##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  For the quarterly period ended September 30, 2008
 Commission File Number 001-32849
 CASTLE BRANDS INC.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    41-2103550
(I.R.S. Employer
Identification No.)
 570 Lexington Avenue, 29th Floor, 
New York, New York
(Address of principal executive offices)
    
    10022
(Zip Code)
 Registrants telephone number, including area code: (646) 356-0200
 x o
  o Large accelerated filer
    
    o Accelerated filer
    
    o Non-accelerated filer
    
    þ Smaller reporting company
 o x




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TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem
1.
    
    Condensed Consolidated Financial Statements:Condensed Consolidated Balance Sheets as of September 30,
2008 (unaudited) and March 31, 2008
    
    
    3Condensed Consolidated Statements of Operations for the
Three-Month and Six-Month Periods ended September 30, 2008
and 2007 (unaudited)
    
    
    4Condensed Consolidated Statements of Changes in Stockholders
Equity for the Six- Months ended September 30, 2008
(unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the
Six-Month Periods ended September 30, 2008 and 2007
(unaudited)
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item
2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item
3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item
4T.
    
    Controls and Procedures
    
    
    34PART II. OTHER INFORMATIONItem
1.
    
    Legal Proceedings
    
    
    35Item
1A.
    
    Risk Factors
    
    
    35Item
5.
    
    Other Information
    
    
    35Item
6.
    
    Exhibits
    
    
    35SIGNATURESEX-10.1EX-31.1EX-31.2EX-32.1
   
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1.
    
    Condensed Consolidated Financial Statements
 
 CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 September 30, 2008
    
    
    March 31, 2008(Unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    852,730
    
    
    $
    1,552,385Short-term investments
    
    
    60,124
    
    
    
    4,231,644Accounts receivable  net of allowance for doubtful accounts of $233,305
and $230,967
    
    
    5,972,709
    
    
    
    7,544,445Due from affiliates
    
    
    69,307
    
    
    
    61,596Inventories
    
    
    7,914,646
    
    
    
    8,535,993Prepaid expenses and other current assets
    
    
    1,240,463
    
    
    
    811,711TOTAL CURRENT ASSETS
    
    
    16,109,979
    
    
    
    22,737,774EQUIPMENT net
    
    
    685,853
    
    
    
    753,317OTHER ASSETSIntangible assets  net of accumulated amortization of $2,884,162 and
$2,517,199
    
    
    13,235,573
    
    
    
    13,591,191Goodwill
    
    
    3,745,287
    
    
    
    3,745,287Restricted cash
    
    
    731,455
    
    
    
    799,864Other assets
    
    
    322,635
    
    
    
    509,493TOTAL ASSETS
    
    $
    34,830,782
    
    
    $
    42,136,926LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent maturities of notes payable and capital lease
    
    $
    3,145
    
    
    $
    99,784Senior notes payable
    
    
    9,796,233
    
    
    
    Accounts payable
    
    
    5,461,597
    
    
    
    2,818,910Accrued expenses
    
    
    522,550
    
    
    
    2,142,845Due to stockholders and affiliates
    
    
    1,300,393
    
    
    
    919,758TOTAL CURRENT LIABILITIES
    
    
    17,083,918
    
    
    
    5,981,297LONG-TERM LIABILITIESSenior notes payable
    
    
    
    
    
    
    9,649,109Notes payable and capital lease, less current maturities
    
    
    9,000,000
    
    
    
    9,001,335Deferred tax liability
    
    
    2,333,140
    
    
    
    2,407,216TOTAL LIABILITIES
    
    
    28,417,058
    
    
    
    27,038,957COMMITMENTS AND CONTINGENCIES (Note 10)
    
    
    
    
    
    
    MINORITY INTERESTS
    
    
    135,645
    
    
    
    309,810STOCKHOLDERS EQUITYPreferred stock, $.01 par value, 5,000,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 45,000,000 shares authorized; 15,629,776
shares issued and outstanding at September 30, and March 31, 2008,
respectively
    
    
    156,298
    
    
    
    156,298Additional paid in capital
    
    
    105,223,847
    
    
    
    104,806,044Accumulated deficiency
    
    
    (97,981,653
    )
    
    
    (87,546,011
    )Accumulated other comprehensive loss
    
    
    (1,120,413
    )
    
    
    (2,628,172
    )TOTAL STOCKHOLDERS EQUITY
    
    
    6,278,079
    
    
    
    14,788,159TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    34,830,782
    
    
    $
    42,136,926
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CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
 Three-months ended
    
    
    Six-months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Sales, net*
    
    $
    7,431,100
    
    
    $
    8,920,952
    
    
    $
    13,322,495
    
    
    $
    14,545,037Cost of sales*
    
    
    5,085,928
    
    
    
    6,436,721
    
    
    
    9,038,613
    
    
    
    9,941,259Gross profit
    
    
    2,345,172
    
    
    
    2,484,231
    
    
    
    4,283,882
    
    
    
    4,603,778Selling expense
    
    
    3,874,105
    
    
    
    4,436,622
    
    
    
    7,303,449
    
    
    
    8,674,230General and administrative expense
    
    
    2,146,424
    
    
    
    2,091,109
    
    
    
    4,218,397
    
    
    
    4,152,029Depreciation and amortization
    
    
    244,352
    
    
    
    284,274
    
    
    
    487,859
    
    
    
    555,701Net operating loss
    
    
    (3,919,709
    )
    
    
    (4,327,774
    )
    
    
    (7,725,823
    )
    
    
    (8,778,182
    )Other income
    
    
    9,811
    
    
    
    
    
    
    
    25,384
    
    
    
    Other expense
    
    
    (16,487
    )
    
    
    (10,297
    )
    
    
    (28,212
    )
    
    
    (21,464
    )Foreign exchange gain(loss)
    
    
    (1,822,077
    )
    
    
    1,082,609
    
    
    
