Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
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.
Additionally, we recently added the Arran Scotch Whiskies to our portfolio as agency brands. 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
On
March 29, 2017, we entered into a Stock Purchase Agreement under which we acquired 201,000 shares (the “GCP Share Acquisition”)
of the common stock of Gosling-Castle Partners Inc., or GCP, representing a 20.1% equity interest in GCP. GCP is a strategic global
export venture between Castle Brands and the Gosling family. As a result of the completion of the GCP Share Acquisition, our total
equity interest in GCP increased to 80.1%. The consideration for the GCP Share Acquisition was (i) $20,000,000 in cash and (ii)
1,800,000 shares of our common stock, which shares are subject to an 18 month lockup covenant. As a result of the GCP Share
Acquisition, GCP will file as part of our U.S. federal consolidated income tax group for periods subsequent to the acquisition.
In
connection with the GCP Share Acquisition, we also entered into an Amended and Restated Distribution Agreement and an Export Agreement
Amendment. Under the Amended and Restated Distribution Agreement, our subsidiary, Castle Brands (USA) Corp. (“CB-USA”),
continues as the exclusive long-term importer and distributor of certain beverage products, including “Goslings Rum”
and “Goslings Stormy Ginger Beer” (collectively, the “Distribution Products”) throughout the United States,
and such other markets as may be added by mutual consent of the parties (the “Distribution Territory”). The initial
term of the Amended and Restated Distribution Agreement extends through March 31, 2030, with automatic ten-year renewal terms
thereafter, subject to specific termination rights held by each party. The Amended and Restated Distribution Agreement automatically
terminates upon the termination, for any reason, of the Export Agreement. CB-USA will purchase Distribution Products from GCP
for distribution in the Distribution Territory at prices set forth in the Amended and Restated Distribution Agreement, as may
be mutually changed by the parties. CB-USA is entitled to receive a net margin amount, certain reimbursement costs, and a specified
fee to defray normal overhead costs, all as specified in the Amended and Restated Distribution Agreement. GCP will maintain primary
responsibility and bear the costs for the overall marketing, advertising, and promotion of the Distribution Products. Also, CB-USA
has a right of first refusal regarding the distribution of any other current or future rum or ginger beer products GCP currently
maintains in, or adds to, its product line for sale in the Distribution Territory.
Under
the Export Agreement Amendment, GCP maintains all global distribution rights (with the exception of Bermuda) during the term of
the Export Agreement and continues as the exclusive authorized global exporter of certain beverage products (the “Export
Products”) in all national or international markets, except Bermuda. The Export Agreement Amendment, among other things,
assigns to GCP global distribution and exporting rights to Goslings Stormy Ginger Beer and all other Goslings Ginger Beer products
and extends the initial term of the Export Agreement from 15 to 25 years, through March 31, 2030, with ten-year renewal terms
thereafter, subject to specific termination rights held by each party. Under the Export Agreement Amendment, in the event Gosling’s
Export decides to sell any or all of its trademarks (or other intellectual property rights) relating to the Export Products (other
than Goslings Stormy Ginger Beer) during the term of the Export Agreement, GCP has a right of first refusal to purchase the trademark(s)
(and intellectual property rights, if applicable) at the same price being offered by a bona fide third-party offeror. If GCP does
not exercise its right of first refusal, then we will acquire an identical right of first refusal. In the event Gosling’s
Export decides to sell any or all of its Export Products and/or trademark(s), whether sold to an affiliate, a third party, GCP
or us, GCP is entitled to share in the proceeds of such sale, as specified in the Export Agreement Amendment. A copy of the Amended
and Restated Distribution Agreement and a Restated Export Agreement are filed as exhibits to this annual report on Form 10-K.
See Note
Operations
overview
We
generate revenue through the sale of our products to our network of wholesale distributors or, in control states, state-operated
agencies, which, in turn, distribute our products to retail outlets. In the U.S., our sales price per case includes excise tax
and import duties, which are also reflected as a corresponding increase in our cost of sales. Most of our international sales
are sold “in bond”, with the excise taxes paid by our customers upon shipment, thereby resulting in lower relative
revenue as well as a lower relative cost of sales, although some of our United Kingdom sales are sold “tax paid”,
as in the U.S. The difference between sales and net sales principally reflects adjustments for various distributor incentives.
Our
gross profit is determined by the prices at which we sell our products, our ability to control our cost of sales, the relative
mix of our case sales by brand and geography and the impact of foreign currency fluctuations. Our cost of sales is principally
driven by our cost of procurement, bottling and packaging, which differs by brand, as well as freight and warehousing costs. We
purchase certain products, such as Goslings rums and ginger beer, Pallini liqueurs, Arran whiskies, Gozio amaretto and Tierras
tequila, as finished goods. For other products, such as Jefferson’s bourbons, we purchase the components, including the
distilled spirits, bottles and packaging materials, and have arrangements with third parties for bottling and packaging. Our U.S.
sales typically have a higher absolute gross margin than in other markets, as sales prices per case are generally higher in the
U.S.
Selling
expense principally includes advertising and marketing expenditures and compensation paid to our marketing and sales personnel.
Our selling expense, as a percentage of sales and per case, is higher than that of our competitors because of our brand development
costs, level of marketing expenditures and established sales force versus our relatively small base of case sales and sales volumes.
However, we believe that maintaining an infrastructure capable of supporting future growth is the correct long-term approach for
us.
While
we expect the absolute level of selling expense to increase in the coming years, we expect selling expense as a percentage of
revenues and on a per case basis to decline or remain constant, as our volumes expand and our sales team sells a larger number
of brands.
General
and administrative expense relates to corporate and administrative functions that support our operations and includes administrative
payroll, occupancy and related expenses and professional services. We expect general and administrative expense in fiscal 2018
to be higher than fiscal 2017 due to costs associated with increased infrastructure to support our growth. However, we expect
our general and administrative expense as a percentage of sales to decline due to economies of scale.
