Item
1. Financial Statements
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
|
|
June
30, 2019
|
|
|
March
31, 2019
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
498,176
|
|
|
$
|
517,309
|
|
Accounts
receivable - net of allowance for doubtful accounts of $ 508,811 and $476,116 at June 30 and March 31, 2019, respectively
|
|
|
14,222,854
|
|
|
|
16,494,234
|
|
Due
from related parties
|
|
|
6,183
|
|
|
|
-
|
|
Inventories
- net of allowance for obsolete and slow-moving inventory of $411,270 and $423,913 at June 30 and March 31, 2019, respectively
|
|
|
46,142,422
|
|
|
|
44,232,340
|
|
Prepaid
expenses and other current assets
|
|
|
5,232,194
|
|
|
|
5,751,382
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
66,101,829
|
|
|
|
66,995,265
|
|
|
|
|
|
|
|
|
|
|
Equipment
- net
|
|
|
691,072
|
|
|
|
724,597
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets - net of accumulated amortization of $8,733,119 and $8,689,254 at June 30 and March 31, 2019, respectively
|
|
|
5,721,079
|
|
|
|
5,764,944
|
|
Right-of-use
assets – operating leases
|
|
|
322,391
|
|
|
|
-
|
|
Right-of-use
assets – finance leases
|
|
|
60,077
|
|
|
|
|
|
Goodwill
|
|
|
496,226
|
|
|
|
496,226
|
|
Investment
in non-consolidated affiliate, at equity
|
|
|
956,013
|
|
|
|
960,853
|
|
Deferred
tax assets
|
|
|
10,145,108
|
|
|
|
9,552,385
|
|
Restricted
cash
|
|
|
352,755
|
|
|
|
352,428
|
|
Other
assets
|
|
|
103,473
|
|
|
|
133,868
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
84,950,023
|
|
|
$
|
84,980,566
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Current
maturities of notes payable
|
|
$
|
326,613
|
|
|
$
|
87,678
|
|
Accounts
payable
|
|
|
12,879,183
|
|
|
|
11,375,965
|
|
Accrued
expenses
|
|
|
2,705,327
|
|
|
|
3,849,178
|
|
Lease
liabilities – operating leases
|
|
|
249,096
|
|
|
|
-
|
|
Lease
liabilities – finance leases
|
|
|
18,820
|
|
|
|
-
|
|
Due
to shareholders and affiliates
|
|
|
2,186,388
|
|
|
|
2,733,759
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
18,365,427
|
|
|
|
18,046,580
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
|
Credit
facility, net (including $834,167 of related-party participation at June 30 and March 31, 2019)
|
|
|
26,759,606
|
|
|
|
26,814,941
|
|
Lease
liabilities – operating leases
|
|
|
41,708
|
|
|
|
-
|
|
Lease
liabilities – finance leases
|
|
|
41,832
|
|
|
|
-
|
|
Notes
payable - 11% Subordinated note
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
Notes
payable - GCP Note
|
|
|
-
|
|
|
|
211,580
|
|
Deferred
tax liability
|
|
|
514,121
|
|
|
|
514,121
|
|
Other
|
|
|
43,816
|
|
|
|
43,816
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
65,766,510
|
|
|
|
65,631,038
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 14)
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 25,000,000 shares authorized, no shares issued and outstanding at June 30 and March 31, 2019
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $.01 par value, 300,000,000 shares authorized at June 30 and March 31, 2019, 169,273,927 and 169,107,996 shares issued
and outstanding at June 30 and March 31, 2019, respectively
|
|
|
1,692,740
|
|
|
|
1,691,080
|
|
Additional
paid-in capital
|
|
|
157,895,754
|
|
|
|
157,342,730
|
|
Accumulated
deficit
|
|
|
(145,098,551
|
)
|
|
|
(144,227,656
|
)
|
Accumulated
other comprehensive loss
|
|
|
(2,194,314
|
)
|
|
|
(2,207,018
|
)
|
|
|
|
|
|
|
|
|
|
Total
controlling shareholders’ equity
|
|
|
12,295,629
|
|
|
|
12,599,136
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interests
|
|
|
6,887,884
|
|
|
|
6,750,392
|
|
|
|
|
|
|
|
|
|
|
Total
Equity, including noncontrolling interests
|
|
|
19,183,513
|
|
|
|
19,349,528
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Equity
|
|
$
|
84,950,023
|
|
|
$
|
84,980,566
|
|
See
accompanying notes to the unaudited condensed consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
Three
months ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Sales,
net*
|
|
$
|
22,635,741
|
|
|
$
|
23,104,388
|
|
Cost
of sales*
|
|
|
13,794,530
|
|
|
|
13,844,836
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
8,841,211
|
|
|
|
9,259,552
|
|
|
|
|
|
|
|
|
|
|
Selling
expense
|
|
|
6,259,002
|
|
|
|
5,821,890
|
|
General
and administrative expense
|
|
|
2,489,192
|
|
|
|
2,517,266
|
|
Depreciation
and amortization
|
|
|
123,238
|
|
|
|
235,792
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(30,221
|
)
|
|
|
684,604
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
(1,192
|
)
|
|
|
(405
|
)
|
(Loss)
income from equity investment in non-consolidated affiliate
|
|
|
(4,840
|
)
|
|
|
34,028
|
|
Foreign
exchange (loss) gain
|
|
|
(71,324
|
)
|
|
|
44,464
|
|
Interest
expense, net
|
|
|
(1,207,845
|
)
|
|
|
(1,051,942
|
)
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(1,315,422
|
)
|
|
|
(289,251
|
)
|
Income
tax benefit (expense), net
|
|
|
582,019
|
|
|
|
(18,115
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(733,403
|
)
|
|
|
(307,366
|
)
|
Net
income attributable to noncontrolling interests
|
|
|
(137,492
|
)
|
|
|
(383,341
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(870,895
|
)
|
|
$
|
(690,707
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per common share, basic and diluted, attributable to common shareholders
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computation, basic and diluted, attributable to common shareholders
|
|
|
167,577,755
|
|
|
|
165,520,314
|
|
*
Sales, net and Cost of sales include excise taxes of $1,364,333 and $1,834,254 for the three months ended June 30, 2019 and 2018,
respectively.
See
accompanying notes to the unaudited condensed consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
|
|
Three
months ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net
loss
|
|
$
|
(733,403
|
)
|
|
$
|
(307,366
|
)
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
12,704
|
|
|
|
(76,329
|
)
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss):
|
|
|
12,704
|
|
|
|
(76,329
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$
|
(720,699
|
)
|
|
$
|
(383,695
|
)
|
See
accompanying notes to the unaudited condensed consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Statement of Changes in Equity
(Unaudited)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Interests
|
|
|
Equity
|
|
BALANCE,
MARCH 31, 2018
|
|
|
166,330,733
|
|
|
$
|
1,663,307
|
|
|
$
|
154,731,044
|
|
|
$
|
(149,891,272
|
)
|
|
$
|
(2,082,011
|
)
|
|
$
|
3,568,636
|
|
|
$
|
7,989,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(690,707
|
)
|
|
|
|
|
|
|
383,341
|
|
|
|
(307,366
|
)
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,329
|
)
|
|
|
|
|
|
|
(76,329
|
)
|
Exercise
of common stock options
|
|
|
503,166
|
|
|
|
5,032
|
|
|
|
210,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,016
|
|
Restricted
share grants
|
|
|
1,100,000
|
|
|
|
11,000
|
|
|
|
(11,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Common
stock purchased under employee stock purchase plan
|
|
|
41,902
|
|
|
|
419
|
|
|
|
40,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,959
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
490,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
490,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
JUNE 30, 2018
|
|
|
167,975,801
|
|
|
$
|
1,679,758
|
|
|
$
|
155,462,053
|
|
|
$
|
(150,581,979
|
)
|
|
$
|
(2,158,340
|
)
|
|
$
|
3,951,977
|
|
|
$
|
8,353,469
|
|
BALANCE,
MARCH 31, 2019
|
|
|
169,107,996
|
|
|
$
|
1,691,080
|
|
|
$
|
157,342,730
|
|
|
$
|
(144,227,656
|
)
|
|
$
|
(2,207,018
|
)
|
|
$
|
6,750,392
|
|
|
$
|
19,349,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(870,895
|
)
|
|
|
|
|
|
|
137,492
|
|
|
|
(733,403
|
)
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,704
|
|
|
|
|
|
|
|
12,704
|
|
Exercise of
common stock options
|
|
|
171,000
|
|
|
|
1,710
|
|
|
|
58,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,850
|
|
Restricted
shares forfeited
|
|
|
(60,633
|
)
|
|
|
(606
|
)
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Common
stock purchased under employee stock purchase plan
|
|
|
55,564
|
|
|
|
556
|
|
|
|
55,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,564
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
439,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
439,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
JUNE 30, 2019
|
|
|
169,273,927
|
|
|
$
|
1,692,740
|
|
|
$
|
157,895,754
|
|
|
$
|
(145,098,551
|
)
|
|
$
|
(2,194,314
|
)
|
|
$
|
6,887,884
|
|
|
$
|
19,183,513
|
|
See
accompanying notes to the unaudited condensed consolidated financial statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Three
months ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(733,403
|
)
|
|
$
|
(307,366
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
118,200
|
|
|
|
235,792
|
|
Provision
for doubtful accounts
|
|
|
15,000
|
|
|
|
14,559
|
|
Amortization
of right-of-use assets
|
|
|
5,038
|
|
|
|
-
|
|
Amortization
of deferred financing costs
|
|
|
34,448
|
|
|
|
42,680
|
|
Deferred
income tax benefit, net
|
|
|
(592,723
|
)
|
|
|
60
|
|
Net
(loss) income from equity investment in non-consolidated affiliate
|
|
|
4,840
|
|
|
|
(34,028
|
)
|
Effect
of changes in foreign currency translation
|
|
|
71,324
|
|
|
|
(44,464
|
)
|
Stock-based
compensation expense
|
|
|
439,270
|
|
|
|
490,485
|
|
Addition
to provision for obsolete inventories
|
|
|
-
|
|
|
|
13,046
|
|
Changes
in operations, assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
2,259,558
|
|
|
|
1,229,090
|
|
Due
from affiliates
|
|
|
(6,183
|
)
|
|
|
-
|
|
Inventory
|
|
|
(1,967,158
|
)
|
|
|
(3,476,002
|
)
|
Prepaid
expenses and supplies
|
|
|
519,415
|
|
|
|
(43,348
|
)
|
Other
assets
|
|
|
(3,001
|
)
|
|
|
(25,756
|
)
|
Accounts
payable and accrued expenses
|
|
|
351,514
|
|
|
|
(1,439,760
|
)
|
Accrued
interest
|
|
|
2,645
|
|
|
|
2,645
|
|
Due
to related parties
|
|
|
(547,372
|
)
|
|
|
(525,227
|
)
|
|
|
|
|
|
|
|
|
|
Total
adjustments
|
|
|
704,815
|
|
|
|
(3,560,228
|
)
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(28,588
|
)
|
|
|
(3,867,594
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(41,194
|
)
|
|
|
(85,282
|
)
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(41,194
|
)
|
|
|
(85,282
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
(payments on) proceeds from credit facility
|
|
|
(56,387
|
)
|
|
|
3,971,018
|
|
Net
proceeds from (payments on) foreign revolving credit facility
|
|
|
23,276
|
|
|
|
(22,675
|
)
|
Proceeds
from issuance of common stock under employee stock purchase plan
|
|
|
55,564
|
|
|
|
40,959
|
|
Proceeds
from exercise of common stock options
|
|
|
59,850
|
|
|
|
216,018
|
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
82,303
|
|
|
|
4,205,320
|
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF FOREIGN CURRENCY TRANSLATION
|
|
|
(31,327
|
)
|
|
|
(34,825
|
)
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(18,806
|
)
|
|
|
217,619
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS INCLUDING RESTRICTED CASH - BEGINNING
|
|
|
869,737
|
|
|
|
759,266
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS
|
|
|
498,176
|
|
|
|
614,402
|
|
RESTRICTED
CASH
|
|
|
352,755
|
|
|
|
362,483
|
|
CASH
AND CASH EQUIVALENTS INCLUDING RESTRICTED CASH - ENDING
|
|
$
|
850,931
|
|
|
$
|
976,885
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
1,184,838
|
|
|
$
|
1,003,589
|
|
Income
taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
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, 2019 is derived from the March 31, 2019 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, 2019 included in the Company’s
annual report on Form 10-K for the year ended March 31, 2019, as amended (“2018 Form 10-K”). Please refer to the notes
to the audited consolidated financial statements included in the 2019 Form 10-K for additional disclosures and a description of
accounting policies.
