accounts using exchange rates
in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period.
The resulting translation adjustments are recorded as a component of other comprehensive income.
Where in this report we refer to amounts
in Euros or British Pounds, we have for your convenience also in certain cases provided a conversion of those amounts to U.S. Dollars
in parentheses. Where the numbers refer to a specific balance sheet account date or financial statement account period, we have
used the exchange rate that was used to perform the conversions in connection with the applicable financial statement. In all other
instances, unless otherwise indicated, the conversions have been made using the exchange rates as of September 30, 2016, each as
calculated from the Interbank exchange rates as reported by Oanda.com. On September 30, 2016, the exchange rate of the Euro and
the British Pound in exchange for U.S. Dollars was €1.00 = U.S. $1.12218 (equivalent to U.S. $1.00 = €0.89112) and £1.00
= U.S. $1.30059 (equivalent to U.S. $1.00 = £0.76888).
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, 2016, as amended, which we refer to as
our 2016 Annual Report. Please refer to that section for disclosures regarding the critical accounting policies related to our
business.
Financial performance overview
The following table provides information
regarding our spirits case sales for the periods presented based on nine-liter equivalent cases, which is a standard spirits industry
metric (table excludes related non-alcoholic beverage products):
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
88,181
|
|
|
|
91,064
|
|
|
|
165,021
|
|
|
|
169,339
|
|
International
|
|
|
19,843
|
|
|
|
15,704
|
|
|
|
36,945
|
|
|
|
37,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
108,024
|
|
|
|
106,768
|
|
|
|
201,966
|
|
|
|
206,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rum
|
|
|
46,510
|
|
|
|
46,951
|
|
|
|
90,793
|
|
|
|
92,676
|
|
Whiskey
|
|
|
27,111
|
|
|
|
21,561
|
|
|
|
48,255
|
|
|
|
47,398
|
|
Liqueur
|
|
|
25,950
|
|
|
|
26,457
|
|
|
|
46,388
|
|
|
|
45,297
|
|
Vodka
|
|
|
8,084
|
|
|
|
11,545
|
|
|
|
15,849
|
|
|
|
20,939
|
|
Tequila
|
|
|
369
|
|
|
|
254
|
|
|
|
681
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
108,024
|
|
|
|
106,768
|
|
|
|
201,966
|
|
|
|
206,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
81.6
|
%
|
|
|
85.3
|
%
|
|
|
81.7
|
%
|
|
|
81.8
|
%
|
International
|
|
|
18.4
|
%
|
|
|
14.7
|
%
|
|
|
18.3
|
%
|
|
|
18.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rum
|
|
|
43.1
|
%
|
|
|
44.0
|
%
|
|
|
45.0
|
%
|
|
|
44.7
|
%
|
Whiskey
|
|
|
25.1
|
%
|
|
|
20.2
|
%
|
|
|
23.9
|
%
|
|
|
22.8
|
%
|
Liqueur
|
|
|
24.0
|
%
|
|
|
24.8
|
%
|
|
|
23.0
|
%
|
|
|
22.1
|
%
|
Vodka
|
|
|
7.5
|
%
|
|
|
10.8
|
%
|
|
|
7.8
|
%
|
|
|
10.1
|
%
|
Tequila
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The following table provides information
regarding our case sales of related non-alcoholic beverage products, which primarily consists of Goslings Stormy Ginger
Beer, for the periods presented:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
344,132
|
|
|
|
311,501
|
|
|
|
620,297
|
|
|
|
534,936
|
|
International
|
|
|
15,915
|
|
|
|
13,593
|
|
|
|
40,732
|
|
|
|
18,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
360,047
|
|
|
|
325,094
|
|
|
|
661,029
|
|
|
|
553,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
95.6
|
%
|
|
|
95.8
|
%
|
|
|
93.8
|
%
|
|
|
96.7
|
%
|
International
|
|
|
4.4
|
%
|
|
|
4.2
|
%
|
|
|
6.2
|
%
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Results of operations
The table below provides, for the periods
indicated, the percentage of net sales of certain items in our consolidated financial statements:
|
|
Three months ended September 30,
|
|
|