We
expect to increase our case sales in the U.S. and internationally over the next several years through organic growth, and through
the introduction of product line extensions, acquisitions and distribution agreements. We will seek to maintain liquidity and
manage our working capital and overall capital resources during this period of anticipated growth to achieve our long-term objectives,
although there is no assurance that we will be able to do so.
We
continue to believe the following industry trends will create growth opportunities for us, including:
|
●
|
the
divestiture of smaller and emerging non-core brands by major spirits companies as they continue to consolidate;
|
|
|
|
|
●
|
increased
barriers to entry, particularly in the U.S., due to continued consolidation and the difficulty in establishing an extensive
distribution network, such as the one we maintain; and
|
|
|
|
|
●
|
the
trend by small private and family-owned spirits brand owners to partner with, or be acquired by, a company with global distribution.
We expect to be an attractive alternative to our larger competitors for these brand owners as one of the few modestly-sized
publicly-traded spirits companies.
|
Our growth strategy is
based upon growing existing brands, partnering with other brands and acquiring smaller and emerging brands. To identify
potential partner and acquisition candidates we plan to rely on our management’s industry experience and our extensive network
of industry contacts. We also plan to maintain and grow our U.S. and international distribution channels so that we are more attractive
to spirits companies who are looking for a route to market for their products. We expect to compete for foreign and small private
and family-owned spirits brands by offering flexible and creative structures, which present an alternative to the larger spirits
companies.
We
intend to finance any future brand acquisitions through a combination of our available cash resources, third party financing and,
in appropriate circumstances, the further issuance of equity and/or debt securities. Acquiring additional brands could have a
significant effect on our financial position, and could cause substantial fluctuations in our quarterly and yearly operating results.
Also, the pursuit of acquisitions and other new business relationships may require significant management attention. We may not
be able to successfully identify attractive acquisition candidates, obtain financing on favorable terms or complete these types
of transactions in a timely manner and on terms acceptable to us, if at all.
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):
|
|
Year
ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cases
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
341,256
|
|
|
|
340,782
|
|
|
|
310,106
|
|
International
|
|
|
75,113
|
|
|
|
85,558
|
|
|
|
82,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
416,369
|
|
|
|
426,340
|
|
|
|
392,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rum
|
|
|
180,914
|
|
|
|
180,698
|
|
|
|
171,189
|
|
Whiskey
|
|
|
109,223
|
|
|
|
109,990
|
|
|
|
84,713
|
|
Liqueur
|
|
|
93,201
|
|
|
|
91,010
|
|
|
|
89,369
|
|
Vodka
|
|
|
31,907
|
|
|
|
43,608
|
|
|
|
46,347
|
|
Tequila
|
|
|
1,124
|
|
|
|
1,034
|
|
|
|
1,106
|
|
Other spirits
|
|
|
—
|
|
|
|
—
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
416,369
|
|
|
|
426,340
|
|
|
|
392,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
82.0
|
%
|
|
|
79.9
|
%
|
|
|
79.0
|
%
|
International
|
|
|
18.0
|
%
|
|
|
20.1
|
%
|
|
|
21.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rum
|
|
|
43.4
|
%
|
|
|
42.5
|
%
|
|
|
43.6
|
%
|
Whiskey
|
|
|
26.2
|
%
|
|
|
25.8
|
%
|
|
|
21.6
|
%
|
Liqueur
|
|
|
22.4
|
%
|
|
|
21.3
|
%
|
|
|
22.7
|
%
|
Vodka
|
|
|
7.7
|
%
|
|
|
10.2
|
%
|
|
|
11.8
|
%
|
Tequila
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
Other spirits
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
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:
|
|
Year
ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cases
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
1,326,140
|
|
|
|
1,070,173
|
|
|
|
682,190
|
|
International
|
|
|
61,740
|
|
|
|
45,101
|
|
|
|
33,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,387,880
|
|
|
|
1,115,274
|
|
|
|
715,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
95.6
|
%
|
|
|
96.0
|
%
|
|
|
95.4
|
%
|
International
|
|
|
4.4
|
%
|
|
|
4.0
|
%
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Critical
accounting policies and estimates
A
number of estimates and assumptions affect our reported amounts of assets and liabilities, amounts of sales and expenses and disclosure
of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate these estimates and assumptions
based on historical experience and other factors and circumstances. We believe our estimates and assumptions are reasonable under
the circumstances; however, actual results may differ from these estimates.
We
believe that the estimates and assumptions discussed below are most important to the portrayal of our financial condition and
results of operations in that they require our most difficult, subjective or complex judgments and form the basis for the accounting
policies deemed to be most critical to our operations.
Revenue
recognition
We
recognize revenue from product sales when the product is shipped to a customer (generally a distributor), title and risk of loss
has passed to the customer under the terms of sale (FOB shipping point or FOB destination) and collection is reasonably assured.
We do not offer a right of return but will accept returns if we shipped the wrong product or wrong quantity. Revenue is not recognized
on shipments to control states in the U.S. until such time as the product is sold through to the retail channel.
Accounts
receivable
We
record trade accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible
accounts to reflect any loss anticipated on the trade accounts receivable balances and charged to the allowance for doubtful accounts.
We calculate this allowance based on our history of write-offs, level of past due accounts based on contractual terms of the receivables
and our relationships with, and economic status of, our customers.
Inventory
valuation
Our inventory, which
consists of distilled spirits, non-beverage alcohol products, dry good raw materials (bottles, cans, labels and caps), packaging,
excise taxes, freight and finished goods, is valued at the lower of cost or market, using the weighted average cost method.
We assess the valuation of our inventories and reduce the carrying value of those inventories that are obsolete or in excess of
our forecasted usage to their estimated realizable value. We estimate the net realizable value of such inventories based on analyses
and assumptions including, but not limited to, historical usage, future demand and market requirements. Reduction to the carrying
value of inventories is recorded in cost of goods sold.