    (1,920,988
    )
    
    
    1,159,935Interest expense, net
    
    
    (528,894
    )
    
    
    (313,354
    )
    
    
    (1,034,244
    )
    
    
    (800,814
    )Current credit on derivative financial instrument
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189,397Income tax benefit
    
    
    37,038
    
    
    
    37,038
    
    
    
    74,076
    
    
    
    74,076Minority interests
    
    
    106,857
    
    
    
    251,020
    
    
    
    174,165
    
    
    
    491,390Net loss
    
    $
    (6,133,461
    )
    
    $
    (3,280,758
    )
    
    $
    (10,435,642
    )
    
    $
    (7,685,662
    )Net loss per common share, basic and diluted
    
    $
    (0.39
    )
    
    $
    (0.21
    )
    
    $
    (0.67
    )
    
    $
    (0.52
    )Weighted average shares used in computation, basic and diluted
    
    
    15,629,776
    
    
    
    15,629,776
    
    
    
    15,629,776
    
    
    
    14,898,083
 
 *
    
    Sales, net and Cost of sales include excise taxes of $1,127,135, $3,025,066, $2,105,189 and
$4,328,056 for the three-months ended September 30, 2008 and
2007 and the six-months ended September 30, 2008 and 2007, respectively.  4




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CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders Equity
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalPaid in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersCommon Stock
    
    
    Capital
    
    
    Deficiency
    
    
    Loss
    
    
    EquityShares
    
    
    AmountBALANCE, MARCH 31, 2008
    
    
    15,629,776
    
    
    $
    156,298
    
    
    $
    104,806,044
    
    
    $
    (87,546,011
    )
    
    $
    (2,628,172
    )
    
    $
    14,788,159Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,435,642
    )
    
    
    
    
    
    
    (10,435,642
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,507,759
    
    
    
    1,507,759Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,927,883
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    417,803
    
    
    
    
    
    
    
    
    
    
    
    417,803BALANCE, SEPTMEBER 30, 2008
    
    
    15,629,776
    
    
    $
    156,298
    
    
    $
    105,223,847
    
    
    $
    (97,981,653
    )
    
    $
    (1,120,413
    )
    
    $
    6,278,079
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CASTLE BRANDS INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
 Six-months ended September 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (10,435,642
    )
    
    $
    (7,685,662
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    487,859
    
    
    
    555,701Provision for doubtful accounts
    
    
    41,228
    
    
    
    36,343Minority interest in net loss of consolidated subsidiary
    
    
    (174,165
    )
    
    
    (491,390
    )Loss on disposal of equipment
    
    
    
    
    
    
    1,051Amortization of deferred financing costs
    
    
    186,858
    
    
    
    321,197Current credit on derivative financial instrument
    
    
    
    
    
    
    (189,397
    )Income tax benefit
    
    
    (74,076
    )
    
    
    (74,076
    )Effect of changes in foreign exchange
    
    
    1,736,691
    
    
    
    (1,038,734
    )Stock-based compensation expense
    
    
    417,803
    
    
    
    536,896Reversal of provision for obsolete inventories
    
    
    (112,419
    )
    
    
    Non-cash interest charge
    
    
    147,124
    
    
    
    Changes in operations, assets and liabilities:Decrease (increase) in accounts receivable
    
    
    1,373,138
    
    
    
    (3,933,607
    )Increase in due from affiliates
    
    
    (8,757
    )
    
    
    Decrease (increase) in inventory
    
    
    563,011
    
    
    
    (2,726,693
    )Increase in prepaid expenses and supplies
    
    
    (438,446
    )
    
    
    (53,338
    )Increase in other assets
    
    
    
    
    
    
    151,191Increase (decrease) in accounts payable and accrued expenses
    
    
    1,237,356
    
    
    
    (248,353
    )Increase in due to related parties
    
    
    408,107
    
    
    
    281,747Total adjustments
    
    
    5,791,312
    
    
    
    (6,871,462
    )NET CASH USED IN OPERATING ACTIVITIES
    
    
    (4,644,330
    )
    
    
    (14,557,124
    )CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of equipment
    
    
    (89,794
    )
    
    
    (212,655
    )Acquisition of intangible assets
    
    
    (16,037
    )
    
    
    (12,029
    )Short-term investments  purchased
    
    
    
    
    
    
    (8,000,000
    )Short-term investments  sold
    
    
    4,171,520
    
    
    
    5,859,358NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    
    
    4,065,689
    
    
    
    (2,365,326
    )CASH FLOWS FROM FINANCING ACTIVITIESRepayment of notes payable
    
    
    (6,981,476
    )
    
    
    (10,761,738
    )Proceeds from notes payable
    
    
    6,888,305
    
    
    
    10,776,732Payments of obligations under capital lease
    
    
    (2,063
    )
    
    
    (1,817
    )Increase in restricted cash
    
    
    
    
    
    
    (170,164
    )Issuance of common stock
    
    
    
    
    
    
    21,014,609Payments for costs of common stock issuance
    
    
    
    
    
    
    (1,396,123
    )NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    
    
    (95,234
    )
    
    
    19,461,499EFFECTS OF FOREIGN CURRENCY TRANSLATION
    
    
    (25,780
    )
    
    
    1,007NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (699,655
    )
    
    
    2,540,056CASH AND CASH EQUIVALENTS  BEGINNING
    
    
    1,552,385
    
    
    
    1,004,957CASH AND CASH EQUIVALENTS  ENDING
    
    $
    852,730
    
    
    $
    3,545,013
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CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial StatementsUnaudited
 NOTE 1  GOING CONCERN
    NOTE 2  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
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CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  (Continued)  Unaudited
 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. The accounts of the
subsidiaries have been included as of the date of acquisition. All significant
intercompany transactions and balances have been eliminated.As used herein, the Company refers to Castle Brands Inc. and, where appropriate, it also
refers collectively to Castle Brands Inc. and its direct and indirect subsidiaries,
including its majority owned GCP subsidiary.B.
    
