Castle Brands Inc. Annual Report 2007

FY2007 Annual Report · Castle Brands Inc.
Loading PDF…
2 0 0 7   A n n u A l   R e p o R t

Ch air m a n’s  Let t er

D e a r  F e l l ow  S h a r e hol de r s:

Fiscal  2007  was  a  pivotal  and  exciting  year  for  Castle  Brands.  
We began the fiscal year with our initial public offering and ended the 
fiscal year with a major re-launch of our flagship brand, Boru Vodka. 
During  fiscal  2007,  we  continued  to  make  substantial  progress  
in  the  implementation  of  our  long-term  strategy.  With  the  successful 
completion  of  our  initial  public  offering  in  April  2006,  our  company 
achieved  increased  visibility  with  our  distributors,  retailers  and  con-
sumers and expanded and diversified our shareholder base. With our 
improved  financial  strength,  our  management  team  focused  on  our 
company’s long-term goals. We increased consumer recognition of the 
brands  in  our  portfolio,  added  an  important  new  category  to  our 
brands, enhanced our management team with experienced profession-
als,  and  increased  the  capital  of  our  company.  We  continue  to  work 
diligently  to  build  our  brands,  to  increase  sales  and  margins,  and  to 
enhance shareholder value.

Globally, our case volume for the year grew 18% to 314,000 nine 
liter  cases.  In  the  United  States,  case  sales  increased  25%  with  our 
largest  brand,  Boru  Vodka,  up  about  54%,  resulting  in  record  case 
sales in the U.S. for our company. With the recent re-launch of Boru, 
including  enhanced  packaging  and  a  new  marketing  campaign,  we 
expect to continue building on this momentum this year. 

While  we  expect  that  the  United  States  will  continue  to  be  our 
fastest growing market, we expect the international market to become 
a dynamic growth market for us as well and one we intend to pursue 
aggressively.  International  sales  increased  approximately  7%,  but  it 
was  a  very  important  year  of  change  and  repositioning  for  us  inter-
nationally.  In  March  2006,  we  welcomed  our  new  International 
Managing Director, John Soden. Mr. Soden, whose experience includes 
over 13 years with one of Ireland’s largest manufacturers and distribu-
tors  of  alcoholic  beverages,  was  charged  with  the  implementation  of 
several  key  initiatives,  each  of  which  he  has  already  well  advanced. 
They include identifying and implementing improved routes to market 
in  Ireland,  attracting  and  working  with  an  aggressive  distributor  for 
our brands throughout the United Kingdom, strengthening our inter-
national  sales  team,  and  instituting  cost  reductions  and  margin 
improvements. We expect good progress from his team this year and in 
the years ahead. 

As part of the re-launch of Boru Vodka, and to further stimulate 
growth and contribution from all of our brands, we created the posi-
tion of Chief Commercial and Marketing Officer with the responsibil-
ity to oversee and develop all of our brands on a worldwide basis. Our 
Chief Commercial and Marketing Officer, Claes Fick, brings to Castle 
Brands over 17 years of experience, most notably having been responsible 
for managing Absolut Vodka in the U.S. Both John and Claes have the 
knowledge  and  experience  to  promote  and  grow  the  Castle  Brands 
portfolio.  Each  of  these  individuals  represents  a  major  asset  to  the 
company as we continue to grow organically and through acquisitions 
and agency relationships both in the U.S. market and internationally.

As  with  any  beverage  company,  distribution  is  key.  In  the  U.S., 
our  Senior  Vice  President,  Kelley  Spillane,  and  his  team  extended  
our  distribution  system  and  we  now  have  distribution  in  place  in  
all  50  states.  Throughout  the  year,  we  leveraged  this  extensive  net-
work  by  adding  approximately  5,000  points  of  distribution  in  the  
U.S.  This  enabled  us  to  achieve  record  case  sales  in  our  most  recent 
fiscal year. In the current year, both increased focus on expanding our  

on-premise initiatives and the new Boru packaging and marketing will  
be  important  contributors  to  this  effort.  We  expect  this  to  result  in 
increased case sales and improved margins for our brands. 

We expanded our portfolio of products by acquiring McLain & 
Kyne, Ltd., a developer and marketer of premium small batch bourbon 
brands,  in  October.  With  this  acquisition  we  entered  the  premium 
bourbon  market  with  three  distinct  products:  Jefferson’s  Reserve, 
Jefferson’s  and  Sam  Houston.  We  believe  that  these  brands  are  posi-
tioned for growth and fit in well with our long-term strategy. We will 
continue to look for similar acquisitions and agency opportunities that 
satisfy our criteria for growth and shareholder benefit.

We  successfully  executed  several  promotional,  advertising  and 
marketing  campaigns  to  further  enhance  brand  awareness.  Although 
we  incurred  substantial  expense  in  promoting  our  brands,  we  truly 
believe that these marketing campaigns will yield long-term increases 
in  the  sales  of  our  products.  Our  marketing  promotion  for  Gosling’s 
Rum  in  Gillette  Stadium  in  Foxborough,  Massachusetts,  provided  us 
with  outstanding  product  placement  and  promotional  opportunities 
for Gosling’s Rum to a targeted core demographic customer. We also 
sponsored  several  sailing  events,  including  the  Annapolis  Race  Week 
in  Maryland  during  the  Labor  Day  weekend.  We  continue  to  believe 
that events such as these are instrumental to gaining consumer recog-
nition and brand awareness of our products, and we look forward to 
introducing a growing number of consumers to our products through 
our marketing efforts over the course of the coming year. 

As we enter a new fiscal year, I am very excited about the oppor-
tunities  that  lie  ahead  for  our  company.  On  the  product  side,  we 
entered  the  current  fiscal  year  with  new  packaging  and  our  new 
“Defend  the  Spirit”  marketing  campaign  for  Boru  Vodka.  The  new 
sleek  packaging  reflects  the  boldness,  clarity  and  quality  of  this  out-
standing  premium  vodka,  a  theme  that  is  carried  through  the  “fight 
and defend” expressions of our marketing campaign. On the financial 
side, we improved our capital structure through the private placement 
of  approximately  $21  million  of  our  common  stock.  The  funds  from 
the offering will be used to further brand development as well as pos-
sible acquisitions. The private placement was a significant achievement 
for our company as it not only raised required capital but also enhanced 
our shareholder base with new institutional investors. 

As we review our accomplishments for the year, I believe we have 
made significant progress in building brand recognition of our products 
and improving our platform for growth. Although we have accomplished 
a lot in the past year and I am very proud of what we have achieved so 
far, there is still much more to be done. As we enter our second year as 
a public company, we are well positioned to continue to implement our 
long-term  plan  to  take  advantage  of  a  dynamic  and  growing  market-
place. You can be assured that the entire management team is focused 
on achieving profitability and enhancing shareholder value.

Thank you for your support.

MARK AnDREWS
Chairman and Chief Executive Officer

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

□(cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Form 10-K

□ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED MARCH 31, 2007

OR

FOR THE TRANSITION PERIOD FROM

TO

COMMISSION FILE NUMBER 001-32849

Castle Brands Inc.
(Exact name of registrant as speciﬁed in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

570 Lexington Avenue, 29th Floor
New York, New York
(Address of principal executive ofﬁces)

41-2103550
(I.R.S. Employer
Identiﬁcation No.)

10022
(Zip Code)

Registrant’s telephone number, including area code (646) 356-0200

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Common stock, $0.01 par value

Name of Each Exchange on Which Registered
American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None.

Indicate by check mark whether the registrant is a well-known seasoned issuer, as deﬁned in Rule 405 of the Securities Act.

Yes □ No □(cid:2)

Indicate by check mark whether the registrant is not required to ﬁle reports pursuant to Section 13 or Section 15(d) of the

Act. Yes □ No □(cid:2)

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 □(cid:2) No □

Indicate by check mark if disclosure of delinquent ﬁlers pursuant to Item 405 of Regulation S-K is not contained herein, and

will not be contained, to the best of registrant’s knowledge, in deﬁnitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. □(cid:2)

Indicate by check mark whether the registrant is a large accelerated ﬁler, accelerated ﬁler or a non-accelerated ﬁler (as deﬁned

in Rule 12b-2 of the Act).

□ Large accelerated ﬁler
Indicate by check mark whether the registrant is a shell company (as deﬁned in Rule 12b-2 of the Act). Yes □ No □(cid:2)

□(cid:2) Non-accelerated ﬁler

□ Accelerated ﬁler

The aggregate market value of registrant’s common stock held by non-afﬁliates, based upon the closing price of the common
stock on March 31, 2007, as reported by the American Stock Exchange, was approximately $79,560,998 million. Shares of common
stock held by each executive ofﬁcer and director and by each person who owns 5% or more of the outstanding common stock,
based on Schedule 13G ﬁlings, have been excluded since such persons may be deemed afﬁliates. This determination of afﬁliate
status is not necessarily a conclusive determination for other purposes.

The registrant had 15,627,329 shares of $0.01 par value common stock outstanding at June 27, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required in Part III of this Form 10-K is incorporated by reference to the proxy statement for the

registrant’s 2007 meeting of stockholders, which proxy statement will be ﬁled no later than 120 days after the close of the
registrant’s ﬁscal year ended March 31, 2007.

TABLE OF CONTENTS

PART I

Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and

Item 6.
Item 7.

Item 7A.
Item 8.
Item 9.

Item 9A.
Item 9B.

Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial

Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10.
Item 11.
Item 12.
Item 13.
Item 14.

Directors, Executive Ofﬁcers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneﬁcial Owners and Management . . . . . . . . . . . .
Certain Relationships and Related Transactions and Director Independence . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 15.
Signatures

Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART IV

2
14
23
23
23
24

25
26

29
48
49

80
80
80

81
81
81
81
81

82

Cautionary Note Regarding Forward-Looking Statements

PART I

This annual report includes statements of our expectations, intentions plans and beliefs that
constitute ‘‘forward-looking statements’’ within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the
safe harbor protection provided by those sections. 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 have
used words such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘expects,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘anticipates,’’ ‘‘believes,’’
‘‘thinks,’’ ‘‘estimates,’’ ‘‘seeks,’’ ‘‘expects,’’ ‘‘predicts,’’ ‘‘could,’’ ‘‘projects,’’ ‘‘potential’’ and other 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’’ and elsewhere in this report. The following factors, among others, could cause our
actual results and performance to differ materially from the results and performance projected in, or
implied by, the forward-looking statements:

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

our history of losses and expectation of further losses;

the effect of poor operating results on our company;

the effect of growth on our infrastructure, resources, and existing sales;

our ability to expand our operations in both new and existing markets and our ability to
develop or acquire new brands;

the impact of supply shortages and alcohol and packaging costs in general;

our ability to raise capital;

our ability to fully utilize and retain new executives;

negative publicity surrounding our products or the consumption of beverage alcohol products
in general;

our ability to acquire and/or maintain brand recognition and acceptance;

trends in consumer tastes;

our ability to protect trademarks and other proprietary information;

the impact of litigation;

the impact of federal, state, local or foreign government regulations;

the effect of competition in our industry; and

economic and political conditions generally.

We assume no obligation to publicly update or revise these forward-looking statements for any

reason, or to update the reasons actual results could differ materially from those anticipated in, or
implied by, these forward-looking statements, even if new information becomes available in the future.

Currency Translation

The functional currencies for our foreign operations are the euro in Ireland and the British pound
in the United Kingdom. With respect to our consolidated ﬁnancial statements, the translation from the
applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using exchange

1

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 included in other income/expenses.

Where in this annual report we refer to amounts in euros or British pounds, we have for your

convenience also in certain cases provided a translation of those amounts to U.S. dollars in
parenthesis. Where the numbers refer to a speciﬁc balance sheet date or ﬁnancial statement period,
we have used the exchange rate that was used to perform the translations in connection with the
applicable ﬁnancial statement. In all other instances, unless otherwise indicated, the translations have
been made using the exchange rates as of March 31, 2007, each as calculated from the Interbank
exchange rates as reported by Oanda.com. On March 31, 2007, the exchange rate of the euro in
exchange for U.S. dollars and the exchange rate of the British pound in exchange for U.S. dollars
were u1.00 = U.S. $1.3335 (equivalent to U.S. $1.00 = u0.7500) for euros and £1.00 = U.S. $1.9625
(equivalent to U.S. $1.00 = £0.5096) for British pounds.

