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

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.

(Exact name of registrant as specified in its charter)

Delaware		41-2103550
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

122 East 42nd Street, Suite 4700,		10168
New York, New York		(Zip Code)
(Address of principal executive offices)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

o Large accelerated filer		o Accelerated filer		o Non-accelerated filer (Do not check if a smaller reporting company)		þ Smaller reporting company

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     The Company had 107,955,207 shares of $0.01 par value common stock outstanding at November 13, 2009.

 

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:			3
Condensed Consolidated Balance Sheets as of September 30, 2009 (unaudited) and March 31, 2009			3
Condensed Consolidated Statements of Operations for the three months and six months ended September 30, 2009 and 2008 (unaudited)			4
Condensed Consolidated Statement of Changes in Equity for the six months ended September 30, 2009 (unaudited)			5
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2009 and 2008 (unaudited)			6
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 4. Controls and Procedures			26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			27
Item 6. Exhibits			27
EX-31.1
EX-31.2
EX-32.1

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 Assets
Cash and cash equivalents		$	599,758			$	4,011,777
Short-term investments			2,196,556				3,661,437
Accounts receivable — net of allowance for doubtful accounts of $592,683 and $529,256			8,469,624				6,857,267
Due from affiliates			88,540				74,295
Inventories— net of allowance for obsolete and slow moving inventory of $585,937 and $1,355,159			9,273,339				8,169,667
Prepaid expenses and other current assets			858,196				719,700
Total Current Assets			21,486,013				23,494,143
Equipment — net			556,651				605,065
Other Assets
Intangible assets — net of accumulated amortization of $3,071,201 and $2,738,718			12,599,505				11,431,988
Goodwill			474,475				—
Restricted cash			747,228				676,403
Other assets			112,659				147,659
Total Assets		$	35,976,531			$	36,355,258
LIABILITIES AND EQUITY:
Current Liabilities
Current maturities of notes payable and capital leases		$	429,631			$	119,050
Accounts payable			4,034,851				3,791,096
Accrued expenses			1,298,803				2,511,833
Due to stockholders and affiliates			2,436,063				1,290,501
Total Current Liabilities			8,199,348				7,712,480
Long-Term Liabilities
Note payable			421,062				300,000
Deferred tax liability			2,184,988				2,259,064
Total Liabilities			10,805,398				10,271,544
Commitments and Contingencies (Note 11)			—				—
Preferred stock, $.01 par value, 25,000,000 shares authorized, none outstanding			—				—
Equity
Common 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				1,016,123
Additional paid-in capital			135,558,475				133,576,957
Treasury 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	)			642,907
Total common stockholders’ equity			25,151,985				26,001,677
Noncontrolling interests			19,148				82,037
Total equity			25,171,133				26,083,714
Total Liabilities and Equity		$	35,976,531			$	36,355,258

See accompanying notes to the condensed consolidated financial statements.

CASTLE BRANDS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(Unaudited)

		Three months ended September 30,								Six months ended September 30,
		2009				2008				2009				2008
Sales, net*		$	8,707,569			$	7,431,100			$	14,561,795			$	13,322,495
Cost of sales*			5,749,934				5,085,928				9,295,154				9,038,613
Gross profit			2,957,635				2,345,172				5,266,641				4,283,882
Selling expense			2,418,223				3,874,105				5,097,713				7,303,449
General and administrative expense			1,375,624				2,146,424				2,749,708				4,218,397
Depreciation and amortization			227,360				244,352				446,732				487,859
Loss from operations			(1,063,572	)			(3,919,709	)			(3,027,512	)			(7,725,823	)
Other income			143				9,811				145				25,384
Other 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				74,076
Net loss			(487,240	)			(6,240,318	)			(1,093,343	)			(10,609,807	)
Net loss attributable to noncontrolling interests			15,779				106,857				62,889				174,165
Net 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

See accompanying notes to the condensed consolidated financial statements.

CASTLE BRANDS INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Equity
(Unaudited)

																						Accumulated
										Additional												Other
		Common Stock								Paid-in				Treasury				Accumulated				Comprehensive				Noncontrolling				Total
		Shares				Amount				Capital				Stock				Deficit				Income (Loss)				Interests				Equity
BALANCE, MARCH 31, 2009			101,612,349			$	1,016,123			$	133,576,957			$	—			$	(109,234,310	)		$	642,907			$	82,037			$	26,083,714
Comprehensive loss
Net 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																				44,000
Repurchase 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																				1,928,572
Stock-based compensation											82,375																				82,375
BALANCE, 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

See accompanying notes to the condensed consolidated financial statements.

