þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 41-2103550 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
122 East 42nd Street, Suite 4700, New York, New York (Address of principal executive offices) |
10168 (Zip Code) |
o Large accelerated filer
|
o Accelerated filer | |
o Non-accelerated filer (Do not check if a smaller reporting company)
|
þ Smaller reporting company |
PART I. FINANCIAL INFORMATION | ||||||||
Item 1. | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
Item 2. | 15 | |||||||
Item 4. | 22 | |||||||
PART II. OTHER INFORMATION | ||||||||
Item 1. | 22 | |||||||
Item 2. | 22 | |||||||
Item 6. | 22 | |||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
2
Item 1. | Condensed Consolidated Financial Statements |
June 30, 2009 | March 31, 2009 | |||||||
(Unaudited) | ||||||||
ASSETS: |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 539,024 | $ | 4,011,777 | ||||
Short-term investments |
3,686,419 | 3,661,437 | ||||||
Accounts receivable net of allowance for doubtful accounts of $576,589 and $529,256 |
6,218,039 | 6,857,267 | ||||||
Due from affiliates |
80,830 | 74,295 | ||||||
Inventories net of allowance for obsolete and slow moving inventory of $953,473
and $1,355,159 |
8,530,706 | 8,169,667 | ||||||
Prepaid expenses and other current assets |
986,626 | 719,700 | ||||||
Total Current Assets |
20,041,644 | 23,494,143 | ||||||
Equipment net |
575,532 | 605,065 | ||||||
Other Assets |
||||||||
Intangible assets net of accumulated amortization of $3,026,690 and $2,738,718 |
11,266,544 | 11,431,988 | ||||||
Restricted cash |
719,443 | 676,403 | ||||||
Other assets |
147,659 | 147,659 | ||||||
Total Assets |
$ | 32,750,822 | $ | 36,355,258 | ||||
LIABILITIES AND EQUITY: |
||||||||
Current Liabilities |
||||||||
Current maturities of notes payable and capital leases |
$ | | $ | 119,050 | ||||
Accounts payable |
3,627,049 | 3,791,096 | ||||||
Accrued expenses |
1,234,175 | 2,511,833 | ||||||
Due to stockholders and affiliates |
1,512,116 | 1,290,501 | ||||||
Total Current Liabilities |
6,373,340 | 7,712,480 | ||||||
Long-Term Liabilities |
||||||||
Note payable |
| 300,000 | ||||||
Deferred tax liability |
2,222,026 | 2,259,064 | ||||||
Total Liabilities |
8,595,366 | 10,271,544 | ||||||
Commitments and Contingencies (Note 9) |
| | ||||||
Preferred stock, $.01 par value, 25,000,000 shares authorized, none outstanding |
| | ||||||
Equity |
||||||||
Common stock, $.01 par value, 225,000,000 shares authorized, 101,812,349 shares
issued and 100,812,349 shares outstanding at June 30, 2009 and 101,612,349 shares
issued and outstanding at March 31, 2009, respectively |
1,018,123 | 1,016,123 | ||||||
Additional paid-in capital |
133,659,453 | 133,576,957 | ||||||
Treasury stock at cost, 1,000,000 shares at June 30, 2009 and none at March 31, 2009 |
(180,000 | ) | | |||||
Accumulated deficiency |
(109,793,303 | ) | (109,234,310 | ) | ||||
Accumulated other comprehensive (loss) income |
(583,744 | ) | 642,907 | |||||
Total common stockholders equity |
24,120,529 | 26,001,677 | ||||||
Noncontrolling interests |
34,927 | 82,037 | ||||||
Total equity |
24,155,456 | 26,083,714 | ||||||
Total Liabilities and Equity |
$ | 32,750,822 | $ | 36,355,258 | ||||
3
Three months ended June 30, | ||||||||
2009 | 2008 | |||||||
Sales, net* |
$ | 5,854,226 | $ | 5,891,395 | ||||
Cost of sales* |
3,545,220 | 3,952,685 | ||||||
Gross profit |
2,309,006 | 1,938,710 | ||||||
Selling expense |
2,679,490 | 3,429,344 | ||||||
General and administrative expense |
1,374,084 | 2,071,973 | ||||||
Depreciation and amortization |
219,372 | 243,507 | ||||||
Loss from operations |
(1,963,940 | ) | (3,806,114 | ) | ||||
Other income |
2 | 15,573 | ||||||
Other expense |
(10,212 | ) | (11,725 | ) | ||||
Foreign exchange gain (loss) |
1,041,953 | (98,911 | ) | |||||
Interest income (expense), net |
18,781 | (505,350 | ) | |||||
