Castle Brands Inc.
Castle Brands Inc (Form: 10-Q, Received: 11/13/2013 08:33:20)
 
 
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, 2013
 
or
 
¨         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 001-32849
 
CASTLE BRANDS INC.
(Exact name of registrant as specified in its charter)
 
Florida
 
41-2103550
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
122 East 42nd Street, Suite 4700 ,
 
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 þ   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 þ     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
 
¨  Accelerated filer
 
¨  Non-accelerated filer (Do not check if a smaller reporting company)
 
þ  Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨   No þ
 
The Company had 111,641,415 shares of $.01 par value common stock outstanding at November 8, 2013.
 
 
 
CASTLE BRANDS INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDING
SEPTEMBER 30, 2013
 
TABLE OF CONTENTS
 
 
 
Page
PART I. FIN ANCIAL INFORMATION
3
 
 
 
Item 1.
Financial Statements:
3
 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited) and March 31, 2013
3
 
 
 
 
Condensed Consolidated Statements of Operations for the three months and six months ended September 30, 2013 and 2012 (unaudited)
4
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the three months and six months ended September 30, 2013 and 2012 (unaudited)
5
 
 
 
 
Condensed Consolidated Statement of Changes in Equity for the six months ended September 30, 2013 (unaudited)
6
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2013 and 2012 (unaudited)
7
 
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
8
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
 
 
 
Item 4.
Controls and Procedures
28
 
 
 
PART II. OTHER INFORMATION
29
 
 
 
Item 1.
Legal Proceedings
29
 
 
 
Item 6.
Exhibits
29
 
 
2

 
PART I. FINANCIAL INFORMATION
Item 1.              Financial Statements
CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
 
September 30,
2013
(Unaudited)
 
March 31,
2013
 
 
 
 
 
 
 
 
 
ASSETS:
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
151,523
 
$
439,323
 
Accounts receivable — net of allowance for doubtful accounts of $91,303 and $70,692, respectively
 
 
7,672,081
 
 
7,025,358
 
Due from shareholders and affiliates
 
 
502,304
 
 
303,226
 
Inventories— net of allowance for obsolete and slow moving inventory of $208,996 and $461,660, respectively
 
 
13,668,804
 
 
13,731,962
 
Prepaid expenses and other current assets
 
 
1,194,379
 
 
983,834
 
 
 
 
 
 
 
 
 
Total Current Assets
 
 
23,189,091
 
 
22,483,703
 
 
 
 
 
 
 
 
 
Equipment — net
 
 
513,005
 
 
516,641
 
 
 
 
 
 
 
 
 
Investment in non-consolidated affiliate, at equity
 
 
96,823
 
 
116,700
 
Intangible assets — net of accumulated amortization of $5,731,420 and $5,404,000, respectively
 
 
8,505,474
 
 
8,805,913
 
Goodwill
 
 
496,226
 
 
490,286
 
Restricted cash
 
 
408,946
 
 
451,346
 
Other assets
 
 
265,308
 
 
252,506
 
 
 
 
 
 
 
 
 
Total Assets
 
$
33,474,873
 
$
33,117,095
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY:
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
Foreign revolving credit facility
 
$
220,102
 
$
89,407
 
Accounts payable
 
 
5,139,748
 
 
5,301,524
 
Accrued expenses
 
 
463,164
 
 
793,243
 
Due to shareholders and affiliates
 
 
2,323,291
 
 
2,351,957
 
 
 
 
 
 
 
 
 
Total Current Liabilities
 
 
8,146,305
 
 
8,536,131
 
 
 
 
 
 
 
 
 
Long-Term Liabilities
 
 
 
 
 
 
 
Keltic facility
 
 
6,733,352
 
 
6,501,321
 
Bourbon term loan (including $584,845 and $600,000 of related-party participation at September 30 and March 31, 2013, respectively)
 
 
2,432,950
 
 
2,496,000
 
Notes payable - Junior loan (including $300,000 of related party participation at Septmeber 30, 2013)
 
 
1,250,000
 
 
 
Notes payable – GCP Note
 
 
216,869
 
 
211,580
 
Warrant liability
 
 
4,761,789
 
 
795,374
 
Deferred tax liability
 
 
1,592,380
 
 
1,666,456
 
 
 
 
 
 
 
 
 
Total Liabilities
 
 
25,133,645
 
 
20,206,862
 
 
 
 
 
 
 
 
 
Commitments and Contingencies (Note 13)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
Preferred stock, $.01 par value, 25,000,000 shares authorized, 6,271 and 6,701 shares
    of series A convertible preferred stock issued and outstanding at September 30 and
    March 31, 2013, respectively (liquidation value of $7,824,616 and $7,876,530 at
    September 30 and March 31, 2013, respectively)
 
 
62,715
 
 
67,013
 
Common stock, $.01 par value, 225,000,000 shares authorized, 111,256,711 and
    108,773,034 shares issued and outstanding at September 30 and March 31, 2013,
    respectively
 
 
1,112,567
 
 
1,087,730
 
Additional paid-in capital
 
 
143,495,585
 
 
142,661,542
 
Accumulated deficit
 
 
(136,370,809)
 
 
(130,270,623)
 
Accumulated other comprehensive loss
 
 
(1,771,911)
 
 
(1,918,094)
 
 
 
 
 
 
 
 
 
Total controlling shareholders’ equity
 
 
6,528,147
 
 
11,627,568
 
 
 
 
 
 
 
 
 
Noncontrolling interests
 
 
1,813,081
 
 
1,282,665
 
 
 
 
 
 
 
 
 
Total equity
 
 
8,341,228
 
 
12,910,233
 
 
 
 
 
 
 
 
 
Total Liabilities and Equity
 
$
33,474,873
 
$
33,117,095
 
 
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,
 
 
 
2013
 
2012
 
2013
 
2012
 
Sales, net*
 
$
11,659,707
 
$
10,317,737
 
$
22,078,324
 
$
20,037,164
 
Cost of sales*
 
 
7,475,352
 
 
6,594,889
 
 
13,975,505
 
 
12,881,664
 
Provision for obsolete inventory
 
 
 
