UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2018

 

or

 

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

 

For the transition period from ___________ to ___________

 

Commission File Number 001-32849

 

CASTLE BRANDS INC.

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes [X] No [  ]

 

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

 

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

 

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

 

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

 

The Company had 168,701,129 shares of $.01 par value common stock outstanding at November 7, 2018.

 

 

 

 
 

 

CASTLE BRANDS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

SEPTEMBER 30, 2018

 

TABLE OF CONTENTS

 

    Page
     
PART I. FINANCIAL INFORMATION 3
     
Item 1. Financial Statements: 3
     
  Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and March 31, 2018 3
     
  Condensed Consolidated Statements of Operations for the three months and six months ended September 30, 2018 and 2017 (unaudited) 4
     
  Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months and six months ended September 30, 2018 and 2017 (unaudited) 5
     
  Condensed Consolidated Statement of Changes in Equity for the six months ended September 30, 2018 (unaudited) 6
     
  Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2018 and 2017 (unaudited) 7
     
  Notes to Unaudited Condensed Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
     
Item 4. Controls and Procedures 33
     
PART II. OTHER INFORMATION 34
   
Item 1. Legal Proceedings 34
     
Item 1A. Risk Factors 34
     
Item 5. Other Information 34
     
Item 6. Exhibits 35

 

 2 
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

   September 30, 2018   March 31, 2018 
   (Unaudited)     
ASSETS          
Current Assets          
Cash and cash equivalents  $368,863   $376,987 
Accounts receivable - net of allowance for doubtful accounts of $422,808 and $390,939 at September 30 and March 31, 2018, respectively   12,702,096    13,083,487 

Inventories - net of allowance for obsolete and slow-moving inventory of $410,268 and $346,344 at September 30 and March 31, 2018, respectively

   40,604,712    34,555,553 
Prepaid expenses and other current assets   3,371,257    3,724,759 
           
Total Current Assets   57,046,928    51,740,786 
           
Equipment – net   762,290    839,409 
           
Intangible assets - net of accumulated amortization of $8,710,096 and $8,485,253 at September 30 and March 31, 2018, respectively   5,744,102    5,968,945 
Goodwill   496,226    496,226 
Investment in non-consolidated affiliate, at equity   903,067    813,926 
Restricted cash   360,025    382,279 
Other assets   93,587    91,789 
           
Total Assets  $65,406,225   $60,333,360 
           
LIABILITIES AND EQUITY          
Current Liabilities          
Current maturities of notes payable  $127,154   $176,148 
Accounts payable   8,765,538    7,674,858 
Accrued expenses   2,755,372    2,497,001 
Due to shareholders and affiliates   1,792,386    2,785,910 
           
Total Current Liabilities   13,440,450    13,133,917 
           
Long-Term Liabilities          
Credit facility, net (including $761,600 and $576,546 of related-party participation at September 30 and March 31, 2018, respectively)   22,182,692    18,505,897 
Note payable - 11% Subordinated note   20,000,000    20,000,000 
Notes payable - GCP Note   216,869    211,580 
Deferred tax liability   485,604    485,484 
Other   6,778    6,778 
           
Total Liabilities   56,332,393    52,343,656 
           
Commitments and Contingencies (Note 11)          
Equity          
Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued and outstanding at September 30 and March 31, 2018   -    - 
Common stock, $.01 par value, 300,000,000 shares authorized at September 30 and March 31, 2018, 168,553,992 and 166,330,733 shares issued and outstanding at September 30 and March 31, 2018, respectively   1,685,540    1,663,307 
Additional paid-in capital   156,186,890    154,731,044 
Accumulated deficit   (150,798,115)   (149,891,272)
Accumulated other comprehensive loss   (2,167,272)   (2,082,011)
           
Total controlling shareholders’ equity   4,907,043    4,421,068 
           
Noncontrolling interests   4,166,789    3,568,636 
           
Total Equity, including noncontrolling interests   9,073,832    7,989,704 
           
Total Liabilities and Equity  $65,406,225   $60,333,360 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 3 
 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

 

   Three months ended
September 30,
   Six months ended
September 30,
 
   2018   2017   2018   2017 
Sales, net*  $23,310,163   $20,894,150   $46,414,551   $41,746,437 
Cost of sales*   14,170,668    12,350,901    28,015,504    24,624,569 
                     
Gross profit   9,139,495    8,543,249    18,399,047    17,121,868 
                     
Selling expense   5,322,430    4,899,208    11,144,320    10,955,407 
General and administrative expense   2,564,246    2,298,882    5,081,512    4,561,879 
Depreciation and amortization   204,380    186,283    440,172    391,235 
                     
Income from operations   1,048,439    1,158,876    1,733,043    1,213,347 
                     
Other expense, net   (8,506)   (59)   (8,911)   (59)
Income from equity investment in non-consolidated affiliate   55,113    29,846    89,141    71,595 
Foreign exchange gain (loss)   2,918    18,853    47,382    (32,308)
Interest expense, net   (1,099,505)   (901,559)   (2,151,447)   (1,793,423)
                     
(Loss) income before provision for income taxes   (1,541)   305,957    (290,792)   (540,848)
Income tax benefit (expense), net   217    (25,335)   (17,898)   (43,748)
                     
Net (loss) income   (1,324)   280,622    (308,690)   (584,596)
Net income attributable to noncontrolling interests   (214,812)   (282,303)   (598,153)   (363,482)
                     
Net loss attributable to common shareholders  $(216,136)  $(1,681)  $(906,843)  $(948,078)
                     
Net loss per common share, basic and diluted, attributable to common shareholders  $(0.00)  $(0.00)  $(0.01)  $(0.01)
                     
Weighted average shares used in computation, basic and diluted, attributable to common shareholders   166,497,681    163,209,562    166,011,668    163,138,853 

 

* Sales, net and Cost of sales include excise taxes of $1,752,916 and $1,759,630 for the three months ended September 30, 2018 and 2017, respectively, and $3,587,170 and $3,399,385 for the six months ended September 30, 2018 and 2017, respectively.

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 4 
 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

   Three months ended
September 30,
   Six months ended
September 30,
 
   2018   2017   2018   2017 
Net (loss) income  $(1,324)  $280,622   $(308,690)  $(584,596)
Other comprehensive (loss) income:                    
Foreign currency translation adjustment   (8,932)   55,697    (85,261)   159,812 
                     
Total other comprehensive (loss) income:   (8,932)   55,697    (85,261)   159,812 
                     
Comprehensive (loss) income  $(10,256)  $336,319   $(393,951)  $(424,784)

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 5 
 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Equity

(Unaudited)

 

       Additional       Accumulated Other         
   Common Stock   Paid-in   Accumulated   Comprehensive   Noncontrolling   Total 
   Shares   Amount   Capital   Deficit   Loss   Interests   Equity 
BALANCE, MARCH 31, 2018   166,330,733   $1,663,307   $154,731,044   $(149,891,272)  $(2,082,011)  $3,568,636   $7,989,704 
                                    
Net loss                  (690,707)        383,341    (307,366)
                                    
Foreign currency translation adjustment                       (76,329)        (76,329)
Exercise of common stock options   503,166    5,032    210,984                   216,016 
Restricted share grants   1,100,000    11,000    (11,000)                  - 
                                    
Common stock purchased under employee stock purchase plan   41,902    419    40,540                   40,959 
Stock-based compensation             490,485                   490,485 
                                    
BALANCE, JUNE 30, 2018   167,975,801   $1,679,758   $155,462,053   $(150,581,979)  $(2,158,340)  $3,951,977   $8,353,469 
                                    
Net loss                  (216,136)        214,812    (1,324)
                                    
Foreign currency translation adjustment                       (8,932)        (8,932)
Exercise of common stock options   626,000    6,260    227,141                   233,401 
Restricted shares forfeited   (47,809)   (478)   478                   - 
                                    
