10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

 

Commission File Number 001-32849

 

CASTLE BRANDS INC.

(Exact name of registrant as specified in its charter)

 

Florida   41-2103550
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification No.)
     
122 East 42nd Street, Suite 5000,    
New York, New York   10168
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (646) 356-0200

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol   Name of each exchange on which registered
Common Stock, $.01 par value per share   ROX   NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

[  ] Large accelerated filer   [X] Accelerated filer
         
[  ] Non-accelerated filer   [  ] Smaller reporting company
         
      [  ] Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

The Company had 170,282,894 shares of $.01 par value common stock outstanding at August 7, 2019.

 

 

 

   
 

 

CASTLE BRANDS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

JUNE 30, 2019

 

TABLE OF CONTENTS

 

      Page
       
PART I. FINANCIAL INFORMATION    
     
Item 1. Financial Statements:   3
       
  Condensed Consolidated Balance Sheets as of June 30, 2019 (unaudited) and March 31, 2019   3
       
  Condensed Consolidated Statements of Operations for the three months ended June 30, 2019 and 2018 (unaudited)   4
       
  Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended June 30, 2019 and 2018 (unaudited)   5
       
  Condensed Consolidated Statement of Changes in Equity for the three months ended June 30, 2019 (unaudited)   6
       
  Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2019 and 2018 (unaudited)   7
       
  Notes to Unaudited Condensed Consolidated Financial Statements   8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   21
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   31
     
Item 4. Controls and Procedures   31
     
PART II. OTHER INFORMATION    
     
Item 1. Legal Proceedings   32
     
Item 1A. Risk Factors   32
     
Item 6. Exhibits   33

 

 2 
 

 

PART I. FINANCIAL INFORMATION

 

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.

 

 3 
 

 

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.

 

 4 
 

 

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.

 

 5 
 

 

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.

 

 6 
 

 

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.

 

 7 
 

 

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.

 

 8 
 

 

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.

 

 9 
 

 

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.

 

 10 
 

 

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.

 

 11 
 

 

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.

 

 12 
 

 

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.

 

 13 
 

 

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.

 

 14 
 

 

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.

 

 15 
 

 

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.

 

 16 
 

 

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.

 

 17 
 

 

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 

 

 18 
 

 

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.

 

 19 
 

 

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%

 

 20 
 

 

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.

 

 21 
 

 

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%

 

 22 
 

 

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)%

 

 23 
 

 

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 )%

 

 24 
 

 

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.

 

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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.

 

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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.

 

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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.

 

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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 n