    Organization and operations  The Company is principally engaged in the
importation, marketing and sale of fine spirit brands of vodka, whiskey, rums and liqueurs
in the United States, Canada, Europe, Latin America and the Caribbean. Except for
Goslings rums and the bourbon products, which are bottled in the United States, all of
the Companys products are imported from Europe. The vodka, Irish whiskeys and certain
liqueurs are produced by CB-IRL, billed in Euros and imported 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. As of September 30, 2008 and March
31, 2008, goodwill and other indefinite lived intangible assets that arose from
acquisitions were $3,745,287 and $3,745,287, respectively. 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 to the estimated residual values and reviewed for
impairment whenever events or changes in circumstances indicate that the carrying value
may not be recoverable.Under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), impairment of
goodwill must be tested at least annually by comparing the fair values of the applicable
reporting units with the carrying amount of their net assets, including goodwill. If the
carrying amount of the reporting units net assets exceeds the units fair value, an
impairment loss would be recognized in an amount equal to the excess of the carrying amount
goodwill over its implied fair value. The implied fair value of goodwill is determined in
the same manner as the amount of goodwill recognized in a business combination with the
fair value of the reporting unit deemed to be the purchase price paid.The fair value of each reporting unit was determined at March 31, 2008 by weighting a
combination of the present value of the Companys discounted anticipated future operating
cash flows and values based on market multiples of revenue and earnings before interest,
taxes, depreciation and amortization (EBITDA) of comparable companies. Such valuations
resulted in the Company recording a goodwill impairment loss of $8,750,000 for the year
ended March 31, 2008. Such adjustments were attributable to downward revisions of earnings
forecasted for future years, an increase in the incremental borrowing rate due to operating
results that were worse than anticipated and an overall decrease to the value of the
comparable companies.
 
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CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  (Continued)  Unaudited
 D.
    
    Impairment of long-lived assets  In accordance
with SFAS 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 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. The Company concluded that there was no impairment during the three and
six-months ended, or as of, September 30, 2008.E.
    
    Excise taxes and duty  Excise taxes and duty are computed at standard rates
based on alcohol proof per gallon/liter and are paid after finished goods are imported
into the United States and Great Britain, are tax paid 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. Historically, the Companys sales in Ireland have been made in-bond, net
of excise taxes. In September 2007, the Company made an initial sale to its new
distributor in Ireland ex-bond that included $1,861,995 million in excise taxes and VAT.
These taxes are reflected in both the Companys revenues and cost of sales as an equal
increase to both.F.
    
    Foreign currency  The functional currency for the Companys foreign
operations is the Euro in Ireland, and the British Pound in the United Kingdom. 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 accompanying condensed consolidated statements of operations. The
Companys 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/loss resting with
CB-USA. In addition, the Company has funded the continuing operations of the international
subsidiaries. At each balance sheet date, the Euro denominated intercompany balances
included on the books of CB-IRL 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.G.
    
    Income taxes  Under the asset and liability method of SFAS No. 109
Accounting for Income Taxes (SFAS 109), 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.On January 1, 2007, the Company adopted the provisions of FIN 48  Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 clarifies and sets forth consistent rules for accounting for uncertain tax positions
in accordance with SFAS 109.As a result of the implementation of FIN 48, the Company made a review of its portfolio of
uncertain tax positions in accordance with recognition standards established by FIN 48. In
this regard, an uncertain tax position represents the Companys expected treatment of a tax
position taken in a filed tax return, or planned to be taken in a future tax return, that
has not been reflected in measuring income tax expense for financial reporting purposes. As
a result of this review, the Company determined that it had no material uncertain tax
positions and, therefore, it has not recorded unrecognized tax benefits. The Company does
not expect any material changes to its uncertain tax positions. The Company has did not
recognize any interest or penalties arising from income taxes in the six-months ended
September 30, 2008.
 
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CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  (Continued)  Unaudited
 The tax years 2006 through 2008 remain open to examination by federal and state tax
jurisdictions.The Company has various foreign subsidiaries for which tax years 2002 through 2008 remain
open to examination in certain foreign tax jurisdictions.H.
    
    Recent accounting pronouncementsOn October 10, 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) FAS 157-3, Determining the Fair Value of a Financial Asset in a Market
That Is Not Active. The FSP was effective upon issuance, including periods for which
financial statements have not been issued. The FSP clarified the
application of SFAS 157,
Fair Value Measurements (SFAS 157), in an inactive market and provided an illustrative
example to demonstrate how the fair value of a financial asset is determined when the
market for that financial asset is inactive. The adoption of this FSP did not have a
material impact on the Companys financial position and results of operations.In May 2008, FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). SFAS 162 identifies a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles for
nongovernmental entities. SFAS 162 is effective 60 days following the SECs approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company
does not believe the adoption of SFAS 162 will have a material effect on its condensed
consolidated financial statements.In April 2008, FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142. FSP FAS 142-3 is intended to improve the
consistency between the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under SFAS
141(R), Business Combinations, (SFAS 141(R))
and other U.S. GAAP. FSP FAS 142-3 is effective for fiscal years beginning after December
15, 2008. Earlier application is not permitted. The Company is currently evaluating the
impact of FSP FAS 142-3, but does not expect the adoption of this pronouncement to have a
material impact on its financial position or results of operations.In December 2007, FASB issued proposed FSP157-b, Effective Date of FASB Statement No.
157, (FSP157-b) that would permit a one-year deferral in applying the measurement
provisions of SFAS 157 to non-financial assets and non-financial liabilities (non-financial
items) that are not recognized or disclosed at fair value in an entitys financial
statements on a recurring basis (at least annually). Therefore, if the change in fair value
of a non-financial item is not required to be recognized or disclosed in the financial
statements on an annual basis or more frequently, the effective date of application of SFAS
157 to that item is deferred until fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. This deferral does not apply, however, to an
entity that applies SFAS 157 in interim or annual financial statements before proposed FSP
157-b is finalized. The Company is currently evaluating the impact, if any, that the
adoption of FSP157-b will have on its operating income or net earnings.
 
