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, 2017

 

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

 

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 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 [X] No [  ]

 

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

 

[  ] Large accelerated filer [X] Accelerated filer
       
[  ] Non-accelerated filer (Do not check if a smaller reporting company) [  ] 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 164,305,883 shares of $.01 par value common stock outstanding at November 7, 2017.

 

 

 

 
 

 

CASTLE BRANDS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

SEPTEMBER 30, 2017

 

TABLE OF CONTENTS

 

  Page
   
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements: 3
     
  Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and March 31, 2017 3
     
  Condensed Consolidated Statements of Operations for the three months and six months ended September 30, 2017 and 2016 (unaudited) 4
     
  Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months and six months ended September 30, 2017 and 2016 (unaudited) 5
     
  Condensed Consolidated Statement of Changes in Equity for the six months ended September 30, 2017 (unaudited) 6
     
  Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2017 and 2016 (unaudited) 7
     
  Notes to Unaudited Condensed Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
     
Item 4. Controls and Procedures 30
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 31
     
Item 1A. Risk Factors 31
     
Item 6. Exhibits 32

 

2

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

   September 30, 2017   March 31, 2017 
   (Unaudited)     
ASSETS        
Current Assets          
Cash and cash equivalents  $322,529   $611,048 
Accounts receivable — net of allowance for doubtful accounts of $302,855 and $302,275 at September 30 and March 31, 2017, respectively   10,735,309    11,460,432 
Inventories— net of allowance for obsolete and slow moving inventory of $348,010 and $312,711 at September 30 and March 31, 2017, respectively   34,178,071    29,801,080 
Prepaid expenses and other current assets   4,092,001    3,674,923 
           
Total Current Assets   49,327,910    45,547,483 
           
Equipment — net   832,407    909,780 
           
Intangible assets — net of accumulated amortization of $8,258,613 and $8,035,018 at September 30 and March 31, 2017, respectively   6,186,000    6,387,330 
Goodwill   496,226    496,226 
Investment in non-consolidated affiliate, at equity   797,691    570,097 
Restricted cash   366,420    331,455 
Other assets   103,877    99,773 
           
Total Assets  $58,110,531   $54,342,144 
           
LIABILITIES AND EQUITY          
Current Liabilities          
Accounts payable  $11,730,622   $7,549,942 
Accrued expenses   3,396,087    4,668,708 
Due to shareholders and affiliates   2,459,762    2,158,318 
           
Total Current Liabilities   17,586,471    14,376,968 
           
Long-Term Liabilities          
Credit facility, net (including $369,131 and $412,269 of related-party participation at September 30 and March 31, 2017, respectively)   12,848,829    13,033,075 
Note payable – 11% Subordinated note   20,000,000    20,000,000 
Notes payable – 5% Convertible notes (including $1,100,000 of related party participation at September 30 and March 31, 2017)   1,650,000    1,675,000 
Notes payable – GCP Note   216,869    211,580 
Deferred tax liability   559,436    558,766 
Other   20,666    20,666 
           
Total Liabilities   52,882,271    49,876,055 
           
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, 2017        
Common stock, $.01 par value, 300,000,000 shares authorized at September 30 and March 31, 2017, 164,305,883 and 162,945,805 shares issued and outstanding at September 30 and March 31, 2017, respectively   1,643,059    1,629,458 
Additional paid-in capital   152,062,967    150,889,613 
Accumulated deficit   (149,171,900)   (148,223,822)
Accumulated other comprehensive loss   (2,148,860)   (2,308,672)
           
Total controlling shareholders’ equity   2,385,266    1,986,577 
           
Noncontrolling interests   2,842,994    2,479,512 
           
Total Equity   5,228,260    4,466,089 
           
Total Liabilities and Equity  $58,110,531   $54,342,144 

 

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,
 
   2017   2016   2017   2016 
Sales, net*  $20,894,150   $19,627,791   $41,746,437   $36,378,716 
Cost of sales*   12,350,901    11,900,531    24,624,569    21,935,341 
                     
Gross profit   8,543,249    7,727,260    17,121,868    14,443,375 
                     
Selling expense   4,899,208    5,031,597    10,955,407    9,662,512 
General and administrative expense   2,298,882    2,140,659    4,561,879    4,130,894 
Depreciation and amortization   186,283    253,463    391,235    507,097 
                     
Income from operations   1,158,876    301,541    1,213,347    142,872 
                     
Other expense, net   (59)   (27)   (59)   (333)
Income from equity investment in non-consolidated affiliate   29,846    18,837    71,595    23,320 
Foreign exchange gain (loss)   18,853    (3,375)   (32,308)   76,488 
Interest expense, net   (901,559)   (328,868)   (1,793,423)   (639,129)
                     
Income (loss) before provision for income taxes   305,957    (11,892)   (540,848)   (396,782)
Income tax expense, net   (25,335)   (477,962)   (43,748)   (688,775)
                     
Net income (loss)   280,622    (489,854)   (584,596)   (1,085,557)
Net income attributable to noncontrolling interests   (282,303)   (210,856)   (363,482)   (380,972)
                     
Net loss attributable to common shareholders  $(1,681)  $(700,710)  $(948,078)  $(1,466,529)
                     