Stock-based compensation             497,219                   497,219 
                                    
BALANCE, SEPTEMBER 30, 2018   168,553,992   $1,685,540   $156,186,890   $(150,798,115)  $(2,167,272)  $4,166,789   $9,073,832 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 6 
 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Six months ended September 30, 
   2018   2017 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(308,690)  $(584,596)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   440,172    391,235 
Provision for doubtful accounts   29,118    30,812 
Amortization of deferred financing costs   48,280    38,960 
Deferred income tax benefit, net   120    670 
Net income from equity investment in non-consolidated affiliate   (89,141)   (71,595)
Effect of changes in foreign currency translation   (47,382)   32,308 
Stock-based compensation expense   987,704    979,816 
Addition to provision for obsolete inventories   160,000    50,000 
Changes in operations, assets and liabilities:          
Accounts receivable   342,426    712,811 
Inventory   (6,251,694)   (4,363,236)
Prepaid expenses and supplies   349,956    (409,020)
Other assets   (23,382)   (32,401)
Accounts payable and accrued expenses   1,372,142    2,891,322 
Accrued interest   5,289    5,289 
Due to related parties   (993,524)   301,444 
           
Total adjustments   (3,669,916)   558,415 
           
NET CASH USED IN OPERATING ACTIVITIES   (3,978,606)   (26,181)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of equipment   (112,644)   (84,251)
Acquisition of intangible assets       (22,265)
Investment in non-consolidated affiliate, at equity       (156,000)
           
NET CASH USED IN INVESTING ACTIVITIES   (112,644)   (262,516)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net borrowings on credit facility   3,650,100    (194,909)
Net payments on foreign revolving credit facility   (42,263)    
Proceeds from issuance of common stock under employee stock purchase plan   40,959    - 
Proceeds from exercise of common stock options   449,416    182,139 
           
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   4,098,212    (12,770)
           
EFFECTS OF FOREIGN CURRENCY TRANSLATION   (37,340)   47,913 
NET DECREASE IN CASH AND CASH EQUIVALENTS   (30,378)   (253,554)
           
CASH AND CASH EQUIVALENTS INCLUDING RESTRICTED CASH – BEGINNING   759,266    942,503 
           
CASH AND CASH EQUIVALENTS   368,863    322,529 
RESTRICTED CASH   360,025    366,420 
CASH AND CASH EQUIVALENTS INCLUDING RESTRICTED CASH - ENDING  $728,888   $688,949 
           
SUPPLEMENTAL DISCLOSURES:          
Schedule of non-cash financing activities          
Conversion of 5% convertible note to common stock  $   $25,000 
           
Interest paid  $2,062,386   $1,685,662 
Income taxes paid  $104,975   $669,500 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 7 
 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and U.S. generally accepted accounting principles (“GAAP”) and, in the opinion of management, contain all adjustments (which consist of only normal recurring adjustments) necessary for a fair presentation of such financial information. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. The condensed consolidated balance sheet as of March 31, 2018 is derived from the March 31, 2018 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, 2018 included in the Company’s annual report on Form 10-K for the year ended March 31, 2018, as amended (“2018 Form 10-K”). Please refer to the notes to the audited consolidated financial statements included in the 2018 Form 10-K for additional disclosures and a description of accounting policies.

 

A. Description of business - The consolidated financial statements include the accounts of the Company, its wholly-owned domestic subsidiaries, Castle Brands (USA) Corp. (“CB-USA”) and McLain & Kyne, Ltd., the Company’s wholly-owned foreign subsidiaries, Castle Brands Spirits Group Limited and Castle Brands Spirits Marketing and Sales Company Limited, and the Company’s 80.1% ownership interest in Gosling-Castle Partners Inc. (“GCP”), with adjustments for income or loss allocated based upon percentage of ownership. The accounts of the subsidiaries have been included as of the date of acquisition. All significant intercompany transactions and balances have been eliminated.
   
B. Liquidity - In November 2018, the Company extended the term of the loan and security agreement (as amended and restated) to July 31, 2020 (as described in Note 7C). The Company believes that its current cash and working capital and the availability under the Credit Facility (as defined in Note 7C) will enable it to fund its obligations, meet its working capital needs, maturing debt obligations and whiskey purchase commitments until it achieves profitability, ensure continuity of supply of its brands and support new brand initiatives and marketing programs through at least November 2019. The Company can continue to meet its operating needs through additional mechanisms including additional or expanded debt financings, potential equity offerings and limiting or adjusting the timing of additional inventory purchases based on available resources.
   
C. Organization and operations - The Company is principally engaged in the importation, marketing and sale of premium and super premium rums, whiskeys, liqueurs, vodka and related non-alcoholic beverage products, including ginger beer, in the United States, Canada, Europe and Asia.
   
D. Revenues - The Company operates in one reportable segment and derives substantially all of its revenue from the sale and delivery of premium beverage alcohol and related non-beverage alcohol products. In the U.S., the Company is required by law to use state-licensed distributors or, in the control states, state-owned agencies performing this function, to sell its brands to retail outlets. In its international markets, the Company relies primarily on established spirits distributors in much the same way as in the U.S. Revenue from product sales is recognized when the product is shipped to a customer (generally a distributor) and title and risk of loss has passed to the customer in accordance with the terms of sale and collection is reasonably assured. Revenue is not recognized on shipments to control states in the United States until such time as product is sold through to the retail channel.
   
  The Company does not ship product unless it has received an order or other documentation authorizing delivery to its customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The Company generally does not provide post-delivery services and does not offer a right-of-return except in the case of an error. Uncollectable accounts receivable are estimated by using a combination of historical customer experience and a customer-by-customer analysis. The Company’s payment terms vary by customer and, in certain cases, the products offered. The term between invoicing and when payment is due is not significant. As permitted under U.S. GAAP, the Company has elected not to assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods to the customer will be one year or less. As permitted under U.S. GAAP, the Company has elected to recognize the incremental costs of obtaining a contract as an expense when incurred as the amortization period of the asset that the Company otherwise would have recognized will be one year or less. As permitted under U.S. GAAP, the Company has elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer, i.e excise taxes (see note 1H). As permitted under U.S. GAAP, the Company has elected to account for any shipping and handling activities that occur after a customer obtains control of any goods as activities to fulfill the promise to transfer the goods, and the Company is not required to evaluate whether such shipping and handling activities are promised services to its customers.

 

 8 
 

 

  See Note 13 for disaggregation of revenue by segment and product as the Company believes this best depicts how the nature, amount, timing and uncertainty of its revenues and cash flows are affected by economic factors.
   
  The Company does not have any customer contracts that meet the definition of unsatisfied performance obligations in accordance with U.S. GAAP.
   
E. Equity investments - Equity investments are carried at original cost adjusted for the Company’s proportionate share of the investees’ income, losses and distributions. The Company assesses the carrying value of its equity investments when an indicator of a loss in value is present and records a loss in value of the investment when the assessment indicates that an other-than-temporary decline in the investment exists. The Company classifies its equity earnings of equity investments as a component of net income or loss.
   
F. Goodwill and other intangible assets - Goodwill represents the excess of purchase price including related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill and other identifiable intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually, or more frequently if circumstances indicate a possible impairment may exist. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives, generally on a straight-line basis, and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
   
G. Impairment of long-lived assets - Under Accounting Standards Codification (“ASC”) 310, “Accounting for the Impairment or Disposal of Long-lived Assets”, the Company periodically reviews whether changes have occurred that would require revisions to the carrying amounts of its definite lived, long-lived assets. When the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized based on the fair value of the asset.
   
H. Excise taxes and duty - Excise taxes and duty are computed at standard rates based on alcohol proof per gallon/liter and are paid after finished goods are imported into the United States or other relevant jurisdiction and then transferred out of “bond.” Excise taxes and duty are recorded to inventory as a component of the cost of the underlying finished goods. When the underlying products are sold “ex warehouse”, the sales price reflects the taxes paid and the inventoried excise taxes and duties are charged to cost of sales.
   