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CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  (Continued)  Unaudited
 On December 4, 2007, the FASB issued SFAS No. 141(R) and SFAS No. 160, Accounting and
Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of
ARB No. 51 (SFAS 160). SFAS 141(R) is required to be adopted concurrently with SFAS 160
and is effective for business combination transactions for which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or after December
15, 2008. Early adoption is prohibited. Application of SFAS 141(R) and SFAS 160 is required
to be adopted prospectively, except for certain provisions of SFAS 160, which are required
to be adopted retrospectively. Business combination transactions accounted for before
adoption of SFAS 141(R) should be accounted for in accordance with SFAS 141 and that
accounting previously completed under SFAS 141 should not be modified as of or after the
date of adoption of SFAS 141(R). The Company is currently evaluating the impact of SFAS
141(R) and SFAS 160, but does not expect the adoption of these pronouncements to have a
material impact on its financial position or results of operations.I.
    
    Reclassifications  Certain prior year balances have been reclassified to
conform to the current period classification.
 NOTE 3  BASIC AND DILUTED NET LOSS PER COMMON SHARE
   September 30,
    
    
    September 30,2008
    
    
    2007Stock options
    
    
    1,994,825
    
    
    
    1,307,625Stock warrants
    
    
    2,305,432
    
    
    
    2,255,432Convertible debentures
    
    
    1,192,380
    
    
    
    1,192,380Total
    
    
    5,492,637
    
    
    
    4,755,437
 NOTE 4 INVESTMENTS
  EstimatedFair ValueSeptember 30, 2008Mutual funds
    
    $
    60,124Total
    
    $
    60,124
 11




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##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  (Continued)  Unaudited
  NOTE 5  INVENTORIES
 September 30,
    
    
    March 31,2008
    
    
    2008Raw materials
    
    $
    2,193,080
    
    
    $
    1,766,892Finished goods
    
    
    5,721,566
    
    
    
    6,769,101Total
    
    $
    7,914,646
    
    
    $
    8,535,993
   NOTE 6  RESTRICTED CASH
 
 NOTE 7  OVERDRAFT ACCOUNTS
 
 NOTE 8  SENIOR NOTES PAYABLE, NOTES PAYABLE AND CAPITAL LEASE
 September 30,
    
    
    March 31,2008
    
    
    2008Notes payable consist of the following:Revolving credit facilities
    
    $
    
    
    
    $
    415,264Senior notes
    
    
    9,796,233
    
    
    
    9,354,861Subordinated convertible notes
    
    
    9,000,000
    
    
    
    9,000,00018,796,233
    
    
    
    18,770,485Capital lease
    
    
    3,145
    
    
    
    8,891Total
    
    $
    18,799,378
    
    
    $
    18,779,376
  12




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##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  (Continued)  Unaudited
 NOTE 9  STOCK OPTIONS AND WARRANTS
 A.
    
    Stock Options  In July 2003, the Company implemented the 2003
Stock Incentive Plan (the Plan) which provides for awards of incentive and
non-qualified stock options, restricted stock and stock appreciation rights for its
officers, employees, consultants and directors in order to
attract and retain such individuals who contribute to the Companys success by their
ability, ingenuity and industry knowledge, and to enable such individuals to participate in
the long-term success and growth of the Company by giving them an equity interest in the
Company. There are 2,000,000 common shares reserved for distribution under the Plan, of
which 5,175 remain available. Stock options granted 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.The fair value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model and is affected by assumptions regarding a number of
highly complex and subjective variables. The use of an option pricing model also requires
the use of a number of complex assumptions including expected volatility, risk-free interest
rate, expected dividends, and expected term. Expected volatility is based on the historical
volatility of a peer group of companies over the expected life of the option as the Company
does not have enough history trading as a public company to calculate its own stock price
volatility. The expected term and vesting of the options represents the estimated period of
time until exercise and is based on historical experience of similar awards, giving
consideration to the contractual terms, vesting schedules and expectations of future
employee behavior. The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of grant for the expected term of the option. The Company has not paid
dividends in the past and does not plan to pay any dividends in the near future. SFAS No.
123R, Share-Based Payment, also requires the Company to estimate forfeitures at the time
of grant and revise these estimates, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The Company estimates forfeitures based on its
expectation of future experience while considering its historical experience.
 A summary of the options outstanding under the stock option plan is as follows:
 Six-months Ended September 30,2008
    
    2007Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of period
    
    
    1,617,625
    
    
    $
    6.37
    
    
    
    1,294,125
    
    
    $
    7.19Granted
    
    
    555,700
    
    
    
    0.30
    
    
    
    48,500
    
    
    
    6.93Forfeited
    
    
    (178,500
    )
    
    
    6.56
    
    
    
    (35,000
    )
    
    
    6.51Outstanding at end of period
    
    
    1,994,825
    
    
    
    4.66
    
    
    
    1,307,625
    
    
    
    7.20Options exercisable at period end
    
    
    866,300
    
    
    
    7.02
    
    
    
    679,575
    
    
    
    7.10Weighted average fair value of
options granted during the period
    
    
    
    
    
    $
    0.15
    
    
    
    
    
    
    $
    3.23
 13




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##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  (Continued)  Unaudited
  Options Outstanding
    
    Options ExercisableWeighted
    
    
    
    
    
    WeightedAverage Remaining
    
    
    
    
    
    Average
    
    AggregateLife in
    
    
    
    
    
    Exercise
    
    IntrinsicRange of Exercise Prices
    
    Shares
    
    Years
    
    Shares
    
    Price
    
    value$0.01  $1.00
    
    
    499,700
    
    
    