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   163,209,562    160,698,696    163,138,853    160,610,804 

 

* Sales, net and Cost of sales include excise taxes of $1,759,630 and $1,912,740 for the three months ended September 30, 2017 and 2016, respectively, and $3,399,385 and $3,628,701 for the six months ended September 30, 2017 and 2016, 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,
 
   2017   2016   2017   2016 
Net income (loss)  $280,622   $(489,854)  $(584,596)  $(1,085,557)
Other comprehensive income (loss):                    
Foreign currency translation adjustment   55,697    19,627    159,812    (24,345)
                     
Total other comprehensive income (loss):   55,697    19,627    159,812    (24,345)
                     
Comprehensive income (loss)  $336,319   $(470,227)  $(424,784)  $(1,109,902)

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5

 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Equity

(Unaudited)

 

                   Accumulated         
   Common Stock   Additional
Paid-in
   Accumulated   Other
Comprehensive
   Noncontrolling   Total 
   Shares   Amount   Capital   Deficit   Loss   Interests   Equity 
BALANCE, MARCH 31, 2017   162,945,805   $1,629,458   $150,889,613   $(148,223,822)  $(2,308,672)  $2,479,512   $4,466,089 
                                    
Net loss                  (948,078)        363,482    (584,596)
Foreign currency translation adjustment                       159,812         159,812 
Exercise of common stock options   240,300    2,403    179,736                   182,139 
Restricted share grants   1,092,000    10,920    (10,920)                   
Conversion of 5% Convertible Notes to common stock   27,778    278    24,722                   25,000 
Stock-based compensation             979,816                   979,816 
                                    
BALANCE, SEPTEMBER 30, 2017   164,305,883   $1,643,059   $152,062,967   $(149,171,900)  $(2,148,860)  $2,842,994   $5,228,260 

 

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, 
   2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(584,596)  $(1,085,557)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   391,235    507,097 
Provision for doubtful accounts   30,812    23,100 
Amortization of deferred financing costs   38,960    89,608 
Deferred income tax expense, net   670    (74,076)
Net income from equity investment in non-consolidated affiliate   (71,595)   (23,320)
Effect of changes in foreign exchange   32,308    (76,488)
Stock-based compensation expense   979,816    762,497 

Accrued interest included in note payable balance

   

5,289

    

5,289

 
Addition to provision for obsolete inventory   50,000    100,000 
Changes in operations, assets and liabilities:          
Accounts receivable   712,811    (1,235,903)
Due from affiliates       531 
Inventory   (4,363,236)   (828,416)

Prepaid expenses and other current assets

   (409,020)   (351,239)
Other assets   (32,401)   (43,725)
Accounts payable and accrued expenses   2,891,322    700,370 
Due to shareholders and affiliates   301,444    543,796 
           
Total adjustments   558,415    99,121 
           
NET CASH USED IN OPERATING ACTIVITIES   (26,181)   (986,436)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of equipment   (84,251)   (164,840)
Acquisition of intangible assets   (22,265)    
Investment in non-consolidated affiliate, at equity   (156,000)    
Change in restricted cash   (12)   (7,190)
           
NET CASH USED IN INVESTING ACTIVITIES   (262,528)   (172,030)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net payments (borrowings) on credit facility   (194,909)   241,913 
Payments for costs of stock issuance       (14,355)
Proceeds from exercise of common stock options   182,139    181,245 
           
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES   (12,770)   408,803 
           
EFFECTS OF FOREIGN CURRENCY TRANSLATION   12,960    (1,286)
NET DECREASE IN CASH AND CASH EQUIVALENTS   (288,519)   (750,949)
CASH AND CASH EQUIVALENTS — BEGINNING   611,048    1,430,532 
           
CASH AND CASH EQUIVALENTS — ENDING  $322,529   $679,583 
           
SUPPLEMENTAL DISCLOSURES:          
Schedule of non-cash financing activities          
Conversion of 5% convertible note to common stock  $

25,000

   $

 
           
Interest paid  $1,685,662   $551,428 
Income taxes paid  $669,500   $1,010,780 

 

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, 2017 is derived from the March 31, 2017 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, 2017 included in the Company’s annual report on Form 10-K for the year ended March 31, 2017, as amended (“2017 Form 10-K”). Please refer to the notes to the audited consolidated financial statements included in the 2017 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. (“McLain & Kyne”), 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 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 – 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 until it achieves profitability, ensure continuity of supply of its brands and support new brand initiatives and marketing programs through at least November 2018.
     
  C. Organization and operations — The Company is principally engaged in the importation, marketing and sale of premium and super premium rums, whiskey, liqueurs, vodka, tequila and related non-alcoholic beverage products in the United States, Canada, Europe and Asia.
     
  D. 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.
     
  E. 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.
     
  F. 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.
     
  G. 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.
     
  H. 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.

 

8

 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

 

  I. 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.

 

  J. 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 adopted the provisions of ASC 740 and as of March 31, 2017, the Company had reserves for uncertain tax positions (including related interest and penalties) for various state and local tax issues of $20,666. The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expense.