Gain on exchange of 3% note payable |
270,275 | | ||||||
Income tax benefit |
37,038 | 37,038 | ||||||
Net loss |
(606,103 | ) | (4,369,489 | ) | ||||
Net loss attributable to noncontrolling interests |
47,110 | 67,308 | ||||||
Net loss attributable to common stockholders |
$ | (558,993 | ) | $ | (4,302,181 | ) | ||
Net loss per common share, basic and diluted, attributable to common stockholders |
$ | (.01 | ) | $ | (0.28 | ) | ||
Weighted average shares used in computation, basic and diluted, attributable to common stockholders |
101,708,944 | 15,629,776 | ||||||
* | Sales, net and Cost of sales include excise taxes of $1,174,604 and $978,054 for the three months ended June 30, 2009 and 2008, respectively. |
4
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||
Common Stock | Paid-in | Treasury | Accumulated | Comprehensive | Noncontrolling | Total | ||||||||||||||||||||||||||
Shares | Amount | Capital | Stock | Deficiency | Income (Loss) | Interests | Equity | |||||||||||||||||||||||||
BALANCE, MARCH 31,
2009 |
101,612,349 | $ | 1,016,123 | $ | 133,576,957 | $ | | $ | (109,234,310 | ) | $ | 642,907 | $ | 82,037 | $ | 26,083,714 | ||||||||||||||||
Comprehensive loss |
||||||||||||||||||||||||||||||||
Net loss |
(558,993 | ) | (47,110 | ) | (606,103 | ) | ||||||||||||||||||||||||||
Foreign currency
translation
adjustment |
(1,226,651 | ) | (1,226,651 | ) | ||||||||||||||||||||||||||||
Total comprehensive
loss |
(1,832,754 | ) | ||||||||||||||||||||||||||||||
Exchange of 3% note
payable, including
interest (net of
gain on conversion
of $270,275) |
200,000 | 2,000 | 42,000 | 44,000 | ||||||||||||||||||||||||||||
Repurchase of
common stock now
held as treasury
stock |
(180,000 | ) | (180,000 | ) | ||||||||||||||||||||||||||||
Stock-based
compensation |
40,496 | 40,496 | ||||||||||||||||||||||||||||||
BALANCE, JUNE 30,
2009 |
101,812,349 | $ | 1,018,123 | $ | 133,659,453 | $ | (180,000 | ) | $ | (109,793,303 | ) | $ | (583,744 | ) | $ | 34,927 | $ | 24,155,456 | ||||||||||||||
5
Three months ended June 30, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (606,103 | ) | $ | (4,369,489 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
219,372 | 243,507 | ||||||
Provision for doubtful accounts |
19,189 | 21,136 | ||||||
Amortization of deferred financing costs |
| 98,411 | ||||||
Deferred tax benefit |
(37,038 | ) | (37,038 | ) | ||||
Effect of changes in foreign exchange |
(1,332,532 | ) | 19,136 | |||||
Stock-based compensation expense |
40,496 | 224,084 | ||||||
Reversal of provision for obsolete inventories |
(415,072 | ) | (84,290 | ) | ||||
Non-cash interest charge |
| 73,562 | ||||||
Gain on exchange of 3% note payable |
(270,275 | ) | | |||||
Changes in operations, assets and liabilities: |
||||||||
Accounts receivable |
715,443 | 1,412,119 | ||||||
Due from affiliates |
(5,884 | ) | (3,943 | ) | ||||
Inventory |
159,763 | (691,388 | ) | |||||
Prepaid expenses and supplies |
(262,582 | ) | (765,567 | ) | ||||
Accounts payable and accrued expenses |
(1,572,164 | ) | 341,260 | |||||
Due to related parties |
204,891 | 261,003 | ||||||
Total adjustments |
(2,536,393 | ) | 1,111,992 | |||||
NET CASH USED IN OPERATING ACTIVITIES |
(3,142,496 | ) | (3,257,497 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Acquisition of equipment |
(4,075 | ) | (65,520 | ) | ||||
Acquisition of intangible assets |
| (4,693 | ) | |||||
Short-term investments net |
(24,982 | ) | 2,178,137 | |||||
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES |
(29,057 | ) | 2,107,924 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Notes payable net |
(121,775 | ) | 378,129 | |||||
Payments of obligations under capital leases |
(928 | ) | (946 | ) | ||||
Repurchase of common stock now held as treasury stock |
(180,000 | ) | | |||||
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
(302,703 | ) | 377,183 | |||||
