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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 December 31, 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.
  Florida
    
    41-2103550(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
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 INFORMATION
    
    
    3Item 1.
    
    Condensed Consolidated Financial Statements:
    
    
    3Condensed Consolidated Balance Sheets as of December 31, 2009 (unaudited) and March 31, 2009
    
    
    3Condensed Consolidated Statements of Operations for the three months and nine months ended
December 31, 2009 and 2008 (unaudited)
    
    
    4Condensed Consolidated Statement of Changes in Equity for the nine months ended December 31,
2009 (unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2009
and 2008 (unaudited)
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    27PART II. OTHER INFORMATION
    
    
    27Item 1.
    
    Legal Proceedings
    
    
    27Item 6.
    
    Exhibits
    
    
    27EX-31.1EX-31.2EX-32.1
  2




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PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 CASTLE BRANDS INC. AND SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
 December 31, 2009
    
    
    March 31, 2009(Unaudited)ASSETS:Current AssetsCash and cash equivalents
    
    $
    938,005
    
    
    $
    4,011,777Short-term investments
    
    
    707,273
    
    
    
    3,661,437Accounts receivable  net of allowance for doubtful accounts of $610,874 and $529,256
    
    
    6,776,754
    
    
    
    6,857,267Due from affiliates
    
    
    1,320
    
    
    
    74,295Inventories net of allowance for obsolete and slow moving inventory of $330,691 and $1,355,159
    
    
    9,584,038
    
    
    
    8,169,667Prepaid expenses and other current assets
    
    
    755,652
    
    
    
    719,700Total Current Assets
    
    
    18,763,042
    
    
    
    23,494,143Equipment net
    
    
    523,425
    
    
    
    605,065Other AssetsIntangible assets  net of accumulated amortization of $3,253,936 and $2,738,718
    
    
    11,852,669
    
    
    
    11,431,988Goodwill
    
    
    964,215
    
    
    
    Restricted cash
    
    
    738,705
    
    
    
    676,403Other assets
    
    
    112,659
    
    
    
    147,659Total Assets
    
    $
    32,954,715
    
    
    $
    36,355,258LIABILITIES AND EQUITY:Current LiabilitiesCurrent maturities of notes payable and capital leases
    
    $
    424,543
    
    
    $
    119,050Accounts payable
    
    
    2,872,587
    
    
    
    3,791,096Accrued expenses
    
    
    944,545
    
    
    
    2,511,833Due to stockholders and affiliates
    
    
    1,587,232
    
    
    
    1,290,501Total Current Liabilities
    
    
    5,828,907
    
    
    
    7,712,480Long-Term LiabilitiesNotes payable
    
    
    538,084
    
    
    
    300,000Deferred tax liability
    
    
    2,147,950
    
    
    
    2,259,064Total Liabilities
    
    
    8,514,941
    
    
    
    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 December 31, 2009 and 101,612,349 shares issued and
outstanding at March 31, 2009, respectively
    
    
    1,089,552
    
    
    
    1,016,123Additional paid-in capital
    
    
    135,601,422
    
    
    
    133,576,957Treasury stock at cost, 1,000,000 shares at December 31, 2009 and none at March 31, 2009
    
    
    (180,000
    )
    
    
    Accumulated deficit
    
    
    (110,501,994
    )
    
    
    (109,234,310
    )Accumulated other comprehensive (loss) income
    
    
    (1,623,317
    )
    
    
    642,907Total common stockholders equity
    
    
    24,435,663
    
    
    
    26,001,677Noncontrolling interests
    
    
    54,111
    
    
    
    82,037Total equity
    
    
    24,489,774
    
    
    
    26,083,714Total Liabilities and Equity
    
    $
    32,954,715
    
    
    $
    36,355,258
  3




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CASTLE
BRANDS INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Operations
(Unaudited)
 Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Sales, net*
    
    $
    7,490,526
    
    
    $
    6,912,185
    
    
    $
    22,052,321
    
    
    $
    20,234,680Cost of sales*
    
    
    4,924,823
    
    
    
    4,754,560
    
    
    
    14,219,977
    
    
    
    13,793,173Gross profit
    
    
    2,565,703
    
    
    
    2,157,625
    
    
    
    7,832,344
    
    
    
    6,441,507Selling expense
    
    
    2,265,354
    
    
    
    3,960,445
    
    
    
    7,363,067
    
    
    
    11,263,894General and administrative expense
    
    
    1,308,248
    
    
    
    2,952,799
    
    
    
    4,057,956
    
    
    
    7,171,196Depreciation and amortization
    
    
    240,774
    
    
    
    240,020
    
    
    
    687,506
    
    
    
    727,879Loss from operations
    
    
    (1,248,673
    )
    
    
    (4,995,639
    )
    
    
    (4,276,185
    )
    