 

The Company’s income tax expense for the three months ended September 30, 2017 and 2016 consists of federal, state and local taxes. 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. For the three months ended September 30, 2017 and September 30, 2016, the Company recognized ($25,335) and ($477,962) of income tax expense, net, respectively, and ($43,748) and ($688,775) of income tax expense, net, respectively for the six months ended September 30, 2017 and September 30, 2016. GCP is currently under a tax audit by New York State for the tax year ended March 31, 2016.

     
  K. Recent accounting pronouncements — 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 is effective for the Company as of April 1, 2018, 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 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 is effective for the Company as of April 1, 2018, 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 January 2017, the FASB issued ASU 2017-04, “Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 350).” ASU 2017-04 removes Step 2 from the goodwill impairment test. 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.

 

9

 

 

 

 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 is effective for the Company as of April 1, 2018, 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 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. This guidance is effective for the Company as of April 1, 2018, 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 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 is effective for the Company as of April 1, 2018, with early adoption permitted. 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 is currently evaluating the new guidance to determine the impact the adoption of this guidance will have on the Company’s results of operations, cash flows and financial condition.

 

In August 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 is effective for the Company as of April 1, 2018, with early adoption permitted. 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 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 March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new standard is effective for the Company as of April 1, 2017. 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.” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for the Company as of April 1, 2019. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. 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 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. In addition, 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 new standard is effective for the Company as of April 1, 2018, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. 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 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for the Company as of April 1, 2017, with early adoption 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 May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, to clarify the principles for recognizing revenue. This guidance includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for the Company as of April 1, 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.

 

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.
     
  L.

Accounting standards adopted — In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance became effective for the Company beginning April 1, 2017. 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 July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance has been applied on a prospective basis and became effective for the Company as of April 1, 2017. 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.

 

 

10

 

 

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 loss per share for the three months ended September 30, 2017 and 2016, no adjustment has been made to the weighted average outstanding common shares as the assumed exercise of outstanding options and warrants, the assumed vesting of restricted shares and the assumed conversion of convertible notes is anti-dilutive.

 

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

 

   Three months ended September 30, 
   2017   2016 
Stock options   15,523,008    16,339,086 
Unvested restricted stock   1,092,000     
5% Convertible notes   1,833,333    1,861,111 
           
Total   18,448,341    18,200,197 

 

NOTE 3 — INVENTORIES

 

   September 30, 2017   March 31, 2017 
Raw materials  $18,543,553   $16,714,225 
Finished goods – net   15,634,518    13,086,855 
           
Total  $34,178,071   $29,801,080 

 

As of September 30, and March 31, 2017, 8% and 9%, respectively, of raw materials and 5% and 7%, respectively, of finished goods were located outside of the United States.

 

In the six months ended September 30, 2017, the Company acquired $3,583,686 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 market.

 

NOTE 4 — EQUITY INVESTMENT

 

Investment in Gosling-Castle Partners Inc., consolidated

 

In March 2017, the Company entered into a Stock Purchase Agreement (“Purchase Agreement”) with Gosling’s Limited (“GL”) and E. Malcolm B. Gosling (“Gosling,” and together with GL, the “Sellers”). Pursuant to the terms of the Purchase Agreement, 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. Under the relevant guidance, a parent accounts for such changes in its ownership interest in a subsidiary as equity transactions. The parent cannot recognize a gain or loss in consolidated net income or comprehensive income for such transactions and is not permitted to step up a portion of the subsidiary’s net assets to fair value for the additional interests acquired. Any difference between the fair value of the consideration paid and the amount by which the noncontrolling interest is adjusted shall be recognized in equity attributable to the parent. As a result, the Company reduced the carrying amount of the noncontrolling interest by $2,232,824, with the $20,215,176 excess of the cash and stock paid over the adjustment to the carrying amount of the noncontrolling interest recognized as a decrease in the Company’s additional paid-in capital.

 

11

 

 

For the three months ended September 30, 2017 and 2016, GCP had pretax net income on a stand-alone basis of $1,425,534 and $1,005,101, respectively. The Company allocated a portion of this net income, or $283,681 and $402,040, to non-controlling interest for the three months ended September 30, 2017 and 2016, respectively. For the six months ended September 30, 2017 and 2016, GCP had pretax net income on a stand-alone basis of $1,851,541 and $1,641,204, respectively. The Company allocated a portion of this net income, or $368,457 and $656,482, to non-controlling interest for the three months ended September 30, 2017 and 2016, respectively. The cumulative balance allocated to noncontrolling interests in GCP was $2,842,994 and $2,479,512 at September 30 and March 31, 2017, respectively, as shown on the accompanying condensed consolidated balance sheets.

 

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 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. The investment has been used for the construction of a new warehouse in Crestwood, Kentucky dedicated to the storage of Jefferson’s whiskies. In September 2017, CB-USA purchased an additional 5% of Copperhead for $156,000 from an existing shareholder. Copperhead owns and operates the Kentucky Artisan Distillery. The Company has accounted for this investment under the equity method of accounting. For the three months ended September 30, 2017 and 2016, the Company recognized $29,846 and $18,837 of income from this investment, respectively. For the six months ended September 30, 2017 and 2016, the Company recognized $71,595 and $23,320 of income from this investment, respectively. The investment balance was $797,691 and $570,097 at September 30 and March 31, 2017, respectively.

