Castle Brands Inc.
Castle Brands Inc (Form: 10-Q, Received: 08/14/2006 15:59:43) Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006

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)


Delaware 41-2103550
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
570 Lexington Avenue, 29th Floor,
New York, New York
10022
(Address of principal executive offices) (Zip Code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act). See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act.


[ ] Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer

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 12,009,741 shares of $0.01 par value common stock outstanding at August 11, 2006.




TABLE OF CONTENTS





Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.    Condensed Consolidated Financial Statements

CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets


  June 30, 2006 March 31, 2006
  (Unaudited)  
ASSETS  
 
CURRENT ASSETS  
 
Cash and cash equivalents $ 20,401,781
$ 1,392,016
Accounts receivable – net of allowance for doubtful accounts of $422,967 and $395,207 4,574,848
3,511,215
Due from affiliates 992,889
953,616
Inventories 7,539,598
6,673,235
Prepaid expenses and other current assets 1,444,227
1,021,369
TOTAL CURRENT ASSETS 34,953,343
13,551,451
EQUIPMENT – net 470,464
407,983
OTHER ASSETS  
 
Intangible assets – net of accumulated amortization of $1,577,437 and $1,379,389 13,826,934
13,936,427
Goodwill 11,649,430
11,649,430
Deferred registration costs
2,823,594
Restricted cash 376,544
362,293
Other assets 577,386
913,032
TOTAL ASSETS $ 61,854,101
$ 43,644,210
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)  
CURRENT LIABILITIES  
 
Current maturities of notes payable and capital leases $ 1,352,244
$ 3,678,547
Accounts payable 5,106,516
3,757,515
Accrued expenses, put warrant payable and derivative instrument 871,296
2,986,188
Due to stockholders and affiliates 1,804,251
2,121,334
Convertible stockholder notes payable
1,660,148
Stockholder notes payable
147,113
TOTAL CURRENT LIABILITIES 9,134,307
14,350,845
LONG TERM LIABILITIES  
 
Senior notes payable 4,599,939
4,594,791
Notes payable and capital leases, less current maturities 9,020,465
15,350,640
Preferred stock and preferred membership units dividends payable
1,546,480
Deferred tax liability 2,666,477
2,703,515
  25,421,188
38,546,271
REDEEMABLE CONVERTIBLE PREFERRED STOCK  
 
Redeemable convertible preferred stock Series A, B, C;
4,103,750 shares designated; 4,089,463 shares outstanding at March 31, 2006, liquidation preference of $33,326,484
28,447,683
COMMITMENTS AND CONTINGENCIES (Note 14)  
 
MINORITY INTERESTS 2,331,372
2,674,731
STOCKHOLDERS’ EQUITY (DEFICIENCY)  
 
Common stock, $.01 par value, 20,500,000 shares authorized; 12,009,741 and 3,106,666 shares issued and oustanding at June 30, 2006 and March 31, 2006, respectively 120,098
31,067
Additional paid in capital 81,574,285
17,182,405
Accumulated deficiency (47,468,833
)
(43,404,887
)
Accumulated other comprehensive (loss)/income (124,009
)
166,940
TOTAL STOCKHOLDERS’ EQUITY (DEFICIENCY) 34,101,541
(26,024,475
)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY) $ 61,854,101
$ 43,644,210

See accompanying notes to the condensed consolidated financial statements.

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CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)


  Three-months Ended June 30,
  2006 2005
    (See Note 18)
Sales, net $ 5,460,405
$ 4,916,394
Cost of sales 3,564,059
3,153,192
Gross profit 1,896,346
1,763,202
Selling expense (Note 1R) 3,542,572
3,137,387
General and administrative expense (Note 1R) 2,235,791
1,137,476
Depreciation and amortization 234,494
221,485
Net operating loss (4,116,511
)
(2,733,146
)
Other income 1,300
Other expense (6,308
)
(9,455
)
Foreign exchange gain/(loss) 397,412
(312,971
)
Interest expense, net (422,676
)
(258,930
)
Write-off of deferred financing costs in connection with conversion of 6% subordinated convertible notes (295,368
)
Current (charge)/credit on derivative financial instrument (2,192
)
16,802
Income tax benefit 37,038
37,038
Minority interests 343,359
129,159
Net loss (4,063,946
)
(3,131,503
)
Preferred stock dividends 48,238
305,179
Net loss attributable to common stockholders $ (4,112,184
)
$ (3,436,682
)
Net loss attributable to common stockholders per common share  
 
Basic $ (0.36
)
$ (1.11
)
Diluted $ (0.36
)
$ (1.11
)
Weighted average shares used in computation  
 
Basic 11,422,725
3,106,666
Diluted 11,422,725
3,106,666

See accompanying notes to the condensed consolidated financial statements.