Six months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Sales, net
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
60.6
|
%
|
|
|
61.9
|
%
|
|
|
60.3
|
%
|
|
|
61.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
39.4
|
%
|
|
|
38.1
|
%
|
|
|
39.7
|
%
|
|
|
39.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expense
|
|
|
25.7
|
%
|
|
|
26.7
|
%
|
|
|
26.6
|
%
|
|
|
26.5
|
%
|
General and administrative expense
|
|
|
10.9
|
%
|
|
|
9.1
|
%
|
|
|
11.4
|
%
|
|
|
10.7
|
%
|
Depreciation and amortization
|
|
|
1.3
|
%
|
|
|
1.3
|
%
|
|
|
1.4
|
%
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1.5
|
%
|
|
|
1.0
|
%
|
|
|
0.3
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Foreign exchange loss
|
|
|
0.0
|
%
|
|
|
(0.2
|
)%
|
|
|
0.2
|
%
|
|
|
(0.3
|
)%
|
Income from equity investment in non-consolidated affiliate
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
Interest expense, net
|
|
|
(1.7
|
)%
|
|
|
(1.4
|
)%
|
|
|
(1.8
|
)%
|
|
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(0.1
|
)%
|
|
|
(0.6
|
)%
|
|
|
(1.1
|
)%
|
|
|
(1.2
|
)%
|
Income tax expense, net
|
|
|
(2.4
|
)%
|
|
|
(3.1
|
)%
|
|
|
(1.9
|
)%
|
|
|
(3.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2.5
|
)%
|
|
|
(3.7
|
)%
|
|
|
(3.0
|
)%
|
|
|
(4.4
|
)%
|
Net income attributable to noncontrolling interests
|
|
|
(1.1
|
)%
|
|
|
(1.8
|
)%
|
|
|
(1.0
|
)%
|
|
|
(1.7
|
)%
|
Net loss attributable to common shareholders
|
|
|
(3.6
|
)%
|
|
|
(5.5
|
)%
|
|
|
(4.0
|
)%
|
|
|
(6.1
|
)%
|
The following is a reconciliation of net
loss attributable to common shareholders to EBITDA, as adjusted:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net loss attributable to common shareholders
|
|
$
|
(700,710
|
)
|
|
$
|
(1,011,271
|
)
|
|
$
|
(1,466,529
|
)
|
|
$
|
(2,134,933
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
328,868
|
|
|
|
257,636
|
|
|
|
639,129
|
|
|
|
514,800
|
|
Income tax expense, net
|
|
|
477,962
|
|
|
|
579,962
|
|
|
|
688,775
|
|
|
|
1,103,924
|
|
Depreciation and amortization
|
|
|
253,463
|
|
|
|
233,069
|
|
|
|
507,097
|
|
|
|
461,325
|
|
EBITDA income (loss)
|
|
|
359,583
|
|
|
|
59,396
|
|
|
|
368,472
|
|
|
|
(54,884
|
)
|
Allowance for doubtful accounts
|
|
|
11,550
|
|
|
|
9,000
|
|
|
|
23,100
|
|
|
|
43,000
|
|
Allowance for obsolete inventory
|
|
|
50,000
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Stock-based compensation expense
|
|
|
410,097
|
|
|
|
458,450
|
|
|
|
762,497
|
|
|
|
698,390
|
|
Other expense (income), net
|
|
|
27
|
|
|
|
(600
|
)
|
|
|
333
|
|
|
|
221
|
|
Income from equity investments in non-consolidated affiliate
|
|
|
(18,837
|
)
|
|
|
(4,513
|
)
|
|
|
(23,320
|
)
|
|
|
(4,513
|
)
|
Foreign exchange loss (gain)
|
|
|
3,375
|
|
|
|
40,360
|
|
|
|
(76,488
|
)
|
|
|
89,579
|
|
Net income attributable to noncontrolling interests
|
|
|
210,856
|
|
|
|
329,214
|
|
|
|
380,972
|
|
|
|
602,732
|
|
EBITDA, as adjusted
|
|
|
1,026,651
|
|
|
|
891,307
|
|
|
|
1,535,566
|
|
|
|
1,474,525
|
|
Earnings before interest, taxes,
depreciation and amortization, or EBITDA, adjusted for allowances for doubtful accounts and obsolete inventory, stock-based
compensation expense, other expense (income), net, income from equity investment in non-consolidated affiliate, foreign
exchange 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, increased to income
of $1.0 million for the three months ended September 30, 2016, as compared to income of $0.9 million for the comparable prior-year
period, and our EBITDA, as adjusted, increased to income of $1.54 million for the six months ended September 30, 2016, as compared
to income of $1.47 million for the comparable prior-year period, both primarily as a result of increased revenue.
Three months ended September 30, 2016
compared with three months ended September 30, 2015
Net sales.