 

NOTE 5 — GOODWILL AND INTANGIBLE ASSETS

 

The carrying amount of goodwill was $496,226 at each of September 30 and March 31, 2017.

 

Intangible assets consist of the following:

 

   September 30, 2017   March 31, 2017 
Definite life brands  $170,000   $170,000 
Trademarks   641,693    631,693 
Rights   8,271,555    8,271,555 
Product development   198,933    186,668 
Patents   994,000    994,000 
Other   55,460    55,460 
           
    10,331,641    10,309,376 
Less: accumulated amortization   8,258,613    8,035,018 
           
Net   2,073,028    2,274,358 
Other identifiable intangible assets — indefinite lived*   4,112,972    4,112,972 
           
   $6,186,000   $6,387,330 

 

* 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, 2017   March 31, 2017 
Definite life brands  $170,000   $170,000 
Trademarks   385,160    367,294 
Rights   6,785,683    6,617,062 
Product development   41,150    34,478 
Patents   876,320    843,184 
           
Accumulated amortization  $8,258,613   $8,035,018 

 

NOTE 6 — RESTRICTED CASH

 

At September 30 and March 31, 2017, the Company had €310,315 or $366,420 (translated at the September 30, 2017 exchange rate) and €310,305 or $331,455 (translated at the March 31, 2017 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.

 

12

 

 

CASTLE BRANDS INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

 

NOTE 7 — NOTES PAYABLE

 

   September 30, 2017   March 31, 2017 
Notes payable consist of the following:          
Foreign revolving credit facilities (A)  $   $ 
Note payable – GCP note (B)   216,869    211,580 
Credit facility (C)   12,938,215    13,133,124 
5% Convertible notes (D)   1,650,000    1,675,000 
11% Subordinated Note (E)   20,000,000    20,000,000 
           
Total  $34,805,084   $35,019,704 

 

  A. The Company has arranged various credit facilities aggregating €310,315 or $366,420 (translated at the September 30, 2017 exchange rate) 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%. The balance on the credit facilities included in notes payable totaled €0 at each of September 30 and March 31, 2017.
     
  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, 2017, $10,579 of accrued interest was converted to amounts due to affiliates. At September 30, 2017, $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, 2017, $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 agreement with Keltic Financial Partners II, LP (“Keltic”), which, as amended, provides for availability (subject to certain terms and conditions) of a facility of up to $19.0 million (the “Credit Facility”) for the purpose of providing the Company with working capital.

 

In September 2014, the Company and CB-USA entered into an Amended and Restated Loan and Security Agreement (as amended, the “Amended Agreement”) with ACF FinCo I LP (“ACF”), as successor in interest to Keltic, in order to amend certain terms of the Credit Facility and the Bourbon Term Loan (defined below). Among other changes, the Amended Agreement modified certain aspects of the existing Credit Facility, including increasing the maximum amount of the Credit Facility from $8,000,000 to $12,000,000 and increasing the inventory sub-limit from $4,000,000 to $6,000,000. In addition, the term of the Credit Facility was extended from December 31, 2016 to July 31, 2019. 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, 2017, the Credit Facility interest rate was 6.75%. The monthly facility fee is 0.75% per annum of the maximum Credit Facility. The Amended Agreement contains EBITDA targets allowing for further interest rate reductions in the future. The Company paid ACF an aggregate $120,000 amendment fee in connection with the execution of the Amended Agreement.

 

In connection with the amendment, the Company and CB-USA entered into the following ancillary agreements: (i) a Reaffirmation Agreement with (a) certain officers of the Company and CB-USA, including John Glover, the Company’s Chief Operating Officer, T. Kelley Spillane, the Company’s Senior Vice President - Global Sales, and Alfred J. Small, the Company’s Senior Vice President, Chief Financial Officer, Treasurer and Secretary, (b) certain participants in the Bourbon Term Loan and (c) certain junior lenders to 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, an affiliate of Richard J. Lampen, a director of the Company and the Company’s President and Chief Executive Officer, an affiliate of Glenn Halpryn, a former director of the Company, Dennis Scholl, a former director of the Company, and Vector Group Ltd., a more than 5% shareholder of the Company, of which Richard Lampen is an executive officer, Henry Beinstein, a director of the Company, and Phillip Frost M.D., a principal shareholder and director, which, among other things, reaffirms the existing Validity and Support Agreements by and among each officer, the Company, CB-USA and ACF, as successor-in-interest to Keltic; (ii) an Amended and Restated Term Note; and (iii) an Amended and Restated Revolving Credit Note.

 

In connection with the Amended Agreement, on September 22, 2014, ACF entered into an amendment to that certain Subordination Agreement, dated as of August 7, 2013 (as amended, the “Subordination Agreement”), by and among ACF, as successor-in-interest to Keltic, and certain junior lenders to the Company; neither the Company nor CB-USA is a party to the Subordination Agreement.