These translations 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.

Item 1. Business

Overview

We are an emerging developer and global marketer of premium branded spirits within four

growing categories of the spirits industry: vodka, rum, whiskey and liqueurs. Our premium spirits
brands include brands that we own, including Boru vodka, Knappogue Castle Whiskey, the Clontarf
Irish whiskeys, Sea Wynde rum, and Brady’s Irish cream liqueur, brands for which we possess certain
marketing and distribution rights, either directly or indirectly, including Goslings’ rums and Celtic
Crossing liqueur and Pallini liqueurs, a brand that we distribute through an agency relationship.

We were formed as a Delaware corporation in July 2003. Our predecessor company, Great Spirits

Company LLC, a Delaware limited liability company was formed in February 1998 by our chief
executive ofﬁcer, Mark Andrews, through one of his afﬁliated entities, Knappogue Corp. In early
2003, Great Spirits Company entered into negotiations with The Roaring Water Bay Spirits Group
Limited to acquire the Boru vodka brand and, in July 2003, we were formed as a holding company to
effectuate the merger of Great Spirits Company and the Roaring Water Bay entities. This merger was
accomplished on December 1, 2003, with the simultaneous (a) merger of Great Spirits Company into a
wholly owned subsidiary established by us for such purpose, now known as Castle Brands (USA)
Corp., and (b) acquisition by us of The Roaring Water Bay Spirits Group Limited and its afﬁliated
companies, referred to by us as Roaring Water Bay, making them our subsidiaries, now known as
Castle Brands Spirits Group Limited and Castle Brands Spirits Marketing and Sales Company
Limited. As a result of this acquisition, we acquired ownership of Boru vodka, the Clontarf family of
Irish whiskeys and Brady’s Irish cream. We completed our initial public offering of common stock in
April 2006.

For our ﬁscal year ended March 31, 2007, we recorded sales of 314,644 cases, which are measured

based on the industry standard of nine-liter equivalent cases, and revenues of approximately
$25.2 million, which represents an increase of 19.0% from revenues recorded for the prior ﬁscal year.
These increases primarily reﬂect organic growth within our brand portfolio. We intend to continue our
current growth through further market penetration of our brands, as well as through strategic
relationships and acquisitions of both established and emerging spirits brands with global growth
potential.

Our brands

We market our premium spirits brands in the following distilled spirit categories: vodka, rum,

whiskey and liqueurs.

2

Boru vodka. Boru vodka is our leading brand and accounted for approximately 35%, 36% and
55% of our revenues for the ﬁscal years ended March 31, 2007, March 31, 2006 and March 31, 2005,
respectively. Boru vodka is premium vodka produced in Ireland. It was developed in 1998 and named
after the legendary High King of Ireland, Brian Boru, an Irish national hero known for uniting the
Irish clans and driving foreign invaders out of Ireland in 1014 A.D. It is quintuple distilled using pure
spring water for smoothness and ﬁltered through ten feet of charcoal made from Irish oak for
increased purity. We have three ﬂavor extensions of Boru vodka: Boru Citrus, Boru Orange and Boru
Crazzberry (a cranberry/raspberry ﬂavor fusion).

Gosling’s rum. We are the exclusive U.S. distributor for the Gosling’s rums, including Gosling’s
Black Seal dark rum, Gosling’s Gold Bermuda Rum and Gosling’s Old Rum. These are all produced
by the Gosling family in Bermuda, where Gosling’s rums have been under continuous production and
ownership by the Gosling family for over 150 years. In February 2005, we expanded our relationship
with the Gosling family by acquiring a 60% controlling interest in Gosling-Castle Partners Inc., a
global export venture between us and the Gosling family. Effective April 1, 2005, Gosling-Castle
Partners secured the exclusive long-term export and distribution rights for the Gosling’s rum products
for all countries other than Bermuda, including an assignment of the Gosling’s rights under our
existing distribution agreement with them. The Gosling’s rum brands accounted for approximately 29%
and 28% of our revenues for the ﬁscal years ended March 31, 2007 and March 31, 2006, respectively.

Sea Wynde.

In 2001 we introduced Sea Wynde, premium rum. Sea Wynde is distinctive in that it

is made entirely from aged, pure pot still rums from the Caribbean and South America.

Knappogue Castle Whiskey. We developed our Knappogue Castle Whiskey, a single malt Irish
whiskey, in 1998, taking advantage of an opportunity to build both on the popularity of single malt
Scotch whisky and the growth in the Irish whiskey category. Knappogue Castle Whiskey is distilled in
pot stills using malted barley and is distinctive in that it is vintage-dated based on the year of
distillation.

Knappogue Castle 1951. Knappogue Castle 1951 is a pure pot-still whiskey that was distilled in
1951 and then aged for 36 years in sherry casks. The name comes from a castle in Ireland, formerly
owned by Mark Edwin Andrews, the originator of the brand and the father of Mark Andrews, our
chairman and chief executive ofﬁcer. Currently, we only offer 300 bottles of this rare Irish whiskey for
sale each year.

Clontarf Irish whiskeys. Our family of Clontarf Irish whiskeys currently represents a majority of

our case sales of Irish whiskey. Clontarf was launched in 2000 to meet the growing demand for an
accessible and smooth premium Irish whiskey. Clontarf is distilled using quality grains and pure Irish
spring water and is then aged in bourbon barrels and mellowed through Irish oak charcoal. Clontarf is
available in single malt, reserve and classic versions.

McLain & Kyne Bourbons.

In 2006, we acquired McLain & Kyne, Ltd., the developers and

marketers of three premium very small batch bourbons, including Jefferson’s, Jefferson’s Reserve and
Sam Houston. Under the McLain & Kyne label, we offer these three distinct premium Kentucky
bourbons, each of which is blended from only eight to twelve barrels to produce speciﬁc ﬂavor
proﬁles. For a further description of this acquisition, see ‘‘— Our growth strategy’’ below.

Brady’s Irish cream liqueur. We launched Brady’s Irish cream in late 2003 to capitalize on the
demand for high quality Irish creams. Brady’s Irish cream is made in small batches using Irish whiskey,
dairy fresh cream and natural ﬂavors.

Celtic Crossing liqueur. As a result of our strategic venture with Gaelic Heritage Corporation

Limited, an afﬁliate of Terra Limited, which is one of our primary bottlers, we have obtained the
exclusive worldwide distribution rights with respect to Celtic Crossing, a premium brand of Irish
liqueur, and a 60% ownership interest in Celtic Crossing in the United States, Canada, Mexico, Puerto
Rico and the islands between North and South America. As part of this strategic venture
arrangement, Gaelic Heritage has retained the exclusive rights to produce and supply us with Celtic
Crossing. Celtic Crossing was developed in the mid 1990s by Gaelic Heritage, and is a unique
combination of Irish spirits, cognac and a taste of honey.

3

Pallini liqueurs. Pursuant to an exclusive marketing agreement with I.L.A.R. S.p.A., we have
obtained the long-term exclusive U.S. distribution rights (excluding duty free sales) with respect to
Pallini Limoncello and its related brand extensions. Pallini Limoncello is a premium lemon liqueur,
which is served on the rocks or as an ingredient in a wide variety of drinks, ranging from martinis to
iced tea. It is also used in cooking, particularly for pastries and cakes. Pallini Limoncello is crafted
from an authentic family recipe created more than 100 years ago by the Pallini family. It is made with
Italy’s ﬁnest Sfusato Amalﬁtano lemons that are hand-selected for optimal freshness and ﬂavor. There
are also two other ﬂavor extensions of this Italian liqueur: Pallini Peachcello, made with white
peaches, and Pallini Raspicello, made from a combination of raspberries and other berries.

Our growth strategy

Our objective is to continue building a distinctive portfolio of global premium spirits brands, with

a primary focus on increasing both our total and individual brand case sales. To achieve this, we
intend to continue:

•

•

•

increasing market penetration of our existing spirits brands. We intend to utilize our existing
distribution relationships, sales expertise and targeted marketing activities to achieve growth
and gain additional market share for our brands within retail stores, bars and restaurants, and
thereby with end consumers, both in the United States and internationally; add experienced
salespeople in selected markets; increase sales to national chain accounts; and expand our
international distribution relationships;

building brand awareness through innovative marketing, advertising and promotional
activities. We place a signiﬁcant emphasis on our bottle design, labeling and packaging, as
well as on our advertising and promotional activities, to establish and reinforce the image of
our brands and have invested signiﬁcant capital over the last several years in developing our
brands. In March 2007, we introduced newly upgraded packaging for Boru vodka and its
related ﬂavor extensions, along with our ‘‘Defend the Spirit’’ advertising campaign. We intend
to continue developing compelling campaigns for our spirits brands through the coordinated
efforts of our experienced internal marketing personnel and leading third-party design and
advertising ﬁrms, principally using billboards, print advertisements and in-store promotional
materials, to increase consumer brand awareness; and

selectively adding 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 portfolio of premium spirits brands, particularly by capitalizing on and
expanding our already demonstrated partnering capabilities. The spirits industry is
characterized by a relatively small number of very large companies, as a result of continuing
industry consolidation, and a sizable number of smaller brands, many of which are family
owned. We believe that by partnering with these smaller and family-owned companies, we
provide them with the potential opportunity to achieve global growth and the other beneﬁts
of a larger organization while, in many cases, maintaining their local identities and traditional
distillation and production businesses. In addition, we will seek to opportunistically acquire
brands divested by our larger competitors that have market presence and signiﬁcant growth
potential. We continued this strategy this year by acquiring all of the outstanding capital stock
of McLain & Kyne, Ltd., a Louisville, Kentucky based developer and marketer of three
premium small batch bourbons: Jefferson’s, Jefferson’s Reserve and Sam Houston. As
consideration for the acquisition, which closed on October 12, 2006, we paid $1,294,800 in
cash to the sellers and issued to the sellers 100,000 shares of our common stock. We will also
pay an earn-out to the sellers based on the ﬁnancial performance of the acquired business, in
an amount no to exceed $4,000,000. We intend to continue to pursue strategies to maximize
stockholder value, which may continue to include acquisitions that will help us further expand
our product offerings. We expect that future acquisitions, if consummated, would involve
some combination of cash, debt and the issuance of our stock.

4

Production and supply

There are several steps in the production and supply process for spirits products. First, all of our

products are distilled. This is a multi-stage process that converts basic ingredients, such as grain or
sugar cane, into alcohol. Next, the alcohol is processed and/or aged in various ways depending on the
requirements of the speciﬁc brand. In the case of our vodka, this processing is designed to remove all
other chemicals, so that the resulting liquid will be odorless and colorless, and have a smooth quality
with minimal harshness. Achieving a high level of purity involves a series of distillations and ﬁltration
processes.

In the case of our ﬂavored vodkas and all of our other spirits brands, rather than removing ﬂavor,
various complex ﬂavor proﬁles are achieved through one or more of the following techniques: infusion
of fruit, addition of various ﬂavoring substances, and, in the case of our rums and whiskeys, aging of
the brands in various types of casks for extended periods of time and the blending of several rums or
whiskeys to achieve a unique ﬂavor proﬁle for each brand. After the distillation, puriﬁcation and
ﬂavoring processes are completed, the various liquids are bottled. This involves several important
stages, including bottle and label design and procurement, ﬁlling of the bottles and packaging the
bottles in various conﬁgurations for shipment.

We do not have signiﬁcant investment in distillation, bottling or other production facilities or

equipment. Instead, we have entered into relationships with several companies to provide those
services to us for our various brands. We believe that these types of arrangements allow us to avoid
committing signiﬁcant amounts of capital to ﬁxed assets and permit us to have the ﬂexibility to meet
growing sales levels by dealing with companies whose capacity signiﬁcantly exceeds our current needs.
These relationships vary on a brand-by-brand basis as discussed below.

