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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, 2008
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from       to
 Commission File Number 001-32849
 CASTLE BRANDS INC.
  Delaware
    
    41-2103550(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)570 Lexington Avenue, 29th Floor,New York, New York
    
    10022(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (646) 356-0200
 þ o
  Large accelerated filer
o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company
þ
  o þ




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TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements:
    
    
    3Condensed Consolidated Balance Sheets as of June 30, 2008
(unaudited) and March 31, 2008
    
    
    3Condensed Consolidated Statements of Operations for the Three
Months ended June 30, 2008 and 2007 (unaudited)
    
    
    4Condensed Consolidated Statements of Changes in Stockholders
Equity for the Three Months ended June 30, 2008 (unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the Three
Months ended June 30, 2008 and 2007 (unaudited)
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4T. Controls and Procedures
    
    
    33PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Defaults Upon Senior Securities
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    35SIGNATURESEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONS




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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, 2008
    
    
    March 31, 2008(Unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    772,523
    
    
    $
    1,552,385Short-term investments
    
    
    2,053,507
    
    
    
    4,231,644Accounts receivable  net of allowance for doubtful accounts of $239,648 and
$230,967
    
    
    6,102,528
    
    
    
    7,544,445Due from affiliates
    
    
    65,538
    
    
    
    61,596Inventories
    
    
    9,312,563
    
    
    
    8,535,993Prepaid expenses and other current assets
    
    
    1,577,093
    
    
    
    811,711TOTAL CURRENT ASSETS
    
    
    19,883,752
    
    
    
    22,737,774EQUIPMENT net
    
    
    754,201
    
    
    
    753,317OTHER ASSETSIntangible assets  net of accumulated amortization of $2,700,701 and
$2,517,199
    
    
    13,407,689
    
    
    
    13,591,191Goodwill
    
    
    3,745,287
    
    
    
    3,745,287Restricted cash
    
    
    799,803
    
    
    
    799,864Other assets
    
    
    411,082
    
    
    
    509,493TOTAL ASSETS
    
    $
    39,001,814
    
    
    $
    42,136,926LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent maturities of notes payable and capital leases
    
    $
    482,297
    
    
    $
    99,784Senior notes payable
    
    
    9,722,671
    
    
    
    Accounts payable
    
    
    4,543,131
    
    
    
    2,818,910Accrued expenses
    
    
    758,267
    
    
    
    2,142,845Due to stockholders and affiliates
    
    
    1,178,577
    
    
    
    919,758TOTAL CURRENT LIABILITIES
    
    
    16,684,943
    
    
    
    5,981,297LONG TERM LIABILITIESSenior notes payable
    
    
    
    
    
    
    9,649,109Notes payable and capital leases, less current maturities
    
    
    9,000,000
    
    
    
    9,001,335Deferred tax liability
    
    
    2,370,178
    
    
    
    2,407,21628,055,121
    
    
    
    27,038,957COMMITMENTS
AND CONTINGENCIES (Note 14)MINORITY INTERESTS
    
    
    242,502
    
    
    
    309,810STOCKHOLDERS EQUITYPreferred stock, $.01 par value, 5,000,000 shares authorized, none outstandingCommon
stock, $.01 par value, 45,000,000 shares authorized; 15,629,776 shares issued and outstanding at June 30, and March 31, 2008.
    
    
    156,298
    
    
    
    156,298Additional paid in capital
    
    
    105,030,128
    
    
    
    104,806,044Accumulated deficiency
    
    
    (91,848,192
    )
    
    
    (87,546,011
    )Accumulated other comprehensive loss
    
    
    (2,634,043
    )
    
    
    (2,628,172
    )TOTAL STOCKHOLDERS EQUITY
    
    
    10,704,191
    
    
    
    14,788,159TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    39,001,814
    
    
    $
    42,136,926
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CASTLE BRANDS INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Operations
  Three-months Ended June 30,2008
    
    
    2007Sales, net
    
    $
    5,891,395
    
    
    $
    5,624,085Cost of sales
    
    
    3,952,685
    
    
    
    3,504,538Gross profit
    
    
    1,938,710
    
    
    
    2,119,547Selling expense
    
    
    3,429,344
    
    
    
    4,237,608General and administrative expense
    
    
    2,071,973
    
    
    
    2,060,920Depreciation and amortization
    
    
    243,507
    
    
    
    271,427Net operating loss
    
    
    (3,806,114
    )
    
    
    (4,450,408
    )Other income
    
    
    15,573
    
    
    
    Other expense
    
    
    (11,725
    )
    
    
    (11,167
    )Foreign exchange (loss)/gain
    
    
    (98,911
    )
    
    
    77,326Interest expense, net
    
    
    (505,350
    )
    
    
    (487,460
    )Current credit on derivative financial instrument
    
    
    
    
    
    
    189,397Income tax benefit
    
    
    37,038
    
    
    
    37,038Minority interests
    
    
    67,308
    
    
    
    240,370Net loss
    
    $
    (4,302,181
    )
    
    $
    (4,404,904
    )Net loss per common shareBasic
    
    $
    (0.28
    )
    
    $
    (0.31
    )Diluted
    
    $
    (0.28
    )
    
    $
    (0.31
    )Weighted average shares used in computationBasic
    
    
    15,629,776
    
    
    
    14,166,391Diluted
    
    
    15,629,776
    
    
    
    14,166,391
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CASTLE BRANDS INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Changes in Stockholders Equity
  AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficiency
    
    
    Loss
    
    
    EquityBALANCE, MARCH 31, 2008
    
    
    15,629,776
    
    
    $
    156,298
    
    
    $
    104,806,044
    
    
    $
    (87,546,011
    )
    
    $
    (2,628,172
    )
    
    $
    14,788,159Comprehensive loss
Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,302,181
    )
    
    
    
    
    
    
    (4,302,181
    )Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,871
    )
    
    
    (5,871
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,308,052
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    224,084
    
    
    
    
    
    
    
    
    
    
    
    224,084BALANCE, JUNE 30, 2008
    
    
    15,629,776
    
    
    $
    156,298
    
    
    $
    105,030,128
    
    
    $
    (91,848,192
    )
    
    $
    (2,634,043
    )
    
    $
    10,704,191
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CASTLE BRANDS INC. and SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
  Three-months Ended June 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (4,302,181
    )
    
    $
    (4,404,904
    )Adjustments to reconcile net loss to net cash used in operating activitiesDepreciation and amortization
    
    
    243,507
    
    
    
    271,427Provision for doubtful accounts
    
    
    21,136
    
    
    
    17,889Minority interest in net loss of consolidated subsidiary
    
    
    (67,308
    )
    
    
    (240,370
    )Loss on disposal of equipment
    
    
    
    
    
    
    1,051Amortization of deferred financing costs
    
    
    98,411
    
    
    