I. Foreign currency - The functional currency for the Company’s foreign operations is the Euro in Ireland and the British Pound in the United Kingdom. Under ASC 830, “Foreign Currency Matters”, the translation from the applicable foreign currencies to U.S. Dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The resulting translation adjustments are recorded as a component of other comprehensive income. Gains or losses resulting from foreign currency transactions are shown as a separate line item in the consolidated statements of operations.

 

 9 
 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

 

J. Fair value of financial instruments - ASC 825, “Financial Instruments”, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties and requires disclosure of the fair value of certain financial instruments. The Company believes that there is no material difference between the fair-value and the reported amounts of financial instruments in the Company’s balance sheets due to the short-term maturity of these instruments, or with respect to the Company’s debt, as compared to the current borrowing rates available to the Company.
   
  The Company’s investments are reported at fair value in accordance with authoritative guidance, which accomplishes the following key objectives:

 

  - Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date;
     
  - Establishes a three-level hierarchy (“valuation hierarchy”) for fair value measurements;
     
  - Requires consideration of the Company’s creditworthiness when valuing liabilities; and
     
  - Expands disclosures about instruments measured at fair value.

 

  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of the valuation hierarchy are as follows:

 

  - Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
     
  - Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are directly or indirectly observable for the asset or liability for substantially the full term of the financial instrument.
     
  - Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

K.

Income taxes - In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The Company recognized the income tax effects of the 2017 Tax Act in its current financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, “Income Taxes”, (“ASC 740”) in the reporting period in which the 2017 Tax Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the 2017 Tax Act for which the accounting under ASC 740 is complete. The Company did not identify items for which the income tax effects of the 2017 Tax Act have not been completed and a reasonable estimate could not be determined as of September 30, 2018.

 

The 2017 Tax Act reduced the U.S. federal corporate tax rate from 35.0% to 21.0% for all corporations effective January 1, 2018. For fiscal year companies, the change in law requires the application of a blended rate for each quarter of the fiscal year, which in the Company’s case is 30.79% for the fiscal year ended March 31, 2018. Thereafter, the applicable statutory rate is 21.0%.

 

Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. A valuation allowance is provided to the extent a deferred tax asset is not considered recoverable.

 

The Company has adopted the provisions of ASC 740 and at each of September 30 and March 31, 2018, the Company had reserves for uncertain tax positions (including related interest and penalties) for various state and local taxes of $6,778. The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expense.

 

 10 
 

 

L.

Recent accounting pronouncements – In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU adds, modifies and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, “Fair Value Measurement.” This guidance is effective for the Company as of April 1, 2020, with early adoption permitted. The Company is currently evaluating the new guidance to determine the impact the adoption of this guidance will have on the Company’s results of operations, cash flows and financial condition.

 

In July 2018, the FASB issued ASU 2018-09, “Codification Improvements.” This ASU makes amendments to multiple codification Topics. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in this ASU do not require transition guidance and will be effective upon issuance of this ASU. However, many of the amendments in this ASU do have transition guidance with effective dates for annual periods beginning after December 15, 2018. The Company is currently evaluating the new guidance to determine the impact the adoption of this guidance will have on the Company’s results of operations, cash flows and financial condition.

 

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. This ASU also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). This guidance is effective for the Company as of April 1, 2019, with early adoption permitted. The Company is currently evaluating the new guidance to determine the impact the adoption of this guidance will have on the Company’s results of operations, cash flows and financial condition.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU amends the requirement on the measurement and recognition of expected credit losses for financial assets held. The ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption is permitted, but not earlier than annual and interim periods beginning after December 15, 2018. This amendment should be applied on a modified retrospective basis with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the new guidance to determine the impact the adoption of this guidance will have on the Company’s results of operations, cash flows and financial condition

 

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or on a straight line basis over the term of the lease. For leases with a term of 12 months or less for which there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities and should recognize lease expense for such leases generally on a straight-line basis over the lease term. Certain qualitative disclosures along with specific quantitative disclosures will be required so that users are able to understand more about the nature of an entity’s leasing activities. Accounting for lessors remains largely unchanged from current U.S. GAAP. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11 “Leases (Topic 842): Targeted Improvements” (ASU 2018-11). ASU 2018-10 clarifies certain areas within ASU 2016-02. Prior to ASU 2018-11, a modified retrospective transition was required for financing or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. ASU 2018-11 allows entities an additional transition method to the existing requirements whereby an entity could adopt the provisions of ASU 2016-02 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption. ASU 2018-11 also allows a practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are present. An entity that elects to use the practical expedients will, in effect, continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. ASU 2016-02, ASU 2018-10 and ASU 2018-11 will be effective for the Company’s fiscal year beginning April 1, 2019 and subsequent interim periods. The Company’s current lease arrangements expire through 2021 and the Company is currently evaluating the impact the adoption of these ASUs will have on the Company’s condensed consolidated financial statements.

 

The Company does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying condensed consolidated financial statements.

   
M. Accounting standards adopted - In February 2018, FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which allows for stranded tax effects in accumulated other comprehensive income resulting from the 2017 Tax Act to be reclassified to retained earnings. This guidance became effective for the Company as of April 1, 2018. The Company determined that the adoption of this guidance did not have a material effect on the Company’s results of operations, cash flows and financial condition.

 

 11 
 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

 

  In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This guidance became effective for the Company as of April 1, 2018. The Company determined that the adoption of this guidance did not have a material effect on the Company’s results of operations, cash flows and financial condition.
   
  In February 2017, the FASB issued ASU 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” ASU 2017-05 clarifies the scope and accounting of a financial asset that meets the definition of an “in-substance nonfinancial asset” and defines the term “in-substance nonfinancial asset.” ASU 2017-05 also adds guidance for partial sales of nonfinancial assets. This guidance became effective for the Company as of April 1, 2018. The Company determined that the adoption of this guidance did not have a material effect on the Company’s results of operations, cash flows and financial condition.
   
  In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” This ASU, which must be applied prospectively, provides a narrower framework to be used to determine if a set of assets and activities constitutes a business than under current guidance and is generally expected to result in greater consistency in the application of ASC Topic 805, Business Combinations. This guidance became effective for the Company as of April 1, 2018. The Company determined that the adoption of this guidance did not have a material effect on the Company’s results of operations, cash flows and financial condition.
   
  In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB’s Emerging Issues Task Force (the “Task Force”).” The new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. The Company adopted the new standard on April 1, 2018 using a retrospective adoption method, which resulted in an adjustment to “Cash and cash equivalents including restricted cash” on the accompanying condensed consolidated statement of cashflows. The Company determined that the adoption of this guidance did not have a material effect on the Company’s results of operations, cash flows and financial condition.
   
  In October 2016, the FASB issued ASU 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other than Inventory.” This ASU removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. This guidance became effective for the Company as of April 1, 2018. Entities must apply a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company determined that the adoption of this guidance did not have a material effect on the Company’s results of operations, cash flows and financial condition.
   
  In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”, which provides guidance on eight cash flow classification issues with the objective of reducing differences in practice. The new standard became effective for the Company as of April 1, 2018. Adoption is required to be on a retrospective basis, unless impracticable for any of the amendments, in which case a prospective application is permitted. The Company determined that the adoption of this guidance did not have a material effect on the Company’s results of operations, cash flows and financial condition.

 

  In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 does not change the core principle of the guidance stated in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-9”), instead, the amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis. ASU 2016-08 will have the same effective date and transition requirements as the new standard issued in ASU 2014-09. In May 2014, the FASB issued ASU 2014-09. The new standard outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new standard contains principles to determine the measurement of revenue and timing of when it is recognized. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the new standard on April 1, 2018 by applying the modified retrospective method, which did not result in a transition adjustment nor an adjustment to opening retained earnings. The Company determined that the adoption of this guidance did not have a material effect on the Company’s results of operations, cash flows and financial condition.
   
