þ
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Florida
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41-2103550
|
|
(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
|
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122 East 42nd Street,
Suite 4700,
New
York, New York
(Address
of principal executive offices)
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10168
(Zip
Code)
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o Large accelerated
filer
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o Accelerated
filer
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o Non-accelerated
filer (Do not check if a smaller reporting company)
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þ Smaller reporting
company
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Financial
Statements:
|
|||
Condensed
Consolidated Balance Sheets as of December 31, 2010 (unaudited) and
March 31, 2010
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|||
Condensed
Consolidated Statements of Operations for the three months and nine months
ended December 31, 2010 and 2009 (unaudited)
|
|||
Condensed
Consolidated Statement of Changes in Equity for the nine months ended
December 31, 2010 (unaudited)
|
|||
Condensed
Consolidated Statements of Cash Flows for the nine months ended December
31, 2010 and 2009 (unaudited)
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|||
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|||
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|||
Controls
and Procedures
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|||
Legal
Proceedings
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|||
Exhibits
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December
31, 2010
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March 31, 2010
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|||||||
(Unaudited)
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||||||||
ASSETS:
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$
|
581,887
|
$
|
1,281,141
|
||||
Accounts
receivable — net of allowance for doubtful accounts of $468,847 and
$807,438, respectively
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6,184,835
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5,394,019
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||||||
Due
from affiliates
|
188,750
|
2,192
|
||||||
Inventories—
net of allowance for obsolete and slow moving inventory of $220,838 and
$370,869, respectively
|
10,611,022
|
9,243,801
|
||||||
Prepaid
expenses and other current assets
|
967,762
|
960,033
|
||||||
Total
Current Assets
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18,534,256
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16,881,186
|
||||||
Equipment — net
|
469,431
|
482,025
|
||||||
Other
Assets
|
||||||||
Investment
in non-consolidated affiliate, at equity
|
175,614
|
--
|
||||||
Intangible
assets — net of accumulated amortization of $3,988,582 and $3,437,237,
respectively
|
11,125,935
|
11,669,432
|
||||||
Goodwill
|
1,063,392
|
994,044
|
||||||
Restricted
cash
|
439,554
|
693,966
|
||||||
Other
assets
|
73,312
|
169,134
|
||||||
Total
Assets
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$
|
31,881,494
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$
|
30,889,787
|
||||
LIABILITIES
AND EQUITY:
|
||||||||
Current
Liabilities
|
||||||||
Current
maturities of notes payable
|
$
|
422,270
|
$
|
425,435
|
||||
Accounts
payable
|
3,270,055
|
3,826,705
|
||||||
Accrued
expenses
|
595,574
|
657,934
|
||||||
Due
to shareholders and affiliates
|
1,677,738
|
676,028
|
||||||
Total
Current Liabilities
|
5,965,637
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5,586,102
|
||||||
Long-Term
Liabilities
|
||||||||
Notes
payable
|
5,834,426
|
434,034
|
||||||
Deferred
tax liability
|
1,999,798
|
2,110,912
|
||||||
Total
Liabilities
|
13,799,861
|
8,131,048
|
||||||
Commitments
and Contingencies (Note 12)
|
||||||||
Equity
|
||||||||
Preferred
stock, $.01 par value, 25,000,000 shares authorized, none
outstanding
|
—
|
—
|
||||||
Common
stock, $.01 par value, 225,000,000 shares authorized, 107,202,145 and
107,955,207 shares issued and outstanding at December 31, and March 31,
2010, respectively
|
1,072,021
|
1,079,552
|
||||||
Additional
paid-in capital
|
135,430,953
|
135,466,448
|
||||||
Accumulated
deficit
|
(116,950,055
|
)
|
(112,105,964
|
)
|
||||
Accumulated
other comprehensive loss
|
(1,799,651
|
)
|
(1,768,531
|
)
|
||||
Total
controlling shareholders’ equity
|
17,753,268
|
22,671,505
|
||||||
Noncontrolling
interests
|
328,365
|
87,234
|
||||||
Total
equity
|
18,081,633
|
22,758,739
|
||||||
Total
Liabilities and Equity
|
$
|
31,881,494
|
$
|
30,889,787
|
Three months ended December
31,
|
Nine
months ended December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Sales,
net*
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$
|
8,719,754
|
$
|
7,490,526
|
$
|
23,048,823
|
$
|
22,052,321
|
||||||||
Cost
of sales*
|
5,994,034
|
5,009,483
|
15,073,438
|
14,809,907
|
||||||||||||
Reversal
of provision for obsolete inventory
|
—
|
(84,660
|
)
|
(24,589
|
)
|
(589,930
|
)
|
|||||||||
Gross
profit
|
2,725,720
|
2,565,703
|
7,999,974
|
7,832,344
|
||||||||||||
Selling
expense
|
2,645,359
|
2,265,354
|
7,963,367
|
7,363,067
|
||||||||||||
General
and administrative expense
|
1,067,801
|
1,308,248
|
3,655,837
|
4,057,956
|
||||||||||||
Depreciation
and amortization
|
229,569
|
240,774
|
695,045
|
687,506
|
||||||||||||
Loss
from operations
|
(1,217,009
|
)
|
(1,248,673
|
)
|
(4,314,275
|
)
|
(4,276,185
|
)
|
||||||||
Other
income
|
—
|
—
|
957
|
145
|
||||||||||||
Other
expense
|
--
|
(26,376
|
)
|
(300
|
)
|
(48,057
|