 
100,000
 
 
 
 
100,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
 
4,184,355
 
 
3,622,848
 
 
8,102,819
 
 
7,055,500
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling expense
 
 
2,933,150
 
 
2,770,866
 
 
5,828,533
 
 
5,393,858
 
General and administrative expense
 
 
1,244,459
 
 
1,159,606
 
 
2,510,064
 
 
2,488,206
 
Depreciation and amortization
 
 
214,638
 
 
229,857
 
 
427,762
 
 
460,939
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from operations
 
 
(207,892)
 
 
(537,481)
 
 
(663,540)
 
 
(1,287,503)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other expense
 
 
(174)
 
 
(16)
 
 
(174)
 
 
(16)
 
Loss from equity investment in non-
   consolidated affiliate
 
 
(17,956)
 
 
(11,075)
 
 
(24,077)
 
 
(10,727)
 
Foreign exchange loss
 
 
(171,863)
 
 
(218,113)
 
 
(111,523)
 
 
(22,172)
 
Interest expense, net
 
 
(268,480)
 
 
(136,816)
 
 
(497,299)
 
 
(247,837)
 
Net change in fair value of warrant liability
 
 
(3,519,164)
 
 
162,607
 
 
(3,966,415)
 
 
71,279
 
Income tax benefit
 
 
37,038
 
 
37,038
 
 
74,076
 
 
74,076
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 
(4,148,491)
 
 
(703,856)
 
 
(5,188,952)
 
 
(1,422,900)
 
Net income attributable to noncontrolling
   interests
 
 
(278,044)
 
 
(197,440)
 
 
(530,416)
 
 
(307,897)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to controlling interests
 
 
(4,426,535)
 
 
(901,296)
 
 
(5,719,368)
 
 
(1,730,797)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend to preferred shareholders
 
 
(187,978)
 
 
(184,199)
 
 
(377,910)
 
 
(364,150)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to common shareholders
 
$
(4,614,513)
 
$
(1,085,495)
 
$
(6,097,278)
 
$
(2,094,947)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per common share, basic and diluted,
   attributable to common shareholders
 
$
(0.04)
 
$
(0.01)
 
$
(0.06)
 
$
(0.02)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares used in computation,
   basic and diluted, attributable to common
   shareholders
 
 
110,459,802
 
 
108,491,137
 
 
109,944,744
 
 
108,441,966
 
 
* Sales, net and Cost of sales include excise taxes of $ 1,588,959 and $1,532,880   for the three months ended September 30, 2013 and 2012, respectively, and $ 3,013,179 and $2,914,421 for the six months ended September 30, 2013 and 2012, respectively.
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
4

 
 
CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
 
 
 
Three months ended September 30,
 
Six months ended September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Net loss
 
$
(4,148,491)
 
$
(703,856)
 
$
(5,188,952)
 
$
(1,422,900)
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 
105,983
 
 
57,575
 
 
146,183
 
 
(106,467)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other comprehensive income (loss):
 
 
105,983
 
 
57,575
 
 
146,183
 
 
(106,467)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive loss
 
$
(4,042,508)
 
$
(646,281)
 
$
(5,042,769)
 
$
(1,529,367)
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Paid-in
 
Accumulated
 
Comprehensive
 
Noncontrolling
 
Total
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
Interests
 
Equity
 
BALANCE, MARCH
   31, 2013
 
 
6,701
 
$
67,013
 
 
108,773,034
 
$
1,087,730
 
$
142,661,542
 
$
(130,270,623)
 
$
(1,918,094)
 
$
1,282,665
 
$
12,910,233
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(5,719,368)
 
 
 
 
 
530,416
 
 
(5,188,952)
 
Foreign currency 
   translation
   adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
146,183
 
 
 
 
 
146,183
 
Conversion of series A
   preferred stock and
   accrued dividends
 
 
(430)
 
 
(4,298)
 
 
1,704,729
 
 
17,048
 
 
(9,842)
 
 
(2,908)
 
 
 
 
 
 
 
 
 
Exercise of common stock warrants
 
 
 
 
 
 
 
 
778,948
 
 
7,789
 
 
288,226
 
 
 
 
 
 
 
 
 
 
 
296,015
 
Accrued dividends -
   series A convertible
   preferred stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
377,910
 
 
(377,910)
 
 
 
 
 
 
 
 
 
Stock-based
   compensation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
177,749
 
 
 
 
 
 
 
 
 
 
 
177,749
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE,
   SEPTEMBER 30,
   2013
 
 
6,271
 
$
62,715
 
 
111,256,711
 
$
1,112,567
 
$
143,495,585
 
$
(136,370,809)
 
$
(1,771,911)
 
$
1,813,081
 
$
8,341,228
 
 
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,
 
 
 
2013
 
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
Net loss
 
$
(5,188,952)
 
$
(1,422,900)
 
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
427,762
 
 
460,939
 
Provision for doubtful accounts
 
 
25,812
 
 
12,000
 
Amortization of deferred financing costs
 
 
67,276
 
 
42,412
 
Change in fair value of warrant liability
 
 
3,966,415
 
 
(71,279)
 
Deferred tax benefit
 
 
(74,076)
 
 
(74,076)
 
Loss from equity investment in non-consolidated affiliate
 
 
24,077
 
 
10,727
 
Foreign exchange loss
 
 
111,523
 
 
22,172
 
Stock-based compensation expense
 
 
177,749
 
 
138,928
 
Provision for obsolete inventories
 
 
 
 
100,000
 
Changes in operations, assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
 
 
(666,064)
 
 
(518,956)
 
Due from affiliates
 
 
(199,078)
 
 
(146,163)
 
Inventory
 
 
75,491
 
 
(904,801)
 
Prepaid expenses and supplies
 
 
(209,818)
 
 
(99,027)
 
Other assets
 
 
(80,078)
 