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CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficiency)
(Unaudited)


      
Common Stock
Additional
Paid in
Capital
Accumulated
Deficiency
Accumulated
Other
Comprehensive
Income/(Loss)
Total
Stockholders’
Equity/
(Deficiency)
  Shares Amount
BALANCE, MARCH 31, 2006 3,106,666
$ 31,067
$ 17,182,405
$ (43,404,887
)
$ 166,940
$ (26,024,475
)
Comprehensive loss  
 
 
 
 
 
Net loss  
 
 
(4,063,946
)
 
(4,063,946
)
Foreign currency translation adjustment  
 
 
 
(290,949
)
(290,949
)
Total comprehensive loss  
 
 
 
 
(4,354,895
)
Accrued preferred stock dividends  
 
(48,238
)
 
 
(48,238
)
Issuance of common stock in initial public offering, net of issuance costs 3,500,000
35,000
26,204,748
 
 
26,239,748
Conversion of redeemable convertible preferred stock, net of fractional shares 4,089,463
40,895
28,406,772
 
 
28,447,667
Issuance of common stock in payment of accrued dividends 193,107
1,931
1,387,834
 
 
1,389,765
Conversion of 5% euro denominated convertible subordinated notes 263,362
2,634
1,660,539
 
 
1,663,173
Conversion of 40% of 6% convertible subordinated notes 857,143
8,571
5,991,429
 
 
6,000,000
Vesting of stock options as compensation  
 
10,575
 
 
10,575
Estimated fair value ascribed to warrants issued to financial consultant  
 
283,727
 
 
283,727
Stock-based compensation  
 
494,494
 
 
494,494
BALANCE, JUNE 30, 2006 12,009,741
$ 120,098
$ 81,574,285
$ (47,468,833
)
$ (124,009
)
$ 34,101,541

See accompanying notes to the condensed consolidated financial statements.

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CASTLE BRANDS INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)


  Three-months Ended June 30,
  2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES   (See Note 18)
Net loss $ (4,063,946
)
$ (3,131,503
)
Adjustments to reconcile net loss to net cash used in operating activities  
 
Depreciation and amortization 234,494
221,485
Minority interest in net loss of consolidated subsidiary (343,359
)
(129,159
)
Loss on disposal of fixed assets
11,816
Write-off of deferred financing costs 92,730
76,533
Current charge/(credit) on derivative financial instrument 2,192
(16,802
)
Deferred tax benefit (37,038
)
(37,038
)
Effect of changes in foreign currency rate (396,302
)
221,632
Stock-based compensation expense 494,494
Non-cash interest charge 283,727
 
Write-off of deferred financing costs in connection with conversion of 6% subordinated convertible notes 295,368
Changes in operations, assets and liabilities  
 
Increase in accounts receivable (999,502
)
(1,030,374
)
Increase in due from related parties –  GXB (38,911
)
(286,975
)
Increase in inventory (756,663
)
(220,758
)
Increase in prepaid expenses and supplies (417,470
)
(326,033
)
Increase in other assets (5,310
)
(85,551
)
(Decrease)/increase in accounts payable, accrued expenses, put warrant payable and derivative instrument (375,185
)
706,483
Decrease in due to related parties (335,435
)
(336,042
)
Total adjustments (2,302,170
)
(1,230,783
)
NET CASH USED IN OPERATING ACTIVITIES (6,366,116
)
(4,362,286
)
CASH FLOWS FROM INVESTING ACTIVITIES  
 
Acquisition of property and equipment (79,645
)
(39,434
)
Acquisition of intangible assets (101,725
)
(32,105
)
Business acquisitions –  net of cash acquired
(3,308
)
NET CASH USED IN INVESTING ACTIVITIES (181,370
)
(74,847
)
CASH FLOWS FROM FINANCING ACTIVITIES  
 
Repayment of notes payable (7,471,519
)
(1,753,852
)
Proceeds from notes payable 4,614,913
5,595,996
Payments of obligations under capital leases (860
)
(1,089
)
Issuance of common stock 31,500,000
Payments for costs of stock issuances (3,085,309
)
(36,929
)
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,557,225
3,804,126
EFFECTS OF FOREIGN CURRENCY TRANSLATION 26
(11,949
)
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 19,009,765
(644,956
)
CASH AND CASH EQUIVALENTS - BEGINNING 1,392,016
5,676,398
CASH AND CASH EQUIVALENTS - ENDING $ 20,401,781
$ 5,031,442
SUPPLEMENTAL DISCLOSURES  
 
Schedule of non-cash investing and financing activities  
 
Conversion of redeemable convertible preferred stock, net of fractional shares, by issuance of common stock $ (28,447,667
)
$
Issuance of common stock in initial public offering $ 28,447,667
$
Issuance of common stock in payment of accrued dividends $ (1,389,765
)
$
Issuance of common stock in initial public offering $ 1,389,765
$
Conversion of 5% euro denominated convertible subordinated notes by issuance of common stock $ (1,663,173
)
$
Issuance of common stock in initial public offering $ 1,663,765
$
Conversion of 40% of 6% convertible subordinated notes by issuance of common stock $ (6,000,000
)
$
Issuance of common stock in initial public offering $ 6,000,000
$
Interest paid $ 489,396
$ 55,161
Income taxes paid $
$

See accompanying notes to the condensed consolidated financial statements.