    50,226Credit on derivative financial instrument
    
    
    
    
    
    
    (189,397
    )Deferred tax benefit
    
    
    (37,038
    )
    
    
    (37,038
    )Effect of changes in foreign exchange
    
    
    19,136
    
    
    
    (182,842
    )Stock-based compensation expense
    
    
    224,084
    
    
    
    270,188Reversal of provision for obsolete inventories
    
    
    (84,290
    )
    
    
    Non-cash interest charge
    
    
    73,562
    
    
    
    131,250Changes in operations, assets and liabilitiesDecrease in accounts receivable
    
    
    1,412,119
    
    
    
    117,156Increase in due from affiliates
    
    
    (3,943
    )
    
    
    Increase in inventory
    
    
    (691,388
    )
    
    
    (1,295,609
    )Increase in prepaid expenses and supplies
    
    
    (765,567
    )
    
    
    (610,074
    )Decrease in other assets
    
    
    
    
    
    
    136,351Decrease/(increase) in accounts payable and accrued expenses
    
    
    341,260
    
    
    
    (1,328,186
    )Decrease/(increase) in due to related parties
    
    
    261,003
    
    
    
    (135,547
    )Total adjustments
    
    
    1,044,684
    
    
    
    (3,023,525
    )NET CASH USED IN OPERATING ACTIVITIES
    
    
    (3,257,497
    )
    
    
    (7,428,429
    )CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of equipment
    
    
    (65,520
    )
    
    
    (82,471
    )Acquisition of intangible assets
    
    
    (4,693
    )
    
    
    (7,836
    )Short-term investments sold
    
    
    2,178,137
    
    
    
    1,942,970NET CASH PROVIDED BY INVESTING ACTIVITIES
    
    
    2,107,924
    
    
    
    1,852,663CASH FLOWS FROM FINANCING ACTIVITIESRepayment of notes payable
    
    
    (3,823,517
    )
    
    
    (4,195,211
    )Proceeds from notes payable
    
    
    4,201,646
    
    
    
    3,726,624Payments of obligations under capital leases
    
    
    (946
    )
    
    
    (903
    )Issuance of common stock
    
    
    
    
    
    
    21,014,609Payments for costs of stock issuances
    
    
    
    
    
    
    (45,950
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    377,183
    
    
    
    20,499,169EFFECTS OF FOREIGN CURRENCY TRANSLATION
    
    
    (7,472
    )
    
    
    1NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (779,862
    )
    
    
    14,923,404CASH AND CASH EQUIVALENTS  BEGINNING
    
    
    1,552,385
    
    
    
    1,004,957CASH AND CASH EQUIVALENTS  ENDING
    
    $
    772,523
    
    
    $
    15,928,361SUPPLEMENTAL DISCLOSURESSchedule of non-cash investing and financing activitiesOffering costs in connection with private placement
    
    $
    
    
    
    $
    (1,337,947
    )Interest paid
    
    $
    586,000
    
    
    $
    596,140
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CASTLE BRANDS INC. AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
 NOTE 1  GOING CONCERN
   NOTE 2  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
  A.
    
    Description of business and business combination  Castle Brands Inc. is the
successor to Great Spirits Company, LLC, a Delaware limited liability company (GSC).
GSC was formed in February 1998. In May 2003, Great Spirits (Ireland) Limited (GSI), a
wholly owned subsidiary of GSC, began operations in Ireland to market GSCs products
internationally. GSI had been an inactive entity since December 2003 and was dissolved as
of September 30, 2006. In July 2003, GSRWB, Inc. (renamed Castle Brands Inc.) and its
wholly owned subsidiary, Great Spirits Corp. (renamed Castle Brands (USA) Corp.)
(CB-USA), were formed under the laws of Delaware in
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contemplation of a pending acquisition. On December 1, 2003, Castle Brands Inc. acquired
The Roaring Water Bay Spirits Group Limited and The Roaring Water Bay Spirits Marketing and
Sales Company Limited and their related entities (collectively, Roaring Water Bay). The
acquisition has been accounted for under purchase accounting. Simultaneously, GSC was
merged into CB-USA, and Castle Brands Inc. issued stock to GSCs members in exchange for
their membership interests in GSC. Subsequent to the acquisition, The Roaring Water Bay
Spirits Group Limited was renamed Castle Brands Spirits Group Limited (CB Ireland) and
The Roaring Water Bay Spirits Marketing and Sales Company Limited was renamed Castle Brands
Spirits Marketing and Sales Company Limited (CB-UK).In February 2005, Castle Brands Inc. acquired 60% of the shares of Gosling-Castle Partners
Inc. (GCP), which holds the worldwide distribution rights (excluding Bermuda) to Goslings
rum and related products.In October 2006, Castle Brands Inc. acquired all of the outstanding capital stock of McLain
& Kyne, Ltd. (McLain & Kyne) pursuant to a Stock Purchase Agreement. McLain & Kyne is a
Louisville, Kentucky based developer and marketer of three premium small batch bourbons:
Jeffersons Reserve, Jeffersons and Sam Houston.As used herein, the Company refers to Castle Brands Inc. and, where appropriate, it also
refers collectively to Castle Brands Inc. and its direct and indirect subsidiaries,
including its majority owned GCP subsidiary.B.
    
    Basis of presentation  The condensed consolidated financial statements
include the accounts of Castle Brands Inc., its wholly-owned subsidiaries, CB-USA and
McLain and Kyne, and its wholly-owned foreign subsidiaries, CB Ireland and CB-UK, and its
majority owned Gosling-Castle Partners, Inc. 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.C.
    
    Organization and operations  The Company is principally engaged in the
manufacture, marketing and sale of fine spirit brands of vodka, whiskey, rums, liqueurs
and tequila (the products) in the United States, Canada, Europe, Latin America and the
Caribbean. Except for Goslings rums and the bourbon products, which are bottled in the
United States, all of the Companys products are imported from Europe. The vodka, Irish
whiskeys and certain liqueurs are produced by CB-IRL, billed in euros and imported into
the United States. The risk of fluctuations in foreign currency is borne by the U.S.
entities.D.
    
    Cash and cash equivalents  The Company considers all highly liquid
instruments with a maturity date at acquisition of three-months or less to be cash and
cash equivalents.E.
    
    Investments  The Company follows Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities,
classifying its investments based on the intended holding period. The Company currently
classifies its investments as available-for-sale. Available-for-sale securities are
carried at estimated fair value, based on available market information, with unrealized
gains and losses, if any, reported as a component of stockholders equity. Investments
consist of money market accounts that are highly liquid in nature and represent the
investment of cash that is available for current operations.F.
    