 
(51,788)
 
Accounts payable and accrued expenses
 
 
(500,955)
 
 
(349,222)
 
Accrued interest
 
 
1,090
 
 
1,089
 
Due to related parties
 
 
(29,014)
 
 
959,860
 
 
 
 
 
 
 
 
 
Total adjustments
 
 
3,118,112
 
 
(467,185)
 
 
 
 
 
 
 
 
 
NET CASH USED IN OPERATING ACTIVITIES
 
 
(2,070,840)
 
 
(1,890,085)
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
Purchase of equipment
 
 
(86,610)
 
 
(43,098)
 
Acquisition of intangible assets
 
 
(26,981)
 
 
(39,375)
 
Change in restricted cash
 
 
61,999
 
 
1,500
 
Payments under contingent consideration agreements
 
 
(5,940)
 
 
(71,280)
 
 
 
 
 
 
 
 
 
NET CASH USED IN INVESTING ACTIVITIES
 
 
(57,532)
 
 
(152,253)
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
Keltic facility
 
 
232,031
 
 
1,879,458
 
Bourbon term loan
 
 
(63,050)
 
 
 
Junior loan
 
 
1,250,000
 
 
 
Foreign revolving credit facility
 
 
122,344
 
 
150,143
 
Proceeds from exercise of series A preferred warrants
 
 
296,015
 
 
 
 
 
 
 
 
 
 
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
 
 
1,837,340
 
 
2,029,601
 
 
 
 
 
 
 
 
 
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
 
 
3,232
 
 
(1,792)
 
NET DECREASE IN CASH AND CASH EQUIVALENTS
 
 
(287,800)
 
 
(14,529)
 
CASH AND CASH EQUIVALENTS — BEGINNING
 
 
439,323
 
 
484,362
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS — ENDING
 
$
151,523
 
$
469,833
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURES:
 
 
 
 
 
 
 
Schedule of non-cash investing and financing activities:
 
 
 
 
 
 
 
Conversion of series A preferred stock to common stock
 
$
429,868
 
$
130,132
 
Interest paid
 
$
384,145
 
$
202,916
 
  
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, 2013 is derived from the March 31, 2013 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, 2013 included in the Company’s annual report on Form 10-K for the year ended March 31, 2013, as amended (“2013 Form 10-K”). Please refer to the notes to the audited consolidated financial statements included in the 2013 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 60 % ownership interest in Gosling-Castle Partners, Inc. (“GCP”), with adjustments for income or loss allocated based upon percentage of ownership. The accounts of the subsidiaries have been included as of the date of acquisition. All significant intercompany transactions and balances have been eliminated.
 
 
 
 
B.
Organization and operations — The Company is principally engaged in the importation, marketing and sale of premium and super premium brands of rums, whiskey, liqueurs, vodka and tequila in the United States, Canada, Europe and Asia.
 
 
 
 
C.
Equity investments - Equity investments are carried at original cost adjusted for the Company’s proportionate share of the investees’ income, losses and distributions. The Company assesses the carrying value of its equity investments when an indicator of a loss in value is present and records a loss in value of the investment when the assessment indicates that an other-than-temporary decline in the investment exists. The Company classifies its equity earnings of non-consolidated affiliate equity investment as a component of net income or loss.
 
 
 
 
D.
Goodwill and other intangible assets — Goodwill represents the excess of purchase price including related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill and other identifiable intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually, or more frequently if circumstances indicate a possible impairment may exist. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives, generally on a straight-line basis, and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
 
 
 
 
E.
Impairment of long-lived assets — Under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 310, “Accounting for the Impairment or Disposal of Long-lived Assets”, the Company periodically reviews whether changes have occurred that would require revisions to the carrying amounts of its definite lived, long-lived assets. When the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized based on the fair value of the asset.
 
 
 
 
F.
Excise taxes and duty — Excise taxes and duty are computed at standard rates based on alcohol proof per gallon/liter and are paid after finished goods are imported into the United States and then transferred out of “bond.” Excise taxes and duty are recorded to inventory as a component of the cost of the underlying finished goods. When the underlying products are sold “ex warehouse”, the sales price reflects the taxes paid and the inventoried excise taxes and duties are charged to cost of sales.
 
 
 
 
G.
Foreign currency — The functional currency for the Company’s foreign operations is the Euro in Ireland and the British Pound in the United Kingdom. Under ASC 830, “Foreign Currency Matters”, the translation from the applicable foreign currencies to U.S. Dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The resulting translation adjustments are recorded as a component of other comprehensive income. Gains or losses resulting from foreign currency transactions are shown as a separate line item in the consolidated statements of operations.
 
 
 
8

  
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements - Continued
 
 
H.
Fair value of financial instruments — ASC 825, “Financial Instruments”, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties and requires disclosure of the fair value of certain financial instruments. The Company believes that there is no material difference between the fair-value and the reported amounts of financial instruments in the Company’s balance sheets due to the short term maturity of these instruments, or with respect to the Company’s debt, as compared to the current borrowing rates available to the Company.
 
 
 
The Company’s investments are reported at fair value in accordance with authoritative guidance, which accomplishes the following key objectives:
 
 
·
Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date;
 
·
Establishes a three-level hierarchy (“valuation hierarchy”) for fair value measurements;
·
Requires consideration of the Company’s creditworthiness when valuing liabilities; and
·
Expands disclosures about instruments measured at fair value.
 
 
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of the valuation hierarchy are as follows:
 
 
·
Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
·
Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are directly or indirectly observable for the asset or liability for substantially the full term of the financial instrument.
 
·
Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.
 
 
I.
Income taxes — Under ASC 740, “Income Taxes”, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. A valuation allowance is provided to the extent a deferred tax asset is not considered recoverable.
 
The Company has not recognized any adjustments for uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expense; however, no such provisions for accrued interest and penalties related to uncertain tax positions have been recorded by the Company.
 
