##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended December 31, 2008
 Commission File Number 001-32849
 CASTLE BRANDS INC.
  Delaware
    
    41-2103550(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)122 East 42ndStreet, Suite 4700
    
    10168New York, New York
    
    (Zip Code)(Address of principal executive offices)
 Registrants telephone number, including area code: (646) 356-0200
 þ o
  o Large accelerated filer
    
    o Accelerated filer
    
    o Non-accelerated filer
    
    þ Smaller reporting company(Do not check if a 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 December 31, 2008 (unaudited) and March 31, 2008
    
    
    3Condensed Consolidated Statements of Operations for the Three-Month and Nine-Month Periods
ended December 31, 2008 and 2007 (unaudited)
    
    
    4Condensed Consolidated Statements of Changes in Stockholders Equity for the Nine-Months
ended December 31, 2008 (unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods ended December
31, 2008 and 2007 (unaudited)
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 4T. Controls and Procedures
    
    
    29PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 6. Exhibits
    
    
    30EX-10.5EX-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
 December 31, 2008
    
    
    March 31, 2008(Unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    6,227,750
    
    
    $
    1,552,385Short-term investments
    
    
    3,651,506
    
    
    
    4,231,644Accounts
receivable  net of allowance for doubtful accounts of $246,342 and $230,967
    
    
    7,555,111
    
    
    
    7,544,445Due from affiliates
    
    
    73,997
    
    
    
    61,596Inventories
    
    
    8,090,330
    
    
    
    8,535,993Prepaid expenses and other current assets
    
    
    786,523
    
    
    
    811,711TOTAL CURRENT ASSETS
    
    
    26,385,217
    
    
    
    22,737,774EQUIPMENT net
    
    
    643,254
    
    
    
    753,317OTHER ASSETSIntangible assets  net of accumulated amortization of $3,050,762 and $2,517,199
    
    
    13,057,570
    
    
    
    13,591,191Goodwill
    
    
    3,745,287
    
    
    
    3,745,287Restricted cash
    
    
    721,973
    
    
    
    799,864Other assets
    
    
    147,659
    
    
    
    509,493TOTAL ASSETS
    
    $
    44,700,960
    
    
    $
    42,136,926LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent maturities of notes payable and capital lease
    
    $
    2,044
    
    
    $
    99,784Accounts payable
    
    
    4,082,848
    
    
    
    2,818,910Accrued expenses
    
    
    2,549,251
    
    
    
    2,142,845Due to stockholders and affiliates
    
    
    1,176,966
    
    
    
    919,758TOTAL CURRENT LIABILITIES
    
    
    7,811,109
    
    
    
    5,981,297LONG-TERM LIABILITIESSenior notes payable
    
    
    
    
    
    
    9,649,109Notes payable and capital lease, less current maturities
    
    
    300,000
    
    
    
    9,001,335Deferred tax liability
    
    
    2,296,102
    
    
    
    2,407,216TOTAL LIABILITIES
    
    
    10,407,211
    
    
    
    27,038,957COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    MINORITY INTERESTS
    
    
    143,706
    
    
    
    309,810STOCKHOLDERS EQUITYPreferred stock, $.01 par value, 5,000,000 shares authorized, 2,391,311 and
none issued and outstanding at December 31, and March 31, 2008, respectively
    
    
    23,913
    
    
    
    Common stock, $.01 par value, 45,000,000 shares authorized; 15,629,776 shares
issued and outstanding at December 31, and March 31, 2008, respectively
    
    
    156,298
    
    
    
    156,298Additional paid-in capital
    
    
    134,478,704
    
    
    
    104,806,044Accumulated deficiency
    
    
    (100,220,195
    )
    
    
    (87,546,011
    )Accumulated other comprehensive loss
    
    
    (288,677
    )
    
    
    (2,628,172
    )TOTAL STOCKHOLDERS EQUITY
    
    
    34,150,043
    
    
    
    14,788,159TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    44,700,960
    
    
    $
    42,136,926
  3




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CASTLE BRANDS INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Operations
 (Unaudited)
 Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Sales, net*
    
    $
    6,912,185
    
    
    $
    6,401,749
    
    
    $
    20,234,680
    
    
    $
    20,946,786Cost of sales*
    
    
    4,754,560
    
    
    
    6,323,052
    
    
    
    13,793,173
    
    
    
    16,264,311Gross profit
    
    
    2,157,625
    
    
    
    78,697
    
    
    
    6,441,507
    
    
    
    4,682,475Selling expense
    
    
    3,960,445
    
    
    
    5,011,180
    
    
    
    11,263,894
    
    
    
    13,685,410General and administrative expense
    
    
    2,952,799
    
    
    
    2,072,462
    
    
    
    7,171,196
    
    
    