    Trade accounts receivable  The Company records trade accounts receivable at
net realizable value. This value includes an appropriate allowance for estimated
uncollectible accounts to reflect anticipated losses on the trade accounts receivable
balances. The Company calculates this allowance based on its history of write-offs, level
of past due accounts based on contractual terms of the receivables and its relationships
with and economic status of the Companys customers.G.
    
    Revenue recognition  Revenue from product sales is recognized when the
product is shipped to a customer (generally a distributor), title and risk of loss has
passed to the customer in accordance
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with the terms of sale (FOB shipping point or FOB destination), and collection is
reasonably assured. Revenue is not recognized on shipments to control states in the United
States until such time as product is sold through to the retail channel.H.
    
    Inventories  Inventories, which comprise distilled spirits, raw materials
(bulk spirits, bottles, labels and caps), packaging and finished goods, is valued at the
lower of cost or market, using the weighted average cost method. The Company assesses the
valuation of its inventories and reduces the carrying value of those inventories that are
obsolete or in excess of the Companys forecasted usage to their estimated net realizable
value. The Company estimates the net realizable value of such inventories based on
analyses and assumptions including, but not limited to, historical usage, expected future
demand and market requirements.I.
    
    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 June 30, 2008 and March 31,
2008, goodwill and other indefinite lived intangible assets that arose from acquisitions
were $3.8 million and $3.8 million, respectively. Goodwill and other identifiable
intangible assets with indefinite lives are not amortized, but instead are tested for
impairment annually, or more frequently if circumstances indicate a possible impairment
may exist. Intangible assets with estimable useful lives are amortized over their
respective estimated useful lives to the estimated residual values and reviewed for
impairment whenever events or changes in circumstances indicate that the carrying value
may not be recoverable.Under SFAS 142, impairment of goodwill must be tested at least annually by comparing the
fair values of the applicable reporting units with the carrying amount of their net assets,
including goodwill. If the carrying amount of the reporting units net assets exceeds the
units fair value, an impairment loss would be recognized in an amount equal to the excess
of the carrying amount goodwill over its implied fair value. The implied fair value of
goodwill is determined in the same manner as the amount of goodwill recognized in a
business combination with the fair value of the reporting unit deemed to be the purchase
price paid.The fair value of each reporting unit was determined at March 31, 2008 by weighting a
combination of the present value of the Companys discounted anticipated future operating
cash flows and values based on market multiples of revenue and earnings before interest,
taxes, depreciation and amortization (EBITDA) of comparable companies. Such valuations
resulted in the Company recording a goodwill impairment loss of $8,750,000 for the year
ended March 31, 2008. Such adjustments were attributable to downward revisions of earnings
forecasted for future years, an increase in the incremental borrowing rate due to operating
results that were worse than anticipated and an overall decrease to the value of the
comparable companies.J.
    
    Impairment of Long-Lived Assets  In accordance with SFAS 144, 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 months ended, or as of June 30, 2008.K.
    
    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. Historically,
sales in the United Kingdom had been made in-bond. Concurrent with the Company
changing its distributor in the United Kingdom, sales are now made ex-bond.
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During the three months ended June 30, 2008 and 2007, the line items for the Companys
revenues and cost of sales included the amounts of excise tax and duties presented in the
table below:
 Three-months endedJune 30,2008
    
    2007Sales, net
    
    $
    978,054
    
    
    $
    1,302,990Cost of Sales
    
    $
    978,054
    
    
    $
    1,302,990
 L.
    
    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 produced by CB-IRL and billed in
euros to the U.S. entities, with the risk of foreign exchange gain/loss resting with
CB-US. In addition, CBI 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 income.M.
    
    Stock-based compensation  Effective April 1, 2006, the Company began
recording compensation expense associated with stock options and other forms of equity
compensation in accordance with Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment(SFAS 123R), as interpreted by SEC Staff Accounting
Bulletin No. 107. Incremental compensation expense for the three months ended
June 30, 2008 and 2007 amounted to $224,084 and $270,188, respectively, of which $100,717
and $114,162 are included in selling expense, respectively, and $123,367 and $156,026 are
in general and administrative expense, respectively, in the accompanying condensed
consolidated statements of operations. See Note 12.N.
    
    Stock warrants  The Company accounted for the warrant and the put option
rights as a compound financial instrument in the condensed consolidated financial
statements at fair value following the guidelines of EITF 00-19, paragraphs 44 and 45, and
paragraphs 11 and 24 of SFAS 150. Changes in the fair value of the compound instrument are
recognized in earnings for each reporting period. Effective with the Companys
registration statement (Reg. no. 333-143422), as amended, filed with the SEC on
June 29, 2007 and effective as of July 9, 2007, the registration rights penalty was
reversed. For the three-months ended June 30, 2007, the Company recorded a credit for the
change in the value of the compound financial instrument of $189,397.O.
    
    Advertising  Advertising costs are expensed when the advertising first appears
in its respective
medium. Advertising expense, which is included in selling expense, was $469,127 and
$851,801
for three-months ended June 30, 2008 and 2007, respectively.P.
    
    Use of estimates  The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
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Estimates include the accounting for items such as evaluating annual impairment tests,
allowance for doubtful accounts, depreciation, amortization and expense accruals.
 Q.
    
    Uncertainties  The Company depends on a limited number of third-party
suppliers for the sourcing of all of its products, including both its
own proprietary brands and those it distributes for others. The
Company does not have long-term written agreements with all of its
suppliers. In addition, if the Company fails to complete purchases of
products ordered annually, certain suppliers have the right to bill it
for product not purchased during the period. Suppliers failure to
perform satisfactorily or handle increased orders, delays in shipments
of products from international suppliers or the loss of existing
suppliers, especially key suppliers, could have material adverse
effects on the Companys operating results. The supply contracts with
The Carbery Group and Terra Limited expire December 31, 2008 and
February 29, 2009, respectively. The inability to renegotiate these
contracts on acceptable terms or find suitable alternatives could have
material adverse effects on the Companys operating results.R.
    