EFFECTS OF FOREIGN CURRENCY TRANSLATION |
1,503 | (7,472 | ) | |||||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(3,472,753 | ) | (779,862 | ) | ||||
CASH AND CASH EQUIVALENTS BEGINNING |
4,011,777 | 1,552,385 | ||||||
CASH AND CASH EQUIVALENTS ENDING |
$ | 539,024 | $ | 772,523 | ||||
SUPPLEMENTAL DISCLOSURES: |
||||||||
Schedule of non-cash investing and financing activities: |
||||||||
Exchange of
$314,275 of the 3% note payable, including all outstanding interest by issuance of common stock for $44,000 in May 2009 |
$ | 314,275 | $ | | ||||
Interest paid |
$ | 5,600 | $ | 586,000 |
6
A. | Description of business and business combination The 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 its wholly-owned foreign subsidiaries, Castle Brands Spirits Group Limited (CB-IRL) and Castle Brands Spirits Marketing and Sales Company Limited (CB-UK), and its 60% ownership interest in Gosling-Castle Partners, Inc. (GCP), with adjustments for income or loss allocated based upon percentage of ownership. 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 fine spirit brands of vodka, whiskey, rums, tequila and liqueurs 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. | 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. | ||
D. | Impairment of long-lived assets In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, 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. | ||
E. | Treasury stock Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Gains and losses on the subsequent reissuance of shares will be credited or charged to additional paid-in capital using the average-cost method. | ||
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. |
7
G. | Foreign currency The functional currency for the Companys foreign operations is the Euro in Ireland and the British Pound in the United Kingdom. Under SFAS No. 52, Foreign Currency Translation (SFAS No. 52), 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 Companys vodka, Irish whiskeys and certain liqueurs are procured by CB-IRL and billed in Euros to the U.S. entities, 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 considers these transactions to be trading balances and short-term funding subject to transaction adjustment under SFAS No. 52. As such, at each balance sheet date, the Euro denominated intercompany balances included on the books of the foreign subsidiaries are 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. | ||
H. | 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. | ||
The Companys investments are reported at fair value in accordance with SFAS No. 157, Fair Value Measurements (SFAS No. 157), which was adopted on April 1, 2008. SFAS No. 157 accomplishes the following key objectives: |
| Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; | ||
| Establishes a three-level hierarchy (valuation hierarchy) for fair value measurements; | ||
| Requires consideration of the Companys creditworthiness when valuing liabilities; and | ||
| Expands disclosures about instruments measured at fair value. |
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of the valuation hierarchy are as follows: |
| Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | ||
| Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, 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 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. | ||
The Company has adopted the provisions of the Financial Accounting Standards Boards (FASB) interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. The Company has not recognized any adjustments for uncertain tax provisions. The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expense; however, no such provisions for accrued interest and penalties related to uncertain tax positions have been recorded as of June 30, 2009. | |||