    6,224,491Depreciation and amortization
    
    
    240,020
    
    
    
    236,150
    
    
    
    727,879
    
    
    
    791,851Loss from operations
    
    
    (4,995,639
    )
    
    
    (7,241,095
    )
    
    
    (12,721,462
    )
    
    
    (16,019,277
    )Other income
    
    
    31,590
    
    
    
    
    
    
    
    56,974
    
    
    
    Other expense
    
    
    (9,841
    )
    
    
    (19,255
    )
    
    
    (38,053
    )
    
    
    (40,719
    )Foreign
exchange (loss) gain
    
    
    (940,981
    )
    
    
    144,454
    
    
    
    (2,861,969
    )
    
    
    1,304,389Interest expense, net
    
    
    (526,363
    )
    
    
    (392,919
    )
    
    
    (1,560,607
    )
    
    
    (1,193,733
    )Gain on
exchange of 6% convertible
subordinated notes
    
    
    4,173,716
    
    
    
    
    
    
    
    4,173,716
    
    
    
    Current credit on derivative financial instrument
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189,397Income tax benefit
    
    
    37,038
    
    
    
    37,038
    
    
    
    111,114
    
    
    
    111,114Minority interests
    
    
    (8,062
    )
    
    
    613,877
    
    
    
    166,103
    
    
    
    1,105,267Net loss
    
    $
    (2,238,542
    )
    
    $
    (6,857,900
    )
    
    $
    (12,674,184
    )
    
    $
    (14,543,562
    )Net loss per common share, basic and diluted
    
    $
    (0.14
    )
    
    $
    (0.44
    )
    
    $
    (0.81
    )
    
    $
    (0.96
    )Weighted average shares used in computation,
basic and diluted
    
    
    15,629,776
    
    
    
    15,629,776
    
    
    
    15,629,776
    
    
    
    15,141,981
 
 *
    
    Sales, net and Cost of sales include excise taxes of $1,068,649 and
$896,035 for the three-months ended December 31, 2008 and 2007,
respectively, and $3,173,839 and $5,197,091 for the nine-months ended
December 31, 2008 and 2007, respectively.  4




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CASTLE BRANDS INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Changes in Stockholders Equity
 (Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalPaid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersPreferred Stock
    
    
    Common Stock
    
    
    Capital
    
    
    Deficiency
    
    
    Loss
    
    
    EquityShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBALANCE, MARCH 31,
2008
    
    
    
    
    
    $
    
    
    
    
    15,629,776
    
    
    $
    156,298
    
    
    $
    104,806,044
    
    
    $
    (87,546,011
    )
    
    $
    (2,628,172
    )
    
    $
    14,788,159Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,674,184
    )
    
    
    
    
    
    
    (12,674,184
    )Foreign
currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,339,495
    
    
    
    2,339,495Total comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,334,689
    )Issuance of Series
A
Preferred Stock,
net of issuance
costs
    
    
    1,200,000
    
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    13,167,250
    
    
    
    
    
    
    
    
    
    
    
    13,179,250Exchange of 9%
senior notes,
including accrued
interest
    
    
    801,608
    
    
    
    8,016
    
    
    
    
    
    
    
    
    
    
    
    10,012,084
    
    
    
    
    
    
    
    
    
    
    
    10,020,100Exchange of 6%
convertible
subordinated notes,
including accrued
interest (net of
gain on conversion
of $4,173,716)
    
    
    389,703
    
    
    
    3,897
    
    
    
    
    
    
    
    
    
    
    
    4,867,387
    
    
    
    
    
    
    
    
    
    
    
    4,871,284Stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,625,939
    
    
    
    
    
    
    
    
    
    
    
    1,625,939BALANCE, DECEMBER
31, 2008
    
    
    2,391,311
    
    
    $
    23,913
    
    
    
    15,629,776
    
    
    $
    156,298
    
    
    $
    134,478,704
    
    
    $
    (100,220,195
    )
    
    $
    (288,677
    )
    
    $
    34,150,043
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CASTLE BRANDS INC. and SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 Nine months ended December 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (12,674,184
    )
    
    $
    (14,543,562
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    727,879
    
    
    
    791,851Provision for doubtful accounts
    
    
    61,222
    
    
    
    186,752Minority interest in net loss of consolidated subsidiary
    
    
    (166,103
    )
    
    
    (1,105,267
    )Loss on disposal of equipment
    
    
    
    
    
    
    1,068Amortization of deferred financing costs
    
    
    474,493
    
    
    
    484,369Current credit on derivative financial instrument
    
    
    
    
    
    
    (189,397
    )Income tax benefit
    
    
    (111,114
    )
    
    
    (111,114
    )Effect of changes in foreign exchange
    
    
    2,651,764
    
    
    