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CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.  Description of business and business combination – Castle Brands Inc. is the successor to Great Spirits Company, LLC, a Delaware limited liability company (‘‘GSC’’). GSC was formed in February 1998. In May 2003, Great Spirits (Ireland) Limited, a wholly owned subsidiary of GSC, began operations in Ireland to market GSC's products internationally. In July 2003, GSRWB, Inc. (renamed Castle Brands Inc.) and its wholly owned subsidiary, Great Spirits Corp. (renamed Castle Brands (USA) Corp.) (‘‘CB-USA’’), were formed under the laws of Delaware in contemplation of a pending acquisition. On December 1, 2003, Castle Brands Inc. acquired The Roaring Water Bay Spirits Group Limited and The Roaring Water Bay Spirits Marketing and Sales Company Limited and their related entities (collectively, ‘‘Roaring Water Bay’’). The acquisition has been accounted for under purchase accounting. Simultaneously, GSC was merged into CB-USA, and Castle Brands Inc. issued stock to GSC's shareholders in exchange for their shares of GSC. Subsequent to the acquisition, The Roaring Water Bay Spirits Group Limited was renamed Castle Brands Spirits Group Limited (‘‘CB Ireland’’) and The Roaring Water Bay Spirits Marketing and Sales Company Limited was renamed Castle Brands Spirits Marketing and Sales Company Limited (‘‘CB-UK’’).

In February 2005, Castle Brands Inc. acquired 60% of the shares of Gosling-Castle Partners Inc. (‘‘GCP’’), which holds the worldwide distribution rights (excluding Bermuda) to Gosling's rum and related products.

As used herein, the ‘‘Company’’ refers to Castle Brands Inc. and, where appropriate, it also refers collectively to Castle Brands Inc. and its direct and indirect subsidiaries, including its majority owned GCP subsidiary.

The accompanying condensed consolidated financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles; but, 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. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the fiscal year ended March 31, 2006 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission.

B.  Brands – Vodka — Boru vodka, is an ultra-pure, quadruple distilled and specially filtered premium vodka. Boru is produced in Ireland and has three flavor extensions (citrus, orange and crazzberry).

Rum — Gosling's rums, a family of premium rums with a 200-year history, for which the Company is, through its export venture GCP, the exclusive marketer outside of Bermuda, including the award-winning Gosling's Black Seal rum; and Sea Wynde, a premium rum developed and introduced by the Company in 2001.

Irish Whiskey — Knappogue Castle Whiskey, a vintage-dated premium single-malt Irish whiskey; Knappogue Castle 1951, a pure pot-still whiskey that has been aged for 36 years; and the Clontarf Irish whiskeys, a family of premium Irish whiskeys, available in single malt, reserve and classic pure grain versions.

Liqueurs/Cordials — Brady's Irish cream, a premium Irish cream liqueur; Celtic Crossing, a premium Irish liqueur; and, pursuant to an exclusive U.S. marketing arrangement, Pallini Limoncello, Raspicello and Peachello premium Italian liqueurs.

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C.  Principles of consolidation – The consolidated financial statements include the accounts of Castle Brands Inc., its wholly-owned subsidiaries, CB-USA and its wholly-owned foreign subsidiaries, CB Ireland and CB-UK, and its majority owned subsidiary Gosling-Castle Partners, Inc. 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.
D.  Organization and operations – The Company is principally engaged in the manufacture, marketing and sale of fine spirit brands of vodka, Irish whiskey, rums and liqueurs (the ‘‘products’’) in the United States, Canada, Europe, and the Caribbean.
E.  Cash equivalents – The Company considers all highly liquid instruments with a maturity at date of acquisition of three-months or less to be cash equivalents.
F.  Trade accounts receivable – The Company records trade accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect anticipated losses on the trade accounts receivable balances. The Company calculates this allowance based on its history of write-offs, level of past due accounts based on contractual terms of the receivables and its relationships with and economic status of the Company's customers.
G.  Revenue recognition – Revenue from product sales is recognized when the product is shipped to a customer (generally a distributor or a control state), title and risk of loss has passed to the customer in accordance with the terms of sale (FOB shipping point or FOB destination), and collection is reasonably assured. Revenue is not recognized on shipments to control states in the United States until such time as product is sold through to the retail channel.
H.  Inventories – Inventories, which comprise distilled spirits, raw materials (bulk spirits, bottles, labels and caps), packaging and finished goods, is valued at the lower of cost or market, using the weighted average cost method. The Company assesses the valuation of its inventories and reduces the carrying value of those inventories that are obsolete or in excess of the Company's forecasted usage to their estimated net realizable value. The Company estimates the net realizable value of such inventories based on analyses and assumptions including, but not limited to, historical usage, expected future demand and market requirements. Reductions to the carrying value of inventories are recorded in cost of goods sold.
I.  Equipment – Equipment consists of office equipment, computers and software and furniture and fixtures. When assets are retired or otherwise disposed of, the cost and related depreciation is removed from the accounts, and any resulting gain or loss is recognized in the statement of operations. Equipment is depreciated using the straight-line method over the estimated useful lives of the assets ranging from three to five years. Depreciation expense for the three-months ended June 30, 2006 and 2005 totaled $36,446 and $27,855, respectively
J.  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. As of June 30, 2006 and March 31, 2006, goodwill and other indefinite lived intangible assets that arose from acquisitions were $11.6 million and $11.6 million, respectively. Goodwill and other 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. The Company evaluates the recoverability of goodwill and indefinite lived intangible assets using a two-step impairment test approach at the reporting unit level. In the first step the fair value for the reporting unit is compared to its book value including goodwill. In the case that the fair value of the reporting unit is less than the book value, a second step is performed which compares the implied fair value of the reporting unit's goodwill to the book value of the goodwill. The fair value for the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of such reporting unit. If the fair value of the goodwill is less than the book value, the difference is recognized as an impairment. Intangible

