Castle Brands
Castle Brands (ROX) develop and market premium and super premium brands in the following beverage alcohol categories: rum, whiskey, liqueurs, vodka and tequila. The company also develop and market related non-alcoholic beverage products, including Goslings Stormy Ginger Beer. The company distribute its products in all 50 U.S. states and the District of Columbia and in thirteen primary international markets, including Ireland, Great Britain, Northern Ireland, Germany, Canada, France, Finland, Norway, Sweden, Denmark, and the Duty Free markets. The company market the following brands, among others:1
- Goslings rum®
- Goslings Stormy Ginger Beer
- Goslings Dark ‘n Stormy® ready-to-drink cocktail
- Jefferson’s® bourbon
- Jefferson’s Reserve®
- Jefferson’s Ocean Aged at Sea®
- Jefferson’s Wine Finish Collection
- Jefferson’s The Manhattan: Barrel Finished Cocktail
- Jefferson’s Chef’s Collaboration
- Jefferson’s Wood Experiment
- Jefferson’s Presidential Select™
- Jefferson’s Straight Rye whiskey
- Pallini® liqueurs
- Clontarf® Irish whiskey
- Knappogue Castle Whiskey®
- Brady’s® Irish Cream
- Boru® vodka
- Tierras™ tequila
- Celtic Honey® liqueur
- Gozio® amaretto
- The Arran Malt® Single Malt Scotch Whisky
- The Robert Burns Scotch Whiskeys
- Machrie Moor Scotch Whiskeys
Castle Brands objective is to continue building Castle Brands into a profitable international spirits company, with a distinctive portfolio of premium and super premium spirits brands. To achieve this, the company continue to seek to:
focus on its more profitable brands and markets. The company continue to focus its distribution efforts, sales expertise and targeted marketing activities on its more profitable brands and markets; grow organically. The company believe that continued organic growth will enable it to achieve long-term profitability. The company focus on brands that have profitable growth potential and staying power, such as its rums and whiskeys, sales of which have grown substantially in recent years; build consumer awareness. The company use its existing assets, expertise and resources to build consumer awareness and market penetration for its brands; leverage its distribution network. Its established distribution network in all 50 U.S. states enables it to promote its brands nationally and makes it an attractive strategic partner for smaller companies seeking U.S. distribution; and selectively add new brand extensions and brands to its portfolio. The company intend to continue to introduce new brand extensions and expressions. For example, Castle Brands has leveraged its successful Jefferson’s portfolio by introducing a number of brand extensions. Additionally, the company recently added the Arran Scotch Whiskies to its portfolio as agency brands. The company continue to explore strategic relationships, joint ventures and acquisitions to selectively expand its premium spirits portfolio. The company expect that future acquisitions or agency relations, if any, would involve some combination of cash, debt and the issuance of its stock.
Recent Developments
On March 29, 2017, the company entered into a Stock Purchase Agreement under which the company acquired 201,000 shares (the “GCP Share Acquisition”) of the common stock of Gosling-Castle Partners Inc., or GCP, representing a 20.1% equity interest in GCP. GCP is a strategic global export venture between Castle Brands and the Gosling family. As a result of the completion of the GCP Share Acquisition, its total equity interest in GCP increased to 80.1%. The consideration for the GCP Share Acquisition was 
$20,000,000 in cash and (ii) 1,800,000 shares of its common stock, which shares are subject to an 18 month lockup covenant. As a result of the GCP Share Acquisition, GCP will file as part of its U.S. federal consolidated income tax group for periods subsequent to the acquisition.
In connection with the GCP Share Acquisition, the company also entered into an Amended and Restated Distribution Agreement and an Export Agreement Amendment. Under the Amended and Restated Distribution Agreement, its subsidiary, Castle Brands (USA) Corp. (“CB-USA”), continues as the exclusive long-term importer and distributor of certain beverage products, including “Goslings Rum” and “Goslings Stormy Ginger Beer” (collectively, the “Distribution Products”) throughout the United States, and such other markets as may be added by mutual consent of the parties (the “Distribution Territory”). The initial term of the Amended and Restated Distribution Agreement extends through March 31, 2030, with automatic ten-year renewal terms thereafter, subject to specific termination rights held by each party. The Amended and Restated Distribution Agreement automatically terminates upon the termination, for any reason, of the Export Agreement. CB-USA will purchase Distribution Products from GCP for distribution in the Distribution Territory at prices set forth in the Amended and Restated Distribution Agreement, as may be mutually changed by the parties. CB-USA is entitled to receive a net margin amount, certain reimbursement costs, and a specified fee to defray normal overhead costs, all as specified in the Amended and Restated Distribution Agreement. GCP will maintain primary responsibility and bear the costs for the overall marketing, advertising, and promotion of the Distribution Products. Also, CB-USA has a right of first refusal regarding the distribution of any other current or future rum or ginger beer products GCP currently maintains in, or adds to, its product line for sale in the Distribution Territory.