)
|
|||||||||
Income
from equity investment in non-consolidated affiliate
|
17,214
|
--
|
17,214
|
--
|
||||||||||||
Foreign
exchange (loss) gain
|
(118,578
|
)
|
628,436
|
(172,824
|
)
|
2,212,933
|
||||||||||
Interest
(expense) income, net
|
(147,606
|
)
|
1,408
|
(244,846
|
)
|
28,265
|
||||||||||
Gain
on sale of intangible asset
|
--
|
405,900
|
--
|
405,900
|
||||||||||||
Gain
on exchange of note payable
|
—
|
—
|
—
|
270,275
|
||||||||||||
Income
tax benefit
|
37,038
|
37,038
|
111,114
|
111,114
|
||||||||||||
Net
loss
|
(1,428,941
|
)
|
(202,267
|
)
|
(4,602,960
|
)
|
(1,295,610
|
)
|
||||||||
Net
(income) loss attributable to noncontrolling interests
|
(55,155
|
)
|
(34,963
|
)
|
(241,131
|
)
|
27,926
|
|||||||||
Net
loss attributable to common shareholders
|
$
|
(1,484,096
|
)
|
$
|
(237,230
|
)
|
$
|
(4,844,091
|
)
|
$
|
(1,267,684
|
)
|
||||
Net
loss per common share, basic and diluted, attributable to common
shareholders
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
$
|
(0.05
|
)
|
$
|
(0.01
|
)
|
||||
Weighted
average shares used in computation, basic and diluted, attributable to
common shareholders
|
107,202,145
|
107,955,207
|
107,500,417
|
103,623,882
|
||||||||||||
Accumulated
|
||||||||||||||||||||||||||||
Additional
|
Other
|
|||||||||||||||||||||||||||
Common Stock
|
Paid-in
|
Accumulated
|
Comprehensive
|
Noncontrolling
|
Total
|
|||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Interests
|
Equity
|
||||||||||||||||||||||
BALANCE,
MARCH
31, 2010
|
107,955,207
|
$
|
1,079,552
|
$
|
135,466,448
|
$
|
(112,105,964
|
)
|
$
|
(1,768,531
|
)
|
$
|
87,234
|
$
|
22,758,739
|
|||||||||||||
Comprehensive
loss
|
||||||||||||||||||||||||||||
Net
(loss) income
|
(4,844,091
|
)
|
241,131
|
(4,602,960
|
)
|
|||||||||||||||||||||||
Foreign
currency translation adjustment
|
(31,120
|
)
|
(31,120
|
)
|
||||||||||||||||||||||||
Total
comprehensive
loss
|
(4,634,080
|
)
|
||||||||||||||||||||||||||
Repurchase
and retirement of common stock
|
(3,790,562
|
)
|
(37,906
|
)
|
(985,569
|
)
|
(1,023,475
|
)
|
||||||||||||||||||||
Issuance
of common stock in exchange for fine wine inventory
|
3,000,000
|
30,000
|
810,000
|
840,000
|
||||||||||||||||||||||||
Issuance
of common stock in connection with stock option exercises
|
37,500
|
375
|
7,500
|
7,875
|
||||||||||||||||||||||||
Stock-based
compensation
|
132,574
|
132,574
|
||||||||||||||||||||||||||
BALANCE,
DECEMBER 31, 2010
|
107,202,145
|
$
|
1,072,021
|
$
|
135,430,953
|
$
|
(116,950,055
|
)
|
$
|
(1,799,651
|
)
|
$
|
328,365
|
$
|
18,081,633
|
Nine months ended December
31,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$
|
(4,602,960
|
)
|
$
|
(1,295,610
|
)
|
||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
695,045
|
687,506
|
||||||
Gain
on sale of intangible asset
|
--
|
(405,900
|
)
|
|||||
Provision
for doubtful accounts
|
(23,165
|
)
|
46,398
|
|||||
Amortization
of deferred financing costs
|
7,292
|
—
|
||||||
Deferred
tax benefit
|
(111,114
|
)
|
(111,114
|
)
|
||||
Income
from equity investment in non-consolidated affiliate
|
(17,214
|
)
|
--
|
|||||
Effect
of changes in foreign exchange
|
(10,383
|
)
|
(2,383,647
|
)
|
||||
Stock-based
compensation expense
|
132,574
|
125,321
|
||||||
Reversal
of provision for obsolete inventories
|
(24,589
|
)
|
(589,930
|
)
|
||||
Non-cash
interest charge
|
101,097
|
--
|
||||||
Gain
on exchange of note payable
|
—
|
(270,275
|
)
|
|||||
Changes
in operations, assets and liabilities:
|
||||||||
Accounts
receivable
|
(778,346
|
)
|
170,964
|
|||||
Due
from affiliates
|
(186,558
|
)
|
73,767
|
|||||
Inventory
|
(519,425
|
)
|
406,589
|
|||||
Prepaid
expenses and supplies
|
(7,966
|
)
|
(29,630
|
)
|
||||
Other
assets
|
88,530
|
35,000
|
||||||
Accounts
payable and accrued expenses
|
(590,842
|
)
|
(2,669,678
|
)
|
||||
Due
to related parties
|
1,001,710
|
254,891
|
||||||
Total
adjustments
|
(243,354
|
)
|
(4,659,738
|
)
|
||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(4,846,314
|
)
|
(5,955,348
|
)
|
||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of equipment
|
(135,128
|
)
|
(63,092
|
)
|
||||
Acquisition
of intangible assets
|
(7,848
|
)
|
—
|
|||||
Investment
in non-consolidated affiliate, at equity
|
(150,000)
|
--
|
||||||
Proceeds
from sale of intangible asset
|
--
|
500,000
|
||||||
Payments
under contingent consideration agreements
|
(69,348
|
)
|
(65,643
|
)
|
||||
Short-term
investments — net
|
—
|
2,954,164
|
||||||
NET
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
|
(362,324
|
)
|
3,325,429
|
|||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Credit
facilities — net
|
2,500,000
|
(127,263
|
)
|
|||||
Note
payable — Betts & Scholl, LLC
|
(212,271
|
)
|
(355,406
|
)
|
||||
Promissory
note – Frost Gamma Investments Trust
|
2,000,000
|
—
|
||||||
Promissory
notes – $1.0 million December 2010 financing
|
1,000,000
|
--
|
||||||
Notes
payable – Gosling’s Export (Bermuda) Limited
|
--
|
223,492
|
||||||
Payments
of obligations under capital leases
|
—
|
(928
|
)
|
|||||
Change
in restricted cash
|
241,044
|
(4,673
|
)
|
|||||
Proceeds
from stock option exercises
|
7,875
|
—
|
||||||
Repurchase
of common stock
|
(1,023,475
|
)
|
(180,000
|
)
|
||||
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
4,513,173
|
(444,778
|
)
|
|||||
EFFECTS
OF FOREIGN CURRENCY TRANSLATION
|
(3,789
|
)
|
925
|
|||||
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(699,254
|
)
|
(3,073,772
|
)
|
||||
CASH
AND CASH EQUIVALENTS — BEGINNING
|
1,281,141
|
4,011,777
|
||||||
CASH
AND CASH EQUIVALENTS — ENDING
|
$
|
581,887
|
$
|
938,005
|
||||
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
Schedule
of non-cash investing and financing activities:
|
||||||||