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  assets with estimable useful lives are amortized over their respective estimated useful lives to the estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company performed its annual impairment assessment on long-lived assets, including intangible assets and goodwill, in accordance with the methods prescribed above. The Company concluded that no impairment existed at March 31, 2006. Amortization expense for the three-months ended June 30, 2006 and 2005 totaled $198,048 and $193,630, respectively
K.  Deferred registration costs – The costs associated with the Company's initial public offering were initially recorded as deferred registration costs then charged to additional paid in capital at the close of the offering on April 10, 2006.
L.  Shipping and handling – The Company reflects as inventory costs freight-in and related external handling charges relating to the purchase of raw materials and finished goods. These costs are charged to cost of sales at the time the underlying product is sold. The Company also incurs shipping costs in connection with its various marketing activities, including the shipment of point of sale materials to the Company's regional sales managers and customers, and the costs of shipping product in connection with its various marketing programs and promotions. These shipping charges are included in selling expense. Shipping charges included in selling expense amounted to $137,161 and $92,153 for three-months ended June 30, 2006 and 2005, respectively.
M.  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 Great Britain 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. During the three-months ended June 30, 2006 and 2005, the captions for the Company's revenues and cost of sales included the amounts of excise tax and duties presented in the table below:

  Three-months ended
June 30,
  2006 2005
Sales, net $ 1,133,939
$ 992,181
Cost of Sales $ 1,133,939
$ 992,181
N.  Distributor charges and promotional goods – The Company incurs charges from its distributors for a variety of transactions and services rendered by the distributor, including product depletions, product samples for various promotional purposes, in-store tastings and training where legal, and local advertising where legal. Such charges are reflected as selling expense as incurred. In addition, for certain of its distributors, the Company has entered into arrangements whereby the purchase of a particular product or products by a distributor is accompanied by a percentage of the sale being composed of promotional goods or as a predetermined discount percentage of dollars off invoice. In such cases, the cost of the promotional goods is charged to cost of sales and dollars off invoice are a reduction to revenue.
O.  Foreign currency translation – The functional currency for the Company's foreign operations is the euro in Ireland, the British pound in the United Kingdom, and the Canadian dollar in Canada. The translation from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using current 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 included in other income/expenses.

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P.  Fair value of financial instruments – SFAS No. 107, ‘‘Disclosures About Fair Value of 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 balance sheets due to the short term maturity of these instruments, or with respect to the debt, as compared to the current borrowing rates available to the Company.
Q.  Income taxes – Under the asset and liability method of SFAS No. 109 ‘‘Accounting for 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.
R.  Stock-based compensation – Effective April 1, 2006, the Company began recording compensation expense associated with stock options and other forms of equity compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), as interpreted by SEC Staff Accounting Bulletin No. 107. Prior to April 1, 2006, the Company accounted for stock options according to the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations, and therefore no related compensation expense was recorded for awards granted with no intrinsic value. The Company adopted the modified prospective transition method provided for under SFAS 123R, and consequently, had not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock options recognized in the three-month period ended June 30, 2006 includes: 1) amortization related to the remaining unvested portion of all stock option awards granted prior to April 1, 2006 over the requisite service period based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, Accounting for Stock-Based Compensation ; and 2) amortization related to all stock option awards granted on or subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. A compensation charge is recorded when it is probable that performance or service conditions will be satisfied. The probability of vesting is updated annually and compensation is adjusted via a cumulative catch-up adjustment or prospectively depending upon the nature of the change.

As a result of the adoption of SFAS 123R, incremental compensation expense for the three-month period ended June 30, 2006 amounted to $494,494, of which $84,869 is included in selling expense and $409,625 is included in general and administrative expense in the accompanying condensed consolidated statements of operations. At June 30, 2006 total unrecognized compensation cost amounted to approximately $3,046,127, representing 823,233 unvested options.

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For stock options granted prior to the adoption of SFAS 123R, if compensation expense for the Company's stock option plan had been determined based upon estimated fair values at the grant dates in accordance with SFAS No. 123, the Company's pro forma net loss and pro forma basic and diluted net loss per common share would have been as follows:


  For the three-months
ended June 30, 2005
   
Net loss attributable to common stockholders, as reported $ (3,436,682
)
Stock-based compensation expense determined (110,453
)
Pro forma net loss attributable to common stockholders $ (3,547,135
)
Loss per share: Basic and diluted – as reported $ (1.11
)
Basic and diluted – pro forma $ (1.14
)
S.  Research and development costs – The costs of research, development and product improvement are charged to expense as incurred and are included in selling expense.
T.  Advertising – Advertising costs are expensed when the advertising first appears in its respective medium. Advertising expense, which is included in selling expense, was $1,066,118 and $1,068,575 for three-months ended June 30, 2006 and 2005, respectively.
U.  Impairment of long-lived assets – The Company periodically reviews whether changes have occurred that would require revisions to the carrying amounts of its long-lived assets. When the sum of the undiscounted 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.
V.  Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates include the accounting for items such as evaluating annual impairment tests, allowance for doubtful accounts, depreciation, amortization and expense accruals.
W.  Recent accounting pronouncements – In June 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued FASB Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (‘‘FIN 48’’). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with SFAS No. 109, ‘‘Accounting for Income Taxes.’’ It prescribes a recognition threshold and measurement methodology for financial statement reporting purposes and promulgates a series of new disclosures of tax positions taken or expected to be taken on a tax return for which less than all of the resulting tax benefits are expected to be realized. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company will adopt this interpretation in the first quarter of fiscal year 2008. We are currently evaluating the requirements of FIN 48 and have not yet determined the impact on the Company's consolidated financial statements.

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

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is computed giving effect to all dilutive potential common shares that were outstanding during the period. Diluted potential common shares consist of incremental shares issuable upon exercise of stock options and warrants, contingent conversion of debentures and convertible preferred stock outstanding. In computing diluted net loss per share for the three-months ended June 30, 2006 and 2005, 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 preferred stock and convertible debentures is anti-dilutive.

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


  June 30,
2006
June 30,
2005
Stock options 1,228,500
899,500
Stock warrants 598,618
498,618
Convertible debentures 1,125,000
1,513,160
Convertible preferred stock
3,741,965
Total 2,952,118
6,653,243

NOTE 3 – INVESTMENTS AND ACQUISITIONS

Investment in Gosling-Castle Partners Inc.

In February 2005, the Company entered into a stock subscription agreement for 60% of the stock of Gosling Partners Inc., whose name was subsequently changed to Gosling-Castle Partners Inc. GCP had no operations prior to the Company entering into the stock subscription agreement. The original stockholders of GCP were E. Malcolm Gosling and Gosling's Limited and after the Company's purchase of 60% of the ownership interest, the remaining ownership interests were owned 20% by each of E. Malcolm Gosling and Gosling's Limited. CB-USA had previously entered into an exclusive distribution agreement with Gosling's Export (Bermuda) Limited (‘‘GXB’’) to distribute Gosling's rum in the United States. Gosling Partners Inc. had originally been formed to acquire, and had acquired prior to the Company's investment in GCP, the following:

•  global distribution rights (excluding Bermuda) to the Gosling's portfolio of products;
•  appointment as the exclusive authorized global exporter for the GXB product line;
•  an exclusive license for the use of GXB's global trademarks for its brand portfolio.

The Company agreed to pay GCP $5,000,000 for its 60% interest: $100,000 in cash and issuance of a promissory note of $4,900,000 to GCP for the balance owed. This promissory note is payable in five installments as follows:

$1,025,000 on April 1, 2005

$1,125,000 on October 1, 2005

$1,000,000 on April 1, 2006

$1,000,000 on October 1, 2006; and

$750,000 on April 1, 2007

Effective with the payment of the second installment on October 1, 2005, this promissory note began accruing interest on the unpaid principal amount at the rate of 4% per annum until the note is repaid in full. As of June 30, and March 31, 2006, $68,667 and $55,000, respectively, in interest on this note has been accrued and remains unpaid.

The global distribution agreement commenced on April 1, 2005 and has a 15 year term. It is renewable for additional 15 year terms as long as GCP meets certain case sale targets during

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the initial term as set forth in the agreement. (See Note 16 – Gosling-Castle Partners Inc. Export Agreement with Gosling's Export (Bermuda) Limited). The Company ascribed the entire purchase of $5,000,000 to the Gosling global distribution agreement described above. In conjunction with this transaction the Company recorded a deferred tax liability of $2,222,222 to reflect the difference between the adjusted book value and tax basis. This deferred tax liability was recorded as an increase to the value of the distribution agreement and is included in intangible assets.

NOTE 4 – RESTRICTED CASH

In connection with the credit facilities as described in Note 6, personal guarantees of the two former managing directors of CB Ireland and CB-UK in the amount of €158,717 were cancelled and replaced with a deposit of cash collateral of €300,000, or $376,544 and $362,293 (as translated at the exchange rates in effect on June 30, and March 31, 2006, respectively).

NOTE 5 – OVERDRAFT ACCOUNTS

CB Ireland and CB-UK maintain overdraft coverage with a financial institution in Ireland of up to €400,000 ($502,000) and £20,000 ($36,300), respectively. Overdraft balances included in notes payable for the periods presented totaled $501,699 and $98,327 at June 30, and March 31, 2006, respectively.