The tax years 2007 through 2009 remain open to examination by federal and state jurisdictions. The Company has various foreign subsidiaries for which tax years 2002 through 2009 remain open to examination in certain foreign tax jurisdictions. | |||
The Companys income tax benefit for the three months ended June 30, 2009 and 2008 consists of federal and state and local taxes attributable to GCP, which does not file a consolidated income tax return with the Company. In connection with the investment in GCP, the Company recorded a deferred tax liability on the ascribed value of the acquired intangible assets of $2,222,222, increasing the value of the asset. The 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 both three-month periods ended June 30, 2009 and 2008, the Company recognized $37,038 of deferred tax benefits. |
8
J. | Accounting standards adopted In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165). This Statement establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The Company adopted SFAS No. 165 for the quarter ended June 30, 2009 and has evaluated subsequent events through the date the financial statements were issued on August 14, 2009. | ||
In June 2008, the FASBs Emerging Issues Task Force reached a consensus regarding EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5 outlines a two-step approach to evaluate the instruments contingent exercise provisions, if any, and to evaluate the instruments settlement provisions when determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entitys own stock. The Company adopted EITF 07-5 effective for the fiscal year beginning April 1, 2009 and it did not have a material impact on the Companys results of operations, cash flows or financial condition. | |||
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 provides that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This presentation is based upon the view of the consolidated business as a single economic entity and considers minority ownership interests in consolidated subsidiaries as equity in the consolidated entity. | |||
SFAS No. 160 requires that companies: |
| present noncontrolling interests (formerly described as minority interests) in the consolidated balance sheet as a separate line item within equity; | ||
| separately present on the face of the income statement the amount of consolidated net income (loss) attributable to the parent and to the noncontrolling interest; | ||
| account for changes in ownership interests that do not result in a change in control as equity transactions; and | ||
| upon deconsolidation of a subsidiary due to a change in control, measure any retained interest at fair value and record a gain or loss for both the portion sold and the portion retained. |
The adoption of SFAS No. 160 had no effect on earnings-per-share because in addition to amending ARB No. 51, SFAS No. 160 amends SFAS No. 128, Earnings Per Share, so that earnings-per-share data will continue to be calculated in the same way that data were calculated before SFAS No. 160 was issued. |
K. | Reclassifications In accordance with SFAS No. 160, which the Company adopted on April 1, 2009, the Company has presented and disclosed noncontrolling interests in its condensed consolidated financial statements. Specifically, the Company: |
| reclassified $82,037 of noncontrolling interests at April 1, 2009 in GCP to a separate line within total equity; | ||
| recorded $67,308 of loss attributable to noncontrolling interests in a separate line on the condensed consolidated statements of operations after net loss to arrive at net loss attributable to common stockholders; | ||
| recorded $47,110 of total comprehensive loss attributable to noncontrolling interests for the three months ended June 30, 2009 in a separate line on the condensed consolidated statement of equity; and | ||
| included $67,308 of net loss attributable to noncontrolling interests in the net loss in the condensed consolidated statements of cash flows for the three months ended June 30, 2009. |
