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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 September 30, 2009
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 001-32849
 CASTLE BRANDS INC.
  Delaware
    
    41-2103550(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 122 East 42nd Street, 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 o
  o Large accelerated filer
    
    o Accelerated filer
    
    o Non-accelerated filer(Do not check if a smaller reporting company)
    
    þ Smaller reporting company
 o þ




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TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements:
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2009 (unaudited) and March 31, 2009
    
    
    3Condensed Consolidated Statements of Operations for the three months and six months ended September 30, 2009
and 2008 (unaudited)
    
    
    4Condensed Consolidated Statement of Changes in Equity for the six months ended September 30, 2009 (unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2009 and 2008
(unaudited)
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 4. Controls and Procedures
    
    
    26PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 6. Exhibits
    
    
    27EX-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
 September 30, 2009
    
    
    March 31, 2009(Unaudited)ASSETS:Current AssetsCash and cash equivalents
    
    $
    599,758
    
    
    $
    4,011,777Short-term investments
    
    
    2,196,556
    
    
    
    3,661,437Accounts receivable  net of allowance for doubtful accounts of $592,683
and $529,256
    
    
    8,469,624
    
    
    
    6,857,267Due from affiliates
    
    
    88,540
    
    
    
    74,295Inventories net of allowance for obsolete and slow moving inventory of
$585,937 and $1,355,159
    
    
    9,273,339
    
    
    
    8,169,667Prepaid expenses and other current assets
    
    
    858,196
    
    
    
    719,700Total Current Assets
    
    
    21,486,013
    
    
    
    23,494,143Equipment net
    
    
    556,651
    
    
    
    605,065Other AssetsIntangible assets  net of accumulated amortization of $3,071,201 and $2,738,718
    
    
    12,599,505
    
    
    
    11,431,988Goodwill
    
    
    474,475
    
    
    
    Restricted cash
    
    
    747,228
    
    
    
    676,403Other assets
    
    
    112,659
    
    
    
    147,659Total Assets
    
    $
    35,976,531
    
    
    $
    36,355,258LIABILITIES AND EQUITY:Current LiabilitiesCurrent maturities of notes payable and capital leases
    
    $
    429,631
    
    
    $
    119,050Accounts payable
    
    
    4,034,851
    
    
    
    3,791,096Accrued expenses
    
    
    1,298,803
    
    
    
    2,511,833Due to stockholders and affiliates
    
    
    2,436,063
    
    
    
    1,290,501Total Current Liabilities
    
    
    8,199,348
    
    
    
    7,712,480Long-Term LiabilitiesNote payable
    
    
    421,062
    
    
    
    300,000Deferred tax liability
    
    
    2,184,988
    
    
    
    2,259,064Total Liabilities
    
    
    10,805,398
    
    
    
    10,271,544Commitments and Contingencies (Note 11)
    
    
    
    
    
    
    Preferred stock, $.01 par value, 25,000,000 shares authorized, none outstanding
    
    
    
    
    
    
    EquityCommon stock, $.01 par value, 225,000,000 shares authorized, 108,955,207 shares
issued and 107,955,207 shares outstanding at September 30, 2009 and 101,612,349
shares issued and outstanding at March 31, 2009, respectively
    
    
    1,089,552
    
    
    
    1,016,123Additional paid-in capital
    
    
    135,558,475
    
    
    
    133,576,957Treasury stock at cost, 1,000,000 shares at September 30, 2009 and none at March
31, 2009
    
    
    (180,000
    )
    
    
    Accumulated deficit
    
    
    (110,264,764
    )
    
    
    (109,234,310
    )Accumulated other comprehensive (loss) income
    
    
    (1,051,278
    )
    
    
    642,907Total common stockholders equity
    
    
    25,151,985
    
    
    
    26,001,677Noncontrolling interests
    
    
    19,148
    
    
    
    82,037Total equity
    
    
    25,171,133
    
    
    
    26,083,714Total Liabilities and Equity
    
    $
    35,976,531
    
    
    $
    36,355,258
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CASTLE BRANDS INC. AND SUBSIDIARIES


Condensed Consolidated Statements of Operations
(Unaudited)
 Three months ended September 30,
    
    
    Six months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Sales, net*
    
    $
    8,707,569
    
    
    $
    7,431,100
    
    
    $
    14,561,795
    
    
    $
    13,322,495Cost of sales*
    
    
    5,749,934
    
    
    
    5,085,928
    
    
    
    9,295,154
    
    
    
    9,038,613Gross profit
    
    
    2,957,635
    
    
    
    2,345,172
    
    
    
    5,266,641
    
    
    
    4,283,882Selling expense
    
    
    2,418,223
    
    
    
    3,874,105
    
    
    
    5,097,713
    
    
    
    7,303,449General and administrative expense
    
    
    1,375,624
    
    
    
    2,146,424
    
    
    
    2,749,708
    
    
    
    4,218,397Depreciation and amortization
    
    
    227,360
    
    
    
    244,352
    
    
    
    446,732
    
    
    
    487,859Loss from operations
    
    
    (1,063,572
    )
    
    
    (3,919,709
    )
    
    
    (3,027,512
    )
    
    
    (7,725,823
    )Other income
    
    
    143
    
    
    
    9,811
    
    
    
    145
    
    
    
    25,384Other expense
    
    
    (11,469
    )
    
    
    (16,487
    )
    
    
    (21,681
    )
    
    
    (28,212
    )Foreign exchange gain (loss)
    
    
    542,544
    
    
    
    (1,822,077
    )
    
    
    1,584,497
    
    
    
    (1,920,988
    )Interest income (expense), net
    
    
    8,076
    
    
    
    (528,894
    )
    
    
    26,857
    
    
    
    (1,034,244
    )Gain on exchange of 3% note payable
    
    
    
    
    
    
    
    
    
    
    270,275
    
    
    
    Income tax benefit
    
    
    37,038
    
    
    
    37,038
    
    
    
    74,076
    
    
    
    74,076Net loss
    
    
    (487,240
    )
    
    
    (6,240,318
    )
    
    
    (1,093,343
    )
    
    
    (10,609,807
    )Net loss attributable to noncontrolling interests
    
    
    15,779
    
    
    
    106,857
    
    
    
    62,889
    
    
    
    174,165Net loss attributable to common stockholders
    
    $
    (471,461
    )
    
    $
    (6,133,461
    )
    
    $
    (1,030,454
    )
    
    $
    (10,435,642
    )Net loss per common share, basic and diluted,
attributable to common stockholders
    
    $
    (0.00
    )
    