Net sales
increased 5.9% to $19.6 million for the three months ended September 30, 2016, as compared to $18.5 million for the
comparable prior-year period, due to U.S. sales growth of Jefferson’s bourbons and Goslings Stormy Ginger Beer,
partially offset by decreases in vodka, liqueur and rum sales. For the three months ended September 30, 2016, sales
of our Goslings Stormy Ginger Beer increased 12.1% to $5.3 million. We anticipate continued growth of Goslings Stormy Ginger
Beer in the near term due to the popularity of cocktails containing ginger beer, Goslings brand awareness and the planned
distribution to new large national retailers, although there is no assurance that we will attain such results. We continue to
focus on our faster growing brands and markets, both in the U.S. and internationally.
The table below presents the increase or
decrease, as applicable, in case sales by spirits product category for the three months ended September 30, 2016 as compared to
the three months ended September 30, 2015:
|
|
Increase/(decrease)
|
|
|
Percentage
|
|
|
|
in case sales
|
|
|
increase/(decrease)
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Rum
|
|
|
(441
|
)
|
|
|
(3,685
|
)
|
|
|
(0.9
|
)%
|
|
|
(9.5
|
)%
|
Whiskey
|
|
|
5,550
|
|
|
|
3,265
|
|
|
|
25.7
|
%
|
|
|
20.7
|
%
|
Liqueur
|
|
|
(507
|
)
|
|
|
(270
|
)
|
|
|
(1.9
|
)%
|
|
|
(1.0
|
)%
|
Vodka
|
|
|
(3,461
|
)
|
|
|
(2,307
|
)
|
|
|
(30.0
|
)%
|
|
|
(22.9
|
)%
|
Tequila
|
|
|
115
|
|
|
|
115
|
|
|
|
45.3
|
%
|
|
|
45.3
|
%
|
Total
|
|
|
1,256
|
|
|
|
(2,883
|
)
|
|
|
1.2
|
%
|
|
|
(3.2
|
)%
|
Our international spirits case sales as
a percentage of total spirits case sales grew to 18.4% for the three months ended September 30, 2016 as compared to 14.7% for the
comparable prior-year period, due to increased whiskey and rum sales in certain international markets.
The following table presents the increase
in case sales of related non-alcoholic beverage products for the three months ended September 30, 2016 as compared to the three
months ended September 30, 2015:
|
|
Increase
|
|
|
Percentage
|
|
|
|
in case sales
|
|
|
increase
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Related Non-Alcoholic Beverage Products
|
|
|
34,953
|
|
|
|
32,631
|
|
|
|
10.8
|
%
|
|
|
10.5
|
%
|
Gross profit
. Gross profit
increased 9.5% to $7.7 million for the three months ended September 30, 2016 from $7.1 million for the comparable prior-year
period, and gross margin improved to 39.4% for the three months ended September 30, 2016 as compared to 38.1% for the
comparable prior-year period. The increase in gross profit was primarily due to increased aggregate revenue in the current
period, while the increase in gross margin was due to the increase in our whiskey sales over the prior-year period. During
the three months ended September 30, 2016, we recorded an allowance for obsolete and slow moving inventory of $0.05 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
charge has been recorded as an increase to cost of sales in the current period. Net of the allowance for obsolete inventory,
gross margin for the three months ended September 30, 2016 was 39.6%.
Selling expense
.
Selling expense increased 1.8% to $5.0 million for the three months ended September 30, 2016 from $4.9 million for the
comparable prior-year period, primarily due to a $0.3 million increase in salaries and personnel expense due to increased
sales staff and compensation costs, partially offset by a $0.1 million decrease in shipping costs from lower sales volume in
the U.S. The increase in revenue, however, resulted in selling expense as a percentage of net sales decreasing to 25.6% for the
three months ended September 30, 2016 as compared to 26.7% for the comparable prior-year period.
General and
administrative expense
. General and administrative expense increased 26.6% to $2.1 million for the three months ended
September 30, 2016 from $1.7 million for the comparable prior-year period, primarily due to a $0.3 million increase in
salaries and personnel expense due to increased staff and compensation costs, and a $0.1 million increase in professional
fees. Increased revenue for the period partially offset the increase in general and administrative expense. As a result,
general and administrative expense as a percentage of net sales increased to 10.9% for the three months ended September 30,
2016 as compared to 9.1% for the comparable prior-year period.
Depreciation and amortization.