Issuance
of common stock in exchange for fine wine inventory in June
2010
|
$
|
840,000
|
$
|
—
|
||||
Exchange
of $314,275 of 3% note payable, including all interest, by issuance of
common stock for $44,000 in May 2009
|
$
|
—
|
$
|
314,275
|
||||
Acquisition
of Betts & Scholl, LLC assets by issuance of common stock in
September 2009
|
$
|
—
|
$
|
1,928,572
|
||||
Acquisition
of Betts & Scholl, LLC assets by issuance of note payable in
September 2009
|
$
|
—
|
$
|
844,541
|
||||
Interest
paid
|
$
|
121,949
|
$
|
10,689
|
A.
|
Description of
business and business combination — The unaudited condensed
consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries, Castle Brands (USA) Corp. (“CB-USA”), and
McLain & Kyne, Ltd. (“McLain & Kyne”), and the Company’s
wholly-owned foreign subsidiaries, Castle Brands Spirits Group Limited
(“CB-IRL”) and Castle Brands Spirits Marketing and Sales Company Limited,
and the Company’s 60% ownership interest in Gosling-Castle Partners, Inc.
(“GCP”), with adjustments for income or loss allocated based upon
percentage of ownership. The accounts of the subsidiaries have been
included as of the date of acquisition. All significant intercompany
transactions and balances have been
eliminated.
|
B.
|
Organization and
operations — The Company is principally engaged in the importation,
marketing and sale of premium and super premium brands of vodka, whiskey,
rums, tequila, liqueurs and fine wine in the United States, Canada,
Europe, Latin America and the Caribbean. The vodka, Irish whiskeys and
certain liqueurs are procured by CB-IRL, billed in Euros and imported from
Europe into the United States. The risk of fluctuations in foreign
currency is borne by the U.S.
entities.
|
C.
|
Equity
investments - Equity investments are carried at original cost
adjusted for the Company’s proportionate share of the investees’ income,
losses and distributions. The Company assesses the carrying value of its
equity investments when an indicator of a loss in value is present and
records a loss in value of the investment when the assessment indicates
that an other-than-temporary decline in the investment exists. The Company
classifies its equity earnings of non-consolidated affiliate equity
investment as a component of net income or
loss.
|
D.
|
Goodwill and other
intangible assets — Goodwill represents the excess of purchase
price including related costs over the value assigned to the net tangible
and identifiable intangible assets of businesses acquired. Goodwill and
other identifiable intangible assets with indefinite lives are not
amortized, but instead are tested for impairment annually, or more
frequently if circumstances indicate a possible impairment may exist.
Intangible assets with estimable useful lives are amortized over their
respective estimated useful lives, generally on a straight-line basis, and
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value may not be
recoverable.
|
E.
|
Impairment of
long-lived assets — Under Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 310, “Accounting for
the Impairment or Disposal of Long-lived Assets”, the Company periodically
reviews whether changes have occurred that would require revisions to the
carrying amounts of its definite lived, long-lived assets. When the sum of
the expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognized based on the fair value of the
asset.
|
F.
|
Excise taxes and
duty — Excise taxes and duty are computed at standard rates based
on alcohol proof per gallon/liter and are paid after finished goods are
imported into the United States and then transferred out of “bond.” Excise
taxes and duty are recorded to inventory as a component of the cost of the
underlying finished goods. When the underlying products are sold “ex
warehouse”, the sales price reflects the taxes paid and the inventoried
excise taxes and duties are charged to cost of
sales.
|
G.
|
Foreign
currency — The functional currency for the Company’s foreign
operations is the Euro in Ireland and the British Pound in the United
Kingdom. Under ASC 830, “Foreign Currency Matters”, the translation from
the applicable foreign currencies to U.S. Dollars is performed for balance
sheet accounts using exchange rates in effect at the balance sheet date
and for revenue and expense accounts using a weighted average exchange
rate during the period. The resulting translation adjustments are recorded
as a component of other comprehensive income. Gains or losses resulting
from foreign currency transactions are shown as a separate line item in
the consolidated statements of operations. The Company’s vodka, Irish
whiskeys and certain liqueurs are procured by CB-IRL and billed in Euros
to CB-USA, with the risk of foreign exchange gain or loss resting with
CB-USA. Also, the Company has funded the continuing operations of the
international subsidiaries. The Company previously considered these
transactions to be trading balances and short-term funding subject to
transaction adjustment under ASC 830. As such, at each balance sheet date,
the Euro denominated intercompany balances included on the books of the
foreign subsidiaries were restated in U.S. Dollars at the exchange rate in
effect at the balance sheet date, with the resulting foreign currency
transaction gain or loss included in net loss. In November 2009, to
improve the liquidity of the foreign subsidiaries, the Company converted
$17,481,169 in intercompany balances due from the foreign subsidiaries
into an additional investment in the subsidiaries. Beginning December 1,
2009, the translation gain or loss from the restatement of any investment
in the foreign subsidiaries will be included in other comprehensive
income.