CASTLE BRANDS INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)

		Six months ended September 30,
		2009				2008
CASH 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				487,859
Provision for doubtful accounts			30,685				41,228
Amortization of deferred financing costs			—				186,858
Deferred tax benefit			(74,076	)			(74,076	)
Effect of changes in foreign exchange			(1,855,246	)			1,736,691
Stock-based compensation expense			82,374				417,803
Provision for obsolete inventories			(505,270	)			(112,419	)
Non-cash interest charge			—				147,124
Gain on exchange of 3% note payable			(270,275	)			—
Changes in operations, assets and liabilities:
Accounts receivable			(1,498,981	)			1,373,138
Due from affiliates			(13,173	)			(8,757	)
Inventory			666,724				563,011
Prepaid expenses and supplies			(130,609	)			(438,446	)
Other assets			35,057				—
Accounts payable and accrued expenses			(1,184,207	)			1,237,356
Due to related parties			1,114,847				408,107
Total adjustments			(3,155,418	)			5,965,477
NET 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				4,171,520
NET CASH PROVIDED BY INVESTING ACTIVITIES			1,385,754				4,065,689
CASH 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				1,552,385
CASH AND CASH EQUIVALENTS — ENDING		$	599,758			$	852,730

		Six months ended September 30,
		2009				2008
SUPPLEMENTAL 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

See accompanying notes to the condensed consolidated financial statements.

CASTLE BRANDS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
Unaudited

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and U.S. generally accepted accounting principles (“GAAP”) and, in the opinion of management, contain all adjustments (which consist of only normal recurring adjustments) necessary for a fair presentation of such financial information. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. The condensed consolidated balance sheet as of March 31, 2009 is derived from the March 31, 2009 audited financial statements. These condensed consolidated financial statements should be read in conjunction with Castle Brands Inc.’s (the “Company”) audited consolidated financial statements for the fiscal year ended March 31, 2009 included in the Company’s annual report on Form 10-K for the year ended March 31, 2009, as amended (“2009 Form 10-K”). Please refer to the notes to the audited consolidated financial statements included in the 2009 Form 10-K for additional disclosures and a description of accounting policies.

	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

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.

			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.

			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

Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Diluted potential common shares consist of incremental shares issuable upon exercise of stock options and warrants and contingent conversion of debentures outstanding. In computing diluted net loss per share for the three months ended September 30, 2009 and 2008, no adjustment has been made to the weighted average outstanding common shares as the assumed exercise of outstanding options and warrants and the assumed conversion of convertible debentures is anti-dilutive.

Potential common shares not included in calculating diluted net loss per share are as follows:

		Six months ended September 30,
		2009				2008
Stock options			3,224,900				1,994,825
Warrants to purchase stock			2,081,814				2,305,432
Convertible debentures			—				1,192,380
Total			5,306,714				5,492,637

NOTE 3 — SHORT-TERM INVESTMENTS

The following is a summary of the Company’s short-term investments that are classified as available-for-sale securities:

						Gross
		Adjusted				Unrealized				Estimated
		Cost				Gain (Loss)				Fair Value
September 30, 2009
Money market accounts		$	511,705			$	—			$	511,705
Certificates of deposit			1,684,851				—				1,684,851
Total		$	2,196,556			$	—			$	2,196,556

						Gross
		Adjusted				Unrealized				Estimated
		Cost				Gain (Loss)				Fair Value
March 31, 2009
Money market accounts		$	1,001,320			$	—			$	1,001,320
Certificates of deposit			2,660,117				—				2,660,117
Total		$	3,661,437			$	—			$	3,661,437

The Company’s investments have been classified within Level 1 of ASC 825 and are reported at fair value.

NOTE 4 — INVENTORIES

		September 30,				March 31,
		2009				2009
Raw materials		$	2,548,284			$	2,048,398
Finished goods			6,725,055				6,121,269
Total		$	9,273,339			$	8,169,667

As of September 30, 2009 and March 31, 2009, 50% and 61%, respectively, of raw materials and 8% and 6%, respectively, of finished goods were located outside of the United States.

