Attached files
| file | filename |
|---|---|
| EX-32.1 - Castle Brands Inc | v211141_ex32-1.htm |
| EX-31.1 - Castle Brands Inc | v211141_ex31-1.htm |
| EX-31.2 - Castle Brands Inc | v211141_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended December 31, 2010
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number 001-32849
CASTLE
BRANDS INC.
(Exact
name of registrant as specified in its charter)
|
Florida
|
41-2103550
|
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
|
122 East 42nd Street,
Suite 4700,
New
York, New York
(Address
of principal executive offices)
|
10168
(Zip
Code)
|
Registrant’s
telephone number, including area code: (646) 356-0200
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 þ No o
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, 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 o No o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
|
o Large accelerated
filer
|
o Accelerated
filer
|
|
|
o Non-accelerated
filer (Do not check if a smaller reporting company)
|
þ Smaller reporting
company
|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The Company had 107,202,145 shares of $.01 par value common stock
outstanding at February 14, 2011.
TABLE
OF CONTENTS
|
Financial
Statements:
|
|||
|
Condensed
Consolidated Balance Sheets as of December 31, 2010 (unaudited) and
March 31, 2010
|
|||
|
Condensed
Consolidated Statements of Operations for the three months and nine months
ended December 31, 2010 and 2009 (unaudited)
|
|||
|
Condensed
Consolidated Statement of Changes in Equity for the nine months ended
December 31, 2010 (unaudited)
|
|||
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended December
31, 2010 and 2009 (unaudited)
|
|||
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|||
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|||
|
Controls
and Procedures
|
|||
|
Legal
Proceedings
|
|||
|
Exhibits
|
|||
PART
I. FINANCIAL INFORMATION
Item 1.
Financial
Statements
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
|
December
31, 2010
|
March 31, 2010
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS:
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$
|
581,887
|
$
|
1,281,141
|
||||
|
Accounts
receivable — net of allowance for doubtful accounts of $468,847 and
$807,438, respectively
|
6,184,835
|
5,394,019
|
||||||
|
Due
from affiliates
|
188,750
|
2,192
|
||||||
|
Inventories—
net of allowance for obsolete and slow moving inventory of $220,838 and
$370,869, respectively
|
10,611,022
|
9,243,801
|
||||||
|
Prepaid
expenses and other current assets
|
967,762
|
960,033
|
||||||
|
Total
Current Assets
|
18,534,256
|
16,881,186
|
||||||
|
Equipment — net
|
469,431
|
482,025
|
||||||
|
Other
Assets
|
||||||||
|
Investment
in non-consolidated affiliate, at equity
|
175,614
|
--
|
||||||
|
Intangible
assets — net of accumulated amortization of $3,988,582 and $3,437,237,
respectively
|
11,125,935
|
11,669,432
|
||||||
|
Goodwill
|
1,063,392
|
994,044
|
||||||
|
Restricted
cash
|
439,554
|
693,966
|
||||||
|
Other
assets
|
73,312
|
169,134
|
||||||
|
Total
Assets
|
$
|
31,881,494
|
$
|
30,889,787
|
||||
|
LIABILITIES
AND EQUITY:
|
||||||||
|
Current
Liabilities
|
||||||||
|
Current
maturities of notes payable
|
$
|
422,270
|
$
|
425,435
|
||||
|
Accounts
payable
|
3,270,055
|
3,826,705
|
||||||
|
Accrued
expenses
|
595,574
|
657,934
|
||||||
|
Due
to shareholders and affiliates
|
1,677,738
|
676,028
|
||||||
|
Total
Current Liabilities
|
5,965,637
|
5,586,102
|
||||||
|
Long-Term
Liabilities
|
||||||||
|
Notes
payable
|
5,834,426
|
434,034
|
||||||
|
Deferred
tax liability
|
1,999,798
|
2,110,912
|
||||||
|
Total
Liabilities
|
13,799,861
|
8,131,048
|
||||||
|
Commitments
and Contingencies (Note 12)
|
||||||||
|
Equity
|
||||||||
|
Preferred
stock, $.01 par value, 25,000,000 shares authorized, none
outstanding
|
—
|
—
|
||||||
|
Common
stock, $.01 par value, 225,000,000 shares authorized, 107,202,145 and
107,955,207 shares issued and outstanding at December 31, and March 31,
2010, respectively
|
1,072,021
|
1,079,552
|
||||||
|
Additional
paid-in capital
|
135,430,953
|
135,466,448
|
||||||
|
Accumulated
deficit
|
(116,950,055
|
)
|
(112,105,964
|
)
|
||||
|
Accumulated
other comprehensive loss
|
(1,799,651
|
)
|
(1,768,531
|
)
|
||||
|
Total
controlling shareholders’ equity
|
17,753,268
|
22,671,505
|
||||||
|
Noncontrolling
interests
|
328,365
|
87,234
|
||||||
|
Total
equity
|
18,081,633
|
22,758,739
|
||||||
|
Total
Liabilities and Equity
|
$
|
31,881,494
|
$
|
30,889,787
|
||||
See
accompanying notes to the unaudited condensed consolidated financial
statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(Unaudited)
|
Three months ended December
31,
|
Nine
months ended December 31,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Sales,
net*
|
$
|
8,719,754
|
$
|
7,490,526
|
$
|
23,048,823
|
$
|
22,052,321
|
||||||||
|
Cost
of sales*
|
5,994,034
|
5,009,483
|
15,073,438
|
14,809,907
|
||||||||||||
|
Reversal
of provision for obsolete inventory
|
—
|
(84,660
|
)
|
(24,589
|
)
|
(589,930
|
)
|
|||||||||
|
Gross
profit
|
2,725,720
|
2,565,703
|
7,999,974
|
7,832,344
|
||||||||||||
|
Selling
expense
|
2,645,359
|
2,265,354
|
7,963,367
|
7,363,067
|
||||||||||||
|
General
and administrative expense
|
1,067,801
|
1,308,248
|
3,655,837
|
4,057,956
|
||||||||||||
|
Depreciation
and amortization
|
229,569
|
240,774
|
695,045
|
687,506
|
||||||||||||
|
Loss
from operations
|
(1,217,009
|
)
|
(1,248,673
|
)
|
(4,314,275
|
)
|
(4,276,185
|
)
|
||||||||
|
Other
income
|
—
|
—
|
957
|
145
|
||||||||||||
|
Other
expense
|
--
|
(26,376
|
)
|
(300
|
)
|
(48,057
|
)
|
|||||||||
|
Income
from equity investment in non-consolidated affiliate
|
17,214
|
--
|
17,214
|
--
|
||||||||||||
|
Foreign
exchange (loss) gain
|
(118,578
|
)
|
628,436
|
(172,824
|
)
|
2,212,933
|
||||||||||
|
Interest
(expense) income, net
|
(147,606
|
)
|
1,408
|
(244,846
|
)
|
28,265
|
||||||||||
|
Gain
on sale of intangible asset
|
--
|
405,900
|
--
|
405,900
|
||||||||||||
|
Gain
on exchange of note payable
|
—
|
—
|
—
|
270,275
|
||||||||||||
|
Income
tax benefit
|
37,038
|
37,038
|
111,114
|
111,114
|
||||||||||||
|
Net
loss
|
(1,428,941
|
)
|
(202,267
|
)
|
(4,602,960
|
)
|
(1,295,610
|
)
|
||||||||
|
Net
(income) loss attributable to noncontrolling interests
|
(55,155
|
)
|
(34,963
|
)
|
(241,131
|
)
|
27,926
|
|||||||||
|
Net
loss attributable to common shareholders
|
$
|
(1,484,096
|
)
|
$
|
(237,230
|
)
|
$
|
(4,844,091
|
)
|
$
|
(1,267,684
|
)
|
||||
|
Net
loss per common share, basic and diluted, attributable to common
shareholders
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
$
|
(0.05
|
)
|
$
|
(0.01
|
)
|
||||
|
Weighted
average shares used in computation, basic and diluted, attributable to
common shareholders
|
107,202,145
|
107,955,207
|
107,500,417
|
103,623,882
|
||||||||||||
* Sales,
net and Cost of sales include excise taxes of $1,229,257 and $1,146,624 for the
three months ended December 31, 2010 and 2009, respectively, and $3,522,510
and $3,851,410 for the nine months ended December 31, 2010 and 2009,
respectively.
See
accompanying notes to the unaudited condensed consolidated financial
statements.
CASTLE
BRANDS INC. AND SUBSIDIARIES
Condensed
Consolidated Statement of Changes in Equity
(Unaudited)
|
Accumulated
|
||||||||||||||||||||||||||||
|
Additional
|
Other
|
|||||||||||||||||||||||||||
|
Common Stock
|
Paid-in
|
Accumulated
|
Comprehensive
|
Noncontrolling
|
Total
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Interests
|
Equity
|
||||||||||||||||||||||
|
BALANCE,
MARCH
31, 2010
|
107,955,207
|
$
|
1,079,552
|
$
|
135,466,448
|
$
|
(112,105,964
|
)
|
$
|
(1,768,531
|
)
|
$
|
87,234
|
$
|
22,758,739
|
|||||||||||||
|
Comprehensive
loss
|
||||||||||||||||||||||||||||
|
Net
(loss) income
|
(4,844,091
|
)
|
241,131
|
(4,602,960
|
)
|
|||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
(31,120
|
)
|
(31,120
|
)
|
||||||||||||||||||||||||
|
Total
comprehensive
loss
|
(4,634,080
|
)
|
||||||||||||||||||||||||||
|
Repurchase
and retirement of common stock
|
(3,790,562
|
)
|
(37,906
|
)
|
(985,569
|
)
|
(1,023,475
|
)
|
||||||||||||||||||||
|
Issuance
of common stock in exchange for fine wine inventory
|
3,000,000
|
30,000
|
810,000
|
840,000
|
||||||||||||||||||||||||
|
Issuance
of common stock in connection with stock option exercises
|
37,500
|
375
|
7,500
|
7,875
|
||||||||||||||||||||||||
|
Stock-based
compensation
|
132,574
|
132,574
|
||||||||||||||||||||||||||
|
BALANCE,
DECEMBER 31, 2010
|
107,202,145
|
$
|
1,072,021
|
$
|
135,430,953
|
$
|
(116,950,055
|
)
|
$
|
(1,799,651
|
)
|
$
|
328,365
|
$
|
18,081,633
|
|||||||||||||
See
accompanying notes to the unaudited condensed consolidated financial
statements.