|
H.
|
Fair value of
financial instruments — ASC 825, “Financial Instruments”, defines
the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties and requires disclosure of the fair value of certain financial
instruments. The Company believes that there is no material difference
between the fair-value and the reported amounts of financial instruments
in the Company’s balance sheets due to the short term maturity of these
instruments, or with respect to the Company’s debt, as compared to the
current borrowing rates available to the
Company.
|
·
|
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.
|
·
|
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.
|
J.
|
Accounting standards
adopted — In July 2010, the FASB issued authoritative guidance
which requires expanded disclosures to help financial statement users
understand the nature of credit risks inherent in a creditor’s portfolio
of financing receivables; how that risk is analyzed and assessed in
arriving at the allowance for credit losses; and the changes, and reasons
for those changes, in both the receivables and the allowance for credit
losses. The disclosures should be prepared on a disaggregated basis and
provide a roll-forward schedule of the allowance for credit losses and
detailed information on financing receivables including, among other
things, recorded balances, nonaccrual status, impairments, credit quality
indicators, details for troubled debt restructurings and an aging of past
due financing receivables. The guidance became effective for the
Company beginning December 15, 2010. The adoption of the standard did not
have a material impact on the Company’s results of operations, cash flows
or financial condition.
|
K.
|
Recent accounting
pronouncements — No new accounting pronouncements issued during the
current period are expected to have a material impact on the Company’s
results of operations, cash flows or financial
condition.
|
Nine months ended
December
31,
|
||||||||
2010
|
2009
|
|||||||
Stock
options
|
4,570,850
|
3,224,900
|
||||||
Warrants
to purchase common stock
|
1,926,814
|
2,016,814
|
||||||
Total
|
6,497,664
|
5,241,714
|
December
31,
2010
|
March 31,
2010
|
|||||||
Raw
materials
|
$
|
3,777,653
|
$
|
2,961,887
|
||||
Finished
goods – net
|
6,833,369
|
6,281,914
|
||||||
Total
|
$
|
10,611,022
|
$
|
9,243,801
|
Amount
|
||||
Balance
as of March 31, 2010
|
$
|
994,044
|
||
Payments
under McLain and Kyne agreement
|
69,348
|
|||
Balance
as of December 31, 2010
|
$
|
1,063,392
|
December
31,
2010
|
March 31,
2010
|
|||||||
Definite
life brands
|
$
|
170,000
|
$
|
170,000
|
||||
Trademarks
|
479,248
|
479,248
|
||||||
Rights
|
8,271,555
|
8,271,555
|
||||||
Distributor
relationships
|
664,000
|
664,000
|
||||||
Product
development
|
28,262
|
20,350
|
||||||
Trade
secrets, formulations and patents
|
994,000
|
994,000
|
||||||
Other
|
28,480
|
28,544
|
||||||
10,635,545
|
10,627,697
|
|||||||
Less:
accumulated amortization
|
3,988,582
|
3,437,237
|
||||||
Net
|
6,646,963
|
7,190,460
|
||||||
Other
identifiable intangible assets — indefinite lived*
|
4,478,972
|
4,478,972
|
||||||
$
|
11,125,935
|
$
|
11,669,432
|
December
31,
2010
|
March 31,
2010
|
|||||||
Definite
life brands
|
$
|
146,385
|
$
|
137,885
|
||||
Trademarks
|
155,720
|
130,834
|
||||||
Rights
|
3,167,334
|
2,751,928
|
||||||
Distributor
relationships
|
83,000
|
33,200
|
||||||
Product
development
|
7,123
|
4,070
|
||||||
Trade
secrets, formulations and patents
|
429,020
|
379,320
|
||||||
Accumulated
amortization
|
$
|
3,988,582
|
$
|
3,437,237
|
December
31,
2010
|
March 31,
2010
|
|||||||
Notes
payable consist of the following:
|
||||||||
Note
payable (A)
|
$
|
422,270
|
$
|
633,332
|
||||
Note
payable (B)
|
219,513
|
226,137
|
||||||
Credit
agreement (C)
|
2,500,000
|
—
|
||||||
Note
payable (D)
|
2,114,913
|
—
|
||||||
Notes
payable (E)
|
1,000,000
|
—
|
||||||
Total
|
$
|
6,256,696
|
$
|
859,469
|
A.
|
In
connection with the Betts & Scholl asset acquisition in
September 2009, the Company issued a secured promissory note in the
aggregate principal amount of $1,094,541 to Betts & Scholl, LLC,
an entity affiliated with Dennis Scholl, who became a director of the
Company at the time of the acquisition. This note is secured by the Betts
& Scholl inventory acquired by the Company under a security agreement.