    9.70
    
    
    
    
    
    
    $
    0.21
    
    
    $
    $1.01  $2.00
    
    
    115,500
    
    
    
    9.40
    
    
    
    24,250
    
    
    
    1.53
    
    
    
    $2.01  $3.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $3.01  $4.00
    
    
    250,000
    
    
    
    9.12
    
    
    
    
    
    
    
    3.09
    
    
    
    $5.01  $6.00
    
    
    388,500
    
    
    
    5.54
    
    
    
    336,375
    
    
    
    5.98
    
    
    
    $6.01  $7.00
    
    
    59,500
    
    
    
    8.66
    
    
    
    51,250
    
    
    
    6.77
    
    
    
    $7.01  $8.00
    
    
    481,000
    
    
    
    6.97
    
    
    
    323,800
    
    
    
    7.72
    
    
    
    $8.01  $9.00
    
    
    200,625
    
    
    
    7.78
    
    
    
    130,625
    
    
    
    9.00
    
    
    
    1,994,825
    
    
    
    7.75
    
    
    
    866,300
    
    
    $
    4.66
    
    
    $
    
  September 30,
    
    
    September 30,2008
    
    
    2007Risk-free interest rates
    
    
    2.92
    %
    
    
    5.08
    %Expected options life in years
    
    
    5.18
    
    
    
    7.00Expected stock price volatility
    
    
    50
    %
    
    
    50
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
  WeightedAverageExerciseShares
    
    
    PriceNonvested at April 1, 2008
    
    
    762,675
    
    
    $
    5.55Granted
    
    
    555,700
    
    
    
    0.30Canceled or expired
    
    
    (90,800
    )
    
    
    6.56Vested
    
    
    (99,050
    )
    
    
    5.91Nonvested at September 30, 2008
    
    
    1,128,525
    
    
    $
    2.85
   Stock Warrants
 14




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##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  (Continued)  Unaudited
 NOTE 10  COMMITMENTS AND CONTINGENCIES
 A.
    
    On October 22, 2007, the Company entered into a credit agreement with Frost Nevada
Investments Trust, which is controlled by Dr. Phillip Frost, a director of the Company,
which enabled the Company to borrow up to $5,000,000. Any amounts outstanding under the
credit facility bore interest at a rate of 10% per annum. Interest was payable quarterly.
The maturity date of any amounts outstanding was the earlier of (i) one business day after
the closing of financing transactions resulting in aggregate gross proceeds to the Company
of at least $10,000,000 and (ii) February 28, 2009. No amounts were ever borrowed under
the facility.Upon entering into the credit agreement, the Company paid the lender a facility fee of
$175,000. If the Company drew down any amount under the credit facility, upon the Company
receiving its first advance, the Company would have had to pay the Lender an additional
facility fee of $200,000. As additional consideration for entering into the credit
facility, the Company issued to the Lender a warrant to purchase 50,000 shares of common
stock, par value $0.01 per share, at an exercise price of $4.00 per share. The Company
ascribed a fair value to the warrant of $59,801 and accounted for the warrant as a deferred
financing cost that was amortized over the life of the underlying credit facility. During
the three-months and six-months ended September 30, 2008, the Company recorded $11,213 and
$22,425 of amortization expense in connection with the warrant, respectively.In October 2008, this credit agreement was terminated in connection with the closing of the
transaction described in Note 12. The remaining unamortized balance
of $85,709 in deferred financing costs associated with the terminated
facility will be expensed in the third quarter of fiscal 2009.B.
    
    Promissory Notes to Certain Executives  Due to the Companys limited
liquidity, the compensation committee recommended to the Board of Directors that five of
the officers receive a promissory note in lieu of a cash bonus payment. These executives
agreed to defer their annual bonuses and the Company issued to these executives an
aggregate of $303,733 of promissory notes. These notes accrued interest at 4.5% and
matured on December 31, 2008, subject to earlier termination or acceleration in certain
circumstances.These notes were subsequently paid in full in accordance with their terms in connection
with the closing of the transaction described in Note 12.C.
    
    Retention arrangements  On July 15, 2008, the Company entered into written
retention agreements with various officers in order to incentivize such executive officers
to remain in the Companys employment up to and following a control event as defined in
the retention agreements. These retention agreements aggregated approximately $415,000.
The retention agreements provide that if, on the 60th calendar day following the first
control event following July 15, 2008, the Company continues to employ the executive
officer in any capacity, then the Company will pay to the executive officer certain
amounts. Control event is defined in the retention agreements as any of the following:
(i) any change of control with respect to the Company; (ii) any sale of the Company; (iii)
any financing with gross proceeds to the Company of at least $10,000,000; or (iv) the
Company (together with its subsidiaries) sells assets, except for the products sold in the
ordinary course of business, with an aggregate value of at least $10,000,000. The October
20, 2008 closing of the transaction described in Note 12 constituted a control event
under the retention agreements as it was a financing with gross proceeds to the Company of
at least $10,000,000.
 15




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##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  (Continued)  Unaudited
 NOTE 11  GEOGRAPHIC INFORMATION
   For the three-months ended September 30,2008
    
    
    2007Revenue:International
    
    $
    1,755,320
    
    
    
    23.6
    %
    
    $
    3,488,992
    
    
    
    39.1
    %United States
    
    
    5,675,780
    
    
    
    76.4
    %
    
    
    5,431,960
    
    
    
    60.9
    %Total revenue
    
    $
    7,431,100
    
    
    
    100
    %
    
    $
    8,920,952
    
    
    
    100
    %Depreciation and amortization:International
    
    $
    22,277
    
    
    
    9.1
    %
    
    $
    22,411
    
    
    
    7.9
    %United States
    
    
    222,075
    
    
    
    90.9
    %
    
    
    261,863
    
    
    