    
    (12,721,462
    )Other income
    
    
    
    
    
    
    31,590
    
    
    
    145
    
    
    
    56,974Other expense
    
    
    (26,376
    )
    
    
    (9,841
    )
    
    
    (48,057
    )
    
    
    (38,053
    )Foreign exchange gain (loss)
    
    
    628,436
    
    
    
    (940,981
    )
    
    
    2,212,933
    
    
    
    (2,861,969
    )Interest income (expense), net
    
    
    1,408
    
    
    
    (526,363
    )
    
    
    28,265
    
    
    
    (1,560,607
    )Gain on sale of intangible asset
    
    
    405,900
    
    
    
    
    
    
    
    405,900
    
    
    
    Gain on exchange of note payable
    
    
    
    
    
    
    4,173,716
    
    
    
    270,275
    
    
    
    4,173,716Income tax benefit
    
    
    37,038
    
    
    
    37,038
    
    
    
    111,114
    
    
    
    111,114Net loss
    
    
    (202,267
    )
    
    
    (2,230,480
    )
    
    
    (1,295,610
    )
    
    
    (12,840,287
    )Net (income) loss attributable to noncontrolling interests
    
    
    (34,963
    )
    
    
    (8,062
    )
    
    
    27,926
    
    
    
    166,103Net loss attributable to common stockholders
    
    $
    (237,230
    )
    
    $
    (2,238,542
    )
    
    $
    (1,267,684
    )
    
    $
    (12,674,184
    )Net loss per common share, basic and diluted, attributable to common stockholders
    
    $
    (0.00
    )
    
    $
    (0.14
    )
    
    $
    (0.01
    )
    
    $
    (0.81
    )Weighted average shares used in computation, basic and diluted, attributable to common stockholders
    
    
    107,955,207
    
    
    
    15,629,776
    
    
    
    103,623,882
    
    
    
    15,629,776
 
 *
    
    Sales, net and Cost of sales include excise taxes of $1,146,624 and
$1,068,649 for the three months ended December 31, 2009 and 2008, respectively,
and $3,851,410 and $3,173,839 for the nine months ended December 31, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,267,684
    )
    
    
    
    
    
    
    (27,926
    )
    
    
    (1,295,610
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,266,224
    )
    
    
    
    
    
    
    (2,266,224
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,561,834
    )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
    
    
    
    
    
    
    
    
    
    
    125,322
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,322BALANCE, DECEMBER 31, 2009
    
    
    108,955,207
    
    
    $
    1,089,552
    
    
    $
    135,601,422
    
    
    $
    (180,000
    )
    
    $
    (110,501,994
    )
    
    $
    (1,623,317
    )
    
    $
    54,111
    
    
    $
    24,439,774
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CASTLE
BRANDS INC. and SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Nine months ended December 31,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (1,295,610
    )
    
    $
    (12,840,287
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    687,506
    
    
    
    727,879Gain on sale of intangible asset
    
    
    (405,900
    )
    
    
    Provision for doubtful accounts
    
    
    46,398
    
    
    
    61,222Amortization of deferred financing costs
    
    
    
    
    
    
    474,493Deferred tax benefit
    
    
    (111,114
    )
    
    
    (111,114
    )Effect of changes in foreign exchange
    
    
    (2,383,647
    )
    
    
    2,651,764Stock-based compensation expense
    
    
    125,321
    
    
    
    1,625,939Provision for obsolete inventories
    
    
    (589,930
    )
    
    
    (252,241
    )Non-cash interest charge
    
    
    
    
    
    
    350,981Gain on exchange of note payable
    
    
    (270,275
    )
    
    
    (4,173,716
    )Changes in operations, assets and liabilities:Accounts receivable
    
    
    170,964
    
    
    
    (335,890
    )Due from affiliates
    
    
    73,767
    
    
    
    (13,719
    )Inventory
    
    
    406,589
    
    
    
    479,948Prepaid expenses and supplies
    
    
    (29,630
    )
    
    
    14,905Other assets
    
    
    35,000
    
    
    
    Accounts payable and accrued expenses
    
    
    (2,669,678
    )
    
    
    2,342,323Due to related parties
    
    
    254,891
    
    
    
    325,535Total adjustments
    
    
    (4,709,738
    )
    
    
    4,168,309NET CASH USED IN OPERATING ACTIVITIES
    
    
    (5,955,348
    )
    
    
    (8,671,978
    )CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of equipment
    
    
    (63,092
    )
    
    
    (111,881
    )Acquisition of intangible assets
    
    
    
    
    
    
    (21,536
    )Proceeds from sale of intangible asset
    
    
    500,000
    
    
    
    Payments under contingent consideration agreements
    
    
    (65,643
    )
    
    
    Increase in other assets
    
    
    
    
    