    $
    (0.39
    )
    
    $
    (0.01
    )
    
    $
    (0.67
    )Weighted average shares used in computation,
basic and diluted, attributable to common
stockholders
    
    
    102,588,639
    
    
    
    15,629,776
    
    
    
    102,151,195
    
    
    
    15,629,776
 
 *
    
    Sales, net and Cost of sales include excise taxes of $1,530,181 and $1,127,135 for the
three months ended September 30, 2009 and 2008, respectively, and $2,704,785 and $2,105,189 for
the six months ended September 30, 2009 and 2008, respectively.  4




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CASTLE BRANDS INC. AND SUBSIDIARIES


Condensed Consolidated Statement of Changes in Equity
(Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    

    OtherCommon Stock
    
    
    Paid-in
    
    
    Treasury
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Noncontrolling
    
    
    TotalShares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    Income (Loss)
    
    
    Interests
    
    
    EquityBALANCE, MARCH 31, 2009
    
    
    101,612,349
    
    
    $
    1,016,123
    
    
    $
    133,576,957
    
    
    $
    
    
    
    $
    (109,234,310
    )
    
    $
    642,907
    
    
    $
    82,037
    
    
    $
    26,083,714Comprehensive lossNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,030,454
    )
    
    
    
    
    
    
    (62,889
    )
    
    
    (1,093,343
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,694,185
    )
    
    
    
    
    
    
    (1,694,185
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,787,528
    )Exchange of 3% note payable, including interest (net
of gain on conversion of $270,275)
    
    
    200,000
    
    
    
    2,000
    
    
    
    42,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,000Repurchase of common stock now held as treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (180,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (180,000
    )Issuance of common stock in connection with Betts &
Scholl, LLC asset acquisition
    
    
    7,142,858
    
    
    
    71,429
    
    
    
    1,857,143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,928,572Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    82,375
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,375BALANCE, SEPTEMBER 30, 2009
    
    
    108,955,207
    
    
    $
    1,089,552
    
    
    $
    135,558,475
    
    
    $
    (180,000
    )
    
    $
    (110,264,764
    )
    
    $
    (1,051,278
    )
    
    $
    19,148
    
    
    $
    25,171,133
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CASTLE BRANDS INC. and SUBSIDIARIES


Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Six months ended September 30,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (1,093,343
    )
    
    $
    (10,609,807
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    446,732
    
    
    
    487,859Provision for doubtful accounts
    
    
    30,685
    
    
    
    41,228Amortization of deferred financing costs
    
    
    
    
    
    
    186,858Deferred tax benefit
    
    
    (74,076
    )
    
    
    (74,076
    )Effect of changes in foreign exchange
    
    
    (1,855,246
    )
    
    
    1,736,691Stock-based compensation expense
    
    
    82,374
    
    
    
    417,803Provision for obsolete inventories
    
    
    (505,270
    )
    
    
    (112,419
    )Non-cash interest charge
    
    
    
    
    
    
    147,124Gain on exchange of 3% note payable
    
    
    (270,275
    )
    
    
    Changes in operations, assets and liabilities:Accounts receivable
    
    
    (1,498,981
    )
    
    
    1,373,138Due from affiliates
    
    
    (13,173
    )
    
    
    (8,757
    )Inventory
    
    
    666,724
    
    
    
    563,011Prepaid expenses and supplies
    
    
    (130,609
    )
    
    
    (438,446
    )Other assets
    
    
    35,057
    
    
    
    Accounts payable and accrued expenses
    
    
    (1,184,207
    )
    
    
    1,237,356Due to related parties
    
    
    1,114,847
    
    
    
    408,107Total adjustments
    
    
    (3,155,418
    )
    
    
    5,965,477NET CASH USED IN OPERATING ACTIVITIES
    
    
    (4,248,761
    )
    
    
    (4,644,330
    )CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of equipment
    
    
    (33,224
    )
    
    
    (89,794
    )Acquisition of intangible assets
    
    
    
    
    
    
    (16,037
    )Payments under contingent consideration agreements
    
    
    (45,903
    )
    
    
    Short-term investments  net
    
    
    1,464,881
    
    
    
    4,171,520NET CASH PROVIDED BY INVESTING ACTIVITIES
    
    
    1,385,754
    
    
    
    4,065,689CASH FLOWS FROM FINANCING ACTIVITIES:Credit facilities  net
    
    
    (118,948
    )
    
    
    (93,171
    )Note payable  Betts & Scholl
    
    
    (250,000
    )
    
    
    Payments of obligations under capital leases
    
    
    (928
    )
    
    
    (2,063
    )Repurchase of common stock now held as treasury stock
    
    
    (180,000
    )
    
    
    NET CASH USED IN FINANCING ACTIVITIES
    
    
    (549,876
    )
    
    
    (95,234
    )EFFECTS OF FOREIGN CURRENCY TRANSLATION
    
    
    864
    
    
    
    (25,780
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (3,412,019
    )
    
    
    (699,655
    )CASH AND CASH EQUIVALENTS  BEGINNING
    
    
    4,011,777
    
    
    
    1,552,385CASH AND CASH EQUIVALENTS  ENDING
    
    $
    599,758
    
    
    $
    852,730
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Six months ended September 30,2009
    
    
    2008SUPPLEMENTAL DISCLOSURES:Schedule of non-cash investing and financing activities:Exchange of $314,275 of the 3% note payable,
including all outstanding interest by issuance of
common stock for $44,000 in May 2009
    
    $
    314,275
    
    
    $
    Acquisition of Betts & Scholl, LLC assets by
issuance of common stock in September 2009
    
    $
    1,928,572
    
    
    $
    Acquisition of Betts & Scholl, LLC assets by
issuance of net note payable in September 2009
    
    $
    844,541
    
    
    $
    Interest paid
    
    $
    5,778
    
    
    $
    724,365
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CASTLE BRANDS INC. AND SUBSIDIARIES


Notes to Condensed Consolidated Financial Statements  Unaudited
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
  A.
    
    Description of business and business combination  The condensed consolidated
financial statements include the accounts of the Company, its wholly-owned subsidiaries,
Castle Brands (USA) Corp. (CB-USA) and McLain & Kyne, Ltd. (McLain & Kyne), and its
wholly-owned foreign subsidiaries, Castle Brands Spirits Group Limited (CB-IRL) and
Castle Brands Spirits Marketing and Sales Company Limited, and its 60% ownership interest
in Gosling-Castle Partners, Inc. (GCP), with adjustments for income or loss allocated
based upon percentage of ownership. All significant intercompany transactions and balances
have been eliminated.B.
    
