Overview
We develop and market premium branded spirits in the following distilled spirit categories: vodka, rum, whiskey, liqueurs and tequila. 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'sTM , Jefferson's Reserve® and Sam Houston® bourbons and TierrasTMtequila.
Our objective is to continue building a distinctive portfolio of global premium spirits brands. We have been shifting our focus from a volume-oriented approach to a profit-centric focus. To achieve this, we continue to seek to:
• increase revenues from existing spirits 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; and

• selectively add new premium brands to our spirits portfolio. We intend to continue developing new brands and pursuing strategic relationships, joint ventures and acquisitions to selectively expand our premium spirits portfolio, particularly by capitalizing on and expanding our already demonstrated partnering capabilities. Our criteria for new brands focuses on underserved areas of the spirits and/or wine 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.

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 21.9% and 33.7%, respectively, for the three months ended June 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. We are engaged in a rigorous expense reduction effort across the entire supply chain of our brands. We are examining each step of the process of sourcing our brands to both improve quality and reduce cost.

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 June 30, 2009, each as calculated from the Interbank exchange rates as reported by Oanda.com. On June 30, 2009, the exchange rate of the Euro and the British Pound in exchange for U.S. Dollars were €1.00 = U.S. $1.4048 (equivalent to U.S. $1.00 = € 0.7119) for Euros and £1.00 = U.S. $1.6520 (equivalent to U.S. $1.00 = £0.6055) 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
                                                 June 30,
                                             2009          2008
                    Cases
                    United States             51,428       48,937
                    International             10,241       18,372


                    Total                     61,669       67,309


                    Vodka                     22,535       25,541
                    Rum                       23,008       22,726
                    Liqueurs                   9,242       12,649
                    Whiskey                    6,258        6,393
                    Tequila                      626            -


                    Total                     61,669       67,309


                    Percentage of Cases
                    United States               83.4 %       72.7 %
                    International               16.6 %       27.3 %


                    Total                      100.0 %      100.0 %


                    Vodka                       36.6 %       37.9 %
                    Rum                         37.3 %       33.8 %
                    Liqueurs                    15.0 %       18.8 %
                    Whiskey                     10.1 %        9.5 %
                    Tequila                      1.0 %        0.0 %


                    Total                      100.0 %      100.0 %

Results of operations
The following table sets forth, for the periods indicated, the percentage of net sales of certain items in our consolidated financial statements.

                                                           Three months ended
                                                                June 30,
                                                            2009          2008
     Sales, net                                               100.0 %      100.0 %
     Cost of sales                                             60.6 %       67.1 %


     Gross profit                                              39.4 %       32.9 %


     Selling expense                                           45.8 %       58.2 %
     General and administrative expense                        23.5 %       35.2 %
     Depreciation and amortization                              3.7 %        4.1 %


     Loss from operations                                    (33.5) %     (64.6) %


     Other income                                               0.0 %        0.4 %
     Other expense                                            (0.2) %      (0.2) %
     Foreign exchange gain (loss)                              17.8 %      (1.7) %
     Interest income (expense), net                             0.3 %      (8.6) %
     Gain on exchange of 3% note payable                        4.6 %        0.0 %
     Income tax benefit                                         0.6 %        0.6 %


     Net loss                                                (10.4) %     (74.1) %


     Net loss attributable to noncontrolling interests          0.8 %        1.1 %


     Net loss attributable to common stockholders             (9.6) %     (73.0) %

Three months ended June 30, 2009 compared with three months ended June 30, 2008 Net sales. Net sales remained even at $5.9 million for the three months ended June 30, 2009 when compared to the three months ended June 30, 2008. Our U.S. case sales as a percentage of total case sales increased to 83.4% during the three months ended June 30, 2009 as compared to 72.7% during the comparable prior year period. U.S. net sales increased to $5.0 million for the three months ended June 30, 2009 from $4.7 million for the comparable prior year period, including $0.2 million in revenue from sales of our recently launched Tierras Tequila. We adjusted our sales and marketing efforts in certain U.S. markets in an effort to yield more profitable results, which led to lower sales of Boru vodka in some of these markets. The growth in U.S. sales reflects the momentum of our portfolio in the U.S., particularly for Gosling's rums, offset by a reduction in sales of certain of our premium liqueurs, due in part to an overall reduction in the categories in which they participate.
The table below presents the increase or decrease, as applicable, in case sales by product category for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008:

                           Increase/(decrease)               Percentage
                              in case sales             increase/(decrease)
                           Overall         U.S.        Overall          U.S.
              Vodka           (3,006 )     (1,251 )        (11.8 )%       (7.0 )%
              Rum                282        5,806            1.2 %        33.9 %
              Whiskey           (135 )        (43 )         (2.1 )%       (1.9 )%
              Liqueurs        (3,407 )     (2,647 )        (26.9 )%      (22.7 )%
              Tequila            626          626            0.0 %         0.0 %


              Total           (5,640 )      2,491           (8.4 )%        5.1 %

Our international case sales and revenue decreased during the three months ended June 30, 2009 as evidenced by a 44.3% reduction in case sales when compared to the comparable prior year period. This decrease was due to our continued efforts to focus on our more profitable brands and markets, difficult market conditions in most markets, particularly Ireland, Northern Ireland and Great Britain and the effects of the restructuring of our international operations.
Gross profit. Gross profit increased 19.1% to $2.3 million during the three months ended June 30, 2009 from $1.9 million during the comparable prior year period, while our gross margin increased to 39.4% during the three months ended June 30, 2009 compared to 32.9% for the comparable prior year period. During the three months ended June 30, 2009 and 2008, we recorded reversals of our allowance for obsolete and slow moving inventory of $0.4 million and $0.1 million, respectively. These reversals were recorded as we were 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. Absent the reversals of the allowance, our gross profit was $1.9 million and $1.8 million during each of the three months ended June 30, 2009 and June 30, 2008 and our gross margin was 32.4% and 31.4%, respectively.
Selling expense. Selling expense decreased 21.9% to $2.7 million for the three months ended June 30, 2009 from $3.4 million for the comparable prior year period. This decrease in selling expense was attributable to our continued cost containment efforts, including a decrease in advertising, marketing and promotion expense of $0.2 million for the three months ended June 30, 2009 compared to the comparable prior year period. We also reduced sales and marketing staff in both our domestic and international operations, resulting in a decrease of employee expense, including salaries, related benefits and travel and entertainment, of $0.7 million for the three months ended June 30, 2009 against the comparable prior year period. As a result of our continued cost containment efforts, selling expense as a percentage of net sales decreased to 45.8% in the three months ended June 30, 2009 as compared to 58.2% for the comparable prior year period.
General and administrative expense. General and administrative expense decreased 33.7% to $1.4 million in the three months ended June 30, 2009 when compared to $2.1 million in the comparable prior year period. Staff reductions resulted in a decrease of employee expense, including salaries, related benefits and travel and entertainment, of $0.5 million in the current period against the comparable prior year period. A decrease of $0.3 million in professional fees was due to our ongoing cost containment efforts. As a result, general and administrative expense as a percentage of net sales decreased to 23.5% in the three months ended June 30, 2009 as compared to 35.2% for comparable prior year period.
Depreciation and amortization. Depreciation and amortization was $0.2 million during each of the three months ended June 30, 2009 and June 30, 2008.
Loss from operations . As a result of the foregoing, our loss from operations improved $1.8 million to ($2.0) million for the three months ended June 30, 2009 from ($3.8) million in the comparable prior year period. As result of our continued cost containment efforts, our focus on our more profitable brands and markets, and expected organic growth of our brands, we anticipate improved results of operations in the near term as compared to prior year periods.
Foreign exchange gain (loss). Foreign exchange gain during the three months ended June 30, 2009 was $1.0 million as compared to a loss of $0.1 million during the three months ended June 30, 2008 due to the weakening of the U.S. dollar against the Euro and the British Pound and its effect on our Euro- and British Pound-denominated intercompany loans to our foreign subsidiaries.
Interest income (expense), net. We had interest income, net of $18,781 during the three-month period ended June 30, 2009 compared to interest expense, net of ($0.5) million during comparable prior year period. We eliminated this expense by converting and exchanging all of our debt for equity.
Gain on exchange of 3% note payable. In May 2009, we exchanged our outstanding 3% note by issuing common stock. This resulted in a pre-tax non-cash gain of $0.3 million for the three-month period ended June 30, 2009.