This note provides for an initial payment of $250,000, paid at closing,
and for eight equal quarterly payments of principal and interest, with the
final payment due on September 21, 2011. Interest under this note
accrues at an annual rate of 0.84%, compounded quarterly. This note
contains customary events of default, which if uncured, entitle the holder
to accelerate the due date of the unpaid principal amount of, and all
accrued and unpaid interest on, the note. In December 2010, the Company
entered into a letter agreement amending the terms of the note with Betts
& Scholl, LLC, that provides that the quarterly installment payments
of principal and interest due December 21, 2010 and March 21, 2011, each
in the amount of approximately $107,000, will not be due and payable until
the maturity date of such note and that such installment payments will
bear interest, payable on such maturity date, at the rate of 11% per
annum, compounded quarterly. At December 31, 2010, $422,270, consisting of
$421,062 of principal and $1,208 of accrued interest, due on this note is
included in current liabilities.
|
B.
|
In
December 2009, GCP issued a promissory note (the “GCP Note”) in the
aggregate principal amount of $211,580 to Gosling's Export (Bermuda)
Limited in exchange for credits issued on certain inventory purchases. The
GCP Note matures on April 1, 2020, is payable at maturity, subject to
certain acceleration events, and calls for annual interest of 5%, to be
accrued and paid at maturity. Interest has been recorded retroactive to
November 15, 2008. At December 31, 2010, $219,513, consisting of
$211,580 of principal and $7,933 of accrued interest, due on the GCP Note
is included in long-term
liabilities.
|
D.
|
In
June 2010, the Company issued a $2,000,000 promissory note to Frost Gamma
Investments Trust. Borrowings under the note mature on June 21, 2012 and
bear interest at a rate of 11% per annum. Interest accrues quarterly and
is payable at maturity. The note may be prepaid in whole or in part at any
time prior to maturity without penalty, but with payment of accrued
interest to the date of prepayment. At December 31, 2010, $2,114,913,
consisting of $2,000,000 of principal and $114,913 of accrued interest is
included in long-term liabilities in respect of the Frost
Note.
|
E.
|
In
December 2010, the Company issued promissory notes in the aggregate
principal amount of $1,000,000 to Frost Gamma Investments Trust, Vector
Group Ltd., IVC Investors, LLLP, Mark E. Andrews, III and Richard J.
Lampen. Borrowings under these notes mature on June 21, 2012 and bear
interest at a rate of 11% per annum. Interest accrues quarterly and is
payable at maturity. These notes may be prepaid in whole or in part at any
time prior to maturity without penalty, but with payment of accrued
interest to the date of prepayment. At December 31, 2010, $1,000,000 of
principal is included in long-term liabilities in respect of these
promissory notes.
|
A.
|
The
Company has entered into a supply agreement with Irish Distillers Limited
(“Irish Distillers”), which provides for the production of Irish whiskeys
for the Company through 2015, subject to annual extensions thereafter,
provided that the Company and Irish Distillers agree on the amount of
liters of pure alcohol to be provided in the following year. Irish
Distillers may terminate this agreement at the end of its term in 2014.
Under this agreement, the Company is obligated to notify Irish Distillers
annually of the amount of liters of pure alcohol it requires for the
current contract year and contracts to purchase that amount. For the
contract year ending June 30, 2011, the Company has contracted to
purchase approximately €803,844 or $1,065,214 (translated at the December
31, 2010 exchange rate) in bulk Irish whiskey. The Company has
purchased €344,021 or $455,879 (translated at the December 31, 2010
exchange rate) in bulk Irish whiskey through December 31, 2010 under the
current contract year. The Company is not obligated to pay Irish
Distillers for any product not yet received. During the term of this
supply agreement, Irish Distillers has the right to limit additional
purchases above the commitment
amount.
|
B.
|
The
Company leases office space in New York, NY, Dublin, Ireland and Houston,
TX. The New York, NY lease began on April 1, 2010 and expires on April 1,
2012 and provides for monthly payments of $16,779. The Dublin lease
commenced on March 1, 2009 and extends through November 30, 2013
and calls for monthly payments of €1,394 or $1,847 (translated at the
December 31, 2010 exchange rate). The Houston, TX lease commenced on
February 24, 2000 and extends through January 31, 2012 and calls
for monthly payments of $1,693. The Company has also entered into
non-cancelable operating leases for certain office
equipment.
|
A.
|
Credit Risk —
The Company maintains its cash and cash equivalents balances at various
large financial institutions that, at times, may exceed federally and
internationally insured limits. As of December 31, and March 31, 2010, the
Company exceeded the insured limit by approximately $325,000 and $760,000,
respectively.
|
B.
|
Customers —
Sales to three customers accounted for approximately 37.9% and 43.1% of
the Company’s revenues for the three months ended December 31, 2010 and
2009, respectively, (of which one customer accounted for 27.6% and 31.8%,
respectively, of total sales). Sales to three customers accounted for
approximately 41.5% and 44.5% of the Company’s revenues for the nine
months ended December 31, 2010 and 2009, respectively, (of which one
customer accounted for 27.9% and 31.5%, respectively, of total
sales). Sales to three customers accounted for approximately
34.9% of accounts receivable at December 31,
2010.