    Organization and operations  The Company is principally engaged in the
importation, marketing and sale of fine spirit brands of vodka, whiskey, rums, tequila and
liqueurs and fine wines in the United States, Canada, Europe, Latin America and the
Caribbean. The vodka, Irish whiskeys and certain liqueurs are procured by CB-IRL, billed in
Euros and imported from Europe into the United States. The risk of fluctuations in foreign
currency is borne by the U.S. entities.C.
    
    Goodwill and other intangible assets  Goodwill represents the excess of
purchase price including related costs over the value assigned to the net tangible and
identifiable intangible assets of businesses acquired. Goodwill and other identifiable
intangible assets with indefinite lives are not amortized, but instead are tested for
impairment annually, or more frequently if circumstances indicate a possible impairment may
exist. Intangible assets with estimable useful lives are amortized over their respective
estimated useful lives, generally on a straight-line basis, and are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value may not be
recoverable.D.
    
    Impairment of long-lived assets  Under the Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) 310, Accounting for the
Impairment or Disposal of Long-lived Assets, the Company periodically reviews whether
changes have occurred that would require revisions to the carrying amounts of its definite
lived, long-lived assets. When the sum of the expected future cash flows is less than the
carrying amount of the asset, an impairment loss is recognized based on the fair value of
the asset.E.
    
    Treasury stock  Treasury stock purchases are accounted for under the cost
method whereby the entire cost of the acquired stock is recorded as treasury stock. Gains
and losses on the subsequent reissuance of shares will be credited or charged to additional
paid-in capital using the average-cost method.F.
    
    Excise taxes and duty  Excise taxes and duty are computed at standard rates
based on alcohol proof per gallon/liter and are paid after finished goods are imported into
the United States and then transferred out of bond. Excise taxes and duty are recorded to
inventory as a component of the cost of the underlying finished goods. When the underlying
products are sold ex warehouse, the sales price reflects the taxes paid and the
inventoried excise taxes and duties are charged to cost of sales.G.
    
    Foreign currency  The functional currency for the Companys foreign
operations is the Euro in Ireland and the British Pound in the United Kingdom. Under ASC
830, Foreign Currency Matters (ASC 830), 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
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foreign currency transactions are shown as a separate line item in the consolidated
statements of operations. The Companys vodka, Irish whiskeys and certain liqueurs are
procured by CB-IRL and billed in Euros to CB-USA, with the risk of foreign exchange gain or
loss resting with CB-USA. Also, the Company has funded the continuing operations of the
international subsidiaries. The Company considers these transactions to be trading balances
and short-term funding subject to transaction adjustment under ASC 830. As such, at each
balance sheet date, the Euro denominated intercompany balances included on the books of the
foreign subsidiaries are restated in U.S. Dollars at the exchange rate in effect at the
balance sheet date, with the resulting foreign currency transaction gain or loss included in
net loss.
 H.
    
    Fair value of financial instruments  ASC 825, Financial Instruments (ASC
825), defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties and requires
disclosure of the fair value of certain financial instruments. The Company believes that
there is no material difference between the fair-value and the reported amounts of
financial instruments in the Companys balance sheets due to the short term maturity of
these instruments, or with respect to the Companys debt, as compared to the current
borrowing rates available to the Company.The Companys investments are reported at fair value in accordance with authoritative
guidance, which accomplishes the following key objectives:
 
    
    Defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at
the measurement date;
    
    Establishes a three-level hierarchy (valuation hierarchy) for fair value
measurements;
    
    Requires consideration of the Companys creditworthiness when valuing
liabilities; and
    
    Expands disclosures about instruments measured at fair value.
 The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date. A financial instruments categorization within the
valuation hierarchy is based upon the lowest level of input that is significant to the fair
value measurement. The three levels of the valuation hierarchy are as follows:
 
    
    Level 1  inputs to the valuation methodology are quoted prices (unadjusted)
for identical assets or liabilities in active markets.
    
    Level 2  inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are observable for
the asset or liability, either directly or indirectly, for substantially the full
term of the financial instrument.
    
    Level 3  inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
 I.
    
    Income taxes  Under ASC 740, 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 not recognized any adjustments for uncertain tax provisions. The Company
recognizes interest and penalties related to uncertain tax positions in general and
administrative expense; however, no such provisions for accrued interest and penalties
related to uncertain tax positions have been recorded as of September 30, 2009.The Companys income tax benefit for the three and six months ended September 30, 2009 and
2008 consists of federal, state and local taxes attributable to GCP, which does not file a
consolidated income tax return with the Company. In connection with the investment in GCP,
the Company recorded a deferred tax liability on the ascribed value of the acquired
intangible assets of $2,222,222, increasing the value of the asset. The deferred tax
liability is being reversed and a deferred tax benefit is being recognized over the
amortization period of the intangible asset (15 years). For the three-month and six-month
periods ended September 30, 2009 and 2008, the Company recognized $37,038 and $74,076 of
deferred tax benefits, respectively.J.
    
    Accounting standards adopted  In August 2009, the FASB issued authoritative
guidance which amends existing GAAP for fair value measurement guidance by clarifying the
fair value measurement requirements for liabilities that lack a quoted price in an active
market. Per the guidance, a valuation technique based on a quoted market price for the
identical or similar liability when traded as an asset or another valuation technique
(e.g., an income or market approach) that is consistent with the underlying principles of
GAAP for fair value measurements would be appropriate. The guidance was effective August
2009, the issuance date, and had no material impact on the Companys results of operations,
cash flows or financial condition.
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In June 2009, the ASC was issued. The ASC is the source of authoritative GAAP to be applied
by nongovernmental entities. The ASC is effective for financials statements issued for
interim and annual periods ending after September 15, 2009. Rules and interpretive releases
of the SEC under authority of federal securities laws are also sources of authoritative GAAP
for SEC registrants. All other accounting literature not included in the ASC is
non-authoritative. The adoption of the ASC did not have a material impact on the Companys
results of operations, cash flows or financial condition.In May 2009, the FASB issued authoritative guidance establishing general standards of
accounting for and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The guidance requires the
disclosure of the date through which an entity has evaluated subsequent events and the basis
for that date. The Company implemented this standard for the quarter ended June 30, 2009. For
the quarter ended September 30, 2009, the Company has evaluated subsequent events through the
date the financial statements were issued on November 13, 2009.In June 2008, the FASB issued authoritative guidance in determining whether an instrument (or
embedded feature) is indexed to an entitys own stock. The guidance outlines a two-step
approach to evaluate the instruments contingent exercise provisions, if any, and to evaluate
the instruments settlement provisions when determining whether an equity-linked financial
instrument (or embedded feature) is indexed to an entitys own stock. The Company implemented
these provisions effective for the fiscal year beginning April 1, 2009 and these provisions
did not have a material impact on the Companys results of operations, cash flows or
financial condition.In December 2007, the FASB issued authoritative guidance regarding noncontrolling interests
in consolidated financial statements that provides that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. This presentation is based upon the view of
the consolidated business as a single economic entity and considers minority ownership
interests in consolidated subsidiaries as equity in the consolidated entity.The standard requires that companies:
 