 

13

 

 

In August 2015, the Company and CB-USA entered into a First Amendment (the “Loan Agreement Amendment”) to the Amended Agreement. Among other changes, the Loan Agreement Amendment increased the amount of the Credit Facility from $12,000,000 to $19,000,000, 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 maturity date remained unchanged at July 31, 2019. 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. The Purchased Inventory Sublimit replaces the Bourbon Term Loan, which was paid in full in the normal course of business. 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, 2017, the interest rate applicable to the Purchased Inventory Sublimit was 8.5%. The monthly facility fee remains 0.75% per annum of the maximum principal amount of the Credit Facility (excluding the Purchased Inventory Sublimit). Also, the Company must pay a monthly facility fee of $2,000 with respect to the Purchased Inventory Sublimit until all obligations with respect thereof are fully paid and performed. The Company paid ACF an aggregate $45,000 commitment fee in connection with the Loan Agreement Amendment.

 

In connection with the Loan Agreement Amendment, the Company and CB-USA entered into the following ancillary agreements: (i) a Reaffirmation Agreement with (a) certain officers of the Company and CB-USA, including John Glover, T. Kelley Spillane and Alfred J. Small and (b) certain junior lenders to the Company, including Frost Gamma Investments Trust, Mark E. Andrews, III, an affiliate of Richard J. Lampen, an affiliate of Glenn Halpryn, Dennis Scholl and Vector Group Ltd., which, among other things, reaffirms the existing Validity and Support Agreements by and among each officer, the Company, CB-USA and ACF and (ii) an Amended and Restated Revolving Credit Note.

 

ACF also required as a condition to entering into the Loan Agreement Amendment that ACF enter into a participation agreement with certain related parties of the Company, including Frost Gamma Investments Trust, Mark E. Andrews, III, Richard J. Lampen and Alfred J. Small, 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.

 

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) $19,000,000 and (y) the sum of the borrowing base calculated in accordance with the Amended Agreement and the Purchased Inventory Sublimit. 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, 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 Loan Agreement Amendment are secured by the grant of a pledge and security interest in all of the assets of the Borrower. At September 30, 2017, the Company was in compliance, in all respects, with the covenants under the Amended 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) 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. Under the terms of the participation agreement, the participants receive interest at the rate of 11% per annum.

 

At September 30 and March 31, 2017, $12,938,215 and $13,133,124, respectively, due on the Credit Facility was included in long-term liabilities. At September 30 and March 31, 2017, there was $6,061,785 and $5,866,876, respectively, in potential availability under the Credit Facility. In connection with the adoption of ASU 2015-03, the Company included $89,386 and $100,049 of debt issuance costs at September 30 and March 31, 2017, respectively, as direct deductions from the carrying amount of the related debt liability.

 

In October 2017, the Company and CB-USA entered into a Third Amendment (the “Third Amendment”) to the Amended Agreement to amend certain terms of the Company’s existing Credit Facility with ACF. Among other changes, the Third Amendment increases the maximum amount of the Credit Facility from $19,000,000 to $21,000,000, and amends 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 $20,000 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.

 

14

 

 

  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. ($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.

 

At September 30, and March 31, 2017, $1,650,000 and $1,675,000 of principal due on the Convertible Notes was included in long-term liabilities, respectively.

 

  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. The principal and interest incurred thereon shall be due and payable in full on March 15, 2019. All claims of the Holder to principal, interest and any other amounts owed under the Subordinated Note are subordinated in right of payment to all indebtedness of the Company existing as of the date of the Subordinated Note. The Subordinated Note contains customary events of default and may be prepaid by the Company, in whole or in part, without penalty, at any time.

 

NOTE 8 — EQUITY

 

Equity distribution agreement - In November 2014, the Company entered into an Equity Distribution Agreement (the “2014 Distribution Agreement”) with Barrington Research Associates, Inc. (“Barrington”), as sales agent, under which the Company could issue and sell over time and from time to time, to or through Barrington, shares (the “Shares”) of its common stock having a gross sales price of up to $10,000,000.

 

The Company did not sell any Shares pursuant to the 2014 Distribution Agreement during the six months ended September 30, 2017. The Company did not sell any Shares pursuant to the 2014 Distribution Agreement during the six months ended September 30, 2016, but incurred $12,000 of issuance costs related to the 2014 Distribution Agreement.

 

The 2014 Distribution Agreement expired in August 2017 upon the expiration of the Company’s Registration Statement on Form S-3 under which the Shares were sold.

 

Convertible Notes conversion - In the six months ended September 30, 2017, a Convertible Note holder converted $25,000 of Convertible Notes into 27,778 shares of Common Stock.

 

GCP Acquisition - As described in Note 4, in March 2017, the Company issued 1,800,000 shares of Common Stock to the Sellers in connection with the GCP Acquisition.

 

15

 

 

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, 2017, the Company had no forward contracts outstanding.

 

NOTE 10 — STOCK-BASED COMPENSATION

 

In April 2017, the Company granted to employees, directors and certain consultants an aggregate of 1,092,000 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. The Company has valued the shares at $1,843,078.