The Company recorded reversals of its allowance for obsolete and slow moving inventory of $90,198 and $28,129 during the three months ended September 30, 2009 and 2008, respectively, and $505,270 and $112,419 during the six months ended September 30, 2009 and 2008, respectively. These reversals were recorded as the Company was able to sell certain of the goods included in the allowance recorded during previous fiscal years. The reversals were recorded as a decrease in cost of sales.

Inventories are stated at the lower of weighted average cost or market.

NOTE 5 — ACQUISITIONS

Acquisition of Betts & Scholl, LLC assets

On September 21, 2009, the Company, through its subsidiary CB-USA, acquired the assets of Betts & Scholl, LLC (“Betts & Scholl”), a premium wine maker formed in 2003 by Master Sommelier Richard Betts and Dennis Scholl. Pursuant to an asset purchase agreement, the Company issued to the sellers a total of 7,142,858 shares of the Company’s common stock. Also, the Company paid $1,094,541 in notes (of which $250,000 was paid at closing) for inventory, which consisted of finished goods and raw materials. As a result of the initial purchase price allocation, the Company recorded goodwill of $428,572. The purchase price allocation for this acquisition is preliminary since the Company is in the process of determining the fair value of the assets acquired and may be revised as additional information becomes available. The preliminary fair values allocated to the acquired Betts & Scholl net tangible and intangible assets are as follows: inventory of $1,094,541 and trade names, assembled workforce, and supplier and customer relationships of $1,500,000. Any change in the fair value of the net assets acquired will change the amount of the purchase price allocable to goodwill. The operating results of the Betts & Scholl business are reflected in the accompanying condensed consolidated financial statements from the date of acquisition and were not material.

Acquisition of McLain & Kyne

On October 12, 2006, the Company acquired all of the outstanding capital stock of McLain & Kyne, pursuant to a stock purchase agreement. As consideration for the acquisition, the Company paid $2,000,000, consisting of $1,294,800 in cash and issued 100,000 shares of its common stock, valued at $705,200, at closing. Under the McLain & Kyne agreement, as amended, the Company will also pay an earn-out, not to exceed $4,000,000, to the sellers based on the financial performance of the acquired business through March 31, 2011. As of March 31, 2009, no such earn-out payments had been earned. For the six months ended September 30, 2009, $45,903 has been earned. The earn-out payments have been recorded as an increase to goodwill.

NOTE 6 — GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the six months ended September 30, 2009 were as follows:

		Amount
Balance as of March 31, 2009		$	—
Payments under McLain and Kyne agreement			45,903

		Amount
Acquisition of Betts & Scholl assets			428,572
Balance as of September 30, 2009		$	474,475

Intangible assets consist of the following:

		September 30, 2009				March 31, 2009
Definite life brands		$	170,000			$	170,000
Trademarks			479,248				479,248
Rights			8,271,555				8,271,555
Product development			20,350				20,350
Patents			994,000				994,000
Other			28,480				28,480
			9,963,633				9,963,633
Less: accumulated amortization			3,071,201				2,738,718
Net			6,892,432				7,224,915
Other identifiable intangible assets — indefinite lived			5,707,073				4,207,073
		$	12,599,505			$	11,431,988

Accumulated amortization consists of the following:

		September 30, 2009				March 31, 2009
Definite life brands		$	132,218			$	126,552
Trademarks			114,243				97,652
Rights			2,475,953				2,201,462
Product development			2,600				—
Patents			346,187				313,052
Accumulated amortization		$	3,071,201			$	2,738,718

NOTE 7 — RESTRICTED CASH

At September 30, and March 31, 2009, the Company had €512,091 or $747,228 (translated at the September 30, 2009 exchange rate) and €512,132 or $676,403 (translated at the March 31, 2009 exchange rate), respectively, of cash restricted from withdrawal and held by a bank in Ireland as collateral for overdraft coverage, creditors’ insurance, customs and excise guaranty, and a revolving credit facility.