Net loss attributable to common stockholders. As a result of the net effects of the foregoing, net loss attributable to common stockholders for the three months ended June 30, 2009 improved 86.1% to ($0.6) million from ($4.3) million for the three months ended June 30, 2008. Net loss per common share, basic and diluted, was ($0.01) per share for the three-month period ended June 30, 2009 as compared to ($0.28) per share for the comparable prior year period. Net loss per common share basic and diluted was positively affected by the increase in common shares outstanding resulting from the common shares issued in connection with the series A preferred stock transaction which we completed in October 2008.
Net loss attributable to noncontrolling interests. As described in the footnotes to our accompanying condensed consolidated financial statements, in accordance with SFAS No. 160, which we adopted on April 1, 2009, we have separately presented "Net loss attributable to noncontrolling interests" on the accompanying condensed consolidated statements of operations. Net loss attributable to noncontrolling interests during the three months ended June 30, 2009 and 2008 amounted to a credit of $0.1 million, the result of allocated losses recorded by our 60%-owned subsidiary, Gosling-Castle Partners, Inc. Liquidity and capital resources
Since our inception, we have incurred significant operating and net losses and have not generated positive cash flows from operations. For the three months ended June 30, 2009, we had a net loss of $0.5 million and used cash of $3.1 million in operating activities. As of June 30, 2009, we had an accumulated deficiency of $109.8 million.
In October 2008, we completed a $15.0 million private placement of our series A preferred stock with certain investors. In connection with the transaction, substantially all of the holders of Castle Brands (USA) Inc.'s 9% senior secured notes, in the principal amount of $9.7 million plus accrued but unpaid interest, and all holders of our 6% convertible notes, in the principal amount of $9.0 million plus accrued but unpaid interest, converted their notes into shares of series A preferred stock. Each share of series A preferred stock automatically converted into common stock, as set forth in the certificate of designation of the series A preferred stock, when we amended our charter in the last quarter of fiscal 2009. In May 2009, we exchanged the remaining 9% senior secured notes, which had been amended so that, among other things, the interest rate was reduced to 3%, payable at maturity, in the principal amount of $300,000, plus accrued but unpaid interest of $14,275, for 200,000 shares of our common stock. The closing of the cash investment and the conversion or exchange of all of our outstanding debt should provide us with sufficient funds to execute our planned operations for at least the next twelve months.
As of June 30, 2009, we had stockholders' equity of $24.1 million and working capital of $13.7 million, compared to $26.0 million and $15.8 million, respectively, as of March 31, 2009.
As of June 30, 2009, we had cash and cash equivalents and short-term investments of approximately $4.2 million, as compared to $7.7 million as of March 31, 2009. The decrease is primarily attributable to the funding of our operations for the three months ended June 30, 2009. At June 30, 2009, we also had approximately $0.7 million of cash restricted from withdrawal and held by a bank in Ireland as collateral for overdraft coverage, creditors' insurance, revolving credit, and other working capital purposes.
The following may result in a material decrease in our liquidity over the near-to-mid term:
• continued significant levels of cash losses from operations;

• an increase in working capital requirements to finance higher levels of inventories and accounts receivable;

• our ability to maintain and improve our relationships with our distributors and our routes to market;

• our ability to procure raw materials at a favorable price to support our level of sales;

• potential acquisition of additional spirits brands; and

• expansion into new markets and within existing markets in the United States and internationally.

We continue to implement a plan supporting the growth of existing brands through sales and marketing initiatives that we expect will generate cash flows from operations in the next few years. As part of this plan, we seek to grow our business through expansion to new markets, growth in existing markets and strengthened distributor relationships. We are also seeking additional brands and agency relationships to leverage our existing distribution platform. We intend to finance our brand acquisitions through a combination of our available cash resources, bank borrowings and, in appropriate circumstances, the further issuance of equity and/or debt securities. Acquiring additional brands could have a significant effect on our financial position, could materially reduce our liquidity and could cause substantial fluctuations in our quarterly and yearly operating results. We are also taking a systematic approach to expense reduction, seeking improvements in routes to market and containing production costs to improve cash flows.