|
Three months ended December
31,
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
Consolidated
Revenue:
|
||||||||||||||||
International
|
$
|
1,432,696
|
16.4
|
%
|
$
|
1,431,247
|
19.1
|
%
|
||||||||
United
States
|
7,287,058
|
83.6
|
%
|
6,059,279
|
80.9
|
%
|
||||||||||
Total
Consolidated Revenue
|
$
|
8,719,754
|
100.0
|
%
|
$
|
7,490,526
|
100
|
%
|
||||||||
Consolidated
Results from Operations:
|
||||||||||||||||
International
|
$
|
(35,746
|
)
|
2.9
|
%
|
$
|
27,386
|
(2.2)
|
%
|
|||||||
United
States
|
(1,181,263
|
)
|
97.1
|
%
|
(1,276,059
|
)
|
102.2
|
%
|
||||||||
Total
Consolidated Results from Operations
|
$
|
(1,217,009
|
)
|
100.0
|
%
|
$
|
(1,248,673
|
)
|
100.0
|
%
|
||||||
Consolidated
Net Loss Attributable to Common Shareholders:
|
||||||||||||||||
International
|
$
|
(210,172
|
)
|
14.2
|
%
|
$
|
15,350
|
6.5
|
%
|
|||||||
United
States
|
(1,273,924
|
)
|
85.8
|
%
|
(252,580
|
)
|
106.5
|
%
|
||||||||
Total
Consolidated Net Loss Attributable to Common Shareholders
|
$
|
(1,484,096
|
)
|
100.0
|
%
|
$
|
(237,230
|
)
|
100.0
|
%
|
||||||
Income
tax benefit:
|
||||||||||||||||
United
States
|
37,038
|
100.0
|
%
|
37,038
|
100.0
|
%
|
||||||||||
Consolidated
Revenue by category:
|
||||||||||||||||
Rum
|
$
|
2,248,611
|
25.8
|
%
|
$
|
2,134,876
|
28.5
|
%
|
||||||||
Liqueurs
|
2,609,008
|
29.9
|
%
|
2,097,431
|
28.0
|
%
|
||||||||||
Whiskey
|
1,728,988
|
19.8
|
%
|
1,812,346
|
24.2
|
%
|
||||||||||
Vodka
|
1,103,244
|
12.7
|
%
|
1,065,276
|
14.2
|
%
|
||||||||||
Tequila
|
41,076
|
0.5
|
%
|
89,367
|
1.2
|
%
|
||||||||||
Fine
Wine
|
701,536
|
8.0
|
%
|
150,550
|
2.0
|
%
|
||||||||||
Other*
|
287,291
|
3.3
|
%
|
140,679
|
1.9
|
%
|
||||||||||
Total
Consolidated Revenue
|
$
|
8,719,754
|
100.0
|
%
|
$
|
7,490,526
|
100
|
%
|
Nine months ended December
31,
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
Consolidated
Revenue:
|
||||||||||||||||
International
|
$
|
2,953,867
|
12.8
|
%
|
$
|
3,339,657
|
15.1
|
%
|
||||||||
United
States
|
20,094,956
|
87.2
|
%
|
18,712,664
|
84.9
|
%
|
||||||||||
Total
Consolidated Revenue
|
$
|
23,048,823
|
100.0
|
%
|
$
|
22,052,321
|
100
|
%
|
||||||||
Consolidated
Results from Operations:
|
||||||||||||||||
International
|
$
|
(112,952
|
)
|
2.6
|
%
|
$
|
(143,154
|
)
|
3.3
|
%
|
||||||
United
States
|
(4,201,323
|
)
|
97.45
|
%
|
(4,133,031
|
)
|
96.7
|
%
|
||||||||
Total
Consolidated Results from Operations
|
$
|
(4,314,275
|
)
|
100.0
|
%
|
$
|
(4,276,185
|
)
|
100.0
|
%
|
||||||
Consolidated
Net Loss Attributable to Common Shareholders:
|
||||||||||||||||
International
|
$
|
(419,243
|
)
|
8.7
|
%
|
$
|
(501,750
|
)
|
39.6
|
%
|
||||||
United
States
|
(4,424,848
|
)
|
91.3
|
%
|
(765,934
|
)
|
60.4
|
%
|
||||||||
Total
Consolidated Net Loss Attributable to Common Shareholders
|
$
|
(4,844,091
|
)
|
100.0
|
%
|
$
|
(1,267,684
|
)
|
100.0
|
%
|
||||||
Income
tax benefit:
|
||||||||||||||||
United
States
|
111,114
|
100.0
|
%
|
111,114
|
100.0
|
%
|
||||||||||
Consolidated
Revenue by category:
|
||||||||||||||||
Rum
|
$
|
7,942,544
|
34.5
|
%
|
$
|
7,109,472
|
32.2
|
%
|
||||||||
Liqueurs
|
6,016,024
|
26.1
|
%
|
5,507,523
|
25.0
|
%
|
||||||||||
Whiskey
|
3,736,977
|
16.2
|
%
|
4,272,817
|
19.4
|
%
|
||||||||||
Vodka
|
2,914,777
|
12.6
|
%
|
3,909,406
|
17.7
|
%
|
||||||||||
Tequila
|
210,071
|
0.9
|
%
|
428,773
|
1.9
|
%
|
||||||||||
Fine
Wine
|
1,161,610
|
5.0
|
%
|
150,550
|
0.7
|
%
|
||||||||||
Other*
|
1,066,820
|
4.7
|
%
|
673,780
|
3.1
|
%
|
||||||||||
Total
Consolidated Revenue
|
$
|
23,048,823
|
100.0
|
%
|
$
|
22,052,321
|
100
|
%
|
As of December
31, 2010
|
As of March 31,
2010
|
|||||||||||||||
Consolidated
Assets:
|
||||||||||||||||
International
|
$
|
2,846,153
|
8.9
|
%
|
3,167,893
|
10.3
|
%
|
|||||||||
United
States
|
29,035,340
|
91.1
|
%
|
27,721,894
|
89.7
|
%
|
||||||||||
Total
Consolidated Assets
|
$
|
31,881,493
|
100.0
|
%
|
30,889,787
|
100.0
|
%
|
·
|
increase
revenues from our more profitable brands. We have focused, and
continue to focus, our distribution relationships, sales expertise and
targeted marketing activities on our more profitable
brands;
|
·
|
improve
value chain and manage cost structure. We have undergone a
comprehensive review and analysis of our supply chains and cost structures
both on a company-wide and brand-by-brand basis. This included personnel
reductions throughout our company; restructuring our international
distribution system; reducing inventory levels; changing distributor
relationships in certain markets; moving production of certain products to
a lower cost facility in the U.S.; and reducing general and administrative
costs. We continue to review costs and seek to reduce expense;
and
|
·
|
selectively
add new premium brands to our portfolio. We intend to continue
developing new brands and pursuing strategic relationships, joint ventures
and acquisitions to selectively expand our premium spirits and fine wine
portfolio, particularly by capitalizing on and expanding our already
demonstrated partnering capabilities. Our criteria for new brands focuses
on underserved areas of the beverage alcohol marketplace, while examining
the potential for direct financial contribution to our company and the
potential for future growth based on development and maturation of agency
brands. We will evaluate future acquisitions and agency relationships on
the basis of their potential to be immediately accretive and their
potential contributions to our objectives of becoming profitable and
further expanding our product offerings. We expect that future
acquisitions, if consummated, would involve some combination of cash, debt
and the issuance of our stock.