Goodwill
and other intangible assets
At
each of March 31, 2017 and 2016, we had $0.5 million of goodwill that arose from acquisitions. Goodwill represents the excess
of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses
acquired. Intangible assets with indefinite lives consist primarily of rights, trademarks, trade names and formulations. We are
required to analyze our goodwill and other intangible assets with indefinite lives for impairment on an annual basis as well as
when events and circumstances indicate that an impairment may have occurred. In testing goodwill for impairment, we have the option
to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that
it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount.
If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required
to perform a quantitative impairment test, otherwise no further analysis is required. We may also elect not to perform the qualitative
assessment and, instead, proceed direct to the quantitative impairment test. Under the goodwill qualitative assessment, various
events and circumstances that would affect the estimated fair value of a reporting unit are identified, including, but not limited
to: prior years’ impairment testing results, budget to actual results, Company-specific facts and circumstances, industry
developments, and the economic environment.
Under
the goodwill two-step quantitative impairment test we evaluate the recoverability of goodwill and indefinite lived intangible
assets at the reporting unit level. In the first step the fair value for the reporting unit is compared to its book value including
goodwill. If the fair value of the reporting unit is less than the book value, a second step is performed which compares the implied
fair value of the reporting unit’s goodwill to the book value of the goodwill. The fair value for the goodwill is determined
based on the difference between the fair values of the reporting units and the net fair values of the identifiable assets and
liabilities of such reporting units. If the fair value of the goodwill is less than the book value, the difference is recognized
as an impairment.
Under
the goodwill qualitative assessment at March 31, 2017 and 2016, various events and circumstances that would affect the estimated
fair value of each reporting unit were identified, including, but not limited to: prior years’ impairment testing results,
budget to actual results, Company-specific facts and circumstances, industry developments, and the economic environment. Based
on this assessment, we determined that no quantitative assessment was required. We did not record any impairment on goodwill or
other intangible assets for fiscal 2017, 2016 or 2015.
Intangible
assets with estimable useful lives are amortized over their respective estimated useful lives to the estimated residual values
and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
We are required to amortize intangible assets with estimable useful lives over their respective estimated useful lives to the
estimated residual values and to review intangible assets with estimable useful lives for impairment in accordance with the Financial
Accounting Standards Board Accounting Standards Codification (“ASC”) 310, “Accounting for the Impairment or
Disposal of Long-lived Assets.”
Stock-based
awards
We
follow current authoritative guidance regarding stock-based compensation, which requires all share-based payments, including grants
of stock options and restricted stock, to be recognized in the income statement as an operating expense, based on their fair values
on the grant date. Stock-based compensation was $1.6 million, $1.4 million and $0.8 million for fiscal 2017, 2016 and 2015,
respectively. We use the Black-Scholes option-pricing model to estimate the fair value of options and restricted stock granted.
The assumptions used in valuing the options granted during fiscal 2017, 2016 and 2015 are included in note 12 to our accompanying
consolidated financial statements.
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. We believe that there is no material difference between the fair value and the reported amounts of financial instruments
in the balance sheets due to the short-term maturity of these instruments, or with respect to the debt, as compared to the current
borrowing rates available to us.
Results
of operations
The
following table sets forth, for the periods indicated, the percentage of net sales of certain items in our consolidated financial
statements.
|
|
Year
ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Sales, net
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
59.0
|
%
|
|
|
60.5
|
%
|
|
|
62.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
41.0
|
%
|
|
|
39.5
|
%
|
|
|
37.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expense
|
|
|
26.0
|
%
|
|
|
26.6
|
%
|
|
|
26.5
|
%
|
General and administrative expense
|
|
|
11.2
|
%
|
|
|
10.2
|
%
|
|
|
11.3
|
%
|
Depreciation and
amortization
|
|
|
1.3
|
%
|
|
|
1.3
|
%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
from operations
|
|
|
2.5
|
%
|
|
|
1.4
|
%
|
|
|
(1.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investment in non-consolidated
affiliate
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Foreign exchange gain (loss)
|
|
|
0.1
|
%
|
|
|
(0.3
|
)%
|
|
|
(0.0
|
)%
|
Interest expense, net
|
|
|
(1.7
|
)%
|
|
|
(1.5
|
)%
|
|
|
(2.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before provision for income taxes
|
|
|
0.9
|
%
|
|
|
(0.4
|
)%
|
|
|
(3.8
|
)%
|
Income tax expense,
net
|
|
|
(0.2
|
)%
|
|
|
(2.0
|
)%
|
|
|
(2.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss
)
|
|
|
0.7
|
%
|
|
|
(2.4
|
)%
|
|
|
(6.0
|
)%
|
Net income attributable
to noncontrolling interests
|
|
|
(1.8
|
)%
|
|
|
(1.1
|
)%
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable
to common shareholders
|
|
|
(1.1
|
)%
|
|
|
(3.5
|
)%
|
|
|
(6.6
|
)%
|
The
following is a reconciliation of net loss attributable to common shareholders to EBITDA, as adjusted:
|
|
Year
ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net
loss attributable to common shareholders
|
|
$
|
(852,613
|
)
|
|
$
|
(2,516,368
|
)
|
|
$
|
(3,799,742
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense,
net
|
|
|
1,335,241
|
|
|
|
1,088,539
|
|
|
|
1,129,047
|
|
Income tax expense,
net
|
|
|
187,702
|
|
|
|
1,450,848
|
|
|
|
1,278,999
|
|
Depreciation
and amortization
|
|
|
1,030,093
|
|
|
|
939,513
|
|
|
|
907,540
|
|
EBITDA income
