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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2009
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 001-32849
 CASTLE BRANDS INC.
  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)
 Registrants telephone number, including area code: (646) 356-0200
 þ o
 o o
  o Large accelerated filer
    
    o Accelerated filero Non-accelerated filer (Do not check if a smaller reporting company)
    
    þ Smaller reporting company
 o þ




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TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements:Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and March 31, 2009
    
    
    3Condensed Consolidated Statements of Operations for the Three-Month Periods ended June 30, 2009 and 2008 (unaudited)
    
    
    4Condensed Consolidated Statement of Changes in Equity for the Three Months ended June 30, 2009 (unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the Three-Month Periods ended June 30, 2009 and 2008 (unaudited)
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 4.
    
    Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    22Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 6.
    
    Exhibits
    
    
    22EX-31.1EX-31.2EX-32.1
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PART I. FINANCIAL INFORMATION
 
 Item 1.
    
    Condensed Consolidated Financial Statements
 
 CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 June 30, 2009
    
    
    March 31, 2009(Unaudited)ASSETS:Current AssetsCash and cash equivalents
    
    $
    539,024
    
    
    $
    4,011,777Short-term investments
    
    
    3,686,419
    
    
    
    3,661,437Accounts receivable  net of allowance for doubtful accounts of $576,589 and $529,256
    
    
    6,218,039
    
    
    
    6,857,267Due from affiliates
    
    
    80,830
    
    
    
    74,295Inventories net of allowance for obsolete and slow moving inventory of $953,473
and $1,355,159
    
    
    8,530,706
    
    
    
    8,169,667Prepaid expenses and other current assets
    
    
    986,626
    
    
    
    719,700Total Current Assets
    
    
    20,041,644
    
    
    
    23,494,143Equipment net
    
    
    575,532
    
    
    
    605,065Other AssetsIntangible assets  net of accumulated amortization of $3,026,690 and $2,738,718
    
    
    11,266,544
    
    
    
    11,431,988Restricted cash
    
    
    719,443
    
    
    
    676,403Other assets
    
    
    147,659
    
    
    
    147,659Total Assets
    
    $
    32,750,822
    
    
    $
    36,355,258LIABILITIES AND EQUITY:Current LiabilitiesCurrent maturities of notes payable and capital leases
    
    $
    
    
    
    $
    119,050Accounts payable
    
    
    3,627,049
    
    
    
    3,791,096Accrued expenses
    
    
    1,234,175
    
    
    
    2,511,833Due to stockholders and affiliates
    
    
    1,512,116
    
    
    
    1,290,501Total Current Liabilities
    
    
    6,373,340
    
    
    
    7,712,480Long-Term LiabilitiesNote payable
    
    
    
    
    
    
    300,000Deferred tax liability
    
    
    2,222,026
    
    
    
    2,259,064Total Liabilities
    
    
    8,595,366
    
    
    
    10,271,544Commitments and Contingencies (Note 9)
    
    
    
    
    
    
    Preferred stock, $.01 par value, 25,000,000 shares authorized, none outstanding
    
    
    
    
    
    
    EquityCommon 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
    
    
    
    1,016,123Additional paid-in capital
    
    
    133,659,453
    
    
    
    133,576,957Treasury 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
    )
    
    
    642,907Total common stockholders equity
    
    
    24,120,529
    
    
    
    26,001,677Noncontrolling interests
    
    
    34,927
    
    
    
    82,037Total equity
    
    
    24,155,456
    
    
    
    26,083,714Total Liabilities and Equity
    
    $
    32,750,822
    
    
    $
    36,355,258
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CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
 Three months ended June 30,2009
    
    
    2008Sales, net*
    
    $
    5,854,226
    
    
    $
    5,891,395Cost of sales*
    
    
    3,545,220
    
    
    
    3,952,685Gross profit
    
    
    2,309,006
    
    
    
    1,938,710Selling expense
    
    
    2,679,490
    
    
    
    3,429,344General and administrative expense
    
    
    1,374,084
    
    
    
    2,071,973Depreciation and amortization
    
    
    219,372
    
    
    
    243,507Loss from operations
    
    
    (1,963,940
    )
    
    
    (3,806,114
    )Other income
    
    
    2
    
    
    
    15,573Other 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
    
    
    
    37,038Net loss
    
    
    (606,103
    )
    
    
    (4,369,489
    )Net loss attributable to noncontrolling interests
    
    
    47,110
    
    
    
    67,308Net 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




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CASTLE BRANDS INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Equity
(Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    Treasury
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Noncontrolling
    
    
    TotalShares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Deficiency
    
    
    Income (Loss)
    
    
    Interests
    
    
    EquityBALANCE, MARCH 31,
2009
    
    
    101,612,349
    
    
    $
    1,016,123
    
    
    $
    133,576,957
    
    
    $
    
    
    
    $
    (109,234,310
    )
    
    $
    642,907
    
    
    $
    82,037
    
    
    $
    26,083,714Comprehensive lossNet 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,000Repurchase of
common stock now
held as treasury
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (180,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (180,000
    )Stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    40,496
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,496BALANCE, JUNE 30,
2009
    