    
    (112,659
    )Short-term investments  net
    
    
    2,954,164
    
    
    
    580,138NET CASH PROVIDED BY INVESTING ACTIVITIES
    
    
    3,325,429
    
    
    
    334,062CASH FLOWS FROM FINANCING ACTIVITIES:Credit facilities  net
    
    
    (127,263
    )
    
    
    (88,784
    )Note payable  Betts & Scholl
    
    
    (355,406
    )
    
    
    Note payable  Goslings Export (Bermuda) Limited
    
    
    223,492
    
    
    
    Payments of obligations under capital leases
    
    
    (928
    )
    
    
    (3,164
    )Increase in restricted cash
    
    
    (4,673
    )
    
    
    (8,613
    )Proceeds from promissory note
    
    
    
    
    
    
    2,000,000Issuance of Series A Preferred Stock
    
    
    
    
    
    
    13,000,000Payments for costs of Series A Preferred Stock Issuance
    
    
    
    
    
    
    (1,820,750
    )Repurchase of common stock now held as treasury stock
    
    
    (180,000
    )
    
    
    NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    
    
    (444,778
    )
    
    
    13,078,689EFFECTS OF FOREIGN CURRENCY TRANSLATION
    
    
    926
    
    
    
    (65,408
    )NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (3,073,772
    )
    
    
    4,675,365CASH AND CASH EQUIVALENTS  BEGINNING
    
    
    4,011,777
    
    
    
    1,552,385CASH AND CASH EQUIVALENTS  ENDING
    
    $
    938,005
    
    
    $
    6,227,750SUPPLEMENTAL 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
    
    
    $
    Exchange of 9% senior notes, including all accrued interest, by issuance of Series A Preferred Stock
    
    $
    
    
    
    $
    10,020,100Exchange of 6% convertible subordinated notes, including all accrued interest, by issuance of Series A Preferred Stock
    
    $
    
    
    
    $
    9,045,000Conversion of promissory note
    
    $
    
    
    
    $
    2,002,778Interest paid
    
    $
    10,689
    
    
    $
    1,307,163
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CASTLE
BRANDS INC. AND SUBSIDIARIES
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
  A.
    
    Description of business and business combination  The unaudited 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,
liqueurs and 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
foreign currency transactions are shown as a separate line item in the consolidated
statements of operations. The
 7




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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 previously considered 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 were 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. In November 2009, in order to improve the liquidity of the foreign subsidiaries, the
Company decided to eliminate $17,481,169 in intercompany balances by converting such
balances into an additional investment in the subsidiaries. Beginning December 1, 2009, the
translation gain or loss from the restatement of the investments in the foreign subsidiaries
will be included in other comprehensive income.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 December 31, 2009.The Companys income tax benefit for the three and nine months ended December 31, 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 difference between the book basis and tax basis created
a deferred tax liability that is being amortized over a period of 15 years (the life of the licensing agreement) on a straight
line basis. For the three-month and nine-month
periods ended December 31, 2009 and 2008, the Company recognized $37,038 and $111,114 of
deferred tax benefits, respectively.J.
    
    Accounting standards adopted  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
 8




---



##### Table of Contents



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 December 31, 2009, the Company has evaluated subsequent events through the
date the financial statements were issued on February 12, 2010.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 unaudited 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 $8,062 of net income and $166,103 of net loss attributable to
noncontrolling interests in a separate line on the unaudited condensed consolidated
statements of operations after net loss to arrive at net loss attributable to common
stockholders for the three and nine months ended December 31, 2008, respectively;
    
    recorded $34,963 of net income and $27,926 of net loss attributable to
noncontrolling interests for the three and nine months ended December 31, 2009,
respectively, in a separate line on the unaudited condensed consolidated statement
of equity; and
    
    included $8,062 of net income and $166,103 of net loss attributable to
noncontrolling interests in the net loss in the unaudited condensed consolidated
statements of cash flows for the three and nine months ended December 31, 2008,
respectively.
 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.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
 9




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##### Table of Contents



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
   Nine months ended December 31,2009
    
    
    2008Series A Preferred Stock
    
    
    
    
    
    
    85,403,988Stock options
    
    
    3,224,900
    
    
    
    1,994,825Warrants to purchase stock
    
    
    2,016,814
    
    
    
    2,198,314Convertible debentures
    
    
    
    
    
    
    1,192,380Total
    
    
    5,241,714
    
    
    
    90,789,507
 NOTE 3  SHORT-TERM INVESTMENTS
  GrossAdjusted
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gain (Loss)
    
    
    Fair ValueDecember 31, 2009Money market accounts
    
    $
    707,273
    
    
    $
    
    
    
    $
    707,273Total
    
    $
    707,273
    
    
    $
    
    
    