A.
|
Description
of business
- The consolidated financial statements include the accounts of Castle Brands Inc. (the “Company”),
its wholly-owned domestic subsidiaries, Castle Brands (USA) Corp. (“CB-USA”) and McLain & Kyne, Ltd. (“McLain
& Kyne”), the Company’s wholly-owned foreign subsidiaries, Castle Brands Spirits Group Limited (“CB-IRL”),
Castle Brands Spirits Marketing and Sales Company Limited, and Great Spirits Whiskey Company Limited, and the Company’s
80.1% 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
- In July 2019, the Company increased the maximum amount available under the Ares Credit Facility from $27,000,000 to
$60,000,000, extended the term of the facility to July 31, 2023, reduced the stated interest rate on the facility and repaid
in full the $20,000,000 11% subordinated note due September 15, 2020 (as described in Note 7C). The Company believes that
its current cash and working capital and the availability under the Credit Facility (as defined in Note 7C) will enable it
to fund its obligations, meet its working capital needs and whiskey purchase commitments until it achieves profitability,
ensure continuity of supply of its brands and support new brand initiatives and marketing programs through at least August
2020. The Company believes it can continue to meet its operating needs through additional mechanisms, if necessary, including
additional or expanded debt financings, potential equity offerings and limiting or adjusting the timing of additional inventory
purchases based on available resources.
|
|
|
C.
|
Organization
and operations
- The Company is principally engaged in the importation, marketing and sale of premium and super premium
rums, whiskey, liqueurs, vodka, tequila and related non-alcoholic beverage products in the United States, Canada, Europe and
Asia.
|
|
|
D.
|
Revenues
- The Company operates in one reportable segment and derives substantially all of its revenue from the sale and delivery
of premium beverage alcohol and related non-alcoholic beverage products. In the U.S., the Company is required by
law to use state-licensed distributors or, in the control states, state-owned agencies performing this function, to sell its
brands to retail outlets. In its international markets, the Company relies primarily on established spirits distributors in
much the same way as in the U.S. Revenue from product sales is recognized when the product is shipped to a customer (generally
a distributor) and title and risk of loss has passed to the customer in accordance with the terms of sale and collection is
reasonably assured. Revenue is not recognized on shipments to control states in the United States until such time as product
is sold through to the retail channel.
|
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
|
The
Company does not ship product unless it has received an order or other documentation authorizing delivery to its customers.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The
Company generally does not provide post-delivery services and does not offer a right-of-return except in the case of an error.
Uncollectable accounts receivable are estimated by using a combination of historical customer experience and a customer-by-customer
analysis. The Company’s payment terms vary by customer and, in certain cases, the products offered. The term between
invoicing and when payment is due is not significant. As permitted under U.S. GAAP, the Company has elected not to assess
whether a contract has a significant financing component if the expectation at contract inception is such that the period
between payment by the customer and the transfer of the promised goods to the customer will be one year or less. As permitted
under U.S. GAAP, the Company has elected to recognize the incremental costs of obtaining a contract as an expense when incurred
as the amortization period of the asset that the Company otherwise would have recognized will be one year or less. As permitted
under U.S. GAAP, the Company has elected to exclude from the measurement of the transaction price all taxes assessed by a
governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected
by the Company from a customer, i.e excise taxes (see note 1H). As permitted under U.S. GAAP, the Company has elected to account
for any shipping and handling activities that occur after a customer obtains control of any goods as activities to fulfill
the promise to transfer the goods, and the Company is not required to evaluate whether such shipping and handling activities
are promised services to its customers.
|
|
|
|
See
Note 14 for disaggregation of revenue by product as the Company believes this best depicts how the nature, amount,
timing and uncertainty of its revenues and cash flows are affected by economic factors.
|
|
|
|
The
Company does not have any customer contracts that meet the definition of unsatisfied performance obligations in accordance
with U.S. GAAP.
|
|
|
E.
|
Equity
investments
- Equity investments are carried at original cost adjusted for the Company’s proportionate share of
the investees’ income, losses and distributions. The Company assesses the carrying value of its equity investments when
an indicator of a loss in value is present and records a loss in value of the investment when the assessment indicates that
an other-than-temporary decline in the investment exists. The Company classifies its equity earnings of equity investments
as a component of net income or loss.
|
|
|
F.
|
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.
|
|
|
G.
|
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.
|
|
|
H.
|
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.
|
|
|
I.
|
Foreign
currency
- The functional currency for the Company’s foreign operations is the Euro in Ireland and the British Pound
in the United Kingdom. Under ASC 830, “Foreign Currency Matters”, the translation from the applicable foreign
currencies to U.S. Dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet
date and for revenue and expense accounts using a weighted average exchange rate during the period. The resulting translation
adjustments are recorded as a component of other comprehensive income. Gains or losses resulting from foreign currency transactions
are shown as a separate line item in the consolidated statements of operations.
|
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
J.
|
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.
|
K.
|
Income
taxes
- In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”)
was enacted. The 2017 Tax Act includes a number of changes to existing U.S. tax laws
that impact the Company, most notably a reduction of the U.S. corporate income tax rate
from 35% to 21% for tax years beginning after December 31, 2017. The Company recognized
the income tax effects of the 2017 Tax Act in its financial statements in accordance
with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application
of ASC Topic 740, “Income Taxes”, (“ASC 740”) in the reporting
period in which the 2017 Tax Act was signed into law. The Company completed its assessment
of income tax effects of the 2017 Tax Act during fiscal year ended March 31, 2019. The
Company made a policy election to treat the income tax due on U.S. inclusion of the new
GILTI provisions as a period expense when incurred.
Under
ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. A valuation allowance
is provided to the extent a deferred tax asset is not considered recoverable.
The
Company has adopted the provisions of ASC 740-10 and as of June 30, 2019, the Company had reserves for uncertain tax positions
(including related interest and penalties) for various state and local taxes of $43,816. The Company recognizes interest and penalties
related to uncertain tax positions in general and administrative expense.
|
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
L.
|
Recent
accounting pronouncements
- In October 2018, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) ASU No. 2018-17,
Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable
Interest Entities. The guidance requires indirect interests held through related parties
under common control arrangements be considered on a proportional basis for determining
whether fees paid to decision makers and service providers are variable interests. The
guidance is effective for fiscal years beginning after December 15, 2019, and interim
periods within those fiscal years. 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
October 2018, the FASB issued ASU No. 2018-16, Inclusion of the Secured Overnight Financing Rate (“SOFR”)
Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (“ASU 2018-16”),
which amends ASC 815, Derivatives and Hedging. This ASU adds the OIS rate based on SOFR to the list of permissible benchmark
rates for hedge accounting purposes. The amendments are effective for fiscal years beginning after December 15, 2019,
and interim periods within those fiscal years. Adoption of ASU 2018-16 will be on a prospective basis for qualifying new
or redesignated hedging relationships entered into on or after the date 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 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2018-15, Intangibles - Goodwill and Other Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation
Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements
for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements
for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for
fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is
permitted. The Company is currently evaluating the new guidance to determine the impact the adoption of this guidance
will have on the Company’s results of operations, cash flows and financial condition.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to
the Disclosure Requirements for Fair Value Measurement.” This ASU adds, modifies and removes several disclosure
requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, “Fair
Value Measurement.” This guidance is effective for the Company as of April 1, 2020, 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
July 2018, the FASB issued ASU 2018-09, “Codification Improvements.” This ASU makes amendments to a wide variety
of codification topics in the FASB’s Accounting Standards Codification. The transition and effective date guidance
is based on the facts and circumstances of each amendment. Some of the amendments in this ASU do not require transition
guidance and will be effective upon issuance of this ASU. However, many of the amendments in this ASU do have transition
guidance with effective dates for annual periods beginning after December 15, 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.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments. This ASU amends the requirement on the measurement and recognition of expected credit losses
for financial assets held. The ASU is effective for annual periods beginning after December 15, 2019 and interim periods
within those annual periods. Early adoption is permitted, but not earlier than annual and interim periods beginning after
December 15, 2018. This amendment should be applied on a modified retrospective basis with 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.
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.
|
|
|
M.
|
Accounting
standards adopted
– In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718):
Improvements to Nonemployee Share-Based Payment Accounting.” This ASU expands the scope of Topic 718 to include share-based
payments to non-employees for goods or services. This ASU also clarifies that Topic 718 does not apply to share-based payments
used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services
to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). This guidance became
effective for the Company as of April 1, 2019. 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
|
In
February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which
provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify
leases as either finance or operating leases and to record a right-of-use asset and a
lease liability for all leases with a term greater than 12 months regardless of the lease
classification. The lease classification will determine whether the lease expense is
recognized based on an effective interest rate method or on a straight-line basis over
the term of the lease. For leases with a term of 12 months or less for which there is
not an option to purchase the underlying asset that the lessee is reasonably certain
to exercise, a lessee is permitted to make an accounting policy election by class of
underlying asset not to recognize lease assets and lease liabilities and should recognize
lease expense for such leases generally on a straight-line basis over the lease term.
Certain qualitative disclosures along with specific quantitative disclosures will be
required so that users are able to understand more about the nature of an entity’s
leasing activities. Accounting for lessors remains largely unchanged from current U.S.
GAAP. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842,
Leases and ASU 2018-11 “Leases (Topic 842): Targeted Improvements” (ASU 2018-11).