    
    101,812,349
    
    
    $
    1,018,123
    
    
    $
    133,659,453
    
    
    $
    (180,000
    )
    
    $
    (109,793,303
    )
    
    $
    (583,744
    )
    
    $
    34,927
    
    
    $
    24,155,456
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CASTLE BRANDS INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Three months ended June 30,2009
    
    
    2008CASH 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
    
    
    
    243,507Provision for doubtful accounts
    
    
    19,189
    
    
    
    21,136Amortization of deferred financing costs
    
    
    
    
    
    
    98,411Deferred tax benefit
    
    
    (37,038
    )
    
    
    (37,038
    )Effect of changes in foreign exchange
    
    
    (1,332,532
    )
    
    
    19,136Stock-based compensation expense
    
    
    40,496
    
    
    
    224,084Reversal of provision for obsolete inventories
    
    
    (415,072
    )
    
    
    (84,290
    )Non-cash interest charge
    
    
    
    
    
    
    73,562Gain on exchange of 3% note payable
    
    
    (270,275
    )
    
    
    Changes in operations, assets and liabilities:Accounts receivable
    
    
    715,443
    
    
    
    1,412,119Due 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
    )
    
    
    341,260Due to related parties
    
    
    204,891
    
    
    
    261,003Total adjustments
    
    
    (2,536,393
    )
    
    
    1,111,992NET 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
    )
    
    
    2,178,137NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
    
    
    (29,057
    )
    
    
    2,107,924CASH FLOWS FROM FINANCING ACTIVITIES:Notes payable  net
    
    
    (121,775
    )
    
    
    378,129Payments 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
    )
    
    
    377,183EFFECTS 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
    
    
    
    1,552,385CASH AND CASH EQUIVALENTS  ENDING
    
    $
    539,024
    
    
    $
    772,523SUPPLEMENTAL 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
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CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  Unaudited
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
  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.
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G.
    
    Foreign currency  The functional currency for the Companys foreign
operations is the Euro in Ireland and the British Pound in the United
Kingdom. Under 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 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 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 Companys 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 Companys 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 instruments 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 Boards
(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 Companys 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.
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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 FASBs Emerging Issues Task Force reached a consensus regarding EITF Issue No. 07-5,
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5).
EITF 07-5 outlines a two-step approach to evaluate the instruments contingent exercise provisions,
if any, and to evaluate the instruments settlement provisions when determining whether an equity-linked
financial instrument (or embedded feature) is indexed to an entitys 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 Companys
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 Assetsan 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 transferors 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
enterprises 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 Principlesa 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




---



##### Table of Contents



NOTE 2  BASIC AND DILUTED NET LOSS PER COMMON SHARE
   Three months ended June 30,2009
    
    
    2008Stock options
    
    
    3,124,900
    
    
    
    1,617,625Warrants to purchase stock
    
    
    2,081,814
    
    
    
    2,305,432Convertible debentures
    
    
    
    
    
    
    1,192,380Total
    
    
    5,206,714
    
    
    
    5,115,437
 NOTE 3  SHORT TERM INVESTMENTS
  GrossAdjusted
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gain (Loss)
    
    
    Fair ValueJune 30, 2009Money market accounts
    
    $
    2,001,568
    
    
    $
    
    
    
    $
    2,001,568Certificates of deposit
    
    
    1,684,851
    
    
    
    
    
    
    
    1,684,851Total
    
    $
    3,686,419
    
    
    $
    
    
    
    $
    3,686,419
 GrossAdjusted
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gain (Loss)
    
    
    Fair ValueMarch 31, 2009Money market accounts
    
    $
    1,001,320
    
    
    $
    
    
    
    $
    1,001,320Certificates of deposit
    
    
    2,660,117
    
    
    
    
    
    
    
    2,660,117Total
    
    $
    3,661,437
    
    
    $
    
    
    
    $
    3,661,437
  NOTE 4  INVENTORIES
 June 30,
    
    
    March 31,2009
    
    
    2009Raw materials
    
    $
    2,308,629
    
    
    $
    2,048,398Finished goods
    
    
    6,222,077
    
    
    
    6,121,269Total
    
    $
    8,530,706
    
    
    $
    8,169,667
  10




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##### Table of Contents



NOTE 5  RESTRICTED CASH
  .
 NOTE 6  NOTES PAYABLE AND CAPITAL LEASE
 June 30,
    
    
    March 31,2009
    
    
    2009Notes payable consist of the following:Revolving credit facilities
    
    $
    
    
    
    $
    118,122Note payable (A)
    
    
    
    
    
    
    300,000
    
    
    
    418,122Capital leases
    
    
    
    
    
    
    928Total
    
    $
    
    
    
    $
    419,050
  NOTE 7  EQUITY
 Treasury stock
 NOTE 8  STOCK-BASED COMPENSATION
 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 Companys 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




---



##### Table of Contents



Three months ended June 30,2009
    
    
    2008Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of period
    
    
    3,555,975
    
    
    $
    2.57
    
    
    