 

Stock-based compensation expense for the three months ended September 30, 2017 and 2016 amounted to $504,490 and $410,097, respectively. Stock-based compensation expense for the six months ended September 30, 2017 and 2016 amounted to $979,816 and $762,497, respectively. At September 30, 2017, total unrecognized compensation cost amounted to $4,199,077, representing 4,226,500 unvested options and 1,092,000 unvested shares of restricted stock. This cost is expected to be recognized over a weighted-average vesting period of 2.32 years. There were 240,300 options exercised during the six months ended September 30, 2017 and 476,500 options exercised during the six months ended September 30, 2016. The Company did not recognize any related tax benefit for the three and six months ended September 30, 2017 and 2016 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, 2018, the Company has contracted to purchase approximately €1,017,189 or $1,201,097 (translated at the September 30, 2017 exchange rate) in bulk Irish whiskey, of which €355,700, or $420,010 (translated at the September 30, 2017 exchange rate), has been purchased as of September 30, 2017. 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 year ending June 30, 2018, the Company has contracted to purchase approximately €442,274 or $522,238 (translated at the September 30, 2017 exchange rate) in bulk Irish whiskey, of which €124,421, or $146,916 (translated at the September 30, 2017 exchange rate), has been purchased as of September 30, 2017. 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 through December 31, 2019. Under this agreement, the distiller provides 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 ended December 31, 2016, the Company contracted and purchased approximately $2,053,750 in newly distilled bourbon. For the contract year ending December 31, 2017, the Company originally contracted to purchase approximately $2,464,500 in newly distilled bourbon, $1,014,028 of which had been purchased as of September 30, 2017. The Company is not obligated to pay the distiller for any product not yet received. During the term of this supply agreement, the distiller has the right to limit additional purchases to ten percent above the commitment amount. In March 2017, the distiller notified the Company of its intent to terminate the contract under its terms after the 2017 contract year, and to limit the purchase amount for the 2017 contract year to the 2016 contract year amount. In October 2017, the Company entered into a new supply agreement with a different bourbon distiller.
     
  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 $1,771 (translated at the September 30, 2017 exchange rate). The Houston, TX lease commenced on April 27, 2015 and extends through June 26, 2018 and provides for monthly payments of $3,440. The Company has also entered into non-cancelable operating leases for certain office equipment.

 

16

 

 

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 and October 2017.

     
  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 36.3% and 35.7% of the Company’s net sales for the three months ended September 30, 2017 and 2016, respectively. Sales to SGWS accounted for approximately 38.0% and 34.5% of the Company’s net sales for the six months ended September 30, 2017 and 2016, respectively, and approximately 35.1% and 33.2% of accounts receivable at September 30 and March 31, 2017, respectively.

 

NOTE 13 — GEOGRAPHIC INFORMATION

 

The Company operates in one reportable segment — the sale of premium beverage alcohol. The Company’s product categories are rum, whiskey, 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 income (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, 
   2017   2016 
Consolidated Sales, net:                    
International  $2,177,367    10.4%  $2,060,044    10.5%
United States   18,716,783    89.6%   17,567,747    89.5%
                     
Total Consolidated Sales, net  $20,894,150    100.0%  $19,627,791    100.0%
                     
Consolidated Income (Loss) from Operations:                    
International  $15,737    1.4%  $(6,843)   (2.3)%
United States   1,143,139    98.6%   308,384    102.3%
                     
Total Consolidated Income from Operations  $1,158,876    100.0%  $301,541    100.0%
                     
Consolidated Net Income (Loss) Attributable to Common Shareholders:                    
International  $47,470    2,822.9%  $17,871    2.6%
United States   (49,151)   (2,922.9)%   (718,581)   (102.6)%
                     
Total Consolidated Net Loss Attributable to Common Shareholders  $(1,681)   100.0%  $(700,710)   100.0%
                     
Income tax expense, net:                    
United States  $25,335    100.0%  $(477,962)   100.0%
                     
 Consolidated Sales, net by category:                    
Whiskey  $7,335,290    35.2%  $6,486,287    24.7%
Rum   4,168,262    19.9%   4,837,653    33.0%
Liqueurs   2,579,437    12.3%   2,560,819    13.0%
Vodka   353,792    1.7%   414,052    2.1%
Tequila   84,560    0.4%   68,731    0.4%
Ginger beer   6,372,809    30.5%   5,260,249    26.8%
                     
Total Consolidated Sales, net  $20,894,150    100.0%  $19,627,791    100.0%

 

17

 

 

   Six Months ended September 30, 
   2017   2016 
Consolidated Sales, net:                    
International  $4,442,146    10.6%  $3,799,543    10.4%
United States   37,304,291    89.4%   32,579,173    89.6%
                     
Total Consolidated Sales, net  $41,746,437    100.0%  $36,378,716    100.0%
                     
Consolidated Income (Loss) from Operations:                    
International  $(13,261)   (1.1)%  $(105,068)   (73.5)%
United States   1,226,608    101.1%   247,940    173.5%
                     
Total Consolidated Income from Operations  $1,213,347    100.0%  $142,872    100.0%
                     
Consolidated Net Income (Loss) Attributable to Common Shareholders:                    
International  $42,262    4.5%  $(62,134)   4.2%
United States   (990,340)   (104.5)%   (1,404,395)   95.8%
                     
Total Consolidated Net Loss Attributable to Common Shareholders  $(948,078)   100.0%  $(1,466,529)   100.0%
                     