Cash flows
The following table summarizes our primary sources and uses of cash during the periods presented:

                                                       Three months ended
                                                            June 30,
                                                        2009          2008
                                                         (in thousands)
         Net cash provided by (used in):
         Operating activities                        $   (3,142 )   $ (3,258 )
         Investing activities                               (29 )      2,108
         Financing activities                              (303 )        377


         Effect of foreign currency translation               1           (7 )


         Net decrease in cash and cash equivalents   $   (3,473 )   $   (780 )

Operating activities. A substantial portion of available cash has been used to fund our operating activities. In general, these cash funding requirements are based on operating losses, driven chiefly by the inherent costs in developing and maintaining our distribution system and our sales and marketing activities. We have also utilized cash to fund our receivables and inventories. In general, these cash outlays for receivables and inventories are only partially offset by increases in our accounts payable to our suppliers and accrued expenses.
On average, the production cycle for our owned brands is up to three months from the time we obtain the distilled spirits and other materials needed to bottle and package our products to the time we receive products available for sale, in part due to the international nature of our business. We do not produce Gosling's rums, Pallini liqueurs or Tierras tequila. Instead, we receive the finished product directly from the owners of such brands. From the time we have products available for sale, an additional three to four months may be required before we sell our inventory and collect payment from customers.
During the three months ended June 30, 2009, net cash used in operating activities was $3.1 million, consisting primarily of a net loss of $0.6 million, a decrease in allowance for obsolete inventories of $0.4 million, an increase in prepaid expense and supplies of $0.3 million, a decrease in accounts payable and accrued expenses of $1.6 million and the effects of changes in foreign exchange of $1.3 million. These uses of cash were partially offset by a $0.7 million decrease in accounts receivable, a $0.2 million dollar decrease in inventories, a $0.2 million increase in due to related parties and depreciation and amortization expense of $0.2 million.
During the three months ended June 30, 2008, net cash used in operating activities was $3.3 million, consisting primarily of losses from operations of $4.3 million, increases in inventories of $0.7 million and prepaid expenses of $0.8 million, and a decrease in accrued expenses of $1.4 million. These uses of cash were offset, in part, by a decrease in accounts receivable of $1.4 million, increases in accounts payable and due to related parties of $1.7 million and $0.2 million, respectively, and by non-cash charges for depreciation and amortization and stock-based compensation expense of $0.2 million and $0.2 million, respectively.
Investing activities. We fund operating activities primarily with cash and short-term investments. Net cash provided by investing activities was $2.1 million during the three months ended June 30, 2008, representing net proceeds from the sale of certain short-term investments.
Financing activities. Net cash used in financing activities during the three months ended June 30, 2009 was $0.3 million, consisting of the repayment of $0.1 million to a bank in Ireland under our revolving credit facility and $0.2 million for the repurchase of our common stock.
Net cash provided by financing activities during the three months ended June 30, 2008 was $0.4 million, represented by net proceeds from borrowings under our revolving credit facility with a bank in Ireland.

Recent accounting standards issued and adopted.
We discuss recently issued and adopted accounting standards in the Accounting standards adopted and Recent accounting pronouncements sections of Note 1 of the Notes to Condensed Consolidated Financial Statements in the accompanying condensed consolidated financial statements. Cautionary Note Regarding Forward Looking Statements This report includes certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which involve risks and uncertainties, relate to the discussion of our business strategies and our expectations concerning future operations, margins, profitability, liquidity and capital resources and to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. We use words such as "may", "will", "should", "expects", "intends", "plans", "anticipates", "believes", "estimates", "seeks", "expects", "predicts", "could", "projects", "potential" and similar terms and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties, risks and factors relating to our operations and business environments, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by these forward-looking statements. These risks and other factors include those listed under "Risk Factors" in our 2009 Annual Report, and as follows:
• our history of losses and expectation of further losses;

. . .