Under the Export Agreement Amendment, GCP maintains all global distribution rights (with the exception of Bermuda) during the term of the Export Agreement and continues as the exclusive authorized global exporter of certain beverage products (the “Export Products”) in all national or international markets, except Bermuda. The Export Agreement Amendment, among other things, assigns to GCP global distribution and exporting rights to Goslings Stormy Ginger Beer and all other Goslings Ginger Beer products and extends the initial term of the Export Agreement from 15 to 25 years, through March 31, 2030, with ten-year renewal terms thereafter, subject to specific termination rights held by each party. Under the Export Agreement Amendment, in the event Gosling’s Export decides to sell any or all of its trademarks (or other intellectual property rights) relating to the Export Products (other than Goslings Stormy Ginger Beer) during the term of the Export Agreement, GCP has a right of first refusal to purchase the trademark(s) (and intellectual property rights, if applicable) at the same price being offered by a bona fide third-party offeror. If GCP does not exercise its right of first refusal, then the company will acquire an identical right of first refusal. In the event Gosling’s Export decides to sell any or all of its Export Products and/or trademark(s), whether sold to an affiliate, a third party, GCP or us, GCP is entitled to share in the proceeds of such sale, as specified in the Export Agreement Amendment. A copy of the Amended and Restated Distribution Agreement and a Restated Export Agreement are filed as exhibits to this annual report on Form 10-K. See Note
Operations overview
The company generate revenue through the sale of its products to its network of wholesale distributors or, in control states, state-operated agencies, which, in turn, distribute its products to retail outlets. In the U.S., its sales price per case includes excise tax and import duties, which are also reflected as a corresponding increase in its cost of sales. Most of its international sales are sold “in bond”, with the excise taxes paid by its customers upon shipment, thereby resulting in lower relative revenue as well as a lower relative cost of sales, although some of its United Kingdom sales are sold “tax paid”, as in the U.S. The difference between sales and net sales principally reflects adjustments for various distributor incentives.
Castle Brands gross profit is determined by the prices at which the company sell its products, its ability to control its cost of sales, the relative mix of its case sales by brand and geography and the impact of foreign currency fluctuations. Its cost of sales is principally driven by its cost of procurement, bottling and packaging, which differs by brand, as well as freight and warehousing costs. The company purchase certain products, such as Goslings rums and ginger beer, Pallini liqueurs, Arran whiskies, Gozio amaretto and Tierras tequila, as finished goods. For other products, such as Jefferson’s bourbons, the company purchase the components, including the distilled spirits, bottles and packaging materials, and have arrangements with third parties for bottling and packaging. Its U.S. sales typically have a higher absolute gross margin than in other markets, as sales prices per case are generally higher in the U.S.
Selling expense principally includes advertising and marketing expenditures and compensation paid to its marketing and sales personnel. Its selling expense, as a percentage of sales and per case, is higher than that of its competitors because of its brand development costs, level of marketing expenditures and established sales force versus its relatively small base of case sales and sales volumes. However, the company believe that maintaining an infrastructure capable of supporting future growth is the correct long-term approach for it.
While the company expect the absolute level of selling expense to increase in the coming years, the company expect selling expense as a percentage of revenues and on a per case basis to decline or remain constant, as its volumes expand and its sales team sells a larger number of brands.
General and administrative expense relates to corporate and administrative functions that support its operations and includes administrative payroll, occupancy and related expenses and professional services. The company expect general and administrative expense in fiscal 2018 to be higher than fiscal 2017 due to costs associated with increased infrastructure to support its growth. However, the company expect its general and administrative expense as a percentage of sales to decline due to economies of scale.
The company expect to increase its case sales in the U.S. and internationally over the next several years through organic growth, and through the introduction of product line extensions, acquisitions and distribution agreements. The company will seek to maintain liquidity and manage its working capital and overall capital resources during this period of anticipated growth to achieve its long-term objectives, although there is no assurance that the company will be able to do so.
The company continue to believe the following industry trends will create growth opportunities for us, including:
the divestiture of smaller and emerging non-core brands by major spirits companies as they continue to consolidate; increased barriers to entry, particularly in the U.S., due to continued consolidation and the difficulty in establishing an extensive distribution network, such as the one the company maintain; and the trend by small private and family-owned spirits brand owners to partner with, or be acquired by, a company with global distribution. The company expect to be an attractive alternative to its larger competitors for these brand owners as one of the few modestly-sized publicly-traded spirits companies.
Castle Brands growth strategy is based upon growing existing brands, partnering with other brands and acquiring smaller and emerging brands. To identify potential partner and acquisition candidates the company plan to rely on its management’s industry experience and its extensive network of industry contacts. The company also plan to maintain and grow its U.S. and international distribution channels so that Castle Brands is more attractive to spirits companies who are looking for a route to market for their products. The company expect to compete for foreign and small private and family-owned spirits brands by offering flexible and creative structures, which present an alternative to the larger spirits companies.
The company intend to finance any future brand acquisitions through a combination of its available cash resources, third party financing and, in appropriate circumstances, the further issuance of equity and/or debt securities. Acquiring additional brands could have a significant effect on its financial position, and could cause substantial fluctuations in its quarterly and yearly operating results. Also, the pursuit of acquisitions and other new business relationships may require significant management attention. The company may not be able to successfully identify attractive acquisition candidates, obtain financing on favorable terms or complete these types of transactions in a timely manner and on terms acceptable to us, if at all.