NOTE 8 — NOTES PAYABLE AND CAPITAL LEASE

		September 30,				March 31,
		2009				2009
Notes payable consist of the following:
Credit facilities		$	6,152			$	118,122
Note payable (A)			—				300,000
Note payable (B)			844,541				—
			850,693				418,122
Capital leases			—				928
Total		$	850,693			$	419,050

NOTE 9 — EQUITY

Common stock — In September 2009, the Company issued to the sellers an aggregate of 7,142,858 shares of Company common stock as partial consideration for the Betts & Scholl asset acquisition. These shares may not be sold or transferred for a period of six months from the date of issuance.

Treasury stock — In May 2009, the Company repurchased 1,000,000 shares of its common stock in a private transaction at a cost of $0.18 per share. At September 30, 2009, these shares were held as 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.

A summary of the options outstanding under the Plan is as follows:

		Six months ended September 30,
		2009								2008
						Weighted								Weighted
						Average								Average
						Exercise								Exercise
		Shares				Price				Shares				Price
Outstanding at beginning of period			3,555,975			$	2.57				1,617,625			$	6.37
Granted			425,000				0.33				555,700				0.30
Forfeited			(756,075	)			5.31				(178,500	)			6.56
Outstanding at end of period			3,224,900			$	1.63				1,994,825			$	4.66
Exercisable at end of period			1,069,900			$	4.27				866,300			$	7.02
Weighted average fair value of grants during period						$	0.11							$	0.15

The following table summarizes options outstanding and exercisable at September 30, 2009:

		Options Outstanding								Options Exercisable
						Weighted
						Average								Weighted
						Remaining								Average				Aggregate
Range of						Life in								Exercise				Intrinsic
Exercise 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 — On December 16, 2008, the Company’s Compensation Committee approved the grant of restricted common stock in lieu of cash retention payments under the retention agreements dated June 15, 2008 between the Company and three of its executive officers. These executive officers received a total of 578,572 shares of restricted common stock. The restricted stock vests in two equal annual installments on each anniversary of the grant date. At September 30, 2009, none of the restricted stock had vested.

The fair value of each award under the Plan is estimated on the grant date using the Black-Scholes option pricing model and is affected by assumptions regarding a number of complex and subjective variables. The use of an option pricing model also requires the use of a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends, and expected term. Expected volatility is based on the Company’s historical volatility and the volatility of a peer group of companies over the expected life of the option as the Company does not have enough history trading as a public company to calculate its own stock price volatility. The expected term and vesting of the options represents the estimated period of time until exercise. For the three and six months ended September 30, 2008, the expected term and vesting of the options was based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. For the three and six months ended September 30, 2009, the expected term was determined using the simplified method available under current guidance, as the Company has had significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The Company has not paid dividends in the past and does not plan to pay any dividends in the near future. Current authoritative guidance also requires the Company to estimate forfeitures at the time of grant and revise these estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on its expectation of future experience while considering its historical experience.

The fair value of options and restricted stock at grant date was estimated using the Black-Scholes option pricing model utilizing the following weighted average assumptions:

		September 30, 2009
Risk-free interest rate			2.75% - 3.08	%
Expected option life in years			6.25
Expected 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:

						Weighted
						Average
						Exercise
						Price
						Per
		Warrants				Warrant
Warrants outstanding and exercisable, March 31, 2009			2,198,314			$	6.88
Granted			—				—
Exercised			—				—
Expired			(116,500	)			8.00
Warrants outstanding and exercisable, September 30, 2009			2,081,814			$	6.82

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

The Company operates in one reportable segment — the sale of premium beverage alcohol. The Company’s product categories are vodka, rum, liqueurs, whiskey and tequila. The Company reports its operations in two geographic areas: International and United States.

The consolidated financial statements include revenues and assets generated in or held in the U.S. and foreign countries. The following table sets forth the percentage of consolidated revenue and consolidated assets from the U.S. and foreign countries.

		For the three months ended September 30,
		2009								2008
Consolidated 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:

		For the three months ended September 30,
		2009								2008
Rum		$	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								2008
Consolidated 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, 2009
Consolidated 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	%

NOTE 14 — SUBSEQUENT EVENTS

The Company has evaluated subsequent events that occurred through November 13, 2009, the date on which the financial statements were issued.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     We develop and market premium brands in the following beverage alcohol categories: vodka, rum, whiskey, liqueurs and tequila and fine wine. We distribute these spirits in all 50 U.S. states and the District of Columbia, in nine primary international markets, including Ireland, Great Britain, Northern Ireland, Germany, Canada, France, Italy, Sweden and the Duty Free markets, and in a number of other countries in continental Europe. We market the following brands, among others, Boru^® vodka, Pallini^® liqueurs, Gosling’s Rum^® , Clontarf^® Irish Whiskey, Knappogue Castle Whiskey^® , Jefferson’s^TM , Jefferson’s Reserve^® and Sam Houston^® bourbons, Tierras^TM tequila and Betts & Scholl^TM wines.