    (1,304,813
    )Stock-based compensation expense
    
    
    1,625,939
    
    
    
    807,268(Reversal of provision) provision for obsolete inventories
    
    
    (252,241
    )
    
    
    1,681,293Non-cash interest charge
    
    
    350,981
    
    
    
    Gain on exchange of 6% convertible subordinated notes
    
    
    (4,173,716
    )
    
    
    Changes in operations, assets and liabilities:Increase in accounts receivable
    
    
    (335,890
    )
    
    
    (1,586,986
    )Increase in due from affiliates
    
    
    (13,719
    )
    
    
    Decrease (increase) in inventory
    
    
    479,948
    
    
    
    (883,438
    )Decrease in prepaid expenses and supplies
    
    
    14,905
    
    
    
    62,239Increase in other assets
    
    
    
    
    
    
    (25,882
    )Increase (decrease) in accounts payable and accrued expenses
    
    
    2,342,323
    
    
    
    (1,769,774
    )Increase (decrease) in due to related parties
    
    
    325,535
    
    
    
    (219,366
    )Total adjustments
    
    
    4,002,206
    
    
    
    (3,181,197
    )NET CASH USED IN OPERATING ACTIVITIES
    
    
    (8,671,978
    )
    
    
    (17,724,759
    )CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of equipment
    
    
    (111,881
    )
    
    
    (236,614
    )Acquisition of intangible assets
    
    
    (21,536
    )
    
    
    (20,219
    )Short-term investments  purchased
    
    
    (3,650,000
    )
    
    
    (10,000,000
    )Short-term investments  sold
    
    
    4,230,138
    
    
    
    8,741,090Increase in other assets
    
    
    (112,659
    )
    
    
    NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    
    
    334,062
    
    
    
    (1,515,743
    )CASH FLOWS FROM FINANCING ACTIVITIESNotes payable  net
    
    
    (88,784
    )
    
    
    (433,266
    )Payments of obligations under capital lease
    
    
    (3,164
    )
    
    
    (2,745
    )Increase in restricted cash
    
    
    (8,613
    )
    
    
    (179,800
    )Issuance of common stock
    
    
    
    
    
    
    21,014,609Payments for costs of common stock issuance
    
    
    
    
    
    
    (1,396,123
    )Proceeds from promissory note
    
    
    2,000,000
    
    
    
    Issuance of Series A Preferred Stock
    
    
    13,000,000
    
    
    
    Payments for costs of Series A Preferred Stock issuance
    
    
    (1,820,750
    )
    
    
    NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    13,078,689
    
    
    
    19,002,675EFFECTS OF FOREIGN CURRENCY TRANSLATION
    
    
    (65,408
    )
    
    
    23,933NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    4,675,365
    
    
    
    (213,894
    )CASH AND CASH EQUIVALENTS  BEGINNING OF PERIOD
    
    
    1,552,385
    
    
    
    1,004,957CASH AND CASH EQUIVALENTS  END OF PERIOD
    
    $
    6,227,750
    
    
    $
    791,063
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CASTLE BRANDS INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
 Nine months ended December 31,2008
    
    
    2007SUPPLEMENTAL DISCLOSURESExchange of 9% senior notes, including all accrued interest, by issuance of
Series A Preferred Stock
    
    $
    10,020,100
    
    
    $
    Exchange of 6% convertible subordinated notes, including all accrued interest,
by issuance of Series A Preferred Stock
    
    $
    9,045,000
    
    
    $
    Conversion of promissory note
    
    $
    2,002,778
    
    
    $
    Interest paid
    
    $
    1,307,163
    
    
    $
    730,254
  7




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CASTLE BRANDS INC. AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
 Unaudited
 NOTE 1  GOING CONCERN
    NOTE 2  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, 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
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CASTLE BRANDS INC. AND SUBSIDIARIES
 Notes to Condensed
Consolidated Financial Statements  (Continued)
 Unaudited
 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 procured 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 December 31, 2008 and March 31, 2008, goodwill and
other indefinite lived intangible assets that arose from acquisitions
were $3,745,287. 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 of 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 in the value of the comparable companies.D.
    