The Company’s income tax benefit for the three and six months ended September 30, 2013 and 2012 consists of federal, state and local taxes attributable to GCP, which does not file a consolidated income tax return with the Company. In connection with the investment in GCP, the Company recorded a deferred tax liability on the ascribed value of the acquired intangible assets of $ 2,222,222 , increasing the value of the asset. The difference between the book basis and tax basis created a deferred tax liability that is being amortized over a period of 15 years (the life of the licensing agreement) on a straight-line basis. For each of the three-month and six-month periods ended September 30, 2013 and 2012, the Company recognized $ 37,038 and $ 74,076 of deferred tax benefits, respectively.
  
 
J.
Accounting standards adopted — In July 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-02, “Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” The amended guidance simplifies how entities test indefinite-lived intangible assets other than goodwill for impairment.   After an assessment of certain qualitative factors, if it is determined to be more likely than not that an indefinite-lived asset is impaired, entities must perform the quantitative impairment test.   Otherwise, the quantitative test is optional.   This new guidance was effective for the Company as of April 1, 2013. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows or financial condition.
 
In October 2012, the FASB issued ASU 2012-04, “Technical Corrections and Improvements.” The amendments in this update cover a wide range of topics in the ASC. These amendments include technical corrections and improvements to the ASC and conforming amendments related to fair value measurements. This new guidance was effective for the Company as of April 1, 2013. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows or financial condition.
 
In February 2013, the FASB issued amendments to the accounting guidance for presentation of comprehensive income to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income, but do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where the net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about these amounts. This new guidance was effective for the Company as of April 1, 2013. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows or financial condition.
 
 
 
9

 
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements - Continued
 
 
K.
Recent accounting pronouncements — The Company has considered all recent accounting pronouncements, and no pronouncements were determined to have a significant impact on the financial statements that have not been disclosed in prior reporting periods.

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 and warrants or conversion of convertible preferred stock outstanding and related accrued dividends. In computing diluted net loss per share for the three and six months ended September 30, 2013 and 2012, no adjustment has been made to the weighted average outstanding common shares as the assumed exercise of outstanding options and warrants and the assumed conversion of convertible preferred stock and related accrued dividends is anti-dilutive.
 
 
Potential common shares not included in calculating diluted net loss per share are as follows:
 
 
 
Six months ended
September 30,
 
 
 
2013
 
2012
 
Stock options
 
 
11,134,765
 
 
7,960,765
 
Warrants to purchase common stock
 
 
11,095,139
 
 
11,874,087
 
Convertible preferred stock and accrued dividends
 
 
25,352,339
 
 
24,842,577
 
 
 
 
 
 
 
 
 
Total
 
 
47,582,243
 
 
44,677,429
 

NOTE 3 —  INVENTORIES
 
 
 
September 30,
 
March 31,
 
 
 
2013
 
2013
 
Raw materials
 
$
5,004,418
 
$
5,191,147
 
Finished goods – net
 
 
8,664,386
 
 
8,540,815
 
 
 
 
 
 
 
 
 
Total
 
$
13,668,804
 
$
13,731,962
 
 
As of September 30 and March 31, 2013, 22 % and 19 %, respectively, of raw materials and 6 % and 4 %, respectively, of finished goods were located outside of the United States.
 
The Company estimates the allowance for obsolete and slow moving inventory based on analyses and assumptions including, but not limited to, historical usage, expected future demand and market requirements.
 
Inventories are stated at the lower of weighted average cost or market.

NOTE 4 —  EQUITY INVESTMENT
 
Investment in DP Castle Partners, LLC
 
 
In August 2010, CB-USA formed DP Castle Partners, LLC (“DPCP”) with Drink Pie, LLC to manage the manufacturing and marketing of Travis Hasse’s Original Apple Pie Liqueur, Cherry Pie Liqueur and any future line extensions of the brand. DPCP has the exclusive global rights to produce and market Travis Hasse’s Original Pie Liqueurs and CB-USA has the global distribution rights for this brand. DPCP pays a per case royalty fee to Drink Pie, LLC under a licensing agreement. CB-USA purchases the finished product from DPCP at a pre-determined margin and then uses its existing infrastructure, sales force and distributor network to sell the product and promote the brands. Finished goods are sold to CB-USA FOB – Production and CB-USA bears the risk of loss on both inventory and third-party receivables. Revenues and cost of sales are recorded at their respective gross amounts on the books and records of CB-USA. For the three months ended September 30, 2013 and 2012, CB-USA purchased $ 0 and $ 164,619 , respectively, in finished goods from DPCP under the distribution agreement. For the six months ended September 30, 2013 and 2012, CB-USA purchased $ 170,880 and $ 324,050 , respectively, in finished goods from DPCP under the distribution agreement. As of September 30 and March 31, 2013, DPCP was indebted to CB-USA in the amount of $ 392,405 and $ 268,598 , respectively, which are included in due to shareholders and affiliates on the accompanying condensed consolidated balance sheet. At September 30, 2013, CB-USA owned 20 % of DPCP and, under the terms of the agreement, will increase its stake in DPCP based on achieving case sale targets. CB-USA also earns a defined rate of interest on its capital contribution to DPCP, based on its ownership in DPCP. For each of the three months and each of six months ended September 30, 2013 and 2012, CB-USA earned $ 2,100 and $ 4,200 , respectively, in interest income on its capital contribution to DPCP. The Company has accounted for this investment under the equity method of accounting. This investment balance was $ 96,823 and $ 116,700 at September 30 and March 31, 2013, respectively.
 
 
10

 
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements - Continued  
 
NOTE 5 —  ACQUISITIONS  
 
Acquisition of McLain & Kyne
 
On October 12, 2006, the Company acquired all of the outstanding capital stock of McLain & Kyne. The Company was required to pay contingent consideration based on the case sales of Jefferson’s Presidential Select bourbon for a specified amount of cases. As of June 30, 2013, the Company had reached the specified case sale threshold for contingent consideration under the agreement. Accordingly, no further contingent consideration will be due. For the six months ended September 30, 2013 and 2012, the sellers earned $ 5,940 and $ 71,280 , respectively, under this agreement. The earn-out payments have been recorded as an increase to goodwill.