Boru vodka

We have a supply agreement with Carbery Milk Products Limited, a member of the Carbery

Group, a distiller and food producer based in Ballineen, Ireland, to provide us with the distilled
alcohol used in our Boru vodka. This supply agreement with Carbery was originally entered into by
Roaring Water Bay in 1998 and became ours in 2003, when we acquired Roaring Water Bay and, with
it, our Boru vodka brand. The supply agreement provides for Carbery to produce natural spirit for us
with speciﬁed levels of alcohol content pursuant to speciﬁcations set forth in the agreement and at
speciﬁed prices through its expiration in December 2008, in quantities to be designated by us annually.
We believe that Carbery has sufﬁcient distilling capacity to meet our needs for Boru vodka for the
foreseeable future. Carbery also produces the ﬂavoring ingredients used in the Boru vodka ﬂavor
extensions and in our Brady’s Irish cream.

From Carbery, the quintuple distilled alcohol is delivered by them to the bottling premises at
Terra Limited in Baileyboro, Ireland, where pursuant to our bottling and services agreement with
Terra, it is ﬁltered in several proprietary ways, pure water is added to achieve the desired proof, and,
in the case of the citrus, orange and crazzberry versions of Boru vodka, ﬂavorings (obtained from
Carbery) are added. Each of our Boru vodka products is then bottled in various sized bottles. We
believe that Terra, which also acts as bottler for all of our Irish whiskeys and as producer and bottler
of our Brady’s Irish cream (and as bottler for Celtic Crossing, which is supplied to us by one of Terra’s
afﬁliates), has sufﬁcient bottling capacity to meet our current needs, and its facility can be expanded
to meet future supply needs, should this be required.

Pursuant to our bottling and services agreement with Terra, which extends through February 28,

2009, Terra provides intake, storage, sampling, testing, ﬁltering, ﬁlling, capping and labeling of bottles,
case packing, warehousing and loading and inventory control for our Boru vodka brands and our
Knappogue Castle and Clontarf Irish whiskeys at prices that are adjusted annually by mutual
agreement based on changes in raw materials and price indexes for consumer price index increases up
to 3½%. This agreement also provides for maintenance of product speciﬁcations and minimum
processing procedures, including compliance with applicable food and alcohol regulations and
maintenance, storage and stock control of all raw products and ﬁnished products delivered to Terra.
All alcohol is held on the premises by Terra under its customs and excise bond.

5

Gosling’s rum

The Gosling’s rums have been produced by Gosling’s Brothers Limited in Hamilton, Bermuda for

approximately 150 years and, pursuant to our distribution arrangements with the Goslings, they have
retained the right to act as the sole supplier to Gosling-Castle Partners Inc. with respect to our
Gosling’s rum requirements. They source their rums in the Caribbean and transport them to Bermuda
where they are blended according to proprietary recipes. The rums are then sent to the Heaven Hill
plant in Bardstown, Kentucky where they are bottled, packaged, stored and shipped to our various
distributors. Gosling’s Brothers recently increased its blending and storage facilities in Bermuda to
accommodate our supply needs for the foreseeable future. We believe Heaven Hill has ample capacity
to meet our projected supply needs. See ‘‘— Strategic brand – partner relationships.’’

Knappogue Castle and Clontarf Irish whiskeys

In 2005, we entered into a long-term supply agreement with Irish Distillers, a subsidiary of
Pernod Ricard, pursuant to which it has agreed to supply us with the aged single malt and grain
whiskeys used in our Knappogue Castle Whiskey and a Knappogue Castle Whiskey blend we may
produce in the future and all three of our Clontarf Irish whiskey products. The supply agreement
provides for Irish Distillers to meet our running ten-year estimate of supply needs for these products,
each of which is produced to a ﬂavor proﬁle prescribed by us. At the beginning of each year of the
agreement, we must nominate our speciﬁc supply needs for each product for that year, which amounts
we are then obligated to purchase over the course of that year. These amounts may not exceed the
annual amounts set forth in the running ten-year estimate unless approved by Irish Distillers. The
agreement provides for ﬁxed prices for the whiskeys used in each product, with escalations based on
certain cost increases. The whiskeys for the four products are then sent to Terra Limited where they
are bottled in bottles designed by us and packaged for shipment.

McLain & Kyne bourbons

Jefferson’s, Jefferson’s Reserve and Sam Houston bourbons are produced for us by Kentucky
Bourbon Distillers in Bardstown, Kentucky. Kentucky Bourbon Distillers sells barrels of aged bourbon
to us, from which we blend no more than eight to twelve barrels to produce speciﬁc ﬂavor proﬁles of
each of our bourbon products. The bourbons are then bottled by Kentucky Bourbon Distillers in
bottles designed and decorated for us and through third party suppliers. While bourbon supply in the
United States has been in short supply in recent years, we believe that Kentucky Bourbon Distillers
has the capacity to meet our foreseeable supply needs for these brands.

Pallini liqueur

The Pallini liqueurs are produced by I.L.A.R. S.p.A., an Italian company based in Rome and
owned since 1875 by the Pallini family. The Pallinis make their Limoncello using Sfusato Amalﬁtano
lemons in a proprietary infusion process. Once made, the Limoncello is then bottled in their plant in
Rome and shipped to us pursuant to our long-term exclusive U.S. marketing and distribution
agreement. In addition to Pallini Limoncello, I.L.A.R. produces Pallini Raspicello, using a
combination of raspberries and other berries and Pallini Peachcello using white peaches, and we are
the exclusive U.S. importer for both of these brands as well. We believe that I.L.A.R. has adequate
facilities in Rome to produce and bottle sufﬁcient Limoncello, Raspicello and Peachcello to meet our
foreseeable needs. See ‘‘— Strategic brand-partner relationships.’’

Brady’s Irish cream

Brady’s Irish cream is produced for us by Terra. Fresh cream is combined with Irish whiskey,

grain neutral spirits and various ﬂavorings procured from the Carbery Group, to our speciﬁcations,
and then bottled by Terra in bottles designed for us. We believe that Terra has the capacity to meet
our foreseeable supply needs for this brand.

Celtic Crossing liqueur

We acquired the exclusive worldwide distribution rights to the Celtic Crossing brand of Irish
liqueur and a 60% ownership interest in the Celtic Crossing brand in the United States, Canada,

6

Mexico, Puerto Rico and the islands between North and South America, from Gaelic Heritage
Corporation Limited, an afﬁliate of Terra. In connection with these arrangements, Gaelic Heritage
retained the right to act as the sole supplier to us of Celtic Crossing. Gaelic Heritage mixes the
ingredients comprising Celtic Crossing using a proprietary formula and then Terra bottles it for them
in bottles designed for us. We believe that the necessary ingredients are available to Gaelic Heritage
in sufﬁcient supply and that Terra’s bottling capacity is currently adequate to meet our projected
supply needs. See ‘‘— Strategic brand-partner relationships.’’

Sea Wynde rum

With the assistance of a master blender, we source several aged rums from Jamaica and Guyana

for our Sea Wynde rum and then send them to a bottling facility near Edinburgh, Scotland where they
are married together and bottled for us in bottles designed by us.

Distribution network

We believe that one of our strengths is the distribution network that we have developed with our

sales team and our independent distributors and brokers. We currently have distribution and
brokerage relationships with third-party distributors in all 50 states in the United States, as well as
material distribution arrangements in approximately six other countries.

U.S. distribution

Background.

Importers of distilled spirits in the United States must sell their products through a

three-tier distribution system. Typically, an imported brand is ﬁrst sold to a U.S. importer, who then
sells it to a network of distributors, or wholesalers, covering the Unites States, in either ‘‘open’’ states
or ‘‘control’’ states. In the 32 open states, the distributors are generally large, privately held
companies. In the 18 control states, the states themselves function as the distributor, and suppliers
such as us are regulated by these states. The distributors and wholesalers in turn sell to the individual
liquor retailers, such as liquor stores, restaurants, bars, supermarkets and other outlets in the states in
which they are licensed to sell beverage alcohol. In larger states such as New York, more than one
distributor may handle a brand in separate geographical areas. In control states, where liquor sales are
controlled by the state governments, importers must sell their products directly to the state liquor
authorities, which also act as the distributors and either maintain control over the retail outlets or
license the retail sales function to private companies, while maintaining strict control over pricing and
proﬁt.

The U.S. spirits industry has undergone dramatic consolidation over the last ten years and the

number of companies and importers has signiﬁcantly declined due to merger and acquisition activity.
There are currently six major spirits companies, each of which own and operate their own importing
business. All companies, including these large companies, are required by law to sell their products
through wholesale distributors in the United States. The major companies are increasingly exerting
signiﬁcant inﬂuence over the regional distributors and as a result, it has become more difﬁcult for
smaller companies to get their products recognized by the distributors. Therefore, with the
establishment of our distribution network in all 50 states, we believe we have overcome a signiﬁcant
barrier to entry in the U.S. spirits business and enhanced our attractiveness as a strategic partner for
smaller companies lacking comparable distribution.

For the ﬁscal year ended March 31, 2007, our U.S. sales represented approximately 66.3% of our
revenues, and we expect them to grow as a percentage of our total sales in the future. See Note 19 of
Notes to Consolidated Financial Statements.

Importation. While we own most of our brands or, by contract, have the exclusive right to act as

U.S. importer of the brands of our strategic partners, we do not currently act as our own importer in
the United States. We currently hold the federal importer and wholesaler license required by the
Alcohol and Tobacco Tax and Trade Bureau, a division of the U.S. Department of the Treasury, and a
wholesale liquor license issued by the State of New York, but we do not yet have the other state

7

licenses necessary to sell our products to the distributors in the individual states. Instead, we use the
services of a licensed importer to act as importer of record on our behalf in the United States, both
with respect to our proprietary brands and those of our strategic partners.

In 1998, we engaged MHW Ltd., a New York-based nationally recognized and licensed importer,
to coordinate the importing and industry compliance required for the sales of our products across the
United States. Through the utilization of MHW’s national expertise and licenses, our inventory is
strategically maintained in one of the largest bonded warehouses on both coasts (Western Carriers and
Western Wine Services) and shipped nationally by an extensive network of licensed and bonded
carriers. Pursuant to an agreement established on April 15, 1998, as amended on December 1, 2004,
MHW also provides us with certain logistical services as well as accounting, inventory, insurance and
disbursement services for our brands. In addition, MHW provides online tracking software, which
provides daily reports on sales of our products to our distributors, receivables, inventory and cash
receipts.

Under the terms of our agreement with MHW, we pay MHW a monthly service fee of $4,900,
plus $1.00 per case on all cases sold during the month. Our agreement with MHW continues until
terminated upon four months prior written notice by either party.

Until recently, it was much more cost effective for us to use MHW as our U.S. importer and to
rely on its state licenses rather than expend the resources necessary to set up the required licensing
infrastructure internally. At this stage of our growth, however, our revenue-based fees to MHW are
reaching the point where it begins to be more economical for us to assume the role of importer
ourselves. While we have commenced this process and expect to bring a number of the services
provided by MHW in-house in the future, until we have obtained the requisite licenses in at least a
majority of the states, we will continue to rely on MHW to perform the importing function for us.

Wholesalers and distributors.

In the United States, we are required by law to use state licensed
distributors or, in the control states, state-owned agencies performing this function, to sell our brands
to the various retail outlets. As a result, we are dependent on them not only for sales but also for
product placement and retail store penetration. We have no distribution agreements or minimum sales
requirements with any of our U.S. alcohol distributors and they are under no obligation to place our
products or market our brands. In addition, all of them also distribute the products and brands of
competitors of ours. As a result, the fostering and maintaining of our relationships with our
distributors is of paramount importance to us. Through our internal sales team, we have established
relationships for our brands with wholesale distributors in each state, and our products are currently
sold in the United States by approximately 80 wholesale distributors, as well as by various state
beverage alcohol control agencies.