CASTLE
BRANDS INC. and SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
Nine months ended December
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
loss
|
$
|
(4,602,960
|
)
|
$
|
(1,295,610
|
)
|
||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
695,045
|
687,506
|
||||||
|
Gain
on sale of intangible asset
|
--
|
(405,900
|
)
|
|||||
|
Provision
for doubtful accounts
|
(23,165
|
)
|
46,398
|
|||||
|
Amortization
of deferred financing costs
|
7,292
|
—
|
||||||
|
Deferred
tax benefit
|
(111,114
|
)
|
(111,114
|
)
|
||||
|
Income
from equity investment in non-consolidated affiliate
|
(17,214
|
)
|
--
|
|||||
|
Effect
of changes in foreign exchange
|
(10,383
|
)
|
(2,383,647
|
)
|
||||
|
Stock-based
compensation expense
|
132,574
|
125,321
|
||||||
|
Reversal
of provision for obsolete inventories
|
(24,589
|
)
|
(589,930
|
)
|
||||
|
Non-cash
interest charge
|
101,097
|
--
|
||||||
|
Gain
on exchange of note payable
|
—
|
(270,275
|
)
|
|||||
|
Changes
in operations, assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(778,346
|
)
|
170,964
|
|||||
|
Due
from affiliates
|
(186,558
|
)
|
73,767
|
|||||
|
Inventory
|
(519,425
|
)
|
406,589
|
|||||
|
Prepaid
expenses and supplies
|
(7,966
|
)
|
(29,630
|
)
|
||||
|
Other
assets
|
88,530
|
35,000
|
||||||
|
Accounts
payable and accrued expenses
|
(590,842
|
)
|
(2,669,678
|
)
|
||||
|
Due
to related parties
|
1,001,710
|
254,891
|
||||||
|
Total
adjustments
|
(243,354
|
)
|
(4,659,738
|
)
|
||||
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(4,846,314
|
)
|
(5,955,348
|
)
|
||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchase
of equipment
|
(135,128
|
)
|
(63,092
|
)
|
||||
|
Acquisition
of intangible assets
|
(7,848
|
)
|
—
|
|||||
|
Investment
in non-consolidated affiliate, at equity
|
(150,000)
|
--
|
||||||
|
Proceeds
from sale of intangible asset
|
--
|
500,000
|
||||||
|
Payments
under contingent consideration agreements
|
(69,348
|
)
|
(65,643
|
)
|
||||
|
Short-term
investments — net
|
—
|
2,954,164
|
||||||
|
NET
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
|
(362,324
|
)
|
3,325,429
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Credit
facilities — net
|
2,500,000
|
(127,263
|
)
|
|||||
|
Note
payable — Betts & Scholl, LLC
|
(212,271
|
)
|
(355,406
|
)
|
||||
|
Promissory
note – Frost Gamma Investments Trust
|
2,000,000
|
—
|
||||||
|
Promissory
notes – $1.0 million December 2010 financing
|
1,000,000
|
--
|
||||||
|
Notes
payable – Gosling’s Export (Bermuda) Limited
|
--
|
223,492
|
||||||
|
Payments
of obligations under capital leases
|
—
|
(928
|
)
|
|||||
|
Change
in restricted cash
|
241,044
|
(4,673
|
)
|
|||||
|
Proceeds
from stock option exercises
|
7,875
|
—
|
||||||
|
Repurchase
of common stock
|
(1,023,475
|
)
|
(180,000
|
)
|
||||
|
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
4,513,173
|
(444,778
|
)
|
|||||
|
EFFECTS
OF FOREIGN CURRENCY TRANSLATION
|
(3,789
|
)
|
925
|
|||||
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(699,254
|
)
|
(3,073,772
|
)
|
||||
|
CASH
AND CASH EQUIVALENTS — BEGINNING
|
1,281,141
|
4,011,777
|
||||||
|
CASH
AND CASH EQUIVALENTS — ENDING
|
$
|
581,887
|
$
|
938,005
|
||||
|
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
|
Schedule
of non-cash investing and financing activities:
|
||||||||
|
Issuance
of common stock in exchange for fine wine inventory in June
2010
|
$
|
840,000
|
$
|
—
|
||||
|
Exchange
of $314,275 of 3% note payable, including all interest, by issuance of
common stock for $44,000 in May 2009
|
$
|
—
|
$
|
314,275
|
||||
|
Acquisition
of Betts & Scholl, LLC assets by issuance of common stock in
September 2009
|
$
|
—
|
$
|
1,928,572
|
||||
|
Acquisition
of Betts & Scholl, LLC assets by issuance of note payable in
September 2009
|
$
|
—
|
$
|
844,541
|
||||
|
Interest
paid
|
$
|
121,949
|
$
|
10,689
|
||||
See
accompanying notes to the unaudited condensed consolidated financial
statements.
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, 2010
is derived from the March 31, 2010 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, 2010 included in
the Company’s annual report on Form 10-K for the year ended March 31, 2010,
as amended (“2010 Form 10-K”). Please refer to the notes to the audited
consolidated financial statements included in the 2010 Form 10-K for additional
disclosures and a description of accounting policies.
The
Company has incurred significant operating losses and has not generated positive
cash flows from its operating activities since inception. For the nine months
ended December 31, 2010, the Company had a net loss of $4,602,960 and used cash
of $4,846,314 in operating activities. As of December 31, 2010, the Company had
cash and cash equivalents of $581,887 and an accumulated deficiency of
$116,950,055. In addition, as described in Note 8, the Company is obligated to
pay $0.4 million in principal pertaining to a promissory note maturing in
September 2011.
The
Company is continuing to implement a plan supporting the continued growth of
existing brands that will be supported by a variety of sales and marketing
initiatives that the Company expects will generate cash flows from operations.
As part of this plan, the Company intends to grow its business through continued
expansion to new markets and within existing markets, as well as strengthening
distributor relationships. The Company is also seeking additional brands and
agency relationships to leverage the existing distribution platform, as well as
a systematic approach to inventory and expense reduction, improvements in routes
to market and production cost containment to improve existing cash flow.
Additionally, the Company is actively seeking additional sources of capital. The
terms of such potential financing have not been determined at this time and may
include the conversion of existing debt into equity, an increase in availability
under the Company’s revolving credit facility, modification to existing debt,
including a change in maturity dates, and/or new equity issuances. No
assurance can be provided that any such financings will be completed. Failure to
consummate any such financings may impact the Company's ability to implement its
planned sales and marketing initiatives and expansion into new and
existing markets, and may require the Company to limit its activities, including
reduction of personnel, market contraction and sales of inventory and/or brands
below market value.
|
A.
|
Description of
business and business combination — The unaudited condensed
consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries, Castle Brands (USA) Corp. (“CB-USA”), and
McLain & Kyne, Ltd. (“McLain & Kyne”), and the Company’s
wholly-owned foreign subsidiaries, Castle Brands Spirits Group Limited
(“CB-IRL”) and Castle Brands Spirits Marketing and Sales Company Limited,
and the Company’s 60% ownership interest in Gosling-Castle Partners, Inc.
(“GCP”), with adjustments for income or loss allocated based upon
percentage of ownership. The accounts of the subsidiaries have been
included as of the date of acquisition. All significant intercompany
transactions and balances have been
eliminated.
|
|
B.
|
Organization and
operations — The Company is principally engaged in the importation,
marketing and sale of premium and super premium brands of vodka, whiskey,
rums, tequila, liqueurs and fine wine in the United States, Canada,
Europe, Latin America and the Caribbean. The vodka, Irish whiskeys and
certain liqueurs are procured by CB-IRL, billed in Euros and imported from
Europe into the United States. The risk of fluctuations in foreign
currency is borne by the U.S.
entities.
|
|
C.
|
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 non-consolidated affiliate equity
investment as a component of net income or
loss.
|
|
D.
|
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.
|
|
E.
|
Impairment of
long-lived assets — Under Financial Accounting Standards Board
(“FASB”) 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.
|
|
F.
|
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 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.
|
|
G.
|
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. The Company’s vodka, Irish
whiskeys and certain liqueurs are procured by CB-IRL and billed in Euros
to CB-USA, with the risk of foreign exchange gain or loss resting with
CB-USA. Also, the Company has funded the continuing operations of the
international subsidiaries. The Company previously considered these
transactions to be trading balances and short-term funding subject to
transaction adjustment under ASC 830. As such, at each balance sheet date,
the Euro denominated intercompany balances included on the books of the
foreign subsidiaries were restated in U.S. Dollars at the exchange rate in
effect at the balance sheet date, with the resulting foreign currency
transaction gain or loss included in net loss. In November 2009, to
improve the liquidity of the foreign subsidiaries, the Company converted
$17,481,169 in intercompany balances due from the foreign subsidiaries
into an additional investment in the subsidiaries. Beginning December 1,
2009, the translation gain or loss from the restatement of any investment
in the foreign subsidiaries will be included in other comprehensive
income.
|
|
H.
|
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.
|
|
I.
|
Income taxes —
Under ASC 740, “Income Taxes”, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. A valuation allowance is
provided to the extent a deferred tax asset is not considered
recoverable.
|
The
Company has not recognized any adjustments for uncertain tax provisions. The
Company recognizes interest and penalties related to uncertain tax positions in
general and administrative expense; however, no such provisions for accrued
interest and penalties related to uncertain tax positions have been recorded as
of December 31, 2010 or 2009.
The
Company’s income tax benefit for the three months and nine months ended December
31, 2010 and 2009 consists of federal, state and local taxes attributable to
GCP, which does not file a consolidated income tax return with the Company. In
connection with the investment in GCP, the Company recorded a deferred tax
liability on the ascribed value of the acquired intangible assets of $2,222,222,
increasing the value of the asset. The difference between the book basis and tax
basis created a deferred tax liability that is being amortized
over a period of 15 years (the life of the licensing agreement) on a
straight-line basis. For each of the three-month and nine-month periods ended
December 31, 2010 and 2009, the Company recognized $37,038 and $111,114 of
deferred tax benefits, respectively.
|
J.
|
Accounting standards
adopted — In July 2010, the FASB issued authoritative guidance
which requires expanded disclosures to help financial statement users
understand the nature of credit risks inherent in a creditor’s portfolio
of financing receivables; how that risk is analyzed and assessed in
arriving at the allowance for credit losses; and the changes, and reasons
for those changes, in both the receivables and the allowance for credit
losses. The disclosures should be prepared on a disaggregated basis and
provide a roll-forward schedule of the allowance for credit losses and
detailed information on financing receivables including, among other
things, recorded balances, nonaccrual status, impairments, credit quality
indicators, details for troubled debt restructurings and an aging of past
due financing receivables. The guidance became effective for the
Company beginning December 15, 2010. The adoption of the standard did not
have a material impact on the Company’s results of operations, cash flows
or financial condition.
|
In
February 2010, the FASB issued authoritative guidance which eliminated as
of February 2010 the requirement for an SEC filer to disclose the date through
which subsequent events have been evaluated. The adoption of this guidance did
not have a material impact on the Company’s results of operations, cash flows or
financial condition.
In
January 2010, the FASB issued authoritative guidance intended to improve
disclosure about fair value measurements. The guidance requires entities to
disclose significant transfers in and out of fair value hierarchy levels and the
reasons for the transfers and to present information about purchases, sales,
issuances, and settlements separately in the reconciliation of fair value
measurements using significant unobservable inputs (Level 3). Also, the guidance
clarifies that a reporting entity should provide fair value measurements for
each class of assets and liabilities and disclose the inputs and valuation
techniques used for fair value measurements using significant other observable
inputs (Level 2) and significant unobservable inputs (Level 3). This guidance is
effective for interim and annual periods beginning after December 15, 2009,
except for the disclosure about purchases, sales, issuances and settlements in
the Level 3 reconciliation, which will be effective for interim and annual
periods beginning after December 15, 2010. As this guidance provides only
disclosure requirements, the adoption of this guidance did not have a material
impact on the Company’s results of operations, cash flows or financial
condition.
In June
2009, the FASB issued authoritative guidance which eliminates the concept of a
qualifying special-purpose entity, creates more stringent conditions for
reporting a transfer of a portion of a financial asset as a sale, clarifies
other sale-accounting criteria, and changes the initial measurement of a
transferor’s interest in transferred financial assets. This guidance became
effective for the Company on April 1, 2010. The adoption of the standard did not
have a material impact on the Company’s results of operations, cash flows or
financial condition.