NOTE 6 —  GOODWILL AND INTANGIBLE ASSETS
 
The changes in the carrying amount of goodwill for the six months ended September 30, 2013 were as follows:
     
 
 
Amount
 
Balance as of March 31, 2013
 
$
490,286
 
 
 
 
 
 
Payments under McLain and Kyne agreement
 
 
5,940
 
 
 
 
 
 
Balance as of September 30, 2013
 
$
496,226
 
 
Intangible assets consist of the following:
 
 
September 30,
2013
 
March 31,
2013
Definite life brands
$
170,000
 
$
170,000
Trademarks
 
535,947
 
 
535,947
Rights
 
8,271,555
 
 
8,271,555
Product development
 
96,959
 
 
96,959
Patents
 
994,000
 
 
994,000
Other
 
55,461
 
 
28,480
 
 
 
 
 
 
 
 
10,123,922
 
 
10,096,941
Less: accumulated amortization
 
5,731,420
 
 
5,404,000
 
 
 
 
 
 
Net
 
4,392,502
 
 
4,692,941
Other identifiable intangible assets — indefinite lived*
 
4,112,972
 
 
4,112,972
 
 
 
 
 
 
 
$
8,505,474
 
$
8,805,913
 
* Other identifiable intangible assets — indefinite lived consists of product formulations.
 
Accumulated amortization consists of the following:
 
 
 
September 30,
2013
 
March 31,
2013
 
Definite life brands
 
$
169,999
 
$
169,999
 
Trademarks
 
 
246,470
 
 
230,379
 
Rights
 
 
4,685,197
 
 
4,409,221
 
Product development
 
 
18,500
 
 
16,280
 
Patents
 
 
611,254
 
 
578,121
 
Other
 
 
-
 
 
-
 
 
 
 
 
 
 
 
 
Accumulated amortization
 
$
5,731,420
 
$
5,404,000
 
 
 
 
11

 
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements - Continued
 
NOTE 7 —  RESTRICTED CASH
 
At September 30 and March 31, 2013, the Company had € 302,476 or $ 408,946 (translated at the September 30, 2013 exchange rate) and € 352,255 or $ 451,346 (translated at the March 31, 2013 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 8A below.

NOTE 8 —  NOTES PAYABLE
 
 
 
September 30,
2013
 
March 31,
2013
Notes payable consist of the following:
 
 
 
 
 
 
Foreign revolving credit facilities (A)
 
$
220,102
 
$
89,407
Note payable – GCP note(B)
 
 
216,869
 
 
211,580
Keltic facility (C)
 
 
6,733,352
 
 
6,501,321
Bourbon term loan (D)
 
 
2,432,950
 
 
2,496,000
Junior loan (E)
 
 
1,250,000
 
 
 
 
 
 
 
 
 
Total
 
$
10,853,273
 
$
9,298,308
 
 
 
A.
The Company has arranged various facilities aggregating € 302,476 or $ 408,946 (translated at the September 30, 2013 exchange rate) with an Irish bank, including overdraft coverage, creditors’ insurance, customs and excise guaranty, and a revolving credit facility. These facilities are payable on demand, continue until terminated by either party, are subject to annual review, and call for interest at the lender’s AA1 Rate minus 1.70 %. The balance on the credit facilities included in notes payable totaled €162,798, or $ 220,102 (translated at the September 30, 2013 exchange rate), and € 69,761 , or $ 89,407 , (translated at the March 31, 2013 exchange rate), at September 30 and March 31, 2013, 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, 2013, $ 10,579 of accrued interest was converted to amounts due to affiliates. At September 30, 2013, $ 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, 2013, $ 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 the Keltic Facility (“Keltic Facility”), a revolving loan agreement with Keltic Financial Partners II, LP ("Keltic"), providing for availability (subject to certain terms and conditions) of a facility of up to $ 5,000,000 for the purpose of providing the Company and CB-USA with working capital. In July 2012, the Keltic Facility was amended to increase availability to $ 7,000,000 , among other changes. In March 2013, the Keltic Facility was amended to increase availability to $ 8,000,000 , among other changes. In August 2013, the Keltic Facility was amended in order to modify the borrowing base calculation and covenants with respect to the Keltic Facility and permit the Company to make regularly scheduled payments of principal and interest and voluntary prepayments on the Junior Loan (as defined below), subject to certain conditions set forth in the Amendment. The Company and CB-USA are referred to individually and collectively as the Borrower. The Keltic Facility expires on December 31, 2016. The Borrower may borrow up to the maximum amount of the Keltic Facility, provided that the Borrower has a sufficient borrowing base (as defined under the loan agreement). The Keltic Facility interest rate is the rate that, when annualized, is the greatest of (a) the Prime Rate plus 3.25%, (b) the LIBOR Rate plus 5.75%, and (c) 6.50%. For the three months ended September 30, 2013, the Company paid interest at 6.5 %. Interest is payable monthly in arrears, on the first day of every month on the average daily unpaid principal amount of the Keltic Facility. After the occurrence and during the continuance of any "Default" or "Event of Default" (as defined under the loan agreement), the Borrower is required to pay interest at a rate that is 3.25% per annum above the then applicable Keltic Facility interest rate. There have been no Events of Default under the Keltic Facility. The Company paid a $ 40,000 commitment fee in connection with the first amendment, a $ 70,000 closing and commitment fee in connection with the second amendment  and a $25,000 closing and commitment fee in connection with the third amendment . Keltic also receives an annual facility fee in an amount equal to 1% per annum of the maximum revolving facility amount and 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). The loan agreement contains standard borrower representations and warranties for asset-based borrowing and a number of reporting obligations and affirmative and negative covenants. The loan agreement includes negative covenants that, among other things, restrict the Borrower’s ability to create additional indebtedness, dispose of properties, incur liens, and make distributions or cash dividends. At September 30, 2013, the Company was in compliance, in all material respects, with the covenants under the Keltic Facility. At September 30 and March 31, 2013, $ 6,733,352 and $ 6,501,321 , respectively, due on the Keltic Facility is included in long-term liabilities. See Note 16 for additional information regarding an amendment to the Keltic Facility that was entered into after September 30, 2013.
 