ASU 2018-10 clarifies certain areas within ASU 2016-02. Prior to ASU 2018-11, a modified
retrospective transition was required for financing or operating leases existing at or
entered into after the beginning of the earliest comparative period presented in the
financial statements. ASU 2018-11 allows entities an additional transition method to
the existing requirements whereby an entity could adopt the provisions of ASU 2016-02
by recognizing a cumulative-effect adjustment to the opening balance of retained earnings
in the period of adoption without adjustment to the financial statements for periods
prior to adoption. ASU 2018-11 also allows a practical expedient that permits lessors
to not separate non-lease components from the associated lease component if certain conditions
are present. An entity that elects to use the practical expedients will, in effect, continue
to account for leases that commenced before the effective date in accordance with previous
GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use
asset and a lease liability for all operating leases at each reporting date based on
the present value of the remaining minimum rental payments that were tracked and disclosed
under previous GAAP. ASU 2016-02, ASU 2018-10 and ASU 2018-11 became effective for the
Company as of April 1, 2019.
The
Company employed the available practical expedients consistently to all of its office and office equipment leases, supply
and warehousing agreements determined to be subject to the standard. The expedients granted the Company the ability to
forgo reassessing lease classifications and whether any expired or existing contracts are, or contain, leases. The Company
followed the guidance of ASU 2018-11 and did not recast its comparative periods. The comparative periods will follow the
guidance of ASC 840, while the current period will follow the guidance of the new ASC 842.
The
Company elected to utilize the transition package of practical expedients permitted within the new standard, which among
other things, allowed the Company to carryforward the historical lease classification. The Company made an accounting
policy election that will exclude leases with an initial term of 12 months or less from its Consolidated Balance Sheets
and will recognize those lease payments in its Consolidated Statements of Operations on a straight-line basis over the
lease term.
On
adoption the Company recognized right-of-use assets and corresponding liabilities of $446,026 on its Consolidated Balance
Sheet for its operating leases with terms greater than 12 months. The Company determined that the adoption of this guidance
did not have a material impact on its Consolidated Statements of Operations, Consolidated Statements of Comprehensive
Income, or its Consolidated Statements of Cash Flows. The new standard will not have a material impact on liquidity and
will not have an impact on the Company’s debt-covenant compliance under its current debt agreements.
The
Company determined that minimal changes to its business processes, systems and controls are needed to support recognition
and disclosure under the new standard. Further, the Company is continuing to assess any incremental disclosures that will
be required in the Company’s consolidated financial statements.
The
Company’s current lease arrangements have terms that expire through 2021.
|
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, vesting of restricted shares or conversion of convertible notes outstanding. In computing diluted net income
per share for the three months ended June 30, 2019 and 2018, no adjustment has been made to the weighted average outstanding common
shares for the assumed exercise of stock options, vesting of restricted shares or conversion of convertible notes as the assumed
exercise, vesting or conversion of these securities is anti-dilutive.
Potential
common shares not included in calculating diluted net loss per share are as follows:
|
|
Three
months ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Stock
options
|
|
|
13,504,575
|
|
|
|
14,797,442
|
|
Unvested
restricted stock
|
|
|
1,488,750
|
|
|
|
1,997,750
|
|
5%
Convertible notes
|
|
|
-
|
|
|
|
55,556
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,993,325
|
|
|
|
16,850,748
|
|
NOTE
3 -
INVENTORIES
|
|
June
30, 2019
|
|
|
March
31, 2019
|
|
Raw
materials
|
|
$
|
29,813,380
|
|
|
$
|
29,967,401
|
|
Finished
goods - net
|
|
|
16,329,042
|
|
|
|
14,264,939
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,142,422
|
|
|
$
|
44,232,340
|
|
As
of June 30, and March 31, 2019, 6% and 6%, respectively, of raw materials and 6% and 8%, respectively, of finished goods were
located outside of the United States.
In
the three months ended June 30, 2019, the Company acquired $2,101,255 of bulk 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 net realizable value.
NOTE
4 -
INVESTMENTS
Investment
in Gosling-Castle Partners Inc., consolidated
For
the three months ended June 30, 2019 and 2018, GCP had pretax net income on a stand-alone basis of $905,878 and $2,526,084,
respectively. The Company allocated a portion of this net income, or $180,270 and $502,691, to non-controlling interest
for the three months ended June 30, 2019 and 2018, respectively. The cumulative balance allocated to noncontrolling interests
in GCP was $6,887,884 and $6,750,392 at June 30 and March 31, 2019, respectively, as shown on the accompanying condensed
consolidated balance sheets.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
Investment
in Copperhead Distillery Company, equity method
For
the three months ended June 30, 2019, the Company recognized a loss of $4,840 from this investment. For the three months ended
June 30, 2018, the Company recognized $34,028 of income from this investment. The investment balance was $956,013 and $960,853
at June 30 and March 31, 2019, respectively.
NOTE
5 -
GOODWILL AND INTANGIBLE ASSETS
The
carrying amount of goodwill was $496,226 at each of June 30 and March 31, 2019.
Intangible
assets consist of the following:
|
|
June
30, 2019
|
|
|
March
31, 2019
|
|
Definite
life brands
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Trademarks
|
|
|
641,693
|
|
|
|
641,693
|
|
Rights
|
|
|
8,271,555
|
|
|
|
8,271,555
|
|
Product
development
|
|
|
208,518
|
|
|
|
208,518
|
|
Patents
|
|
|
994,000
|
|
|
|
994,000
|
|
Other
|
|
|
55,460
|
|
|
|
55,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,341,226
|
|
|
|
10,341,226
|
|
Less:
accumulated amortization
|
|
|
8,733,119
|
|
|
|
8,689,254
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
1,608,107
|
|
|
|
1,651,972
|
|
Other
identifiable intangible assets - indefinite lived*
|
|
|
4,112,972
|
|
|
|
4,112,972
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,721,079
|
|
|
$
|
5,764,944
|
|
*
Other identifiable intangible assets - indefinite lived consists of product formulations and the Company’s relationships
with its distillers.
Accumulated
amortization consists of the following:
|
|
June
30, 2019
|
|
|
March
31, 2019
|
|
Definite
life brands
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Trademarks
|
|
|
451,035
|
|
|
|
440,056
|
|
Rights
|
|
|
7,091,845
|
|
|
|
7,064,074
|
|
Product
development
|
|
|
60,034
|
|
|
|
57,737
|
|
Patents
|
|
|
960,205
|
|
|
|
957,387
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
$
|
8,733,119
|
|
|
$
|
8,689,254
|
|
NOTE
6 -
RESTRICTED CASH
At
June 30 and March 31, 2019, the Company had €310,349 or $352,755 (translated at the June 30, 2019 exchange rate) and €314,189
or $352,428 (translated at the March 31, 2019 exchange rate), respectively, of cash restricted from withdrawal and held by a bank
in Ireland as collateral for overdraft coverage, creditors’ insurance, customs and excise guaranty and a revolving credit
facility as described in Note 7A below.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
NOTE
7 -
NOTES PAYABLE
|
|
June
30, 2019
|
|
|
March
31, 2019
|
|
Notes
payable consist of the following:
|
|
|
|
|
|
|
|
|
Foreign
revolving credit facilities (A)
|
|
$
|
112,388
|
|
|
$
|
87,678
|
|
Note
payable - GCP note (B)
|
|
|
214,225
|
|
|
|
211,580
|
|
Credit
facility (C)
|
|
|
26,759,606
|
|
|
|
26,814,941
|
|
11%
Subordinated Note (D)
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,086,219
|
|
|
$
|
47,114,199
|
|
A.
|
The
Company has arranged various credit facilities aggregating €310,349 or $352,755 (translated at the June 30, 2019 exchange
rate) and €314,189 or $352,428 (translated at the March 31, 2019 exchange rate) at June 30 and March 31, 2019, respectively,
with an Irish bank, including overdraft coverage, creditors’ insurance, customs and excise guaranty, a revolving credit
facility and Company credit cards. These credit 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%. At June 30 and March 31, 2019,
there was €98,878 or $112,388 (translated at the June 30, 2019 exchange rate) and €78,164 or $87,678 (translated
at the March 31, 2019 exchange rate) of principal due on the foreign revolving credit facilities included in current maturities
of notes payable, 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, 2019, $10,579 of accrued
interest was converted to amounts due to affiliates. At June 30, 2019, $214,225, consisting
of $211,580 of principal and $2,645 of accrued interest, due on the GCP Note is included
in current liabilities. At March 31, 2019, $211,580 of principal due on the GCP Note
is included in long-term liabilities.
|
C.
|
In
August 2011, the Company and CB-USA entered into a loan and security agreement (as amended and restated, and further amended,
the “Amended Agreement”) with a third-party lender ACF FinCo I LP (“ACF,”) as successor in interest,
which, as amended, provided for availability (subject to certain terms and conditions) of a facility of up to $21.0 million
(the “Credit Facility”) for the purpose of providing the Company with working capital, including a sublimit in
the maximum principal amount of $7,000,000 to permit the Company to acquire aged whiskey inventory (the “Purchased Inventory
Sublimit”), subject to certain conditions set forth in the Amended Agreement. The Company and CB-USA are referred to
individually and collectively as the Borrower. Pursuant to the Amended Agreement, the Company and CB-USA may borrow
up to the lesser of (x) $21,000,000 and (y) the sum of the borrowing base calculated in accordance with the Amended Agreement
and the Purchased Inventory Sublimit.
|
In
May 2018, the Company and CB-USA entered into a Fourth Amendment (the “Fourth Amendment”) to the Amended Agreement
to amend certain terms of the Credit Facility. Among other changes, the Fourth Amendment increased the maximum amount of the Credit
Facility from $21,000,000 to $23,000,000 and amended the definition of borrowing base to increase the amount of borrowing that
can be collateralized by inventory.
The
Credit Facility interest rate is the rate that, when annualized, is the greatest of (a) the Prime Rate plus 3.00%, (b) the LIBOR
Rate plus 5.50% and (c) 6.00%. As of June 30, 2019, the Credit Facility interest rate was 8.0%.
The
Purchased Inventory Sublimit interest rate is the rate that, when annualized, is the greatest of (a) the Prime Rate plus 4.25%,
(b) the LIBOR Rate plus 6.75% and (c) 7.50%. As of June 30, 2019, the interest rate applicable to the Purchased Inventory Sublimit
was 9.75%. The monthly facility fee is 0.75% per annum of the maximum Credit Facility. Also, the Company must pay a monthly facility
fee of $2,000 with respect to the Purchased Inventory Sublimit until all obligations with respect thereof are fully paid and performed.