    Impairment of long-lived assets  In accordance with 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 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 nine-months ended December 31,
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
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CASTLE BRANDS INC. AND SUBSIDIARIES
 Notes to Condensed
Consolidated Financial Statements  (Continued)
 Unaudited
 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. 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, 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 FASB interpretation No. 48
(FIN 48) Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109.The Company has recognized
no adjustment 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 December 31, 2008.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 pronouncementsIn June 2008, the Financial Accounting Standards Boards (FASB) 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. EITF 07-5 is
effective for fiscal years beginning after December 15, 2008 and must be applied to outstanding
instruments as of the beginning of the fiscal year of adoption as a cumulative-effect adjustment
to the opening balance of retained earnings. Early adoption is not permitted. The Company does
not anticipate the adoption of EITF 07-5 will have a material impact on its results of
operations, cash flows or financial condition.On May 9, 2008, the FASB issued FASB Staff Position No. APB 14-1, Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)
(FSP No. APB 14-1). The Company does not anticipate that the adoption of FSP No. APB 14-1 will
have a material impact on its results of operations, cash flows or financial condition.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 GAAP. 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
operations, cash flows or financial condition.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 No. (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
 10




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##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
 Notes to Condensed
Consolidated Financial Statements  (Continued)
 Unaudited
 adoption of this pronouncement to have a
material impact on its financial position or results of operations.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 has evaluated the impact of SFAS 141(R) and
SFAS 160, and the adoption of these pronouncements will have a
material impact on its
financial position and results of operations.The table below sets forth the preliminary estimated impact of the retrospective application of the adoption of SFAS 141(R)
and SFAS 160 on April 1, 2009 on net loss per common share for
the fiscal year ending March 31, 2009:
 Three months
    
    
    Nine monthsended
    
    
    endedDecember 31,
    
    
    December 31,2008
    
    
    2008Net loss per common share  as reported
    
    $
    (0.14
    )
    
    $
    (0.81
    )Effect of adoption of SFAS 141(R) and SFAS 160
    
    
    0.00
    
    
    
    (0.01
    )Net loss per common share  as adjusted
    
    $
    (0.14
    )
    
    $
    (0.82
    )
 I.
    
    Capital and Credit Market Crisis  The recent unprecedented volatility in capital and credit
markets may create additional risks in the upcoming months and possibly years and the Company
will continue to perform assessments to determine the impact, if any, on its condensed
consolidated financial statements.
 NOTE 3  BASIC AND DILUTED NET LOSS PER COMMON SHARE
   Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Series A Preferred Stock
    
    
    85,403,988
    
    
    
    
    
    
    
    85,403,988
    
    
    
    Stock options
    
    
    1,994,825
    
    
    
    1,557,625
    
    
    
    1,994,825
    
    
    
    1,557,625Stock warrants
    
    
    2,198,314
    
    
    
    2,305,432
    
    
    
    2,198,314
    
    
    
    2,305,432Convertible debentures
    
    
    1,192,380
    
    
    
    1,192,380
    
    
    
    1,192,380
    
    
    
    1,192,380Total
    
    
    90,789,507
    
    
    
    5,055,437
    
    
    
    90,789,507
    
    
    
    5,055,437
 11




---



##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
 Notes to Condensed
Consolidated Financial Statements  (Continued)
 Unaudited
 NOTE 4 INVESTMENTS
  December 31,
    
    
    March 31,2008
    
    
    2008Money market accounts
    
    $
    990,896
    
    
    $
    2,041,810Mutual funds
    
    
    
    
    
    
    2,189,834Certificates of deposit
    
    
    2,660,610
    
    
    
    Total
    
    $
    3,651,506
    
    
    $
    4,231,644
  NOTE 5  INVENTORIES
 December 31,
    
    
    March 31,2008
    
    
    2008Raw materials
    
    $
    1,954,545
    
    
    $
    1,766,892Finished goods
    
    
    6,135,785
    
    
    
    6,769,101Total
    
    $
    8,090,330
    
    
    $
    8,535,993
   NOTE 6  RESTRICTED CASH
 
 NOTE 7  OVERDRAFT ACCOUNTS
 
 NOTE 8  NOTES PAYABLE AND CAPITAL LEASE
 December 31,
    
    
    March 31,2008
    
    
    2008Notes payable consist of the following:Revolving credit facility
    
    $
    
    
    
    $
    95,911Senior secured notes
    
    
    300,000
    
    
    
    9,649,109Convertible subordinated notes
    
    
    
    
    
    
    9,000,000Subtotal
    
    
    300,000
    
    
    
    18,745,020Capital lease
    
    
    2,044
    
    
    
    5,208Total
    
    $
    302,044
    
    
    $
    18,750,228
  NOTE 9  PREFERRED STOCK
 Preferred stock issuance
 12




---



##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
 Notes to Condensed
Consolidated Financial Statements  (Continued)
 Unaudited
   Conversion and/or Amendment of Notes
  $2,000,000 Promissory Note and Termination of Credit Agreement
 NOTE 10  STOCK OPTIONS AND WARRANTS
 Stock Options
  13




---



##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
 Notes to Condensed
Consolidated Financial Statements  (Continued)
 Unaudited
   Nine months Ended December 31,2008
    
    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
    
    
    
    298,500
    
    
    
    3.71Forfeited
    
    
    (178,500
    )
    
    
    6.56
    
    
    
    (35,000
    )
    