    Recent accounting pronouncementsIn December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b, Effective
Date of FASB Statement No. 157, that would permit a one-year deferral in applying the
measurement provisions of Statement No. 157 to non-financial assets and non-financial
liabilities (non-financial items) that are not recognized or disclosed at fair value in an
entitys financial statements on a recurring basis (at least annually). Therefore, if the
change in fair value of a non-financial item is not required to be recognized or disclosed
in the financial statements on an annual basis or more frequently, the effective date of
application of Statement 157 to that item is deferred until fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years. This deferral does not
apply, however, to an entity that applies Statement 157 in interim or annual financial
statements before proposed FSP 157-b is finalized. The Company is currently evaluating the
impact, if any, that the adoption of 157-b will have on the Companys operating income or
net earnings.On December 4, 2007, the FASB issued SFAS No. 141(R), Business Combinations, and SFAS
No. 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51. Statement No. 141(R) is required to be adopted
concurrently with Statement No. 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 Statement No. 141(R) and Statement No. 160 is required to be adopted prospectively,
except for certain provisions of Statement No. 160, which are required to be adopted
retrospectively. Business combination transactions accounted for before adoption of
Statement No. 141(R) should be accounted for in accordance with Statement No. 141 and that
accounting previously completed under Statement No. 141 should not be modified as of or
after the date of adoption of Statement No. 141(R). The Company is currently evaluating the
impact of Statement No. 141(R) and Statement No. 160, but does not expect the adoption of
these pronouncements to have a material impact on the Companys financial position or
results of operations.In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159),
which allows an entity the irrevocable option to elect fair value for the initial and
subsequent measurement for certain financial assets and liabilities on a
contract-by-contract basis. Subsequent changes in fair value of these financial assets and
liabilities would be recognized in earnings when they occur. SFAS 159 further establishes
certain additional disclosure requirements. SFAS 159 is effective for fiscal years
beginning after November 15, 2007, with earlier adoption permitted. The adoption of this
pronouncement did not have a material impact on the Companys condensed consolidated
financial position or results of operations.
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S.
    
    Reclassifications  Certain prior year balances have been reclassified to
conform to the current period classification.
 NOTE 3  BASIC AND DILUTED NET LOSS PER COMMON SHARE
   June 30,
    
    
    June 30,2008
    
    
    2007Stock options
    
    
    1,617,625
    
    
    
    1,307,625Stock warrants
    
    
    2,305,432
    
    
    
    2,255,432Convertible debentures
    
    
    1,192,380
    
    
    
    1,162,380Total
    
    
    5,115,437
    
    
    
    4,725,437
 NOTE 4  INVESTMENTS
  EstimatedJune 30, 2008
    
    Fair ValueMoney Market accounts
    
    $
    2,053,507Total
    
    $
    2,053,507
  NOTE 5  INVENTORIES
 June 30,
    
    
    March 31,2008
    
    
    2008Raw materials
    
    $
    2,163,032
    
    
    $
    1,766,892Finished goods
    
    
    7,149,531
    
    
    
    6,769,101Total
    
    $
    9,312,563
    
    
    $
    8,535,993
 
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NOTE 6  INTANGIBLE ASSETS
  June 30,
    
    
    March 31,2008
    
    
    2008Definite life brands
    
    $
    170,000
    
    
    $
    170,000Trademarks
    
    
    482,754
    
    
    
    482,754Rights
    
    
    9,036,793
    
    
    
    9,036,793Patents
    
    
    994,000
    
    
    
    994,000Supply relationships
    
    
    732,000
    
    
    
    732,000Other
    
    
    28,480
    
    
    
    28,48011,444,027
    
    
    
    11,444,027Less: accumulated amortization
    
    
    2,700,701
    
    
    
    2,517,199Net
    
    
    8,743,326
    
    
    
    8,926,828Other identifiable intangible
assets  indefinite life
Trade names and formulations
    
    
    4,664,363
    
    
    
    4,664,363Intangible
assets, net
    
    $
    13,407,689
    
    
    $
    13,591,191
  June 30,
    
    
    March 31,2008
    
    
    2008Brands
    
    $
    118,051
    
    
    $
    115,218Trademarks
    
    
    73,770
    
    
    
    65,956Rights
    
    
    1,910,029
    
    
    
    1,772,042Patents
    
    
    252,083
    
    
    
    238,333Supply relationship
    
    
    346,768
    
    
    
    325,650Accumulated amortization
    
    $
    2,700,701
    
    
    $
    2,517,199
    For the years ending June 30,
    
    Amount2009
    
    $
    736,3192010
    
    
    736,3192011
    
    
    736,3192012
    
    
    728,3092013
    
    
    710,527Total
    
    $
    3,647,793
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NOTE 7  RESTRICTED CASH
 
 NOTE 8  OVERDRAFT ACCOUNTS
 
 NOTE 9  SENIOR NOTES PAYABLE, NOTES PAYABLE AND CAPITAL LEASE
 June 30,
    
    
    March 31,2008
    
    
    2008Notes payable consist of the following:Revolving credit facilities
    
    $
    478,035
    
    
    $
    95,911Senior notes
    
    
    9,722,671
    
    
    
    9,649,109Subordinated convertible notes
    
    
    9,000,000
    
    
    
    9,000,00019,200,706
    
    
    
    18,745,020Capital leases
    
    
    4,262
    
    
    
    5,208Total
    
    $
    19,204,968
    
    
    $
    18,750,228
  For the years ending June 30,2009
    
    
    10,204,9682010
    
    
    9,000,000Total
    
    
    19,204,968Less current portion
    
    
    10,204,968Non current portion
    
    $
    9,000,000
 NOTE 10  FOREIGN CURRENCY FORWARD CONTRACTS
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NOTE 11  PROVISION FOR INCOME TAXES
 Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
     NOTE 12  STOCK OPTIONS AND WARRANTS
 A.
    
    Stock Options  In July 2003, the Company implemented the 2003 Stock
Incentive Plan (the Plan) which provides for awards of incentive and non-qualified
stock options, restricted stock and stock appreciation rights for its officers, employees,
consultants and directors in order to attract and retain such individuals who contribute
to the Companys success by their ability, ingenuity and industry knowledge, and to enable
such individuals to participate in the long-term success and growth of the Company by
giving them an equity interest in the Company. There are 2,000,000 common shares reserved
and available for distribution under the Plan, of which 382,375 remain available. Stock
options granted under the Plan are granted with an exercise price at or above the fair
market value of the underlying common stock at the date of grant, generally vest over a
four or five year period and expire ten years after the grant date.The fair value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model and is affected by assumptions regarding a number of
highly complex and subjective variables. The use of an option pricing model also requires
the use of a number of complex assumptions including expected volatility, risk-free
interest rate, expected dividends, and expected term. Expected volatility is based on the
historical volatility of a peer group of companies over the expected life of the option as
the Company does not have enough history trading as a public company to calculate its own
stock price volatility. The expected term and vesting of the options represents the
estimated period of time until exercise and is based on historical experience of similar
awards, giving consideration to the contractual terms, vesting schedules and expectations
of future employee behavior. The risk-free interest rate is based on the U.S. Treasury
yield curve in effect at the time of grant for the expected term of the option. The
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Company has not paid dividends in the past and does not plan to pay any dividends in the
near future. SFAS 123R also requires the Company to estimate forfeitures at the time of
grant and revise these estimates, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The Company estimates forfeitures based on its
expectation of future experience while considering its historical experience.A summary of the options outstanding under the stock option plan is as follows:
 Three-months ended June 30,2008
    
    
    2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of period
    
    
    1,617,625
    
    
    $
    6.37
    
    
    