    92.1
    %Total depreciation and amortization
    
    $
    244,352
    
    
    
    100
    %
    
    $
    284,274
    
    
    
    100
    %Income tax benefit:United States
    
    $
    37,038
    
    
    
    100
    %
    
    $
    37,038
    
    
    
    100
    %Revenues by category:Vodka
    
    $
    1,576,913
    
    
    
    21.2
    %
    
    $
    3,927,960
    
    
    
    44.0
    %Rum
    
    
    2,396,183
    
    
    
    32.3
    %
    
    
    1,905,219
    
    
    
    21.4
    %Liqueurs
    
    
    2,040,700
    
    
    
    27.5
    %
    
    
    1,940,863
    
    
    
    21.8
    %Whiskey
    
    
    1,236,576
    
    
    
    16.6
    %
    
    
    1,010,289
    
    
    
    11.3
    %Other*
    
    
    180,728
    
    
    
    2.4
    %
    
    
    136,621
    
    
    
    1.5
    %Total revenue
    
    $
    7,431,100
    
    
    
    100
    %
    
    $
    8,920,952
    
    
    
    100
    %Assets:International
    
    $
    4,482,614
    
    
    
    12.9
    %United States
    
    
    30,348,168
    
    
    
    87.1
    %Total assets
    
    $
    34,830,782
    
    
    
    100.0
    %
 For the six-months ended September 30,2008
    
    
    2007Revenue:International
    
    $
    2,969,928
    
    
    
    22.3
    %
    
    $
    5,192,622
    
    
    
    35.7
    %United States
    
    
    10,352,567
    
    
    
    77.7
    %
    
    
    9,352,415
    
    
    
    64.3
    %Total revenue
    
    $
    13,322,495
    
    
    
    100
    %
    
    $
    14,545,037
    
    
    
    100
    %Depreciation and amortization:International
    
    $
    45,177
    
    
    
    9.3
    %
    
    $
    43,984
    
    
    
    7.9
    %United States
    
    
    442,682
    
    
    
    90.7
    %
    
    
    511,717
    
    
    
    92.1
    %Total depreciation and amortization
    
    $
    487,859
    
    
    
    100
    %
    
    $
    555,701
    
    
    
    100
    %Income tax benefit:United States
    
    $
    74,076
    
    
    
    100
    %
    
    $
    74,076
    
    
    
    100
    %Revenues by category:Vodka
    
    $
    2,790,722
    
    
    
    20.9
    %
    
    $
    5,568,895
    
    
    
    38.3
    %Rum
    
    
    4,533,607
    
    
    
    34.1
    %
    
    
    3,994,032
    
    
    
    27.5
    %Liqueurs
    
    
    3,554,659
    
    
    
    26.7
    %
    
    
    2,989,653
    
    
    
    20.5
    %Whiskey
    
    
    2,135,927
    
    
    
    16.0
    %
    
    
    1,772,332
    
    
    
    12.2
    %Other*
    
    
    307,580
    
    
    
    2.3
    %
    
    
    220,125
    
    
    
    1.5
    %Total revenue
    
    $
    13,322,495
    
    
    
    100
    %
    
    $
    14,545,037
    
    
    
    100
    %
 
 *
    
    Includes related food products. 16




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##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  (Continued)  Unaudited
 NOTE 12  SUBSEQUENT EVENTS
 Preferred stock issuance
   Stockholder Meeting
 
    
    amendments to the Companys charter to increase the authorized shares of the Company
to 250,000,000 shares, 225,000,000 shares of which will be designated as Common Stock
and 25,000,000 shares of which will be designated as preferred stock, and to permit
stockholders to act by written consent and
    
    the election of a to be determined number of directors designated by the Purchasers
as the sole directors comprising the Board of Directors of the Company.
  $2,000,000 Promissory Note
 Conversion and/or Amendment of Notes
 17




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##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  (Continued)  Unaudited
   Termination of Credit Agreement
 Change in Management and Board of Directors
 Participation by Directors and Executive Officers in Transaction
 
    
    Phillip Frost, M.D. controls Frost Gamma Investments Trust, which purchased
397,200 shares of Series A Preferred Stock in the Purchase Agreement
transaction for $4,965,000. Dr. Frost is a director and, with his affiliates,
is a principal stockholder of the Company. Dr. Frost, through Frost Nevada
Investments Trust, converted $3,279,775 of principal and interest under the
CB-USA 9% senior secured notes into 262,382 shares of Series A Preferred Stock
in connection with the transaction. Dr. Frost also acquired, through Frost
Gamma Investments Trust, senior notes in the amount of $1,394,550 and converted
same into 111,564 shares of Series A Preferred Stock.
 
    
    Under the Purchase Agreement, Mark Andrews, a director, former chief
executive officer and former greater than 5% stockholder, together with members
of his family, converted $516,500 of principal and interest under the CB-USA
Corp. 9% senior secured notes into 41,320 shares of Series A Preferred Stock.
Mr. Andrews also acquired additional senior secured notes in the amount of
$154,950 and converted same into 12,396 shares of Series A Preferred Stock.
    
    Glenn L. Halpryn, a director, is a member of Halpryn Group IV, LLC, a
purchaser of $1,000,000 of the Series A Preferred Stock under the Purchase
Agreement.
 18




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##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  (Continued)  Unaudited
 
    
    Richard J. Lampen, a director and the Companys interim president and chief
executive officer, purchased $17,500 of the Series A Preferred Stock under the
Purchase Agreement, and is the executive vice president of Vector Group Ltd.,
which purchased $4,000,000 of the Series A Preferred Stock under the Purchase
Agreement and became a greater than 5% stockholder of the Company.
    