In June
2009, the FASB issued authoritative guidance which eliminates exceptions to
consolidating qualifying special-purpose entities, contains new criteria for
determining the primary beneficiary, and increases the frequency of required
reassessments to determine whether a company is the primary beneficiary of a
variable interest entity. This guidance also contains a new requirement that any
term, transaction, or arrangement that does not have a substantive effect on an
entity’s status as a variable interest entity, a company’s power over a variable
interest entity, or a company’s obligation to absorb losses or its right to
receive benefits of an entity must be disregarded. The elimination of the
qualifying special-purpose entity concept and its consolidation exceptions means
more entities will be subject to consolidation assessments and reassessments.
This guidance became effective for the Company on April 1, 2010. The adoption of
the standard did not have a material impact on the Company’s results of
operations, cash flows or financial condition.
In June
2009, the FASB issued an amendment to the accounting and disclosure requirements
for the consolidation of variable interest entities. The guidance affects the
overall consolidation analysis and requires enhanced disclosures on involvement
with variable interest entities. This guidance became effective for the Company
on April 1, 2010. The adoption of the standard did not have a material impact on
the Company’s results of operations, cash flows or financial
condition.
|
K.
|
Recent accounting
pronouncements — No new accounting pronouncements issued during the
current period are expected to have a material impact on the Company’s
results of operations, cash flows or financial
condition.
|
NOTE 2 — BASIC AND
DILUTED NET LOSS PER COMMON SHARE
Basic net
loss per common share is computed by dividing net loss by the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share is computed giving effect to all dilutive potential common shares
that were outstanding during the period that are not anti-dilutive. Diluted
potential common shares consist of incremental shares issuable upon exercise of
stock options and warrants outstanding. In computing diluted net loss per share
for the three months and nine months ended December 31, 2010 and 2009, no
adjustment has been made to the weighted average outstanding common shares as
the assumed exercise of outstanding options and warrants is
anti-dilutive.
Potential
common shares not included in calculating diluted net loss per share are as
follows:
|
Nine months ended
December
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Stock
options
|
4,570,850
|
3,224,900
|
||||||
|
Warrants
to purchase common stock
|
1,926,814
|
2,016,814
|
||||||
|
Total
|
6,497,664
|
5,241,714
|
||||||
NOTE 3 — INVENTORIES
|
December
31,
2010
|
March 31,
2010
|
|||||||
|
Raw
materials
|
$
|
3,777,653
|
$
|
2,961,887
|
||||
|
Finished
goods – net
|
6,833,369
|
6,281,914
|
||||||
|
Total
|
$
|
10,611,022
|
$
|
9,243,801
|
||||
The
Company recorded reversals of its allowance for obsolete and slow moving
inventory of $84,660 during the three months ended December 2009, and $24,589
and $589,930 during the nine months ended December 31, 2010 and 2009,
respectively. These reversals were recorded as the Company was able to sell
certain of the goods included in the allowance recorded during previous fiscal
years. The Company did not record any reversal during the three months ended
December 31, 2010. The Company estimates the allowance for obsolete and slow
moving inventory based on analyses and assumptions including, but not limited
to, historical usage, expected future demand and market
requirements.
Inventories
are stated at the lower of weighted average cost or market.
NOTE 4 — EQUITY
INVESTMENT
Investment in DP Castle
Partners, LLC
In August
2010, CB-USA formed DP Castle Partners, LLC (“DPCP”) with Drink Pie, LLC to
manage the manufacturing and marketing of Travis Hasse’s Original Apple Pie
Liqueur, Cherry Pie Liqueur and any future line extensions of the brand. DPCP
has the exclusive global rights to produce and market Travis Hasse’s Original
Pie Liqueurs and CB-USA has the global distribution rights for this brand. DPCP
pays a per case royalty fee to Drink Pie, LLC under a licensing agreement.
CB-USA purchases the finished product from DPCP at a pre-determined margin and
then uses its existing infrastructure, sales force and distributor network to
sell the product and promote the brands. Finished goods are sold to CB-USA FOB –
Production and CB-USA bears the risk of loss on both inventory and third-party
receivables. Revenues and cost of sales are recorded at their respective gross
amounts on the books and records of CB-USA. For the three and nine months ended
December 31, 2010, the CB-USA purchased $620,731 in finished goods from DPCP
under the distribution agreement. As of December 31, 2010, CB-USA was indebted
to DPCP in the amount of $98,881 which is included in due to shareholders and
affiliates on the accompanying condensed consolidated balance sheet. Under the
terms of the agreement, CB-USA initially owns 20% of the entity and will
increase its stake in DPCP based on achieving case sale targets. The Company has
accounted for this investment under the equity method of accounting. This
investment balance was $175,614 at December 31, 2010.
NOTE 5 — ACQUISITIONS
Acquisition of McLain &
Kyne
On
October 12, 2006, the Company acquired all of the outstanding capital stock of
McLain & Kyne, pursuant to a stock purchase agreement. As consideration for
the acquisition, the Company paid $2,000,000, consisting of $1,294,800 in cash
and 100,000 shares of its common stock, valued at $705,200, at closing. Under
the McLain & Kyne agreement, as amended, the Company will also pay an
earn-out, not to exceed $4,000,000, to the sellers based on the financial
performance of the acquired business through March 31, 2011. For the nine months
ended December 31, 2010 and 2009, the sellers earned $69,348 and $65,643,
respectively, under this agreement. The earn-out payments have been
recorded as an increase to goodwill.
NOTE 6 — GOODWILL
AND INTANGIBLE ASSETS
The
changes in the carrying amount of goodwill for the nine months ended December
31, 2010 were as follows:
|
Amount
|
||||
|
Balance
as of March 31, 2010
|
$
|
994,044
|
||
|
Payments
under McLain and Kyne agreement
|
69,348
|
|||
|
Balance
as of December 31, 2010
|
$
|
1,063,392
|
||
Intangible
assets consist of the following:
|
December
31,
2010
|
March 31,
2010
|
|||||||
|
Definite
life brands
|
$
|
170,000
|
$
|
170,000
|
||||
|
Trademarks
|
479,248
|
479,248
|
||||||
|
Rights
|
8,271,555
|
8,271,555
|
||||||
|
Distributor
relationships
|
664,000
|
664,000
|
||||||
|
Product
development
|
28,262
|
20,350
|
||||||
|
Trade
secrets, formulations and patents
|
994,000
|
994,000
|
||||||
|
Other
|
28,480
|
28,544
|
||||||
|
10,635,545
|
10,627,697
|
|||||||
|
Less:
accumulated amortization
|
3,988,582
|
3,437,237
|
||||||
|
Net
|
6,646,963
|
7,190,460
|
||||||
|
Other
identifiable intangible assets — indefinite lived*
|
4,478,972
|
4,478,972
|
||||||
|
$
|
11,125,935
|
$
|
11,669,432
|
|||||
|
December
31,
2010
|
March 31,
2010
|
|||||||
|
Definite
life brands
|
$
|
146,385
|
$
|
137,885
|
||||
|
Trademarks
|
155,720
|
130,834
|
||||||
|
Rights
|
3,167,334
|
2,751,928
|
||||||
|
Distributor
relationships
|
83,000
|
33,200
|
||||||
|
Product
development
|
7,123
|
4,070
|
||||||
|
Trade
secrets, formulations and patents
|
429,020
|
379,320
|
||||||
|
Accumulated
amortization
|
$
|
3,988,582
|
$
|
3,437,237
|
||||
* Other
identifiable intangible assets — indefinite lived consists of product
formulations.
NOTE 7 — RESTRICTED
CASH
At
December 31, and March 31, 2010, the Company had €331,701 or $439,554
(translated at the December 31, 2010 exchange rate) and €515,845 or $693,966
(translated at the March 31, 2010 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. In April 2010, the Company reduced the aggregate
amount of the credit facilities, and the commensurate cash restricted from
withdrawal, by €185,000 or $236,654 (translated at the exchange rate then in
effect).
NOTE 8 — NOTES
PAYABLE
|
December
31,
2010
|
March 31,
2010
|
|||||||
|
Notes
payable consist of the following:
|
||||||||
|
Note
payable (A)
|
$
|
422,270
|
$
|
633,332
|
||||
|
Note
payable (B)
|
219,513
|
226,137
|
||||||
|
Credit
agreement (C)
|
2,500,000
|
—
|
||||||
|
Note
payable (D)
|
2,114,913
|
—
|
||||||
|
Notes
payable (E)
|
1,000,000
|
—
|
||||||
|
Total
|
$
|
6,256,696
|
$
|
859,469
|
||||
|
A.
|
In
connection with the Betts & Scholl asset acquisition in
September 2009, the Company issued a secured promissory note in the
aggregate principal amount of $1,094,541 to Betts & Scholl, LLC,
an entity affiliated with Dennis Scholl, who became a director of the
Company at the time of the acquisition. This note is secured by the Betts
& Scholl inventory acquired by the Company under a security agreement.
This note provides for an initial payment of $250,000, paid at closing,
and for eight equal quarterly payments of principal and interest, with the
final payment due on September 21, 2011. Interest under this note
accrues at an annual rate of 0.84%, compounded quarterly. This note
contains customary events of default, which if uncured, entitle the holder
to accelerate the due date of the unpaid principal amount of, and all
accrued and unpaid interest on, the note. In December 2010, the Company
entered into a letter agreement amending the terms of the note with Betts
& Scholl, LLC, that provides that the quarterly installment payments
of principal and interest due December 21, 2010 and March 21, 2011, each
in the amount of approximately $107,000, will not be due and payable until
the maturity date of such note and that such installment payments will
bear interest, payable on such maturity date, at the rate of 11% per
annum, compounded quarterly. At December 31, 2010, $422,270, consisting of
$421,062 of principal and $1,208 of accrued interest, due on this note is
included in current liabilities.
|
|
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. Interest has been recorded retroactive to
November 15, 2008. At December 31, 2010, $219,513, consisting of
$211,580 of principal and $7,933 of accrued interest, due on the GCP Note
is included in long-term
liabilities.
|
|
D.
|
In
June 2010, the Company issued a $2,000,000 promissory note to Frost Gamma
Investments Trust. Borrowings under the note mature on June 21, 2012 and
bear interest at a rate of 11% per annum. Interest accrues quarterly and
is payable at maturity. The note may be prepaid in whole or in part at any
time prior to maturity without penalty, but with payment of accrued
interest to the date of prepayment. At December 31, 2010, $2,114,913,
consisting of $2,000,000 of principal and $114,913 of accrued interest is
included in long-term liabilities in respect of the Frost
Note.
|
|
E.
|
In
December 2010, the Company issued promissory notes in the aggregate
principal amount of $1,000,000 to Frost Gamma Investments Trust, Vector
Group Ltd., IVC Investors, LLLP, Mark E. Andrews, III and Richard J.
Lampen. Borrowings under these notes mature on June 21, 2012 and bear
interest at a rate of 11% per annum. Interest accrues quarterly and is
payable at maturity. These notes may be prepaid in whole or in part at any
time prior to maturity without penalty, but with payment of accrued
interest to the date of prepayment. At December 31, 2010, $1,000,000 of
principal is included in long-term liabilities in respect of these
promissory notes.
|
NOTE 9 — EQUITY
Common stock — In
June 2010, the Company issued 3,000,000 shares of its common stock in exchange
for fine wine inventory. The inventory was valued at $840,000 based on the
closing price of the common stock on the date of the transaction.