    1,294,125
    
    
    $
    7.19Granted
    
    
    
    
    
    
    
    
    
    
    48,500
    
    
    
    6.93Forfeited
    
    
    
    
    
    
    
    
    
    
    (35,000
    )
    
    
    6.51Outstanding at end of period
    
    
    1,617,625
    
    
    
    6.37
    
    
    
    1,307,625
    
    
    
    7.20Options exercisable at period end
    
    
    922,250
    
    
    $
    7.10
    
    
    
    655,450
    
    
    $
    7.11Weighted average fair value of
options granted during the period
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    3.23
  Options Outstanding
    
    
    
    
    
    
    OptionsWeighted
    
    
    
    
    
    
    ExercisableAverage
    
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    
    Average
    
    
    AggregateRange of
    
    
    
    
    
    Life in
    
    
    
    
    
    
    Exercise
    
    
    IntrinsicExercise Prices
    
    Shares
    
    
    Years
    
    
    Shares
    
    
    Price
    
    
    value$0.00  $2.00
    
    
    60,000
    
    
    
    9.58
    
    
    
    
    
    
    $
    
    
    
    $
    $2.01  $5.00
    
    
    250,000
    
    
    
    9.38
    
    
    
    
    
    
    
    
    
    
    
    $5.00  $6.00
    
    
    440,500
    
    
    
    5.77
    
    
    
    373,975
    
    
    
    5.98
    
    
    
    $6.01  $7.00
    
    
    129,500
    
    
    
    8.74
    
    
    
    68,750
    
    
    
    6.39
    
    
    
    $7.01  $8.00
    
    
    537,000
    
    
    
    7.21
    
    
    
    348,900
    
    
    
    7.72
    
    
    
    $8.01  $9.00
    
    
    200,625
    
    
    
    8.03
    
    
    
    130,625
    
    
    
    9.00
    
    
    
    1,617,625
    
    
    
    
    
    
    
    922,250
    
    
    $
    7.10
    
    
    $
    
  June 30,2007Risk-free interest rates
    
    
    5.08
    %Expected options life in years
    
    
    7.00Expected stock price volatility
    
    
    50
    %Expected dividend yield
    
    
    0
    %
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WeightedAverageExerciseShares
    
    
    PriceNonvested at April 1, 2008
    
    
    762,675
    
    
    $
    5.55Granted
    
    
    
    
    
    
    Canceled or expired
    
    
    
    
    
    
    Vested
    
    
    (67,300
    )
    
    
    7.66Nonvested at June 30, 2008
    
    
    695,375
    
    
    $
    5.35
   Stock Warrants
 WeightedAverageExercisePriceWarrants
    
    
    Per WarrantWarrants outstanding and exercisable, March 31, 2008
    
    
    2,305,432
    
    
    $
    6.93Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Warrants outstanding and exercisable, June 30, 2008
    
    
    2,305,432
    
    
    $
    6.93
 NOTE 13  RELATED PARTY TRANSACTIONS
 A.
    
    The Company is operating under an agreement with MHW, Ltd. (MHW) whereby MHW acts
as the Companys agent in the distribution of its products across the United States. MHWs
president also serves as a director of the Company and has a de minimus indirect ownership
interest in the Company. In addition, MHW has a 10% ownership interest in the Celtic
Crossing trade mark, one of the Companys products, in the United States and its
territories, Canada, Mexico, and the Caribbean.Pursuant to the MHW distribution agreement, in states where the Company does not yet hold
the requisite licensing, MHW receives sales orders from the Companys domestic wholesalers
at prices agreed upon with the Company. MHW simultaneously purchases Company inventory
necessary to fill those orders and ships that inventory to the various wholesalers. MHW
then
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invoices, collects, and deposits remittances from those wholesalers into an MHW bank
account designated for the Company. The funds are remitted to the Company on a bi-weekly
basis. Although MHW is responsible for the billing function, the collected funds are the
property of the Company and MHW is not liable to the Company for any unpaid balances due
from wholesalers.In addition to the distribution services provided for the Company, MHW also provides
administrative and support services on behalf of the Company. For the three-months ended
June 30, 2008 and 2007, aggregate charges recorded for all services provided were
approximately $65,971 and $74,023, respectively, which have been included in general and
administrative expenses on the accompanying condensed consolidated statements of
operations.B.
    
    The Company has transactions with Knappogue Corp., a stockholder in the Company.
Knappogue Corp. is controlled by the Companys Chairman and his family. The transactions
primarily involve rental fees for use of Knappogue Corp.s interest in the Knappogue
Castle for various corporate purposes including Company meetings and to entertain
customers. For the three-months ended June 30, 2008 and 2007, fees incurred by the Company
to Knappogue Corp. amounted to $6,820 and $13,487 respectively. These charges have been
included in selling expense in the accompanying condensed consolidated statement of
operations.C.
    
    In April 2004, the Company contracted with BPW, Ltd., for business development
services including providing introductions for the Company to agency brands that would
enhance the Companys portfolio of products and assisting the Company in successfully
negotiating agency agreements with targeted brands. BPW, Ltd. is controlled by a director
of the Company. The contract provided for a monthly retainer to BPW, Ltd. of $3,500 during
the active performance of work by BPW, Ltd., a bonus payable to BPW Ltd. in equal
quarterly installments upon the finalization of an agency brand agreement based upon
estimated annual case sales by the Company during the first year of operations at the rate
of $1 per 9-liter case of volume, less any retainer previously paid, and a commission
based upon actual future sales of the agency brand while under the Companys management.
For the three months ended June 30, 2008 and 2007 and BPW, Ltd. was paid $17,009 and
$12,668, respectively, under this contract. These charges have been included in general
and administrative expense on the accompanying condensed consolidated statements of
operations. As of December 2007, the Company entered into a second contract with BPW, Ltd.
on substantially the same material terms and conditions as the April 2004 agreement. No
amounts were paid to BPW, Ltd. under the December 2007 contract from inception through
June 30, 2008. This contract is cancelable by either party, at their convenience, upon 30
days written notice.D.
    
    For the three-months ended June 30, 2008 and 2007, the Company purchased goods and
services from Terra Manufacturing Limited (Terra) and Carbery Milk Products Limited
(Carbery) of approximately $1,256,896 and $625,725, respectively. The Company had
assumed the underlying supplier agreements with Terra and Carbery from CB-Ireland. Terras
affiliate, Tanis Investments, and Carbery are both shareholders in the Company. As of June
30, and March 31, 2008, the Company was indebted to these two affiliates in the amount of
approximately $407,552 and $611,572, respectively, which is included in due to
stockholders and affiliates on the accompanying condensed consolidated balance sheet.E.
    