    
    present noncontrolling interests (formerly described as minority interests)
in the consolidated balance sheet as a separate line item within equity;
    
    separately present on the face of the income statement the amount of
consolidated net income (loss) attributable to the parent and to the noncontrolling
interest;
    
    account for changes in ownership interests that do not result in a change in
control as equity transactions; and
    
    upon deconsolidation of a subsidiary due to a change in control, measure any
retained interest at fair value and record a gain or loss for both the portion sold
and the portion retained.
 The adoption of the standard had no effect on earnings-per-share because under the guidance,
earnings-per-share data will continue to be calculated in the same way that data were
calculated before the standard was issued.K.
    
    Reclassifications  In accordance with the authoritative guidance the
Company adopted on April 1, 2009, the Company has presented and disclosed noncontrolling
interests in its condensed consolidated financial statements. Specifically, the
Company:
 
    
    reclassified $82,037 of noncontrolling interests at April 1, 2009 in
GCP to a separate line within total equity;
    
    recorded $106,857 and $174,165 of loss attributable to noncontrolling
interests in a separate line on the condensed consolidated statements of operations
after net loss to arrive at net loss attributable to common stockholders for the
three and six months ended September 30, 2008, respectively;
    
    recorded $15,779 and $62,889 of total comprehensive loss attributable to
noncontrolling interests for the three and six months ended September 30, 2009,
respectively, in a separate line on the condensed consolidated statement of equity;
and
    
    included $106,857 and $174,165 of net loss attributable to noncontrolling
interests in the net loss in the condensed consolidated statements of cash flows for
the three and six months ended September 30, 2008.
 L.
    
    Recent accounting pronouncements   In June 2009, the FASB issued
authoritative guidance which eliminates the concept of a qualifying special-purpose entity,
creates more stringent conditions for reporting a transfer of a portion of a financial
asset as a sale, clarifies other sale-accounting criteria, and changes the initial
measurement of a transferors interest in transferred financial assets. This guidance will
be effective for the Company on April 1, 2010. The Company is evaluating the impact the
implementation of the guidance will have on its results of operations, cash flows or
financial condition.
 10




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##### Table of Contents



In June 2009, the FASB issued authoritative guidance which eliminates exceptions to
consolidating qualifying special-purpose entities, contains new criteria for determining the
primary beneficiary, and increases the frequency of required reassessments to determine
whether a company is the primary beneficiary of a variable interest entity. This guidance
also contains a new requirement that any term, transaction, or arrangement that does not have
a substantive effect on an entitys status as a variable interest entity, a companys power
over a variable interest entity, or a companys obligation to absorb losses or its right to
receive benefits of an entity must be disregarded. The elimination of the qualifying
special-purpose entity concept and its consolidation exceptions means more entities will be
subject to consolidation assessments and reassessments. This guidance will be effective for
the Company on April 1, 2010. The Company is evaluating the impact the implementation of the
guidance will have on its results of operations, cash flows or financial condition.In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for
the consolidation of variable interest entities. The guidance affects the overall
consolidation analysis and requires enhanced disclosures on involvement with variable
interest entities. The guidance is effective for fiscal years beginning after November 15,
2009. The Company does not expect the adoption of the standard will have a material impact on
its results of operations, cash flows or financial condition.
 NOTE 2  BASIC AND DILUTED NET LOSS PER COMMON SHARE
   Six months ended September 30,2009
    
    
    2008Stock options
    
    
    3,224,900
    
    
    
    1,994,825Warrants to purchase stock
    
    
    2,081,814
    
    
    
    2,305,432Convertible debentures
    
    
    
    
    
    
    1,192,380Total
    
    
    5,306,714
    
    
    
    5,492,637
 NOTE 3  SHORT-TERM INVESTMENTS
  GrossAdjusted
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gain (Loss)
    
    
    Fair ValueSeptember 30, 2009Money market accounts
    
    $
    511,705
    
    
    $
    
    
    
    $
    511,705Certificates of deposit
    
    
    1,684,851
    
    
    
    
    
    
    
    1,684,851Total
    
    $
    2,196,556
    
    
    $
    
    
    
    $
    2,196,556
 GrossAdjusted
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gain (Loss)
    
    
    Fair ValueMarch 31, 2009Money market accounts
    
    $
    1,001,320
    
    
    $
    
    
    
    $
    1,001,320Certificates of deposit
    
    
    2,660,117
    
    
    
    
    
    
    
    2,660,117Total
    
    $
    3,661,437
    
    
    $
    
    
    
    $
    3,661,437
 11




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##### Table of Contents



NOTE 4  INVENTORIES
 September 30,
    
    
    March 31,2009
    
    
    2009Raw materials
    
    $
    2,548,284
    
    
    $
    2,048,398Finished goods
    
    
    6,725,055
    
    
    
    6,121,269Total
    
    $
    9,273,339
    
    
    $
    8,169,667
    NOTE 5  ACQUISITIONS
 Acquisition of Betts & Scholl, LLC assets
  Acquisition of McLain & Kyne
  NOTE 6  GOODWILL AND INTANGIBLE ASSETS
  AmountBalance as of March 31, 2009
    
    $
    Payments under McLain and Kyne agreement
    
    
    45,903
 12




---



##### Table of Contents



AmountAcquisition of Betts & Scholl assets
    
    
    428,572Balance as of September 30, 2009
    
    $
    474,475
  September 30, 2009
    
    
    March 31, 2009Definite life brands
    
    $
    170,000
    
    
    $
    170,000Trademarks
    
    
    479,248
    
    
    
    479,248Rights
    
    
    8,271,555
    
    
    
    8,271,555Product development
    
    
    20,350
    
    
    
    20,350Patents
    
    
    994,000
    
    
    
    994,000Other
    
    
    28,480
    
    
    
    28,4809,963,633
    
    
    
    9,963,633Less: accumulated amortization
    
    
    3,071,201
    
    
    
