10Q review - No S3 shares were sold.
Had ROX not increased inventory for the 6 months ended Sept 30, 2017 and not purchased more of KAD, they would have an additional $6,316,234 available to shareholders.
That means ROX's 6 month EPS YoY would have been $0.04
Of course the KAD investment was a good move.
Of course ROX has to increase inventory to meet future demand and to age bourbon ( $2,732,548) .
Of course ROX has to purchase aged bourbon to meet current and near term needs ( $3,583,686 ) .
It also means that if annualized to 8¢ and assuming a 20x's P/E multiple, ROX might reasonably be trading at $1.60.
On that note, The Street does not approve of the Q's numbers. We might drop back into the 70's¢ or 80's¢. I almost hope so. I will buy more for a terribly undervalued company.
I think some of what is happening at ROX is terrific and I will look beyond the short term reaction.
I will also believe the distributors delayed holiday purchases and ROX's best Q of the year will once again revert back to the Holiday calender Q, as it had been in all of the previous years, except the past 2.
Sales, net*
Three months ended September 30, 2017 ... $ 20,894,150 ... 2016 ... $ 19,627,791
Six months ended September 30, 2017 ... $ 41,746,437 ... 2016 ... $ 36,378,716
* Sales, net and Cost of sales include excise taxes of $1,759,630 and $1,912,740 for the three months ended September 30, 2017 and 2016, respectively, and $3,399,385 and $3,628,701 for the six months ended September 30, 2017 and 2016, respectively.
The biggest key here is the 6 month total showing a huge bump of $5,367,721 or 13% YoY for the 6 month period
EBITDA
Earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted for allowances for doubtful accounts and obsolete inventory, stock-based compensation expense, other expense (income), net, income from equity investment in non-consolidated affiliate, foreign exchange and net income attributable to noncontrolling interests is a key metric we use in evaluating our financial performance. EBITDA, as adjusted, is considered a non-GAAP financial measure as defined by Regulation G promulgated by the SEC under the Securities Act of 1933, as amended. We consider EBITDA, as adjusted, important in evaluating our performance on a consistent basis across various periods. Due to the significance of non-cash and non-recurring items, EBITDA, as adjusted, enables our Board of Directors and management to monitor and evaluate the business on a consistent basis. We use EBITDA, as adjusted, as a primary measure, among others, to analyze and evaluate financial and strategic planning decisions regarding future operating investments and allocation of capital resources. We believe that EBITDA, as adjusted, eliminates items that are not indicative of our core operating performance or are based on management’s estimates, such as allowance accounts, are due to changes in valuation, such as the effects of changes in foreign exchange or do not involve a cash outlay, such as stock-based compensation expense. Our presentation of EBITDA, as adjusted, should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items or by non-cash items, such as stock-based compensation, which is expected to remain a key element in our long-term incentive compensation program. EBITDA, as adjusted, should be considered in addition to, rather than as a substitute for, income from operations, net income and cash flows from operating activities.
Our EBITDA, as adjusted, increased to $1.9 million for the three months ended September 30, 2017, as compared to $1.0 million for the comparable prior-year period and increased to $2.7 million for the six months ended September 30, 2017, as compared to $1.5 million for the comparable prior-year period.
Of interest to all of us who feared Walmart would command deep pricing discounts, the average Goslings Ginger Beer revenues per case actually went up for the past six months which includes the entire period Walmart has been purchasing GGB.
6 month GGB revenues were $13,207,558
877,429 cases were sold.
Average case cost = $15.05 for 6 months ended September 30, 2017
Average case cost = $15.59 for 3 months ended June 30, 2017
That means the Walmart effect is bringing the average case cost down as Walmart sales increase.
The 3 month increase YoY of GGB is 438,354 - 276,165 = 162,189 cases
The 3 month increase of average cases sales attributatable to the 5000 additional Walmarts and Supermarkets added during March 2017 YoY of GGB for 3 months ended June 30, 2017 is 2.5 cases.
The 6 month increase YoY of GGB is 877,429 - 620,297 = 257,132 cases
The 6 month increase of average cases sales attributatable to the 5000 additional Walmarts and Supermarkets added during March 2017 YoY of GGB for 6 months ended June 30, 2017 is 3.96 cases.
That means that GGB is gaining traction in the 5,000 additional Walmarts and Supermarkets that were added during March 2017.
That means that GGB increased case sales per those 5,000 stores by 1.46 cases per store per week.
This was a key metric I wrote about yesterday. The increases should not be measured YoY. The important GGB metric is sequential Q's to measure the impact of the Walmart effect.