Depreciation
and amortization was $0.3 million for the three months ended September 30, 2016 as compared to $0.2 million for the comparable
prior-year period.
Income from operations
. As a result
of the foregoing, we had income from operations of $0.3 million for the three months ended September 30, 2016 as compared to income
from operations of $0.2 million for the comparable prior-year period. As a result of our focus on our stronger growth markets
and better performing brands, and expected growth from our existing brands, we anticipate improved results of operations in the
near term as compared to prior years, although there is no assurance that we will attain such results.
Income tax expense, net.
Income tax
expense, net is the estimated tax expense attributable to the net taxable income recorded by our 60% owned subsidiary, GCP, 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 September 30, 2016 as compared to net expense of ($0.6) million for the comparable prior-year period.
Foreign exchange loss.
Foreign exchange
loss for the three months ended September 30, 2016 was de minimis as compared to a loss of ($0.04) 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 September 30, 2016 and 2015 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 prior years.
Net income attributable to noncontrolling
interests.
Net income attributable to noncontrolling interests was $0.2 million for the three months ended September 30,
2016 as compared to $0.3 million for the comparable prior-year period, both the result of net income allocated to the
40% noncontrolling interests in GCP.
Net loss attributable to common shareholders.
As a result of the net effects of the foregoing, net loss attributable to common shareholders improved to ($0.7) million for the
three months ended September 30, 2016 as compared to ($1.0) million for the comparable prior-year period. Net loss per common share,
basic and diluted, was ($0.00) per share for the three months ended September 30, 2016 as compared to ($0.01) for the comparable
prior-year period.
Six months ended September 30, 2016
compared with six months ended September 30, 2015
Net sales.
Net sales increased 3.8%
to $36.4 million for the six months ended September 30, 2016, as compared to $35.0 million for the comparable prior-year period,
due to U.S. sales growth of Jefferson’s bourbons and Goslings Stormy Ginger Beer, partially offset by decreases in vodka
and rum sales. For the six months ended September 30, 2016, sales of our Goslings Stormy Ginger Beer increased 18.5% to $9.5
million. We anticipate continued growth of Goslings Stormy Ginger Beer in the near term due to the popularity of cocktails containing
ginger beer, Goslings brand awareness and the planned distribution to new large national retailers, although there is no assurance
that we will attain such results. We continue to focus on our faster growing brands and markets, both in the U.S. and internationally.
The table below presents the increase or
decrease, as applicable, in case sales by spirits product category for the six months ended September 30, 2016 as compared to the
six months ended September 30, 2015:
|
|
Increase/(decrease)
|
|
|
Percentage
|
|
|
|
in case sales
|
|
|
increase/(decrease)
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Rum
|
|
|
(1,883
|
)
|
|
|
(2,549
|
)
|
|
|
(2.0
|
)%
|
|
|
(3.6
|
)%
|
Whiskey
|
|
|
857
|
|
|
|
1,044
|
|
|
|
1.8
|
%
|
|
|
3.1
|
%
|
Liqueur
|
|
|
1,091
|
|
|
|
1,167
|
|
|
|
2.4
|
%
|
|
|
2.6
|
%
|
Vodka
|
|
|
(5,090
|
)
|
|
|
(4,034
|
)
|
|
|
(24.3
|
)%
|
|
|
(21.4
|
)%
|
Tequila
|
|
|
54
|
|
|
|
54
|
|
|
|
8.6
|
%
|
|
|
8.6
|
%
|
Total
|
|
|
(4,970
|
)
|
|
|
(4,317
|
)
|
|
|
(2.4
|
)%
|
|
|
(2.5
|
)%
|
Our international spirits case
sales as a percentage of total spirits case sales remained relatively constant at 18.3% for the six months ended September
30, 2016 as compared to 18.2% for the comparable prior-year period, as increased rum sales were offset by decreased vodka
sales.
The following table presents the increase
in case sales of related non-alcoholic beverage products for the six months ended September 30, 2016 as compared to the six months
ended September 30, 2015:
|
|
Increase
|
|
|
Percentage
|
|
|
|
in case sales
|
|
|
Increase
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Related Non-Alcoholic Beverage Products
|
|
|
107,880
|
|
|
|
85,361
|
|
|
|
19.5
|
%
|
|
|
16.0
|
%
|
Gross profit
. Gross profit increased
5.6% to $14.4 million for the six months ended September 30, 2016 from $13.7 million for the comparable prior-year period, and
gross margin improved to 39.7% for the six months ended September 30, 2016 as compared to 39.0% for the comparable prior-year period.