    2,738,718Net
    
    
    6,892,432
    
    
    
    7,224,915Other identifiable intangible assets  indefinite lived
    
    
    5,707,073
    
    
    
    4,207,073$
    12,599,505
    
    
    $
    11,431,988
  September 30, 2009
    
    
    March 31, 2009Definite life brands
    
    $
    132,218
    
    
    $
    126,552Trademarks
    
    
    114,243
    
    
    
    97,652Rights
    
    
    2,475,953
    
    
    
    2,201,462Product development
    
    
    2,600
    
    
    
    Patents
    
    
    346,187
    
    
    
    313,052Accumulated amortization
    
    $
    3,071,201
    
    
    $
    2,738,718
 NOTE 7  RESTRICTED CASH
   .
 NOTE 8  NOTES PAYABLE AND CAPITAL LEASE
 September 30,
    
    
    March 31,2009
    
    
    2009Notes payable consist of the following:Credit facilities
    
    $
    6,152
    
    
    $
    118,122Note payable (A)
    
    
    
    
    
    
    300,000Note payable (B)
    
    
    844,541
    
    
    
    850,693
    
    
    
    418,122Capital leases
    
    
    
    
    
    
    928Total
    
    $
    850,693
    
    
    $
    419,050
 
 (A)
    
    In May 2009, the Company exchanged its 3% note payable in the principal amount of
$300,000, plus accrued but unpaid interest of $14,275, for 200,000 shares of common stock
valued at $44,000. The Company recorded a pre-tax non-cash gain on the exchange of the note
of $270,275 in the quarter ended June 30, 2009.(B)
    
    In connection with the Betts & Scholl asset acquisition in September 2009, the Company
issued a secured promissory note (the Note) in the aggregate principal amount of
$1,094,541. The Note is secured by the Betts & Scholl inventory acquired 13




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##### Table of Contents



by the Company
under a security agreement. The Note provides for an initial payment of $250,000, paid at
closing, and for eight equal quarterly payments of principal and interest, with the final
payment due on September 21, 2011. Interest under the note accrues at an annual rate of
0.84%, the applicable federal rate on the acquisition date, compounded quarterly. The Note
contains customary events of default, which if uncured, entitle the holder to accelerate
the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the
Note. At September 30, 2009, $423,479 and $421,062 of principal due on the Note is included
in current and long-term liabilities, respectively. NOTE 9  EQUITY
 Common stock
 Treasury stock
 NOTE 10  STOCK-BASED COMPENSATION
 A.
    
    Stock Incentive Plan  In July 2003, the Company implemented the 2003 Stock
Incentive Plan (the Plan) which provides for awards of incentive and non-qualified stock
options, restricted stock and stock appreciation rights for its officers, employees,
consultants and directors to attract and retain such individuals. Stock option grants under
the Plan are granted with an exercise price at or above the fair market value of the
underlying common stock at the date of grant, generally vest over a four or five year
period and expire ten years after the grant date.As established, there were 2,000,000 shares of common stock reserved and available for
distribution under the Plan. In January 2009, the Companys stockholders approved an
amendment to the Plan to increase the number of shares available under the Plan from
2,000,000 to 12,000,000 and to establish the maximum number of shares issuable to any one
individual in any particular year. As of September 30, 2009, 8,196,528 shares remain
available for issuance under the Plan.
  Six months ended September 30,2009
    
    
    2008Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of period
    
    
    3,555,975
    
    
    $
    2.57
    
    
    
    1,617,625
    
    
    $
    6.37Granted
    
    
    425,000
    
    
    
    0.33
    
    
    
    555,700
    
    
    
    0.30Forfeited
    
    
    (756,075
    )
    
    
    5.31
    
    
    
    (178,500
    )
    
    
    6.56Outstanding at end of period
    
    
    3,224,900
    
    
    $
    1.63
    
    
    
    1,994,825
    
    
    $
    4.66Exercisable at end of period
    
    
    1,069,900
    
    
    $
    4.27
    
    
    
    866,300
    
    
    $
    7.02Weighted average fair value of grants during period
    
    
    
    
    
    $
    0.11
    
    
    
    
    
    
    $
    0.15
 14




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##### Table of Contents



Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    
    Average
    
    
    AggregateRange of
    
    
    
    
    
    Life in
    
    
    
    
    
    
    Exercise
    
    
    IntrinsicExercise Prices
    
    Shares
    
    
    Years
    
    
    Shares
    
    
    Price
    
    
    value$0.01  $0.50
    
    
    2,554,900
    
    
    
    8.91
    
    
    
    399,900
    
    
    $
    0.21
    
    
    $
    79,980$1.01  $2.00
    
    
    68,000
    
    
    
    8.34
    
    
    
    68,000
    
    
    
    1.82
    
    
    
    $5.01  $6.00
    
    
    243,500
    
    
    
    4.59
    
    
    
    243,500
    
    
    
    5.97
    
    
    
    $6.01  $7.00
    
    
    17,000
    
    
    
    7.49
    
    
    
    17,000
    
    
    
    6.36
    
    
    
    $7.01  $8.00
    
    
    194,000
    
    
    
    6.17
    
    
    
    194,000
    
    
    
    7.57
    
    
    
    $8.01  $9.00
    
    
    147,500
    
    
    
    6.57
    
    
    
    147,500
    
    
    
    9.00
    
    
    
    3,224,900
    
    
    
    8.53
    
    
    
    1,069,900
    
    
    $
    4.27
    
    
    $
    79,980
 Restricted Stock Grants
   September 30, 2009Risk-free interest rate
    
    
    2.75%  - 3.08
    %Expected option life in years
    
    
    6.25Expected stock price volatility
    
    
    65
    %Expected dividend yield
    
    
    0
    %
 B.
    
    Warrants  The following is a summary of the Companys outstanding warrants
for the periods presented:
 WeightedAverageExercisePricePerWarrants
    
    WarrantWarrants outstanding and exercisable, March 31, 2009
    
    
    2,198,314
    
    
    $
    6.88Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Expired
    
    
    (116,500
    )
    
    
    8.00Warrants outstanding and exercisable, September 30, 2009
    
    
    2,081,814
    
    
    $
    6.82
 15




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##### Table of Contents



NOTE 11  COMMITMENTS AND CONTINGENCIES
 A.
    