Income tax expense, net:                    
United States   (43,748)   100.0%   (688,775)   100.0%
                     
Consolidated Sales, net by category:                    
Whiskey  $14,505,777    34.8%  $11,985,706    32.8%
Rum   8,621,765    20.7%   9,449,569    26.0%
Liqueur   4,638,346    11.1%   4,506,191    12.4%
Vodka   643,255    1.5%   791,637    2.2%
Tequila   129,736    0.3%   127,339    0.4%

Ginger beer

   13,207,558    31.6%   9,518,274    26.2%
                     
Total Consolidated Sales, net  $41,746,437    100.0%  $36,378,716    100.0%

 

   As of September 30, 2017   As of March 31, 2017 
Consolidated Assets:                    
International  $2,994,097    5.2%  $3,234,536    6.0%
United States   55,116,434    94.8%   51,107,608    94.0%
                     
Total Consolidated Assets  $58,110,531    100.0%  $54,342,144    100.0%

 

*Includes related non-beverage alcohol products.

 

18

 

 

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, vodka and tequila. We also develop and market our related non-alcoholic beverage product, 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
  Tierras™ tequila
  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 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, whiskies 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 recently added the Arran Scotch whiskies to our portfolio as agency brands. We continue to explore strategic relationships, joint ventures and acquisitions to selectively expand our premium spirits portfolio. We expect that future acquisitions or agency relations, if any, would involve some combination of cash, debt and the issuance of our stock.

 

Recent Events

 

Additional Investment in Copperhead Distillery Company

 

In October, we purchased an additional 5% of Copperhead Distillery Company, which owns and operates the Kentucky Artisan Distillery, for $0.2 million. The additional investment brings our ownership of Copperhead Distillery Company to 25%. The Kentucky Artisan Distillery currently has three warehouses storing Jefferson’s bourbons, provides distilling using special mash-bills made from locally grown grains for Jefferson’s brands and houses the Jefferson’s Visitor Center and store, showcasing the Jefferson’s brand.

 

Expanded Credit Facility

 

In October, we entered into a Third Amendment to our existing Credit Facility with ACF FinCo I LP. Among other changes, the Third Amendment increased the maximum amount of the Credit Facility from $19,000,000 to $21,000,000, and amended the definition of borrowing base to increase the amount of borrowing that can be collateralized by inventory.

 

19

 

 

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, 2017, each as calculated from the Interbank exchange rates as reported by Oanda.com. On September 30, 2017, the exchange rate of the Euro and the British Pound in exchange for U.S. Dollars was €1.00 = U.S. $1.18080 (equivalent to U.S. $1.00 = €0.84722) and £1.00 = U.S. $1.33983 (equivalent to U.S. $1.00 = £0.74614).

 

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, 2017, as amended, which we refer to as our 2017 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, 
   2017   2016   2017   2016 
Cases                    
United States   80,777    88,181    157,243    165,021 
International   20,990    19,843    42,918    36,945 
                     
Total   101,767    108,024    200,161    201,966 
                     
Rum   41,718    46,510    84,358    90,793 
Whiskey   25,904    27,111    53,669    48,255 
Liqueur   27,695    25,950    49,398    46,388 
Vodka   6,027    8,084    12,079    15,849 
Tequila   423    369    657    681 
                     
Total   101,767    108,024    200,161    201,966 
                     
Percentage of Cases                    
United States   79.4%   81.6%   78.6%   81.7%
International   20.6%   18.4%   21.4%   18.3%
                     
Total   100.0%   100.0%   100.0%   100.0%
                     
Rum   41.0%   43.1%   42.2%   45.0%
Whiskey   25.5%   25.1%   26.8%   23.9%
Liqueur   27.2%   24.0%   24.7%   23.0%
Vodka   5.9%   7.5%   6.0%   7.8%
Tequila   0.4%   0.3%   0.3%   0.3%
                     
Total   100.0%   100.0%   100.0%   100.0%

 

20

 

 

The following table provides information regarding our case sales of our related non-alcoholic beverage products, Goslings Stormy Ginger Beer, for the periods presented:

 

   Three months ended   Six months ended 
   September 30,   September 30, 
   2017   2016   2017   2016 
Cases                    
United States   439,075    344,132    877,429    620,297 
International   10,520    15,915    29,449    40,732 
                     
Total   449,595    360,047    906,878    661,029 
                     
Percentage of Cases                    
United States   97.7%   95.6%   96.8%   93.8%
International   2.3%   4.4%   3.2%   6.2%
                     
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,
 
   2017   2016   2017   2016 
Sales, net   100.0%   100.0%   100.0%   100.0%
Cost of sales   59.1%   60.6%   59.0%   60.3%
                     
Gross profit   40.9%   39.4%   41.0%   39.7%
                     
Selling expense   23.4%   25.7%   26.2%   26.6%
General and administrative expense   11.0%   10.9%   10.9%   11.4%
Depreciation and amortization   0.9%   1.3%   1.0%   1.4%
                     