    For the three-months ended June 30, 2008 and 2007, the Company made royalty payments
of approximately $11,850 and $10,112, respectively, for use of a patent, to an entity that
is owned by two stockholders in the Company. These charges have been included in other
expense on the accompanying condensed consolidated statements of operations. The royalty
agreement also includes the right to acquire the patent for the Trinity Bottle for 90,000
($142,000) for the duration of the licensing period, which expires on December 1, 2008.F.
    
    On April 18, 2007, the Company entered into a Securities Purchase Agreement (the Securities
Purchase Agreement) with selected investors (each an Investor and collectively, the
Investors). Pursuant to the terms of the Securities Purchase Agreement, the Company sold in a
private placement a total of 3,520,035 shares of its Common Stock for aggregate gross proceeds of
$21,014,609. Net proceeds to the Company after offering costs were $19,618,484. The transaction
closed on May 8, 2007. The Investors included, among others, Frederick M. R. Smith and Phillip
Frost, MD, each a then director of the Company, and CNF Investments II, LLC, of which Robert J.
Flanagan, a director of the Company, is a manager.As part of the transaction, Investors received warrants to purchase approximately 1,408,014
additional shares at an exercise price of $6.57 per share (the Warrants). The Warrants are
exercisable for a period of five years from the closing of the offering. The Warrants contain
anti-dilution protection for stock splits and similar events, but do not contain any price-based
anti-dilution adjustments..
    
    Pursuant to the Securities Purchase Agreement, the Company and the Investors made
representations and warranties regarding matters that are customarily included in financings of
this nature. Subject to time-related conditions or qualifications, such representations and
warranties shall survive the closing. The Securities Purchase Agreement also contains
indemnification agreements among the parties in the event of certain liabilities.On April 18, 2007, the Company entered into a Registration Rights Agreement (the
Registration Rights Agreement) with the Investors. Pursuant to the Registration Rights
Agreement, the Company has agreed to register the resale of the shares of Common Stock sold to the
Investors pursuant to the Securities Purchase Agreement, including the shares issuable upon
exercise of the Warrants. The Company agreed to file with the SEC a registration statement with
respect to this registration within 30 days after closing. The Company filed such registration
statement on May 31, 2007, within this 30 day timeframe. The registration statement was declared
effective as of July 9, 2007. If certain of its obligations under the Registration Rights Agreement
are not met, the Company has agreed to make pro-rata liquidated damages payments to each Investor.
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##### Table of Contents



NOTE 14  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 2017, subject to annual extensions on a rolling ten year basis. 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 year and contracts to purchase that
amount. For the calendar year ended December 31, 2008, the Company has contracted to
purchase approximately 684,000 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 has entered into a distribution agreement with Gaelic Heritage
Corporation, Ltd. (Gaelic), an international supplier, to be the sole-producer of
Celtic Crossing, one of the Companys products, for an indefinite period.C.
    
    In August 2004, Castle Brands entered into an agency agreement with I.L.A.R. S.p.A.,
the producer of Pallini Limoncello and its flavor extensions, to be the sole and exclusive
importer of Pallini Limoncello and its flavor extensions throughout the United States and
its territories and possessions. This agreement is subject to automatic renewal for as
much as five years per renewal period upon Castle Brands achievement of contractual case
sale targets. The agreement expires on December 31, 2009.Under this agreement, Castle Brands is permitted to import Pallini Limoncello and its flavor
extensions at a set price, updated annually, and is obligated to set aside a portion of the
gross margin toward a marketing fund for Pallini. The agreement also encompasses the hiring
of a Pallini Brand Manager at Castle Brands with Pallini reimbursing the costs of this
position up to a stipulated annual amount. These reimbursements are included in the
accompanying condensed consolidated financial statements as a reduction in selling expense.D.
    
    In September 2004, CB-USA entered into an exclusive distribution agreement with
Goslings Export (Bermuda) Limited (GXB) to be the sole and exclusive importer of
Goslings rum brands within the United States. Under this agreement, CB-USA will receive a
net sales commission on each case sold. In February 2005, GXB sold its interest in the
distribution agreement to Gosling-Castle Partners Inc.CB-USA will receive a stipulated commission per case, subject to adjustment, provided
certain case sales are achieved, for all sales in calendar years under the distribution
agreement. The sales commission is net of agreed reimbursements, including taxes and
payments to the marketing affiliate, GCP. This distribution agreement is for fifteen years,
subject to extension.E.
    
    In February 2008, Castle Brands entered into an agreement (the Agreement) with
Autentica Tequilera S.A. de C.V. (Autentica Tequilera) pursuant to which the Company
became the exclusive US importer of a new super premium tequila Tequila Tierras
Autenticas de Jalisco (Tierras).Pursuant to the Agreement, the Company obtained rights of first refusal with respect to the
importation of (i) any new market for Tierras (except Mexico), and a (ii) any new products
of Autentica Tequilera within the US or any other market (except Mexico). The Company also
obtained a right of first refusal on any sale of the Tierras brand, and a right to acquire
up to 35% of the economic benefit of any such sale with a third-party based upon the
achievement of certain cumulative sales targets. The Agreement has a term of five years,
with automatic five-year renewals based upon sale targets, which are agreed for the first
two renewals and to be negotiated for subsequent renewals.
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These products are not yet for sale in the United States but are expected to be available
during the third quarter of fiscal 2009.F.
    
    The Company subleases office space in Dublin, Ireland and New York, NY and leases
office space in Houston, TX and Louisville, KY. The Dublin office lease commenced on June
1, 2004 and extends through February 28, 2009. Rent is payable quarterly in advance. The
New York City lease commenced on August 15, 2004 and extends through December 31, 2008.
The Houston lease commenced on February 24, 2000 and extends through March 31, 2009. The
Louisville lease commenced June 1, 2004, became effective for the Company concurrent with
the acquisition of McLain & Kyne, Ltd., and expires May 31, 2009. The Company has also
entered into non-cancelable operating leases for certain office equipment.Future minimum lease payments are as follows:
 For the years ending June 30,
    
    Amount2009
    
    $
    234,9272010
    
    
    4,439Total
    
    $
    239,366
 In addition to the above annual rental payments, the Company is obligated to pay its
pro-rata share of utility and maintenance expenses on the leased premises. Rent expense
under operating leases amounted to approximately $95,843 and $105,112 for the three-months
ended June 30, 2008 and 2007 respectively, and is included in general and administrative
expense on the accompanying condensed consolidated statements of operations.G.
    
    Pursuant to the distribution agreement signed in March 1998 between the Company and
Gaelic, which was amended and restated in April 2001, the Company, which currently owns
60% of the Celtic Crossing trademark in the United States, has the option to purchase 70%
of the trademark outside the United States from Gaelic at a specified price adjusted by
interim, annual changes in the Irish Consumer Price Index.In the event of the sale of the brand rights by either the Company or Gaelic, the
non-selling party shall have the right of first refusal to purchase the interest at the same
price as the proposed sale and the right to sell alongside the other party.Pursuant to the agreement, the Company is required to pay royalties to Gaelic for each case
purchased, such royalties are included within cost of sales in the accompanying condensed
consolidated statements of operations.H.
    