Share repurchase – In
June 2010, the Company repurchased 3,790,562 shares of its common stock at a
price of $0.27 per share in a privately-negotiated transaction. Also, the
Company’s board of directors approved a stock repurchase program authorizing the
Company to repurchase up to an additional 2,500,000 shares of its common stock.
As of December 31, 2010, no shares of the Company’s common stock had been
repurchased under the repurchase program.
NOTE 10 — FOREIGN
CURRENCY FORWARD CONTRACTS
The
Company enters into forward contracts from time to time to reduce its exposure
to foreign currency fluctuations. The Company recognizes in the balance sheet
derivative contracts at fair value, and reflects any net gains and losses
currently in earnings. At December 31, 2010 and March 31, 2010, the Company had
no forward contracts outstanding. Gain or loss on foreign currency forward
contracts, which was de minimis during the periods presented, is included in
other income and expense.
NOTE 11 — STOCK-BASED
COMPENSATION
In
December 2010, the Company granted to certain employees options to purchase an
aggregate of 41,850 shares of the Company’s common stock at an exercise price of
$0.35 per share under the Company’s 2003 Stock Incentive Plan. The options,
which expire in December 2020, vest 33.3% on each of the first three
anniversaries of the grant date. The Company has valued the options at $8,810
using the Black-Scholes option pricing model.
In June
2010, the Company granted to employees, directors and certain consultants
options to purchase an aggregate of 1,500,000 shares of the Company’s common
stock at an exercise price of $0.35 per share under the Company’s 2003 Stock
Incentive Plan. The options, which expire in June 2020, vest 25% on each of the
first four anniversaries of the grant date. The Company has valued the options
at $250,020 using the Black-Scholes option pricing model.
Stock-based
compensation expense for the three months ended December 31, 2010 and 2009 and
for the nine months ended December 31, 2010 and 2009 amounted to $47,881 and
$42,947, respectively and $132,574 and $125,321, respectively. At December 31,
2010, total unrecognized compensation cost amounted to $361,234, representing
2,955,600 unvested options. This cost is expected to be recognized over a
weighted-average period of 2.63 years. There were 37,500 shares exercised
during the nine months ended December 31, 2010 and none exercised during the
nine months ended December 31, 2009. The Company did not recognize any related
tax benefit for the three and nine months ended December 31, 2010 and 2009 from
these option exercises.
NOTE 12 — COMMITMENTS
AND CONTINGENCIES
|
A.
|
The
Company has entered into a supply agreement with Irish Distillers Limited
(“Irish Distillers”), which provides for the production of Irish whiskeys
for the Company through 2015, subject to annual extensions thereafter,
provided that the Company and Irish Distillers agree on the amount of
liters of pure alcohol to be provided in the following year. Irish
Distillers may terminate this agreement at the end of its term in 2014.
Under this agreement, the Company is obligated to notify Irish Distillers
annually of the amount of liters of pure alcohol it requires for the
current contract year and contracts to purchase that amount. For the
contract year ending June 30, 2011, the Company has contracted to
purchase approximately €803,844 or $1,065,214 (translated at the December
31, 2010 exchange rate) in bulk Irish whiskey. The Company has
purchased €344,021 or $455,879 (translated at the December 31, 2010
exchange rate) in bulk Irish whiskey through December 31, 2010 under the
current contract year. The Company is not obligated to pay Irish
Distillers for any product not yet received. During the term of this
supply agreement, Irish Distillers has the right to limit additional
purchases above the commitment
amount.
|
|
B.
|
The
Company leases office space in New York, NY, Dublin, Ireland and Houston,
TX. The New York, NY lease began on April 1, 2010 and expires on April 1,
2012 and provides for monthly payments of $16,779. The Dublin lease
commenced on March 1, 2009 and extends through November 30, 2013
and calls for monthly payments of €1,394 or $1,847 (translated at the
December 31, 2010 exchange rate). The Houston, TX lease commenced on
February 24, 2000 and extends through January 31, 2012 and calls
for monthly payments of $1,693. The Company has also entered into
non-cancelable operating leases for certain office
equipment.
|
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. As of December 31, and March 31, 2010, the
Company exceeded the insured limit by approximately $325,000 and $760,000,
respectively.
|
|
B.
|
Customers —
Sales to three customers accounted for approximately 37.9% and 43.1% of
the Company’s revenues for the three months ended December 31, 2010 and
2009, respectively, (of which one customer accounted for 27.6% and 31.8%,
respectively, of total sales). Sales to three customers accounted for
approximately 41.5% and 44.5% of the Company’s revenues for the nine
months ended December 31, 2010 and 2009, respectively, (of which one
customer accounted for 27.9% and 31.5%, respectively, of total
sales). Sales to three customers accounted for approximately
34.9% of accounts receivable at December 31,
2010.
|
NOTE 14 — GEOGRAPHIC
INFORMATION
The
Company operates in one reportable segment — the sale of premium beverage
alcohol. The Company’s product categories are vodka, rum, liqueurs, whiskey,
tequila and fine wine. 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 revenue, consolidated results from
operations, consolidated net loss attributable to common shareholders,
consolidated income tax benefit and consolidated assets from the U.S. and
foreign countries and consolidated revenue by category:
|
Three months ended December
31,
|
||||||||||||||||
|
2010
|
2009
|
|||||||||||||||
|
Consolidated
Revenue:
|
||||||||||||||||
|
International
|
$
|
1,432,696
|
16.4
|
%
|
$
|
1,431,247
|
19.1
|
%
|
||||||||
|
United
States
|
7,287,058
|
83.6
|
%
|
6,059,279
|
80.9
|
%
|
||||||||||
|
Total
Consolidated Revenue
|
$
|
8,719,754
|
100.0
|
%
|
$
|
7,490,526
|
100
|
%
|
||||||||
|
Consolidated
Results from Operations:
|
||||||||||||||||
|
International
|
$
|
(35,746
|
)
|
2.9
|
%
|
$
|
27,386
|
(2.2)
|
%
|
|||||||
|
United
States
|
(1,181,263
|
)
|
97.1
|
%
|
(1,276,059
|
)
|
102.2
|
%
|
||||||||
|
Total
Consolidated Results from Operations
|
$
|
(1,217,009
|
)
|
100.0
|
%
|
$
|
(1,248,673
|
)
|
100.0
|
%
|
||||||
|
Consolidated
Net Loss Attributable to Common Shareholders:
|
||||||||||||||||
|
International
|
$
|
(210,172
|
)
|
14.2
|
%
|
$
|
15,350
|
6.5
|
%
|
|||||||
|
United
States
|
(1,273,924
|
)
|
85.8
|
%
|
(252,580
|
)
|
106.5
|
%
|
||||||||
|
Total
Consolidated Net Loss Attributable to Common Shareholders
|
$
|
(1,484,096
|
)
|
100.0
|
%
|
$
|
(237,230
|
)
|
100.0
|
%
|
||||||
|
Income
tax benefit:
|
||||||||||||||||
|
United
States
|
37,038
|
100.0
|
%
|
37,038
|
100.0
|
%
|
||||||||||
|
Consolidated
Revenue by category:
|
||||||||||||||||
|
Rum
|
$
|
2,248,611
|
25.8
|
%
|
$
|
2,134,876
|
28.5
|
%
|
||||||||
|
Liqueurs
|
2,609,008
|
29.9
|
%
|
2,097,431
|
28.0
|
%
|
||||||||||
|
Whiskey
|
1,728,988
|
19.8
|
%
|
1,812,346
|
24.2
|
%
|
||||||||||
|
Vodka
|
1,103,244
|
12.7
|
%
|
1,065,276
|
14.2
|
%
|
||||||||||
|
Tequila
|
41,076
|
0.5
|
%
|
89,367
|
1.2
|
%
|
||||||||||
|
Fine
Wine
|
701,536
|
8.0
|
%
|
150,550
|
2.0
|
%
|
||||||||||
|
Other*
|
287,291
|
3.3
|
%
|
140,679
|
1.9
|
%
|
||||||||||
|
Total
Consolidated Revenue
|
$
|
8,719,754
|
100.0
|
%
|
$
|
7,490,526
|
100
|
%
|
||||||||
|
Nine months ended December
31,
|
||||||||||||||||
|
2010
|
2009
|
|||||||||||||||
|
Consolidated
Revenue:
|
||||||||||||||||
|
International
|
$
|
2,953,867
|
12.8
|
%
|
$
|
3,339,657
|
15.1
|
%
|
||||||||
|
United
States
|
20,094,956
|
87.2
|
%
|
18,712,664
|
84.9
|
%
|
||||||||||
|
Total
Consolidated Revenue
|
$
|
23,048,823
|
100.0
|
%
|
$
|
22,052,321
|
100
|
%
|
||||||||
|
Consolidated
Results from Operations:
|
||||||||||||||||
|
International
|
$
|
(112,952
|
)
|
2.6
|
%
|
$
|
(143,154
|
)
|
3.3
|
%
|
||||||
|
United
States
|
(4,201,323
|
)
|
97.45
|
%
|
(4,133,031
|
)
|
96.7
|
%
|
||||||||
|
Total
Consolidated Results from Operations
|
$
|
(4,314,275
|
)
|
100.0
|
%
|
$
|
(4,276,185
|
)
|
100.0
|
%
|
||||||
|
Consolidated
Net Loss Attributable to Common Shareholders:
|
||||||||||||||||
|
International
|
$
|
(419,243
|
)
|
8.7
|
%
|
$
|
(501,750
|
)
|
39.6
|
%
|
||||||
|
United
States
|
(4,424,848
|
)
|
91.3
|
%
|
(765,934
|
)
|
60.4
|
%
|
||||||||
|
Total
Consolidated Net Loss Attributable to Common Shareholders
|
$
|
(4,844,091
|
)
|
100.0
|
%
|
$
|
(1,267,684
|
)
|
100.0
|
%
|
||||||
|
Income
tax benefit:
|
||||||||||||||||
|
United
States
|
111,114
|
100.0
|
%
|
111,114
|
100.0
|
%
|
||||||||||
|
Consolidated
Revenue by category:
|
||||||||||||||||
|
Rum
|
$
|
7,942,544
|
34.5
|
%
|
$
|
7,109,472
|
32.2
|
%
|
||||||||
|
Liqueurs
|
6,016,024
|
26.1
|
%
|
5,507,523
|
25.0
|
%
|
||||||||||
|
Whiskey
|
3,736,977
|
16.2
|
%
|
4,272,817
|
19.4
|
%
|
||||||||||
|
Vodka
|
2,914,777
|
12.6
|
%
|
3,909,406
|
17.7
|
%
|
||||||||||
|
Tequila
|
210,071
|
0.9
|
%
|
428,773
|
1.9
|
%
|
||||||||||
|
Fine
Wine
|
1,161,610
|
5.0
|
%
|
150,550
|
0.7
|
%
|
||||||||||
|
Other*
|
1,066,820
|
4.7
|
%
|
673,780
|
3.1
|
%
|
||||||||||
|
Total
Consolidated Revenue
|
$
|
23,048,823
|
100.0
|
%
|
$
|
22,052,321
|
100
|
%
|
||||||||
|
As of December
31, 2010
|
As of March 31,
2010
|
|||||||||||||||
|
Consolidated
Assets:
|
||||||||||||||||
|
International
|
$
|
2,846,153
|
8.9
|
%
|
3,167,893
|
10.3
|
%
|
|||||||||
|
United
States
|
29,035,340
|
91.1
|
%
|
27,721,894
|
89.7
|
%
|
||||||||||
|
Total
Consolidated Assets
|
$
|
31,881,493
|
100.0
|
%
|
30,889,787
|
100.0
|
%
|
|||||||||
*Includes
related non-beverage alcohol products.