 
12

 
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements - Continued
 
 
D. 
In March 2013, the Company and CB-USA entered into an inventory term loan of $ 2,496,000 (the "Bourbon Term Loan") that was used for the purchase of bourbon inventory on March 11, 2013. Unless sooner terminated in accordance with its terms, the Bourbon Term Loan matures on December 31, 2016.   The Bourbon Term Loan 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%. For the three months ended September 30, 2013, the Company paid interest of 7.5%. Interest is payable monthly in arrears, on the first day of every month on the average daily unpaid principal amount of the Bourbon Term Loan. After the occurrence and during the continuance of any "Default" or "Event of Default" (as defined under the loan agreement), the Borrower is required to pay interest at a rate that is 3.25% per annum above the then applicable Bourbon Term Loan interest rate. The Borrower is required to pay down the principal balance of the Bourbon Term Loan within 15 banking days from the completion of a bottling run of bourbon from the bourbon inventory stock purchased on or about the date of the Bourbon Term Loan in an amount equal to the purchase price of such bourbon. The unpaid principal balance of the Bourbon Term Loan, all accrued and unpaid interest thereon, all fees, costs and expenses payable in connection with the Bourbon Term Loan are due and payable in full on December 31, 2016.
  
 
Keltic required as a condition to funding the Bourbon Term Loan that Keltic had entered into a participation agreement (the "Participation Agreement") providing for an initial aggregate of $ 750,000 of the Bourbon Term Loan to be purchased by junior participants. Certain related parties of the Company purchased a portion of these junior participations in the Bourbon Term Loan, including Frost Gamma Investments Trust ($ 500,000 ), an entity affiliated with Phillip Frost, M.D., a director and principal shareholder of the Company, Mark E. Andrews, III ($ 50,000 ), a director of the Company and the Company’s Chairman, and an affiliate of Richard J. Lampen ($ 50,000 ), a director of the Company and the Company’s President and Chief Executive Officer (amounts shown are initial purchase amounts). Under the terms of the Participation Agreement, the junior participants receive interest at the rate of 11 % per annum. Neither the Company nor CB-USA is a party to the Participation Agreement. However, the Borrower is party to a fee letter (the "Fee Letter") with the junior participants (including the related party junior participants) pursuant to which the Borrower is obligated to pay the junior participants an aggregate commitment fee of $ 45,000 in three equal annual installments of $ 15,000 . In August 2013, the Bourbon Term Loan was amended to provide the Company with the ability to increase the maximum aggregate principal amount of the Bourbon Term Loan from $ 2,500,000 to up to $ 4,000,000 to finance the purchase of aged whiskies following the identification of junior participants to purchase a portion of the increased Bourbon Term Loan amount. The balance on the Bourbon Term Note included in notes payable totaled $ 2,432,950 and $2,496,000 at September 30 and March 31, 2013, respectively.
 
 
E.
In August 2013, the Company entered into a Loan Agreement (the "Junior Loan Agreement"), by and between the Company and the lending parties thereto (the "Junior Lenders"), which provides for an aggregate $ 1,250,000 unsecured loan (the "Junior Loan") to the Company. The Junior Loan bears interest at a rate of 11 % per annum, payable quarterly in arrears commencing November 1, 2013, and matures on October 15, 2015 . The Junior Loan 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 Junior Loan Agreement contains customary events of default, which, if uncured, entitle each Junior Lender to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the portion of the Junior Loan made by such Junior Lender. The Junior Loan Agreement provides for a funding fee of 2 % per annum on the then outstanding Junior Loan balance (pro-rated for any period of less than one year), payable pro rata among the Junior Lenders on the date of the Junior Loan Agreement and on the first and second anniversaries thereof. The Junior Lenders include Frost Gamma Investments Trust ($ 200,000 ), Mark E. Andrews, III ($ 50,000 ) and an affiliate of Richard J. Lampen ($ 50,000 ). In connection with the Junior Loan Agreement, the Junior Lenders entered into a subordination agreement with Keltic; the Company is a party to the subordination agreement.

NOTE 9 —  EQUITY  
 
Preferred stock dividends – Holders of the Company’s 10 % Series A Convertible Preferred Stock, par value $ 0.01 per share (“Series A Preferred Stock”), are entitled to receive cumulative dividends at the rate per share (as a percentage of the stated value of $ 1,000 per share) of 10 % per annum, whether or not declared by the Company’s Board of Directors, which are only payable in shares of the Company’s common stock upon conversion of the Series A Preferred Stock or upon a liquidation. For the three months ended September 30, 2013 and 2 0 12, the Company recorded accrued dividends of $ 187,978 and $ 184,199 , respectively, and for the six months ended September 30, 2013 and 2 0 12 the Company recorded accrued dividends of $ 377,910 and $ 364,150 , respectively, included as an increase in the accumulated deficit and in additional paid-in capital on the accompanying condensed consolidated balance sheets.
 
Preferred stock conversions – In the six months ended September 30, 2013, holders of Series A Preferred Stock converted 430 shares of Series A Preferred Stock, and accrued dividends thereon, into 1,704,729 shares of common stock.
 
In the six months ended September 30, 2012, holders of Series A Preferred Stock converted 130.132 shares of Series A Preferred Stock, and accrued dividends thereon, into 470,234 shares of common stock.
 
 
13

 
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements - Continued
 
NOTE 10 —  WARRANTS
 
The warrants issued in connection with the June 2011 private placement of the Company’s Series A Preferred Stock (the “2011 Warrants”) have an exercise price of $ 0.38 per share, subject to adjustment, and are exercisable for a period of five years . The exercise price of the 2011 Warrants is equal to 125% of the conversion price of the Series A Preferred Stock.
 