    
    6.51Outstanding at end of period
    
    
    1,994,825
    
    
    
    4.66
    
    
    
    1,557,625
    
    
    
    6.54Options exercisable at period end
    
    
    1,994,825
    
    
    
    4.66
    
    
    
    698,700
    
    
    
    7.10Weighted average fair value of options
granted during the period
    
    
    
    
    
    $
    2.20
    
    
    
    
    
    
    $
    1.27
   Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    
    Average
    
    
    AggregateLife in
    
    
    
    
    
    
    Exercise
    
    
    IntrinsicRange of Exercise Prices
    
    Shares
    
    
    Years
    
    
    Shares
    
    
    Price
    
    
    value$0.01  $1.00
    
    
    499,700
    
    
    
    9.44
    
    
    
    499,700
    
    
    $
    0.21
    
    
    $
    4,997$1.01  $2.00
    
    
    115,500
    
    
    
    9.15
    
    
    
    115,500
    
    
    
    1.53
    
    
    
    $3.01  $4.00
    
    
    250,000
    
    
    
    8.87
    
    
    
    250,000
    
    
    
    3.09
    
    
    
    $5.01  $6.00
    
    
    388,500
    
    
    
    5.29
    
    
    
    388,500
    
    
    
    5.98
    
    
    
    $6.01  $7.00
    
    
    59,500
    
    
    
    8.40
    
    
    
    59,500
    
    
    
    6.77
    
    
    
    $7.01  $8.00
    
    
    481,000
    
    
    
    6.71
    
    
    
    481,000
    
    
    
    7.72
    
    
    
    $8.01  $9.00
    
    
    200,625
    
    
    
    7.53
    
    
    
    200,625
    
    
    
    9.00
    
    
    
    1,994,825
    
    
    
    7.66
    
    
    
    1,994,825
    
    
    $
    4.66
    
    
    $
    4,997
  December
    
    December31,
    
    31,2008
    
    2007Risk-free interest rates
    
    
    2.92
    %
    
    
    4.92
    %Expected options life in years
    
    
    5.18
    
    
    
    6.75Expected stock price volatility
    
    
    50
    %
    
    
    50
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
  14




---



##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
 Notes to Condensed
Consolidated Financial Statements  (Continued)
 Unaudited
 Stock Warrants
 NOTE 11  COMMITMENTS AND CONTINGENCIES
 Credit Agreement
 Litigation and Arbitration
 NOTE 12  GEOGRAPHIC INFORMATION
   Three months ended December 31,2008
    
    
    2007Revenue:International
    
    $
    1,677,387
    
    
    
    24.3
    %
    
    $
    1,880,092
    
    
    
    29.4
    %United States
    
    
    5,234,798
    
    
    
    75.7
    %
    
    
    4,521,657
    
    
    
    70.6
    %Total revenue
    
    $
    6,912,185
    
    
    
    100
    %
    
    $
    6,401,749
    
    
    
    100
    %Depreciation and amortization:International
    
    $
    20,130
    
    
    
    8.4
    %
    
    $
    23,312
    
    
    
    9.9
    %United States
    
    
    219,890
    
    
    
    91.6
    %
    
    
    212,838
    
    
    
    90.1
    %Total depreciation and amortization
    
    $
    240,020
    
    
    
    100
    %
    
    $
    236,150
    
    
    
    100
    %Income
tax benefit:United States
    
    $
    37,038
    
    
    
    100
    %
    
    $
    37,038
    
    
    
    100
    %Revenues
by category:Vodka
    
    $
    1,510,176
    
    
    
    21.8
    %
    
    $
    1,410,477
    
    
    
    22.0
    %Rum
    
    
    2,168,587
    
    
    
    31.4
    %
    
    
    1,620,016
    
    
    
    25.3
    %Liqueurs
    
    
    1,473,385
    
    
    
    21.3
    %
    
    
    1,541,200
    
    
    
    24.1
    %Whiskey
    
    
    1,636,253
    
    
    
    23.7
    %
    
    
    1,757,580
    
    
    
    27.5
    %Other*
    
    
    123,784
    
    
    
    1.8
    %
    
    
    72,476
    
    
    
    1.1
    %Total revenue
    
    $
    6,912,185
    
    
    
    100
    %
    
    $
    6,401,749
    
    
    
    100
    %
 15




---



##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
 Notes to Condensed
Consolidated Financial Statements  (Continued)
 Unaudited
 December 31,2008
    
    
    2007Assets:International
    
    $
    5,219,450
    
    
    
    11.7
    %
    
    
    7,339,200
    
    
    
    13.1
    %United States
    
    
    39,481,510
    
    
    
    88.3
    %
    
    
    48,867,260
    
    
    
    86.9
    %Total assets
    
    $
    44,700,960
    
    
    