  In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Also, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The Company adopted the new standard on April 1, 2018, which did not result in a cumulative-effect adjustment to the balance sheet. The Company determined that the adoption of this guidance did not have a material effect on the Company’s results of operations, cash flows and financial condition.

 

 12 
 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

 

NOTE 2 - BASIC AND DILUTED NET LOSS PER COMMON SHARE

 

Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed giving effect to all potentially dilutive common shares that were outstanding during the period that are not anti-dilutive. Potentially dilutive common shares consist of incremental shares issuable upon exercise of stock options, vesting of restricted shares or conversion of convertible notes outstanding. In computing diluted net income per share for the three months ended September 30, 2018 and 2017, no adjustment has been made to the weighted average outstanding common shares for the assumed exercise of stock options, vesting of restricted shares or conversion of convertible notes as the assumed exercise, vesting or conversion of these securities is anti-dilutive.

 

Potential common shares not included in calculating diluted net loss per share are as follows:

 

   Three months ended September 30, 
   2018   2017 
Stock options   14,171,442    15,523,008 
Unvested restricted stock   1,997,750    1,092,000 
5% Convertible notes   55,556    1,833,333 
           
Total   16,224,748    18,448,341 

 

NOTE 3 - INVENTORIES

 

   September 30, 2018   March 31, 2018 
Raw materials  $25,080,981   $21,015,172 
Finished goods – net   15,523,821    13,540,381 
           
Total  $40,604,712   $34,555,553 

 

As of September 30 and March 31, 2018, 6% and 9%, respectively, of raw materials and 6% and 3%, respectively, of finished goods were located outside of the United States.

 

In the six months ended September 30, 2018, the Company acquired $7,490,366 of bulk bourbon whiskey in support of its anticipated near and mid-term needs.

 

The Company estimates the allowance for obsolete and slow-moving inventory based on analyses and assumptions including, but not limited to, historical usage, expected future demand and market requirements.

 

Inventories are stated at the lower of weighted average cost or net realizable value.

 

NOTE 4 - EQUITY INVESTMENT

 

Investment in Gosling-Castle Partners Inc., consolidated

 

In March 2017, the Company acquired an additional 201,000 shares (the “GCP Share Acquisition”) of the common stock of GCP, representing a 20.1% equity interest in GCP. GCP is a strategic global export venture between the Company and the Gosling family. As a result of the completion of the GCP Share Acquisition, the Company’s total equity interest in GCP increased to 80.1%. The consideration for the GCP Share Acquisition was (i) $20,000,000 in cash and (ii) 1,800,000 shares of common stock of the Company. The Company accounted for this transaction in accordance with ASC 810 “Consolidation,” and in particular section 810-10-45.

 

For the three months ended September 30, 2018 and 2017, GCP had pretax net income on a stand-alone basis of $1,415,600 and $1,425,534, respectively. The Company allocated a portion of this net income, or $281,704 and $283,681, to non-controlling interest for the three months ended September 30, 2018 and 2017, respectively. For the six months ended September 30, 2018 and 2017, GCP had pretax net income on a stand-alone basis of $3,341,936 and $1,851,541, respectively. The Company allocated a portion of this net income, or $665,045 and $368,457, to non-controlling interest for the three months ended September 30, 2018 and 2017, respectively. The cumulative balance allocated to noncontrolling interests in GCP was $4,166,789 and $3,568,636 at September 30 and March 31, 2018, respectively, as shown on the accompanying condensed consolidated balance sheets.

 

 13 
 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

 

Investment in Copperhead Distillery Company, equity method

 

In June 2015, CB-USA purchased 20% of Copperhead Distillery Company (“Copperhead”) for $500,000. Copperhead owns and operates the Kentucky Artisan Distillery. The investment was part of an agreement to build a new warehouse in Crestwood, Kentucky to store Jefferson’s bourbons, provide distilling capabilities using special mash-bills made from locally grown grains and create a visitor center and store to enhance the consumer experience for the Jefferson’s brand. In September 2017, CB-USA purchased an additional 5% of Copperhead for $156,000 from an existing shareholder. The Company has accounted for this investment under the equity method of accounting. For the three months ended September 30, 2018 and 2017, the Company recognized $55,113 and $29,846 of income from this investment, respectively. For the six months ended September 30, 2018 and 2017, the Company recognized $89,141 and $71,595 of income from this investment, respectively. The investment balance was $903,067 and $813,926 at September 30 and March 31, 2018, respectively.

 

NOTE 5 - GOODWILL AND INTANGIBLE ASSETS

 

The carrying amount of goodwill was $496,226 at each of September 30 and March 31, 2018.

 

Intangible assets consist of the following:

 

   September 30, 2018   March 31, 2018 
Definite life brands  $170,000   $170,000 
Trademarks   641,693    641,693 
Rights   8,271,555    8,271,555 
Product development   208,518    208,518 
Patents   994,000    994,000 
Other   55,460    55,460 
           
    10,341,226    10,341,226 
Less: accumulated amortization   8,710,096    8,485,253 
           
Net   1,631,130    1,855,973 
Other identifiable intangible assets - indefinite lived*   4,112,972    4,112,972 
           
   $5,744,102   $5,968,945 

 

* Other identifiable intangible assets - indefinite lived consists of product formulations and the Company’s relationships with its distillers.

 

Accumulated amortization consists of the following:

 

   September 30, 2018   March 31, 2018 
Definite life brands  $170,000   $170,000 
Trademarks   421,836    403,617 
Rights   7,122,925    6,954,303 
Product development   52,748    47,880 
Patents   942,587    909,453 
           
Accumulated amortization  $8,710,096   $8,485,253 

 

NOTE 6 - RESTRICTED CASH

 

At September 30 and March 31, 2018, the Company had €310,334 or $360,025 (translated at the September 30, 2018 exchange rate) and €310,324 or $382,279 (translated at the March 31, 2018 exchange rate), respectively, of cash restricted from withdrawal and held by a bank in Ireland as collateral for overdraft coverage, creditors’ insurance, customs and excise guaranty and a revolving credit facility as described in Note 7A below.

 

 14 
 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

 

NOTE 7 - NOTES PAYABLE

 

   September 30, 2018   March 31, 2018 
Notes payable consist of the following:          
Foreign revolving credit facilities (A)  $77,154   $126,148 
Note payable - GCP note (B)   216,869    211,580 
Credit facility (C)   22,182,692    18,505,897 
5% Convertible notes (D)   50,000    50,000 
11% Subordinated Note (E)   20,000,000    20,000,000 
           
Total  $42,599,085   $38,893,625 

 

A. The Company has arranged various credit facilities aggregating €310,334 or $360,025 (translated at the September 30, 2018 exchange rate) and €310,324 or $382,279 (translated at the March 31, 2018 exchange rate) at September 30 and March 31, 2018, respectively, with an Irish bank, including overdraft coverage, creditors’ insurance, customs and excise guaranty, a revolving credit facility and Company credit cards. These credit facilities are payable on demand, continue until terminated by either party, are subject to annual review, and call for interest at the lender’s AA1 Rate minus 1.70%. At September 30 and March 31, 2018, there was €66,505 or $77,154 (translated at the September 30, 2018 exchange rate) and €102,404 or $126,148 (translated at the March 31, 2018 exchange rate) of principal due on the foreign revolving credit facilities included in current maturities of notes payable, respectively.
   
B. In December 2009, GCP issued a promissory note (the “GCP Note”) in the aggregate principal amount of $211,580 to Gosling’s Export (Bermuda) Limited in exchange for credits issued on certain inventory purchases. The GCP Note matures on April 1, 2020, is payable at maturity, subject to certain acceleration events, and calls for annual interest of 5%, to be accrued and paid at maturity. At March 31, 2018, $10,579 of accrued interest was converted to amounts due to affiliates. At September 30, 2018, $216,869, consisting of $211,580 of principal and $5,289 of accrued interest, due on the GCP Note is included in long-term liabilities. At March 31, 2018, $211,580 of principal due on the GCP Note is included in long-term liabilities.
   