L. | Recent accounting pronouncements In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assetsan amendment of FASB Statement No. 140 (SFAS No. 166). SFAS No. 166 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. SFAS No. 166 will be effective for the Company on April 1, 2010. The Company is evaluating the impact the adoption of SFAS No. 166 will have on its results of operations, cash flows or financial condition. | ||
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS No. 167). SFAS No. 167 improves financial reporting by enterprises involved with variable interest entities and addresses (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in SFAS No. 166 and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under Interpretation 46(R) do not always provide timely and useful information about an enterprises involvement in a variable interest entity. SFAS No. 167 will be effective for the Company on April 1, 2010. The Company is evaluating the impact the adoption of SFAS No. 167 will have on its results of operations, cash flows or financial condition. | |||
In June 2009, the FASB issued SFAS No. 168 The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162 (SFAS No. 168). The FASB Accounting Standards Codification (Codification) will be the single source of authoritative nongovernmental GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 will be effective for the Company for the quarter ending September 30, 2009. All existing accounting standards are superseded as described in SFAS 168. All other accounting literature not included in the Codification is nonauthoritative. The Company is evaluating the impact the adoption of SFAS No. 168 will have on its results of operations, cash flows or financial condition. |
9
Three months ended June 30, | ||||||||
2009 | 2008 | |||||||
Stock options |
3,124,900 | 1,617,625 | ||||||
Warrants to purchase stock |
2,081,814 | 2,305,432 | ||||||
Convertible debentures |
| 1,192,380 | ||||||
Total |
5,206,714 | 5,115,437 | ||||||
Gross | ||||||||||||
Adjusted | Unrealized | Estimated | ||||||||||
Cost | Gain (Loss) | Fair Value | ||||||||||
June 30, 2009 |
||||||||||||
Money market accounts |
$ | 2,001,568 | $ | | $ | 2,001,568 | ||||||
Certificates of deposit |
1,684,851 | | 1,684,851 | |||||||||
Total |
$ | 3,686,419 | $ | | $ | 3,686,419 | ||||||
Gross | ||||||||||||
Adjusted | Unrealized | Estimated | ||||||||||
Cost | Gain (Loss) | Fair Value | ||||||||||
March 31, 2009 |
||||||||||||
Money market accounts |
$ | 1,001,320 | $ | | $ | 1,001,320 | ||||||
Certificates of deposit |
2,660,117 | | 2,660,117 | |||||||||
Total |
$ | 3,661,437 | $ | | $ | 3,661,437 | ||||||
June 30, | March 31, | |||||||
2009 | 2009 | |||||||
Raw materials |
$ | 2,308,629 | $ | 2,048,398 | ||||
Finished goods |
6,222,077 | 6,121,269 | ||||||
Total |
$ | 8,530,706 | $ | 8,169,667 | ||||
10
June 30, | March 31, | |||||||
2009 | 2009 | |||||||
Notes payable consist of the following: |
||||||||
Revolving credit facilities |
$ | | $ | 118,122 | ||||
Note payable (A) |
| 300,000 | ||||||
| 418,122 | |||||||
Capital leases |
| 928 | ||||||
Total |
$ | | $ | 419,050 | ||||
A. | Stock Incentive Plan 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 to attract and retain such individuals. Stock option grants under the Plan are granted with an exercise price at or above the fair market value of the underlying common stock at the date of grant, generally vest over a four or five year period and expire ten years after the grant date. | |
As established, there were 2,000,000 shares of common stock reserved and available for distribution under the Plan. In January 2009, the Companys stockholders approved an amendment to the Plan to increase the number of shares available under the Plan from 2,000,000 to 12,000,000 and to establish the maximum number of shares issuable to any one individual in any particular year. As of June 30, 2009, 8,296,528 shares remain available for issuance under the Plan. |