The
Amended Agreement contains EBITDA targets allowing for further interest rate reductions in the future. The Company and CB-USA
are permitted to prepay the Credit Facility in whole or the Purchased Inventory Sublimit, in whole or in part, subject to certain
prepayment penalties as set forth in the Amended Agreement.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
For
the three months ended June 30, 2019, the Company paid interest on the Amended Agreement and on the Purchased Inventory Sublimit
as follows:
|
|
Amended
Agreement
|
|
|
Purchased
Inventory Sublimit
|
|
April
1, 2019 – June 30, 2019
|
|
|
8.00000
|
%
|
|
|
9.75000
|
%
|
For
the three months ended June 30, 2018, the Company paid interest on the Amended Agreement and on the Purchased Inventory Sublimit
as follows:
|
|
Amended
Agreement
|
|
|
Purchased
Inventory Sublimit
|
|
April
1, 2018 – April 30, 2018
|
|
|
7.31175
|
%
|
|
|
9.06175
|
%
|
May 1 –
May 31, 2018
|
|
|
7.35805
|
%
|
|
|
9.10805
|
%
|
June 1 –
June 30, 2018
|
|
|
7.30031
|
%
|
|
|
9.05031
|
%
|
Interest
is payable monthly in arrears, on the first day of every month on the average daily unpaid principal amount of the Credit Facility.
After the occurrence and during the continuance of any “Default” or “Event of Default” (as defined under
the Amended Agreement), the Borrower is required to pay interest at a rate that is 3.25% per annum above the then applicable Credit
Facility interest rate. There have been no Events of Default under the Credit Facility. ACF also receives a collateral management
fee of $1,000 per month (increased to $2,000 after the occurrence of and during the continuance of an Event of Default) in addition
to the facility fee with respect to the Purchased Inventory Sublimit. The Amended Agreement contains standard borrower representations
and warranties for asset-based borrowing and a number of reporting obligations and affirmative and negative covenants. The Amended
Agreement includes negative covenants that, among other things, restrict the Borrower’s ability to create additional indebtedness,
dispose of properties, incur liens and make distributions or cash dividends. The obligations of the Borrower under the Amended
Amendment are secured by the grant of a pledge and security interest in all the assets of the Borrower. At June 30, 2019,
the Company was in compliance, in all respects, with the covenants under the Amended Agreement. The Credit Facility was set to
mature on July 31, 2020.
ACF
required as a condition to entering into an amendment to the Amended Agreement in August 2015 that ACF enter into a participation
agreement with certain related parties of the Company, including Frost Gamma Investments Trust, an entity affiliated with Phillip
Frost, M.D., a director and principal shareholder of the Company, Mark E. Andrews, III, a director of the Company and the Company’s
Chairman, Richard J. Lampen, a director of the Company and the Company’s President and Chief Executive Officer, Brian L.
Heller, the Company’s General Counsel and Assistant Secretary, and Alfred J. Small, the Company’s Senior Vice President,
Chief Financial Officer, Treasurer and Secretary, to allow for the sale of participation interests in the Purchased Inventory
Sublimit and the inventory purchased with the proceeds thereof. The participation agreement provides that ACF’s commitment
to fund each advance of the Purchased Inventory Sublimit shall be limited to seventy percent (70%), up to an aggregate maximum
principal amount for all advances equal to $4,900,000. Neither the Company nor CB-USA is a party to the participation agreement.
However, the Company and CB-USA are party to a fee letter with the junior participants (including the related party junior participants)
pursuant to which the Company and CB-USA were obligated to pay the junior participants a closing fee of $18,000 on the effective
date of the Amended 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.
In
August 2015, the Company used $3,000,000 of the Purchased Inventory Sublimit to acquire aged bourbon inventory. Frost Gamma Investments
Trust ($150,000), Mark E. Andrews, III ($50,000), Richard J. Lampen ($100,000), Brian L. Heller ($42,500) and Alfred J. Small
($15,000) each acquired participation interests in the Purchased Inventory Sublimit and the inventory purchased with the proceeds
thereof. In January 2017, the Company acquired $1,030,000 in aged bulk bourbon under the Purchased Inventory Sublimit with additional
borrowings from certain related parties of the Company, 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), as junior participants in the Purchased
Inventory Sublimit with respect to such purchase. In October 2017, the Company acquired $1,308,125 in aged bulk bourbon under
the Purchased Inventory Sublimit with additional borrowings from certain related parties of the Company, including Frost Gamma
Investments Trust ($65,406), Richard J. Lampen ($43,604), Mark E. Andrews, III ($21,802), Brian L. Heller ($18,532), and Alfred
J. Small ($6,541), as junior participants in the Purchased Inventory Sublimit with respect to such purchase. In December 2017,
the Company acquired $900,425 in aged bulk bourbon under the Purchased Inventory Sublimit with additional borrowings from certain
related parties of the Company, including Frost Gamma Investments Trust ($45,021), Richard J. Lampen ($30,014), Mark E. Andrews,
III ($15,007), Brian L. Heller ($12,756), and Alfred J. Small ($4,502), as junior participants in the Purchased Inventory Sublimit
with respect to such purchase. In April 2018, the Company acquired $2,001,000 in aged bulk bourbon under the Purchased Inventory
Sublimit with additional borrowings from certain related parties of the Company, including Frost Gamma Investments Trust ($100,050),
Richard J. Lampen ($66,700), Mark E. Andrews, III ($33,350), Brian L. Heller ($28,348), and Alfred J. Small ($10,005), as junior
participants in the Purchased Inventory Sublimit with respect to such purchase. In June 2018, the Company acquired $1,035,000
in aged bulk bourbon under the Purchased Inventory Sublimit with additional borrowings from certain related parties of the Company,
including Frost Gamma Investments Trust ($51,750), Richard J. Lampen ($34,500), Mark E. Andrews, III ($17,250), Brian L. Heller
($14,663), and Alfred J. Small ($5,175), as junior participants in the Purchased Inventory Sublimit with respect to such purchase.
Under the terms of the participation agreement, the participants receive interest at the rate of 11% per annum.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
In
October 2018, the Company and CB-USA entered into a Fifth Amendment (the “Fifth Amendment”) to the Amended Agreement
to amend certain terms of the Company’s existing Credit Facility with ACF. Among other changes, the Fifth Amendment increased
the maximum amount of the Credit Facility from $23,000,000 to $25,000,000 and amended the definition of borrowing base to increase
the amount of borrowing that can be collateralized by inventory. The Company and CB-USA paid ACF an aggregate $50,000 commitment
fee in connection with the Amendment. In connection with the Amendment, the Company and CB-USA also entered into an Amended and
Restated Revolving Credit Note.
In
November 2018, the Company and CB-USA entered into a Sixth Amendment (the “Sixth Amendment”) to the Amended Agreement
to amend certain terms of the Company’s existing Credit Facility with ACF. Among other changes, the Sixth Amendment extended
the term of the Credit Facility to July 31, 2020 and amended the definition of borrowing base to increase the amount of borrowing
that could be collateralized by inventory. The Company and CB-USA paid ACF an aggregate $57,500 commitment fee in connection with
the Amendment.
In
January 2019, the Company and CB-USA entered into a Seventh Amendment (the “Seventh Amendment”) to the Amended Agreement
to amend certain terms of the Company’s existing Credit Facility with ACF. Among other changes, the Seventh Amendment increased
the maximum amount of the Credit Facility from $25,000,000 to $27,000,000 and amended the definition of borrowing base to increase
the amount of borrowing that can be collateralized by inventory. The Seventh Amendment also contains a fixed charge coverage ratio
covenant requiring the Company to maintain a fixed charge coverage ratio of not less than 1.1 to 1.0. The Company and CB-USA paid
ACF an aggregate $20,000 commitment fee in connection with the Seventh Amendment. In connection with the Seventh Amendment, the
Company and CB-USA also entered into an Amended and Restated Revolving Credit Note.
At
June 30 and March 31, 2019, $26,900,697 and $26,957,084, respectively, due on the Credit Facility was included in long-term liabilities.
At June 30 and March 31, 2019, there was $99,303 and $42,916, respectively, in potential availability under the Credit Facility.
In connection with the adoption of ASU 2015-03, the Company included $141,091 and $142,143 of debt issuance costs at June 30 and
March 31, 2019, respectively, as direct deductions from the carrying amount of the related debt liability.
In
July 2019, the Company and CB-USA, entered into an Eighth Amendment (the “Eighth Amendment”) to the Amended Agreement
to amend certain terms of the Company’s existing Credit Facility with ACF. Among other changes, the Eighth Amendment (i)
increases the maximum amount of the Credit Facility from $27,000,000 to $60,000,000 and removes the Purchased Inventory Sublimit;
(ii) amends the borrowing capacity of the Facility to remove reference to the Purchased Inventory Sublimit and instead be equal
to the lesser of (x) $60,000,000 and (y) the sum of the borrowing base calculated in accordance with the Loan Agreement; (iii)
amends the definition of borrowing base to increase the amount of borrowing that can be collateralized by bourbon and finished
goods inventory; (iv) amends the interest rate applicable to the revolving credit facility to be equal to the greatest of (x)
the prime rate plus 1.50%, (y) the LIBOR rate plus 4.00% and (z) 5.50%; (v) contains a fixed charge coverage ratio covenant requiring
the Company to maintain a fixed charge coverage ratio of not less than 1.1 to 1.0, measured on a rolling four (4) fiscal quarter
basis; (vi) adds a covenant regarding revenue levels for certain Company brands; (vii) amends the permitted payments covenant
to include repayment of the entire amount then due and payable under the terms of the 11% Subordinated Note due 2020 dated March
29, 2017, as amended, issued by the Company in favor of Frost Nevada Investments Trust; (viii) reduces the monthly facility fee
from 0.75% per annum of the maximum Facility amount to 0.25% per annum of the maximum Facility amount; and (ix) extends the maturity
date of the Facility to July 31, 2023. The Company and CB-USA paid ACF an aggregate $150,000 commitment fee in connection with
the Eighth Amendment.
As
a result of the removal of the Purchased Inventory Sublimit, all amounts owed to certain related parties of the Company pursuant
to the participation agreement entered into between such related parties and ACF were repaid in full.
In
connection with the Amendment, the Company and CB-USA also entered into a Second Amended and Restated Revolving Credit Note (“Revolving
Note”).
D.
|
In
March 2017, the Company 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 $20,000,000 (the “Subordinated Note”). The Subordinated
Note bears interest quarterly at the rate of 11% per annum.
|
|
|
|
In
April 2018, the Company entered into a First Amendment to the Subordinated Note to extend the maturity date on the Subordinated
Note from March 15, 2019 until September 15, 2020. No other provisions of the Subordinated Note were amended.
|
|
|
|
In
July 2019, in connection with the Eighth Amendment to the Amended Agreement as described in Note 7C, the Company prepaid $20,183,333,
representing the outstanding indebtedness owed under the Subordinated Note, plus accrued, but unpaid, interest thereon. No
prepayment penalties were incurred by the Company. Upon the prepayment of the outstanding indebtedness, the Subordinated Note
was cancelled.
|
NOTE
8 -
EQUITY
Employee
Stock Purchase Plan
- In February 2017, the Company’s shareholders approved the 2017 Employee Stock Purchase Plan (“2017
ESPP”) which provides for an aggregate of 3,000,000 shares of the Company’s stock reserved for issuance over the term
of the 2017 ESPP. The purpose of the 2017 ESPP is to provide incentives for present and future employees of the Company and any
designated subsidiary to acquire a proprietary interest in the Company through the purchase of shares of the Company’s common
stock. For the three months ended June 30, 2019 and 2018, 55,564 shares and 41,902 shares, respectively, had been acquired under
the 2017 ESPP.