C.

In August 2011, the Company and CB-USA entered into a loan and security agreement (as amended and restated, and further amended, the “Amended Agreement”) with a third-party lender ACF FinCo I LP (“ACF,”) as successor in interest, which, as amended, provided for availability (subject to certain terms and conditions) of a facility of up to $21.0 million (the “Credit Facility”) for the purpose of providing the Company with working capital., including a sublimit in the maximum principal amount of $7,000,000 to permit the Company to acquire aged whiskey inventory (the “Purchased Inventory Sublimit”) subject to certain conditions set forth in the Amended Agreement. The Company and CB-USA are referred to individually and collectively as the Borrower. Pursuant to the Loan Agreement Amendment, the Company and CB-USA may borrow up to the lesser of (x) $21,000,000 and (y) the sum of the borrowing base calculated in accordance with the Amended Agreement and the Purchased Inventory Sublimit.

 

In May 2018, the Company and CB-USA entered into a Fourth Amendment (the “Fourth Amendment”) to the Amended Agreement to amend certain terms of the Credit Facility. Among other changes, the Fourth Amendment increased the maximum amount of the Credit Facility from $21,000,000 to $23,000,000, and amended the definition of borrowing base to increase the amount of borrowing that can be collateralized by inventory.

 

The Credit Facility interest rate is the rate that, when annualized, is the greatest of (a) the Prime Rate plus 3.00%, (b) the LIBOR Rate plus 5.50% and (c) 6.00%. As of September 30, 2018, the Credit Facility interest rate was 7.75%.

 

The Purchased Inventory Sublimit interest rate is the rate that, when annualized, is the greatest of (a) the Prime Rate plus 4.25%, (b) the LIBOR Rate plus 6.75% and (c) 7.50%. As of September 30, 2018, the interest rate applicable to the Purchased Inventory Sublimit was 9.5%. The monthly facility fee is 0.75% per annum of the maximum Credit Facility. Also, the Company must pay a monthly facility fee of $2,000 with respect to the Purchased Inventory Sublimit until all obligations with respect thereof are fully paid and performed.

 

 15 
 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

 

  The Amended Agreement contains EBITDA targets allowing for further interest rate reductions in the future. The Company and CB-USA are permitted to prepay the Credit Facility in whole or the Purchased Inventory Sublimit, in whole or in part, subject to certain prepayment penalties as set forth in the Loan Agreement Amendment. For the six months ended September 30, 2018, the Company paid interest at 7.31175% through April 30, 2018, then 7.35805% through May 31, 2018, then 7.30031% through June 30, 2018, then 7.5% through September 27, 2018, then 7.75% through September 30, 2018 on the Amended Agreement. For the six months ended September 30, 2017, the Company paid interest at 6.5% through June 14, 2017, then 6.75% through September 30, 2017 on the Amended Agreement. For the six months ended September 30, 2018, the Company paid interest at 9.06175% through April 30, 2018, then 9.10805% through May 31, 2018, then 9.05031% through June 30, 2018, then 9.25% through September 27, 2018, then 9.5% through September 30, 2018 on the Purchased Inventory Sublimit. For the six months ended September 30, 2017, the Company paid interest at 8.25% through June 14, 2017, and then at 8.5% through September 30, 2017 on the Purchased Inventory Sublimit. Interest is payable monthly in arrears, on the first day of every month on the average daily unpaid principal amount of the Credit Facility. After the occurrence and during the continuance of any “Default” or “Event of Default” (as defined under the Amended Agreement), the Borrower is required to pay interest at a rate that is 3.25% per annum above the then applicable Credit Facility interest rate. There have been no Events of Default under the Credit Facility. ACF also receives a collateral management fee of $1,000 per month (increased to $2,000 after the occurrence of and during the continuance of an Event of Default) in addition to the facility fee with respect to the Purchased Inventory Sublimit. The Amended Agreement contains standard borrower representations and warranties for asset-based borrowing and a number of reporting obligations and affirmative and negative covenants. The Amended Agreement includes negative covenants that, among other things, restrict the Borrower’s ability to create additional indebtedness, dispose of properties, incur liens and make distributions or cash dividends. The obligations of the Borrower under the Amended Amendment are secured by the grant of a pledge and security interest in all of the assets of the Borrower. At September 30, 2018, the Company was in compliance, in all respects, with the covenants under the Amended Agreement. The Credit Facility matures on July 31, 2020.
   
  ACF required as a condition to entering into an amendment to the Amended Agreement in August 2015 that ACF enter into a participation agreement with certain related parties of the Company, including Frost Gamma Investments Trust, an entity affiliated with Phillip Frost, M.D., a director and principal shareholder of the Company, Mark E. Andrews, III, a director of the Company and the Company’s Chairman, Richard J. Lampen, a director of the Company and the Company’s President and Chief Executive Officer, Brian L. Heller, the Company’s General Counsel and Assistant Secretary, and Alfred J. Small, the Company’s Senior Vice President, Chief Financial Officer, Treasurer and Secretary, to allow for the sale of participation interests in the Purchased Inventory Sublimit and the inventory purchased with the proceeds thereof. The participation agreement provides that ACF’s commitment to fund each advance of the Purchased Inventory Sublimit shall be limited to seventy percent (70%), up to an aggregate maximum principal amount for all advances equal to $4,900,000. Neither the Company nor CB-USA is a party to the participation agreement. However, the Company and CB-USA are party to a fee letter with the junior participants (including the related party junior participants) pursuant to which the Company and CB-USA were obligated to pay the junior participants a closing fee of $18,000 on the effective date of the Loan Agreement Amendment and are obligated to pay a commitment fee of $18,000 on each anniversary of the effective date until the junior participants’ obligations are terminated pursuant to the participation agreement.

 

  In August 2015, the Company used $3,000,000 of the Purchased Inventory Sublimit to acquire aged bourbon inventory. Frost Gamma Investments Trust ($150,000), Mark E. Andrews, III ($50,000), Richard J. Lampen ($100,000), Brian L. Heller ($42,500) and Alfred J. Small ($15,000) each acquired participation interests in the Purchased Inventory Sublimit and the inventory purchased with the proceeds thereof. In January 2017, the Company acquired $1,030,000 in aged bulk bourbon under the Purchased Inventory Sublimit with additional borrowings from certain related parties of the Company, including Frost Gamma Investments Trust ($51,500), Richard J. Lampen ($34,333), Mark E. Andrews, III ($17,167), Brian L. Heller ($14,592), and Alfred J. Small ($5,150), as junior participants in the Purchased Inventory Sublimit with respect to such purchase. In October 2017, the Company acquired $1,308,125 in aged bulk bourbon under the Purchased Inventory Sublimit with additional borrowings from certain related parties of the Company, including Frost Gamma Investments Trust ($65,406), Richard J. Lampen ($43,604), Mark E. Andrews, III ($21,802), Brian L. Heller ($18,532), and Alfred J. Small ($6,541), as junior participants in the Purchased Inventory Sublimit with respect to such purchase. In December 2017, the Company acquired $900,425 in aged bulk bourbon under the Purchased Inventory Sublimit with additional borrowings from certain related parties of the Company, including Frost Gamma Investments Trust ($45,021), Richard J. Lampen ($30,014), Mark E. Andrews, III ($15,007), Brian L. Heller ($12,756), and Alfred J. Small ($4,502), as junior participants in the Purchased Inventory Sublimit with respect to such purchase. In April 2018, the Company acquired $2,001,000 in aged bulk bourbon under the Purchased Inventory Sublimit with additional borrowings from certain related parties of the Company, including Frost Gamma Investments Trust ($100,050), Richard J. Lampen ($66,700), Mark E. Andrews, III ($33,350), Brian L. Heller ($28,348), and Alfred J. Small ($10,005), as junior participants in the Purchased Inventory Sublimit with respect to such purchase. In June 2018, the Company acquired $1,035,000 in aged bulk bourbon under the Purchased Inventory Sublimit with additional borrowings from certain related parties of the Company, including Frost Gamma Investments Trust ($51,750), Richard J. Lampen ($34,500), Mark E. Andrews, III ($17,250), Brian L. Heller ($14,663), and Alfred J. Small ($5,175), as junior participants in the Purchased Inventory Sublimit with respect to such purchase. Under the terms of the participation agreement, the participants receive interest at the rate of 11% per annum.
   