NOTE 6 – SENIOR NOTES PAYABLE, NOTES PAYABLE AND CAPITAL LEASE


  June 30,
2006
March 31,
2006
Notes payable consist of the following:  
 
Revolving credit facilities (A) $ 633,886
$ 332,409
Revolving credit facilities (B) 122,207
166,283
Subordinated notes (C)
307,938
Senior notes (D) 4,599,939
4,594,791
Subordinated convertible notes (E) 9,000,000
15,000,000
Non-interest bearing notes (F) 605,081
1,210,162
9% Promissory note (G)
2,000,000
  14,961,113
23,611,583
Capital leases 11,535
12,395
Total $ 14,972,648
$ 23,623,978
(A) The Company has arranged revolving credit facilities aggregating approximately €1,412,303 ($1,772,581) with a lender for working capital purposes. These facilities are payable on demand, continue until terminated by either party on not less than three-months prior written notice, and call for interest at rates ranging from prime plus 3% to 7.85%. The Company also maintains a €190,000 ($238,469) term note with the same lender. The note carries an interest rate of 5.2%, is payable on demand and subject to annual review and renewal by the lender, and calls for monthly payments of principal and interest of €6,377 through 2007.
(B) The Company has arranged revolving credit facilities aggregating approximately £242,000 ($439,545). The facilities, which are payable on demand and subject to annual review and renewal by the lender, call for interest at rates ranging from prime plus 2% to prime plus 2.25%.
(C) In connection with the Company's acquisition of CB Ireland, the Company issued to the

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former minority shareholders of CB Ireland €255,000 ($307,937) of subordinated notes, which matured on July 11, 2007. The notes accrued interest at the rate of 5.7% per annum with the aggregate interest payable being limited to €51,000 ($61,588). All outstanding principal and accrued interest on these notes in the amount of €290,328 ($350,600) were paid in April 2006.
(D) On June 9, September 28 and October 13, 2004, the Company issued $3,555,000, $1,005,000 and $100,000, respectively, of senior notes collateralized by accounts receivable and inventories of CB-USA. As issued, these senior notes bore an interest rate of 8%, payable semi-annually on November 30th and May 31st, and matured on May 31, 2007. Effective August 15, 2005, the terms of these notes were modified with the consent of the note holders to mature on May 31, 2009 in exchange for an interest rate adjustment to 9%. In addition, each holder of $1,000 of senior notes received warrants to purchase 25 shares of the Company's common shares. At June 30, 2006, there were 116,500 warrants issued and outstanding in conjunction with issuance of senior notes. These warrants have been valued at $129,195 in the aggregate and have been treated as a discount to the notes payable. Interest expense pertaining to this discount is recognized, and the notes payable accreted, over the adjusted term of the notes with a maturity of May 2009.
(E) On March 1, 2005, the Company entered into an agreement to issue up to $10,000,000 of subordinated convertible notes to a single investor. In June 2005, the Company issued the remaining $5,000,000 of convertible notes. The notes, which mature five years from the date of issuance, bear interest at the rate of 6% per annum which is payable quarterly. The Company has the option for the first two years from the date of issuance to pay interest in kind at the rate of 7.5% per annum. Through June 30, 2006, the Company has accrued and paid all interest in cash at the 6% percent rate pursuant to the terms of the note and has the means and intent to continue to do so. The notes may be converted into common stock at $8 per share at any time, and shall be converted at the option of the holder or automatically after the third year from the date of issuance on the 30th consecutive trading day on which the closing price of the common stock is no less than $20 per share. 40% of the notes converted automatically into common stock upon the completion of our initial public offering on April 10, 2006, at a price of $7.00 per share.
In July 2005, the Company entered into an agreement with an investor to issue $5,000,000 of subordinated convertible notes. The closing was completed in August 2005. The notes, which mature five years from the date of issuance, bear interest at the rate of 6% per annum. The Company has the option for the first two years from the date of issuance to pay interest in kind at the rate of 7.5% per annum. Through June 30, 2006, the Company has accrued and paid all interest in cash at the 6% percent rate pursuant to the terms of the note and has the means and intent to continue to do so. The notes may be converted into common stock at $8 per share at any time, and shall be converted automatically after the third year from the date of issuance on the 30th consecutive trading day on which the closing price of the common stock is no less than $20 per share. 40% of the notes converted automatically into common stock upon the completion of our initial public offering on April 10, 2006, at a price of $7.00 per share.
In July 2005, the original $10,000,000 of convertible notes was amended to be equivalent in terms to those of the new $5,000,000 investor. The automatic conversion of 40% of the combined $15,000,000 of convertible notes at the $7.00 conversion price upon the closing of the initial public offering resulted in the issuance of 107,143 more shares than would have been issued at the $8.00 conversion price.

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(F) On February 14, 2005, the Company, through its interest in GCP, entered into an agreement with Gosling's Export (Bermuda) Limited (‘‘GXB’’) to acquire the global distribution rights (excluding Bermuda) to GXB's portfolio of products in exchange for $2,500,000 in non-interest bearing notes due in four equal semi-annual installments (See Note 3).
(G) On February 17, 2006, the Company entered into a $5 million credit agreement with an investment trust which is a stockholder and controlled by one of the Company's directors. On February 17, 2006, the Company borrowed $2.0 million under this credit agreement and issued a promissory note bearing interest at the rate of 9% per annum, payable at maturity. In addition, the Company paid a $100,000 facility fee upon receipt of these funds. The Company repaid all outstanding principal and accrued interest under this note in the amount of $2,026,000 in April 2006.