    100.0
    %
    
    
    56,206,460
    
    
    
    100
    %
 Nine months ended December 31,2008
    
    
    2007Revenue:International
    
    $
    4,647,315
    
    
    
    23.0
    %
    
    $
    7,072,714
    
    
    
    33.8
    %United States
    
    
    15,587,365
    
    
    
    77.0
    %
    
    
    13,874,072
    
    
    
    66.2
    %Total revenue
    
    $
    20,234,680
    
    
    
    100
    %
    
    $
    20,946,786
    
    
    
    100
    %Depreciation and amortization:International
    
    $
    65,308
    
    
    
    9.0
    %
    
    $
    67,296
    
    
    
    8.5
    %United States
    
    
    662,571
    
    
    
    91.0
    %
    
    
    724,555
    
    
    
    91.5
    %Total depreciation and amortization
    
    $
    727,879
    
    
    
    100
    %
    
    $
    791,851
    
    
    
    100
    %Income
tax benefit:United States
    
    $
    111,114
    
    
    
    100
    %
    
    $
    111,114
    
    
    
    100
    %Revenues
by category:Vodka
    
    $
    4,300,897
    
    
    
    21.3
    %
    
    $
    6,979,373
    
    
    
    33.3
    %Rum
    
    
    6,702,194
    
    
    
    23.1
    %
    
    
    5,614,047
    
    
    
    26.8
    %Liqueurs
    
    
    5,028,044
    
    
    
    24.8
    %
    
    
    4,530,850
    
    
    
    21.6
    %Whiskey
    
    
    3,772,181
    
    
    
    18.6
    %
    
    
    3,529,912
    
    
    
    16.9
    %Other*
    
    
    431,364
    
    
    
    2.1
    %
    
    
    292,604
    
    
    
    1.4
    %Total revenue
    
    $
    20,234,680
    
    
    
    100
    %
    
    $
    20,946,786
    
    
    
    100
    %
 
 *
    
    Includes related food products. NOTE 13  SUBSEQUENT EVENTS
 Stockholder Meeting
 
    
    an amendment to the Companys charter to increase the authorized shares of the Company to
250,000,000 shares, 225,000,000 shares of which are designated as Common Stock and
25,000,000 shares of which are designated as preferred stock;
    
    an amendment to the Companys charter to permit stockholders to act by written consent;
    
    the election of nine directors designated by the Purchasers as the sole directors
comprising the Board of Directors of the Company; and
    
    amendments to the Companys 2003 Stock Incentive Plan, as amended, to increase the
number of shares available to be granted 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.
 Option Grants
 16




---



##### Table of Contents



CASTLE BRANDS INC. AND SUBSIDIARIES
 Notes to Condensed
Consolidated Financial Statements  (Continued)
 Unaudited
  Restricted Stock Grants
 17




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Note Regarding Forward Looking Statements
  
    
    our limited operating history;
    
    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;
    
    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, as well as our dependency
on a limited number of suppliers;
    
    our relationships with and our dependency on our 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;
 18




---



##### Table of Contents




    
    the effect of competition in our industry; and
    
    economic and political conditions generally, including the current recessionary economic environment
and concurrent market instability.
  Overview
 ® ® ® ® TM ® ® ®
  
    
    aggressive brand development to encourage case sale and revenue growth of our
existing portfolio of brands through sales and promotional
activities; and
    
    the selective addition of complementary premium brands through a combination of
strategic initiatives, including acquisitions, joint ventures and long-term exclusive
distribution arrangements.
  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.
    Cost containment
  
    
    staff reductions in both the U.S. and international operations;
    
    a restructuring of our international distribution system;
    
    changing distributor relationships in certain markets;
 19




---



##### Table of Contents




    
    a restructuring of the Gosling-Castle Partners, Inc. working relationship;
    
    moving production of certain products to a more cost-effective facility in the U.S.; and
    
    reduction in general and administrative costs, including professional fees,
insurance, occupancy and other overhead costs.
   Recent Events
 Series A
Preferred Stock Purchase Agreement
   Conversion and/or Amendment of Notes
  $2,000,000 Promissory Note and Termination of Credit Agreement
 20




---



##### Table of Contents



Stockholder Meeting
 
    
    an amendment to our charter to increase the authorized shares
to 250 million shares,
225 million shares of which are designated as Common Stock and
25 million shares of which
are designated as preferred stock;
    
    an amendment to our charter to permit stockholders to act by written consent;
    
    the election of nine directors designated by the Purchasers as the sole directors
comprising our Board of Directors; and
    
    amendments to the our 2003 Stock Incentive Plan, as amended, to increase the number of
shares available to be granted under the plan from two million to 12.0 million and to
establish the maximum number of shares issuable to any one individual in any particular
year.
 Option Grants
 Restricted Stock Grants
 Currency Translation
   21