Due to the down-round financing provisions included in the terms of the warrant, the Company accounted for the 2011 Warrants issued in June 2011 in the consolidated financial statements as a liability at their initial fair value of $ 487,022 and accounted for the 2011 Warrants issued in October 2011 as a liability at their initial fair value of $ 780,972 . Changes in the fair value of the 2011 Warrants are recognized in earnings for each subsequent reporting period. At September 3 0 and March 31, 2013, the fair value of the 2011 Warrants was included in the balance sheet under the caption Warrant liability of $ 4,761,789 and $ 795,374 , respectively. For the three months ended September 3 0 , 2013  the Company recorded a loss on the change in the value of the 2011 Warrants of $ 3,352,252 ; for the three months ended September 30, 2012, the Company recorded a gain on the change in the value of the 2011 Warrants of $ 162,607 . For the six months ended September 30, 2013 the Company recorded a loss on the change in the value of the 2011 Warrants of $ 3,799,503 ; for the six months ended September 30, 2012, the Company recorded a gain on the change in the value of the 2011 Warrants of  $ 71,279 .
 
The fair value of the warrants is a Level 3 fair value under the valuation hierarchy and was estimated using the Black-Scholes option pricing model utilizing the following assumptions:
 
 
 
September 30,
2013
 
 
March 31,
2013
 
Stock price
 
$
0.76
 
 
$
0.31
 
Risk-free interest rate
 
 
0.63
%
 
 
0.36
%
Expected option life in years
 
 
2.75
 
 
 
3.25
 
Expected stock price volatility
 
 
51
%
 
 
40
%
Expected dividend yield
 
 
0
%
 
 
0
%
 
 
2011 Warrants exercised – In the six months ended September 30, 2013, holders of 2011 Warrants exercised 778,948 2011 Warrants and received shares of common stock. The Company received $ 296,015 in cash upon the exercise of these warrants.

NOTE 11 —  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, 2013, the Company had no forward contracts outstanding. Gain or loss on foreign currency forward contracts, which was de minimis during the periods presented, is included in other income and expense.

NOTE 12 —  STOCK-BASED COMPENSATION
 
In May 2013, the Company granted to a director, upon his initial election to the board, options to purchase an aggregate of 100,000 shares of the Company’s common stock at an exercise price of $ 0.32 per share under the Company’s 2003 Stock Incentive Plan. The options, which expire in May 2023 , vest 25% on each of the first four anniversaries of the grant date. The Company has valued the options at $ 19,076 using the Black-Scholes option pricing model .
 
In June 2013, the Company granted to certain employees options to purchase an aggregate of 425,000 shares of the Company’s common stock at an exercise price of $ 0.38 per share under the Company’s 2003 Stock Incentive Plan. The options, which expire in June 2023 , vest 33.3% on each of the first three anniversaries of the grant date. The Company has valued the options at $ 93,500 using the Black-Scholes option pricing model .
 
In June 2013, the Company granted to employees, directors and certain consultants options to purchase an aggregate of 1,495,000 shares of the Company’s common stock at an exercise price of $ 0.38 per share under the Company’s 2003 Stock Incentive Plan. The options, which expire in June 2023 , vest 25% on each of the first four anniversaries of the grant date. The Company has valued the options at $ 343,850 using the Black-Scholes option pricing model .
 
In July 2013, the Company granted to a director options to purchase an aggregate of 1,000,000 shares of the Company’s common stock at an exercise price of $ 0.35 per share under the Company’s 2003 Stock Incentive Plan. The options, which expire in July 2023 , vest 33.3% on each of the first three anniversaries of the grant date. The Company has valued the options at $ 208,405 using the Black-Scholes option pricing model .
 
Stock-based compensation expense for the three months ended September 30, 2013 and 2012 and for the six months ended September 30, 2013 and 2012 amounted to $ 105,215 and $ 79,748 , respectively and $ 177,749 and $ 138,928 , respectively. At September 30, 2013, total unrecognized compensation cost amounted to $ 968,786 , representing 6,032,799 unvested options. This cost is expected to be recognized over a weighted-average vesting period of 2.59 years. There were no options exercised during the six months ended September 30, 2013 and 2012. The Company did not recognize any related tax benefit for the three months ended September 30, 2013 and 2012 from option exercises.
 
 
14

 
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements - Continued
 
NOTE 13 —  COMMITMENTS AND CONTINGENCIES
 
 
A.
The Company has entered into a supply agreement with Irish Distillers Limited (“IDL”), 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. IDL 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 IDL 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, 2014 , the Company has contracted to purchase approximately € 704,900 or $ 953,018 (translated at the September 30, 2013 exchange rate) in bulk Irish whiskey , of which € 397,722 , or $ 537,716 , has been purchased as of September 30, 2013 . The Company is not obligated to pay IDL for any product not yet received. During the term of this supply agreement, IDL has the right to limit additional purchases above the commitment amount.
 
 
B.
The Company has also entered into a supply agreement with IDL, 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. IDL 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 IDL 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, 2014 , the Company has contracted to purchase approximately € 245,103 or $ 331,377 (translated at the September 30, 2013 exchange rate) in bulk Irish whiskey , of which € 50,227 , or $ 67,906 , has been purchased as of September 30, 2013 . The Company is not obligated to pay IDL for any product not yet received. During the term of this supply agreement, IDL has the right to limit additional purchases above the commitment amount.
 
 
C.
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 April 30, 2014 and provides for monthly payments of $ 18,693 . The Dublin lease commenced on March 1, 2009 and extends through November 30, 2013 and provides for monthly payments of € 1,250 or $ 1,690 (translated at the September 30, 2013 exchange rate). The Dublin lease has been extended through October 31, 2016 and provides for monthly payments of € 1,100 , or $ 1,487 (translated at the September 30, 2013 exchange rat e).  The Houston, TX lease commenced on February 24, 2000 and extends through January 31, 2015 and provides for monthly payments of $ 1,820 . The Company has also entered into non-cancelable operating leases for certain office equipment.