(loss)
|
|
|
1,700,423
|
|
|
|
962,532
|
|
|
|
(484,156
|
)
|
Allowance for doubtful
accounts
|
|
|
123,200
|
|
|
|
61,000
|
|
|
|
236,000
|
|
Allowance for obsolete
inventory
|
|
|
240,000
|
|
|
|
200,000
|
|
|
|
281,000
|
|
Stock-based compensation
expense
|
|
|
1,577,994
|
|
|
|
1,370,556
|
|
|
|
787,710
|
|
Transaction fees
|
|
|
346,704
|
|
|
|
—
|
|
|
|
—
|
|
Other expense (income),
net
|
|
|
10,660
|
|
|
|
666
|
|
|
|
(16,602
|
)
|
Income from equity
investment in non-consolidated affiliate
|
|
|
(51,430
|
)
|
|
|
(18,667
|
)
|
|
|
—
|
|
Foreign exchange (income)
loss
|
|
|
(83,707
|
)
|
|
|
190,867
|
|
|
|
4,564
|
|
Net
income attributable to noncontrolling interests
|
|
|
1,359,145
|
|
|
|
809,662
|
|
|
|
325,829
|
|
EBITDA, as adjusted
|
|
|
5,222,989
|
|
|
|
3,576,616
|
|
|
|
1,134,345
|
|
Earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted for allowances for doubtful
accounts and obsolete inventory, stock-based compensation expense, transaction fees, other expense (income), net, income from equity
investment in non-consolidated affiliate, foreign exchange and net income attributable to noncontrolling interests is a key metric
we use in evaluating our financial performance. EBITDA, as adjusted, is considered a non-GAAP financial measure as defined by Regulation
G promulgated by the SEC under the Securities Act of 1933, as amended. We consider EBITDA, as adjusted, important in evaluating
our performance on a consistent basis across various periods. Due to the significance of non-cash and non-recurring items, EBITDA,
as adjusted, enables our Board of Directors and management to monitor and evaluate the business on a consistent basis. We use EBITDA,
as adjusted, as a primary measure, among others, to analyze and evaluate financial and strategic planning decisions regarding future
operating investments and allocation of capital resources. We believe that EBITDA, as adjusted, eliminates items that are not indicative
of our core operating performance or are based on management’s estimates, such as allowance accounts, are due to changes
in valuation, such as the effects of changes in foreign exchange or do not involve a cash outlay, such as stock-based compensation
expense. Our presentation of EBITDA, as adjusted, should not be construed as an inference that our future results will be unaffected
by unusual or non-recurring items or by non-cash items, such as stock-based compensation, which is expected to remain a key element
in our long-term incentive compensation program. EBITDA, as adjusted, should be considered in addition to, rather than as a substitute
for, income from operations, net income and cash flows from operating activities.
Our
EBITDA, as adjusted, improved to $5.2 million for the year ended March 31, 2017, as compared to $3.6 million for the prior
fiscal year, primarily as a result of our increased sales and gross profit. Our EBITDA, as adjusted, improved to $3.6 million
for the year ended March 31, 2016, as compared to $1.1 million for the prior year, primarily as a result of our increased sales
and gross profit.
Fiscal
2017 compared with fiscal 2016
Net
sales.
Net sales increased 7.0% to $77.3 million for the year ended March 31, 2017, as compared to $72.2 million for the prior
fiscal year, primarily due to U.S. sales growth of Jefferson’s bourbons and Goslings Stormy Ginger Beer, partially offset
by decreases in vodka and international Irish whiskey sales. For the year ended March 31, 2017, sales of our Goslings Stormy Ginger
Beer increased 23.3% to $20.0 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 distribution to large national
and regional retailers and on-premise accounts, 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 year ended March
31, 2017 as compared to the year ended March 31, 2016:
|
|
|
Increase/(decrease)
|
|
|
Percentage
|
|
|
|
|
in
case sales
|
|
|
increase/(decrease)
|
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Rum
|
|
|
|
216
|
|
|
|
2,046
|
|
|
|
0.1
|
%
|
|
|
1.5
|
%
|
Whiskey
|
|
|
|
(767
|
)
|
|
|
7,356
|
|
|
|
(0.7
|
)%
|
|
|
9.8
|
%
|
Liqueur
|
|
|
|
2,191
|
|
|
|
2,213
|
|
|
|
2.4
|
%
|
|
|
2.4
|
%
|
Vodka
|
|
|
|
(11,701
|
)
|
|
|
(11,231
|
)
|
|
|
(26.8
|
)%
|
|
|
(28.1
|
)%
|
Tequila
|
|
|
|
90
|
|
|
|
90
|
|
|
|
8.7
|
%
|
|
|
8.7
|
%
|
Total
|
|
|
|
(9,971
|
)
|
|
|
474
|
|
|
|
(2.3
|
)%
|
|
|
0.1
|
%
|
Our
international spirits case sales as a percentage of total spirits case sales decreased to 18.0% for the year ended March 31, 2017
as compared to 20.1% for the prior fiscal year, primarily due to decreased Irish whiskey and rum sales in certain international
markets resulting in part from the timing of shipments to large retailers in Great Britain and Scandinavia.
The
following table presents the increase in case sales of related non-alcoholic beverage products for the year ended March 31, 2017
as compared to the year ended March 31, 2016:
|
|
Increase
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
Increase
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Related Non-Alcoholic Beverage
Products
|
|
|
272,606
|
|
|
|
255,967
|
|
|
|
24.4
|
%
|
|
|
23.9
|
%
|
Gross
profit
.
Gross profit increased 11.0% to $31.7 million for
the year ended March 31, 2017 from $28.6 million for the prior fiscal year, while gross margin increased to 41.0% for the year
ended March 31, 2017 as compared to 39.5% for the prior fiscal year. The increase in gross profit was primarily due to increased
aggregate revenue in the current period. During each of the years ended March 31, 2017 and 2016, we recorded additions to allowance
for obsolete and slow moving inventory of $0.2 million. We recorded these write-offs and 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 estimates
and variances. The net charges have been recorded as an increase to cost of sales in the relevant period. Net of the allowances
for obsolete inventories, gross margin for the year ended March 31, 2017 was 41.2% as compared to 39.8% for the prior-year
period.
Selling
expense
. Selling expense increased 4.7% to $20.1 million for the year ended March 31, 2017 from $19.2 million for the prior
fiscal year, primarily due to a $0.3 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 $0.9 million
increase in salaries and personnel expense due to increased staff and compensation costs, including a $0.2 million increase
in travel and entertainment expense, partially offset by a $0.3 million decrease in shipping costs from lower sales volume.