  At September 30 and March 31, 2018, $22,255,062 and $18,604,962, respectively, due on the Credit Facility was included in long-term liabilities. At September 30 and March 31, 2018, there was $744,938 and $2,395,038, respectively, in potential availability under the Credit Facility. In connection with the adoption of ASU 2015-03, the Company included $72,370 and $99,065 of debt issuance costs at September 30 and March 31, 2018, respectively, as direct deductions from the carrying amount of the related debt liability.
   
 

In October 2018, the Company and CB-USA entered into a Fifth Amendment (the “Fifth Amendment”) to the Amended Agreement to amend certain terms of the Company’s existing Credit Facility with ACF. Among other changes, the Fifth Amendment increased the maximum amount of the Credit Facility from $23,000,000 to $25,000,000, and amended the definition of borrowing base to increase the amount of borrowing that can be collateralized by inventory. The Company and CB-USA paid ACF an aggregate $50,000 commitment fee in connection with the Amendment. In connection with the Amendment, the Company and CB-USA also entered into an Amended and Restated Revolving Credit Note.

 

In November 2018, the Company and CB-USA entered into a Sixth Amendment (the “Sixth Amendment”) to the Amended Agreement to amend certain terms of the Company’s existing Credit Facility with ACF. Among other changes, the Sixth Amendment extends the term of the Credit Facility to July 31, 2020 and amended the definition of borrowing base to increase the amount of borrowing that can be collateralized by inventory. The Company and CB-USA paid ACF an aggregate $57,500 commitment fee in connection with the Amendment.

 

 16 
 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

 

D.

In October 2013, the Company entered into a 5% Convertible Subordinated Note Purchase Agreement (the “Note Purchase Agreement”) with the purchasers party thereto, under which the Company issued an aggregate initial principal amount of $2,125,000 of unsecured subordinated notes (the “Convertible Notes”). The Convertible Notes bear interest at a rate of 5% per annum, payable quarterly, until their maturity date of December 15, 2018. The Convertible Notes, and accrued but unpaid interest thereon, are convertible in whole or in part from time to time at the option of the holders thereof into shares of the Company’s common stock at a conversion price of $0.90 per share (the “Conversion Price”). The Convertible Notes may be prepaid in whole or in part at any time without penalty or premium, but with payment of accrued interest to the date of prepayment. The Convertible Notes contain customary events of default, which, if uncured, entitle each note holder to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the Convertible Notes.

 

The purchasers of the Convertible Notes included related parties of the Company, including an affiliate of Dr. Phillip Frost ($500,000), Mark E. Andrews, III ($50,000), an affiliate of Richard J. Lampen ($50,000), an affiliate of Glenn Halpryn ($200,000), Dennis Scholl ($100,000), and Vector Group Ltd., a more than 5% shareholder of ours, of which Richard Lampen is an executive officer, Henry Beinstein, a director of ours, is a director and Phillip Frost, M.D. is a principal shareholder ($200,000).

 

The Company may forcibly convert all or any part of the Convertible Notes and all accrued but unpaid interest thereon if (i) the average daily volume of the Company’s common stock (as reported on the principal market or exchange on which the common stock is listed or quoted for trading) exceeds $50,000 per trading day and (ii) the volume weighted average price of the common stock for at least twenty (20) trading days during any thirty (30) consecutive trading day period exceeds 250% of the then-current Conversion Price. Any forced conversion will be applied ratably to the holders of all Convertible Notes issued pursuant to the Note Purchase Agreement based on each holder’s then-current note holdings.

 

In connection with the Note Purchase Agreement, each purchaser of the Convertible Notes was required to execute a joinder to the subordination agreement, by and among ACF and certain other junior lenders to the Company; the Company is not a party to the subordination agreement.

 

During the year ended March 31, 2018, certain holders of the Convertible Notes converted an aggregate $1,632,000 of the outstanding principal and interest balances of their Convertible Notes into 1,813,334 shares of the Company’s common stock, pursuant to the terms of the Convertible Notes. The converting holders included an affiliate of Dr. Phillip Frost, Mark E. Andrews, III an affiliate of Richard J. Lampen, and Vector Group Ltd.

 

At each of September 30 and March 31, 2018, $50,000 of principal due on the Convertible Notes was included in current maturities of notes payable.

   
E.

In March 2017, the Company issued a promissory note to Frost Nevada Investments Trust (the “Holder”), an entity affiliated with Phillip Frost, M.D., in the aggregate principal amount of $20,000,000 (the “Subordinated Note”). The purpose of Company’s issuance of the Subordinated Note was to finance the GCP Share Acquisition. The Subordinated Note bears interest quarterly at the rate of 11% per annum. All claims of the Holder to principal, interest and any other amounts owed under the Subordinated Note are subordinated in right of payment to all indebtedness of the Company existing as of the date of the Subordinated Note. The Subordinated Note contains customary events of default and may be prepaid by the Company, in whole or in part, without penalty, at any time.

 

In April 2018, the Company entered into a First Amendment to the Subordinated Note to extend the maturity date on the Subordinated Note from March 15, 2019 until September 15, 2020. No other provisions of the Subordinated Note were amended.

 

NOTE 8 - EQUITY

 

Restricted Share Grants - In April 2018, the Company’s Compensation Committee approved the grant of 1,100,000 restricted common shares to certain directors, officers, employees and related parties. The restricted shares vest in four equal annual installments.

 

 17 
 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

 

NOTE 9 - FOREIGN CURRENCY FORWARD CONTRACTS

 

The Company enters into forward contracts from time to time to reduce its exposure to foreign currency fluctuations. The Company recognizes in the balance sheet derivative contracts at fair value, and reflects any net gains and losses currently in earnings. At September 30 and March 31, 2018, the Company had no forward contracts outstanding.

 

NOTE 10 - STOCK-BASED COMPENSATION

 

In April 2018, the Company granted to employees, directors and certain consultants an aggregate of 1,100,000 restricted shares of the Company’s common stock under the Company’s 2013 Incentive Compensation Plan. The restricted shares vest 25% on each of the first four anniversaries of the grant date, subject to earlier vesting in certain circumstances. The Company has valued the shares at $1,342,000.

 

Stock-based compensation expense for the three months ended September 30, 2018 and 2017 amounted to $497,219 and $504,490, respectively. Stock-based compensation expense for the six months ended September 30, 2018 and 2017 amounted to $987,704 and $979,816, respectively. At September 30, 2018, total unrecognized compensation cost amounted to $3,645,961, representing 2,154,875 unvested options and 1,997,750 unvested shares of restricted stock. This cost is expected to be recognized over a weighted-average vesting period of 1.91 years. There were 1,129,166 options exercised during the six months ended September 30, 2018 and 240,300 options exercised during the six months ended September 30, 2017. The Company did not recognize any related tax benefit for the three months ended June 30, 2018 and 2017 from option exercises, as the effects were de minimis.