    1,617,625
    
    
    $
    6.37Granted
    
    
    325,000
    
    
    
    0.35
    
    
    
    
    
    
    
    Forfeited
    
    
    (756,075
    )
    
    
    5.31
    
    
    
    
    
    
    
    Outstanding at end of period
    
    
    3,124,900
    
    
    $
    1.68
    
    
    
    1,617,625
    
    
    $
    6.37Exercisable at end of period
    
    
    1,069,900
    
    
    $
    4.27
    
    
    
    922,250
    
    
    $
    7.10Weighted average fair value of grants
during period
    
    
    
    
    
    $
    0.09
    
    
    
    
    
    
    $
    
  Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    
    Average
    
    
    AggregateRange of
    
    
    
    
    
    Life in
    
    
    
    
    
    
    Exercise
    
    
    IntrinsicExercise 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
 Restricted Stock Grants
   June 30, 2009Risk-free interest rate
    
    
    3.08
    %Expected option life in years
    
    
    6.25Expected stock price volatility
    
    
    65
    %Expected dividend yield
    
    
    0
    %
 12




---



##### Table of Contents



B.
    
    Warrants  The Company has entered into various warrant agreements.The following is a summary of the Companys outstanding warrants for the periods presented:
 WeightedAverageExercisePriceWarrants
    
    
    Per WarrantWarrants outstanding and exercisable, March 31, 2009
    
    
    2,198,314
    
    
    $
    6.88Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Expired
    
    
    (116,500
    )
    
    
    8.00Warrants outstanding and exercisable, June 30, 2009
    
    
    2,081,814
    
    
    $
    6.82
 NOTE 9  COMMITMENTS AND CONTINGENCIES
 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.
 NOTE 10  CONCENTRATIONS
 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 Companys 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




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##### Table of Contents



NOTE 11  GEOGRAPHIC INFORMATION
   For the three months ended June 30,2009
    
    
    2008Consolidated 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, 2009Consolidated 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. NOTE 12  SUBSEQUENT EVENTS
  14




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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
 ® ® ® ® ® TM ® ® TM
  
    
    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.
 Cost Containment
  
    
    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




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##### Table of Contents



Currency Translation
   
  Critical Accounting Policies
  Financial performance overview
  Three months endedJune 30,2009
    
    
    2008CasesUnited States
    
    
    51,428
    
    
    
    48,937International
    
    
    10,241
    
    
    
    18,372Total
    
    
    61,669
    
    
    
    67,309Vodka
    
    
    22,535
    
    
    
    25,541Rum
    
    
    23,008
    
    
    
    22,726Liqueurs
    
    
    9,242
    
    
    
    12,649Whiskey
    
    
    6,258
    
    
    
    6,393Tequila
    
    
    626
    
    
    
    Total
    
    
    61,669
    
    
    
    67,309Percentage of CasesUnited 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




---



##### Table of Contents



Results of operations
  Three months endedJune 30,2009
    
    
    2008Sales, 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)
    %
 Three months ended June 30, 2009 compared with three months ended June 30, 2008
 Net sales.
  Increase/(decrease)
    
    
    Percentagein 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




---



##### Table of Contents



Gross profit.
 Selling expense.
 General and administrative expense.
 Depreciation and amortization.
 Loss from operations
 Foreign exchange gain (loss).
 Interest income (expense), net.
 Gain on exchange of 3% note payable.
 18




---



##### Table of Contents



Net loss attributable to common stockholders.
 Net loss attributable to noncontrolling interests.
 Liquidity and capital resources
      
    
    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




---



##### Table of Contents



Cash flows
  Three months endedJune 30,2009
    
    
    2008(in thousands)Net cash provided by (used in):Operating activities
    
    $
    (3,142
    )
    
    $
    (3,258
    )Investing activities
    
    
    (29
    )
    
    
    2,108Financing activities
    
    
    (303
    )
    
    
    377Effect of foreign currency translation
    
    
    1
    
    
    
    (7
    )Net decrease in cash and cash equivalents
    
    $
    (3,473
    )
    
    $
    (780
    )
 Operating activities.
    Investing activities.
 Financing activities.
  20




---



##### Table of Contents



Recent accounting standards issued and adopted.
 Accounting standards
adopted Recent accounting pronouncements Notes to Condensed
Consolidated Financial Statements
 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 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




---



##### Table of Contents



Item 4.
    
    Controls And Procedures
   Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
 Litigation and Arbitration
   
 Item 2.
    
    Unregistered Sales of Equity Securities and Use Of Proceeds
   Maximum Number (orTotal Number of
    
    
    Approximate DollarShares Purchased as
    
    
    Value) of SharesPart of Publicly
    
    
    that May Yet BeTotal Number of
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    Purchased Under thePeriod
    
    
    Shares Purchased
    
    
    per Share
    
    
    Programs
    
    
    Plans or ProgramsApril 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
    
    Description31.1*
    
    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




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##### Table of Contents



SIGNATURES
  CASTLE BRANDS INC.By:
    /s/ Alfred J. SmallAlfred J. SmallChief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)  23