Selling expense as a percentage of net sales decreased to 26.0% for the year ended March 31, 2017 as compared to 26.6% for the
prior fiscal year due to increased sales.
General
and administrative expense
. General and administrative expense increased 17.0% to $8.6 million for the year ended March 31,
2017 from $7.4 million for the prior fiscal year, primarily due to a $0.5 million increase in salaries and personnel expense due
to increased staff and compensation costs, $0.3 million increase in professional fees due to the GCP Share Acquisition,
and a $0.1 million increase each in insurance costs, occupancy expense and stock compensation expense for our Board of
Directors. Increased revenue for the year partially offset the increase in general and administrative expenses, which resulted
in general and administrative expense as a percentage of net sales increasing to 11.2% for the year ended March 31, 2017 as compared
to 10.2% for the prior fiscal year.
Depreciation
and amortization.
Depreciation and amortization was $1.0 million for the year ended March 31, 2017 as compared
to $0.9 million for the prior fiscal year.
Income
from operations
. As a result of the foregoing, we had income from operations of $1.9 million for the year ended March
31, 2017 as compared to income from operations of $1.0 million for the prior fiscal year. As a result of our focus on our stronger
growth markets and better performing brands, and expected growth from our existing brands, we anticipate improved results of operations
in the near term as compared to prior years, although there is no assurance that we will attain such results.
Income
tax expense, net.
Income tax expense, net is the estimated tax expense primarily attributable to the net taxable income recorded
by our GCP subsidiary, adjusted for changes in the deferred tax asset and deferred tax liability during the periods, and was net
expense of ($0.2) million for the year ended March 31, 2017 as compared to net expense of ($1.5) million for the prior
fiscal year. The net tax expense for the year ended March 31, 2017 is net of a $0.4 million tax benefit from the change
in our deferred tax liability.
Foreign
exchange gain (loss).
Foreign exchange gain for the year ended March 31, 2017 was $0.1 million as compared to a loss of ($0.2)
million for the prior fiscal year due to the net effects of fluctuations of the U.S. dollar against the Euro and its impact on
our Euro-denominated intercompany balances due to our foreign subsidiaries for inventory purchases.
Interest
expense, net.
We had interest expense, net of ($1.3) million for the year ended March 31, 2017 as compared to ($1.1) million
for the prior fiscal year 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 $1.4 million
for the year ended March 31, 2017 as compared to $0.8 million for the prior fiscal year, both the result of net income allocated
to the 40.0% noncontrolling interests in GCP. The change in noncontrolling interests from our acquisition of an additional 20.1%
of GCP occurred at the end of March 2017 and was immaterial on our results.
Net
loss attributable to common shareholders.
As a result of the net effects of the foregoing, net
loss attributable to common shareholders improved to ($0.9) million for the year ended March 31, 2017 as compared to
($2.5) million for the prior fiscal year. Net loss per common share, basic and diluted, was ($0.01) per share for the
year ended March 31, 2017 as compared to ($0.02) for the prior fiscal year.
Fiscal
2016 compared with fiscal 2015
Net
sales.
Net sales increased 25.7% to $72.2 million for the year ended March 31, 2016, as compared to $57.5 million for the
prior fiscal year, due to sales growth of our Jefferson’s portfolio and our Goslings rum and Goslings Stormy Ginger Beer,
partially offset by decreases in sales of vodka. Also, for the year ended March 31, 2016, sales of our Goslings Stormy Ginger
Beer increased by 400,223 cases, or 56.0%, overall, including a 388,354 case increase, or 57.0%, in U.S. case sales as compared
to the prior year. We anticipate continued growth of Goslings Stormy Ginger Beer in the near term due to the popularity of cocktails
containing ginger beer and Goslings brand awareness, 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 year ended March
31, 2016 as compared to the year ended March 31, 2015:
|
|
Increase/(decrease)
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
increase/(decrease)
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Rum
|
|
|
9,509
|
|
|
|
9,452
|
|
|
|
5.6
|
%
|
|
|
7.6
|
%
|
Whiskey
|
|
|
25,277
|
|
|
|
20,734
|
|
|
|
29.8
|
%
|
|
|
38.4
|
%
|
Liqueur
|
|
|
1,641
|
|
|
|
2,644
|
|
|
|
1.8
|
%
|
|
|
3.0
|
%
|
Vodka
|
|
|
(2,739
|
)
|
|
|
(2,068
|
)
|
|
|
(5.9
|
)%
|
|
|
(4.9
|
)%
|
Tequila
|
|
|
(72
|
)
|
|
|
(72
|
)
|
|
|
(6.5
|
)%
|
|
|
(6.5
|
)%
|
Other spirits
|
|
|
(14
|
)
|
|
|
(14
|
)
|
|
|
(100.0
|
)%
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
33,602
|
|
|
|
30,676
|
|
|
|
8.6
|
%
|
|
|
9.9
|
%
|
Our
international spirits case sales as a percentage of total spirits case sales decreased to 20.1% for the year ended March 31, 2016
as compared to 21.0% for the prior year, primarily due to the timing of shipments of rum to our international wholesaler.
The
following table presents the increase in case sales of related non-alcoholic beverage products for the year ended March 31, 2016
as compared to the year ended March 31, 2015:
|
|
Increase
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
increase
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Related Non-Alcoholic Beverage
Products
|
|
|
399,852
|
|
|
|
387,983
|
|
|
|
55.9
|
%
|
|
|
56.9
|
%
|
Gross
profit.
Gross profit increased 32.4% to $28.6 million for the year ended March 31, 2016 from $21.6 million for the prior fiscal
year, and our gross margin increased to 39.5% for the year ended March 31, 2016 compared to 37.5% for the prior year. The increase
in gross profit was primarily due to increased sales volume and revenue in the current period, while the increase in gross margin
was due to increased sales of our more profitable brands, in particular the Jefferson’s bourbons, partially offset by increased
sales of lower-margin Goslings Stormy Ginger Beer. During the year ended March 31, 2016, we recorded an addition to allowance
for obsolete and slow moving inventory of $0.2 million, as compared to $0.3 million for the prior fiscal year. 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, our gross margin for the year ended March 31, 2016 was 39.8% as compared
to 38.0% for the prior year.