That also means that if the GGB sales increase in ROX's 3rd fiscal quarter by the same 1.46 cases (the current holiday Q), ROX can count on additional revenues of 1.46 cases times $15 = $1,423,500
Consolidated Sales, net by category:
Three months ended September 30, 2017 ... 2016 ...
Whiskey ... $7,335,290 ... 35.2% ... $6,486,287 ... 24.7%
Rum ... $4,168,262 ... 19.9 % ... $4,837,653 ... 33.0%
Liqueurs ... $2,579,437 ... 12.3% ... $2,560,819 ... 13.0%
Vodka ... $353,792 ... 1.7% ... $414,052 ... 2.1%
Tequila ... $84,560 ... 0.4% ... $68,731 ... 0.4%
Ginger beer ... $6,372,809 ... 30.5% ... $5,260,249 ... 26.8%
Cases
For Three months ended September 30, ... Six months ended September 30,
.............................. 2017 ............... 2016 ............... 2017 ............... 2016
United States ..... 80,777 ..... 88,181 ..... 157,243 ..... 165,021
International ..... 20,990 ..... 19,843 ..... 42,918 ..... 36,945
Total ..... 101,767 ..... 108,024 ..... 200,161 ..... 201,966
Rum ..... 41,718 ..... 46,510 ..... 84,358 ..... 90,793
Whiskey ..... 25,904 ..... 27,111 ..... 53,669 ..... 48,255
Liqueur ..... 27,695 ..... 25,950 ..... 49,398 ..... 46,388
Vodka ..... 6,027 ..... 8,084 ..... 12,079 ..... 15,849
Tequila ..... 423 ..... 369 ..... 657 ..... 681
Total ..... 101,767 ..... 108,024 ..... 200,161 ..... 201,966
Regarding declining case sales, let's hope that this was affected by the distributors delaying their holiday orders into ROX's 3rd fiscal Q, or the current 4th Holiday Q of the year.
Of additional note, none of the 10,000 Jefferson's Presidential 16 bottles (1,666 cases) are included in these figures since it wasn't bottled until the current Q (October 2017).
Inventories— net of allowance for obsolete and slow moving inventory of $348,010 and $312,711 at September 30 and March 31, 2017, respectively ... $34,178,071 ... $29,801,080
A big key here is the 3 month sequential total shows a huge bump of $4,376,991 or 13% sequential Q's
A HUGE key here is the YoY huge inventory increase at September 30, 2017 ... $34,178,071 and September 30, 2016 ... $28,017,837 shows a HUGE bump of $6,160,234 or 20% YoY.
In the six months ended September 30, 2017, the Company acquired $3,583,686 of bulk bourbon whiskey in support of its anticipated near and mid-term needs.
Inventories are stated at the lower of weighted average cost or market.
This means that during the 6 month period ending September 30, 2017, ROX laid down bourbon to age ... $6,316,234 - $3,583,686 = $2,732,548 worth of barrels.
Accumulated deficit at September 30 and March 31, 2017, respectively (149,171,900) (148,223,822)
CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Net income (loss)
Three months ended September 30, 2017 ... $ (1,681) ... 2016 ... $ (700,710)
That loss for the Q is less than many homeowner's mortgage payment.
That also brings us back to trying to calculate breakeven which remains somewhere between $80 - $85 million.
CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Net income (loss)
Three months ended September 30, 2017 ... $336,319 ... 2016 ... $ (470,227)
ROX MADE MONEY
See accompanying notes to the unaudited condensed consolidated financial statements.
Weighted average shares used in computation, basic and diluted, attributable to common shareholders
Three months ended September 30, 2017 ... 163,209,562 ... 2016 ... 160,698,696
After removing the shares provided to the Goslings family ( 1,800,000 ) in exchange for the added ROX investment in the Goslings import company bring ROX's position to 80.1%, the remaining increase for the entire 12 months was only 710,866, which can be attributed to Options being exercised. As you can see from the next line, it was virtually all stock based compensation.
Stock-based compensation ... $979,816
NOTE 10 — STOCK-BASED COMPENSATION
In April 2017, the Company granted to employees, directors and certain consultants an aggregate of 1,092,000 restricted shares of the Company’s common stock under the Company’s 2013 Incentive Compensation Plan. The restricted shares vest 25% on each of the first four anniversaries of the grant date. The Company has valued the shares at $1,843,078.