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##### Table of Contents



 
  Critical Accounting Policies
  Financial performance overview
  Three months ended
    
    Nine months endedDecember 31,
    

December 31,Case Sales
    
    2008
    
    2007
    
    2008
    
    2007Cases:United States
    
    
    53,393
    
    
    
    46,427
    
    
    
    159,841
    
    
    
    151,920International
    
    
    26,491
    
    
    
    23,107
    
    
    
    72,459
    
    
    
    90,122Total
    
    
    79,884
    
    
    
    69,534
    
    
    
    232,300
    
    
    
    242,042Vodka
    
    
    27,573
    
    
    
    26,702
    
    
    
    84,837
    
    
    
    117,831Rum
    
    
    23,156
    
    
    
    17,491
    
    
    
    72,669
    
    
    
    59,412Liqueurs
    
    
    14,392
    
    
    
    14,768
    
    
    
    44,179
    
    
    
    42,264Whiskey
    
    
    14,763
    
    
    
    10,573
    
    
    
    30,615
    
    
    
    22,535Total
    
    
    79,884
    
    
    
    69,534
    
    
    
    232,300
    
    
    
    242,042Percentage of Cases:United States
    
    
    66.8
    %
    
    
    66.8
    %
    
    
    68.8
    %
    
    
    62.8
    %International
    
    
    33.2
    %
    
    
    33.2
    %
    
    
    31.2
    %
    
    
    37.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Vodka
    
    
    34.5
    %
    
    
    38.4
    %
    
    
    36.5
    %
    
    
    48.7
    %Rum
    
    
    29.0
    %
    
    
    25.2
    %
    
    
    31.3
    %
    
    
    24.5
    %Liqueurs
    
    
    18.0
    %
    
    
    21.2
    %
    
    
    19.0
    %
    
    
    17.5
    %Whiskey
    
    
    18.5
    %
    
    
    15.2
    %
    
    
    13.2
    %
    
    
    9.3
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  22




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##### Table of Contents



Results of operations
  Three months ended
    
    Nine months endedDecember 31,
    
    December 31,2008
    
    2007
    
    2008
    
    2007Sales, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    68.8
    %
    
    
    98.8
    %
    
    
    68.2
    %
    
    
    77.6
    %Gross profit
    
    
    31.2
    %
    
    
    1.2
    %
    
    
    31.8
    %
    
    
    22.4
    %Selling expense
    
    
    57.3
    %
    
    
    78.3
    %
    
    
    55.7
    %
    
    
    65.3
    %General and administrative expense
    
    
    42.7
    %
    
    
    32.4
    %
    
    
    35.4
    %
    
    
    29.7
    %Depreciation and amortization
    
    
    3.5
    %
    
    
    3.7
    %
    
    
    3.6
    %
    
    
    3.8
    %Loss from operations
    
    
    (72.3
    )%
    
    
    (113.2
    )%
    
    
    (62.9
    )%
    
    
    (76.4
    )%Other income
    
    
    0.4
    %
    
    
    0.0
    %
    
    
    0.3
    %
    
    
    0.0
    %Other expense
    
    
    (0.1
    )%
    
    
    (0.3
    )%
    
    
    (0.2
    )%
    
    
    (0.2
    )%Foreign
exchange (loss) gain
    
    
    (13.6
    )%
    
    
    2.2
    %
    
    
    (14.0
    )%
    
    
    6.3
    %Interest expense, net
    
    
    (7.6
    )%
    
    
    (6.1
    )%
    
    
    (7.7
    )%
    
    
    (5.7
    )%Gain on
exchange of 6% convertible
subordinated notes
    
    
    60.4
    %
    
    
    0.0
    %
    
    
    20.6
    %
    
    
    0.0
    %Current credit on derivative financial instrument
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.9
    %Income tax benefit
    
    
    0.5
    %
    
    
    0.6
    %
    
    
    0.5
    %
    
    
    0.5
    %Minority interests
    
    
    (0.1
    )%
    
    
    9.6
    %
    
    
    0.8
    %
    
    
    5.3
    %Net loss
    
    
    (32.4
    )%
    
    
    (107.2
    )%
    
    
    (62.6
    )%
    
    
    (69.3
    )%
 Three
months
ended December 31, 2008 Compared With Three months ended December 31, 2007
 Net sales.
   23




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##### Table of Contents



Increase (decrease) in
    
    Percentagecase sales
    
    increase (decrease)Overall
    
    U.S.
    