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 June
30 and March 31, 2019, the Company had no forward contracts outstanding.
NOTE
10 -
STOCK-BASED COMPENSATION
Stock-based
compensation expense for the three months ended June 30, 2019 and 2018 amounted to $439,270 and $490,485, respectively. At June
30, 2019, total unrecognized compensation cost amounted to $2,282,871, representing 767,250 unvested options and 1,488,750 unvested
shares of restricted stock. This cost is expected to be recognized over a weighted-average period of 0.9 years for the unvested
options and 2.50 years for the unvested restricted shares. There were 171,000 options exercised during the three months ended
June 30, 2019 and 503,166 options exercised during the three months ended June 30, 2018. The Company did not recognize any related
tax benefit for the three months ended June 30, 2019 and 2018 from option exercises, as the effects were de minimis.
NOTE
11 -
LEASES
Leasing
Accounting Pronouncement Adoption
On
April 1, 2019, the Company adopted ASU No. 2016-02- Leases (Topic 842) applying the modified retrospective method and the option
presented under ASU 2018-11 to transition only active leases as of April 1, 2019 with a cumulative effect adjustment as of that
date. All comparative periods prior to April 1, 2019 retain the financial reporting and disclosure requirements of ASC 840. The
Company elected the package of practical expedients permitted under the transition guidance within the new standard. The package
of three expedients includes: 1) the ability to carry forward the historical lease classification, 2) the elimination of the requirement
to reassess whether existing or expired agreements contain leases, and 3) the elimination of the requirement to reassess initial
direct costs. The Company also elected the practical expedient related to short-term leases without purchase options reasonably
certain to exercise, allowing it to exclude leases with terms of less than twelve (12) months from capitalization for all asset
classes. The Company did not elect the hindsight practical expedient when determining the lease terms. The adoption of the new
standard resulted in the recording of right-of-use (“ROU”) assets and lease liabilities of $446,026 each, as of April
1, 2019. The standard did not materially impact the Company’s consolidated net earnings and had no impact on cash flows.
The new standard had no material impact on liquidity and had no impact on the Company’s debt-covenant compliance under its
current debt agreements.
Leasing
Policies
The
Company determines if an arrangement is a lease at inception. Leases are included in right-of-use assets and lease liabilities
in the current and long-term portions of liabilities.
ROU
assets represent the Company’s right to use an underlying asset for the duration of the lease term. Lease liabilities represent
the Company’s obligation to make lease payments as determined by the lease agreement. Lease liabilities are recorded at
commencement for the net present value of future lease payments over the lease term. The discount rate used is generally the Company’s
estimated incremental borrowing rate unless the lessor’s implicit rate is readily determinable. Discount rates are calculated
periodically to estimate the rate the Company would pay to borrow the funds necessary to obtain an asset of similar value, over
a similar term, with a similar security. ROU assets are recorded and recognized at commencement for the lease liability amount,
initial direct costs incurred and is reduced for lease incentives received. The Company’s lease terms may include options
to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense
is recognized on a straight-line basis over the lease term. Finance lease cost is recognized on a straight line basis over the
shorter of the useful life of the asset and the lease term.
Leases
The
Company has operating and finance leases for corporate offices and certain office equipment. The leases have remaining lease terms
of one year to three years, none of which include options to extend and none of which include options to terminate the leases
within one year. The Company’s lease population includes purchase options on equipment leases that are included in the lease
payments when reasonably certain to be exercised. The Company’s lease population does not include any residual value guarantees.
The Company’s lease population does not contain any material restrictive covenants.
The
Company has leases with variable payments, most commonly in the form of Common Area Maintenance (“CAM”) and tax charges
which are based on actual costs incurred. These variable payments were excluded from the ROU asset and lease liability balances
since they are not fixed or in-substance fixed payments. Variable payments are expensed as incurred.
The
components of lease expense were as follows (leases transacted in euros have been translated at the June 30, 2019 exchange rate):
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
|
|
2019
|
|
Operating
lease cost
|
|
$
|
63,137
|
|
Variable
lease cost
|
|
|
10,992
|
|
|
|
|
|
|
Finance
lease cost:
|
|
|
|
|
Amortization
of right-of-use assets
|
|
|
5,040
|
|
Interest
on lease liabilities
|
|
|
1,272
|
|
Total
lease cost
|
|
$
|
80,441
|
|
Supplemental
cash flow information related to leases was as follows (leases transacted in euros have been translated at the June 30, 2019 exchange
rate):
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
|
|
2019
|
|
Cash
paid for amounts included in measurement of lease liabilities:
|
|
|
|
|
Operating
cash flows from operating leases
|
|
$
|
94,705
|
|
Financing
cash flows from finance leases
|
|
|
5,735
|
|
Supplemental
balance sheet information related to leases was as follows (leases transacted in euros have been translated at the June 30, 2019
exchange rate):
|
|
June
30,
|
|
|
|
2019
|
|
Operating
leases:
|
|
|
|
|
Operating
lease right-of-use assets
|
|
$
|
322,392
|
|
|
|
|
|
|
Current
operating lease liability
|
|
$
|
249,094
|
|
Non-current
operating lease liability
|
|
|
41,707
|
|
Total
operating lease liabilities
|
|
$
|
290,801
|
|
|
|
|
|
|
Finance
leases:
|
|
|
|
|
|
|
|
|
|
Equipment,
at cost
|
|
$
|
65,127
|
|
Accumulated
amortization
|
|
|
(5,051
|
)
|
Equipment,
net
|
|
$
|
60,076
|
|
|
|
|
|
|
Lease
liabilities – current
|
|
$
|
18,820
|
|
Lease
liabilities - long-term
|
|
|
41,835
|
|
Total
finance lease liabilities
|
|
$
|
60,655
|
|
|
|
|
|
|
Weighted
average remaining lease term:
|
|
|
|
|
Operating
leases
|
|
|
1.03
|
|
Finance
leases
|
|
|
3.24
|
|
|
|
|
|
|
Weighted
average discount rate:
|
|
|
|
|
Operating
leases
|
|
|
8.0
|
%
|
Finance
leases
|
|
|
8.0
|
%
|
As
of June 30, 2019, maturities of lease liabilities were as follows (leases transacted in euros have been translated at the June
30, 2019 exchange rate):
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
Year
Ending March 31:
|
|
|
|
|
|
|
Remainder
of 2020
|
|
$
|
249,514
|
|
|
|
$
17, 244
|
|
2021
|
|
|
43,536
|
|
|
|
20,796
|
|
2022
|
|
|
10,884
|
|
|
|
18,600
|
|
2023
|
|
|
-
|
|
|
|
12,400
|
|
Total
lease payments
|
|
|
303,934
|
|
|
|
69,040
|
|
Less
imputed interest
|
|
|
(13,133
|
)
|
|
|
(8,385
|
)
|
Total
|
|
$
|
290,801
|
|
|
$
|
60,655
|
|
Under
ASC 840,
Leases
, future minimum lease payments under noncancelable operating leases as of March 31, 2019 were as follows:
Years
ending March 31,
|
|
Amount
|
|
2020
|
|
$
|
388,694
|
|
2021
|
|
|
65,360
|
|
2022
|
|
|
26,663
|
|
|
|
|
|
|
Total
|
|
$
|
480,717
|
|
NOTE
12 -
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, 2020, the Company has contracted to purchase
approximately €1,233,954 or $1,402,562 (translated at the June 30, 2019 exchange rate) in bulk Irish whiskey. The Company
is not obligated to pay the Irish Distillery for any product not yet received. During the term of this supply agreement, the
Irish Distillery has the right to limit additional purchases above the commitment amount
|
|
|
B.
|
The
Company has also entered into a supply agreement with the Irish Distillery, which provides for the production of single malt
Irish whiskeys for the Company until the contract is terminated by either party in accordance with the terms of the agreement.
The Irish Distillery may terminate the contract if it provides at least thirteen years prior notice to the Company, except
for breach. Under this agreement, the Company provides the Irish Distillery with a forecast of the estimated amount of liters
of pure alcohol it requires for the next twelve fiscal contract years and agrees to purchase 80% of that amount, subject to
certain annual adjustments. For the contract year ending June 30, 2020, the Company has contracted to purchase approximately
€596,992 or $678,565 (translated at the June 30, 2019 exchange rate) in bulk Irish whiskey. The Company is not obligated
to pay the Irish Distillery for any product not yet received. During the term of this supply agreement, the Irish Distillery
has the right to limit additional purchases above the commitment amount.
|
|
|
C.
|
The
Company has entered into a supply agreement with a bourbon distiller, which provides for the production of newly-distilled
bourbon whiskey. Under this agreement, the distiller will provide 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 ending December 31,
2019, the Company contracted to purchase approximately $4,550,000 in newly-distilled bourbon, of which $2,322,450 was purchased
as of June 30, 2019. The Company is not obligated to pay the distiller for any product not yet received.
|
CASTLE
BRANDS INC. AND SUBSIDIARIES
Notes
to Unaudited Condensed Consolidated Financial Statements - Continued
D.
|
As
described in Note 8C, in August 2011, the Company and CB-USA entered into the Credit Facility, as amended in July 2012, March
2013, August 2013, November 2013, August 2014, September 2014, August 2015, October 2017, May 2018, October 2018, November
2018, January 2019 and July 2019.
|
|
|
E.
|
Except
as set forth below, the Company believes that neither it, nor any of its subsidiaries, is currently subject to litigation
which, in the opinion of management after consultation with counsel, is likely to have a material adverse effect on the Company.
|
The
Company may become involved in litigation from time to time relating to claims arising in the ordinary course of its business.
These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
NOTE
13 -
CONCENTRATIONS
A.
|
Credit
Risk
- The Company maintains its cash and cash equivalents balances at various large financial institutions that, at times,
may exceed federally and internationally insured limits. The Company 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 and Spirits of America, Inc. family of companies, accounted
for approximately 42.7% and 36.4% of the Company’s net sales for the three months ended June 30, 2019 and 2018,
respectively, and approximately 46.1% and 31.7% of accounts receivable at June 30 and March 31, 2019, respectively.
|
NOTE
14 -
GEOGRAPHIC INFORMATION
The
Company operates in one reportable segment - the sale of premium beverage alcohol. The Company’s product categories are
whiskeys, rum, liqueurs, vodka, tequila and ginger beer, a related non-alcoholic beverage product. 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 June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Consolidated
Sales, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
2,050,009
|
|
|
|
9.1
|
%
|
|
$
|
2,299,006
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
- control states
|
|
|
4,062,985
|
|
|
|
19.7
|
%
|
|
|
5,311,639
|
|
|
|
23.0
|
%
|
U.S.