    $
    707,273
 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
  10




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##### Table of Contents



NOTE 4  INVENTORIES
 December 31,
    
    
    March 31,2009
    
    
    2009Raw materials
    
    $
    2,865,928
    
    
    $
    2,048,398Finished goods
    
    
    6,718,110
    
    
    
    6,121,269Total
    
    $
    9,584,038
    
    
    $
    8,169,667
    NOTE 5  ACQUISITIONS AND DIVESTITURES
 Acquisition of Betts & Scholl, LLC assets
  Acquisition of McLain & Kyne
  Sale of Sam Houston bourbon brand
  NOTE 6  GOODWILL AND INTANGIBLE ASSETS
  AmountBalance as of March 31, 2009
    
    $
    Payments under McLain and Kyne agreement
    
    
    65,643Acquisition of Betts & Scholl assets
    
    
    898,572Balance as of December 31, 2009
    
    $
    964,215
 11




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##### Table of Contents



December 31,
    
    
    March 31,2009
    
    
    2009Definite life brands
    
    $
    170,000
    
    
    $
    170,000Trademarks
    
    
    479,248
    
    
    
    479,248Rights
    
    
    8,271,555
    
    
    
    8,271,555Distributor relationships
    
    
    664,000
    
    
    
    Product development
    
    
    20,350
    
    
    
    20,350Patents
    
    
    994,000
    
    
    
    994,000Other
    
    
    28,480
    
    
    
    28,48010,627,633
    
    
    
    9,963,633Less: accumulated amortization
    
    
    3,253,936
    
    
    
    2,738,718Net
    
    
    7,373,697
    
    
    
    7,224,915Other identifiable intangible assets  indefinite lived
    
    
    4,478,972
    
    
    
    4,207,073$
    11,852,669
    
    
    $
    11,431,988
  December 31,
    
    
    March 31,2009
    
    
    2009Definite life brands
    
    $
    135,052
    
    
    $
    126,552Trademarks
    
    
    122,538
    
    
    
    97,652Rights
    
    
    2,613,941
    
    
    
    2,201,462Product development
    
    
    3,053
    
    
    
    Patents
    
    
    379,352
    
    
    
    313,052Accumulated amortization
    
    $
    3,253,936
    
    
    $
    2,738,718
 NOTE 7  RESTRICTED CASH
  
 NOTE 8  NOTES PAYABLE AND CAPITAL LEASE
 December 31,
    
    
    March 31,2009
    
    
    2009Notes payable consist of the following:Credit facilities
    
    $
    
    
    
    $
    118,122Note payable (A)
    
    
    
    
    
    
    300,000Note payable (B)
    
    
    739,135
    
    
    
    Note payable (C)
    
    
    223,492
    
    
    
    962,627
    
    
    
    418,122Capital leases
    
    
    
    
    
    
    928Total
    
    $
    962,627
    
    
    $
    419,050
 12




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##### Table of Contents



(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 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 December 31, 2009, $424,543 and $314,592 of principal due on the Note is included
in current and long-term liabilities, respectively.(C)
    
    In December 2009, GCP issued a promissory note (the GCP Note) in the aggregate
principle amount of $211,580 to Goslings Export (Bermuda) Limited (GXB) in exchange for
credits issued on certain inventory purchases. The GCP Note matures on April 1, 2020, is
payable at maturity, subject to certain acceleration events, and calls for annual interest
of 5%, to be accrued and paid at maturity. Interest has been recorded retroactive to
November 15, 2008. At December 31, 2009, $223,492, consisting of $211,580 of principal and
$11,912 of accrued interest, due on the GCP Note is included in long-term liabilities.
 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 December 31, 2009, 8,196,528 shares remain available for issuance under
the Plan.
  Nine months ended December 31,2009
    
    
    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
    
    
    
    1,994,825
    
    
    $
    4.66Weighted average fair value of grants during period
    
    
    
    
    
    $
    0.11
    
    
    
    
    
    
    $
    2.20
 13




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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
    
    
    
    8.94
    
    
    
    399,900
    
    
    $
    0.21
    
    
    $
    51,987$1.01  $2.00
    
    
    68,000
    
    
    
    8.09
    
    
    
    68,000
    
    
    
    1.82
    
    
    
    $5.01  $6.00
    
    
    243,500
    
    
    
    4.34
    
    
    
    243,500
    
    
    
    5.97
    
    
    
    $6.01  $7.00
    
    
    17,000
    
    
    
    7.24
    
    
    
    17,000
    
    
    
    6.36
    
    
    
    $7.01  $8.00
    
    
    194,000
    
    
    
    5.92
    
    
    
    194,000
    
    
    
    7.57
    
    
    
    $8.01  $9.00
    
    
    147,500
    
    
    
    6.32
    
    
    
    147,500
    
    
    
    9.00
    
    
    
    3,224,900
    
    
    
    8.26
    
    
    