International distribution

Unlike the United States, the majority of the other countries in which we sell our brands allow

for sales to be made directly from the brand owner to the various retail establishments, including
liquor stores, chain stores, restaurants and pubs, without requiring that sales go through an importer
or through a distributor or wholesaler tier. In our international markets, we do not use the services of
an importer, although we use Terra Limited to handle the billing, inventory and shipping for us with
respect to our non-U.S. markets, similar to that aspect of our arrangement with MHW in the United
States. We do, however, rely primarily on established spirits distributors and wholesalers in most of
our non-U.S. markets in much the same way as we do in the United States.

As in the United States, the spirits industry has undergone consolidation internationally, with
considerable realignment of brands and brand ownership. The number of major spirits companies
internationally has been reduced signiﬁcantly due to mergers and brand ownership consolidation.
While there are still a substantial number of companies owning one or more brands, most business is
now done by six major companies each of whom owns and operates its own distribution company in
the major international markets. These captive distribution companies focus primarily on the brands
of the companies that own them.

Even though we do not utilize the direct route to market in our international operations, we do

not believe that we are at a signiﬁcant disadvantage, because typically the local wholesalers have

8

signiﬁcant and established relationships with the retail accounts and are able to provide extensive
customer service, in store merchandising and on premise promotions. In addition, even though we
must compensate our wholesalers and distributors in each market in which we sell our brands, we are,
as a result of using these distributors, still able to beneﬁt from substantially lower infrastructure costs
and centralized billing and collection.

Our primary international markets are the Republic of Ireland, the United Kingdom, Germany,

France, Italy and Canada. In addition, we have sales in a number of other countries in Continental
Europe and the Caribbean. For the ﬁscal year ended March 31, 2007, our non-U.S. sales represented
33.7% of our revenues. See Note 19 of Notes to Consolidated Financial Statements.

Signiﬁcant customers

Sales to one customer, Southern Wine and Spirits (and its related entities), accounted for

approximately 21.2% of our consolidated revenues for the ﬁscal year ended March 31, 2007.

Our sales team

While we currently expect more rapid growth in the United States, international markets hold

considerable potential and are an important part of our global strategy. We are in the process of
reevaluating our international strategy on a market-by-market basis to strengthen our distributor
relationships, optimize our sales team and effectively focus our ﬁnancial resources.

We currently have a total sales force of 30 people, including eight regional U.S. sales managers
and two international sales managers, with an average of over 15 years of industry experience with
premium spirits brands.

Our sales personnel are engaged in the day to day management of our distributors, which

includes setting quotas, coordinating promotional plans for our brands, maintaining adequate levels of
stock, brand education and training and sales calls with distributor personnel. In addition to
distributor management, our sales team also maintains relationships with key retail customers through
independent sales calls. They also schedule promotional events, create local brand promotion plans,
host our in-store tastings in the jurisdictions where such promotions are legal and provide waitstaff
and bartender training and education with respect to our brands.

Advertising, marketing and promotion

In order to build our brands, we must effectively communicate with three distinct audiences: our

distributors, the retail trade and the end consumer. We place signiﬁcant emphasis on advertising,
marketing and promotional activities to establish and reinforce the image of our brands, with the
objective of building substantial brand value. We also make a substantial investment in these activities.
We are committed to continuing advertising and promotion activities to build our brands and their
value and believe that our execution of disciplined and strategic branding and marketing campaigns
will continue to drive our sales growth.

We employ full-time, in-house marketing, sales and customer service personnel who work
together with third party design and advertising ﬁrms to maintain a high degree of focus on each of
our product categories and build brand awareness through innovative marketing activities. We use a
range of marketing strategies and tactics to build brand equity and increase sales, including consumer
and trade advertising, price promotions, point-of-sale materials, event sponsorship, in-store and
on-premise promotions and public relations, as well as a variety of other traditional and
non-traditional marketing techniques to support the sales of our brands.

In addition to traditional advertising, we also employ four other marketing methods to support

our brands: public relations, events, tastings and marketing to celebrities. We continue to have a
signiﬁcant public relations effort in the United States, which has helped gain important editorial
coverage for our brands. Event sponsorship is an economical way for us to have our brands tasted by
inﬂuential consumers, and we actively contribute product to trend-setting events where our brand has
exclusivity in the brand category. We also conduct hundreds of in-store and on-premise promotions
each year. In addition, we provide our products to celebrities appearing on various television
programs.

9

We support our marketing efforts for our brands with a wide assortment of point-of-sale materials

such as mirrors, banners, glassware, table tents, shelf talkers, case cards, napkins and apparel. The
combination of trade and consumer programs, supported by attractive point-of-sale materials, also
establishes greater credibility for us with our distributors and retailers.

We also place a signiﬁcant emphasis on our bottle design, labeling and packaging to establish and
reinforce the image of our brands. For instance, we recently introduced a signiﬁcantly redesigned and
upgraded Boru vodka bottle designed by the design ﬁrm of Claessens International.

Strategic brand-partner relationships

A key component of our growth strategy and one of our competitive strengths is our ability to

forge strategic relationships with owners of both emerging and established spirits brands seeking
opportunities to increase their sales beyond their home markets and achieve global growth. Our
original relationship with the Boru vodka brand was as its exclusive U.S. distributor. To date, we have
also established strategic relationships with respect to Gosling’s rum, the Pallini liqueurs and Celtic
Crossing, all of which relationships are described below, and we will endeavor to continue expanding
our brand portfolio through similar such arrangements in the future.

Gaelic Heritage Corporation Limited/Celtic Crossing

In March 1998, we entered into an exclusive national distribution agreement with Gaelic Heritage

Corporation Limited, an afﬁliate of Terra Limited, one of our suppliers, which was subsequently
amended in April 2001, pursuant to which we acquired from Gaelic a 60% ownership interest, and our
importer, MHW, acquired a 10% ownership interest, in the Celtic Crossing brand in the United States,
Canada, Mexico, Puerto Rico and the islands between North and South America. We also have the
right to acquire 70% of the ownership of the Celtic Crossing brand in the remainder of the world. We
also acquired the exclusive right to distribute Celtic Crossing on a world-wide basis. Under the terms
of the agreement with Gaelic, as amended, we have the right to purchase from Gaelic, based upon our
forecasts, cases of Celtic Crossing at annually agreed costs and a royalty payment per case sold at
various rates depending on the territory and type of case sold. During the term of the agreement,
without the prior written consent of Gaelic, we may not distribute any other Irish liqueur unless it is
bottled in Gaelic’s (Terra’s) facilities. Pursuant to the terms of the agreement, Gaelic provides us with
u6.3 million ($8.4 million) of product liability insurance. The agreement may be terminated, among
other things, upon notiﬁcation by either party that the other party has materially breached the
agreement and such breach is not cured within 60 days of the date such notice is given.

I.L.A.R. S.p.A./Pallini liqueurs

In August 2004, we entered into an exclusive marketing and distribution agreement with I.L.A.R.

S.p.A., a family owned Italian spirits company founded in 1875, pursuant to which we obtained the
long-term exclusive U.S. distribution rights with respect to its Pallini Limoncello liqueur and a right of
ﬁrst refusal on related brand extensions. We exercised such right with respect to its Pallini Raspicello
and its Pallini Peachcello in May 2005 and commenced shipment of such products in September 2005.

During the period through December 31, 2007, we have the right to purchase Limoncello at a
stipulated price subject to one adjustment in 2006 or 2007 to reﬂect the inﬂation rate in the Italian
economy and subject to further adjustment for raw material increases of 5% or more during any
quarter to the extent the increase is above the rate of inﬂation and only for the period the increase is
maintained. After 2007, I.L.A.R. has the discretion to raise prices as long as the price increases do not
exceed those of major competitors for comparable products. I.L.A.R. is required to maintain certain
product standards, and we have input into adjustments of the product and packaging. We are required
to prepare a preliminary annual strategy plan for advertising and distribution for review and are
required to make certain advertising, marketing and promotional expenditures based on volume. The
initial term of the agreement expires on December 31, 2009 and is automatically renewed for either
three or ﬁve years, based on case sales in 2009. I.L.A.R. indemniﬁes us in the United States for claims
arising out of compliance with U.S. laws or regulations or relating to the quality or ﬁtness of products

10

and maintains $5 million of insurance upon which we are named an additional insured. We indemnify
I.L.A.R. for claims arising out of claims relating to the marketing, promotion, sale or distribution of
the products and maintain $5 million of standard product liability insurance upon which I.L.A.R. is
the named insured. Additional agreements are pending regarding I.L.A.R.’s distribution of our
products.

Gosling-Castle Partners Inc./Gosling’s rums

Effective as of January 2005, we entered into a national distribution agreement with Gosling’s

Export (Bermuda) Limited, referred to as Gosling’s Export, pursuant to which we obtained the
exclusive right to distribute the Gosling’s rum products, which have been produced by the Gosling
family in Bermuda for over 150 years, and Gosling’s rum-related gourmet food products in the United
States. In February 2005, we expanded this relationship by purchasing a 60% controlling interest in a
strategic export venture, now named Gosling-Castle Partners Inc., with the Gosling family.
Gosling-Castle Partners was formed to enter into an export agreement with Gosling’s Export that
gives Gosling-Castle Partners the exclusive right to distribute Gosling’s rum and related products on a
world wide basis (other than in Bermuda) and assigns to Gosling-Castle Partners all of Gosling’s
Export’s interest in our January 2005 U.S. distribution agreement with them. In exchange for the
global distribution rights under the export agreement, Gosling-Castle Partners issued a note to
Gosling’s Export in the principal amount of $2.5 million, which was paid in four equal installments of
$625,000 bi-annually through October 1, 2006. The export agreement has an initial term expiring in
April 2020, subject to a 15 year extension if certain case sale targets are met. Under the terms of the
export agreement, which commenced in April 2005, Gosling-Castle Partners is generally entitled to a
stipulated share of the proceeds from the sale, if ever, of the ownership of any of the Gosling’s brands
to a third-party, through a sale of the stock of Gosling’s Export or its parent, with the size of such
share depending upon the number of case sales made during the twelve months preceding the sale. In
addition, prior to selling the ownership of any of their brands that are subject to these agreements,
Gosling’s Export must ﬁrst offer such brand to Gosling-Castle Partners and then to us. To obtain our
interest in Gosling-Castle Partners, we contributed $5.0 million to its capital, which amount consisted
of $100,000 in cash and a promissory note in the principal amount of $4.9 million which was payable
bi-annually through April 1, 2007. Pursuant to our arrangement with the Goslings, they have retained
the right to act, through Gosling’s Brothers Limited, as the sole supplier to Gosling-Castle Partners
with respect to our Gosling’s rum requirements.

Intellectual property

Trademarks are an important aspect of our business. Our brands are protected by trademark
registrations or are the subject of pending applications for trademark registration in the United States,
the European Community and most other countries where we currently distribute the brand or have
plans to distribute the brand. In some cases, the trademarks are registered in the names of our various
subsidiaries and related companies. Generally, the term of a trademark registration varies from
country to country, and, in the United States, trademark registrations need to be renewed every ten
years. We will continue to register our trademarks in additional markets as we expand our distribution
territories.

We have entered into distribution agreements for brands owned by third parties, such as the
Pallini liqueurs and the Gosling’s rums. The Pallini liqueurs and Gosling’s rum brands are registered
by their respective owners and we have the exclusive right to distribute the Gosling’s rums on a
worldwide basis (other than in Bermuda) and the Pallini liqueur brands in the United States. See
‘‘— Strategic brand-partner relationships.’’

Our unique ‘‘trinity’’ bottle is the subject of Irish and UK utility patents owned by The Roaring

Water Bay (Research & Development) Company Limited and a U.S. Design patent owned by our
subsidiary Castle Brands Spirits Company Limited. In December 2003, we entered into a license
agreement with Roaring Water Bay (Research & Development) Company Limited whereby we
obtained an exclusive license to use the patents for a ﬁve-year term ending in December 2008. The

11

license agreement provides for a royalty equal to 8% of the net invoice price of trinity bottle products
covered by these patents sold or otherwise disposed of by us, subject to a maximum of u30,000
($40,005) per year. The license agreement also includes our right to acquire the patent registrations for
the Trinity bottle for u90,000 ($120,015).