    The Company has entered into a supply agreement with Irish Distillers Limited (Irish
Distillers), which provides for the production of Irish whiskeys for the Company through
2014, subject to annual extensions thereafter, provided that the Company and Irish
Distillers agree on the amount of liters of pure alcohol to be provided in the following
year. Irish Distillers may terminate this agreement at the end of its term in 2014. Under
this agreement, the Company is obligated to notify Irish Distillers annually of the amount
of liters of pure alcohol it requires for the current contract year and contracts to
purchase that amount. For the contract year ending June 30, 2010, the Company has
contracted to purchase approximately 995,000 in bulk Irish whiskey. The Company is not
obligated to pay Irish Distillers for any product not yet received. During the term of
this supply agreement, Irish Distillers has the right to limit additional purchases above
the commitment amount.B.
    
    The Company subleases office space in New York, NY, and leases office space in Dublin,
Ireland, and Houston, TX. The New York, NY lease commenced on January 1, 2009 and extends
through April 29, 2010. The Dublin office lease commenced on March 1, 2009 and extends
through November 30, 2013. The Houston, TX lease commenced on February 24, 2000 and extends
through January 31, 2010. The Company has also entered into non-cancelable operating leases
for certain office equipment.
 NOTE 12  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 September 30, 2009 and March 31, 2009, the Company
exceeded the insured limit by approximately $2,302,577 and $4,434,000, respectively.B.
    
    Customers  Sales to three customers accounted for approximately 50.4% and
46.5% of the Companys revenues for the three months ended September 30, 2009 and 2008,
respectively, (of which one customer accounted for 34.7% and 26.4%, respectively, of total
sales). Sales to three customers accounted for approximately 50.6% and 51.9% of the
Companys revenues for the six months ended September 30, 2009 and 2008, respectively, (of
which one customer accounted for 34.9% and 34.8%, respectively, of total sales). Sales to
three customers accounted for approximately 51.6% and 30.8% of accounts receivable at
September 30, 2009 and March 31, 2009, respectively.
 NOTE 13  GEOGRAPHIC INFORMATION
   For the three months ended September 30,2009
    
    
    2008Consolidated Revenue:International
    
    $
    1,026,722
    
    
    
    11.8
    %
    
    $
    1,755,320
    
    
    
    23.6
    %United States
    
    
    7,680,847
    
    
    
    88.2
    %
    
    
    5,675,780
    
    
    
    76.4
    %Total Consolidated Revenue
    
    $
    8,707,569
    
    
    
    100
    %
    
    $
    7,431,100
    
    
    
    100
    %Consolidated Depreciation and Amortization:International
    
    $
    21,533
    
    
    
    9.0
    %
    
    $
    22,277
    
    
    
    9.1
    %United States
    
    
    206,007
    
    
    
    91.0
    %
    
    
    222,075
    
    
    
    90.9
    %Total Consolidated Depreciation and Amortization
    
    $
    227,360
    
    
    
    100
    %
    
    $
    244,352
    
    
    
    100
    %Income tax benefit:United States
    
    $
    37,038
    
    
    
    100
    %
    
    $
    37,038
    
    
    
    100
    %Consolidated Revenue by category:
 16




---



##### Table of Contents



For the three months ended September 30,2009
    
    
    2008Rum
    
    $
    2,707,389
    
    
    
    31.1
    %
    
    $
    2,396,183
    
    
    
    32.3
    %Liqueurs
    
    
    2,371,342
    
    
    
    27.2
    %
    
    
    2,040,700
    
    
    
    27.5
    %Vodka
    
    
    1,614,770
    
    
    
    18.6
    %
    
    
    1,576,913
    
    
    
    21.2
    %Whiskey
    
    
    1,534,645
    
    
    
    17.6
    %
    
    
    1,236,576
    
    
    
    16.6
    %Tequila
    
    
    162,471
    
    
    
    1.9
    %
    
    
    
    
    
    
    
    %Other*
    
    
    316,952
    
    
    
    3.6
    %
    
    
    180,728
    
    
    
    2.4
    %Total Consolidated Revenue
    
    $
    8,707,569
    
    
    
    100
    %
    
    $
    7,431,100
    
    
    
    100
    %
 For the six months ended September 30,2009
    
    
    2008Consolidated Revenue:International
    
    $
    1,908,410
    
    
    
    13.1
    %
    
    $
    2,969,928
    
    
    
    22.3
    %United States
    
    
    12,653,385
    
    
    
    86.9
    %
    
    
    10,352,567
    
    
    
    77.7
    %Total Consolidated Revenue
    
    $
    14,561,795
    
    
    
    100
    %
    
    $
    13,322,495
    
    
    
    100
    %Consolidated Depreciation and Amortization:International
    
    $
    42,412
    
    
    
    9.5
    %
    
    $
    45,177
    
    
    
    9.3
    %United States
    
    
    404,320
    
    
    
    90.5
    %
    
    
    442,682
    
    
    
    90.7
    %Total Consolidated Depreciation and Amortization
    
    $
    446,732
    
    
    
    100
    %
    
    $
    487,859
    
    
    
    100
    %Income tax benefit:United States
    
    $
    74,076
    
    
    
    100
    %
    
    $
    74,076
    
    
    
    100
    %Consolidated Revenue by category:Rum
    
    $
    4,974,595
    
    
    
    34.2
    %
    
    $
    4,533,607
    
    
    
    34.1
    %Liqueurs
    
    
    3,410,093
    
    
    
    23.4
    %
    
    
    3,554,659
    
    
    
    26.7
    %Vodka
    
    
    2,844,130
    
    
    
    19.5
    %
    
    
    2,790,722
    
    
    
    20.9
    %Whiskey
    
    
    2,460,470
    
    
    
    16.9
    %
    
    
    2,135,927
    
    
    
    16.0
    %Tequila
    
    
    339,406
    
    
    
    2.3
    %
    
    
    
    
    
    
    
    %Other*
    
    
    533,101
    
    
    
    3.7
    %
    
    
    307,580
    
    
    
    2.3
    %Total Consolidated Revenue
    
    $
    14,561,795
    
    
    
    100
    %
    
    $
    13,322,495
    
    
    
    100
    %
 September 30, 2009
    
    
    March 31, 2009Consolidated Assets:International
    
    $
    4,119,772
    
    
    
    11.5
    %
    
    $
    4,370,907
    
    
    
    12.0
    %United States
    
    
    31,856,759
    
    
    
    88.5
    %
    
    
    31,984,351
    
    
    
    88.0
    %Total Consolidated Assets
    
    $
    35,976,531
    
    
    
    100.0
    %
    
    $
    36,355,258
    
    
    