    1,069,900
    
    
    $
    4.27
    
    
    $
    79,980
   Restricted Stock Grants
   December 31, 2009Risk-free interest rate
    
    
    2.75%  3.08
    %Expected option life in years
    
    
    6.25Expected stock price volatility
    
    
    65
    %Expected dividend yield
    
    
    0
    %
  14




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##### Table of Contents



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
    
    
    $
    6.88Expired
    
    
    (181,500
    )
    
    
    8.00Warrants outstanding and exercisable, December 31, 2009
    
    
    2,016,814
    
    
    $
    6.78
 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
960,000 in
bulk Irish whiskey, of which approximately
565,000 has been purchased through December 31, 2009. 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 and calls for monthly payments of $19,975. The Dublin lease commenced
on March 1, 2009 and extends through November 30, 2013 and calls for monthly payments of
1,394 or $1,998 (translated at the December 31, 2009 exchange rate). The Houston, TX lease
commenced on February 24, 2000 and extends through January 31, 2011 and calls for monthly
payments of $1,778. The Company has also entered into non-cancelable operating leases for
certain office equipment.C.
    
    In December 2009, the Company entered into a $2.5 million revolving credit agreement (the
Credit Agreement) with, among others, Frost Gamma Investments Trust, an entity affiliated
with Dr. Phillip Frost, a director and principal stockholder of the Company, Vector Group
Ltd., a principal stockholder of the Company, Lafferty Ltd., a principal stockholder of the
Company, IVC Investors, LLLP, an entity affiliated with Glenn Halpryn, a Company director,
Mark Andrews, the Companys Chairman,
and Richard J. Lampen, the Companys Interim President and Chief Executive Officer. Under the
Credit Agreement, the Company may borrow from time to time up to $2.5 million to be used for
working capital or general corporate purposes. Any borrowings under the Credit Agreement will
mature on April 1, 2013 and will bear interest at a rate of 11% per annum, payable quarterly.
The Credit Agreement provides for the payment of an aggregate commitment fee of $75,000
payable to the lenders over the three-year period. The note to be issued under the Credit
Agreement contains customary events of default, which if uncured, entitle the holders to
accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest
on, such note. Amounts may be repaid and reborrowed under the Credit Agreement without
penalty. The note is secured by the inventory and trade accounts receivable of CB-USA, subject
to certain exceptions, pursuant to a Security Agreement. As of December 31, 2009, no amounts
have been drawn under the Credit Agreement.
 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 December 31, 2009 and March 31, 2009, the Company
exceeded the insured limit by approximately $1,311,207 and $4,434,000, respectively.B.
    
    Customers  Sales to three customers accounted for approximately 43.1% and 42.3%
of the Companys revenues for the three months ended December 31, 2009 and 2008,
respectively, (of which one customer accounted for 31.8% and 31.5%, respectively, of total
sales). Sales to three customers accounted for approximately 44.5% and 41.6% of the
Companys revenues for the nine months ended December 31, 2009 and 2008, respectively, (of
which one customer accounted for 31.5% and 29.0%, respectively, of total sales). Sales to
three customers accounted for approximately 36.8% and 30.8% of accounts receivable at
December 31, 2009 and March 31, 2009, respectively.
 15




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##### Table of Contents



NOTE 13  GEOGRAPHIC INFORMATION
   For the three months ended December 31,2009
    
    
    2008Consolidated Revenue:International
    
    $
    1,431,247
    
    
    
    19.1
    %
    
    $
    1,677,387
    
    
    
    24.3
    %United States
    
    
    6,059,279
    
    
    
    80.9
    %
    
    
    5,234,798
    
    
    
    75.7
    %Total Consolidated Revenue
    
    $
    7,490,526
    
    
    
    100
    %
    
    $
    6,912,185
    
    
    
    100
    %Consolidated Depreciation and Amortization:International
    
    $
    21,490
    
    
    
    8.9
    %
    
    $
    20,130
    
    
    
    8.4
    %United States
    
    
    219,284
    
    
    
    91.1
    %
    
    
    219,890
    
    
    
    91.6
    %Total Consolidated Depreciation and Amortization
    
    $
    240,774
    
    
    
    100
    %
    
    $
    240,020
    
    
    
    100
    %Income tax benefit:United States
    
    $
    37,038
    
    
    
    100
    %
    
    $
    37,038
    
    
    
    100
    %Consolidated Revenue by category:Rum
    
    $
    2,134,876
    
    
    
    28.5
    %
    
    $
    2,168,587
    
    
    
    31.4
    %Liqueurs
    
    
    2,097,431
    
    
    
    28.0
    %
    
    
    1,473,385
    
    
    
    21.3
    %Vodka
    
    
    1,065,276
    
    
    
    14.2
    %
    
    
    1,510,176
    
    
    