Trademarks

This annual report includes the names of our brands, which constitute trademarks or trade names

which are proprietary to and/or registered in our name or in the name of one of our subsidiaries or
related companies, including, but not limited to, Castle BrandsTM, Boru®, Crazzberry®, Brady’s®,
Knappogue Castle Whiskey®, ClontarfTM, Jefferson’s BourbonTM, Jefferson’s Reserve®, Sam Houston
Bourbon®, Sea Wynde®, Celtic Crossing® and British Royal Navy Imperial RumTM; and trademarks
with respect to brands for which we have certain exclusive distribution rights and which are
proprietary to and/or registered in the names of third parties, such as Pallini®, which is owned by
I.L.A.R. S.p.A., and Gosling’sTM, Gosling’s Black Seal®, Gosling’s Gold Bermuda RumTM and Gosling’s
Old RumTM which are owned by Gosling Brothers Limited. This annual report also contains other
brand names, trade names, trademarks or service marks of other companies and these brand names,
trade names, trademarks or service marks are the property of those other companies.

Seasonality

Our industry is subject to seasonality with peak sales in each major category generally occurring

in the fourth calendar quarter, which is our third ﬁscal quarter. See ‘‘Risk Factors – Our quarterly
operating results have ﬂuctuated in the past and may ﬂuctuate signiﬁcantly in the future rendering
quarter-to-quarter comparisons unreliable as indicators of performance.’’

Information systems

We employ Microsoft Dynamics GP as our ﬁnancial reporting system worldwide. This system is

installed on our servers in New York and is accessible remotely by our personnel globally via secured
Internet connection. We maintain local area networks, referred to as LANS, in our Houston, Dublin
and New York ofﬁces. These LANS support email communication and Internet connectivity for these
ofﬁces and, in addition, support such features as automatic data back-up and recovery in the event of
a hardware failure at a local terminal. These LANS are maintained by professional third-party service
providers at each location.

We have also entered into a 36-month contract in June 2005, with Dimensional Insight, Inc. for its

InterReport service. Among other things, this service provides business intelligence regarding
U.S. sales of our products held by our distributors, inventory levels at our distributors and shipments
of our products from distributors to speciﬁc retailers, as well as reporting formats that compare this
information against comparable prior year periods. We consider this to be an effective tool for our
sales force and ﬁnancial planners as it provides the feedback required to improve the accuracy of sales
forecasting and inventory management, and the effectiveness of our sales and marketing promotions.

Competition

We believe that we compete on the basis of quality, price, brand recognition and distribution
strength. Our premium brands compete with other alcoholic and nonalcoholic beverages for consumer
purchases, as well as for shelf space in retail stores, restaurant presence and wholesaler attention. In
addition to the six major companies discussed below, we compete with numerous multinational
producers and distributors of beverage alcohol products, many of which have greater resources than
us.

Over the past ten years, the U.S. distilled spirits industry has undergone dramatic consolidation

and realignment of brands and brand ownership. The number of major spirits importers in the United
States has signiﬁcantly declined due to mergers and brand ownership consolidation. While historically
there were a substantial number of companies owning one or more major brands, today there are six
major companies: Diageo, Pernod Ricard, Bacardi, Brown-Forman, Future Brands and Constellation
Brands.

12

While these companies are the leading importers of spirits to the U.S. market, we believe that we

are sometimes in a better position to partner with small to mid-size brands. Despite our relative
capital position and resources with respect to our larger competitors, we have been able to compete
with these larger companies in connection with entering into agency distribution agreements and
acquiring brands by being more responsive to private and family-owned brands, utilizing ﬂexibility in
transaction structures and providing brand owners the option to retain local production and ‘‘home’’
market sales. Given our size relative to our major competitors, most of which have multi-billion dollar
operations, we believe that we can generally provide greater focus on smaller brands and tailor
structures based on individual preferences of brand owners.

By focusing on the premium segment of the market, in which products typically carry higher

margins, and having an established, experienced sales force, we are often able to gain greater
attention from our distributors than other companies of our size. Our U.S. regional sales managers,
who average over 15 years of industry experience, provide long-standing relationships with distributor
personnel and with their major customers. Finally, the continued consolidation among the major
companies is expected to create an opportunity for small to mid-size spirits companies, such as
ourselves, as distributors seek diversiﬁcation among their suppliers.

Government regulation

As holder of federal beverage alcohol permits, we are subject to the jurisdiction of the Federal

Alcohol Administration Act (27 CFR Parts 19, 26, 27, 28, 29, 31, 71 and 252), U.S. Customs Laws
(USC Title 19), Internal Revenue Code of 1986 (Subtitles E and F), and the Alcoholic Beverage
Control Laws of all ﬁfty states.

The Alcohol and Tobacco Tax and Trade Bureau of the United States Treasury Department
regulates the spirits industry with respect to production, blending, bottling, sales and advertising and
transportation of alcohol products. Also, each state regulates the advertising, promotion,
transportation, sale and distribution of alcohol products within its jurisdiction. We are also required to
conduct business in the United States only with holders of licenses to import, warehouse, transport,
distribute and sell spirits.

In Europe, we are also subject to similar regulations related to the production of spirits,

including, among others, the Food Hygiene Regulations 1950-1989 (Licensing Acts 1833-2004),
European Communities (Hygiene of Foodstuffs) Regulations, 2000 (S.I. No. 165 of 2000), European
Communities (Labeling, Presentation and Advertising of Food Stuffs) Regulations, 2002 (S.I. No. 483
of 2002), Irish Whiskey Act, 1980 (S.I. No. 33 of 1980), European Communities (Deﬁnitions,
Description and Presentation of Spirit Drinks) Regulations, 1995 (S.I. No. 300 of 1995), Merchandise
Marks Act 1970, Licensing Act 2003 and Licensing Act Northern Ireland Order 1996 covering the
testing of raw materials used and the standards maintained in production processing, storage, labeling,
distribution and taxation.

The advertising, marketing and sale of alcoholic beverages are subject to various restrictions in
the United States and Europe. These range from a complete prohibition of the marketing of alcohol
in some countries to restrictions on the advertising style, media and messages used.

Labeling of spirits is also regulated in many markets, varying from health warning labels to
importer identiﬁcation, alcohol strength and other consumer information. Speciﬁc warning statements
related to risks of drinking beverage alcohol products are required to be included on all beverage
alcohol products sold in the United States.

In the 18 U.S. control states, the state liquor commissions act in place of distributors and decide

which products are to be purchased and offered for sale in their respective states. Products are
selected for purchase and sale through listing procedures which are generally made available to new
products only at periodically scheduled listing interviews. Products not selected for listings can only be
purchased by consumers through special orders, if at all.

The distribution of alcohol-based beverages is also subject to extensive taxation both in the
United States, at both the federal and state level, and internationally. Most foreign countries in which

13

we do business impose excise duties on distilled spirits, although the form of such taxation varies
signiﬁcantly from a simple application on units of alcohol by volume to intricate systems based on the
imported or wholesale value of the product. Several countries impose additional import duty on
distilled spirits, often discriminating between categories in the rate of such tariffs. Import and excise
duties may have a signiﬁcant effect on our sales, both through reducing the overall consumption of
alcohol and through encouraging consumer switching into lower-taxed categories of alcohol.

We are also subject to regulations which limit or preclude certain persons with criminal records

from serving as our ofﬁcers or directors. In addition, certain regulations prohibit parties with
consumer outlet ownership from becoming ofﬁcers, directors or substantial shareholders.

We believe that we are in material compliance with all applicable federal, state and other
regulations. However, we operate in a highly regulated industry which may be subject to more
stringent interpretations of existing regulations. Future costs of compliance with changes in regulations
could be signiﬁcant.

Since we are importers of distilled spirits products produced primarily outside the United States,

adverse effects of regulatory changes are more likely to materially affect earnings and our competitive
market position rather than capital expenditures. Capital expenditures in our industry are normally
associated with either production facilities or brand acquisition costs. Because we are not a
U.S. producer, changes in regulations affecting production facility operations may indirectly affect the
costs of the brands we purchase for resale, but we would not anticipate any resulting material adverse
impact upon our capital expenditures.

Because it is our intent to expand our brand portfolio, any regulatory revisions that increase the
asset value of brands could have a material negative impact upon our ability to purchase such brands.
More typically in our industry, however, the introduction of new and more restrictive regulations
would have the opposite effect of reducing, rather than increasing, the asset value of brands directly
impacted by more restrictive regulations.

We are a company in an industry dominated by global conglomerates with international brands.
Therefore, to the extent that new more restrictive marketing and sales regulations are promulgated, or
excise taxes and customs duties are increased, our earnings and competitive industry position could be
materially adversely affected. Large international conglomerates have far greater ﬁnancial resources
than we do and would be better able to absorb increased compliance costs.

Employees

As of March 31, 2007, we had 62 employees, of which 30 were in sales and 32 were in

management, ﬁnance, marketing and administration. Of our employees, 43 are located in the United
States and 19 are employed outside of the United States in countries including Ireland and Great
Britain. In April and May of this year, we terminated our two employees in the United Kingdom.

Geographic Information

We operate in one business – premium branded spirits. Our product categories are vodka, rum,
liqueurs, and whiskey. We report our operations in two geographical areas: International and United
States. See Note 19 of Notes to Consolidated Financial Statements.

Item 1A. Risk Factors

Our future success is highly uncertain and cannot be predicted based upon our limited operating
history.

Although our predecessor was formed in 1998, most of our brands, including Boru vodka, our
leading brand, have only been acquired or introduced by us since our formation in July 2003. As a
result, compared to most of our current and potential competitors, we have a relatively short
operating history and our brands are early in their growth cycle. Additionally, we anticipate acquiring

14

brands in the future that are unlikely to have established global brand recognition. Accordingly, it is
difﬁcult to predict when or whether we will be ﬁnancially and operationally successful, making our
business and future prospects difﬁcult to evaluate.

We have a history of losses, we expect to experience continuing losses for the foreseeable future, and
we may never achieve proﬁtability.

We have incurred losses since inception and had an accumulated loss of $60.0 million as of

March 31, 2007. We believe that we will continue to incur sizeable net losses for the foreseeable future
as we expect to make continued and signiﬁcant investment in product development, and sales and
marketing and to incur signiﬁcant administrative expenses as we seek to grow our current and future
brands. We also anticipate that our cash allocations will exceed our income from sales for the
foreseeable future. Despite our anticipated aggressive marketing expenditures, our products may
never achieve widespread market acceptance and may not generate sales and proﬁts to justify our
investment. In addition, we may ﬁnd that our expansion plans are more costly than we currently
anticipate and that they do not ultimately result in commensurate increases in our sales, which would
further increase our losses. If we continue to incur expenses at a greater rate than our revenues, we
may never achieve proﬁtability.

We may require additional capital to ﬁnance the acquisition of additional brands and to grow existing
brands, and our inability to raise such capital on beneﬁcial terms or at all could harm our operations
and restrict our growth.

We may require additional capital in the future on an accelerated basis to fund potential

acquisitions of new brands, expansion of our product lines, and increased sales, marketing and
advertising costs with respect to our existing and any newly acquired brands. If, at such time, we have
not generated sufﬁcient cash from operations to ﬁnance those additional capital needs, we will need to
raise additional funds through private or public equity and/or debt ﬁnancing. We cannot assure you
that, if and when needed, additional ﬁnancing will be available to us on acceptable terms or at all. If
additional capital is needed and either unavailable or cost prohibitive, our growth may be limited as
we may need to change our business strategy to slow the rate of, or eliminate, our expansion or
reduce or curtail our operations. In addition, any additional ﬁnancing we undertake could impose
covenants upon us that restrict our operating ﬂexibility, and, if we issue equity securities to raise
capital, our existing stockholders may experience dilution or the new securities may have rights senior
to those of our common stock.