NOTE 15 — SUBSEQUENT
EVENTS
In
January 2011, CB-USA entered into an agreement ("New Agreement") with Pallini
Internazionale S.r.l. ("Pallini"), as successor in interest to I.L.A.R. S.p.A,
regarding the importation and distribution of certain Pallini brand products.
The New Agreement supersedes that certain Agreement dated as of August 27, 2004
between I.L.A.R. S.p.A and CB-USA ("Original Agreement"). The terms of the New
Agreement are effective as of April 1, 2010.
The New
Agreement expires on March 31, 2016, subject to successive five year renewals
unless either party delivers a notice of non-renewal six months prior to the end
of the term. The Original Agreement had an expiration date of December 31, 2012.
Under the New Agreement, if minimum volume targets are not achieved and not
cured, Pallini has the right to terminate the agreement without payment of
termination fees to CB-USA. However, if such targets are met, CB-USA has the
right under the New Agreement to receive certain termination payments and other
payments upon the non-renewal of the agreement, certain terminations of the
agreement or the sale of the brand. CB-USA has modified reporting requirements
under the New Agreement as compared to the Original Agreement. The exclusive
territory under the New Agreement is the fifty states of the United States of
America and the District of Columbia, but does not include Puerto Rico, overseas
territories or military bases of the United States that were included in the
Original Agreement.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview
We
develop and market premium brands in the following beverage alcohol categories:
vodka, rum, whiskey, liqueurs, tequila and fine wine. We distribute these
spirits in all 50 U.S. states and the District of Columbia, in twelve primary
international markets, including Ireland, Great Britain, Northern Ireland,
Germany, Canada, Bulgaria, France, Russia, Finland, Norway, Sweden, China and
the Duty Free markets, and in a number of other countries in continental Europe
and Latin America. We market the following brands, among others, Gosling’s Rum®
, Jefferson’s TM ,
Jefferson’s Reserve® and Jefferson's Presidential Select TM
bourbons, Clontarf® Irish Whiskey, Pallini® liqueurs, Boru® vodka, Knappogue
Castle whiskey® , Tierras TM
tequila, Travis Hasse’s Original® Pie Liqueurs, A. de Fussigny® cognacs
and Betts & Scholl TM wines,
including the CC: line of wines.
Our
objective is to continue building a distinctive portfolio of global premium and
super premium spirits and fine wine brands as we move towards profitability. To
achieve this, we continue to seek to:
|
·
|
increase
revenues from our more profitable brands. We have focused, and
continue to focus, our distribution relationships, sales expertise and
targeted marketing activities on our more profitable
brands;
|
|
·
|
improve
value chain and manage cost structure. We have undergone a
comprehensive review and analysis of our supply chains and cost structures
both on a company-wide and brand-by-brand basis. This included personnel
reductions throughout our company; restructuring our international
distribution system; reducing inventory levels; changing distributor
relationships in certain markets; moving production of certain products to
a lower cost facility in the U.S.; and reducing general and administrative
costs. We continue to review costs and seek to reduce expense;
and
|
|
·
|
selectively
add new premium brands to our portfolio. We intend to continue
developing new brands and pursuing strategic relationships, joint ventures
and acquisitions to selectively expand our premium spirits and fine wine
portfolio, particularly by capitalizing on and expanding our already
demonstrated partnering capabilities. Our criteria for new brands focuses
on underserved areas of the beverage alcohol marketplace, while examining
the potential for direct financial contribution to our company and the
potential for future growth based on development and maturation of agency
brands. We will evaluate future acquisitions and agency relationships on
the basis of their potential to be immediately accretive and their
potential contributions to our objectives of becoming profitable and
further expanding our product offerings. We expect that future
acquisitions, if consummated, would involve some combination of cash, debt
and the issuance of our stock.
|
Recent
Events
Pallini
Agreement
In
January 2011, we entered into an agreement ("New Agreement") with Pallini
Internazionale S.r.l. ("Pallini"), as successor in interest to I.L.A.R. S.p.A,
regarding the importation and distribution of certain Pallini brand products.
The New Agreement supersedes that certain Agreement dated as of August 27, 2004
with I.L.A.R. S.p.A ("Original Agreement"). The terms of the New Agreement are
effective as of April 1, 2010.
The New
Agreement expires on March 31, 2016, subject to successive five year renewals
unless either party delivers a notice of non-renewal six months prior to the end
of the term. The Original Agreement had an expiration date of December 31, 2012.
Under the New Agreement, if minimum volume targets are not achieved and not
cured, Pallini has the right to terminate the agreement without payment of
termination fees to us. However, if such targets are met, we have the right
under the New Agreement to receive certain termination payments and other
payments upon the non-renewal of the agreement, certain terminations of the
agreement or the sale of the brand. We have modified reporting requirements
under the New Agreement as compared to the Original Agreement. The exclusive
territory under the New Agreement is the fifty states of the United States of
America and the District of Columbia, but does not include Puerto Rico, overseas
territories or military bases of the United States that were included in the
Original Agreement.
December
2010 Promissory Notes
In
December 2010, we issued promissory notes in the aggregate principal amount of
$1.0 million to Frost Gamma Investments Trust, an entity affiliated with Phillip
Frost, M.D., a director and principal shareholder of our company, Vector Group
Ltd., a principal shareholder of our company, IVC Investors, LLLP, an entity
affiliated with Glenn Halpryn, a director of our company, Mark E. Andrews, III,
our chairman, and Richard J. Lampen, our president and chief executive officer.
Borrowings under the notes mature on June 21, 2012 and bear interest at a rate
of 11% per annum. Interest accrues quarterly and is due at maturity. The notes
may be prepaid in whole or in part at any time prior to maturity without
penalty, but with payment of accrued interest to the date of
prepayment.
DP
Castle Partners, LLC
In August
2010, we formed DP Castle Partners, LLC (“DPCP”) with Drink Pie, LLC to
manage the manufacturing and marketing of Travis Hasse’s Original® Apple Pie
Liqueur, Cherry Pie Liqueur and any future line extensions of the brand. DPCP
has the exclusive global rights to produce and market Travis Hasse’s Original®
Pie Liqueurs and we have the global distribution rights for this brand. We
purchase the finished product from DPCP at a pre-determined margin and then use
our existing infrastructure, sales force and distributor network to sell the
product and promote the brands. Under the terms of the agreement, we own 20% of
DPCP and will acquire an increasing stake in the brand based on achieving
certain case sale targets.
Revolving Credit Facility
In
December 2009, we entered into a $2.5 million revolving credit agreement
with, among others, Frost Gamma Investments Trust, Vector Group Ltd., Lafferty
Ltd., a principal shareholder of our company, IVC Investors, LLLP, Mark E.
Andrews, III and Richard J. Lampen. Under the credit agreement, we may borrow
from time to time up to $2.5 million to be used for working capital or general
corporate purposes. Borrowings under the credit agreement mature on
April 1, 2013 and bear interest at a rate of 11% per annum, payable
quarterly. At December 31, 2010, the note was secured by $10.2 million of
inventory and $4.5 million in trade accounts receivable of Castle Brands (USA)
Corp. under a security agreement. We have borrowed the full $2.5 million
available under the credit agreement as of the date of this filing.
In June
2010, we issued a $2.0 million promissory note to Frost Gamma Investments Trust,
which we refer to as the Frost Note. Borrowings under the Frost Note mature on
June 21, 2012 and bear interest at a rate of 11% per annum. Interest accrues
quarterly and is due at maturity. The Frost Note may be prepaid in whole or in
part at any time prior to maturity without penalty, but with payment of accrued
interest to the date of prepayment.
Share Repurchase
In June
2010, we repurchased 3,790,562 shares of our common stock at a price of $0.27
per share in a privately-negotiated transaction. Also, our board of directors
approved a stock repurchase program authorizing us to repurchase up to an
additional 2.5 million shares of our common stock. As of the date of this
report, no shares of our common stock had been repurchased under the repurchase
program.
Currency
Translation
The
functional currencies for our foreign operations are the Euro in Ireland and
continental Europe 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. Previously, gains or losses resulting from balances due from funding our
international subsidiaries were included in other income (expenses). In November
2009, to improve the liquidity of our foreign subsidiaries, we converted our
intercompany balances due from our foreign subsidiaries into an additional
investment in these subsidiaries. Beginning December 1, 2009, the translation
gain or loss from the restatement of any investment in our foreign subsidiaries
will be included in other comprehensive income. Prior to this conversion, we
considered these transactions to be trading balances and short-term funding
subject to transaction adjustment. As such, at each balance sheet date, we
restated the Euro denominated intercompany balances included on the books of the
foreign subsidiaries in U.S. Dollars at the exchange rate in effect at the
balance sheet date, with the resulting foreign currency transaction gain or loss
included in net loss.
Where in
this report we refer to amounts in Euros, 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 December 31, 2010, each as
calculated from the Interbank exchange rates as reported by Oanda.com. On
December 31, 2010, the exchange rate of the Euro in exchange for U.S.
Dollars was €1.00 = U.S. $1.32515 (equivalent to U.S. $1.00 =
€0.75455).