    100
    %
 
 *
    
    Includes related non-beverage alcohol products. NOTE 14  SUBSEQUENT EVENTS
  17




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
 ® ® ® ® ® TM ® ® TM TM
  
    
    increase revenues from existing brands.We are focusing our
existing distribution relationships, sales expertise and
targeted marketing activities to concentrate on our more
profitable brands by expanding our domestic and
international distribution relationships to increase the
mutual benefits of concentrating on our most profitable
brands, while continuing to achieve brand recognition and
growth and gain additional market share for our brands
within retail stores, bars and restaurants, and thereby
with end consumers;
    
    improve value chain and manage cost structure.We have
undergone a comprehensive review and analysis of our supply
chains and cost structures both on a company-wide and
brand-by-brand basis. This has included restructurings and
personnel reductions throughout our company. We further
intend to map, analyze and redesign our purchasing and
supply systems to reduce costs in our current operations
and achieve profitability in future operations;
    
    selectively add new premium brands to our portfolio.We
intend to continue developing new brands and pursuing
strategic relationships, joint ventures and acquisitions to
selectively expand our premium spirits and wine portfolio,
particularly by capitalizing on and expanding our already
demonstrated partnering capabilities. Our criteria for new
brands focuses on underserved areas of the beverage alcohol
marketplace, while examining the potential for direct
financial contribution to our company and the potential for
future growth based on development and maturation of agency
brands. We will evaluate future acquisitions and agency
relationships on the basis of their potential to be
immediately accretive and their potential contributions to
our objectives of becoming profitable and further expanding
our product offerings. We expect that future acquisitions,
if consummated, would involve some combination of cash,
debt and the issuance of our stock; and
    
    cost containment.We have taken significant steps over the
past twelve months to reduce our costs, resulting in a
decrease in selling expense and general and administrative
expense of 30.2% and 34.8%, respectively, for the six
months ended September 30, 2009 as compared to the
comparable prior year period. These steps included:
reducing staff in both the U.S. and international
operations; restructuring our international distribution
system; changing distributor relationships in certain
markets; restructuring the Gosling-Castle Partners, Inc.
working relationship; moving production of certain products
to a lower cost facility in the U.S.; and reducing general
and administrative costs, including professional fees,
insurance, occupancy and other overhead costs. Efforts to
further reduce expenses continue.
  Recent Events
  18




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##### Table of Contents



Currency Translation
   
  Critical Accounting Policies
  Financial performance overview
  Three months ended
    
    
    Six months endedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008CasesUnited States
    
    
    67,351
    
    
    
    57,511
    
    
    
    115,228
    
    
    
    106,448International
    
    
    18,944
    
    
    
    27,596
    
    
    
    32,735
    
    
    
    45,968Total
    
    
    86,295
    
    
    
    85,107
    
    
    
    147,963
    
    
    
    152,416Vodka
    
    
    29,818
    
    
    
    31,723
    
    
    
    52,352
    
    
    
    57,265Rum
    
    
    27,591
    
    
    
    26,787
    
    
    
    50,599
    
    
    
    49,512Liqueurs
    
    
    19,533
    
    
    
    17,138
    
    
    
    28,775
    
    
    
    29,787Whiskey
    
    
    8,765
    
    
    
    9,459
    
    
    
    15,023
    
    
    
    15,852Tequila
    
    
    588
    
    
    
    
    
    
    
    1,214
    
    
    
    Total
    
    
    86,295
    
    
    
    85,107
    
    
    
    147,963
    
    
    
    152,416Percentage of CasesUnited States
    
    
    78.0
    %
    
    
    67.6
    %
    
    
    77.9
    %
    
    
    69.8
    %International
    
    
    22.0
    %
    
    
    32.4
    %
    
    
    22.1
    %
    
    
    30.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 19




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##### Table of Contents



Three months ended
    
    
    Six months endedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Vodka
    
    
    34.6
    %
    
    
    37.3
    %
    
    
    35.4
    %
    
    
    37.6
    %Rum
    
    
    32.0
    %
    
    
    31.5
    %
    
    
    34.2
    %
    
    
    32.5
    %Liqueurs
    
    
    22.6
    %
    
    
    20.1
    %
    
    
    19.4
    %
    
    
    19.5
    %Whiskey
    
    
    10.1
    %
    
    
    11.1
    %
    
    
    10.2
    %
    
    
    10.4
    %Tequila
    
    
    0.7
    %
    
    
    0.0
    %
    
    
    0.8
    %
    
    
    0.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Results of operations
  Three months ended
    
    Six months endedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Sales, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    66.0
    %
    
    
    68.4
    %
    
    
    63.8
    %
    
    
    67.8
    %Gross profit
    
    
    34.0
    %
    
    
    31.6
    %
    
    
    36.2
    %
    
    
    32.2
    %Selling expense
    
    
    27.8
    %
    
    
    52.1
    %
    
    
    35.0
    %
    
    
    54.8
    %General and administrative expense
    
    
    15.8
    %
    
    
    28.9
    %
    
    
    18.9
    %
    
    
    31.7
    %Depreciation and amortization
    
    
    2.6
    %
    
    
    3.3
    %
    
    
    3.1
    %
    
    
    3.7
    %Loss from operations
    
    
    (12.2)
    %
    
    
    (52.7
    )%
    
    
    (20.8)
    %
    
    
    (58.0
    )%Other income
    
    
    0.0
    %
    
    
    0.1
    %
    
    
    0.0
    %
    
    
    0.2
    %Other expense
    
    
    (0.1)
    %
    
    
    (0.2
    )%
    
    
    (0.1)
    %
    
    
    (0.2
    )%Foreign exchange gain (loss)
    
    
    6.2
    %
    
    
    (24.5
    )%
    
    
    10.8
    %
    
    
    (14.4
    )%Interest income (expense), net
    
    
    0.1
    %
    
    
    (7.1
    )%
    
    
    0.2
    %
    
    
    (7.8
    )%Gain on exchange of 3% note payable
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    1.9
    %
    
    
    0.0
    %Income tax benefit
    
    
    0.4
    %
    
    
    0.5
    %
    
    
    0.5
    %
    
    
    0.6
    %Net loss
    
    
    (5.6)
    %
    
    
    (84.0
    )%
    
    
    (7.5)
    %
    
    
    (79.6
    )%Net loss attributable to noncontrolling interests
    
    
    0.2
    %
    
    
    1.4
    %
    
    
    0.4
    %
    
    
    1.3
    %Net loss attributable to common stockholders
    
    
    (5.4)
    %
    
    
    (82.5
    )%
    
    
    (7.1)
    %
    
    
    (78.3
    )%
 Three months ended September 30, 2009 compared with three months ended September 30, 2008
 Net sales.
  20




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Increase/(decrease)
    
    Percentagein case sales
    
    increase/(decrease)Overall
    
    U.S.
    