    21.8
    %Whiskey
    
    
    1,812,346
    
    
    
    24.2
    %
    
    
    1,636,253
    
    
    
    23.7
    %Tequila
    
    
    89,367
    
    
    
    1.2
    %
    
    
    
    
    
    
    
    %Wine
    
    
    150,550
    
    
    
    2.0
    %
    
    
    
    
    
    
    
    %Other*
    
    
    140,679
    
    
    
    1.9
    %
    
    
    123,784
    
    
    
    1.8
    %Total Consolidated Revenue
    
    $
    7,490,526
    
    
    
    100
    %
    
    $
    6,912,185
    
    
    
    100
    %
 For the nine months ended December 31,2009
    
    
    2008Consolidated Revenue:International
    
    $
    3,339,657
    
    
    
    15.1
    %
    
    $
    4,647,315
    
    
    
    23.0
    %United States
    
    
    18,712,664
    
    
    
    84.9
    %
    
    
    15,587,365
    
    
    
    77.0
    %Total Consolidated Revenue
    
    $
    22,052,321
    
    
    
    100
    %
    
    $
    20,234,680
    
    
    
    100
    %Consolidated Depreciation and Amortization:International
    
    $
    63,902
    
    
    
    9.3
    %
    
    $
    65,308
    
    
    
    9.0
    %United States
    
    
    623,604
    
    
    
    90.7
    %
    
    
    662,571
    
    
    
    91.0
    %Total Consolidated Depreciation and Amortization
    
    $
    687,506
    
    
    
    100
    %
    
    $
    727,879
    
    
    
    100
    %Income tax benefit:United States
    
    $
    111,114
    
    
    
    100
    %
    
    $
    111,114
    
    
    
    100
    %Consolidated Revenue by category:Rum
    
    $
    7,109,472
    
    
    
    32.2
    %
    
    $
    6,702,194
    
    
    
    33.2
    %Liqueurs
    
    
    5,507,523
    
    
    
    25.0
    %
    
    
    5,028,044
    
    
    
    24.8
    %Vodka
    
    
    3,909,406
    
    
    
    17.7
    %
    
    
    4,300,897
    
    
    
    21.3
    %Whiskey
    
    
    4,272,817
    
    
    
    19.4
    %
    
    
    3,772,181
    
    
    
    18.6
    %Tequila
    
    
    428,773
    
    
    
    1.9
    %
    
    
    
    
    
    
    
    %Wine
    
    
    150,550
    
    
    
    0.7
    %
    
    
    
    
    
    
    
    %Other*
    
    
    673,780
    
    
    
    3.1
    %
    
    
    431,364
    
    
    
    2.1
    %Total Consolidated Revenue
    
    $
    22,052,321
    
    
    
    100
    %
    
    $
    20,234,680
    
    
    
    100
    %
 December 31, 2009
    
    
    March 31, 2009Consolidated Assets:International
    
    $
    3,850,814
    
    
    
    11.7
    %
    
    $
    4,370,907
    
    
    
    12.0
    %United States
    
    
    29,103,901
    
    
    
    88.3
    %
    
    
    31,984,351
    
    
    
    88.0
    %Total Consolidated Assets
    
    $
    32,954,715
    
    
    
    100.0
    %
    
    $
    36,355,258
    
    
    
    100
    %
 
 *
    
    Includes related non-beverage alcohol products. 16




---



##### Table of Contents



NOTE 14  SUBSEQUENT EVENTS
 Reincorporation
  
 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
 17




---



##### Table of Contents



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 34.6% and 43.4%, respectively, for the nine months ended December 31, 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
    Currency Translation
   18




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##### Table of Contents



Critical Accounting Policies
  Financial performance overview
  Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008CasesUnited States
    
    
    52,355
    
    
    
    53,393
    
    
    
    167,583
    
    
    
    156,745International
    
    
    21,045
    
    
    
    26,491
    
    
    
    53,780
    
    
    
    72,459Total
    
    
    73,400
    
    
    
    79,884
    
    
    
    221,363
    
    
    
    229,204Vodka
    
    
    20,675
    
    
    
    28,371
    
    
    
    73,027
    
    
    
    82,539Rum
    
    
    22,782
    
    
    
    23,156
    
    
    
    73,381
    
    
    
    72,669Liqueurs
    
    
    18,294
    
    
    
    14,392
    
    
    
    47,069
    
    
    
    44,179Whiskey
    
    
    10,727
    
    
    
    13,965
    
    
    
    25,750
    
    
    
    29,817Tequila
    
    
    299
    
    
    
    
    
    
    
    1,513
    
    
    
    Wine
    
    
    623
    
    
    
    
    
    
    
    623
    
    
    
    Total
    
    
    73,400
    
    
    
    79,884
    
    
    
    221,363
    
    
    