These
conversions should not be construed as representations that the Euro 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, 2010, as amended, which we refer to as our 2010 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 case sales for the periods
presented based on nine-liter equivalent cases, which is a standard spirits
industry metric (table excludes related non-beverage alcohol
products):
|
Three months ended
|
Nine months ended
|
|||||||||||||||
|
December
31,
|
December
31,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Cases
|
||||||||||||||||
|
United
States
|
65,644
|
52,355
|
177,311
|
167,583
|
||||||||||||
|
International
|
19,856
|
21,045
|
45,452
|
53,780
|
||||||||||||
|
Total
|
85,500
|
73,400
|
222,763
|
221,363
|
||||||||||||
|
Rum
|
22,942
|
22,782
|
81,054
|
73,381
|
||||||||||||
|
Vodka
|
19,743
|
20,675
|
52,684
|
73,027
|
||||||||||||
|
Liqueurs
|
25,466
|
18,294
|
55,992
|
47,069
|
||||||||||||
|
Whiskey
|
11,758
|
10,727
|
24,007
|
25,750
|
||||||||||||
|
Tequila
|
303
|
299
|
937
|
1,513
|
||||||||||||
|
Fine
Wine
|
5,129
|
623
|
7,644
|
623
|
||||||||||||
|
Other
|
159
|
—
|
445
|
—
|
||||||||||||
|
Total
|
85,500
|
73,400
|
222,763
|
221,363
|
||||||||||||
|
Percentage
of Cases
|
||||||||||||||||
|
United
States
|
76.8
|
%
|
71.3
|
%
|
79.6
|
%
|
75.7
|
%
|
||||||||
|
International
|
23.2
|
%
|
28.7
|
%
|
20.4
|
%
|
24.3
|
%
|
||||||||
|
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||||
|
Rum
|
26.7
|
%
|
31.1
|
%
|
36.4
|
%
|
33.1
|
%
|
||||||||
|
Vodka
|
23.1
|
%
|
28.2
|
%
|
23.7
|
%
|
33.0
|
%
|
||||||||
|
Liqueurs
|
29.8
|
%
|
24.9
|
%
|
25.1
|
%
|
21.3
|
%
|
||||||||
|
Whiskey
|
13.8
|
%
|
14.6
|
%
|
10.8
|
%
|
11.6
|
%
|
||||||||
|
Tequila
|
0.4
|
%
|
0.4
|
%
|
0.4
|
%
|
0.7
|
%
|
||||||||
|
Fine
Wine
|
6.0
|
%
|
0.8
|
%
|
3.4
|
%
|
0.3
|
%
|
||||||||
|
Other
|
0.2
|
%
|
0.0
|
%
|
0.2
|
%
|
0.0
|
%
|
||||||||
|
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||||
The table below provides, for the periods indicated, the percentage of net
sales of certain items in our consolidated financial statements:
|
Three months ended December
31,
|
Nine months ended December
31,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Sales,
net
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.00
|
%
|
||||||||
|
Cost
of sales
|
68.7
|
%
|
66.9
|
%
|
65.4
|
%
|
67.2
|
%
|
||||||||
|
Reversal
of provision for obsolete inventory
|
0.0
|
%
|
(1.1
|
)%
|
(0.1
|
)%
|
(2.7
|
)%
|
||||||||
|
Gross
profit
|
31.3
|
%
|
34.3
|
%
|
34.7
|
%
|
35.5
|
%
|
||||||||
|
Selling
expense
|
30.3
|
%
|
30.2
|
%
|
34.5
|
%
|
33.4
|
%
|
||||||||
|
General
and administrative expense
|
12.2
|
%
|
17.5
|
%
|
15.9
|
%
|
18.4
|
%
|
||||||||
|
Depreciation
and amortization
|
2.6
|
%
|
3.2
|
%
|
3.0
|
%
|
3.1
|
%
|
||||||||
|
Loss
from operations
|
(14.0
|
)%
|
(16.7
|
)%
|
(18.7
|
)%
|
(19.4
|
)%
|
||||||||
|
Other
income
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||||||
|
Other
expense
|
0.0
|
%
|
(0.4
|
)%
|
0.0
|
%
|
(0.2
|
)%
|
||||||||
|
Income
from equity investment in non-consolidated affiliate
|
0.2
|
%
|
0.0
|
%
|
0.1
|
%
|
0.0
|
%
|
||||||||
|
Foreign
exchange (loss) gain
|
(1.4
|
)%
|
8.4
|
%
|
(0.7
|
)%
|
10.0
|
%
|
||||||||
|
Interest
(expense) income, net
|
(1.7
|
)%
|
0.0
|
%
|
(1.1
|
)%
|
0.1
|
%
|
||||||||
|
Gain
on exchange of note payable
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
1.2
|
%
|
||||||||
|
Gain
on sale of intangible asset
|
0.0
|
%
|
5.4
|
%
|
0.0
|
%
|
1.8
|
%
|
||||||||
|
Income
tax benefit
|
0.4
|
%
|
0.5
|
%
|
0.5
|
%
|
0.5
|
%
|
||||||||
|
Net
loss
|
(16.4
|
)%
|
(2.7
|
)%
|
(20.0
|
)%
|
(5.9
|
)%
|
||||||||
|
Net
(income) loss attributable to noncontrolling interests
|
(0.6
|
)%
|
(0.5
|
)%
|
(1.0
|
)%
|
0.1
|
%
|
||||||||
|
Net
loss attributable to common shareholders
|
$
|
(17.0
|
)%
|
$
|
(3.2
|
)%
|
$
|
(21.0
|
)%
|
$
|
(5.7
|
)%
|
||||
Net sales. Net sales
increased 16.4% to $8.7 million for the three months ended December 31, 2010, as
compared to $7.5 million for the comparable prior-year period. Our U.S. case
sales as a percentage of total case sales increased to 76.8% for the three
months ended December 31, 2010, as compared to 71.3% for the comparable
prior-year period due to the organic growth of certain brands and the
introduction of three new brands into the U.S. market. Our international case
sales suffered from changes in wholesalers and increased price competition in
the vodka category. U.S. net sales increased to $7.3 million for the three
months ended December 31, 2010 from $6.1 million for the comparable
prior-year period. U.S. net sales for the three months ended December 31, 2010
include $0.6 million in revenue from sales of our Betts & Scholl wines,
which we acquired in September 2009, $0.6 million in revenue from sales of
the Travis Hasse's Pie Liqueurs, which we launched in September 2010, and
$0.1 million in revenue from sales of the A. de Fussigny cognacs, which we
launched in August 2010. Although total rum sales increased in the quarter ended
December 31, 2010 as compared to the prior-year period, U.S. case sales were
lower in the current period because the December 31, 2009 quarter included a
bulk sale of obsolete rum inventory.
The table
below presents the increase or decrease, as applicable, in case sales by product
category for the three months ended December 31, 2010 as compared to the three
months ended December 31, 2009:
|
Increase/(decrease)
|
Percentage
|
|||||||||||||||
|
in case sales
|
increase/(decrease)
|
|||||||||||||||
|
Overall
|
U.S.
|
Overall
|
U.S.
|
|||||||||||||
|
Rum
|
160
|
(1,083
|
)
|
0.7
|
%
|
(6.6
|
)%
|
|||||||||
|
Vodka
|
(932
|
)
|
1,528
|
(4.5
|
)%
|
11.2
|
%
|
|||||||||
|
Liqueurs
|
7,172
|
7,804
|
39.2
|
%
|
45.4
|
%
|
||||||||||
|
Whiskey
|
1,031
|
371
|
9.6
|
%
|
8.7
|
%
|
||||||||||
|
Tequila
|
4
|
4
|
1.3
|
%
|
1.3
|
%
|
||||||||||
|
Fine
Wine
|
4,506
|
4,506
|
723.3
|
723.3
|
||||||||||||
|
Other
|
159
|
159
|
—
|
—
|
||||||||||||
|
Total
|
12,100
|
13,289
|
16.5
|
%
|
25.4
|
%
|
||||||||||
Gross profit. Gross profit
increased 6.2% to $2.7 million for the three months ended December 31, 2010, as
compared to $2.6 million for the comparable prior-year period, while our gross
margin decreased to 31.3% for the three months ended December 31, 2010 compared
to 34.3% for the comparable prior-year period. Our overall decrease in gross
margin is partially due to the increased sales of lower margin products as a
percentage of overall sales, including certain recently introduced wines and
liqueurs. During the three months ended December 31, 2009, we recorded a
reversal of our allowance for obsolete and slow moving inventory of $0.1
million. We recorded this reversal because we were able to sell certain goods
included in the allowance recorded during previous fiscal years. We did not
record a reversal during the three months ended December 31, 2010. Absent the
reversal of the allowance, our gross profit was $2.7 million and
$2.5 million for the three months ended December 31, 2010 and 2009,
respectively, and our gross margin was 31.3% and 33.1%,
respectively.
Selling expense. Selling
expense increased 16.8% to $2.6 million for the three months ended December 31,
2010 from $2.3 million for the comparable prior-year period. This increase in
selling expense for the three months ended December 31, 2010 as compared to the
prior-year period resulted from $0.1 million in increased employee expense due
to the addition of staff in our Fine Wine Division, $0.2 million in severance
charges, and a $0.1 million increase in shipping costs to our distributors due
to our shift to delivered pricing, where we pay shipping charges that are passed
on to our distributors. The increase in selling expense was substantially offset
by an increase in sales, resulting in a net increase of selling expense as a
percentage of net sales to 30.3% for the three months ended December 31, 2010 as
compared to 30.2% for the comparable prior-year period.
General and administrative
expense. General and administrative expense decreased 18.4% to $1.1
million for the three months ended December 31, 2010 as compared to $1.3 million
for the comparable prior-year period, primarily due to decreases of $0.1 million
in salaries and related benefits and $0.1 million in professional fees due to
our ongoing cost containment efforts. As a result of decreased expenses and an
increase in sales in the current period, general and administrative expense as a
percentage of net sales decreased to 12.2% for the three months ended December
31, 2010 as compared to 17.5% for the comparable prior-year period.
Depreciation and
amortization. Depreciation and amortization was $0.2 million for each of
the three months ended December 31, 2010 and 2009.
Loss from operations . As a
result of the foregoing, our loss from operations was $1.2 million for each of
the three months ended December 31, 2010 and 2009. As a result of our focus on
our stronger growth markets and better performing brands, and expected growth
from our existing brands, recently acquired brands and brands we may acquire in
the future, we anticipate improved results of operations in the near term as
compared to comparable prior-year periods, although there is no assurance that
we will attain such results.
Income from equity investment in
non-consolidated affiliate. As described in “Recent Events” above, in
August 2010, we formed DP Castle Partners, LLC with Drink Pie, LLC to manage the
manufacturing and marketing of Travis Hasse’s Original® Apple Pie Liqueur and
Cherry Pie Liqueur. We have accounted for this investment on the equity method
of accounting. Income from this investment was $0.02 million for the three
months ended December 31, 2010.
Foreign exchange (loss) gain.
Foreign exchange loss for the three months ended December 31, 2010 was ($0.1)
million as compared to a gain of $0.6 million for the three months ended
December 31, 2009 due to the strengthening of the U.S. dollar against the Euro
and its effect on our Euro-denominated intercompany balances due to our foreign
subsidiaries for inventory purchases. In November 2009, to improve the liquidity
of our foreign subsidiaries, we converted our intercompany balances due from our
foreign subsidiaries into an additional investment in these subsidiaries.
Beginning December 1, 2009, the translation gain or loss from the restatement of
any investment in our foreign subsidiaries will be included in other
comprehensive income. Prior to this conversion, we considered these transactions
to be trading balances and short-term funding subject to transaction adjustment
under ASC 830, "Foreign Currency Matters". As such, at each balance sheet date,
we restated the Euro denominated intercompany advances included on the books of
the foreign subsidiaries in U.S. Dollars at the exchange rate in effect at the
balance sheet date, with the resulting foreign currency transaction gain or loss
included in net loss.
Interest (expense) income,
net. We had interest expense, net of ($0.1) million for the three months
ended December 31, 2010 as compared to interest income, net of $0.001 million
for the three months ended December 31, 2009. The increase in interest expense
is due to the outstanding balances on our notes payable as described below in
“Liquidity and Capital Resources,” particularly our $2.5 million revolving
credit facility and the Frost Note. We expect interest expense to increase in
future periods due to borrowings under the Frost Note, the December 2010
Promissory Notes and our borrowings under our revolving credit facility to fund
operations, inventory requirements and potential acquisition
opportunities.
Gain on sale of intangible
asset. In November 2009, we sold our Sam Houston bourbon brand to a
third party for $0.5 million in cash. This sale resulted in a gain of
$0.4 million for the three months ended December 31, 2009.
Net (income) loss attributable to
noncontrolling interests. Net (income) loss attributable to
noncontrolling interests during the three months ended December 31, 2010
amounted to a loss of ($0.1) million as compared to income of $0.03 million for
the comparable prior-year period, both the result of allocated net results
recorded by our 60%-owned subsidiary, Gosling-Castle Partners, Inc.
Net loss attributable to common
shareholders. As a result of the net effects of the foregoing, net loss
attributable to common shareholders for the three months ended December 31, 2010
increased to a loss of $1.5 million from a loss of $0.2 million for the three
months ended December 31, 2009. Net loss per common share, basic and diluted,
was $0.01 per share for the three months ended December 31, 2010 as compared to
$0.00 per share for the comparable prior-year period.
Nine
months ended December 31, 2010 compared with nine months ended December 31,
2009
Net sales. Net sales
increased 4.5% to $23.0 million for the nine months ended December 31, 2010, as
compared to $22.0 million for the comparable prior-year period. Our U.S. case
sales as a percentage of total case sales increased to 79.6% for the nine months
ended December 31, 2010, as compared to 75.7% for the comparable prior-year
period due to the organic growth of certain brands and the introduction of three
new brands into the U.S. market. Our international case sales suffered from
changes in wholesalers and increased price competition in the vodka category.