The increase in gross profit was primarily due to increased aggregate revenue in the current period, while the increase in gross
margin was due to the increase in our whiskey sales over the prior-year period. During each of the six-month periods ended September
30, 2016 and 2015, we recorded an addition to allowance for obsolete and slow moving inventory of $0.1 million. We recorded these
allowances 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 relevant period. Net
of the allowance for obsolete inventory, gross margin for the six months ended September 30, 2016 was 40.0% as compared to 39.3%
for the prior-year period.
Selling expense
. Selling expense
increased 4.0% to $9.7 million for the six months ended September 30, 2016 from $9.3 million for the comparable prior-year period,
primarily due to a $0.6 million increase in advertising, marketing and promotion expense related to the timing of certain sales
and marketing programs, including Goslings’ sponsorship of the 35th America’s Cup, and a $0.3 million increase in salaries
and personnel expense due to increased staff and compensation costs, partially offset by a $0.3 million decrease in shipping costs
from lower sales volume. The increase in selling costs resulted in selling expense as a percentage of net sales increasing to 26.6%
for the six months ended September 30, 2016 as compared to 26.5% for the comparable prior-year period.
General and administrative
expense
. General and administrative expense increased 9.9% to $4.1 million for the six months ended September 30, 2016
from $3.8 million for the comparable prior-year period, primarily due to a $0.2 million increase in salaries and personnel
expense due to increased staff and compensation costs, and a $0.1 million increase in professional fees. Increased revenue
for the period partially offset the increase in general and administrative expenses, which resulted in general and
administrative expense as a percentage of net sales increasing to 11.4% for the six months ended September 30, 2016 as
compared to 10.7% for the comparable prior-year period.
Depreciation and amortization.
Depreciation
and amortization was $0.5 million for each of the six-month periods ended September 30, 2016 and 2015.
Income from operations
. As a result
of the foregoing, we had income from operations of $0.1 million for the six months ended September 30, 2016 as compared to income
from operations of $0.2 million for the comparable prior-year period. As a result of our focus on our stronger growth markets and
better performing brands, and expected growth from our existing brands, we anticipate improved results of operations in the near
term as compared to prior years, although there is no assurance that we will attain such results.
Income tax expense, net.
Income tax
expense, net is the estimated tax expense attributable to the net taxable income recorded by our 60% owned subsidiary, GCP, adjusted
for changes in the deferred tax asset and deferred tax liability during the periods, and was net expense of ($0.7) million for
the six months ended September 30, 2016 as compared to net expense of ($1.1) million for the comparable prior-year period.
Foreign exchange gain (loss).
Foreign
exchange gain for the six months ended September 30, 2016 was $0.1 million as compared to a loss of ($0.1) million for the comparable
prior-year period due to the net effects of fluctuations of the U.S. dollar against the Euro and its impact on our Euro-denominated
intercompany balances due to our foreign subsidiaries for inventory purchases.
Interest expense, net.
We had interest
expense, net of ($0.6) million for the six months ended September 30, 2016 as compared to ($0.5) million for the comparable prior-year
period 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 prior years.
Net income attributable to noncontrolling
interests.
Net income attributable to noncontrolling interests was $0.4 million for the six months ended September 30, 2016
as compared to $0.6 million for the comparable prior-year period, both the result of net income allocated to the
40% noncontrolling interests in GCP.
Net loss attributable to common shareholders.
As a result of the net effects of the foregoing, net loss attributable to common shareholders improved to ($1.5) million for the
six months ended September 30, 2016 as compared to ($2.1) million for the comparable prior-year period. Net loss per common share,
basic and diluted, was ($0.01) per share for the six months ended September 30, 2016 as compared to ($0.01) for 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 six months ended September
30, 2016, we had a net loss of ($0.6) million, and used cash of $1.0 million in operating activities. As of September 30, 2016,
we had cash and cash equivalents of $0.7 million and had an accumulated deficit of $147.0 million.
We believe our current cash and working
capital, the availability under the Credit Facility (as defined below) and the additional funds that may be raised under our 2014
Distribution Agreement (as defined below) will enable us to fund our losses until we achieve profitability, ensure continuity of
supply of our brands, and support new brand initiatives and marketing programs through at least November 2017.