Selling
expense.
Selling expense increased 26.0% to $19.2 million for the year ended March 31, 2016 from $15.3 million for the prior
year, primarily due to a $2.7 million increase in advertising, marketing and promotion expense related to increased sales volume
and the timing of certain sales and marketing programs, including the 35
th
America’s Cup sponsorship, and a $1.3
million increase in employee costs. The increase in sales resulted in selling expense as a percentage of net sales remaining relatively
constant at 26.6% for the year ended March 31, 2016 as compared to 26.5% for the prior fiscal year.
General
and administrative expense
. General and administrative expense increased 13.8% to $7.4 million for the year ended March 31,
2016 from $6.5 million for the prior year, primarily due to a $0.5 million increase in employee expense, a $0.4 million increase
in professional fees and a $0.4 million increase in stock-based compensation expense, offset by a $0.2 million decrease in provision
for bad debts and a $0.1 million decrease in insurance expense. Increased sales resulted in general and administrative expense
as a percentage of net sales decreasing to 10.2% for the year ended March 31, 2016 as compared to 11.3% for the prior fiscal year.
As a result of our becoming an accelerated filer in fiscal 2015, we experienced increased general and administrative
expense due to the costs and fees associated with the additional regulatory requirements.
Depreciation
and amortization.
Depreciation and amortization was $0.9 million for each of the years ended March 31, 2016 and 2015.
Income
(loss) from operations
. As a result of the foregoing, results from operations improved to income of $1.0 million for the year
ended March 31, 2016 as compared to a loss of ($1.1) million for the prior year. 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 ($1.5) million for the year ended March 31, 2016 as compared to net expense of ($1.3) million for the prior
year.
Foreign
exchange loss.
Foreign exchange loss for the year ended March 31, 2016 was ($0.2) million as compared to a de minimis loss
for the prior fiscal year due to the net effects of fluctuations of the U.S. dollar against the Euro and its impact on our Euro-denominated
intercompany balances due to our foreign subsidiaries for inventory purchases.
Interest
expense, net.
We had interest expense, net of ($1.1) million for each of the years ended March 31, 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 ($0.8) million for
the year ended March 31, 2016 as compared to ($0.3) million for the prior year, both the result of allocated net income recorded
by our 60% owned subsidiary, 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 ($2.5) million for the year ended March 31, 2016 as compared to ($3.8) million for the prior year. Net
loss per common share, basic and diluted, was ($0.02) per share for each of the years ended March 31, 2016 and 2015.
Liquidity
and capital resources
Overview
Since
our inception, we have incurred significant operating and net losses and have not generated positive cash flows from operations.
For the year ended March 31, 2017, we had net income of $0.5 million, and used cash of $1.7 million in operating activities.
As of March 31, 2017, we had cash and cash equivalents of $0.6 million and had an accumulated deficit of $148.2 million.
Existing
Financing
We
and our wholly-owned subsidiary, CB-USA, are parties to an Amended and Restated Loan and Security Agreement (as amended, the “Loan
Agreement”) with ACF FinCo I LP (“ACF”), which provides for availability (subject to certain terms and conditions)
of a facility (the “Credit Facility”) to provide us with working capital, including capital to finance purchases of
aged whiskeys in support of the growth of our Jefferson’s 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 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), Brian L. Heller, our Special Counsel and Assistant Secretary ($42,500), 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 6.5% (reflecting a discount for achieving
one such EBITDA target) and the Purchased Inventory Sublimit currently bears interest at 8.25%. 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
January 2017, we acquired $1.0 million in aged bulk bourbon purchased under the Purchased Inventory Sublimit. Certain related
parties, including Frost Gamma Investments Trust ($51,500), Richard J. Lampen ($34,333), Mark E. Andrews, III ($17,167), Brian
L. Heller ($14,592) and Alfred J. Small ($5,150), were junior participants in the Purchased Inventory Sublimit with respect to
such purchase.
The
Loan Agreement contains standard borrower representations and warranties for asset-based borrowing and a number of reporting obligations
and affirmative and negative covenants. The Loan Agreement includes negative covenants that, among other things, restrict our
ability to create additional indebtedness, dispose of properties, incur liens, and make distributions or cash dividends. At March
31, 2017, we were in compliance, in all material respects, with the covenants under the Loan Agreement.
In
March 2017, we issued a promissory note to Frost Nevada Investments Trust (the “Holder”), an entity affiliated with
Phillip Frost, M.D., in the aggregate principal amount of $20.0 million (the “Subordinated Note”). The purpose
of the Subordinated Note was to finance the GCP Share Acquisition. The Note bears interest quarterly at the rate of 11%
per annum. The principal and interest accrued thereon is due and payable in full on March 15, 2019. All claims of the Holder
to principal, interest and any other amounts owed under the Subordinated Note are subordinated in right of payment to all
indebtedness of the Company existing as of the date of the Subordinated Note. The Subordinated Note contains customary
events of default and may be prepaid by the Company, in whole or in part, without penalty, at any time.
In
December 2009, GCP issued a promissory note in the aggregate principal amount of $0.2 million to Gosling’s Export
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 December 31, 2016 exchange
rate) with an Irish bank, including overdraft coverage, creditors’ insurance, customs and excise guaranty, and a revolving
credit facility. These facilities are payable on demand, continue until terminated by either party, are subject to annual review,
and call for interest at the lender’s AA1 Rate minus 1.70%. We have deposited €0.3 million or $0.3 million (translated
at the March 31, 2017 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) 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.
No
shares were issued in the fiscal year ended March 31, 2017 under the 2014 Distribution Agreement. As of June 9, 2017, 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 March 31, 2017, we had shareholders’ equity of $4.5 million as compared to $22.2 million at March 31, 2016. This
decrease in shareholders’ equity was due to our $0.4 million total comprehensive income for the year ended March 31, 2017,
offset by our $22.4 million GCP Share Acquisition (comprised of $20 million in cash and 1.8 million shares of Common Stock), partially
offset by the exercise of stock options and stock-based compensation expense of $1.6 million.