U.S. net sales increased to $20.0 million for the nine months ended
December 31, 2010 from $18.7 million for the comparable prior-year period.
2010 U.S. net sales include $1.2 million in revenue from sales of our Betts
& Scholl wines, which we acquired in September 2009, $0.7 million in
revenue from sales of the Travis Hasse's Pie Liqueurs, which we launched in
September 2010, and $0.2 million in revenue from sales of the A. de
Fussigny cognacs, which we launched in August 2010. The growth in U.S. sales
reflects the momentum for our Gosling’s rums, Pallini Limoncello and Jefferson’s
bourbons.
The table
below presents the increase or decrease, as applicable, in case sales by product
category for the nine months ended December 31, 2010 as compared to the nine
months ended December 31, 2009:
|
Increase/(decrease)
|
Percentage
|
|||||||||||||||
|
in case sales
|
increase/(decrease)
|
|||||||||||||||
|
Overall
|
U.S.
|
Overall
|
U.S.
|
|||||||||||||
|
Rum
|
7,673
|
4,516
|
10.5
|
%
|
7.8
|
%
|
||||||||||
|
Vodka
|
(20,343
|
)
|
(11,642
|
)
|
(27.9
|
)%
|
(22.5
|
)%
|
||||||||
|
Liqueurs
|
8,923
|
9,157
|
19.0
|
%
|
20.1
|
%
|
||||||||||
|
Whiskey
|
(1,743
|
)
|
806
|
(6.8
|
)%
|
7.7
|
%
|
|||||||||
|
Tequila
|
(576
|
)
|
(576
|
)
|
(38.1
|
)%
|
(38.1
|
)%
|
||||||||
|
Fine
Wine
|
7,021
|
7,021
|
1,127.0
|
%
|
1,127.0
|
%
|
||||||||||
|
Other
|
445
|
445
|
—
|
—
|
||||||||||||
|
Total
|
1,400
|
9,727
|
0.6
|
%
|
5.8
|
%
|
||||||||||
Selling expense. Selling
expense increased 8.2% to $8.0 million for the nine months ended December 31,
2010 from $7.4 million for the comparable prior-year period. This increase in
selling expense resulted from $0.4 million in increased employee expense due to
the addition of staff in our Fine Wine Division, $0.2 million in severance
charges, and an increase of $0.3 million in shipping costs to our distributors
due to our move to delivered pricing. This increase in selling expense was
offset by a decrease in advertising, marketing and promotion expense of $0.2
million for the nine months ended December 31, 2010 compared to the comparable
prior-year period. The increase in selling expense was substantially offset by
an increase in sales, resulting in a net increase of selling expense as a
percentage of net sales to 34.5% for the nine months ended December 31, 2010 as
compared to 33.4% for the comparable prior-year period.
General and administrative
expense. General and administrative expense decreased 9.9% to $3.7
million for the nine months ended December 31, 2010 as compared to $4.1 million
for the comparable prior-year period, primarily due to decreases of $0.3 million
in professional fees and $0.1 million in insurance expense, respectively, due to
our ongoing cost containment efforts. As a result of decreased expenses and an
increase in sales in the current period, general and administrative expense as a
percentage of net sales decreased to 15.9% for the nine months ended December
31, 2010 as compared to 18.4% for the comparable prior-year period.
Depreciation and
amortization. Depreciation and amortization was $0.7 million for each of
the nine months ended December 31, 2010 and 2009.
Loss from operations . As a
result of the foregoing, our loss from operations was $4.3 million for each of
the nine months ended December 31, 2010 and 2009. As a result of our focus on
our stronger growth markets and better performing brands, and expected growth
from our existing brands, recently acquired brands and brands we may acquire in
the future, we anticipate improved results of operations in the near term as
compared to comparable prior-year periods, although there is no assurance that
we will attain such results.
Income from equity investment in
non-consolidated affiliate. We have accounted for our investment in DP
Castle Partners, LLC on the equity method of accounting. Income from this
investment was $0.02 million for the nine months ended December 31,
2010.
Foreign exchange (loss) gain.
Foreign exchange loss for the nine months ended December 31, 2010 was ($0.2)
million as compared to a gain of $2.2 million for the nine months ended December
31, 2009 due to the strengthening of the U.S. dollar against the Euro and its
effect on our Euro-denominated intercompany balances due to our foreign
subsidiaries for inventory purchases. In November 2009, to improve the liquidity
of our foreign subsidiaries, we converted our intercompany balances due from our
foreign subsidiaries into an additional investment in these subsidiaries.
Beginning December 1, 2009, the translation gain or loss from the restatement of
any investment in our foreign subsidiaries will be included in other
comprehensive income. Prior to this conversion, we considered these transactions
to be trading balances and short-term funding subject to transaction adjustment
under ASC 830, "Foreign Currency Matters". As such, at each balance sheet date,
we restated the Euro denominated intercompany advances included on the books of
the foreign subsidiaries in U.S. Dollars at the exchange rate in effect at the
balance sheet date, with the resulting foreign currency transaction gain or loss
included in net loss.
Interest (expense) income,
net. We had interest expense, net of ($0.2) million for the three months
ended December 31, 2010 as compared to interest income, net of $0.03 million for
the nine months ended December 31, 2009. The increase in interest expense is due
to the outstanding balances on our notes payable as described below in
“Liquidity and Capital Resources,” particularly our $2.5 million revolving
credit facility and the Frost Note. We expect interest expense to increase in
future periods due to borrowings under the Frost Note, the December 2010
Promissory Notes and our borrowings under our revolving credit facility to fund
operations, inventory requirements and potential acquisition
opportunities.
Gain on sale of intangible
asset. In November 2009, we sold our Sam Houston bourbon brand to a
third party for $0.5 million in cash. This sale resulted in a gain of
$0.4 million for the nine months ended December 31, 2009.
Gain on exchange of note
payable. In May 2009, we exchanged our subsidiary's outstanding 3% note
payable for 200,000 shares of our common stock. This resulted in a pre-tax,
non-cash gain of $0.3 million for the nine months ended December 31,
2009.
Net (income) loss attributable to
noncontrolling interests. Net (income) loss attributable to
noncontrolling interests during the nine months ended December 31, 2010 amounted
to a loss of ($0.2) million as compared to income of $0.03 million for the
comparable prior-year period, both the result of allocated net results recorded
by our 60%-owned subsidiary, Gosling-Castle Partners, Inc.
Net loss attributable to common
shareholders. As a result of the net effects of the foregoing, net loss
attributable to common shareholders for the nine months ended December 31, 2010
increased to a loss of $4.8 million from a loss of $1.3 million for the nine
months ended December 31, 2009. Net loss per common share, basic and diluted,
was $0.05 per share for the nine months ended December 31, 2010 as compared to
$0.01 per share for the comparable prior-year period.
Overview
Since our
inception, we have incurred significant operating and net losses and have not
generated positive cash flows from operations. For the nine months ended
December 31, 2010, we had a net loss of $4.8 million, and used cash of $4.8
million in operating activities. As of December 31, 2010, we had cash and cash
equivalents of $581,887 and had an accumulated deficit of $116.9 million. In
addition, as described in Note 8 to our condensed consolidated financial
statements, we are obligated to pay $0.4 million in principal pertaining to a
note payable maturing in September 2011.
In
the past, we have been able to obtain financing to fund our losses. We are
seeking additional financing to ensure continuity of supply of certain of our
brands, fund future acquisitions and agency relationships, and support new brand
initiatives and marketing programs. The terms of such potential
financing have not been determined at this time and may include the conversion
of existing debt into equity, an increase in availability under our revolving
credit facility, modification to our existing debt, including a change in
maturity dates, and/or new equity issuances. No assurance can be
provided that we will complete any such financings.
If we are
unable to secure financing from our existing shareholders and lenders, we may
experience difficulty in accessing debt and equity markets. Additional debt or
equity financing may not be available on acceptable terms from any source as a
result of, among other factors, our significant operating and net losses and
negative cash flows from operations.
If we
raise additional capital by issuing equity securities, the terms and prices for
these financings may be much more favorable to the new investors than the terms
obtained by our existing shareholders. These financings also may significantly
dilute the ownership of existing shareholders.
If we
raise additional capital by accessing debt markets, the terms and pricing for
these financings may be much more favorable to the new lenders than the terms
obtained from our prior lenders. These financings also may require liens on
certain of our assets that may limit our flexibility.
Existing
Financing
In December 2010, we
issued promissory notes in the aggregate principal amount of $1.0 million
to Frost Gamma Investments Trust, an entity affiliated with Phillip Frost, M.D.,
a director and principal shareholder of our company, Vector Group Ltd., a
principal shareholder of our company, IVC Investors, LLLP, an entity affiliated
with Glenn Halpryn, a director of our company, Mark E. Andrews, III, our
chairman, and Richard J. Lampen, our president and chief executive officer.
Borrowings under these notes mature on June 21, 2012 and bear interest at a rate
of 11% per annum. Interest is accrued quarterly and due at maturity. These notes
may be prepaid in whole or in part at any time prior to maturity without
penalty, but with payment of accrued interest to the date of prepayment. These
notes do not contain any financial covenants. As of December 31, 2010, $1.0
million of principal was outstanding under these notes.
In June
2010, we issued a $2.0 million note to an affiliate of Phillip Frost, M.D.,
a director and principal shareholder of our Company, which we refer to as the
Frost Note. Borrowings under the Frost Note mature on June 21, 2012 and bear
interest at a rate of 11% per annum. Interest is accrued quarterly and due at
maturity. The Frost Note may be prepaid in whole or in part at any time prior to
maturity without penalty, but with payment of accrued interest to the date of
prepayment. The Frost Note does not contain any financial covenants. As of
December 31, 2010, $2.1 million, consisting of $2.0 million of principal and
$0.1 million of accrued interest was outstanding under the Frost
Note.
In
December 2009, we entered into a $2.5 million revolving credit agreement
with, among others, Frost Gamma Investments Trust, Vector Group Ltd., Lafferty
Ltd., a principal shareholder of our company, IVC Investors, LLLP, Mark E.
Andrews, III and Richard J. Lampen. Under the credit agreement, we may borrow
from time to time up to $2.5 million to be used for working capital or general
corporate purposes. Borrowings under the credit agreement mature on
April 1, 2013 and bear interest at a rate of 11% per annum, payable
quarterly. The credit agreement provides for the payment of an aggregate
commitment fee of $75,000 payable to the lenders over the three-year period. The
note issued under the credit agreement contains customary events of default,
which if uncured, entitle the holders to accelerate the due date of the unpaid
principal amount of, and all accrued and unpaid interest on, such note. Amounts
may be repaid and reborrowed under the revolving credit agreement without
penalty. At December 31, 2010, the note was secured by $9.5 million of inventory
and $5.0 million in trade accounts receivable of Castle Brands (USA) Corp. under
a security agreement. We have borrowed the full $2.5 million available under the
credit agreement as of the date of this report.