    229,204Percentage of CasesUnited States
    
    
    71.3
    %
    
    
    66.8
    %
    
    
    75.7
    %
    
    
    68.8
    %International
    
    
    28.7
    %
    
    
    33.2
    %
    
    
    24.3
    %
    
    
    31.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Vodka
    
    
    28.2
    %
    
    
    34.5
    %
    
    
    33.0
    %
    
    
    36.5
    %Rum
    
    
    31.1
    %
    
    
    29.0
    %
    
    
    33.1
    %
    
    
    31.3
    %Liqueurs
    
    
    24.9
    %
    
    
    18.0
    %
    
    
    21.3
    %
    
    
    19.0
    %Whiskey
    
    
    14.6
    %
    
    
    18.5
    %
    
    
    11.6
    %
    
    
    13.2
    %Tequila
    
    
    0.4
    %
    
    
    0.0
    %
    
    
    0.7
    %
    
    
    0.0
    %Wine
    
    
    0.8
    %
    
    
    0.0
    %
    
    
    0.3
    %
    
    
    0.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 19




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##### Table of Contents



Results of operations
  Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Sales, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    65.7
    %
    
    
    68.8
    %
    
    
    64.5
    %
    
    
    68.2
    %Gross profit
    
    
    34.3
    %
    
    
    31.2
    %
    
    
    35.5
    %
    
    
    31.8
    %Selling expense
    
    
    29.6
    %
    
    
    57.3
    %
    
    
    33.2
    %
    
    
    55.7
    %General and administrative expense
    
    
    17.5
    %
    
    
    42.7
    %
    
    
    18.3
    %
    
    
    35.4
    %Depreciation and amortization
    
    
    3.2
    %
    
    
    3.5
    %
    
    
    3.1
    %
    
    
    3.6
    %Loss from operations
    
    
    (16.0
    )%
    
    
    (72.3
    )%
    
    
    (19.1
    )%
    
    
    (62.9
    )%Other income
    
    
    0.0
    %
    
    
    0.4
    %
    
    
    0.0
    %
    
    
    0.3
    %Other expense
    
    
    (0.4
    )%
    
    
    (0.1
    )%
    
    
    (0.2
    )%
    
    
    (0.2
    )%Foreign exchange gain (loss)
    
    
    8.5
    %
    
    
    (13.6
    )%
    
    
    10.0
    %
    
    
    (14.0
    )%Interest income (expense), net
    
    
    0.0
    %
    
    
    (7.6
    )%
    
    
    0.1
    %
    
    
    (7.7
    )%Gain on exchange of note payable
    
    
    0.0
    %
    
    
    60.4
    %
    
    
    1.3
    %
    
    
    20.6
    %Gain on sale of intangible asset
    
    
    5.4
    %
    
    
    0.0
    %
    
    
    1.8
    %
    
    
    0.0
    %Income tax benefit
    
    
    0.5
    %
    
    
    0.5
    %
    
    
    0.5
    %
    
    
    0.5
    %Net loss
    
    
    (2.0
    )%
    
    
    (32.3
    )%
    
    
    (5.6
    )%
    
    
    (63.4
    )%Net loss attributable to noncontrolling interests
    
    
    (0.5
    )%
    
    
    (0.1
    )%
    
    
    0.1
    %
    
    
    0.8
    %Net loss attributable to common stockholders
    
    
    (2.5
    )%
    
    
    (32.4
    )%
    
    
    (5.5
    )%
    
    
    (62.6
    )%
 Three months ended December 31, 2009 compared with three months ended December 31, 2008
 Net sales.
  Increase/(decrease)
    
    
    Percentagein case sales
    
    
    increase/(decrease)Overall
    
    
    U.S.
    
    
    Overall
    
    
    U.S.Vodka
    
    
    (7,696
    )
    
    
    (5,885
    )
    
    
    (27.1
    )%
    
    
    (30.1
    )%Rum
    
    
    (374
    )
    
    
    (348
    )
    
    
    (1.6
    )%
    
    
    (2.1
    )%Whiskey
    
    
    (3,238
    )
    
    
    565
    
    
    
    (23.2
    )%
    
    
    15.3
    %Liqueurs
    
    
    3,902
    
    
    
    3,708
    
    
    
    27.1
    %
    
    
    27.5
    %Tequila
    
    
    299
    
    
    
    299
    
    
    
    0.0
    %
    
    
    0.0
    %Wine
    
    
    623
    
    
    
    623
    
    
    
    0.0
    %
    
    
    0.0
    %Total
    
    
    (6,484
    )
    
    
    (1,038
    )
    
    
    (8.1
    )%
    
    
    (1.9
    )%
 20




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##### Table of Contents



Gross profit.
 Selling expense.
 General and administrative expense.
 Depreciation and amortization.
 Loss from operations
 Foreign exchange gain (loss).
 Interest income (expense), net.
 21




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##### Table of Contents



Gain on sale of intangible asset.
 Gain on exchange of note payable.
 Net (income) loss attributable to noncontrolling interests.
 Net loss attributable to common stockholders.
 Nine months ended December 31, 2009 compared with nine months ended December 31, 2008
 Net sales.
  Increase/(decrease)
    
    
    Percentagein case sales
    
    
    increase/(decrease)Overall
    
    
    U.S.
    