    Overall
    
    U.S.Vodka
    
    
    (1,905
    )
    
    
    1,549
    
    
    
    (6.0
    )%
    
    
    7.8
    %Rum
    
    
    804
    
    
    
    2,565
    
    
    
    3.0
    %
    
    
    13.2
    %Whiskey
    
    
    (694
    )
    
    
    1,494
    
    
    
    (7.3
    )%
    
    
    61.7
    %Liqueurs
    
    
    2,395
    
    
    
    3,644
    
    
    
    14.0
    %
    
    
    23.1
    %Tequila
    
    
    588
    
    
    
    588
    
    
    
    0.0
    %
    
    
    0.0
    %Total
    
    
    1,188
    
    
    
    9,840
    
    
    
    (0.7
    )%
    
    
    16.1
    %
  Gross profit.
 Selling expense.
 General and administrative expense.
 Depreciation and amortization.
 Loss from operations
 Foreign exchange gain (loss).
 Interest income (expense), net.
 21




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Net loss attributable to noncontrolling interests.
 Net loss attributable to common stockholders.
 Six months ended September 30, 2009 compared with six months ended September 30, 2008
 Net sales.
  Increase/(decrease)
    
    Percentagein case sales
    
    increase/(decrease)Overall
    
    U.S.
    
    Overall
    
    U.S.Vodka
    
    
    (4,913
    )
    
    
    298
    
    
    
    (8.6
    )%
    
    
    0.8
    %Rum
    
    
    1,087
    
    
    
    4,821
    
    
    
    2.2
    %
    
    
    13.2
    %Whiskey
    
    
    (829
    )
    
    
    1,451
    
    
    
    (5.2
    )%
    
    
    30.8
    %Liqueurs
    
    
    (1,012
    )
    
    
    997
    
    
    
    (3.4
    )%
    
    
    3.6
    %Tequila
    
    
    1,214
    
    
    
    1,214
    
    
    
    0.0
    %
    
    
    0.0
    %Total
    
    
    (4,453
    )
    
    
    8,781
    
    
    
    (2.9
    )%
    
    
    8.2
    %
  Gross profit.
 Selling expense.
 22




---



##### Table of Contents



General and administrative expense.
 Depreciation and amortization.
 Loss from operations
 Foreign exchange gain (loss).
 Interest income (expense), net.
 Gain on exchange of 3% note payable.
 Net loss attributable to noncontrolling interests.
 Net loss attributable to common stockholders.
 Liquidity and capital resources
   23




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
    
    continued significant levels of cash losses from operations;
    
    an increase in working capital requirements to finance higher levels of inventories and accounts receivable;
    
    our ability to maintain and improve our relationships with our distributors and our routes to market;
    
    our ability to procure raw materials at a favorable price to support our level of sales;
    
    potential acquisition of additional spirits brands; and
    
    expansion into new markets and within existing markets in the United States and internationally.
  Cash flows
  Six months endedSeptember 30,2009
    
    
    2008(in thousands)Net cash provided by (used in):Operating activities
    
    $
    (4,249
    )
    
    $
    (4,644
    )Investing activities
    
    
    1,386
    
    
    
    4,066Financing activities
    
    
    (500
    )
    
    
    (95
    )Effect of foreign currency translation
    
    
    1
    
    
    
    (26
    )Net decrease in cash and cash equivalents
    
    $
    (3,412
    )
    
    $
    (699
    )
 24




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##### Table of Contents



Operating activities.
    Investing activities.
  Financing activities.
  Recent accounting standards issued and adopted.
  Cautionary Note Regarding Forward Looking Statements
  25




---



##### Table of Contents




    
    our history of losses and expectation of further losses;
    
    the effect of poor operating results on our company;
    
    the adequacy of our cash resources and our ability to raise additional capital;
    
    our ability to expand our operations in both new and existing markets and our ability to develop or acquire new brands;
    
    our relationships with and our dependency on our distributors;
    
    the impact of supply shortages and alcohol and packaging costs in general, as well as our dependency on a limited
number of suppliers;
    
    the success of our sales and marketing activities;
    
    economic and political conditions generally, including the current recessionary economic environment and concurrent
market instability;
    
    the effect of competition in our industry;
    
    negative publicity surrounding our products or the consumption of beverage alcohol products in general;
    
    our ability to acquire and/or maintain brand recognition and acceptance;
    
    trends in consumer tastes;
    
    our and our strategic partners abilities to protect trademarks and other proprietary information;
    
    the impact of litigation;
    
    the impact of currency exchange rate fluctuations and devaluations on our revenues, sales and overall financial
results; and
    
    the impact of federal, state, local or foreign government regulations.
  
 Item 4. Controls And Procedures
   26




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Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Litigation and Arbitration
   
 Item 6. Exhibits
 ExhibitNumber
    
    Description2.1
    
    Asset Purchase Agreement, dated as of September 21, 2009, by and between Castle Brands Inc. and Betts &
Scholl, LLC (incorporated by reference to Exhibit 2.1 to the Companys current report on Form 8-K filed with
the SEC on September 22, 2009).4.1
    
    Secured Non-negotiable Promissory Note, dated as of September 21, 2009, made by Castle Brands Inc. in favor of
Betts & Scholl, LLC (incorporated by reference to Exhibit 4.1 to the Companys current report on Form 8-K
filed with the SEC on September 22, 2009).4.2
    
    Security Agreement, dated as of September 21, 2009, by and between Castle Brands Inc. and Betts & Scholl, LLC
(incorporated by reference to Exhibit 4.2 to the Companys current report on Form 8-K filed with the SEC on
September 22, 2009).10.1
    
    Form of Indemnification Agreement (incorporated by reference to Exhibit 10.3 to the Companys current report
on Form 8-K filed with the SEC on October 14, 2008).10.2
    
    Amendment No. 2 to Bottling and Services Agreement, dated as of July 23, 2009, by and between Terra Limited
and Castle Brands Spirits Company Limited (incorporated by reference to Exhibit 10.1 to the Companys current
report on Form 8-K filed on July 29, 2009). Certain portions of this agreement have been omitted under a
request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934 and filed
separately with the SEC.31.1
    
    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.
 
 SIGNATURES
  CASTLE BRANDS INC.By:
    /s/ Alfred J. SmallAlfred J. SmallChief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)  27