In
connection with the September 2009 Betts & Scholl acquisition, we issued a
secured promissory note in the aggregate principal amount of $1.1 million to
Betts & Scholl, LLC, an entity affiliated with Dennis Scholl, who become a
director of the Company at the time of the acquisition. The note is secured
under a security agreement by the Betts & Scholl inventory acquired. The
note provides for an initial payment of $0.3 million, paid at closing, and for
eight equal quarterly payments of principal and interest, with the final payment
due on September 21, 2011. Interest under the note accrues at an annual rate of
0.84%, compounded quarterly. The note contains customary events of default,
which if uncured, entitle the holder to accelerate the due date of the unpaid
principal amount of, and all accrued and unpaid interest on, the note. In
December 2010, we entered into a letter agreement amending the terms of the note
with Betts & Scholl, LLC, that provides that the quarterly installment
payments of principal and interest due December 21, 2010 and March 21, 2011,
each in the amount of approximately $107,000, will not be due and payable until
the maturity date of such note and that such installment payments will bear
interest, payable on such maturity date, at the rate of 11% per annum,
compounded quarterly.
In
December 2009, Gosling-Castle Partners, Inc., a 60% owned subsidiary, issued a
promissory note in the aggregate principal amount of $0.2 million to Gosling's
Export (Bermuda) Limited in exchange for credits issued on certain inventory
purchases. This note matures on April 1, 2020, is payable at maturity, subject
to certain acceleration events, and calls for annual interest of 5%, to be
accrued and paid at maturity. Interest has been recorded retroactive to November
15, 2008.
Liquidity
Discussion
As of
December 31, 2010, we had shareholders’ equity of $18.1 million as compared to
$22.7 million at March 31, 2010. This decrease is primarily due to our total
comprehensive loss in the nine months ended December 31, 2010. We had working
capital of $12.7 million at December 31, 2010 as compared to $11.3 million as of
March 31, 2010. This increase is primarily due to increased inventory,
particularly fine wine inventory.
As of
December 31, 2010, we had cash and cash equivalents of approximately $0.6
million, as compared to $1.3 million as of March 31, 2010. The decrease is
primarily attributable to the funding of our operations and working capital
needs for the nine months ended December 31, 2010. At December 31, 2010, 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 result in a material decrease in our liquidity over the
near-to-mid term:
|
·
|
continued
significant levels of 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
acquisition of additional brands;
and
|
|
·
|
expansion
into new markets and within existing markets in the United States and
internationally.
|
We
continue to implement a plan supporting the growth of existing brands through
sales and marketing initiatives that we expect will generate cash flows from
operations in the next few years. As part of this plan, we seek to grow our
business through expansion to new markets, growth in existing markets and
strengthened distributor relationships. Further, we are actively seeking to
reduce our inventory levels in an effort to reduce our working capital
requirements and provide improved cash flow from operations. We are also seeking
additional brands and agency relationships to leverage our existing distribution
platform. We intend to finance our brand acquisitions through a combination of
our available cash resources, borrowings and, in appropriate circumstances, the
further issuance of equity and/or debt securities. Acquiring additional brands
could have a significant effect on our financial position, could materially
reduce our liquidity and could cause substantial fluctuations in our quarterly
and yearly operating results. We are also taking a systematic approach to
expense reduction, seeking improvements in routes to market and containing
production costs to improve cash flows.
Cash
flows
The following table summarizes our primary sources and uses of cash during
the periods presented:
|
Nine months ended
|
||||||||
|
December
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
(in
thousands)
|
||||||||
|
Net
cash provided by (used in):
|
||||||||
|
Operating
activities
|
$
|
(4,846
|
)
|
$
|
(5,955
|
)
|
||
|
Investing
activities
|
(362
|
)
|
3,325
|
|||||
|
Financing
activities
|
4,513
|
(445
|
)
|
|||||
|
Effect
of foreign currency translation
|
(4
|
)
|
1
|
|||||
|
Net
decrease in cash and cash equivalents
|
$
|
(699
|
)
|
$
|
(3,074
|
)
|
||
Operating
activities. A substantial portion of available cash has been used to fund
our operating activities. In general, these cash funding requirements are based
on operating losses, driven chiefly by the inherent costs in developing and
maintaining our distribution system and our sales and marketing activities. We
have also utilized cash to fund our receivables and inventories. In general,
these cash outlays for receivables and inventories are only partially offset by
increases in our accounts payable to our suppliers.
On
average, the production cycle for our owned brands is up to three months from
the time we obtain the distilled spirits, bulk wine and other materials needed
to bottle and package our products to the time we receive products available for
sale, in part due to the international nature of our business. We do not produce
Gosling’s rums, Pallini liqueurs, Tierras tequila, A. de Fussigny cognacs or
Brunello di Montalcino wines. Instead, we receive the finished product directly
from the owners of such brands. From the time we have products available for
sale, an additional two to three months may be required before we sell our
inventory and collect payment from customers.
During
the nine months ended December 31, 2010, net cash used in operating activities
was $4.8 million, consisting primarily of a net loss of $4.6 million, a $0.8
million increase in accounts receivable, a $0.6 million decrease in accounts
payable and accrued expenses, a $0.5 million increase in inventory and a $0.2
million increase in due from affiliates. These uses of cash were partially
offset by a $1.0 million increase in due to related parties, a $0.1 million
decrease in other assets and depreciation and amortization expense of $0.7
million.
During
the nine months ended December 31, 2009, net cash used in operating
activities was $6.0 million, consisting primarily of a net loss of
$1.2 million, a gain on the sale of intangible assets of $0.4 million, a
decrease in allowance for obsolete inventories of $0.6 million, a decrease
in accounts payable and accrued expenses of $2.7 million, a gain on the
conversion of debt of $0.3 million and the effects of changes in foreign
exchange of $2.4 million. These uses of cash were partially offset by a
$0.4 million decrease in inventories, a $0.3 million increase in due
to related parties and depreciation and amortization expense of
$0.7 million.
Investing
Activities. Net cash used in investing activities was $0.4 million for
the nine months ended December 31, 2010, representing a $0.2 million equity
investment in a non-consolidated affiliate, $0.1 million used in the acquisition
of fixed and intangible assets and $0.01 million in payments under contingent
consideration agreements.
Net cash
provided by investing activities was $3.3 million during the nine months
ended December 31, 2009, representing $3.0 million in net proceeds
from the sale of certain short-term investments and $0.5 million in
proceeds from the sale of intangible assets, offset by $0.1 million used in
the acquisition of fixed assets and $0.1 million in payments under
contingent consideration agreements.
Financing
activities. Net cash provided by financing activities for the nine months
ended December 31, 2010 was $4.5 million, consisting of the $2.0 million
borrowed under the Frost Note, $2.5 million borrowed under our $2.5 million
revolving credit agreement, $1.0 million borrowed under the December 2010
Promissory Notes and a $0.2 million reduction in restricted cash. These proceeds
were offset by the repayment of $0.2 million on the Betts & Scholl note and
$1.0 million for the repurchase of our common stock.
Net cash
used in financing activities during the nine months ended December 31, 2009
was $0.4 million, consisting of the repayment of $0.1 million to a
bank in Ireland under our revolving credit facility, the repayment of
$0.4 million on the Betts & Scholl note and $0.2 million for the
repurchase of our common stock, offset by $0.2 million in proceeds from a
note payable from Gosling's Export (Bermuda) Limited.
Recent
accounting standards issued and adopted.
We
discuss recently issued and adopted accounting standards in the “Accounting
standards adopted” and “Recent accounting pronouncements” sections of Note 1 of
the “Notes to Unaudited Condensed Consolidated Financial Statements” in the
accompanying unaudited condensed consolidated financial statements.
Cautionary
Note Regarding Forward Looking Statements
This
report includes certain “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements, which
involve risks and uncertainties, relate to the discussion of our business
strategies and our expectations concerning future operations, margins,
profitability, liquidity and capital resources and to analyses and other
information that are based on forecasts of future results and estimates of
amounts not yet determinable. We use words such as “may”, “will”, “should”,
“expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “seeks”,
“expects”, “predicts”, “could”, “projects”, “potential” and similar terms and
phrases, including references to assumptions, in this report to identify
forward-looking statements. These forward-looking statements are made based on
expectations and beliefs concerning future events affecting us and are subject
to uncertainties, risks and factors relating to our operations and business
environments, all of which are difficult to predict and many of which are beyond
our control, that could cause our actual results to differ materially from those
matters expressed or implied by these forward-looking statements. These risks
and other factors include those listed under “Risk Factors” in our 2010 Annual
Report, and as follows:
|
·
|
our
history of losses and expectation of further
losses;
|
|
·
|
the
effect of poor operating results on our
company;
|
|
·
|
the
adequacy of our cash resources and our ability to raise additional
capital;
|
|
·
|
our
ability to expand our operations in both new and existing markets and our
ability to develop or acquire new
brands;
|
|
·
|
our
relationships with and our dependency on our
distributors;
|
|
·
|
the
impact of supply shortages and alcohol and packaging costs in general, as
well as our dependency on a limited number of suppliers and inventory
requirements;
|
|
·
|
the
success of our sales and marketing
activities;
|
|
·
|
economic
and political conditions generally, including the current recessionary
economic environment and concurrent market
instability;
|
|
·
|
the
effect of competition in our
industry;
|
|
·
|
negative
publicity surrounding our products or the consumption of beverage alcohol
products in general;
|
|
·
|
our
ability to acquire and/or maintain brand recognition and
acceptance;
|
|
·
|
trends
in consumer tastes;
|
|
·
|
our
and our strategic partners’ abilities to protect trademarks and other
proprietary information;
|
|
·
|
the
impact of litigation;
|
|
·
|
the
impact of currency exchange rate fluctuations and devaluations on our
revenues, sales and overall financial
results;
|
|
·
|
our
executive officers, directors and principal shareholders own a substantial
portion of our voting stock; and
|
|
·
|
the
impact of federal, state, local or foreign government
regulations.
|
We
assume no obligation to publicly update or revise these forward-looking
statements for any reason, or to update the reasons actual results could differ
materially from those anticipated in, or implied by, these forward-looking
statements, even if new information becomes available in the
future.
Item 4.
Controls and Procedures
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Disclosure controls and procedures
are our controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934, as amended, is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding
disclosure.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a—15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended) as of the end of the period covered by this report, and,
based on that evaluation, our principal executive officer and principal
financial officer have concluded that these controls and procedures are
effective as of such date.
Changes in Internal
Control over Financial Reporting
There were no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of
Rule 13a-15 of the Exchange Act that occurred during the period covered by
this report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
Item 1.
Legal Proceedings
We believe that neither we nor any of our 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 us.
We may, however, become involved in litigation from time to time relating
to claims arising in the ordinary course of our business. These claims, even if
not meritorious, could result in the expenditure of significant financial and
managerial resources.
Item 6.
Exhibits
|
Exhibit
|
||
|
Number
|
Description
|
|
|
4.1
|
Form
of Note, dated as of December 27, 2010, made by the Company (incorporated
by reference to exhibit 4.1 to our current report on Form 8-K filed with
the SEC on December 28, 2010).
|
|
|
4.2
|
Letter
Agreement dated December 27, 2010 between the Company and Betts &
Scholl, LLC (incorporated by reference to exhibit 4.2 to our current
report on Form 8-K filed with the SEC on December 28,
2010)
|
|
|
31.1
|
Certification
Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. *
|
|
|
31.2
|
Certification
Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. *
|
|
|
32.1
|
Certification
of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*
|
* Filed herewith
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
CASTLE
BRANDS INC.
|
||
|
By:
|
/s/
Alfred J. Small
|
|
|
Alfred
J. Small
|
||
|
Chief
Financial Officer
(Principal
Financial Officer and
Principal
Accounting Officer)
|
||
February
14, 2011