The Company financed the purchase of certain office equipment totaling $17,821 included in equipment. The leases call for monthly payments of $337 in principal and interest at the rate of 5% per annum, to be paid through July 2009. As of June 30, and March 31, 2006, the Company owed $11,535 and $12,395, respectively, under this lease. As of June 30, 2006, future minimum lease payments equaled $12,476 including interest.

Principal payments due over the next five years for the above listed notes payable and capital lease are due as follows (as translated at the exchange rates in effect on June 30, 2006):


  For the Period
ending June 30,
2007 $ 1,352,244
2008 14,901
2009 3,922
2010 7,601,581
2011 6,000,000
Total 14,972,648
Less current portion 1,352,244
Non current portion $ 13,620,404

NOTE 7 – ROARING WATER BAY NOTES PAYABLE

In connection with the Company's acquisition of Roaring Water Bay in December 2003 (see Note 1.A), €444,389 ($576,372) of subordinated notes were issued by CB Ireland in substitution of subordinated notes of the same amount originally issued on April 1, 2001 by CB Ireland. The original notes had a maturity date of April 1, 2006 and were non- interest bearing. The replacement notes were non-interest bearing and the terms called for annual principal payments of €177,743, €133,323 and €133,323 on December 1, 2004, 2005 and 2006, respectively. Interest of 6% was imputed on these notes at the date of acquisition of $56,653. The note discount was accreted monthly by a charge to interest expense. For the three-months ended June 30, 2006 and 2005, the Company recorded interest expense on these notes of $11,500 and $4,832, respectively.

The remaining principal amounts due on these notes in the aggregate amount of $159,961 (as translated at the exchange rate in effect on April 20, 2006) were repaid by the Company in April 2006.

In connection with the acquisition of Roaring Water Bay (see Note 1.A) in December 2003, the former principal shareholders received €1,374,750 of convertible subordinated notes in partial consideration for their shares in CB Ireland and CB-UK. These notes were convertible into common shares of the Company at the current conversion price of €5.22, which was subject to adjustment from time to time as set forth in the note agreement. These convertible notes were to mature on December 1, 2006 and had an interest rate of 5%

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payable quarterly on March 31st, June 30th, September 30th and December 31st. As of March 31, 2006, the Company was indebted in the amount of $1,660,148 on the notes (as translated at the exchange rate in effect on March 31, 2006). These notes converted into 263,362 shares of common stock upon the closing of the initial public offering and $20,726 of accrued interest was paid in April 2006.

NOTE 8 – COMMON STOCK

At March 31, 2006, the Company had 3,106,666 common shares outstanding.

On April 5, 2006, the Securities and Exchange Commission declared effective the Company's registration statement on Form S-1 (File No. 333-128676) with respect to the Company's initial public offering. The initial public offering commenced on April 6, 2006 and terminated after all of the registered securities, except for the securities issuable pursuant to the over-allotment option, had been sold. The underwriters in the offering were Oppenheimer & Co. Inc., ThinkEquity Partners LLC and Ladenburg Thalmann & Co. Inc. On April 10, 2006, 3,500,000 shares of common stock were sold on the Company's behalf at an initial public offering price of $9.00 per share. The Company registered the shares of its common stock in the initial public offering under the Securities Act of 1933, as amended. The Company's registered shares are currently being traded on the American Stock Exchange under the ticker symbol ROX.

Net proceeds to the company after payment of issuance costs not already paid as of April 10, 2006 were $26,346,406, determined as follows:


Aggregate offering proceeds to the Company $ 31,500,000
Underwriting discounts and commissions 2,205,000
Other fees and expenses 2,948,594
Total expenses 5,153,594
Net proceeds to the company $ 26,346,406

In addition, certain transactions occurred at the time of the initial public offering and were settled from the net proceeds of such offering:

•  The conversion of all of the Company's outstanding Series A convertible preferred stock into 535,715 shares of common stock;
•  The conversion of all of the Company's outstanding Series B convertible preferred stock into 200,000 shares of common stock;
•  The conversion of all of the Company's outstanding Series C convertible preferred stock into 3,353,748 shares of common stock;
•  193,107 shares of common stock were issued in payment of all of the dividends accrued on preferred stock through April 9, 2006;
•  All of the €1,374,750 ($1,660,148) principal amount of the Company's 5% euro denominated convertible subordinated notes was converted into 263,362 shares of common stock;
•  $6.0 million (40%) of the $15.0 million principal amount of the Company's 6% convertible notes was converted into 857,143 shares of common stock;
•  Unamortized deferred financing costs incurred in connection with the $6.0 million of 6% convertible notes referred to above were recognized as interest expense;
•  €255,000 ($307,937) of subordinated notes were repaid;
•  The balance of non-interest bearing stockholder notes payable, including $13,888 of aggregate imputed interest on the original notes, from net offering proceeds ($159,963), adjusted for change in foreign exchange rate at payment date ($1,038) was repaid;

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•  $2,005,000 of borrowings under the February 2006 credit facility (including $5,000 of interest accrued from April 1, 2006 through April 10, 2006) was repaid;
•  $91,222 of accrued interest was paid; and
•  $204,952 of all accrued dividends on the preferred membership units of the predecessor company, Great Spirits, LLC was paid.

At June 30, 2006, the Company had 12,009,741 common shares outstanding.