We are dependent on a limited number of suppliers. Failure to obtain satisfactory performance from
our suppliers or loss of our existing suppliers could cause us to lose sales, incur additional costs and
lose credibility in the marketplace. We also have annual purchase obligations with certain suppliers.

We depend on a limited number of third-party suppliers for the sourcing of all of our products,

including both our own proprietary brands and those we distribute for others. These suppliers consist
of third-party distillers, bottlers and producers in the United States, Bermuda, the Caribbean and
Europe. We rely on the owners of Gosling’s rum and the Pallini liqueurs to produce their brands for
us. With respect to our proprietary products, we, in several instances, rely on a single supplier to fulﬁll
one or all of the manufacturing functions for one or more of our brands. For instance, The Carbery
Group is the sole producer for Boru vodka, our leading brand; Irish Distillers Limited is the sole
provider of our single malt, blended and grain Irish whiskeys; Gaelic Heritage Corporation Limited is
the sole producer of our Celtic Crossing Irish liqueur; and Terra Limited is not only the sole producer
of our Brady’s Irish cream liqueur but also the only bottler of both our Boru vodka and our Irish
whiskeys. We do not have long-term written agreements with all of our suppliers. In addition, if we
fail to complete purchases of products ordered annually, certain suppliers have the right to bill us for
product not purchased during the period. The termination of our written or oral agreements or an
adverse change in the terms of these agreements could have a negative impact on our business. If our
suppliers increase their prices, we may not have alternative sources of supply and may not be able to
raise the prices of our products to cover all or even a portion of the increased costs. In addition, our

15

suppliers’ failure to perform satisfactorily or handle increased orders, delays in shipments of products
from international suppliers or the loss of our existing suppliers, especially our key suppliers, could
cause us to fail to meet orders for our products, lose sales, incur additional costs and/or expose us to
product quality issues. In turn, this could cause us to lose credibility in the marketplace and damage
our relationships with distributors, ultimately leading to a decline in our business and results of
operations.

We cannot yet act as our own importer of record in the United States and rely entirely on MHW Ltd.
to perform this function for us. The loss of its services could thus signiﬁcantly interrupt our U.S. sales
and harm our reputation, our business and our results of operations.

In the United States, there is a three-tier distribution system for imported spirits: the imported

brand is sold to a licensed importer; the importer sells the imported brand to a wholesale distributor;
and the distributor sells the imported brand to retail liquor stores, bars, restaurants and other outlets
in the states in which it is licensed to sell alcohol. While we own most of our brands, we cannot yet
act as our own importer as we do not currently have any of the state licenses necessary to sell our
products to the distributors. We have, as a result, historically depended on MHW Ltd. to serve in this
capacity for us. In addition to acting as importer of record for us, MHW also provides and supervises
storage and transportation of our products to local wholesale distributors and provides several
accounting and payment related services to us. Until we are licensed in a majority of the states and
bring these services in-house, the loss of MHW’s services or its poor performance, either nationally or
at a state level, could signiﬁcantly interrupt or decrease our U.S. sales and harm our reputation, our
business and our results of operations. In addition, while MHW purchases product from us to ﬁll
wholesale orders, MHW is not liable to us for any unpaid balances due from the distributors on these
orders. Accordingly, the inability or failure of MHW to collect accounts receivable from our
distributors could also cause a decline in our results of operations.

In addition, until recently, it was much more cost effective for us to use MHW as our

U.S. importer and to rely on its state licenses rather than expend the resources necessary to set up the
required licensing infrastructure internally. At this stage of our growth, however, we believe that our
fees to MHW, which are based in part on our case sale volumes, are now reaching the point where it
may be more economical for us to assume the role of importer ourselves. While we have commenced
this process, we currently hold only the federal importer and wholesaler license required by the
Alcohol and Tobacco Tax and Trade Bureau and a wholesale liquor license from the state of New
York. Until we have obtained the requisite licenses in a majority of the states, we must continue to
rely on MHW to perform the importing function for us and, if we continue to grow, pay increasing
fees to it for these services.

We are substantially dependent upon our independent wholesale distributors. The failure or inability
of even a few of our distributors to adequately distribute our products within their territories could
harm our sales and result in a decline in our results of operations.

We are required by law to use state licensed distributors or, in 18 states known as ‘‘control
states,’’ state-owned agencies performing this function, to sell our products to retail outlets, including
liquor stores, bars, restaurants and national chains in the United States. We have established
relationships for our brands with wholesale distributors in each state; however, failure to maintain
those relationships could signiﬁcantly and adversely affect our business, sales and growth. Over the
past decade there has been increasing consolidation, both intrastate and interstate, among distributors.
As a result, many states now have only two or three signiﬁcant distributors. In addition, there are
several distributors that now control distribution for not just one state but several states. As a result,
if we fail to maintain good relations with a distributor, our products could in some instances be frozen
out of one or more markets entirely. The ultimate success of our products also depends in large part
on our distributors’ ability and desire to distribute our products to the desired U.S. target markets, as
we rely signiﬁcantly on them for product placement and retail store penetration. We have no formal
distribution agreements or minimum sales requirements with any of our distributors and they are
under no obligation to place our products or market our brands. Moreover, all of them also distribute

16

competitive brands and product lines. We cannot assure you that our U.S. alcohol distributors will
continue to purchase our products, commit sufﬁcient time and resources to promote and market our
brands and product lines or that they can or will sell them to our desired or targeted markets. If they
do not, our sales will be harmed, resulting in a decline in our results of operations.

While most of our international markets do not require the use of independent distributors by

law, we have chosen to conduct our sales through distributors in all of our markets and, accordingly,
we face similar risks to those set forth above with respect to our international distribution. Some of
these international markets may have only a limited number of viable distributors. In the Republic of
Ireland, one of our larger international markets, we have relied on Comans Wholesale Limited as the
exclusive distributor of our leading brand, Boru vodka. We have delivered notice to Comans
terminating our agreement with them as of September 30, 2007.

The sales of our products could decrease signiﬁcantly if we cannot secure and maintain listings in the
control states.

In the control states, the state liquor commissions act in place of distributors and decide which

products are to be purchased and offered for sale in their respective states. Products selected for
listing must generally reach certain volumes and/or proﬁt levels to maintain their listings. Products are
selected for purchase and sale through listing procedures which are generally made available to new
products only at periodically scheduled listing interviews. Products not selected for listings can only be
purchased by consumers through special orders, if at all. If, in the future, we are unable to maintain
our current listings in the 18 control states, or secure and maintain listings in those states for any
additional products we may acquire, sales of our products could decrease signiﬁcantly.

If we are unable to identify and successfully acquire additional premium brands that are
complementary to our existing portfolio, our growth will be limited, and, even if they are acquired, we
may not realize planned beneﬁts due to integration difﬁculties or other operating issues.

A key component of our growth strategy is the acquisition of additional premium spirits brands

that are complementary to our existing portfolio through acquisitions of such brands or their
corporate owners, either directly or through mergers, joint ventures, long-term exclusive distribution
arrangements and/or other strategic relationships. If we are unable to identify suitable brand
candidates and successfully execute our acquisition strategy, our growth will be limited. In addition,
even if we are successful in acquiring additional brands, we may not be able to achieve or maintain
proﬁtability levels that justify our investment in, or realize operating and economic efﬁciencies or
other planned beneﬁts with respect to, those additional brands. The addition of new products or
businesses entails numerous risks with respect to integration and other operating issues, any of which
could have a detrimental effect on our results of operations and/or the value of our equity. These risks
include:

•

•

•

•

•

•

•

difﬁculties in assimilating acquired operations or products;

unanticipated costs that could materially adversely affect our results of operations;

negative effects on reported results of operations from acquisition related charges and
amortization of acquired intangibles;

diversion of management’s attention from other business concerns;

adverse effects on existing business relationships with suppliers, distributors and retail
customers;

risks of entering new markets or markets in which we have limited prior experience; and

the potential inability to retain and motivate key employees of acquired businesses.

In addition, there are special risks associated with the acquisition of additional brands through
joint venture arrangements. While we own a controlling interest in our Gosling-Castle Partners Inc.
strategic export venture, we may not have the majority interest in, or control of, future joint ventures

17

that we may enter into. There is, therefore, risk that our joint venture partners may at any time have
economic, business or legal interests or goals that are inconsistent with our interests or goals or those
of the joint venture. There is also risk that our current or future joint venture partners may be unable
to meet their economic or other obligations and that we may be required to fulﬁll those obligations
alone.

Our ability to grow through the acquisition of additional brands will also be dependent upon the

availability of capital to complete the necessary acquisition arrangements. 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, and could cause substantial ﬂuctuations
in our quarterly and yearly operating results. Also, acquisitions could result in the recording of
signiﬁcant goodwill and intangible assets on our ﬁnancial statements, the amortization or impairment
of which would reduce reported earnings in subsequent years.

Our quarterly operating results have ﬂuctuated in the past and may ﬂuctuate signiﬁcantly in the future
rendering quarter-to-quarter comparisons unreliable as indicators of performance.

Our quarterly revenues and operating results have varied in the past due to seasonality of our

industry and the timing of our major marketing campaigns and brand additions. For instance, in our
industry peak sales in each major category generally occur in the fourth calendar quarter, which is our
third ﬁscal quarter. As a result, our third ﬁscal quarter revenues (those for the quarter ending
December 31) are generally higher than other quarters and, for the ﬁscal year ended March 31, 2007,
accounted for approximately 29.3% of our revenues for that year. Our quarterly operating results are
likely to continue to vary signiﬁcantly from quarter to quarter in the future for the same reasons. As a
result, we believe that quarter-to-quarter comparisons of our revenues and operating results are not
meaningful indicators of performance.

Currency exchange rate ﬂuctuations and devaluations could cause a signiﬁcant adverse effect on our
revenues, sales and overall ﬁnancial results.

For the ﬁscal year ended March 31, 2007, non-U.S. operations accounted for approximately 33.7%

of our revenues. Therefore, gains and losses on the conversion of foreign payments into U.S. dollars
could cause ﬂuctuations in our results of operations, and ﬂuctuating exchange rates could cause
reduced revenues and/or gross margins from non-U.S. dollar-denominated international sales. Also,
for the ﬁscal year ended March 31, 2007, euro denominated sales accounted for approximately 21.5%
of our total revenue and British pound denominated sales accounted for approximately 8.3% of our
total revenue, so a substantial change in the rate of exchange between the U.S. dollar and the euro or
British pound could have a signiﬁcant adverse affect on our ﬁnancial results. Our ability to acquire
spirits and produce and sell our products at favorable prices will also depend in part on the relative
strength of the U.S. dollar. We may not be able to hedge against these risks.

Adverse public opinion about alcohol could reduce demand for our products.

Anti-alcohol groups have, in the past, successfully advocated more stringent labeling

requirements, higher taxes and other regulations designed to discourage consumption of beverage
alcohol. More restrictive regulations, negative publicity regarding alcohol consumption and/or changes
in consumer perceptions of the relative healthfulness or safety of beverage alcohol could decrease
sales and consumption of alcohol and thus the demand for our products. This could, in turn,
signiﬁcantly decrease both our revenues and our revenue growth, causing a decline in our results of
operations.

Class action or other litigation relating to alcohol abuse or the misuse of alcohol could deplete our
cash and divert our personnel resources and, if successful, signiﬁcantly harm our business.

Our industry faces the possibility of class action or other similar litigation alleging that the
continued excessive use or abuse of beverage alcohol has caused death or serious health problems. It

18

is also possible that federal, state or foreign governments could assert that the use of alcohol has
signiﬁcantly increased government funded health care costs. Litigation or assertions of this type have
adversely affected companies in the tobacco industry, and it is possible that we, as well as our
suppliers, could be named in litigation of this type.