11
Three months ended June 30, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Exercise | Exercise | |||||||||||||||
Shares | Price | Shares | Price | |||||||||||||
Outstanding at beginning of period |
3,555,975 | $ | 2.57 | 1,617,625 | $ | 6.37 | ||||||||||
Granted |
325,000 | 0.35 | | | ||||||||||||
Forfeited |
(756,075 | ) | 5.31 | | | |||||||||||
Outstanding at end of period |
3,124,900 | $ | 1.68 | 1,617,625 | $ | 6.37 | ||||||||||
Exercisable at end of period |
1,069,900 | $ | 4.27 | 922,250 | $ | 7.10 | ||||||||||
Weighted average fair value of grants
during period |
$ | 0.09 | $ | |
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted | ||||||||||||||||||||
Average | Weighted | |||||||||||||||||||
Remaining | Average | Aggregate | ||||||||||||||||||
Range of | Life in | Exercise | Intrinsic | |||||||||||||||||
Exercise Prices | Shares | Years | Shares | Price | value | |||||||||||||||
$0.01 $0.50 |
2,454,900 | 9.52 | 399,900 | $ | 0.21 | $ | 3,999 | |||||||||||||
$1.01 $2.00 |
68,000 | 8.59 | 68,000 | 1.82 | | |||||||||||||||
$5.01 $6.00 |
243,500 | 4.84 | 243,500 | 5.97 | | |||||||||||||||
$6.01 $7.00 |
17,000 | 7.74 | 17,000 | 6.36 | | |||||||||||||||
$7.01 $8.00 |
194,000 | 6.42 | 194,000 | 7.57 | | |||||||||||||||
$8.01 $9.00 |
147,500 | 6.78 | 147,500 | 9.00 | | |||||||||||||||
3,124,900 | 8.81 | 1,069,900 | $ | 4.27 | $ | 3,999 | ||||||||||||||
June 30, 2009 | ||||
Risk-free interest rate |
3.08 | % | ||
Expected option life in years |
6.25 | |||
Expected stock price volatility |
65 | % | ||
Expected dividend yield |
0 | % |
12
B. | Warrants The Company has entered into various warrant agreements. | ||
The following is a summary of the Companys outstanding warrants for the periods presented: |
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Price | ||||||||
Warrants | Per Warrant | |||||||
Warrants outstanding and exercisable, March 31, 2009 |
2,198,314 | $ | 6.88 | |||||
Granted |
| | ||||||
Exercised |
| | ||||||
Expired |
(116,500 | ) | 8.00 | |||||
Warrants outstanding and exercisable, June 30, 2009 |
2,081,814 | $ | 6.82 | |||||
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 2014, subject to automatic five year extensions thereafter. 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, 2010, the Company has contracted to purchase approximately 995,000 in bulk Irish whiskey. The Company is not liable to 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 subleases office space in New York, NY, and leases office space in Dublin, Ireland, and Houston, TX. The New York, NY lease commenced on January 1, 2009 and extends through April 29, 2010. The Dublin office lease commenced on March 1, 2009 and extends through November 30, 2013. The Houston, TX lease commenced on February 24, 2000 and extends through September 30, 2009. The Company has also entered into non-cancelable operating leases for certain office equipment. |
A. | Credit Risk The Company maintains its cash and short-term investment balances at various large financial institutions that, at times, may exceed federally and internationally insured limits. As of June 30, 2009 and March 31, 2009, the Company exceeded the insured limit by approximately $3,978,606 and $4,434,000, respectively. | ||
B. | Customers Sales to three customers accounted for approximately 45.0% and 45.3% of the Companys revenues for the three months ended June 30, 2009 and 2008, respectively, (of which one customer accounted for 31.3% and 29.4%, respectively, of total sales). Sales to three customers accounted for approximately 40.3% and 30.8% of accounts receivable at June 30, 2009 and March 31, 2009, respectively. |
13
For the three months ended June 30, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Consolidated Revenue: |