    The Company is subject to strict government regulations associated with the
marketing, importation, warehousing, transportation and distribution of spirits.I.
    
    On February 12, 2007, the Company entered into a credit agreement with Frost Nevada
Investments Trust, which is controlled by Dr. Phillip Frost, a former director, which
enabled the Company to borrow up to $5.0 million. Upon entering into the credit agreement,
the Company paid the lender a facility fee of $150,000. For the years ended March 31, 2008
and 2007, the Company had not drawn down on this facility. The facility was terminated
pursuant to its terms following the closing of the May 2007 private placement of common
stock.On October 22, 2007, the Company entered into a credit agreement with Frost Nevada
Investments Trust, which is controlled by Dr. Phillip Frost, a former director of the
Company,
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which enables the Company to borrow up to $5,000,000. Any amounts outstanding under the
Credit Facility bear interest at a rate of 10% per annum. Interest is payable quarterly.
The maturity date of any amounts outstanding is the earlier of (i) one business day after
the closing of financing transactions which results in aggregate gross proceeds to the
Company of at least $10,000,000 and (ii) February 28, 2009.Upon entering into the credit agreement, the Company paid the lender a facility fee of
$175,000. If the Company draws down any amount under the Credit Facility, upon the Company
receiving its first advance, the Company would have to pay the Lender an additional
facility fee of $200,000. As additional consideration for entering into the Credit
Facility, the Company issued to the Lender a warrant to purchase 50,000 shares of Common
Stock, par value $0.01 per share, at an exercise price of $4.00 per share. The Company
ascribed a fair value to the warrant of $59,801 and accounts for the warrant as a deferred
financing cost that is amortized over the life of the underlying credit facility. During
the three months ended June 30, 2008, the Company recorded $14,950 of amortization expense
in connection with the warrant.
 NOTE 15  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, 2008, the Company exceeded
the insured limit by approximately $2,768,865.B.
    
    Suppliers  The Company has entered into a supplier agreement with Irish
Distillers, Ltd., which provides for the production of single malt, blended and grain
Irish whiskeys for the Company through 2015, with automatic renewal thereafter for
successive five (5) calendar year renewal terms.The Company has entered into a distribution agreement with Gaelic Heritage Corporation, Ltd.
(Gaelic), an international supplier, to be the sole-producer of Celtic Crossing, one of
the Companys products, for an indefinite period.The Company has entered into a distribution agreement with ILAR, S.p.A (ILAR), an
international supplier, to be the sole-producer of the Pallini premium Italian liqueurs,
expiring December 31, 2009, subject to a three or five year renewal, depending on case
purchase.The Company has entered into a distribution agreement with Goslings Export (Bermuda)
limited, an international supplier, to be the sole-producer of the Goslings family of rum
products for 15 years.The Company has entered into a supplier agreement with Carbery Milk Products Limited, an
international supplier, which provides for the production of the Companys vodka and cream
products through December 31, 2008. The Company is currently seeking alternative means of
supply, including but not limited to the extension or renewal of the existing contract.The Company has entered into a bottling and services agreement with Terra Limited which
provides for the bottling of the Companys vodka, whiskey and cream products through
February 28, 2009. The Company is currently seeking alternative means of supply, including
but not limited to the extension or renewal of the existing contract.The Company has entered into an agreement with Autentica Tequilera to be the sole producer
of a new super premium tequila Tequila Tierras Autenticas de Jalisco (Tierras). These
products are not yet for sale in the United States but are expected to be available during
the third quarter of fiscal 2009.
 21




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##### Table of Contents



C.
    
    Customers  Sales to one customer accounted for approximately 19% and 17% of
the Companys revenues for the three-months ended June 30, 2008 and June 30, 2007,
respectively. Three customers accounted for approximately 29% and 24% of accounts
receivable as of June 30, 2008 and March 31, 2008, respectively.
 NOTE 16  GEOGRAPHIC INFORMATION
   For the three-months ended June 30,2008
    
    
    2007Consolidated Revenue:International
    
    $
    1,214,608
    
    
    
    20.6
    %
    
    $
    1,703,630
    
    
    
    30.3
    %United States
    
    
    4,676,787
    
    
    
    79.4
    %
    
    
    3,920,455
    
    
    
    69.7
    %Total Consolidated Revenue
    
    $
    5,891,395
    
    
    
    100
    %
    
    $
    5,624,085
    
    
    
    100
    %Consolidated Depreciation and Amortization:International
    
    $
    22,900
    
    
    
    9.4
    %
    
    $
    21,573
    
    
    
    7.9
    %United States
    
    
    220,607
    
    
    
    90.6
    %
    
    
    249,854
    
    
    
    92.1
    %Total Consolidated Depreciation and
Amortization
    
    $
    243,507
    
    
    
    100
    %
    
    $
    271,427
    
    
    
    100
    %Income Tax Benefit:United States
    
    
    37,038
    
    
    
    100
    %
    
    
    37,038
    
    
    
    100
    %Revenues by Category:Vodka
    
    $
    1,213,810
    
    
    
    20.6
    %
    
    $
    1,640,935
    
    
    
    29.2
    %Rum
    
    
    2,137,424
    
    
    
    36.3
    %
    
    
    2,088,813
    
    
    
    37.1
    %Liqueurs/Cordials
    
    
    1,513,959
    
    
    
    25.7
    %
    
    
    1,048,790
    
    
    
    18.7
    %Whiskey
    
    
    899,351
    
    
    
    15.3
    %
    
    
    762,043
    
    
    
    13.5
    %Other*
    
    
    126,851
    
    
    
    2.1
    %
    
    
    83,504
    
    
    
    1.5
    %Total Consolidated Revenue
    
    $
    5,891,395
    
    
    
    100
    %
    
    $
    5,624,085
    
    
    
    100
    %Consolidated Assets:International
    
    $
    4,925,119
    
    
    
    12.6
    %
    
    $
    6,035,598
    
    
    
    8.7
    %United States
    
    
    34,076,695
    
    
    
    87.4
    %
    
    
    62,971,746
    
    
    
    91.3
    %Total Consolidated Assets
    
    $
    39,001,814
    
    
    
    100.0
    %
    
    $
    69,007,344
    
    
    
    100.0
    %
 
 *
    
    Includes related food products. NOTE 17  SUBSEQUENT EVENTS
 Frost Nevada Investments Trust Credit Agreement
  Promissory Notes to Certain Executives
  22