Existing Financing
We and our wholly-owned subsidiary, Castle
Brands (USA) Corp. (“CB-USA”), are parties to an Amended and Restated Loan and Security Agreement (as amended, the
“Loan Agreement”) with ACF FinCo I LP (“ACF”), which provides for availability (subject to certain terms
and conditions) of a facility (the “Credit Facility”) to provide us with working capital, including capital to finance
purchases of aged whiskeys in support of the growth of our Jefferson’s bourbons, in the amount of $19.0 million, including
a sublimit in the maximum principal amount of $7.0 million to permit us to acquire aged whiskey inventory (the “Purchased
Inventory Sublimit”) subject to certain conditions set forth in the Loan Agreement. The Credit Facility matures on July 31,
2019 (the “Maturity Date”). The monthly facility fee is 0.75% per annum of the maximum Credit Facility amount (excluding
the Purchased Inventory Sublimit).
Pursuant to the Loan Agreement, we and CB-USA
may borrow up to the lesser of (x) $19.0 million and (y) the sum of the borrowing base calculated in accordance with the Loan Agreement
and the Purchased Inventory Sublimit. We and CB-USA may prepay the Credit Facility in whole or the Purchased Inventory Sublimit,
in whole or in part, subject to certain prepayment penalties as set forth in the Loan Agreement. The Purchased Inventory Sublimit
replaced our bourbon term loan (the “Bourbon Term Loan”), which was paid in full in the normal course of business in
May 2015.
In connection with the Loan Agreement, we
entered into a Reaffirmation Agreement with (i) 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 (ii) 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 former 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.
ACF required as a condition to entering
into an amendment to the Loan Agreement in August 2015 that ACF enter into a participation agreement with certain related parties
of ours, including Frost Gamma Investments Trust ($150,000), Mark E. Andrews, III ($50,000), Richard J. Lampen ($100,000), and
Alfred J. Small ($15,000), to allow for the sale of participation interests in the Purchased Inventory Sublimit and the inventory
purchased with the proceeds thereof. The participation agreement provides that ACF’s commitment to fund each advance of the
Purchased Inventory Sublimit shall be limited to seventy percent (70%), up to an aggregate maximum principal amount for all advances
equal to $4.9 million. Under the terms of the participation agreement, the participants receive interest at the rate of 11% per
annum. We are not a party to the participation agreement. However, we and CB-USA are party to a fee letter with the junior participants
(including the related party junior participants) pursuant to which we and CB-USA were obligated to pay the junior participants
a closing fee of $18,000 on the effective date of the amendment to the Loan Agreement and are obligated to pay a commitment fee
of $18,000 on each anniversary of the effective date until the junior participants’ obligations are terminated pursuant to
the participation agreement.
We may borrow up to the maximum amount of
the Credit Facility, provided that we have a sufficient borrowing base (as defined in the Loan Agreement). The Credit Facility
interest rate (other than with respect to the Purchased Inventory Sublimit) is the rate that, when annualized, is the greatest
of (a) the Prime Rate plus 3.00%, (b) the LIBOR Rate plus 5.50% and (c) 6.0%. The interest rate applicable to the Purchased Inventory
Sublimit is the rate, that when annualized, is the greatest of (a) the Prime Rate plus 4.25%, (b) the LIBOR Rate plus 6.75% and
(c) 7.50%. Interest is payable monthly in arrears, on the first day of every month on the average daily unpaid principal amount
of the Credit Facility. After the occurrence and during the continuance of any “Default” or “Event of Default”
(as defined under the Loan Agreement) we are required to pay interest at a rate that is 3.25% per annum above the then applicable
Credit Facility interest rate. The Loan Agreement contains EBITDA targets allowing for further interest rate reductions in the
future. The Credit Facility currently bears interest at 6.0% (reflecting a discount for achieving one such EBITDA target) and the
Purchased Inventory Sublimit currently bears interest at 7.75%. We are required to pay down the principal balance of the Purchased
Inventory Sublimit within 15 banking days from the completion of a bottling run of bourbon from our bourbon inventory stock purchased
with funds borrowed under the Purchased Inventory Sublimit in an amount equal to the purchase price of such bourbon. The unpaid
principal balance of the Credit Facility, all accrued and unpaid interest thereon, and all fees, costs and expenses payable in
connection with the Credit Facility, are due and payable in full on the Maturity Date. In addition to closing fees, ACF receives
facility fees and a collateral management fee (each as set forth in the Loan Agreement). Our obligations under the Loan Agreement
are secured by the grant of a pledge and a security interest in all of our assets.