- open states
|
|
|
16,522,747
|
|
|
|
80.3
|
%
|
|
|
15,493,743
|
|
|
|
77.0
|
%
|
United
States
|
|
|
20,585,732
|
|
|
|
90.9
|
%
|
|
|
20,805,382
|
|
|
|
90.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Sales, net
|
|
$
|
22,635,741
|
|
|
|
100.0
|
%
|
|
$
|
23,104,388
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
(Loss) Income from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
(118,357
|
)
|
|
|
(391.6
|
)%
|
|
$
|
(77,906
|
)
|
|
|
(11.4
|
)%
|
United
States
|
|
|
88,136
|
|
|
|
291.6
|
%
|
|
|
762,510
|
|
|
|
111.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated (Loss) Income from Operations
|
|
$
|
(30,221
|
)
|
|
|
100.0
|
%
|
|
$
|
684,604
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Net Loss Attributable to Common Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
(92,252
|
)
|
|
|
10.6
|
%
|
|
$
|
(49,002
|
)
|
|
|
7.1
|
%
|
United
States
|
|
|
(778,643
|
)
|
|
|
89.4
|
%
|
|
|
(641,705
|
)
|
|
|
92.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Net Loss Attributable to Common Shareholders
|
|
$
|
(870,895
|
)
|
|
|
100.0
|
%
|
|
$
|
(690,707
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
582,019
|
|
|
|
100.0
|
%
|
|
$
|
(18,115
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Sales, net by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whiskey
|
|
$
|
9,708,985
|
|
|
|
42.9
|
%
|
|
$
|
9,484,388
|
|
|
|
41.1
|
%
|
Rum
|
|
|
3,550,033
|
|
|
|
15.7
|
%
|
|
$
|
4,557,023
|
|
|
|
19.7
|
%
|
Liqueurs
|
|
|
1,874,946
|
|
|
|
8.3
|
%
|
|
|
1,987,096
|
|
|
|
8.6
|
%
|
Vodka
|
|
|
226,757
|
|
|
|
1.0
|
%
|
|
|
320,578
|
|
|
|
1.4
|
%
|
Tequila
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
58,683
|
|
|
|
0.3
|
%
|
Ginger
beer
|
|
|
7,275,020
|
|
|
|
32.1
|
%
|
|
|
6,696,620
|
|
|
|
29.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Sales, net
|
|
$
|
22,635,741
|
|
|
|
100.0
|
%
|
|
$
|
23,104,388
|
|
|
|
100.0
|
%
|
|
|
As
of June 30, 2019
|
|
|
As
of March 31, 2019
|
|
Consolidated
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
3,264,493
|
|
|
|
3.8
|
%
|
|
$
|
3,382,553
|
|
|
|
4.0
|
%
|
United
States
|
|
|
81,685,530
|
|
|
|
96.2
|
%
|
|
|
81,598,013
|
|
|
|
96.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated Assets
|
|
$
|
84,950,023
|
|
|
|
100.0
|
%
|
|
$
|
84,980,566
|
|
|
|
100.0
|
%
|
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 and vodka.
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 and in thirteen primary international markets, including Ireland, Great Britain,
Northern Ireland, Germany, Canada, France, Finland, Norway, Sweden, Holland, and the Duty Free markets. We market the following
brands, among others:
|
●
|
Goslings
rum®
|
|
●
|
Goslings
Stormy Ginger Beer
|
|
●
|
Goslings
Dark ‘n Stormy® ready-to-drink cocktail
|
|
●
|
Jefferson’s®
bourbon
|
|
●
|
Jefferson’s
Reserve®
|
|
●
|
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
Straight Rye whiskey
|
|
●
|
Pallini®
liqueurs
|
|
●
|
Clontarf®
Irish whiskey
|
|
●
|
Knappogue
Castle Whiskey®
|
|
●
|
Brady’s®
Irish Cream
|
|
●
|
Boru®
vodka
|
|
●
|
Celtic
Honey® liqueur
|
|
●
|
Gozio®
amaretto
|
|
●
|
The
Arran Malt® Single Malt Scotch Whisky
|
|
●
|
The
Robert Burns Scotch Whiskeys
|
|
●
|
Machrie
Moor Scotch Whiskeys
|
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 whiskeys and ginger beer, sales of which have grown substantially
in recent years;
|
|
●
|
focus
on innovation. We continue to innovate in our portfolio by developing new brand extensions, expressions, blends and processes,
such as our Ocean Aged at Sea bourbons and our wine-finishes for our bourbons and Irish whiskeys. We believe that continued
focus on innovation will drive sales growth, build brand loyalty, and open new markets;
|
|
●
|
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;
|
|
●
|
selectively
add new brands to our portfolio. We continue to explore strategic relationships, joint ventures and acquisitions to selectively
expand our premium spirits portfolio. For example, we added the Arran Scotch whiskeys to our portfolio as agency brands. We
expect that future acquisitions or agency relations, if any, would involve some combination of cash, debt and the issuance
of our stock; and
|
|
●
|
build
consumer awareness. We use our existing assets, expertise and resources to build consumer awareness and market penetration
for our brands.
|
Recent
Developments
Ares
Amendment
In
July 2019, we, and our wholly-owned subsidiary Castle Brands USA Corp. (“CB-USA”), entered into an Eighth Amendment
(the “Eighth Amendment”) to the Amended and Restated Loan and Security Agreement (as amended, the “Loan Agreement”)
with ACF FinCo I LP (“ACF”), which provides for (subject to certain terms and conditions) a credit facility
(the “Credit Facility”). Among other changes, the Eighth Amendment (i) increases the maximum amount of the Credit
Facility from $27.0 million to $60.0 million and removes the Purchased Inventory Sublimit; (ii) amends the borrowing capacity
of the Facility to remove reference to the Purchased Inventory Sublimit and instead be equal to the lesser of (x) $60.0 million
and (y) the sum of the borrowing base calculated in accordance with the Loan Agreement; (iii) amends the definition of borrowing
base to increase the amount of borrowing that can be collateralized by bourbon and finished goods inventory; (iv) amends the interest
rate applicable to the revolving credit facility to be equal to the greatest of (x) the prime rate plus 1.50%, (y) the LIBOR rate
plus 4.00% and (z) 5.50%; (v) contains a fixed charge coverage ratio covenant requiring us to maintain a fixed charge coverage
ratio of not less than 1.1 to 1.0, measured on a rolling four (4) fiscal quarter basis; (vi) adds a covenant regarding revenue
levels for certain of our brands; (vii) amends the permitted payments covenant to include repayment of the entire amount then
due and payable under the terms of the 11% Subordinated Note due 2020 dated March 29, 2017, as amended, issued by us in favor
of Frost Nevada Investments Trust; (viii) reduces the monthly facility fee from 0.75% per annum of the maximum Facility amount
to 0.25% per annum of the maximum Facility amount; and (ix) extends the maturity date of the Facility to July 31, 2023. We and
CB-USA paid ACF an aggregate $150,000 commitment fee in connection with the Eighth Amendment.
As
a result of the removal of the Purchased Inventory Sublimit, all amounts that were then owed to certain related parties
of ours (pursuant to the participation agreement entered into between such related parties and ACF) were repaid
in full.
In
connection with the Eighth Amendment, we prepaid in full the outstanding indebtedness owed under the 11% Subordinated Note,
in the aggregate principal amount of $20 million plus all accrued, but unpaid, interest thereon. We did not incur any prepayment
penalties. Upon the prepayment of the outstanding indebtedness, the 11% Subordinated Note was cancelled.
Currency
Translation
The
functional currencies for our foreign operations are the Euro in Ireland and the British Pound in the United Kingdom. With respect
to our consolidated financial statements, the translation from the applicable foreign currencies to U.S. Dollars is performed
for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using
a weighted average exchange rate during the period. The resulting translation adjustments are recorded as a component of other
comprehensive income.
Where
in this report we refer to amounts in Euros or British Pounds, we have for your convenience also in certain cases provided a conversion
of those amounts to U.S. Dollars in parentheses. Where the numbers refer to a specific balance sheet account date or financial
statement account period, we have used the exchange rate that was used to perform the conversions in connection with the applicable
financial statement. In all other instances, unless otherwise indicated, the conversions have been made using the exchange rates
as of June 30, 2019, each as calculated from the Interbank exchange rates as reported by Oanda.com. On June 30, 2019, the exchange
rate of the Euro and the British Pound in exchange for U.S. Dollars was €1.00 = U.S. $1.13664 (equivalent to U.S.
$1.00 = €0.87989) and £1.00 = U.S. $1.26904 (equivalent to U.S. $1.00 = £0.78800).
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, 2019, as
amended, which we refer to as our 2019 Annual Report. Please refer to that section for disclosures regarding the critical accounting
policies related to our business.
Financial
performance overview
The
following table provides information regarding our spirits case sales for the periods presented based on nine-liter equivalent
cases, which is a standard spirits industry metric (table excludes related non-alcoholic beverage products):
|
|
Three
months ended
|
|
|
|
June
30,
|
|
|
|
2019
|
|
|
2018
|
|
Cases:
|
|
|
|
|
|
|
United
States
|
|
|
74,466
|
|
|
|
82,685
|
|
International
|
|
|
20,365
|
|
|
|
21,594
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
94,831
|
|
|
|
104,280
|
|
|
|
|
|
|
|
|
|
|
Rum
|
|
|
35,160
|
|
|
|
44,553
|
|
Whiskey
|
|
|
33,250
|
|
|
|
30,744
|
|
Liqueurs
|
|
|
22,231
|
|
|
|
22,611
|
|
Vodka
|
|
|
4,190
|
|
|
|
6,061
|
|
Tequila
|
|
|
-
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
94,831
|
|
|
|
104,280
|
|
|
|
|
|
|
|
|
|
|
Percentage
of Cases:
|
|
|
|
|
|
|
|
|
United
States
|
|
|
78.5
|
%
|
|
|
79.3
|
%
|
International
|
|
|
21.5
|
%
|
|
|
20.7
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Rum
|
|
|
37.1
|
%
|
|
|
42.7
|
%
|
Whiskey
|
|
|
35.1
|
%
|
|
|
29.5
|
%
|
Liqueurs
|
|
|
23.4
|
%
|
|
|
21.7
|
%
|
Vodka
|
|
|
4.4
|
%
|
|
|
5.8
|
%
|
Tequila
|
|
|
0.0
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
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
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cases:
|
|
|
|
|
|
|
United
States
|
|
|
467,168
|
|
|
|
445,147
|
|
International
|
|
|
10,453
|
|
|
|
19,305
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
477,261
|
|
|
|
464,452
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
97.8
|
%
|
|
|
97.5
|
%
|
International
|
|
|
2.2
|
%
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Results
of operations
The
table below provides, for the periods indicated, the percentage of net sales of certain items in our consolidated financial statements:
|
|
Three
months ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Sales,
net
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
60.9
|
%
|
|
|
59.9
|
%
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
39.1
|
%
|
|
|
40.1
|
%
|
|
|
|
|
|
|
|
|
|
Selling
expense
|
|
|
27.7
|
%
|
|
|
25.2
|
%
|
General
and administrative expense
|
|
|
11.0
|
%
|
|
|
10.9
|
%
|
Depreciation
and amortization
|
|
|
0.5
|
%
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(0.1
|
)%
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
(Loss)
income from equity investment in non-consolidated affiliate
|
|
|
(0.0
|
)%
|
|
|
0.1
|
%
|
Foreign
exchange (loss) gain
|
|
|
(0.3
|
)%
|
|
|
0.2
|
%
|
Interest
expense, net
|
|
|
(5.3
|
)%
|
|
|
(4.6
|
)%
|
Loss
before provision for income taxes
|
|
|
(5.8
|
)%
|
|
|
(1.3
|
)%
|
Income
tax benefit (expense), net
|
|
|
2.6
|
%
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(3.2
|
)%
|
|
|
(1.4
|
)%
|
Net
income attributable to noncontrolling interests
|
|
|
(0.6
|
)%
|
|
|
(1.7
|
)%
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
|
(3.8
|
)%
|
|
|
(3.1
|
)%
|
The
following is a reconciliation of net loss attributable to common shareholders to EBITDA, as adjusted:
|
|
Three
months ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net
loss attributable to common shareholders
|
|
$
|
(870,895
|
)
|
|
$
|
(690,707
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
1,207,845
|
|
|
|
1,051,942
|
|
Income
tax (benefit) expense, net
|
|
|
(582,019
|
)
|
|
|
18,115
|
|
Depreciation
and amortization
|
|
|
123,238
|
|
|
|
235,792
|
|
EBITDA
|
|
|
(121,831
|
)
|
|
|
615,142
|
|
Allowance
for doubtful accounts
|
|
|
15,000
|
|
|
|
14,559
|
|
Allowance
for obsolete inventory
|
|
|
-
|
|
|
|
80,000
|
|
Stock-based
compensation expense
|
|
|
439,270
|
|
|
|
490,485
|
|
Other
expense, net
|
|
|
1,192
|
|
|
|
405
|
|
Loss
(income) from equity investment in non-consolidated affiliate
|
|
|
4,840
|
|
|
|
(34,028
|
)
|
Foreign
exchange loss (gain)
|
|
|
71,324
|
|
|
|
(44,464
|
)
|
Net
income attributable to noncontrolling interests
|
|
|
137,492
|
|
|
|
383,341
|
|
EBITDA,
as adjusted
|
|
$
|
547,287
|
|
|
$
|
1,505,440
|
|
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 (loss) from equity investment in non-consolidated affiliate,
foreign exchange loss (income) 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.