    Micaela Pallini, a director of the Company, is a director and the head of
production of I.L.A.R. S.p.A., which purchased $3,000,000 of the Series A
Preferred Stock under the Purchase Agreement and became a greater than 5%
stockholder of the Company. I.L.A.R. S.p.A. is a supplier to the Company under
an exclusive marketing agreement.
 Certificate of Designation of Series A Preferred Stock
 Dividends
 Preference
on Liquidation
 
 
 
 Voting
 Automatic Conversion
 19




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##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  (Continued)  Unaudited
 Option Grants
 20




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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Note Regarding Forward Looking Statements
  
    
    our history of losses and expectation of further losses;
    
    the effect of poor operating results on our company;
    
    the effect of growth on our infrastructure, resources and existing sales;
    
    our ability to expand our operations in both new and existing markets and our ability
to develop or acquire new brands;
    
    the impact of supply shortages and alcohol and packaging costs in general;
    
    our ability to raise capital;
    
    our relationships with distributors;
    
    the success of our marketing activities;
    
    our ability to fully utilize and retain new executives;
    
    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 ability to protect trademarks and other proprietary information;
    
    the impact of litigation;
    
    the impact of federal, state, local or foreign government regulations;
    
    the effect of competition in our industry; and
    
    economic and political conditions generally, including the current recessionary
economic environment and concurrent market instability.
  21




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##### Table of Contents



Overview
 ® ® ® ® TM ® ® ®
   Change in operational emphasis
  
    
    Revenue growth from our existing brands;
    
    Revenue growth from new brands acquired, including via agency relationships; and
    
    Revenue growth from brands created to address as yet unsatisfied market needs.
     22




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##### Table of Contents



Cost containment
   Recent Events
 Series A Preferred Stock Purchase Agreement
    $2 Million Promissory Note
 23




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##### Table of Contents



Conversion and/or Amendment of Notes
   Termination of Credit Agreement
 Change in Management and Board of Directors
 Participation by Directors and Executive Officers in Transaction
 
    
    Phillip Frost, M.D. controls Frost Gamma Investments Trust, which purchased
397,200 shares of Series A Preferred Stock in the Purchase Agreement
transaction for $5.0 million. Dr. Frost is a director and, with his
affiliates, is a principal stockholder our company. Dr. Frost, through Frost
Nevada Investments Trust, converted $3.3 million of principal and interest
under the CB-USA 9% senior secured notes into 262,382 shares of Series A
Preferred Stock in connection with the transaction. Dr. Frost also acquired,
through Frost Gamma Investments Trust, senior notes in the amount of $1.4
million and converted same into 111,564 shares of Series A Preferred Stock.
 24




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##### Table of Contents




    
    Under the Purchase Agreement, Mark Andrews, a director, former chief
executive officer and former greater than 5% stockholder, together with members
of his family, converted $0.5 million of principal and interest under the
CB-USA 9% senior secured notes into 41,320 shares of Series A Preferred Stock.
Mr. Andrews also acquired additional senior secured notes in the amount of $0.2
million and converted same into 12,396 shares of Series A Preferred Stock.
    
    Glenn L. Halpryn, a director, is a member of Halpryn Group IV, LLC, a
purchaser of $1.0 million of the Series A Preferred Stock under the Purchase
Agreement.
    
    Richard J. Lampen, a director and our interim president and chief executive
officer, purchased $17,500 of the Series A Preferred Stock under the Purchase
Agreement, and is the executive vice president of Vector Group Ltd., which
purchased $4.0 million of the Series A Preferred Stock under the Purchase
Agreement and became a greater than 5% stockholder.
    
    Micaela Pallini, a director of our company, is a director and the head of
production of I.L.A.R. S.p.A., which purchased $3.0 million of the Series A
Preferred Stock under the Purchase Agreement and became a greater than 5%
stockholder. I.L.A.R. S.p.A. is a supplier to us under an exclusive marketing
agreement.
  Option Grants
  Currency Translation
   25




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##### Table of Contents



 
  Critical Accounting Policies
  Financial performance overview
  Three-months ended
    
    
    Six-months endedSeptember 30,
    
    
    September 30,Case Sales
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Cases:United States
    
    
    57,511
    
    
    
    60,769
    
    
    
    106,448
    
    
    
    105,492International
    
    
    27,596
    
    
    
    37,568
    
    
    
    45,968
    
    
    
    67,015Total
    
    
    85,107
    
    
    
    98,337
    
    
    
    152,416
    
    
    
    172,507Vodka
    
    
    31,723
    
    
    
    55,132
    
    
    
    57,265
    
    
    
    91,129Rum
    
    
    26,787
    
    
    
    19,151
    
    
    
    49,512
    
    
    
    41,921Liqueurs
    
    
    17,138
    
    
    
    17,078
    
    
    
    29,787
    
    
    
    27,496Whiskey
    
    
    9,459
    
    
    
    6,976
    
    
    
    15,852
    
    
    
    11,961Total
    
    
    85,107
    
    
    
    98,337
    
    
    
    152,416
    
    
    
    172,507Percentage of Cases:United States
    
    
    67.6
    %
    
    
    61.8
    %
    
    
    69.8
    %
    
    
    61.2
    %International
    
    
    32.4
    %
    
    
    38.2
    %
    
    
    30.2
    %
    
    
    38.8
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Vodka
    
    
    37.3
    %
    
    
    56.0
    %
    
    
    37.6
    %
    
    
    52.8
    %Rum
    
    
    31.5
    %
    
    
    19.5
    %
    
    
    32.5
    %
    
    
    24.3
    %Liqueurs
    
    
    20.1
    %
    
    
    17.4
    %
    
    
    19.5
    %
    
    
    16.0
    %Whiskey
    
    
    11.1
    %
    
    
    7.1
    %
    
    
    10.4
    %
    
    
    6.9
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  26




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##### Table of Contents



Results of operations
  Three-months Ended
    
    
    Six-months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Sales, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    68.4
    %
    