In October 2016, we acquired $1.6
million in aged bulk bourbon, including $1.4 million purchased under the Purchased Inventory Sublimit. Certain
related parties, including Frost Gamma Investments Trust ($72,000), Richard J. Lampen ($48,000), Mark E. Andrews, III
($24,000) and Alfred J. Small ($7,200), were junior participants in the Purchased Inventory Sublimit with respect to such
purchase.
The Loan Agreement contains standard
borrower representations and warranties for asset-based borrowing and a number of reporting obligations and affirmative and negative
covenants. The Loan Agreement includes negative covenants that, among other things, restrict our ability to create additional indebtedness,
dispose of properties, incur liens, and make distributions or cash dividends. At September 30, 2016, we were in compliance, in
all material respects, with the covenants under the Loan Agreement.
In December 2009, GCP, 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 September 30, 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%. We have deposited €0.3 million or $0.3 million (translated at the September 30, 2016 exchange rate)
with the bank to secure these borrowings.
In October 2013, we issued an aggregate
principal amount of $2.1 million of unsecured 5% convertible subordinated notes (the “Convertible Notes”). We used
a portion of the proceeds to finance the acquisition of additional bourbon inventory in support of the growth of our Jefferson’s
bourbon brand.
The Convertible Notes 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. The Convertible
Note purchasers included certain related parties of ours, including an affiliate of Dr. Phillip Frost ($500,000), Mark E. Andrews,
III ($50,000), an affiliate of Richard J. Lampen ($50,000), an affiliate of Glenn Halpryn ($200,000), Dennis Scholl ($100,000)
and Vector Group Ltd. ($200,000).
We 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 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 based on each holder’s then-current note holdings.
In November 2014, we entered into a distribution
agreement (the “2014 Distribution Agreement”) with Barrington Research Associates, Inc. (“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.
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.
As of November 9, 2016, Shares having a
gross sales price of up to approximately $4.7 million remained available for issuance pursuant to the 2014 Distribution Agreement.
Liquidity Discussion
As of September 30, 2016, we had
shareholders’ equity of $23.6 million as compared to $23.8 million at March 31, 2016. Our $1.1 million net loss and our
total comprehensive loss for the six months ended September 30, 2016, were partially offset by the exercise of stock options
and stock based compensation expense of $0.9 million.
We had working capital of $29.7 million
at September 30, 2016 as compared to $29.3 million at March 31, 2016, primarily due to a $1.2 million increase in accounts receivable
and an $0.8 million increase in inventory, which was partially offset by a $0.5 million increase in due to shareholders and affiliates,
a net $0.7 million increase in accounts payable and accrued expenses and a $0.8 million decrease in cash and cash equivalents.
As of September 30, 2016, we had cash and
cash equivalents of approximately $0.7 million, as compared to $1.4 million as of March 31, 2016. The decrease is primarily attributable
to the funding of our operations and working capital needs. At September 30, 2016, 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:
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·
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continued cash losses from operations;
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·
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our ability to obtain additional debt or equity financing should it be required;
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·
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an increase in working capital requirements to finance higher levels of inventories and accounts receivable;
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·
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our ability to maintain and improve our relationships with our distributors and our routes to market;
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·
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our ability to procure raw materials at a favorable price to support our level of sales;
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·
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potential acquisitions of additional brands; and
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·
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expansion into new markets and within existing markets in the U.S. and internationally.
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We continue to implement sales and marketing
initiatives that we expect will generate cash flows from operations in the next few years. We seek to grow our business through
expansion to new markets, growth in existing markets and strengthened distributor relationships. As our brands continue to grow,
our working capital requirements will increase. In particular, the growth of our Jefferson’s brands requires a significant
amount of working capital relative to our other brands, as we are required to purchase and hold ever increasing amounts of aged
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 may also seek additional brands and agency
relationships to leverage our existing distribution platform. We intend to finance any such brand acquisitions through a combination
of our available cash resources, borrowings and, in appropriate circumstances, additional issuances of equity and/or debt securities.
Acquiring additional brands could have a significant effect on our financial position, could materially reduce our liquidity and
could cause substantial fluctuations in our quarterly and yearly operating results. We continue to control expenses, seek improvements
in routes to market and contain production costs to improve cash flows.