||||||||||||||||
International |
$ | 881,688 | 15.5 | % | $ | 1,214,608 | 20.6 | % | ||||||||
United States |
4,972,538 | 84.5 | % | 4,676,787 | 79.4 | % | ||||||||||
Total Consolidated Revenue |
$ | 5,854,226 | 100 | % | $ | 5,891,395 | 100 | % | ||||||||
Consolidated Depreciation and Amortization: |
||||||||||||||||
International |
$ | 20,879 | 9.5 | % | $ | 22,900 | 9.4 | % | ||||||||
United States |
198,493 | 90.5 | % | 220,607 | 90.6 | % | ||||||||||
Total Consolidated Depreciation and
Amortization |
$ | 219,372 | 100 | % | $ | 243,507 | 100 | % | ||||||||
Income tax benefit: |
||||||||||||||||
United States |
$ | 37,038 | 100 | % | $ | 37,038 | 100 | % | ||||||||
Consolidated Revenue by category: |
||||||||||||||||
Vodka |
$ | 1,229,360 | 21.0 | % | $ | 1,213,810 | 20.6 | % | ||||||||
Rum |
2,267,207 | 38.7 | % | 2,137,424 | 36.3 | % | ||||||||||
Liqueurs |
1,038,751 | 17.8 | % | 1,513,959 | 25.7 | % | ||||||||||
Whiskey |
925,826 | 15.8 | % | 899,351 | 15.3 | % | ||||||||||
Tequila |
176,935 | 3.0 | % | | | % | ||||||||||
Other* |
216,147 | 3.7 | % | 126,851 | 2.1 | % | ||||||||||
Total Consolidated Revenue |
$ | 5,854,226 | 100 | % | $ | 5,891,395 | 100 | % | ||||||||
June 30, 2009 | March 31, 2009 | |||||||||||||||
Consolidated Assets: |
||||||||||||||||
International |
$ | 4,366,499 | 13.3 | % | $ | 4,370,907 | 12.0 | % | ||||||||
United States |
28,384,323 | 86.7 | % | 31,984,351 | 88.0 | % | ||||||||||
Total Consolidated Assets |
$ | 32,750,822 | 100.0 | % | $ | 36,355,258 | 100 | % | ||||||||
* | Includes related food products. |
14
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
| increase revenues from existing spirits brands. We are focusing our existing distribution relationships, sales expertise and targeted marketing activities to concentrate on our more profitable brands by expanding our domestic and international distribution relationships to increase the mutual benefits of concentrating on our most profitable brands, while continuing to achieve brand recognition and growth and gain additional market share for our brands within retail stores, bars and restaurants, and thereby with end consumers; | ||
| 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 has included restructurings and personnel reductions throughout our company. We further intend to map, analyze and redesign our purchasing and supply systems to reduce costs in our current operations and achieve profitability in future operations; and | ||
| selectively add new premium brands to our spirits portfolio. We intend to continue developing new brands and pursuing strategic relationships, joint ventures and acquisitions to selectively expand our premium spirits portfolio, particularly by capitalizing on and expanding our already demonstrated partnering capabilities. Our criteria for new brands focuses on underserved areas of the spirits and/or wine 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. |
| reducing staff in both the U.S. and international operations; | ||
| restructuring our international distribution system; | ||
| changing distributor relationships in certain markets; | ||
| restructuring the Gosling-Castle Partners, Inc. working relationship; | ||
| moving production of certain products to a lower cost facility in the U.S.; and | ||
| reducing general and administrative costs, including professional fees, insurance, occupancy and other overhead costs. |
15
Three months ended | ||||||||
June 30, | ||||||||
2009 | 2008 | |||||||
Cases |
||||||||
United States |
51,428 | 48,937 | ||||||
International |
10,241 | 18,372 | ||||||
Total |
61,669 | 67,309 | ||||||
Vodka |
22,535 | 25,541 | ||||||
Rum |
23,008 | 22,726 | ||||||
Liqueurs |
9,242 | 12,649 | ||||||
Whiskey |
6,258 | 6,393 | ||||||
Tequila |
626 | | ||||||
Total |
61,669 | 67,309 | ||||||
Percentage of Cases |