     Our objective is to continue building a distinctive portfolio of global premium spirits and wine brands. We have shifted our focus from a volume-oriented approach to a profit-centric focus. To achieve this, we continue to seek to:

	•		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.

     The success of our efforts is reflected in our operating results as our loss from operations improved $4.7 million, or 60.8%, for the six months ended September 30, 2009 from the comparable prior year period. As result of our continued cost containment efforts, our focus on our more profitable brands and markets, the expected organic growth of our existing brands, the success of our recently-released Tierras Tequila and Jefferson’s Presidential Select bourbon and our newly-created Fine Wine Division, we anticipate continued improved results of operations as we move towards profitability.

Recent Events

     In September 2009, we acquired the assets of Betts & Scholl LLC, a premium wine maker formed in 2003 by Master Sommelier Richard Betts and Dennis Scholl. In the transaction, we issued to the sellers a total of 7.14 million shares of our common stock and approximately $1.1 million of notes, of which $0.25 million was paid at closing. Dennis Scholl has joined our Board of Directors, where he serves as an independent director, and Richard Betts has joined us as a Vice President and head of our newly-formed Fine Wine Division.

The Fine Wine Division has been created to market and sell a select portfolio of premium wines from around the world. As part of our fine wine strategy, we will seek to recruit and represent the wines of a small number of premium, like-minded brand owners and wineries. The goal is to establish enough high quality wine expressions to provide a reasonable offering to customers. At the same time, however, we expect to limit the number of brands so each brand receives the attention it deserves. The division will take advantage of our existing infrastructure, including our distribution system.

Currency Translation

     The functional currencies for our foreign operations are the Euro in Ireland and continental Europe and the British Pound in the United Kingdom. With respect to our condensed consolidated financial statements, 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, including balances due from funding our international subsidiaries, are included in other income (expenses).

     Where in this quarterly report we refer to amounts in Euros or British Pounds, we have for your convenience also in certain cases provided a conversion of those amounts to U.S. Dollars in parentheses. Where the numbers refer to a specific balance sheet account date or financial statement account period, we have used the exchange rate that was used to perform the conversions in connection with the applicable financial statement. In all other instances, unless otherwise indicated, the conversions have been made using the exchange rates as of September 30, 2009, each as calculated from the Interbank exchange rates as reported by Oanda.com. On September 30, 2009, the exchange rate of the Euro and the British Pound in exchange for U.S. Dollars were €1.00 = U.S. $1.45917 (equivalent to U.S. $1.00 = €0.68532) for Euros and £1.00 = U.S. $1.59221 (equivalent to U.S. $1.00 = £0.62806) for British Pounds.

     These conversions should not be construed as representations that the Euro and British Pound amounts actually represent U.S. Dollar amounts or could be converted into U.S. Dollars at the rates indicated.

Critical Accounting Policies

     There are no material changes from the critical accounting policies set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended March 31, 2009, as amended, which we refer to as our 2009 Annual Report. Please refer to that section for disclosures regarding the critical accounting policies related to our business.

Financial performance overview

     The following table provides information regarding our case sales for the periods presented based on nine-liter equivalent cases, which is a standard spirits industry metric:

		Three months ended								Six months ended
		September 30,								September 30,
		2009				2008				2009				2008
Cases
United States			67,351				57,511				115,228				106,448
International			18,944				27,596				32,735				45,968
Total			86,295				85,107				147,963				152,416
Vodka			29,818				31,723				52,352				57,265
Rum			27,591				26,787				50,599				49,512
Liqueurs			19,533				17,138				28,775				29,787
Whiskey			8,765				9,459				15,023				15,852
Tequila			588				—				1,214				—
Total			86,295				85,107				147,963				152,416
Percentage of Cases
United 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	%

		Three months ended								Six months ended
		September 30,								September 30,
		2009				2008				2009				2008
Vodka			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	%