We had working capital
of $31.2 million at March 31, 2017 as compared to $27.9 million at March 31, 2016, primarily due to a $4.1 million increase
in inventory, a $2.1 million increase in prepaid expenses and a $1.1 million increase in accounts receivable, which was
partially offset by net income of $0.5 million, a $2.2 million increase in accounts payable and accrued expenses, stock based
compensation expense of $1.6 million, a $0.8 million increase in due to related parties and depreciation and amortization expense
of $1.0 million.
As
of March 31, 2017, we had cash and cash equivalents of approximately $0.6 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 March 31, 2017 and
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:
|
●
|
continued
cash losses from operations;
|
|
|
|
|
●
|
our
ability to obtain additional debt or equity financing should it be required;
|
|
|
|
|
●
|
an
increase in working capital requirements to finance higher levels of inventories and accounts receivable;
|
|
|
|
|
●
|
our
ability to maintain and improve our relationships with our distributors and our routes to market;
|
|
|
|
|
●
|
our
ability to procure raw materials at a favorable price to support our level of sales;
|
|
|
|
|
●
|
potential
acquisitions of additional brands; and
|
|
|
|
|
●
|
expansion
into new markets and within existing markets in the U.S. and internationally.
|
We
continue to implement sales and marketing initiatives that we expect will generate cash flows from operations in the next few
years. We seek to grow our business through expansion to new markets, growth in existing markets and strengthened distributor
relationships. As our brands continue to grow, our working capital requirements will increase. In particular, the growth of our
Jefferson’s brands requires a significant amount of working capital relative to our other brands, as we are required to
purchase and hold ever increasing amounts of aged 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.
We
intend to restructure a portion of our debt, including the Convertible Notes and Subordinated Note, by a combination of expanding
and extending the Loan Agreement and Credit Facility with ACF, extending the term of the existing notes, converting some or all
of the debt to equity or paying down the debt with funds that may be raised 2014 Distribution Agreement. If we are unable to restructure
or refinance our debt, or are unable to raise equity on terms that are acceptable to us, it could
have a significant effect on our financial position, could materially reduce our liquidity and could cause substantial fluctuations
in our quarterly and yearly operating results.
As
of March 31, 2017, we had borrowed $13.1 million of the $19.0 million available under the Credit Facility, including $3.5 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 $3.5 million available for aged whiskey inventory purchases. As of June 9, 2017, we
had borrowed $13.1 million of the $19.0 million available under the Credit Facility, including $3.1 million of the
$7.0 million available under the Purchased Inventory Sublimit, leaving $2.0 million in potential availability for working
capital needs under the Credit Facility and $3.9 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 June 2018.
Cash
flows
The
following table summarizes our primary sources and uses of cash during the periods presented:
|
|
Year
ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in
thousands)
|
|
Net cash provided
by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(1,723
|
)
|
|
$
|
(2,854
|
)
|
|
$
|
(8,852
|
)
|
Investing activities
|
|
|
(20,374
|
)
|
|
|
(990
|
)
|
|
|
(495
|
)
|
Financing
activities
|
|
|
21,281
|
|
|
|
4,087
|
|
|
|
9,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency translation
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
$
|
(819
|
)
|
|
$
|
239
|
|
|
$
|
283
|
|
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, Arran Scotch whiskies, 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 March 31, 2017 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 year ended March 31, 2017, net cash used in operating activities was $1.7 million, consisting primarily of a $4.3 million
increase in inventory, a $2.1 million increase in prepaid expenses and a $1.2 million increase in accounts receivable.
These uses of cash were partially offset by $0.5 million in net income, a $2.2 million increase in accounts payable and
accrued expenses, stock based compensation expense of $1.6 million, a $0.8 million increase in due to related parties and depreciation
and amortization expense of $1.0 million.
During
the year ended March 31, 2016, net cash used in operating activities was $2.9 million, consisting primarily of a net loss of $1.7
million, a $6.5 million increase in inventory, a $0.6 million decrease in due to related parties and a $0.1 million increase in
prepaid expenses and supplies. These uses of cash were partially offset by a $3.2 million increase in accounts payable and accrued
expense, a $0.1 million increase in due from affiliates, stock based compensation expense of $1.4 million and depreciation and
amortization expense of $0.9 million.
During
the year ended March 31, 2015, net cash used in operating activities was $8.9 million, consisting primarily of a $7.2 million
increase in inventory, a net loss of $3.5 million, a $0.3 million increase in other assets and a $1.7 million increase in accounts
receivable. These uses of cash were partially offset by a $1.3 million increase in accounts payable and accrued expenses, a $0.1
million decrease in prepaid expenses, stock based compensation expense of $0.8 million, depreciation and amortization expense
of $0.9 million, a provision for obsolete inventories of $0.3 million and $0.3 million in deferred income tax expense, net.
Investing
Activities.
Net cash used in investing activities was $20.4 million for the year ended March 31, 2017, consisting of the
$20.0 million cash consideration used in the GCP Share Acquisition and $0.4 million used in the acquisition of fixed and intangible
assets.
Net
cash used in investing activities was $1.0 million for the year ended March 31, 2016, representing a $0.5 million investment in
Copperhead Distillery and $0.5 million used in the acquisition of fixed and intangible assets.
Net
cash used in investing activities was $0.5 million for the year ended March 31, 2015, representing $0.5 million used in the acquisition
of fixed and intangible assets.
Financing
activities.
Net cash provided by financing activities for the year ended March 31, 2017 was $21.3 million, consisting
of $20.0 million in proceeds from the issuance of the 11% Subordinated Note, $1.0 million in net proceeds from the Credit
Facility and $0.3 million from the exercise of stock options.
Net
cash provided by financing activities for the year ended March 31, 2016 was $4.1 million, consisting primarily of $3.1 million
in net proceeds from the issuance of Common Stock pursuant to the 2014 Distribution Agreement, $2.0 million in net proceeds from
the Credit Facility and $0.4 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.