Stock-based compensation expense for the three months ended September 30, 2017 and 2016 amounted to $504,490 and $410,097, respectively. Stock-based compensation expense for the six months ended September 30, 2017 and 2016 amounted to $979,816 and $762,497, respectively. At September 30, 2017, total unrecognized compensation cost amounted to $4,199,077, representing 4,226,500 unvested options and 1,092,000 unvested shares of restricted stock. This cost is expected to be recognized over a weighted-average vesting period of 2.32 years. There were 240,300 options exercised during the six months ended September 30, 2017 and 476,500 options exercised during the six months ended September 30, 2016. The Company did not recognize any related tax benefit for the three and six months ended September 30, 2017 and 2016 from option exercises, as the effects were de minimis.
NOTE 8 — EQUITY (Most interesting - The S3 expired during August 2017 and no shares were issued.) (One convertable note was taken off the books and converted to common shares.
Equity distribution agreement - In November 2014, the Company entered into an Equity Distribution Agreement (the “2014 Distribution Agreement”) with Barrington Research Associates, Inc. (“Barrington”), as sales agent, under which the Company could issue and sell over time and from time to time, to or through Barrington, shares (the “Shares”) of its common stock having a gross sales price of up to $10,000,000.
The Company did not sell any Shares pursuant to the 2014 Distribution Agreement during the six months ended September 30, 2017. The Company did not sell any Shares pursuant to the 2014 Distribution Agreement during the six months ended September 30, 2016, but incurred $12,000 of issuance costs related to the 2014 Distribution Agreement.
The 2014 Distribution Agreement expired in August 2017 upon the expiration of the Company’s Registration Statement on Form S-3 under which the Shares were sold.
Convertible Notes conversion - In the six months ended September 30, 2017, a Convertible Note holder converted $25,000 of Convertible Notes into 27,778 shares of Common Stock.
GCP Acquisition - As described in Note 4, in March 2017, the Company issued 1,800,000 shares of Common Stock to the Sellers in connection with the GCP Acquisition.
Investment in Gosling-Castle Partners Inc., consolidated
In March 2017, the Company entered into a Stock Purchase Agreement (“Purchase Agreement”) with Gosling’s Limited (“GL”) and E. Malcolm B. Gosling (“Gosling,” and together with GL, the “Sellers”). Pursuant to the terms of the Purchase Agreement, the Company acquired an additional 201,000 shares (the “GCP Share Acquisition”) of the common stock of GCP, representing a 20.1% equity interest in GCP. GCP is a strategic global export venture between the Company and the Gosling family. As a result of the completion of the GCP Share Acquisition, the Company’s total equity interest in GCP increased to 80.1%. The consideration for the GCP Share Acquisition was (i) $20,000,000 in cash and (ii) 1,800,000 shares of common stock of the Company.
The Company’s income tax expense for the three months ended September 30, 2017 and 2016 consists of federal, state and local taxes. In connection with the investment in GCP, the Company recorded a deferred tax liability on the ascribed value of the acquired intangible assets of $2,222,222, increasing the value of the asset. For the three months ended September 30, 2017 and September 30, 2016, the Company recognized ($25,335) and ($477,962) of income tax expense, net, respectively, and ($43,748) and ($688,775) of income tax expense, net, respectively for the six months ended September 30, 2017 and September 30, 2016. GCP is currently under a tax audit by New York State for the tax year ended March 31, 2016.
Investment in Copperhead Distillery Company, equity method. The additional 5% of Copperhead (KAD) cost $156,000. Apparently ROX paid cash for this additional asset. Had ROX not done this ROX was fractionally GAAP black.
In June 2015, CB-USA purchased 20% of Copperhead Distillery Company (“Copperhead”) for $500,000. Copperhead owns and operates the Kentucky Artisan Distillery. The investment was part of an agreement to build a new warehouse to store Jefferson’s bourbons, provide distilling capabilities using special mash-bills made from locally grown grains and create a visitor center and store to enhance the consumer experience for the Jefferson’s brand. The investment has been used for the construction of a new warehouse in Crestwood, Kentucky dedicated to the storage of Jefferson’s whiskies. In September 2017, CB-USA purchased an additional 5% of Copperhead for $156,000 from an existing shareholder. Copperhead owns and operates the Kentucky Artisan Distillery. The Company has accounted for this investment under the equity method of accounting. For the three months ended September 30, 2017 and 2016, the Company recognized $29,846 and $18,837 of income from this investment, respectively. For the six months ended September 30, 2017 and 2016, the Company recognized $71,595 and $23,320 of income from this investment, respectively. The investment balance was $797,691 and $570,097 at September 30 and March 31, 2017, respectively.
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