|
Three months ended
|
Nine months ended
|
|||||||||||||||
December
31,
|
December
31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Cases
|
||||||||||||||||
United
States
|
65,644
|
52,355
|
177,311
|
167,583
|
||||||||||||
International
|
19,856
|
21,045
|
45,452
|
53,780
|
||||||||||||
Total
|
85,500
|
73,400
|
222,763
|
221,363
|
||||||||||||
Rum
|
22,942
|
22,782
|
81,054
|
73,381
|
||||||||||||
Vodka
|
19,743
|
20,675
|
52,684
|
73,027
|
||||||||||||
Liqueurs
|
25,466
|
18,294
|
55,992
|
47,069
|
||||||||||||
Whiskey
|
11,758
|
10,727
|
24,007
|
25,750
|
||||||||||||
Tequila
|
303
|
299
|
937
|
1,513
|
||||||||||||
Fine
Wine
|
5,129
|
623
|
7,644
|
623
|
||||||||||||
Other
|
159
|
—
|
445
|
—
|
||||||||||||
Total
|
85,500
|
73,400
|
222,763
|
221,363
|
||||||||||||
Percentage
of Cases
|
||||||||||||||||
United
States
|
76.8
|
%
|
71.3
|
%
|
79.6
|
%
|
75.7
|
%
|
||||||||
International
|
23.2
|
%
|
28.7
|
%
|
20.4
|
%
|
24.3
|
%
|
||||||||
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||||
Rum
|
26.7
|
%
|
31.1
|
%
|
36.4
|
%
|
33.1
|
%
|
||||||||
Vodka
|
23.1
|
%
|
28.2
|
%
|
23.7
|
%
|
33.0
|
%
|
||||||||
Liqueurs
|
29.8
|
%
|
24.9
|
%
|
25.1
|
%
|
21.3
|
%
|
||||||||
Whiskey
|
13.8
|
%
|
14.6
|
%
|
10.8
|
%
|
11.6
|
%
|
||||||||
Tequila
|
0.4
|
%
|
0.4
|
%
|
0.4
|
%
|
0.7
|
%
|
||||||||
Fine
Wine
|
6.0
|
%
|
0.8
|
%
|
3.4
|
%
|
0.3
|
%
|
||||||||
Other
|
0.2
|
%
|
0.0
|
%
|
0.2
|
%
|
0.0
|
%
|
||||||||
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Three months ended December
31,
|
Nine months ended December
31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Sales,
net
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.00
|
%
|
||||||||
Cost
of sales
|
68.7
|
%
|
66.9
|
%
|
65.4
|
%
|
67.2
|
%
|
||||||||
Reversal
of provision for obsolete inventory
|
0.0
|
%
|
(1.1
|
)%
|
(0.1
|
)%
|
(2.7
|
)%
|
||||||||
Gross
profit
|
31.3
|
%
|
34.3
|
%
|
34.7
|
%
|
35.5
|
%
|
||||||||
Selling
expense
|
30.3
|
%
|
30.2
|
%
|
34.5
|
%
|
33.4
|
%
|
||||||||
General
and administrative expense
|
12.2
|
%
|
17.5
|
%
|
15.9
|
%
|
18.4
|
%
|
||||||||
Depreciation
and amortization
|
2.6
|
%
|
3.2
|
%
|
3.0
|
%
|
3.1
|
%
|
||||||||
Loss
from operations
|
(14.0
|
)%
|
(16.7
|
)%
|
(18.7
|
)%
|
(19.4
|
)%
|
||||||||
Other
income
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||||||
Other
expense
|
0.0
|
%
|
(0.4
|
)%
|
0.0
|
%
|
(0.2
|
)%
|
||||||||
Income
from equity investment in non-consolidated affiliate
|
0.2
|
%
|
0.0
|
%
|
0.1
|
%
|
0.0
|
%
|
||||||||
Foreign
exchange (loss) gain
|
(1.4
|
)%
|
8.4
|
%
|
(0.7
|
)%
|
10.0
|
%
|
||||||||
Interest
(expense) income, net
|
(1.7
|
)%
|
0.0
|
%
|
(1.1
|
)%
|
0.1
|
%
|
||||||||
Gain
on exchange of note payable
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
1.2
|
%
|
||||||||
Gain
on sale of intangible asset
|
0.0
|
%
|
5.4
|
%
|
0.0
|
%
|
1.8
|
%
|
||||||||
Income
tax benefit
|
0.4
|
%
|
0.5
|
%
|
0.5
|
%
|
0.5
|
%
|
||||||||
Net
loss
|
(16.4
|
)%
|
(2.7
|
)%
|
(20.0
|
)%
|
(5.9
|
)%
|
||||||||
Net
(income) loss attributable to noncontrolling interests
|
(0.6
|
)%
|
(0.5
|
)%
|
(1.0
|
)%
|
0.1
|
%
|
||||||||
Net
loss attributable to common shareholders
|
$
|
(17.0
|
)%
|
$
|
(3.2
|
)%
|
$
|
(21.0
|
)%
|
$
|
(5.7
|
)%
|
Increase/(decrease)
|
Percentage
|
|||||||||||||||
in case sales
|
increase/(decrease)
|
|||||||||||||||
Overall
|
U.S.