NOTE 9 – REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Company had convertible preferred stock outstanding, as follows:


Description March 31,
2006
Convertible Preferred Stock, Series A, $1 par value, 550,000 shares authorized, 535,715 shares issued and outstanding; cash dividends at 5%, or accrued dividends at 7% at Company's option, paid semi-annually; 20% redemption per year commencing with sixth anniversary of issuance, automatic conversion to common stock at conversion price of $7 per share upon initial public offering of $10 million or more $ 3,750,005
Convertible Preferred Stock, Series B, $1 par value, 200,000 shares authorized, issued and outstanding; cash dividends at 5%, or accrued dividends at 7% at Company's option, paid semi-annually, 20% redemption per year commencing with sixth anniversary of issuance, automatic conversion to common stock at conversion price of $6 per share upon initial public offering of $10 million or more 1,200,000
Convertible Preferred Stock, Series C, $1 par value, 3,353,750 shares authorized, issued and outstanding at March 31, 2006; cash dividends at 4%, or accrued dividends at 6% at Company's option, paid semi-annually; 20% redemption per year commencing with sixth anniversary of issuance, automatic conversion to common stock at conversion price of $8 per share upon initial public offering of $10 million or more 26,830,000
(See Note 12 for consideration given to warrant beneficial conversion features)  
Subtotal 31,780,005
Offering costs and value ascribed to warrants (3,332,322
)
Net $ 28,447,683

Effective with the Company's initial public offering on April 6, 2006, all of the Company's outstanding Series A convertible preferred stock converted into 535,715 shares of common stock; all of the Company's outstanding Series B convertible preferred stock converted into 200,000 shares of common stock; and all of the Company's outstanding Series C convertible preferred stock converted into 3,353,748 shares (net of fractional shares) of common stock.

NOTE 10 – FOREIGN CURRENCY FORWARD CONTRACTS

The Company enters into forward contracts to attempt to limit 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 March 31, 2006, the Company held outstanding forward exchange positions for the purchase of euros, expiring

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through July 2006, in the amount of $723,700 with a weighted average conversion rate of €1 = $1.2062 as compared to the spot rate at March 31, 2006 of €1 = $1.2076. At June 30, 2006, the Company held outstanding forward exchange positions for the purchase of euros, expiring through September 2006, in the amount of $831,165 with a weighted average conversion rate of €1 = $1.2722 as compared to the spot rate at June 30, 2006 of €1 = $1.2551. Gain or loss on foreign transactions, which was de minimus, is included in foreign exchange gain (loss) on the accompanying condensed statements of operations.

NOTE 11 – PROVISION FOR INCOME TAXES

The Company's income tax benefit for the three-months ended June 30, 2006 and 2005 consists of federal and state and local taxes attributable to Gosling-Castle Partners Inc. (‘‘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 deferred tax liability is being reversed and a deferred tax benefit is being recognized over the amortization period of the intangible asset (15 years). For the three-months ended June 30, 2006 and 2005, the Company recognized $37,038 and $37,038 of deferred tax benefit, respectively.

On December 1, 2003, the Company recorded a deferred tax liability of $629,444 as the amount ascribed to the difference between the book and tax basis of the tangible and intangible assets acquired as additional goodwill.

NOTE 12 – STOCK OPTIONS AND WARRANTS

A.  Stock Options – In July 2003, the Company implemented the 2003 Stock Incentive Plan (‘‘the Plan’’) which provides for awards of incentive and non-qualified stock options, restricted stock and stock appreciation rights for its officers, employees, consultants and directors in order to attract and retain such individuals who contribute to the Company's success by their ability, ingenuity and industry knowledge, and to enable such individuals to participate in the long-term success and growth of the Company by giving them an equity interest in the Company. There are 2,000,000 common shares reserved and available for distribution under the Plan. In January 2004, the Board of Directors approved the Plan and the grant of 553,000 options to its full-time U.S. and international employees at an exercise price of $6.00 per share. These options vest over a four or five year period and expire ten years after the grant date.

In connection with the Company's acquisition of CB Ireland and CB-UK, the Company granted to an individual the option to purchase up to 10,000 shares of common stock at an exercise price of $6.00 per share at any time through November 30, 2013.

Stock-based compensation expense recognized in the condensed consolidated statement of operations for the three-months ended June 30, 2006 amounted to $494,494. No cash was received from options exercised under all share-based payment arrangements for the three-months ended June 30, 2006.

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A summary of the options outstanding under the stock option plan is as follows:


  Three-months ended June 30,
  2006 2005
  Shares Weighted
Average
Exercise
Price
Shares Weighted
Average
Exercise
Price
Outstanding at beginning of period 888,500
$ 6.82
745,500
$ 6.47
Granted 340,000
7.96
150,000
8.00
Forfeited
Outstanding at end of period 1,228,500
7.14
895,500
6.75
Options exercisable at period end 405,267
$ 6.63
174,533
$ 6.36
Weighted average fair value of options granted during the period  
$ 3.46
 
$ 2.17

The following table represents information relating to stock options outstanding at June 30, 2006:


  Options Outstanding Options Exercisable
Shares Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life in
Years
Shares Weighted
Average
Exercise
Price