As of September 30, 2016, we had borrowed
$12.3 million of the $19.0 million available under the Credit Facility, including $2.2 million of the $7.0 million available under
the Purchased Inventory Sublimit, leaving $1.9 million in potential availability for working capital needs under the Credit Facility
and $4.8 million available for aged whiskey inventory purchases. As of the date of this report, we had borrowed $9.7 million of
the $19.0 million available under the Credit Facility, including $3.6 million of the $7.0 million available under the Purchased
Inventory Sublimit, leaving $2.3 million in potential availability for working capital needs under the Credit Facility and $3.4
million available for aged whiskey inventory purchases. We believe our current cash and working capital, the availability under
the Credit Facility and the additional funds that may be raised under the 2014 Distribution Agreement will enable us to fund our
losses until we achieve profitability, ensure continuity of supply of our brands, and support new brand initiatives and marketing
programs through at least November 2017.
Cash flows
The following table summarizes our primary
sources and uses of cash during the periods presented:
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Six months ended
September 30,
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2016
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2015
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|
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(in thousands)
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|
Net cash provided by (used in):
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|
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|
|
|
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Operating activities
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$
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(987
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)
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|
$
|
(1,125
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)
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Investing activities
|
|
|
(172
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)
|
|
|
(719
|
)
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Financing activities
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|
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409
|
|
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2,395
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Subtotal
|
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(749
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)
|
|
|
551
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|
Effect of foreign currency translation
|
|
|
(1
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)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
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Net (decrease) increase in cash and cash equivalents
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$
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(751
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)
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|
$
|
548
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|
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 Goslings 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 September 30,
2016 included significant additional stores of aged bourbon purchased in advance of forecasted production requirements. We expect
to use the aged bourbon in the normal course of future sales, generating positive cash flows in future periods.
During the six months ended September 30,
2016, net cash used in operating activities was $1.0 million, consisting primarily of a $1.2 million increase in accounts receivable,
an $0.8 million increase in inventory, a net loss of $0.6 million and a $0.4 million increase in prepaid expenses. These uses of
cash were partially offset by a $0.7 million increase in accounts payable and accrued expenses, a $0.5 million increase in due
to related parties, stock based compensation expense of $0.8 million and depreciation and amortization expense of $0.5 million
During the six months ended September 30,
2015, net cash used in operating activities was $1.1 million, consisting primarily of a net loss of $1.5 million, a $2.7 million
increase in inventory and a $0.5 million decrease in due to related parties. These uses of cash were partially offset by a $1.6
million increase in accounts payable and accrued expense, a $0.2 million decrease in accounts receivable, a $0.1 million increase
in due from affiliates, stock based compensation expense of $0.7 million and depreciation and amortization expense of $0.5 million.
Investing Activities.
Net
cash used in investing activities was $0.2 million for the six months ended September 30, 2016, representing $0.2 million used
in the acquisition of fixed and intangible assets.
Net cash used in investing activities was
$0.7 million for the six months ended September 30, 2015, representing a $0.5 million investment in Copperhead Distillery and $0.2
million used in the acquisition of fixed and intangible assets.
Financing activities.
Net
cash provided by financing activities for the six months ended September 30, 2016 was $0.4 million, consisting of $0.2 million
in net proceeds from the Credit Facility and $0.2 million from the exercise of stock options.
Net cash provided by financing activities
for the six months ended September 30, 2015 was $2.4 million, consisting of $3.2 million in net proceeds from the issuance of common
stock pursuant to the at-the-market offering, $0.4 million in net proceeds from the Credit Facility and $0.2 million from the exercise
of common stock options, partially offset by $0.7 million paid on the Bourbon Term Loan and $0.6 million in dividends paid to non-controlling
interests of GCP.
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, 2016, as amended, and as follows:
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recent worldwide and domestic economic trends and financial market conditions could adversely impact our financial performance;
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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;
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our brands could fail to achieve more widespread consumer acceptance, which may limit our growth;
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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;
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our annual purchase obligations with certain suppliers;
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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;
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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;
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currency exchange rate fluctuations and devaluations may significantly adversely affect our revenues, sales, costs of goods
and overall financial results;
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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;
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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;
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the possibility that we cannot secure and maintain listings in control states, which could cause the sales of our products
to decrease significantly;
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an impairment in the carrying value of our goodwill or other acquired intangible assets could negatively affect our operating
results and shareholders’ equity;
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changes in consumer preferences and trends could adversely affect demand for our products;
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there is substantial competition in our industry and the many factors that may prevent us from competing successfully;
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adverse changes in public opinion about alcohol could reduce demand for our products;
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class action or other litigation relating to alcohol misuse or abuse could adversely affect our business; and
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adverse regulatory decisions and legal, regulatory or tax changes could limit our business activities, increase our operating
costs and reduce our margins.
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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.