Three
months ended June 30, 2019 compared with three months ended June 30, 2018
Net sales.
Net sales decreased 2.0% to $22.6 million for the three
months ended June 30, 2019, as compared to $23.1 million for the comparable prior-year period, as U.S. sales growth of Jefferson’s
bourbons and Goslings Stormy Ginger Beer were offset by decreases in Goslings rum sales and sales of certain of our liqueurs in
the three months ended June 30, 2019. In addition, a change in the Pennsylvania Control Board operating model resulted in a
$1.1 million year over year reduction in revenue and a $0.5 million reduction in net contribution based on phasing, all of which
we expect will be reversed as the fiscal year progresses. We expect to continue to focus on our faster growing brands and
markets, both in the U.S. and internationally, including high revenue, specialty releases of our Jefferson’s bourbons in
future periods.
The
table below presents the increase or decrease, as applicable, in case sales by spirits product category for the three months ended
June 30, 2019 as compared to the three months ended June 30, 2018:
|
|
Increase/(decrease)
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
Increase/(decrease)
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Rum
|
|
|
(9,393
|
)
|
|
|
(7,404
|
)
|
|
|
(21.1
|
)%
|
|
|
(24.7
|
)%
|
Whiskey
|
|
|
2,506
|
|
|
|
936
|
|
|
|
8.2
|
%
|
|
|
3.8
|
%
|
Liqueur
|
|
|
(380
|
)
|
|
|
(150
|
)
|
|
|
(1.7
|
)%
|
|
|
(0.7
|
)%
|
Vodka
|
|
|
(1,871
|
)
|
|
|
(1,291
|
)
|
|
|
(30.9
|
)%
|
|
|
(23.9
|
)%
|
Tequila
|
|
|
(311
|
)
|
|
|
(311
|
)
|
|
|
(100.0
|
)%
|
|
|
(100.0
|
)%
|
Total
|
|
|
(9,449
|
)
|
|
|
(8,219
|
)
|
|
|
(9.1
|
)%
|
|
|
(9.9
|
)%
|
Our
international spirits case sales as a percentage of total spirits case sales increased to 21.5% for the three months ended June
30, 2019 as compared to 20.7% for the comparable prior-year period, primarily due to increased Irish whiskey and rum sales in
certain international markets resulting in part from the timing of shipments to large retailers in Ireland.
The
following table presents the increase in case sales of ginger beer products, our non-alcoholic beverage product, for the
three months ended June 30, 2019 as compared to the three months ended June 30, 2018:
|
|
Increase
|
|
|
Percentage
|
|
|
|
in
case sales
|
|
|
Increase
|
|
|
|
Overall
|
|
|
U.S.
|
|
|
Overall
|
|
|
U.S.
|
|
Ginger
Beer Products
|
|
|
12,809
|
|
|
|
22,021
|
|
|
|
2.8
|
%
|
|
|
4.9
|
%
|
Gross
profit.
Gross profit decreased 4.5% to $8.8 million for the three months ended June 30, 2019 from $9.3 million for the comparable
prior-year period, while gross margin decreased to 39.1% for the three months ended June 30, 2019 as compared to 40.1% for the
comparable prior-year period. The decrease in gross margin was primarily due to a temporary increase in aggregate costs of our
bulk bourbon in the current period and to the impact of high margin, specialty releases of our Jefferson’s bourbon in the
comparable prior-year period. We expect that gross margin will improve over the long-term as our lower-cost new-fill bourbon
ages and becomes available for use across all of our Jefferson’s expressions. Gross profit was positively impacted by a
rebate of $0.2 million on excise taxes recognized under the Craft Beverage Modernization and Tax Reform Act of 2017 in the three
months ended June 30, 2019, and we expect a similar benefit in each of our next two fiscal quarters. The timing and amount of
such future rebates remain subject to the review and approval of the U.S. Customs and Border Protection Agency.
Selling
expense
. Selling expense increased 7.5% to $6.3 million for the three months ended June 30, 2019 from $5.8 million for the
comparable prior-year period, primarily due to a $0.7 million increase advertising, marketing and promotion expense related to
the timing of certain sales and marketing programs, including increased marketing support for our Jefferson’s bourbons,
partially offset by a $0.2 million decrease in employee costs. Selling expense as a percentage of net sales increased to 27.7%
for the three months ended June 30, 2019 as compared to 25.2% for the comparable prior-year period due to decreased revenues
in the current period.
General
and administrative expense
. General and administrative expense decreased (1.1%) to $2.49 million for the three months
ended June 30, 2019 from $2.51 million for the comparable prior-year period. General and administrative expense as a percentage
of net sales increased to 11.0% for the three months ended June 30, 2019 as compared to 10.9% for the comparable prior-year period
due to a slight decrease in revenues in the current period.
Depreciation
and amortization.
Depreciation and amortization was $0.1 million for the three months ended June 30, 2019 as compared to $0.2
million for the comparable prior-year period.
(Loss)
income from operations
. As a result of the foregoing, we had a de minimis loss from operations for the three months ended
June 30, 2019 as compared to income from operations of $0.7 million for the comparable prior-year period. As a result of our focus
on our stronger growth markets and better performing brands, expected growth from our existing brands, and improved gross margin
on our Jefferson’s brands as our lower-cost new-fill bourbon ages and becomes available for use across all of our Jefferson’s
expressions, 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 benefit (expense), net.
Income tax benefit (expense), net consists of federal and state taxes, as applicable,
in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve
for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments
as necessary. Net income tax benefit was $0.6 million for the three months ended June 30, 2019 as compared to expense of ($0.02)
million in the comparable prior-year period.
For
the three months ended June 30, 2019, we recorded an income tax benefit of $0.6 million. The effective tax rate for the three
months ended June 30, 2019 was 44.25%. The Company’s effective tax rate is higher than the U.S. federal statutory rate of
21% as a result of incentive stock options that are not deductible for tax purposes and current year Section 163(j) deferred interest
carryforwards that are not expected to be realized on a more-likely-than-not basis.
Based
on historical taxable income and projected future taxable income, the Company concluded as of March 31, 2019 that certain of its
U.S. deferred tax assets are realizable on a more-likely-than-not basis. The Company maintains a valuation allowance on Section
163(j) deferred interest carryforwards and a partial valuation allowance on certain state net operating losses that are not expected
to be utilized. As of June 30, 2019, our conclusion regarding the realizability of our US deferred tax assets did not change
Foreign
exchange.
Foreign exchange loss for the three months ended June 30, 2019 was ($0.07) million as compared to a net gain of
$0.05 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 ($1.2) million for the three months ended June 30, 2019 as compared to ($1.1)
million for the comparable prior-year period due to balances outstanding under our credit facilities and long-term debt. Due to
the reduced interest rate applicable to our Credit Facility due to the Eighth Amendment and the repayment of the 11% Subordinated
Note, we expect interest expense, net to decrease as compared to prior periods, despite the increase in average debt levels.
Net
income attributable to noncontrolling interests.
Net income attributable to noncontrolling interests was $0.1 million
for the three months ended June 30, 2019 as compared to $0.4 million for the comparable prior-year period, as a result of net
income allocated to the 19.9% 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 was ($0.9) million for the three months ended June 30, 2019 as compared to a net loss of ($0.7) million for
the comparable prior-year period. Net loss per common share, basic and diluted, was ($0.01) per share for the three months ended
June 30, 2019 as compared to net loss per common share, basic and diluted, of ($0.00) per share for the three months ended June
30, 2018.
EBITDA,
as adjusted.
EBITDA, as adjusted, decreased to $0.5 million for the three months ended June 30, 2019, as compared to $1.5
million for the comparable prior-year period, primarily due to decreased sales and gross profit, as well as increased sales and
marketing expense.
Liquidity
and capital resources
Overview
Since
our inception, we have incurred significant net losses and have not generated positive cash flows from operations. For the three
months ended June 30, 2019, we had a net loss of ($0.8) million, and used a de minimis amount of cash in operating activities.
As of June 30, 2019, we had cash and cash equivalents of $0.5 million and had an accumulated deficit of $145.7 million.
We
believe our current cash and working capital and the availability under the Credit Facility (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 August 2020. We believe we can continue to meet our operating needs through additional
mechanisms, if necessary, including additional or expanded debt financings, potential equity offerings and limiting or adjusting
the timing of additional inventory purchases based on available resources.
In
July 2019, we expanded and extended the Loan Agreement and Credit Facility with ACF and retired the Subordinated Note in full.
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 whiskeys. We and CB-USA entered into four amendments to the Loan
Agreement during our 2019 fiscal year which increased the maximum amount of the Credit Facility from $21.0 million to $27.0 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 was set to
mature on July 31, 2020 (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) $27.0 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.