Income from operations   5.6%   1.5%   2.9%   0.3%
                     
Other expense, net   (0.0)%   (0.0)%   (0.0)%   (0.0)%
Foreign exchange gain (loss)   0.1%   0.0%   (0.1)%   0.2%
Income from equity investment in non-consolidated affiliate   0.1%   0.1%   0.2%   0.1%
Interest expense, net   (4.3)%   (1.7)%   (4.3)%   (1.8)%
                     
Income (loss) before provision for income taxes   1.5%   (0.1)%   (1.3)%   (1.1)%
Income tax expense, net   (0.1)%   (2.4)%   (0.1)%   (1.9)%
                     
Net income (loss)   1.4%   (2.5)%   (1.4)%   (3.0)%
Net income attributable to noncontrolling interests   (1.4)%   (1.1)%   (0.9)%   (1.0)%
Net loss attributable to common shareholders   0.0%   (3.6)%   (2.3)%   (4.0)%

 

 

21

 

 

The following is a reconciliation of net loss attributable to common shareholders to EBITDA, as adjusted:

 

   Three months ended   Six months ended 
   September 30,   September 30, 
   2017   2016   2017   2016 
Net loss attributable to common shareholders  $(1,681)  $(700,710)  $(948,078)  $(1,466,529)
Adjustments:                    
Interest expense, net   901,559    328,868    1,793,423    639,129 
Income tax expense, net   25,335    477,962    43,748    688,775 
Depreciation and amortization   186,283    253,463    391,235    507,097 
EBITDA income   1,111,496    359,583    1,280,329    368,472 
Allowance for doubtful accounts   16,712    11,550    30,812    23,100 
Allowance for obsolete inventory       50,000    50,000    100,000 
Stock-based compensation expense   504,490    410,097    979,816    762,497 
Other expense, net   59    27    59    333 
Income from equity investments in non-consolidated affiliate   (29,846)   (18,837)   (71,595)   (23,320)
Foreign exchange loss (gain)   (18,853)   3,375    32,308    (76,488)
Net income attributable to noncontrolling interests   282,303    210,856    363,482    380,972 
EBITDA, as adjusted  $1,866,362   $1,026,651   $2,665,210   $1,535,566 

 

Earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted for allowances for doubtful accounts and obsolete inventory, stock-based compensation expense, other expense (income), net, income from equity investment in non-consolidated affiliate, foreign exchange and net income attributable to noncontrolling interests is a key metric we use in evaluating our financial performance. EBITDA, as adjusted, is considered a non-GAAP financial measure as defined by Regulation G promulgated by the SEC under the Securities Act of 1933, as amended. We consider EBITDA, as adjusted, important in evaluating our performance on a consistent basis across various periods. Due to the significance of non-cash and non-recurring items, EBITDA, as adjusted, enables our Board of Directors and management to monitor and evaluate the business on a consistent basis. We use EBITDA, as adjusted, as a primary measure, among others, to analyze and evaluate financial and strategic planning decisions regarding future operating investments and allocation of capital resources. We believe that EBITDA, as adjusted, eliminates items that are not indicative of our core operating performance or are based on management’s estimates, such as allowance accounts, are due to changes in valuation, such as the effects of changes in foreign exchange or do not involve a cash outlay, such as stock-based compensation expense. Our presentation of EBITDA, as adjusted, should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items or by non-cash items, such as stock-based compensation, which is expected to remain a key element in our long-term incentive compensation program. EBITDA, as adjusted, should be considered in addition to, rather than as a substitute for, income from operations, net income and cash flows from operating activities.

 

Our EBITDA, as adjusted, increased to $1.9 million for the three months ended September 30, 2017, as compared to $1.0 million for the comparable prior-year period and increased to $2.7 million for the six months ended September 30, 2017, as compared to $1.5 million for the comparable prior-year period.

 

Three months ended September 30, 2017 compared with three months ended September 30, 2016

 

Net sales. Net sales increased 6.5% to $20.9 million for the three months ended September 30, 2017, as compared to $19.6 million for the comparable prior-year period, primarily due to U.S. sales growth of Jefferson’s bourbons and Goslings Stormy Ginger Beer, partially offset by decreases in rum and vodka sales. For the three months ended September 30, 2017, sales of our Goslings Stormy Ginger Beer increased 21.1% to $6.4 million. We anticipate continued growth of Goslings Stormy Ginger Beer in the near term due to the popularity of cocktails containing ginger beer, Goslings brand awareness and the distribution to large national and regional retailers and on-premise accounts, although there is no assurance that we will attain such results. Net sales during the three months ended September 30, 2017 included $0.2 million in sales of Arran whiskies, which was launched in the first quarter of our current fiscal year. We continue to focus on our faster growing brands and markets, both in the U.S. and internationally.

 

The table below presents the increase or decrease, as applicable, in case sales by spirits product category for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016:

 

   Increase/(decrease)   Percentage 
   in case sales   increase/(decrease) 
   Overall   U.S.   Overall   U.S. 
Rum   (4,792)   (7,652)   (10.3)%   (21.8)%
Whiskey   (1,207)   564    (4.5)%   3.0%
Liqueur   1,745    1,419    6.7%   5.5%
Vodka   (2,057)   (1,789)   (25.4)%   (23.1)%
Tequila   54    54    14.6%   14.6%
Total   (6,257