 

NOTE 11 - COMMITMENTS AND CONTINGENCIES

 

A. The Company has entered into a supply agreement with an Irish distiller (“Irish Distillery”), which provides for the production of blended Irish whiskeys for the Company until the contract is terminated by either party in accordance with the terms of the agreement. The Irish Distillery may terminate the contract if it provides at least six years prior notice to the Company, except for breach. Under this agreement, the Company provides the Irish Distillery with a forecast of the estimated amount of liters of pure alcohol it requires for the next four fiscal contract years and agrees to purchase 90% of that amount, subject to certain annual adjustments. For the contract year ending June 30, 2019, the Company has contracted to purchase approximately €1,105,572 or $1,282,596 (translated at the September 30, 2018 exchange rate) in bulk Irish whiskey, of which €285,489, or $331,202 (translated at the September 30, 2018 exchange rate), has been purchased as of September 30, 2018. The Company is not obligated to pay the Irish Distillery for any product not yet received. During the term of this supply agreement, the Irish Distillery has the right to limit additional purchases above the commitment amount.
   
B. The Company has also entered into a supply agreement with the Irish Distillery, which provides for the production of single malt Irish whiskeys for the Company until the contract is terminated by either party in accordance with the terms of the agreement. The Irish Distillery may terminate the contract if it provides at least thirteen years prior notice to the Company, except for breach. Under this agreement, the Company provides the Irish Distillery with a forecast of the estimated amount of liters of pure alcohol it requires for the next twelve fiscal contract years and agrees to purchase 80% of that amount, subject to certain annual adjustments. For the contract year ending June 30, 2019, the Company has contracted to purchase approximately €575,791 or $667,987 (translated at the September 30, 2018 exchange rate) in bulk Irish whiskey, of which €140,401, or $162,882 (translated at the September 30, 2018 exchange rate), has been purchased as of September 30, 2018. The Company is not obligated to pay the Irish Distillery for any product not yet received. During the term of this supply agreement, the Irish Distillery has the right to limit additional purchases above the commitment amount.
   
C. The Company has entered into a supply agreement with a bourbon distiller, which provides for the production of newly-distilled bourbon whiskey. Under this agreement, the distiller will provide the Company with an agreed upon amount of original proof gallons of newly-distilled bourbon whiskey, subject to certain annual adjustments. For the contract year ending December 31, 2018, the Company has contracted to purchase approximately $3,900,000 in newly distilled bourbon, of which $1,682,200 has been purchased as of September 30, 2018. The Company is not obligated to pay the distiller for any product not yet received.
   
D. The Company leases office space in New York, NY, Dublin, Ireland and Houston, TX. The New York, NY lease began on May 1, 2010 and expires on February 29, 2020 and provides for monthly payments of $26,255. The Dublin lease commenced on March 1, 2009 and extends through October 31, 2019 and provides for monthly payments of €1,500 or $1,740 (translated at the September 30, 2018 exchange rate). The Houston, TX lease commenced on April 27, 2015 and extends through June 26, 2021 and provides for monthly payments of $3,581. The Company has also entered into non-cancelable operating leases for certain office equipment.

 

 18 
 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

 

E. As described in Note 7C, in August 2011, the Company and CB-USA entered into the Credit Facility, as amended in July 2012, March 2013, August 2013, November 2013, August 2014, September 2014, August 2015, October 2017, May 2018 and October 2018.
   
F. Except as set forth below, the Company believes that neither it, nor any of its subsidiaries, is currently subject to litigation which, in the opinion of management after consultation with counsel, is likely to have a material adverse effect on the Company.

 

The Company may become involved in litigation from time to time relating to claims arising in the ordinary course of its business. These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.

 

NOTE 12 - CONCENTRATIONS

 

A. Credit Risk - The Company maintains its cash and cash equivalents balances at various large financial institutions that, at times, may exceed federally and internationally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.
   
B. Customers - Sales to one customer, the Southern Glazer’s Wine and Spirits of America, Inc. family of companies (“SGWS”) accounted for approximately 37.8% and 36.3% of the Company’s net sales for the three months ended September 30, 2018 and 2017, respectively. Sales to SGWS accounted for approximately 37.0% and 38.0% of the Company’s net sales for the six months ended September 30, 2018 and 2017, respectively, and approximately 38.6% and 35.9% of accounts receivable at September 30 and March 31, 2018, respectively.

 

NOTE 13 - GEOGRAPHIC INFORMATION

 

The Company operates in one reportable segment - the sale of premium beverage alcohol. The Company’s product categories are whiskeys, rum, liqueurs, vodka, tequila and ginger beer, a related non-alcoholic beverage product. The Company reports its operations in two geographic areas: International and United States.

 

The consolidated financial statements include revenues and assets generated in or held in the U.S. and foreign countries. The following table sets forth the amounts and percentage of consolidated sales, net, consolidated income from operations, consolidated net loss attributable to common shareholders, consolidated income tax expense and consolidated assets from the U.S. and foreign countries and consolidated sales, net by category.

 

   Three months ended September 30, 
   2018   2017 
Consolidated Sales, net:                    
International  $2,237,418    9.6%  $2,177,367    10.4%
U.S. - control states   4,519,667    21.4%   4,365,492    23.3%
U.S. - open states   16,553,078    78.6%   14,351,291    76.7%
United States   21,072,745    90.4%   18,716,783    89.6%
                     
Total Consolidated Sales, net  $23,310,163    100.0%  $20,894,150    100.0%
                     
Consolidated Income from Operations:                    
International  $24,211    2.3%  $15,737    1.4%
United States   1,024,228    97.7%   1,143,139    98.6%
                     
Total Consolidated Income from Operations  $1,048,439    100.0%  $1,158,876    100.0%
                     
Consolidated Net Income (Loss) Attributable to Common Shareholders:                    
International  $48,135    22.3%  $47,470    2,822.9%
United States   (264,271)   (122.3)%   (49,151)   (2,922.9)%
                     
Total Consolidated Net Loss Attributable to Common Shareholders  $(216,136)   100.0%  $(1,681)   100.0%
                     
Income tax expense, net:                    
United States  $217    100.0%  $25,335    100.0%
                     
Consolidated Sales, net by category:                    
Whiskey  $9,000,528    38.6%  $7,335,290    35.2%
Rum   4,174,322    17.9%  $4,168,262    19.9%
Liqueurs   2,536,745    10.9%   2,579,437    12.3%
Vodka   336,166    1.4%   353,792    1.7%
Tequila   26,479    0.1%   84,560    0.4%
Ginger beer   7,235,923    31.0%   6,372,809    30.5%
                     
Total Consolidated Sales, net  $23,310,163    100.0%  $20,894,150    100.0%

 

 19 
 

 

   Six months ended September 30, 
   2018   2017 
Consolidated Sales, net:                    
International  $4,544,236    9.8%  $4,442,146    10.6%
U.S. - control states   9,831,306    23.5%   8,644,802    23.2%
U.S. - open states   32,039,009    76.5%   28,659,489    76.8%
United States   41,870,315    91.2%   37,304,291    89.4%
                     
Total Consolidated Sales, net  $46,414,551    100.0%  $41,746,437    100.0%
                     
Consolidated (Loss) Income from Operations:                    
International  $(53,695)   (3.1)%  $(13,261)   (1.1)%
United States   1,786,738    103.1%   1,226,608    101.1%
                     
Total Consolidated Income from Operations  $1,733,043    100.0%  $1,213,347    100.0%
                     
Consolidated Net (Loss) Income Attributable to Common Shareholders:                    
International  $(867)   0.1%  $42,262    4.5%
United States   (905,976)   99.9%   (990,340)   (104.5)%
                     
Total Consolidated Net Loss Attributable to Common Shareholders  $(906,843)   100.0%  $(948,078)   100.0%
                     
Income tax expense, net:                    
United States  $(17,898)   100.0%  $(43,748)   100.0%
                     
Consolidated Sales, net by category:                    
Whiskey  $19,141,660    39.8%  $14,505,777    34.8%
Rum   8,733,772    18.8%  $8,621,765    20.7%
Liqueurs   4,523,841    9.7%   4,638,346    11.1%
Vodka   656,744    1.4%   643,255    1.5%
Tequila   85,162    0.2%   129,736    0.3%
Ginger beer   13,932,543    30.0%   13,207,558    31.6%
                     