In addition, lawsuits have been brought recently in nine states alleging that beer and spirits

manufacturers have improperly targeted underage consumers in their advertising. The plaintiffs in
these actions claim that the defendants’ advertising ‘‘disproportionately’’ targeted underage consumers,
by using youthful themes, humor and other subjects that are attractive to young persons. Plaintiffs in
these cases allege that the defendants’ advertisements, marketing and promotions violate the
consumer protection or deceptive trade practices statutes in each of these states and seek repayment
of the family funds expended by the underage consumers. While we have not been named in these
lawsuits, it is possible we could be named in similar lawsuits in the future. Any class action or other
litigation asserted against us could be expensive and time consuming to defend against, depleting our
cash and diverting our personnel resources and, if the plaintiffs in such actions were to prevail, our
business could be harmed signiﬁcantly.

Either our or our strategic partners’ failure to protect our respective trademarks, service marks and
trade secrets could compromise our competitive position and decrease the value of our brand
portfolio.

Our business and prospects depend in part on our, and with respect to our agency or joint

venture brands, our strategic partners’, ability to develop favorable consumer recognition of our
brands and trademarks. Although both we and our strategic partners actively apply for registration of
our brands and trademarks, they could be imitated in ways that we cannot prevent. In addition, we
rely on trade secrets and proprietary know-how, concepts and formulas. Our methods of protecting
this information may not be adequate. Moreover, we may face claims of misappropriation or
infringement of third parties’ rights that could interfere with our use of this information. Defending
these claims may be costly and, if unsuccessful, may prevent us from continuing to use this proprietary
information in the future and result in a judgment or monetary damages being levied against us. We
do not maintain non-competition agreements with all of our executives and key personnel or with
some of our key suppliers. If competitors independently develop or otherwise obtain access to our or
our strategic partners’ trade secrets, proprietary know-how or recipes, the appeal, and thus the value,
of our brand portfolio could be reduced, negatively impacting our sales and growth potential.

We depend on our key personnel. If we lose the services of any of these individuals or fail to hire and
retain additional management personnel as we grow, we may not be able to implement our business
strategy or operate our business effectively.

We rely on a small number of key individuals to implement our plans and operations, including
Mark Andrews, our chairman and chief executive ofﬁcer, Keith A. Bellinger, our president and chief
operating ofﬁcer, and T. Kelley Spillane, our senior vice president – U.S. sales, as well as our other
executive ofﬁcers and our regional and foreign sales managers. While we currently maintain key
person life insurance coverage on the lives of Messrs. Andrews, Bellinger and Spillane, that insurance
may not be available to us in the future or the proceeds therefrom may not be adequate to replace
the services of these managers. To the extent that the services of any of these individuals become
unavailable, we will be required to hire other qualiﬁed personnel, and we may not be successful in
ﬁnding or hiring adequate replacements. As a result, if we lose the services of any of these individuals,
we may not be able to implement our business strategy or operate our business effectively. Further,
our management of future growth and our successful integration of any acquired brands or companies
will require substantial additional attention from our senior management team and require us to
retain additional qualiﬁed management personnel and to attract and train new personnel. Failure to
successfully retain and hire needed personnel to manage our growth and development would harm
our ability to implement our business plan and grow our business.

In addition, in recent periods, we have experienced turnover at the Chief Financial Ofﬁcer

position, with two CFO departures within the last eight months. Keith A. Bellinger has resumed

19

responsibilities as our principal ﬁnancial ofﬁcer while a search for a new CFO is underway. While we
have hired a consultant, Donald Marsh, to assist our management team in the management and
execution of ﬁnance-related matters, the absence of a CFO may result in the Company being unable
to maximize certain efﬁciencies within its ﬁnance department.

Regulatory decisions and changes in the legal, regulatory and tax environment in the countries in
which we operate could limit our business activities or increase our operating costs and reduce our
margins.

Our business is subject to extensive regulation regarding production, distribution, marketing,
advertising and labeling of beverage alcohol products in all of the countries in which we operate. We
are required to comply with these regulations and to maintain various permits and licenses. We are
also required to conduct business only with holders of licenses to import, warehouse, transport,
distribute and sell spirits. We cannot assure you that these and other governmental regulations
applicable to our industry will not change or become more stringent. Moreover, because these laws
and regulations are subject to interpretation, we may not be able to predict when and to what extent
liability may arise. Additionally, due to increasing public concern over alcohol-related societal
problems, including driving while intoxicated, underage drinking, alcoholism and health consequences
from the abuse of alcohol, various levels of government may seek to impose additional restrictions or
limits on advertising or other marketing activities promoting beverage alcohol products. Failure to
comply with any of the current or future regulations and requirements relating to our industry and
products could result in monetary penalties, suspension or even revocation of our licenses and
permits, or those of MHW on whom we are currently dependent to import and distribute our
products in the United States. Costs of compliance with changes in regulations could be signiﬁcant and
could harm our business, as we could ﬁnd it necessary to raise our prices in order to maintain proﬁt
margins, which could lower the demand for our products and reduce our sales and proﬁt potential.

In addition, the distribution of beverage alcohol products is subject to extensive taxation both in

the United States and internationally (and, in the United States, at both the federal and state
government levels), and beverage alcohol products themselves are the subject of national import and
excise duties in most countries around the world. An increase in taxation or in import or excise duties
could also signiﬁcantly harm our sales revenue and margins, both through the reduction of overall
consumption and by encouraging consumers to switch to lower-taxed categories of beverage alcohol.

We could face product liability or other related liabilities that increase our costs of operations and
harm our reputation.

Although we maintain liability insurance and will attempt to limit contractually our liability for
damages arising from our products, these measures may not be sufﬁcient for us to successfully avoid
or limit liability. Our product liability insurance coverage is limited to $1.0 million per occurrence and
$2.0 million in the aggregate and our general liability umbrella policy is capped at $10.0 million.
Further, any contractual indemniﬁcation and insurance coverage we have from parties supplying our
products is limited, as a practical matter, to the creditworthiness of the indemnifying party and the
insured limits of any insurance provided by these suppliers. In any event, extensive product liability
claims could be costly to defend and/or costly to resolve and could harm our reputation.

Contamination of our products and/or counterfeit or confusingly similar products could harm the
image and integrity of, or decrease customer support for, our brands and decrease our sales.

The success of our brands depends upon the positive image that consumers have of them.
Contamination, whether arising accidentally or through deliberate third-party action, or other events
that harm the integrity or consumer support for our brands, could affect the demand for our products.
Contaminants in raw materials purchased from third parties and used in the production of our
products or defects in the distillation process could lead to low beverage quality as well as illness
among, or injury to, consumers of our products and could result in reduced sales of the affected brand
or all of our brands. Also, to the extent that third parties sell products that are either counterfeit

20

versions of our brands or brands that look like our brands, consumers of our brands could confuse our
products with products that they consider inferior. This could cause them to refrain from purchasing
our brands in the future and in turn could impair our brand equity and adversely affect our sales and
operations.

We must maintain a relatively large inventory of our products to support customer delivery
requirements, and if this inventory is lost due to theft, ﬁre or other damage or becomes obsolete, our
results of operations would be negatively impacted.

We must maintain relatively large inventories to meet customer delivery requirements for our

products. We are always at risk of loss of that inventory due to theft, ﬁre or other damage, and any
such loss, whether insured against or not, could cause us to fail to meet our orders and harm our sales
and operating results. In addition, our inventory may become obsolete as we introduce new products,
cease to produce old products or modify the design of our products’ packaging, which would increase
our operating losses and negatively impact our results of operations.

We have a material amount of goodwill and other intangible assets. If, as a result of newly adopted
accounting standards, we are in the future required to write down a portion of this goodwill and other
intangible assets, it would increase our net loss.

As of March 31, 2007, goodwill represented approximately $13.6 million, or 25.0%, of our total

assets and other intangible assets represented approximately $13.2 million, or 24.2%, of our total
assets. Goodwill is the amount by which the costs of an acquisition accounted for using the purchase
method exceed the fair value of the net assets acquired. Under Statement of Financial Accounting
Standards No. 142 entitled ‘‘Goodwill and Other Intangible Assets,’’ goodwill and indeﬁnite lived
intangible assets are no longer amortized, but instead are subject to a periodic impairment evaluation
based on the fair value of the reporting unit. Any write-down of goodwill or intangible assets resulting
from future periodic evaluations would increase our net loss and those increases could be material.

Our existing and future debt obligations could impair our liquidity and ﬁnancial condition.

As of March 31, 2007, we had total consolidated indebtedness of approximately $18.8 million. We

may incur additional debt in the future to fund all or part of our capital requirements. Our
outstanding debt and future debt obligations could impair our liquidity and could:

• make it more difﬁcult for us to satisfy our other obligations;

•

•

require us to dedicate a substantial portion of any cash ﬂow we may generate to payments on
our debt obligations, which would reduce the availability of our cash ﬂow to fund working
capital, capital expenditures and other corporate requirements;

impede us from obtaining additional ﬁnancing in the future for working capital, capital
expenditures, acquisitions and general corporate purposes; and

• make us more vulnerable in the event of a downturn in our business prospects and limit our

ﬂexibility to plan for, or react to, changes in our industry.

If we were to fail in the future to make any required payment under agreements governing our

indebtedness or fail to comply with the ﬁnancial and operating covenants contained in those
agreements, we would be in default as regards to that indebtedness. If the lenders were to require
immediate payment, we might not have sufﬁcient assets to satisfy our obligations under our credit
facility, our subordinated notes or our other indebtedness. Our lenders would have the ability to
require that we immediately pay all outstanding indebtedness, and we might not have sufﬁcient assets
to satisfy their demands. In such event, we could be forced to seek protection under bankruptcy laws,
which could signiﬁcantly harm our reputation and sales.

We may not be able to maintain our listing on the American Stock Exchange, which may limit the
ability of our stockholders to resell their common stock in the secondary market.

Although we are currently listed on the American Stock Exchange, we might not meet the
criteria for continued listing on the American Stock Exchange in the future. If we are unable to meet

21

the continued listing criteria of the American Stock Exchange and became delisted, trading of our
common stock could be conducted in the Over-the-Counter Bulletin Board. In such case, an investor
would likely ﬁnd it more difﬁcult to dispose of our common stock or to obtain accurate market
quotations for it. If our common stock is delisted from the American Stock Exchange, it will become
subject to the Securities and Exchange Commission’s ‘‘penny stock rules,’’ which impose sales practice
requirements on broker-dealers that sell that common stock to persons other than established
customers and ‘‘accredited investors.’’ Application of this rule could make broker-dealers unable or
unwilling to sell our common stock and limit the ability of purchasers in this offering to resell their
common stock in the secondary market.

Our executive ofﬁcers, directors and principal stockholders own a substantial percentage of our voting
stock, which likely allows them to control matters requiring stockholder approval. They could make
business decisions for us that cause our stock price to decline.

As of June 27, 2007, our executive ofﬁcers, directors and principal stockholders beneﬁcially
owned approximately 40% of our common stock, including warrants, options and convertible notes
that are exercisable for, or convertible into, shares of our common stock within 60 days of the date of
this annual report. As a result, if they act in concert, they could control matters requiring approval by
our stockholders, including the election of directors, and could have the ability to prevent or cause a
corporate transaction, even if other stockholders, oppose such action. This concentration of voting
power could also have the effect of delaying, deterring, or preventing a change of control or other
business combination, which could cause our stock price to decline.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act could have a material adverse effect on our ability to produce accurate ﬁnancial
statements and on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to furnish a

report by our management on our internal control over ﬁnancial reporting by March 31, 2008. We
have not been subject to these requirements in the past. The internal control report must contain (a) a
statement of management’s responsibility for establishing and maintaining adequate internal control
over ﬁnancial reporting, (b) a statement identifying the framework used by management to conduct
the required evaluation of the effectiveness of our internal control over ﬁnancial reporting,
(c) management’s assessment of the effectiveness of our internal control over ﬁnancial reporting as of
the end of our most recent ﬁscal year, including a statement as to whether or not internal control over
ﬁnancial reporting is effective, and (d) for the ﬁscal year ending March 31, 2009, a statement that our
independent registered public accounting ﬁrm has issued an attestation report on management’s
assessment of internal control over ﬁnancial reporting.