Net
cash provided by financing activities for the year ended March 31, 2015 was $9.6 million, consisting of $8.2 million in net proceeds
from the Credit Facility, $3.1 million in net proceeds from the issuance of Common Stock under our distribution agreements with
Barrington, $0.6 million in proceeds from the exercise of 2011 Warrants and $0.2 million in proceeds from the exercise of stock
options, partially offset by the $1.25 million repayment of a junior loan and the $1.3 million paid on the Bourbon Term Loan.
Obligations
and commitments
The
table sets forth our contractual commitments as of March 31, 2017:
|
|
Payments
due by period
|
|
Contractual
Obligations
|
|
Less
than 1 year
|
|
|
1
- 3 years
|
|
|
4
- 5 years
|
|
|
After
5 years
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations
(1)
|
|
$
|
3,211
|
|
|
$
|
38,216
|
|
|
$
|
212
|
|
|
$
|
-
|
|
|
$
|
41,639
|
|
Supply agreements (2)
|
|
|
3,613
|
|
|
|
3,720
|
|
|
|
3,048
|
|
|
|
9,494
|
|
|
|
19,875
|
|
Operating leases
(3)
|
|
|
385
|
|
|
|
682
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,067
|
|
Total
|
|
$
|
7,209
|
|
|
$
|
42,618
|
|
|
$
|
3,260
|
|
|
$
|
9,494
|
|
|
$
|
62,581
|
|
Interest
payments are based on current interest rates at March 31, 2017. Debt principal and debt interest represent principal and interest
to be paid on our revolving credit facility based on the balance outstanding as of March 31, 2017. Interest on the revolving credit
facility is calculated using the prevailing rates as of March 31, 2017. Our estimate assumes that we will maintain the same levels
of indebtedness and financial performance through the credit facility’s maturity in July 2019.
|
(1)
|
Long-term
debt obligations.
For more information concerning our long-term debt, see “Liquidity and Capital Resources”
above and note 8 to our accompanying consolidated financial statements.
|
|
|
|
|
(2)
|
Supply
agreements.
For a discussion of our supply agreements, see note 14 to our accompanying consolidated financial statements.
|
|
|
|
|
(3)
|
Operating
leases.
For a discussion of our operating leases, please see note 14 E to our accompanying consolidated financial
statements.
|
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 annual 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 March 31, 2017, each as calculated from the Interbank exchange rates as reported by Oanda.com. On March 31,
2017, the exchange rate of the Euro and the British Pound in exchange for U.S. Dollars was €1.00 = U.S.$1.06816 (equivalent
to U.S.$1.00 = €0.93618) and £1.00 = U.S.$1.24866 (equivalent to U.S.$1.00 = £0.80086).
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.
Impact
of inflation
We
believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing
prices did not have a material impact on our operations during fiscal 2017, 2016 or 2015. Severe increases in inflation, however,
could affect the global and U.S. economies and could have an adverse impact on our business, financial condition and results of
operations.
Recent
accounting pronouncements
We
discuss recently issued and adopted accounting standards in the “Accounting standards adopted” and “Recent accounting
pronouncements” sections of note 1 to our accompanying 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” and as follows:
|
●
|
our
history of losses;
|
|
|
|
|
●
|
recent
worldwide and domestic economic trends and financial market conditions could adversely impact our financial performance;
|
|
|
|
|
●
|
our
potential need for additional capital, which, if not available on acceptable terms or at all, could restrict our future growth
and severely limit our operations;
|
|
|
|
|
●
|
our
brands could fail to achieve more widespread consumer acceptance, which may limit our growth;
|
|
|
|
|
●
|
our
dependence on a limited number of suppliers, who may not perform satisfactorily or may end their relationships with us, which
could result in lost sales, incurrence of additional costs or lost credibility in the marketplace;
|
|
|
|
|
●
|
our
annual purchase obligations with certain suppliers;
|
|
|
|
|
●
|
the
failure of even a few of our independent wholesale distributors to adequately distribute our products within their territories
could harm our sales and result in a decline in our results of operations;
|
|
|
|
|
●
|
our need to maintain a relatively large inventory
of our products to support customer delivery requirements, which could negatively impact our operations if such inventory
is lost due to theft, fire or other damage;
|
|
|
|
|
●
|
the
potential limitation to our growth if we are unable to identify and successfully acquire additional brands that are complementary
to our existing portfolio, or integrate such brands after acquisitions;
|
|
|
|
|
●
|
currency
exchange rate fluctuations and devaluations may significantly adversely affect our revenues, sales, costs of goods and overall
financial results;
|
|
|
|
|
●
|
our business and stock price may be adversely
affected if we have material weaknesses or significant deficiencies in our internal control over financial reporting;
|
|
|
|
|
●
|
the
possibility that we or our strategic partners will fail to protect our respective trademarks and trade secrets, which could
compromise our competitive position and decrease the value of our brand portfolio;
|
|
|
|
|
●
|
the
possibility that we cannot secure and maintain listings in control states, which could cause the sales of our products to
decrease significantly;
|
|
|
|
|
●
|
an
impairment in the carrying value of our goodwill or other acquired intangible assets could negatively affect our operating
results and shareholders’ equity;
|
|
|
|
|
●
|
changes
in consumer preferences and trends could adversely affect demand for our products;
|
|
|
|
|
●
|
there
is substantial competition in our industry and the many factors that may prevent us from competing successfully;
|
|
|
|
|
●
|
adverse
changes in public opinion about alcohol could reduce demand for our products;
|
|
●
|
class
action or other litigation relating to alcohol misuse or abuse could adversely affect our business; and
|
|
|
|
|
●
|
adverse
regulatory decisions and legal, regulatory or tax changes could limit our business activities, increase our operating costs
and reduce our margins.
|
We
assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual
results could differ materially from those anticipated in, or implied by, these forward-looking statements, even if new information
becomes available in the future.