Total Consolidated Sales, net  $46,414,551    100.0%  $41,746,437    100.0%

 

   As of September 30, 2018   As of March 31, 2018 
Consolidated Assets:                    
International  $2,501,001    3.8%  $2,886,735    4.8%
United States   62,905,365    96.2%   57,446,625    95.2%
                     
Total Consolidated Assets  $65,406,366    100.0%  $60,333,360    100.0%

 

 20 
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We develop and market premium and super premium brands in the following beverage alcohol categories: rum, whiskey, liqueurs and vodka. We also develop and market related non-alcoholic beverage products, including Goslings Stormy Ginger Beer. We distribute our products in all 50 U.S. states and the District of Columbia and in thirteen primary international markets, including Ireland, Great Britain, Northern Ireland, Germany, Canada, France, Finland, Norway, Sweden, Denmark, and the Duty Free markets. We market the following brands, among others:

 

Goslings rum®
Goslings Stormy Ginger Beer
Goslings Dark’n Stormy® ready-to-drink cocktail
Jefferson’s® bourbon
Jefferson’s Reserve®
Jefferson’s Ocean Aged at Sea®
Jefferson’s Wine Finish Collection
Jefferson’s The Manhattan: Barrel Finished Cocktail
Jefferson’s Chef’s Collaboration
Jefferson’s Wood Experiment
Jefferson’s Presidential Select
Jefferson’s Straight Rye whiskey
Pallini® liqueurs
Clontarf® Irish whiskey
Knappogue Castle Whiskey®
Brady’s® Irish Cream
Boru® vodka
Celtic Honey® liqueur
Gozio® amaretto
The Arran Malt® Single Malt Scotch Whisky
The Robert Burns Scotch Whiskeys
Machrie Moor Scotch Whiskeys

 

Our objective is to continue building Castle Brands into a profitable international spirits company, with a distinctive portfolio of premium and super premium spirits brands. To achieve this, we continue to seek to:

 

focus on our more profitable brands and markets. We continue to focus our distribution efforts, sales expertise and targeted marketing activities on our more profitable brands and markets;
grow organically. We believe that continued organic growth will enable us to achieve long-term profitability. We focus on brands that have profitable growth potential and staying power, such as our rums, whiskeys and ginger beer, sales of which have grown substantially in recent years;
build consumer awareness. We use our existing assets, expertise and resources to build consumer awareness and market penetration for our brands;
leverage our distribution network. Our established distribution network in all 50 U.S. states enables us to promote our brands nationally and makes us an attractive strategic partner for smaller companies seeking U.S. distribution; and
selectively add new brand extensions and brands to our portfolio. We intend to continue to introduce new brand extensions and expressions. For example, we have leveraged our successful Jefferson’s portfolio by introducing a number of brand extensions. Additionally, we added the Arran Scotch whiskeys to our portfolio as agency brands. We continue to explore strategic relationships, joint ventures and acquisitions to selectively expand our premium spirits portfolio. We expect that future acquisitions or agency relations, if any, would involve some combination of cash, debt and the issuance of our stock.

 

 21 
 

 

Recent Events

 

Expanded Credit Facility

 

In October, we entered into a Fifth Amendment to our existing Credit Facility with ACF FinCo I LP. Among other changes, the Fifth Amendment increased the maximum amount of the Credit Facility from $23,000,000 to $25,000,000, and amended the definition of borrowing base to increase the amount of borrowing that can be collateralized by inventory.

 

In November, we entered into a Sixth Amendment to our existing Credit Facility with ACF FinCo I LP. Among other changes, the Sixth Amendment extended the termination date for the facility to July 31, 2020 and amended the definition of borrowing base to increase the amount of borrowing that can be collateralized by inventory.

 

Currency Translation

 

The functional currencies for our foreign operations are the Euro in Ireland and the British Pound in the United Kingdom. With respect to our consolidated financial statements, the translation from the applicable foreign currencies to U.S. Dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The resulting translation adjustments are recorded as a component of other comprehensive income.

 

Where in this report we refer to amounts in Euros or British Pounds, we have for your convenience also in certain cases provided a conversion of those amounts to U.S. Dollars in parentheses. Where the numbers refer to a specific balance sheet account date or financial statement account period, we have used the exchange rate that was used to perform the conversions in connection with the applicable financial statement. In all other instances, unless otherwise indicated, the conversions have been made using the exchange rates as of September 30, 2018, each as calculated from the Interbank exchange rates as reported by Oanda.com. On September 30, 2018, the exchange rate of the Euro and the British Pound in exchange for U.S. Dollars was €1.00 = U.S. $1.16012 (equivalent to U.S. $1.00 = €0.86198) and £1.00 = U.S. $1.30240 (equivalent to U.S. $1.00 = £0.76781).

 

These conversions should not be construed as representations that the Euro and British Pound amounts actually represent U.S. Dollar amounts or could be converted into U.S. Dollars at the rates indicated.

 

Critical Accounting Policies

 

There are no material changes from the critical accounting policies set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended March 31, 2018, as amended, which we refer to as our 2018 Annual Report. Please refer to that section for disclosures regarding the critical accounting policies related to our business.

 

Financial performance overview

 

The following table provides information regarding our spirits case sales for the periods presented based on nine-liter equivalent cases, which is a standard spirits industry metric (table excludes related non-alcoholic beverage products):

 

   Three months ended   Six months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
Cases                    
United States   82,531    80,777    165,216    157,243 
International   18,073    20,990    39,667    42,918 
                     
Total   100,604    101,767    204,884    200,161 
                     
Rum   36,500    41,718    81,053    84,358 
Whiskey   31,391    25,904    62,135    53,669 
Liqueur   25,919    27,695    48,530    49,398 
Vodka   6,645    6,027    12,706    12,079 
Tequila   149    423    460    657 
                     
Total   100,604    101,767    204,884    200,161 
                     
Percentage of Cases                    
United States   82.0%   79.4%   80.6%   78.6%
International   18.0%   20.6%   19.4%   21.4%
                     
Total   100.0%   100.0%   100.0%   100.0%
                     
Rum   36.3%   41.0%   39.6%   42.2%
Whiskey   31.2%   25.5%   30.3%   26.8%
Liqueur   25.8%   27.2%   23.7%   24.7%
Vodka   6.6%   5.9%   6.2%   6.0%
Tequila   0.1%   0.4%   0.2%   0.3%
                     
Total   100.0%   100.0%   100.0%   100.0%

 

 22 
 

 

The following table provides information regarding our case sales of Goslings Stormy Ginger Beer, for the periods presented:

 

   Three months ended   Six months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
Cases                
United States   474,664    439,075    919,811    877,429 
International   11,230    10,520    22,835    29,449 
                     
Total   485,894    449,595    942,646    906,878 
                     
Percentage of Cases                    
United States   97.6%   97.7%   97.6%   96.8%
International   2.3%   2.3%   2.4%   3.2%
                     
Total   100.0%   100.0%   100.0%   100.0%

 

Results of operations

 

The table below provides, for the periods indicated, the percentage of net sales of certain items in our consolidated financial statements:

 

   Three months ended
September 30,
   Six months ended
September 30,
 
   2018   2017   2018   2017 
Sales, net   100.0%   100.0%   100.0%   100.0%
Cost of sales   60.8%   59.1%   60.4%   59.0%
                     
Gross profit   39.2%   40.9%   39.6%   41.0%
                     
Selling expense   22.8%   23.4%   24.0%   26.2%
General and administrative expense   11.0%   11.0%   10.9%   10.9%
Depreciation and amortization   0.9%   0.9%   0.9%   1.0%
                     
Income from operations   4.5%   5.6%   3.7%   2.9%
                     
Other expense, net   (0.0)%