NOTE 14 —  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 did not exceed the limits in effect at September 30, 2013 and exceeded the limits in effect by approximately $ 300,000 at March 31, 2013.
 
 
B.
Customers — Sales to one customer accounted for approximately 29.1 % and 31.0 % of the Company’s revenues for the three months ended September 30, 2013 and 2012, respectively. Sales to one customer accounted for approximately 29.9 % and 31.7 % of the Company’s revenues for the six months ended September 30, 2013 and 2012, respectively, and approximately 40.2 % of accounts receivable at September 30, 2013.

NOTE 15 —  GEOGRAPHIC INFORMATION
 
The Company operates in one reportable segment — the sale of premium beverage alcohol. The Company’s product categories are rum, liqueur, whiskey, vodka, tequila and wine. The Company reports its operations in two geographic areas: International and United States.
 
The consolidated financial statements include revenues and assets generated in or held in the U.S. and foreign countries. The following table sets forth the amounts and percentage of consolidated revenue, consolidated results from operations, consolidated net loss attributable to common shareholders, consolidated income tax benefit and consolidated assets from the U.S. and foreign countries and consolidated revenue by category.
 
15

 
CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements - Continued
 
 
 
Three Months ended September 30,
 
 
 
2013
 
2012
 
Consolidated Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
International
 
$
1,456,514
 
 
12.5
%
 
$
1,070,467
 
 
10.4
%
United States
 
 
10,203,193
 
 
87.5
%
 
 
9,247,270
 
 
89.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Consolidated Revenue
 
$
11,659,707
 
 
100.0
%
 
$
10,317,737
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Income (Loss) from Operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
International
 
$
2,262
 
 
(1.1)
%
 
$
(77,634)
 
 
14.4
%
United States
 
 
(210,154)
 
 
101.1
%
 
 
(459,847)
 
 
85.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Consolidated Loss from Operations
 
$
(207,892)
 
 
100.0
%
 
$
(537,481)
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Net Income (Loss) Attributable to Controlling
      Interests:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
International
 
$
11,128
 
 
(0.3)
%
 
$
(94,975)
 
 
10.5
%
United States
 
 
(4,270,751)
 
 
100.3
%
 
 
(806,320)
 
 
89.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Consolidated Net Loss Attributable to Controlling
    Interests
 
$
(4,259,623)
 
 
100.0
%
 
$
(901,295)
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax benefit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
 
37,038
 
 
100.0
%
 
 
37,038
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Revenue by category:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rum
 
$
4,285,230
 
 
38.6
%
 
$
4,047,647
 
 
39.2
%
Liqueur
 
 
2,609,505
 
 
22.4
%
 
 
2,437,008
 
 
23.7
%
Whiskey
 
 
2,294,165
 
 
19.7
%
 
 
1,795,671
 
 
17.3
%
Vodka
 
 
743,328
 
 
6.4
%
 
 
808,663
 
 
7.8
%
Tequila
 
 
34,946
 
 
0.3
%
 
 
60,989
 
 
0.6
%
Wine
 
 
178,878
 
 
1.5
%
 
 
122,066
 
 
1.2
%
Other*
 
 
1,513,655
 
 
13.0
%
 
 
1,045,693
 
 
10.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Consolidated Revenue
 
$
11,659,707
 
 
100.0
%
 
$
10,317,737
 
 
100.0
%
 
 
 
Six Months ended September 30,
 
 
 
2013
 
2012
 
Consolidated Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
International
 
$
2,867,861
 
 
13.0
%
 
$
2,624,015
 
 
13.1
%
United States
 
 
19,210,463
 
 
87.0
%
 
 
17,413,149
 
 
86.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Consolidated Revenue
 
$
22,078,324
 
 
100.0
%
 
$
20,037,164
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Income (Loss) from Operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
International
 
$
42,943
 
 
(6.5)
%
 
$
(134,921)
 
 
10.5
%
United States
 
 
(706,483)
 
 
106.5
%
 
 
(1,152,582)
 
 
89.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Consolidated Loss from Operations
 
$
(663,540)
 
 
100.0
%
 
$
(1,287,503)
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Net Income (Loss) Attributable to Controlling
     Interests:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
International
 
$
27,744
 
 
(0.5)
%
 
$
(146,703)
 
 
8.5
%
United States
 
 
(5,580,200)
 
 
100.5
%
 
 
(1,584,094)
 
 
91.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Consolidated Net Loss Attributable to Controlling
    Interests
 
$
(5,552,456)
 
 
100.0
%
 
$
(1,730,797)
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax benefit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
 
74,076
 
 
100.0
%
 
 
74,076
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Revenue by category:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rum
 
$
8,499,001
 
 
38.5
%
 
$
8,174,117
 
 
40.9
%
Liqueur
 
 
4,480,311
 
 
20.3
%
 
 
4,093,813
 
 
20.4
%
Whiskey
 
 
4,589,392
 
 
20.8
%
 
 
3,615,752
 
 
18.0
%
Vodka
 
 
1,332,978
 
 
6.0
%
 
 
1,811,390
 
 
9.0
%
Tequila
 
 
94,848
 
 
0.4
%
 
 
160,751
 
 
0.8
%
Wine
 
 
293,488
 
 
1.3
%
 
 
280,672
 
 
1.4
%
Other*
 
 
2,788,307
 
 
12.7
%
 
 
1,900,669
 
 
9.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Consolidated Revenue
 
$
22,078,324
 
 
100.0
%
 
$
20,037,164
 
 
100.0
%
 
 
 
As of September 30, 2013
 
 
As of March 31, 2013
 
Consolidated Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
International
 
$
2,362,589
 
 
7.1
%
 
 
1,941,537
 
 
5.9
%
United States
 
 
31,112,284
 
 
92.9
%
 
 
31,175,558
 
 
94.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Consolidated Assets
 
$
33,474,873
 
 
100.0
%