    
    72.2
    %
    
    
    67.8
    %
    
    
    68.3
    %Gross profit
    
    
    31.6
    %
    
    
    27.8
    %
    
    
    32.2
    %
    
    
    31.7
    %Selling expense
    
    
    52.1
    %
    
    
    49.7
    %
    
    
    54.8
    %
    
    
    59.6
    %General and administrative expense
    
    
    28.9
    %
    
    
    23.4
    %
    
    
    31.7
    %
    
    
    28.5
    %Depreciation and amortization
    
    
    3.3
    %
    
    
    3.2
    %
    
    
    3.7
    %
    
    
    3.8
    %Loss from operations
    
    
    (52.7
    )%
    
    
    (48.5
    )%
    
    
    (58.0
    )%
    
    
    (60.2
    )%Other income
    
    
    0.1
    %
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.0
    %Other expense
    
    
    (0.2
    )%
    
    
    (0.1
    )%
    
    
    (0.2
    )%
    
    
    (0.1
    )%Foreign
exchange gain (loss)
    
    
    (24.5
    )%
    
    
    12.1
    %
    
    
    (14.4
    )%
    
    
    8.0
    %Interest expense, net
    
    
    (7.1
    )%
    
    
    (3.5
    )%
    
    
    (7.8
    )%
    
    
    (5.5
    )%Current credit on derivative financial instrument
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    1.3
    %Income tax benefit
    
    
    0.5
    %
    
    
    0.4
    %
    
    
    0.6
    %
    
    
    0.5
    %Minority interests
    
    
    1.4
    %
    
    
    2.8
    %
    
    
    1.3
    %
    
    
    3.4
    %Net loss
    
    
    (82.5
    )%
    
    
    (36.8
    )%
    
    
    (78.3
    )%
    
    
    (52.6
    )%
 Three-months Ended September 30, 2008 Compared With Three-months Ended September 30, 2007
 Net sales.
 27




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##### Table of Contents



Increase (decrease) in
    
    
    Percentagecase sales
    
    

increase (decrease)Overall
    
    
    U.S.
    
    
    Overall
    
    
    U.S.Vodka
    
    
    (23,409
    )
    
    
    (6,181
    )
    
    
    (42.5
    )%
    
    
    (23.7
    )%Rum
    
    
    7,636
    
    
    
    2,220
    
    
    
    39.9
    %
    
    
    12.9
    %Liqueurs
    
    
    59
    
    
    
    698
    
    
    
    0.3
    %
    
    
    4.6
    %Whiskey
    
    
    2,483
    
    
    
    4
    
    
    
    35.6
    %
    
    
    0.2
    %Total
    
    
    (13,231
    )
    
    
    (3,259
    )
    
    
    (13.5
    )%
    
    
    (5.4
    )%
 Gross profit.
  Selling expense.
  General and administrative expense.
 28




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##### Table of Contents



Depreciation and amortization.
 Loss from operations
 Other income(expense),net.
    Net loss.
 Six-months Ended September 30, 2008 Compared With Six-months Ended September 30, 2007
 Net sales.
  29




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##### Table of Contents



Increase (decrease) in
    
    
    Percentagecase sales
    
    

increase (decrease)Overall
    
    
    U.S.
    
    
    Overall
    
    
    U.S.Vodka
    
    
    (33,864
    )
    
    
    (6,784
    )
    
    
    (37.2
    )%
    
    
    (15.2
    )%Rum
    
    
    7,591
    
    
    
    4,471
    
    
    
    18.1
    %
    
    
    13.9
    %Liqueurs
    
    
    2,291
    
    
    
    3,332
    
    
    
    8.3
    %
    
    
    13.8
    %Whiskey
    
    
    3,891
    
    
    
    (63
    )
    
    
    32.5
    %
    
    
    (1.3
    )%Total
    
    
    (20,091
    )
    
    
    956
    
    
    
    (11.6
    )%
    
    
    0.9
    %
 Gross profit.
  Selling expense.
 General and administrative expense.
 Depreciation and amortization.
 Loss from operations
 30




---



##### Table of Contents



Other income(expense),net.
    Net loss.
 Liquidity and capital resources
     31




---



##### Table of Contents




    
    an increase in working capital requirements to finance higher levels of inventories
and accounts receivable;
    
    increases in advertising, public relations and sales promotions for existing and new
brands;
    
    acquisition of additional spirits brands; and
    
    expansion into new markets and within existing markets in the United States and
internationally.
  Cash flows
  Six-months endedSeptember 30,2008
    
    
    2007Net cash provided by (used in):Operating activities
    
    
    ($4,644
    )
    
    
    ($14,557
    )Investing activities
    
    
    4,066
    
    
    
    (2,365
    )Financing activities
    
    
    (95
    )
    
    
    19,462Effects of foreign currency translation
    
    
    (26
    )
    
    
    Net (decrease)increase in cash and cash equivalents
    
    
    ($699
    )
    
    $
    2,540
 Operating activities.
  32




---



##### Table of Contents



Investing activities.
 Financing activities
 Recent accounting pronouncements
     33




---



##### Table of Contents



Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
   
 
 Item 4T.
    
    Controls And Procedures
   34




---



##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
   
 Item 1A.
    
    Risk Factors
  
 Item 5.
    
    Other Information
 th
 Executive
Officer
    
    Retention PaymentJohn Glover
    
    $
    75,000Alfred Small
    
    $
    52,500John Soden
    
    
    72,100T. Kelley Spillane
    
    $
    75,000Seth Weinberg
    
    $
    75,000
   35




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##### Table of Contents



Item 6.
    
    Exhibits
 Exhibit Number
    
    Description10.1
    
    
    Form of Retention Agreement31.1
    
    
    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.
 36




---



##### Table of Contents



SIGNATURES
  CASTLE BRANDS INC.By:

/s/
Alfred J. SmallAlfred J. SmallChief Financial Officer
(Principal Financial Officer)  37




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description10.1
    
    
    Form of Retention Agreement31.1
    
    
    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.
 38