|
Overall
|
U.S.
|
|||||||||||||
Rum
|
160
|
(1,083
|
)
|
0.7
|
%
|
(6.6
|
)%
|
|||||||||
Vodka
|
(932
|
)
|
1,528
|
(4.5
|
)%
|
11.2
|
%
|
|||||||||
Liqueurs
|
7,172
|
7,804
|
39.2
|
%
|
45.4
|
%
|
||||||||||
Whiskey
|
1,031
|
371
|
9.6
|
%
|
8.7
|
%
|
||||||||||
Tequila
|
4
|
4
|
1.3
|
%
|
1.3
|
%
|
||||||||||
Fine
Wine
|
4,506
|
4,506
|
723.3
|
723.3
|
||||||||||||
Other
|
159
|
159
|
—
|
—
|
||||||||||||
Total
|
12,100
|
13,289
|
16.5
|
%
|
25.4
|
%
|
Increase/(decrease)
|
Percentage
|
|||||||||||||||
in case sales
|
increase/(decrease)
|
|||||||||||||||
Overall
|
U.S.
|
Overall
|
U.S.
|
|||||||||||||
Rum
|
7,673
|
4,516
|
10.5
|
%
|
7.8
|
%
|
||||||||||
Vodka
|
(20,343
|
)
|
(11,642
|
)
|
(27.9
|
)%
|
(22.5
|
)%
|
||||||||
Liqueurs
|
8,923
|
9,157
|
19.0
|
%
|
20.1
|
%
|
||||||||||
Whiskey
|
(1,743
|
)
|
806
|
(6.8
|
)%
|
7.7
|
%
|
|||||||||
Tequila
|
(576
|
)
|
(576
|
)
|
(38.1
|
)%
|
(38.1
|
)%
|
||||||||
Fine
Wine
|
7,021
|
7,021
|
1,127.0
|
%
|
1,127.0
|
%
|
||||||||||
Other
|
445
|
445
|
—
|
—
|
||||||||||||
Total
|
1,400
|
9,727
|
0.6
|
%
|
5.8
|
%
|
·
|
continued
significant levels of cash losses from
operations;
|
·
|
our
ability to obtain additional debt or equity financing should it be
required;
|
·
|
an
increase in working capital requirements to finance higher levels of
inventories and accounts
receivable;
|
·
|
our
ability to maintain and improve our relationships with our distributors
and our routes to market;
|
·
|
our
ability to procure raw materials at a favorable price to support our level
of sales;
|
·
|
potential
acquisition of additional brands;
and
|
·
|
expansion
into new markets and within existing markets in the United States and
internationally.
|
Nine months ended
|
||||||||
December
31,
|
||||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Net
cash provided by (used in):
|
||||||||
Operating
activities
|
$
|
(4,846
|
)
|
$
|
(5,955
|
)
|
||
Investing
activities
|
(362
|
)
|
3,325
|
|||||
Financing
activities
|
4,513
|
(445
|
)
|
|||||
Effect
of foreign currency translation
|
(4
|
)
|
1
|
|||||
Net
decrease in cash and cash equivalents
|
$
|
(699
|
)
|
$
|
(3,074
|
)
|
·
|
our
history of losses and expectation of further
losses;
|
·
|
the
effect of poor operating results on our
company;
|
·
|
the
adequacy of our cash resources and our ability to raise additional
capital;
|
·
|
our
ability to expand our operations in both new and existing markets and our
ability to develop or acquire new
brands;
|
·
|
our
relationships with and our dependency on our
distributors;
|
·
|
the
impact of supply shortages and alcohol and packaging costs in general, as
well as our dependency on a limited number of suppliers and inventory
requirements;
|
·
|
the
success of our sales and marketing
activities;
|
·
|
economic
and political conditions generally, including the current recessionary
economic environment and concurrent market
instability;
|
·
|
the
effect of competition in our
industry;
|
·
|
negative
publicity surrounding our products or the consumption of beverage alcohol
products in general;
|
·
|
our
ability to acquire and/or maintain brand recognition and
acceptance;
|
·
|
trends
in consumer tastes;
|
·
|
our
and our strategic partners’ abilities to protect trademarks and other
proprietary information;
|
·
|
the
impact of litigation;
|
·
|
the
impact of currency exchange rate fluctuations and devaluations on our
revenues, sales and overall financial
results;
|
·
|
our
executive officers, directors and principal shareholders own a substantial
portion of our voting stock; and
|
·
|
the
impact of federal, state, local or foreign government
regulations.
|
Exhibit
|
||
Number
|
Description
|
|
4.1
|
Form
of Note, dated as of December 27, 2010, made by the Company (incorporated
by reference to exhibit 4.1 to our current report on Form 8-K filed with
the SEC on December 28, 2010).
|
|
4.2
|
Letter
Agreement dated December 27, 2010 between the Company and Betts &
Scholl, LLC (incorporated by reference to exhibit 4.2 to our current
report on Form 8-K filed with the SEC on December 28,
2010)
|
|
31.1
|
Certification
Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. *
|
|
31.2
|
Certification
Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. *
|
|
32.1
|
Certification
of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*
|
CASTLE
BRANDS INC.
|
||
By:
|
/s/
Alfred J. Small
|
|
Alfred
J. Small
|
||
Chief
Financial Officer
(Principal
Financial Officer and
Principal
Accounting Officer)
|