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, an entity affiliated with Phillip Frost,
M.D., a director of ours and a principal shareholder of ours ($150,000), Mark E. Andrews, III, a director of ours and our Chairman
($50,000), Richard J. Lampen, a director of ours and our President and Chief Executive Officer ($100,000), Brian L. Heller, our
General Counsel and Assistant Secretary ($42,500), and Alfred J. Small, our Senior Vice President, Chief Financial Officer, Treasurer
& Secretary ($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. As of June 30, 2019, we had borrowed $27.0 million of the $27.0 million then
available under the Credit Facility, including $7.0 million of the $7.0 million available under the Purchased Inventory Sublimit.
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 8.0% and the Purchased Inventory Sublimit
currently bears interest at 9.75%. 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. The Loan Amendment also contains a fixed charge coverage ratio
covenant requiring us to maintain a fixed charge coverage ratio of not less than 1.1 to 1.0.
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 June
30, 2019, we were in compliance, in all material respects, with the covenants under the Loan Agreement.
In
July 2019, we and CB-USA, entered into an Eighth Amendment (the “Eighth Amendment”) to the Amended Agreement to amend
certain terms of the Credit Facility. Among other changes, the Eighth Amendment (i) increases the maximum amount of the Credit
Facility from $27.0 million to $60.0 million and removes the Purchased Inventory Sublimit; (ii) amends the borrowing capacity
of the Facility to remove reference to the Purchased Inventory Sublimit and instead be equal to the lesser of (x) $60.0 million
and (y) the sum of the borrowing base calculated in accordance with the Loan Agreement; (iii) amends the definition of borrowing
base to increase the amount of borrowing that can be collateralized by bourbon and finished goods inventory; (iv) amends the interest
rate applicable to the revolving credit facility to be equal to the greatest of (x) the prime rate plus 1.50%, (y) the LIBOR rate
plus 4.00% and (z) 5.50%; (v) contains a fixed charge coverage ratio covenant requiring the Company to maintain a fixed charge
coverage ratio of not less than 1.1 to 1.0, measured on a rolling four (4) fiscal quarter basis; (vi) adds a covenant regarding
revenue levels for certain Company brands; (vii) amends the permitted payments covenant to include repayment of the entire amount
then due and payable under the terms of the 11% Subordinated Note due 2020 dated March 29, 2017, as amended, issued by the Company
in favor of Frost Nevada Investments Trust; (viii) reduces the monthly facility fee from 0.75% per annum of the maximum Facility
amount to 0.25% per annum of the maximum Facility amount; and (ix) extends the maturity date of the Facility to July 31, 2023.
We and CB-USA paid ACF an aggregate $150,000 commitment fee in connection with the Eighth Amendment.
As
a result of the removal of the Purchased Inventory Sublimit, all amounts owed to certain related parties of ours pursuant to the
participation agreement entered into between such related parties and ACF were repaid in full.
In
connection with the Eighth Amendment, we and CB-USA also entered into a Second Amended and Restated Revolving Credit Note
(“Revolving Note”).
In
March 2017, we issued an 11% Subordinated Note due 2019, dated March 29, 2017, in the principal amount of $20.0 million with Frost
Nevada Investments Trust (the “Subordinated Note”), an entity affiliated with Phillip Frost, M.D., a director and
a principal shareholder of ours. In April 2018, we entered into a first amendment to the Subordinated Note to extend the maturity
date on the Subordinated Note to September 15, 2020.
In
July 2019, in connection with the Eighth Amendment to the Amended Agreement as described above, we prepaid in full the outstanding
indebtedness owed under the Subordinated Note, in the aggregate principal amount of $20 million plus all accrued but unpaid interest
thereon. No prepayment penalties were incurred by us. Upon the prepayment of the outstanding indebtedness, the Subordinated Note
was cancelled.
In
December 2009, GCP 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 $0.4 million (translated at the March 31, 2019 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 $0.4 million (translated
at the March 31, 2019 exchange rate) with the bank to secure these borrowings.
Liquidity
Discussion
As
of June 30, 2019, we had shareholders’ equity of $19.2 million as compared to $19.3 million at March 31, 2019. This
decrease in shareholders’ equity was primarily due to our ($0.7) million total comprehensive loss for the three months
ended June 30, 2019, partially offset by the $0.4 million in stock-based compensation expense and the $0.1 million from the
exercise of stock options and the common stock purchased under our employee stock purchase plan.
We
had working capital of $48.0 million at June 30, 2019 as compared to $49.0 million at March 31, 2019, primarily due to a $2.0
million increase in inventory and a $0.5 million decrease in due to related parties, which was partially offset by a $2.3 million
decrease in accounts receivable, a $0.5 million decrease in prepaid expenses and other current assets and a $0.3
million increase in accounts payable and accrued expenses.
As
of June 30 and March 31, 2019, we had cash and cash equivalents of approximately $0.5 million. Changes in our cash and cash equivalents
are primarily attributable to the net borrowings on our credit facilities to fund our operations and working capital needs. At
June 30 and March 31, 2019, we also had approximately $0.4 million of cash restricted from withdrawal and held by a bank in Ireland
as collateral for overdraft coverage, creditors’ insurance, revolving credit and other working capital purposes.
The
following may materially affect our liquidity over the near-to-mid term:
|
●
|
continued
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 increasing amounts of aged whiskey to meet growing demand. We must purchase and hold several years’ worth
of aged whiskey 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, by seeking improvements in routes to market and containing production
costs to improve cash flows.
In
July 2019, we expanded and extended the Loan Agreement and Credit Facility with ACF, repaid the Subordinated Note in full, and
reduced our overall interest expense in future periods.
As
of June 30, 2019, we had borrowed $27.0 million of the $27.0 million then available under the Credit Facility, including $7.0
million of the $7.0 million available under the Purchased Inventory Sublimit. As of August 8, 2019, we had borrowed $50.0 million
of the $60.0 million then available under the amended Credit Facility, leaving $10.0 million in potential availability for working
capital needs under the amended Credit Facility. We believe our current cash and working capital and the availability under the
Credit Facility will enable us to fund our losses until we achieve profitability, ensure continuity of supply of our brands, and
support new brand initiatives and marketing programs through at least August 2020. We believe we can continue to meet our operating
needs through additional financing mechanisms, if necessary, including additional or expanded debt financings, potential
equity offerings and limiting or adjusting the timing of additional inventory purchases based on available resources, although
we continue to evaluate alternative financing options.
Cash
flows
The
following table summarizes our primary sources and uses of cash during the periods presented:
|
|
Three
months ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in
thousands)
|
|
Net
cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(29
|
)
|
|
$
|
(3,868
|
)
|
Investing
activities
|
|
|
(41
|
)
|
|
|
(85
|
)
|
Financing
activities
|
|
|
82
|
|
|
|
4,205
|
|
Subtotal
|
|
|
12
|
|
|
|
252
|
|
Effect
of foreign currency translation
|
|
|
(31
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents including restricted cash
|
|
$
|
(19
|
)
|
|
$
|
(217
|
)
|
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 the costs in maintaining our distribution system, our sales and marketing activities and
cash required to fund the purchase of 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 measuring from the time we obtain the distilled
spirits and the 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 whiskeys or Gozio amaretto. Instead, we receive the finished product directly from the owners of such brands. From
the time we have products available for sale, an additional two to three months may be required before we sell our inventory and
collect payment from customers. Further, our inventory at June 30, 2019 included significant additional stores of aged bourbon
purchased in advance of forecasted production requirements. In October 2017, we entered into a supply agreement with a bourbon
distiller, which provides for the production of newly-distilled bourbon whiskey. Under this agreement, the distiller will provide
us with an agreed upon amount of original proof gallons of newly-distilled bourbon whiskey, subject to certain annual adjustments.
For the contract year ending December 31, 2019, we contracted to purchase approximately $4.6 million in newly distilled bourbon,
of which $2.3 million had been purchased as of June 30, 2019. We are not obligated to pay the distiller for any product not yet
received. We expect to use the aged bourbon in the normal course of future sales, contributing to our cash flows in future
periods.
During
the three months ended June 30, 2019, net cash used in operating activities was de minimis, consisting primarily of a $2.0 million
increase in inventory, a $0.5 million decrease in due to related parties and a net loss of $0.7 million. These uses of
cash were partially offset by a $2.3 million decrease in accounts receivable, a $0.4 million increase in accounts payable and
accrued expenses, stock-based compensation expense of $0.4 million and depreciation and amortization expense of $0.1 million
During
the three months ended June 30, 2018, net cash used in operating activities was $3.9 million, consisting primarily of a $3.5 million
increase in inventory, a $1.4 million decrease in accounts payable and accrued expenses, a $0.5 million decrease in due to related
parties and a net loss of $0.3 million. These uses of cash were partially offset by a $1.2 million decrease in accounts receivable,
stock-based compensation expense of $0.5 million and depreciation and amortization expense of $0.2 million.
Investing
Activities.
Net cash used in investing activities was $0.04 million for the three months ended June 30, 2019, representing
$0.04 million used in the acquisition of fixed assets.
Net
cash used in investing activities was $0.1 million for the three months ended June 30, 2018, representing $0.1 million used in
the acquisition of fixed and intangible assets.
Financing
activities.
Net cash provided by financing activities for the three months ended June 30, 2019 was $0.1 million, consisting
primarily of $0.1 million from the exercise of stock options and the purchase of stock under our 2017 ESPP, partially offset by
$0.06 million in net payments on the Credit Facility.
Net
cash provided by financing activities for the three months ended June 30, 2018 was $4.2 million, consisting primarily of $4.0
million in net proceeds from the Credit Facility and $0.2 million from the exercise of stock options.
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 in this quarterly report on Form 10-Q.
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. Specifically, this quarterly report contains forward-looking statements regarding:
(i) our expectations and strategies to build a profitable international spirits company; (ii) our expectations to focus on faster
growing brands and markets; (ii) our expectations related to improvements in our financial and operational results; (iii) our
expectations of, and intended uses of, our liquidity and capital resources; (iv) our ability to expand our financing through additional
mechanisms to meet our operating needs; (v) our expectations regarding our future capital expenditures; and (vi) our ability to
finance potential acquisitions. 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, 2019, as amended,
and as follows:
●
|
our
history of losses;
|
●
|
our
significant level of indebtedness;
|
●
|
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
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;
|
●
|
our
brands could fail to achieve more widespread consumer acceptance, which may limit our growth;
|
●
|
the
potential limitation to our growth if we are unable to successfully acquire additional brands, and even if additional brands
are acquired, such acquisitions may have a negative impact on our results of operations;
|
●
|
currency
exchange rate fluctuations and devaluations may significantly adversely affect our revenues, sales, costs of goods and overall
financial results;
|
●
|
In
the past, we have identified a material weakness in our internal control over financial reporting, and our business and stock
price may be adversely affected if we have other material weaknesses or significant deficiencies in our internal control over
financial reporting;
|
●
|
a
failure of one or more of our key IT systems, networks, processes, associated sites or service providers could have a material
adverse impact on our business;
|
●
|
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;
|
●
|
our
failure to attract or retain key executive or employee talent could adversely impact our business;
|
●
|
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;
|
●
|
our
business performance is substantially dependent upon the continued growth of rum, whiskey and ginger beer sales;
|
●
|
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.