||||||||
United States |
83.4 | % | 72.7 | % | ||||
International |
16.6 | % | 27.3 | % | ||||
Total |
100.0 | % | 100.0 | % | ||||
Vodka |
36.6 | % | 37.9 | % | ||||
Rum |
37.3 | % | 33.8 | % | ||||
Liqueurs |
15.0 | % | 18.8 | % | ||||
Whiskey |
10.1 | % | 9.5 | % | ||||
Tequila |
1.0 | % | 0.0 | % | ||||
Total |
100.0 | % | 100.0 | % | ||||
16
Three months ended | ||||||||
June 30, | ||||||||
2009 | 2008 | |||||||
Sales, net |
100.0 | % | 100.0 | % | ||||
Cost of sales |
60.6 | % | 67.1 | % | ||||
Gross profit |
39.4 | % | 32.9 | % | ||||
Selling expense |
45.8 | % | 58.2 | % | ||||
General and administrative expense |
23.5 | % | 35.2 | % | ||||
Depreciation and amortization |
3.7 | % | 4.1 | % | ||||
Loss from operations |
(33.5) | % | (64.6) | % | ||||
Other income |
0.0 | % | 0.4 | % | ||||
Other expense |
(0.2) | % | (0.2) | % | ||||
Foreign exchange gain (loss) |
17.8 | % | (1.7) | % | ||||
Interest income (expense), net |
0.3 | % | (8.6) | % | ||||
Gain on exchange of 3% note payable |
4.6 | % | 0.0 | % | ||||
Income tax benefit |
0.6 | % | 0.6 | % | ||||
Net loss |
(10.4) | % | (74.1) | % | ||||
Net loss attributable to noncontrolling interests |
0.8 | % | 1.1 | % | ||||
Net loss attributable to common stockholders |
(9.6) | % | (73.0) | % | ||||
Increase/(decrease) | Percentage | |||||||||||||||
in case sales | increase/(decrease) | |||||||||||||||
Overall | U.S. | Overall | U.S. | |||||||||||||
Vodka |
(3,006 | ) | (1,251 | ) | (11.8 | )% | (7.0 | )% | ||||||||
Rum |
282 | 5,806 | 1.2 | % | 33.9 | % | ||||||||||
Whiskey |
(135 | ) | (43 | ) | (2.1 | )% | (1.9 | )% | ||||||||
Liqueurs |
(3,407 | ) | (2,647 | ) | (26.9 | )% | (22.7 | )% | ||||||||
Tequila |
626 | 626 | 0.0 | % | 0.0 | % | ||||||||||
Total |
(5,640 | ) | 2,491 | (8.4 | )% | 5.1 | % | |||||||||
17
18
| continued significant levels of cash losses from operations; | ||
| 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 spirits brands; and | ||
| expansion into new markets and within existing markets in the United States and internationally. |
19
Three months ended | ||||||||
June 30, | ||||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Net cash provided by (used in): |
||||||||
Operating activities |
$ | (3,142 | ) | $ | (3,258 | ) | ||
Investing activities |
(29 | ) | 2,108 | |||||
Financing activities |
(303 | ) | 377 | |||||
Effect of foreign currency translation |
1 | (7 | ) | |||||
Net decrease in cash and cash equivalents |
$ | (3,473 | ) | $ | (780 | ) | ||
20
| 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; | ||
| 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; and | ||
| the impact of federal, state, local or foreign government regulations. |
21
Item 4. | Controls And Procedures |
Item 1. | Legal Proceedings |
Item 2. | Unregistered Sales of Equity Securities and Use Of Proceeds |
Maximum Number (or | ||||||||||||||||||
Total Number of | Approximate Dollar | |||||||||||||||||
Shares Purchased as | Value) of Shares | |||||||||||||||||
Part of Publicly | that May Yet Be | |||||||||||||||||
Total Number of | Average Price Paid | Announced Plans or | Purchased Under the | |||||||||||||||
Period | Shares Purchased | per Share | Programs | Plans or Programs | ||||||||||||||
April 1 to April
30, 2009
|
| | | | ||||||||||||||
May 1 to May 31,
2009
|
1,000,000 | (1) | $ | 0.18 | | | ||||||||||||
June 1 to June 30,
2009
|
| | | |||||||||||||||
Total
|
1,000,000 | $ | 0.18 | | | |||||||||||||
(1) | These shares were repurchased by the Company in a private transaction at a cost of $0.18 per share. |
Item 6. | Exhibits |
Exhibit Number | Description | |
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 Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
* | Filed herewith |
22
CASTLE BRANDS INC. |
||||
By: | /s/ Alfred J. Small | |||
Alfred J. Small | ||||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
||||
23