    Overall
    
    U.S.Vodka
    
    
    871
    
    
    
    185
    
    
    
    3.3
    %
    
    
    1.0
    %Rum
    
    
    5,665
    
    
    
    5,533
    
    
    
    32.4
    %
    
    
    49.5
    %Liqueurs
    
    
    (376
    )
    
    
    872
    
    
    
    (2.5)
    %
    
    
    6.9
    %Whiskey
    
    
    4,190
    
    
    
    375
    
    
    
    39.6
    %
    
    
    11.3
    %Total
    
    
    10,350
    
    
    
    6,965
    
    
    
    14.9
    %
    
    
    15.0
    %
 Gross
profit.
  Selling
expense.
 General and administrative expense.
 Depreciation and amortization.
 Loss from operations
 Other income(expense), net.
    24




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##### Table of Contents



Net loss.
 Nine
months ended December 31, 2008 Compared With Nine months ended December 31, 2007
 Net sales.
   Increase (decrease) in
    
    Percentagecase sales
    
    increase (decrease)Overall
    
    U.S.
    
    Overall
    
    U.S.Vodka
    
    
    (32,994
    )
    
    
    (6,600
    )
    
    
    (28.0
    )%
    
    
    (10.3
    )%Rum
    
    
    13,256
    
    
    
    10,004
    
    
    
    22.3
    %
    
    
    23.1
    %Liqueurs
    
    
    1,915
    
    
    
    4,204
    
    
    
    4.5
    %
    
    
    11.5
    %Whiskey
    
    
    8,081
    
    
    
    312
    
    
    
    35.9
    %
    
    
    3.9
    %Total
    
    
    (9,742
    )
    
    
    7,920
    
    
    
    (4.0
    )%
    
    
    5.2
    %
 Gross
profit.
  Selling
expense.
 25




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##### Table of Contents



General and administrative expense.
 Depreciation and amortization.
 Loss from operations
 Other
income (expense), net.
     Net loss.
 Liquidity and capital resources
    26




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##### Table of Contents




    
    continued significant levels of operating 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 favorable prices 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.
 Cash flows
  Nine months endedDecember 31,2008
    
    
    2007(in thousands)Net cash provided by (used in):Operating activities
    
    $
    (8,672
    )
    
    $
    (17,725
    )Investing activities
    
    
    334
    
    
    
    (1,516
    )Financing activities
    
    
    13,078
    
    
    
    19,003Effects of foreign currency translation
    
    
    (65
    )
    
    
    24Net increase (decrease) in cash and cash equivalents
    
    $
    4,675
    
    
    $
    (214
    )
 Operating activities.
  27




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Investing activities.
 Financing
activities
 Recent accounting pronouncements
      28




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##### Table of Contents



Three months
    
    
    Nine monthsended
    
    
    endedDecember 31,
    
    
    December 31,2008
    
    
    2008Net loss per common share  as reported
    
    $
    (0.14
    )
    
    $
    (0.82
    )Effect of adoption of SFAS 141(R) and SFAS 160
    
    
    0.00
    
    
    
    (0.01
    )Net loss per common share  as adjusted
    
    $
    (0.14
    )
    
    $
    (0.82
    )
 
 Item 4T. 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
  29




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##### Table of Contents



Item 6. Exhibits
 Exhibit Number
    
    Description3.1
    
    Certificate of Designation of Series A
Convertible Preferred Stock of Castle Brands
Inc. (incorporated by reference to Exhibit
3.1 to the issuers current report on Form
8-K (File No. 001-32849) filed with the
Securities and Exchange Commission on
October 14, 2008).10.1
    
    Series A Preferred Stock Purchase Agreement,
dated October 11, 2008 (incorporated by
reference to Exhibit 10.1 to the issuers
current report on Form 8-K (File No.
001-32849) filed with the Securities and
Exchange Commission on October 14, 2008).10.2
    
    Promissory Note issued to Frost Gamma
Investments Trust, dated October 14, 2008
(incorporated by reference to Exhibit 10.2
to the issuers current report on Form 8-K
(File No. 001-32849) filed with the
Securities and Exchange Commission on
October 14, 2008).10.3
    
    Form of Indemnification Agreement
(incorporated by reference to Exhibit 10.3
to the issuers current report on Form 8-K
(File No. 001-32849) filed with the
Securities and Exchange Commission on
October 14, 2008).10.4
    
    Letter Agreement, dated November 7, 2008,
between Castle Brands Inc. and Vector Group
Ltd. (incorporated by reference to Exhibit
10.1 to the issuers current report on Form
8-K (File No. 001-32849) filed with the
Securities and Exchange Commission on
November 12, 2008)10.5*#
    
    Form of Restricted Stock 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.
 
 *
    
    Filed herewith#
    
    Management Compensation Contract 
 SIGNATURES
  CASTLE BRANDS INC.By:
    /s/ Alfred J. SmallAlfred J. SmallChief Financial Officer
(Principal Financial Officer)  30