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23




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Note Regarding Forward Looking Statements
  
    
    our ability to continue as a going concern;
    
    our history of losses and expectation of further losses;
    
    the effect of poor operating results on our company;
    
    the effect of growth on our infrastructure, resources and existing sales;
    
    our ability to expand our operations in both new and existing markets and our ability
to develop or acquire new brands;
    
    the impact of supply shortages and alcohol and packaging costs in general;
    
    our ability to raise capital;
    
    our ability to fully utilize and retain new executives;
    
    negative publicity surrounding our products or the consumption of beverage alcohol
products in general;
    
    our ability to acquire and/or maintain brand recognition and acceptance;
    
    trends in consumer tastes;
    
    our ability to protect trademarks and other proprietary information;
    
    the impact of litigation;
    
    the impact of federal, state, local or foreign government regulations;
    
    the effect of competition in our industry; and
    
    economic and political conditions generally.
  24




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##### Table of Contents



Currency Translation
   
   Overview
   Change in operational emphasis
  
    
    Revenue growth from the Companys existing brands
    
    Revenue growth from new brands acquired via
agency relationships
    
    Revenue growth from brands created to address as yet unsatisfied market needs.
  25




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##### Table of Contents



Cost containment
  Operational performance overview
  Three-months Ended June30,Case Sales
    
    2008
    
    2007CasesUnited States
    
    
    48,937
    
    
    
    44,723International
    
    
    18,372
    
    
    
    29,447Total
    
    
    67,309
    
    
    
    74,170Vodka
    
    
    25,541
    
    
    
    35,997Rum
    
    
    22,726
    
    
    
    22,770Liqueurs/cordials
    
    
    12,649
    
    
    
    10,418Whiskey
    
    
    6,393
    
    
    
    4,985Total
    
    
    67,309
    
    
    
    74,170Percentage of CasesUnited States
    
    
    72.7
    %
    
    
    60.3
    %International
    
    
    27.3
    %
    
    
    39.7
    %Total
    
    
    100.0
    %
    
    
    100.0
    %Vodka
    
    
    37.9
    %
    
    
    48.5
    %Rum
    
    
    33.8
    %
    
    
    30.7
    %
 26




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##### Table of Contents



Three-months Ended June30,Case Sales
    
    2008
    
    2007Liqueurs/cordials
    
    
    18.8
    %
    
    
    14.1
    %Whiskey
    
    
    9.5
    %
    
    
    6.7
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
   Results of operations
  Three-months ended June 30,2008
    
    2007Sales, net
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    67.1
    %
    
    
    62.3
    %Gross profit
    
    
    32.9
    %
    
    
    37.7
    %Selling expense
    
    
    58.2
    %
    
    
    75.3
    %General and administrative expense
    
    
    35.2
    %
    
    
    36.6
    %Depreciation and amortization
    
    
    4.1
    %
    
    
    4.8
    %Loss from continuing operations
    
    
    (64.6
    )%
    
    
    (79.0
    )%Other income
    
    
    0.4
    %
    
    
    0.0
    %Other expense
    
    
    (0.2
    )%
    
    
    (0.2
    )%Foreign exchange gain
    
    
    (1.7
    )%
    
    
    1.4
    %Interest expense, net
    
    
    (8.6
    )%
    
    
    (8.7
    )%Current credit/(charge) on derivative financial instrument
    
    
    0.0
    %
    
    
    3.4
    %Income tax benefit
    
    
    0.6
    %
    
    
    0.7
    %
 27




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##### Table of Contents



Three-months ended June 30,2008
    
    2007Minority interests
    
    
    1.1
    %
    
    
    4.3
    %Net loss attributable to common stockholders
    
    
    (73.0
    )%
    
    
    (78.3
    )%
 Three-months Ended June 30, 2008 Compared With Three-months Ended June 30, 2007
 Net sales.
     Increase/(Decrease)in
    
    Percentagecase sales
    
    Increase/(Decrease)Overall
    
    U.S.
    
    Overall
    
    U.S.Vodka
    
    
    (10,456
    )
    
    
    (604
    )
    
    
    (29.0
    )%
    
    
    (3.3
    )%Rum
    
    
    (44
    )
    
    
    2,252
    
    
    
    (0.2
    )%
    
    
    15.1
    %Liqueurs/cordials
    
    
    2,231
    
    
    
    2,633
    
    
    
    21.4
    %
    
    
    29.1
    %Whiskey
    
    
    1,408
    
    
    
    (67
    )
    
    
    28.2
    %
    
    
    (2.8
    )%Total
    
    
    (6,861
    )
    
    
    4,214
    
    
    
    (9.3
    )%
    
    
    9.4
    %
 Gross profit.
  28




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##### Table of Contents



Selling expense.
  General and administrative expense.
 Depreciation and amortization.
 Loss from Operations
 Other Income/(Expense), Net.
 
 Net loss.
 Liquidity and capital resources
  29




---



##### Table of Contents




    
    an increase in working capital requirements to finance higher levels of inventories
and accounts receivable;
    
    increases in advertising, public relations and sales promotions for existing and new
brands;
    
    acquisition of additional spirits brands;
    
    an increase in legal, accounting and other expenses due to our status as a public
company;
    
    financing the operations of our 60%-owned Gosling-Castle Partners strategic export
venture; and
    
    expansion into new markets and within existing markets in the United States and
internationally.
   Hiring of financial advisor
  30




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##### Table of Contents



Cash flows
  Three-months Ended June 30,2008
    
    
    2007Net cash provided by (used in):Operating activities
    
    $
    (3,258
    )
    
    $
    (7,428
    )Investing activities
    
    
    2,108
    
    
    
    1,853Financing activities
    
    
    377
    
    
    
    20,499Effects of foreign currency translation
    
    
    (7
    )
    
    
    Net increase in cash and cash equivalents
    
    $
    (780
    )
    
    $
    14,924
 Operating activities.
   Investing activities.
 Financing activities.
 Contractual obligations
  Subsequent
events
 Frost Nevada Investments Trust Credit Agreement
  Promissory Notes to Certain Executives
  31




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##### Table of Contents



Recent accounting pronouncements
  Business Combinations Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51
 The Fair Value Option for Financial Assets and Financial Liabilities
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  32




---



##### Table of Contents




 
 Item 4T. Controls and Procedures
 Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  33




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Unregistered Sales of Equity Securities
  Use of proceeds from registered securities
  Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  34




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##### Table of Contents



Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 ExhibitNumber
    
    Description31.1
    
    Certification of Principal Executive Officer Pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive and Principal Financial
Officers Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 35




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##### Table of Contents



SIGNATURES
  CASTLE BRANDS INC.By:
    /s/ Donald L. Marsh, Jr.Donald L. Marsh, Jr.President and Chief Operating Officer
(Principal Executive Officer)




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    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.