    
    Overall
    
    
    U.S.Vodka
    
    
    (9,512
    )
    
    
    (2,491
    )
    
    
    (11.5
    )%
    
    
    (4.6
    )%Rum
    
    
    712
    
    
    
    4,473
    
    
    
    1.0
    %
    
    
    8.4
    %Whiskey
    
    
    (4,066
    )
    
    
    2,016
    
    
    
    (13.6
    )%
    
    
    24.0
    %Liqueurs
    
    
    2,890
    
    
    
    4,705
    
    
    
    6.5
    %
    
    
    11.5
    %Tequila
    
    
    1,513
    
    
    
    1,513
    
    
    
    0.0
    %
    
    
    0.0
    %Wine
    
    
    623
    
    
    
    623
    
    
    
    0.0
    %
    
    
    0.0
    %Total
    
    
    (7,840
    )
    
    
    10,839
    
    
    
    (3.4
    )%
    
    
    6.9
    %
  Gross profit.
 22




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##### Table of Contents



Selling expense.
 General and administrative expense.
 Depreciation and amortization.
 Loss from operations
 Foreign exchange gain (loss).
 Interest income (expense), net.
 Gain on sale of intangible asset.
 Gain on exchange of note payable.
 Net loss attributable to noncontrolling interests.
 23




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##### Table of Contents



Net loss attributable to common stockholders.
 Liquidity and capital resources
        24




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##### Table of Contents




    
    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 brands; and
    
    expansion into new markets and within existing markets in the United States and internationally.
  Cash flows
  Nine months endedDecember 31,2009
    
    
    2008(in thousands)Net cash provided by (used in):Operating activities
    
    $
    (5,955
    )
    
    $
    (8,672
    )Investing activities
    
    
    3,325
    
    
    
    334Financing activities
    
    
    (445
    )
    
    
    13,078Effect of foreign currency translation
    
    
    1
    
    
    
    (65
    )Net (decrease) increase in cash and cash equivalents
    
    $
    (3,074
    )
    
    $
    4,675
 Operating activities.
    25




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##### Table of Contents



Investing activities.
  Financing activities.
  Recent accounting standards issued and adopted.
  Cautionary Note Regarding Forward Looking Statements
  
    
    our history of losses and expectation of further losses;
    
    the effect of poor operating results on our company;
    
    the adequacy of our cash resources and our ability to raise additional capital;
    
    our ability to expand our operations in both new and existing markets and our ability to develop or acquire new brands;
    
    our relationships with and our dependency on our distributors;
    
    the impact of supply shortages and alcohol and packaging costs in general, as well as
our dependency on a limited number of suppliers;
    
    the success of our sales and marketing activities;
    
    economic and political conditions generally, including the current recessionary
economic environment and concurrent market instability;
    
    the effect of competition in our industry;
    
    negative publicity surrounding our products or the consumption of beverage alcohol products in general;
    
    our ability to acquire and/or maintain brand recognition and acceptance;
 26




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##### Table of Contents




    
    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
   Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Litigation and Arbitration
   
 Item 6. Exhibits
 ExhibitNumber
    
    Description4.1
    
    
    Credit Agreement, dated as of December 30, 2009, by and among Castle Brands Inc., Frost Gamma Investments
Trust, Vector Group Ltd., Lafferty Ltd., Mark E. Andrews, III, IVC Investors, LLLP, Jacqueline
Simkin Trust As Amended and Restated 12/16/2003, and Richard J. Lampen, including the note to be issued there
under (incorporated by reference to Exhibit 4.1 to the Companys current report on Form 8-K filed with the SEC
on December 30, 2009).4.2
    
    
    Security Agreement, dated as of December 30, 2009 by and among Castle Brands Inc., Frost Gamma Investments
Trust, Vector Group Ltd., Lafferty Ltd., Mark E. Andrews, III, IVC Investors, LLLP, Jacqueline
Simkin Trust As Amended and Restated 12/16/2003, and Richard J. Lampen, including the note to be issued there
under (incorporated by reference to Exhibit 4.2 to the Companys current report on Form 8-K filed with the SEC
on December 30, 2009).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.
 27




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##### Table of Contents



SIGNATURES
  CASTLE BRANDS INC.By:
    /s/ Alfred J. SmallAlfred J. SmallChief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)  28