To achieve compliance with Section 404 within the prescribed period, we are engaged in a process

to document and evaluate our internal control over ﬁnancial reporting, which is both costly and
challenging. In this regard, we will continue to dedicate internal resources, engage outside consultants
and adopt a detailed work plan to (a) assess and document the adequacy of internal control over
ﬁnancial reporting, (b) take steps to improve control processes where appropriate, (c) validate through
testing that controls are functioning as documented, and (d) implement a continuous reporting and
improvement process for internal control over ﬁnancial reporting. Despite our efforts, we can provide
no assurance as to our, or our independent registered public accounting ﬁrm’s, conclusions with
respect to the effectiveness of our internal control over ﬁnancial reporting under Section 404. There is
a risk that neither we nor our independent registered public accounting ﬁrm will be able to conclude
within the prescribed timeframe that our internal controls over ﬁnancial reporting are effective as
required by Section 404. This could result in an adverse reaction in the ﬁnancial markets due to a loss
of conﬁdence in the reliability of our ﬁnancial statements.

22

Provisions in our amended and restated certiﬁcate of incorporation, our amended and restated bylaws
and Delaware law could make it more difﬁcult for a third party to acquire us, discourage a takeover
and adversely affect existing stockholders.

Our amended and restated certiﬁcate of incorporation, our amended and restated bylaws and the

Delaware General Corporation Law contain provisions that may have the effect of making more
difﬁcult, delaying, or deterring attempts by others to obtain control of our company, even when these
attempts may be in the best interests of our stockholders. These include provisions limiting the
stockholders’ powers to remove directors or take action by written consent instead of at a
stockholders’ meeting. Our amended and restated certiﬁcate of incorporation also authorizes our
board of directors, without stockholder approval, to issue one or more series of preferred stock, which
could have voting and conversion rights that adversely affect or dilute the voting power of the holders
of our common stock. Delaware law also imposes conditions on the voting of ‘‘control shares’’ and on
certain business combination transactions with ‘‘interested stockholders.’’

These provisions and others that could be adopted in the future could deter unsolicited takeovers

or delay or prevent changes in our control or management, including transactions in which
stockholders might otherwise receive a premium for their shares over then current market prices.
These provisions may also limit the ability of stockholders to approve transactions that they may deem
to be in their best interests.

We do not expect to pay any dividends for the foreseeable future. Our stockholders may never obtain
a return on their investment.

We do not anticipate that we will pay any dividends to holders of our common stock in the
foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing
operations, further develop our brands and ﬁnance the acquisition of additional brands. In addition,
our ability to pay dividends is prohibited by the terms of our 6% convertible notes and we expect that
any future credit facility will contain terms prohibiting or limiting the amount of dividends that may
be declared or paid on our common stock. Accordingly, investors must rely on sales of their common
stock after price appreciation, which may never occur, as the only way to realize any return on their
investment.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties

Our executive ofﬁces are located in New York, New York, where we lease approximately

3,800 square feet of ofﬁce space under a sublease that expires on March 30, 2008. We also lease
approximately 7,500 square feet of ofﬁce space in Dublin, Ireland under a lease that expires on
February 28, 2009 and approximately 1,000 square feet of ofﬁce space in Houston, Texas under a lease
that expires on March 31, 2008.

Item 3. Legal Proceedings

Except as described below, we believe that neither we nor any of our wholly owned subsidiaries is

currently subject to litigation which, in the opinion of our management, is likely to have a material
adverse effect on us.

Our subsidiary, Castle Brands Spirits Company Limited, is the holder of a trademark registration

for the mark ‘‘BORU’’ with the United States Patent and Trademark Ofﬁce. On May 9, 2007,
Distillerie Stock U.S.A. Ltd. ﬁled a Petition for Cancellation with the United States Patent and
Trademark Ofﬁce for the cancellation of the trademark registration for BORU on several grounds,
including potential confusion between BORU and its existing registered trademark ‘‘BORA’’. We have
various defenses on the merits as well as procedural defenses which we expect to ﬁle in a timely

23

manner against Distillerie Stock’s claims. We intend to vigorously pursue these defenses as
appropriate. Currently, the matter is pending at the United States Patent and Trademark Ofﬁce before
the Trademark Trial and Appeal Board. While matters before the Trademark Trial and Appeal Board
cannot result in monetary damages or directly affect the right to use a trademark, they can result in
the cancellation of a trademark registration. Thus, it is possible this matter could result in the
cancellation of our trademark registration for BORU in the United States. As a result, it is not
feasible to predict the ﬁnal outcome, and there can be no assurance that these claims might not be
ﬁnally resolved adversely to us, resulting in material liability to our operations.

We may, however, become involved in litigation from time to time relating to claims arising in the
ordinary course of our business. These claims, even if not meritorious, could result in the expenditure
of signiﬁcant ﬁnancial and managerial resources.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the ﬁscal

year covered by this Annual Report on Form 10-K.

24

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases

PART II

of Equity Securities

Price range of common stock

The following table describes the per share range of high and low sales prices for our common

stock, as reported by the American Stock Exchange. On April 6, 2006, our common stock began
trading on the American Stock Exchange under the symbol ‘‘ROX.’’

Fiscal Quarter

First Quarter (April 6 – June 30, 2006) . . . . . . . . . . . . . . . . . . . . .
Second Quarter (July 1 – September 30, 2006) . . . . . . . . . . . . . .
Third Quarter (October 1 – December 31, 2006) . . . . . . . . . . . .
Fourth Quarter (January 1 – March 31, 2007) . . . . . . . . . . . . . . .

High

$9.15
$7.90
$7.55
$7.48

Low

$5.95
$5.50
$5.56
$5.03

As of June 28, 2007, there were 187 stockholders of record of our common stock. This does not

include the number of persons whose stock is in nominee or ‘‘street name’’ accounts through brokers.

Dividend policy

We have never declared or paid any cash dividends on our capital stock other than $1,389,765

dividends we paid in shares of our common stock to our preferred stockholders upon the
consummation of our initial public offering. We do not intend to pay any cash dividends with respect
to our common stock in the foreseeable future. We currently intend to retain any earnings for use in
the operation of our business and to fund future growth. In addition, our ability to pay dividends is
subject to the consent of the holders of our 6% convertible notes and we expect that any future credit
facility will contain terms prohibiting or limiting the amount of dividends that may be declared or paid
on our common stock. Any future determination to pay cash dividends will be at the discretion of our
board of directors and will depend upon our ﬁnancial condition, operating results, capital
requirements and such other factors as the board of directors deems relevant.

25

COMPARISON OF CUMULATIVE TOTAL RETURN

The following graph compares the cumulative total stockholder return on our common stock from

April 6, 2006 (the date trading of our common stock began on the American Stock Exchange)
through March 31, 2007 to the cumulative total return for (i) the Russell 2000 Index (the ‘‘Russell
2000 Index’’) and (ii) a peer group that we selected that consists of alcoholic and non-alcoholic
beverage companies. The peer group is comprised of Wilamette Valley Vineyards, Inc., Scheid
Vineyards Inc., Drinks Americas Holdings, Ltd., Lifeway Foods Inc. and Jones Soda Co. (the ‘‘Peer
Index’’). Total return values were calculated based on cumulative total return assuming the
investment, at the closing price on April 6, 2006, of $100 in each of our common stock, the Russell
2000 Index, and the Peer Index. In calculating total annual stockholder return, reinvestment of
dividends, if any, is assumed. The indices are included for comparative purpose only. They do not
necessarily reﬂect management’s opinion that such indices are an appropriate measure of the relative
performance of our common stock. This graph is not ‘‘soliciting material,’’ is not deemed ﬁled with the
Securities and Exchange Commission and is not to be incorporated by reference in any of our ﬁlings
under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date hereof and irrespective of any general incorporation language
in any such ﬁling.

COMPARISON OF 1 YEAR CUMULATIVE TOTAL RETURN*
Among Castle Brands Inc., the Peer Index
And the Russell 2000 Index

$200

$180

$160

$140

$120

$100

$80

$60

$40

$20

$0

4/06

4/06

5/06

6/06

7/06

8/06

9/06

10/06

11/06

12/06

1/07

2/07

3/07

Castle Brands, Inc.

Russell 2000

Peer Group

*

$100 invested on 4/6/06 in stock or index-including reinvestment of dividends. Fiscal year ending
March 31.

Item 6. Selected Consolidated Financial Data

The following tables set forth selected consolidated ﬁnancial data and other data for the periods

ended and as of the dates indicated. The selected consolidated ﬁnancial data for the ﬁscal years ended
March 31, 2007, 2006, 2005, 2004 and 2003 has been derived from our historical audited consolidated
ﬁnancial statements. You should read the following selected consolidated ﬁnancial data and other data
in conjunction with our consolidated ﬁnancial statements, including the related notes, and the section
entitled ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’
included elsewhere in this Annual Report on Form 10-K.

26

The ‘‘other data’’ presented below relates to our case sales, which are measured based on the
industry standard of nine-liter equivalent cases, an important measure in our industry that we use to
evaluate the effectiveness of our operational strategies and overall ﬁnancial performance. We believe
that by providing this information investors can better assess trends in our business. Net sales per case
is total net sales for the applicable period presented, divided by the total number of cases sold during
the period. Gross proﬁt per case and selling expense per case are derived by dividing our gross proﬁt
and selling expense, respectively, for the applicable period presented by the number of cases sold for
such period.

Years ended March 31,

2007

2006

2005

2004

2003

Consolidated statement of operations data
(in thousands, except per share data):

Sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 25,164
16,780

$ 21,150
13,656

$ 12,618
8,745

$ 4,827
3,285

$ 2,419
1,427

Gross proﬁt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Selling expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . .

8,384

16,766
8,646
1,001

7,494

13,048
5,493
907

3,873

11,569
3,637
323

1,542

5,398
1,960
226

992

3,348
818
73

Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(18,029)

(11,954)

(11,656)

(6,042)

(3,247)

Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange gain/(loss) . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of deferred ﬁnancing costs in
connection with conversion of 6%
subordinated convertible notes . . . . . . . . . . . . .

Current credit/(charge) on derivative ﬁnancial

instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax beneﬁt. . . . . . . . . . . . . . . . . . . . . . . . . .
Minority interests. . . . . . . . . . . . . . . . . . . . . . . . . . .

5
(47)
1,360
(1,085)

4
(37)
(338)
(1,579)

(295)

118
148
1,267

—

16
148
656

124
(46)
120
(998)

—

(77)
—
5

2
(82)
(85)
(304)

0
(3)
(8)
(182)

—

26
—
35

—

9
—
—

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (16,558) $ (13,084) $ (12,528) $ (6,450) $ (3,431)

Less: Preferred stock and preferred membership

unit dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

48

1,596

1,252

761

15

Net loss attributable to common stockholders . .

$ (16,606) $ (14,680) $ (13,780) $ (7,211) $ (3,446)

Net loss per common share basic and diluted (1) .

$

(1.40) $

(4.73) $

(4.44) $ (3.22) $ (1.87)

Weighted average shares outstanding basic and

diluted (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,898

3,107

3,107

2,237

1,841

Other data (unaudited):

Number of case sales . . . . . . . . . . . . . . . . . . . . . . .
Net sales per case . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross proﬁt per case . . . . . . . . . . . . . . . . . . . . . . . .
Selling expense per case . . . . . . . . . . . . . . . . . . . . .

314,644
$ 79.98
$ 26.65
$ 53.29

267,052
79.20
28.06
48.86

$
$
$

170,060
74.20
22.77
68.03

$
$
$

64,013
$ 75.41
$ 24.08
$ 84.33

21,708
$111.44
$ 45.68
$154.24

(1) Net loss per common share basic and diluted was positively affected by the increase in shares
outstanding resulting from the shares issued and converted in our initial public offering.

27

Selected balance sheet data (in thousands):

2007

2006

As of March 31,
2005

2004

2003

Cash equivalents and short-term investments. . . . .
Working capital (deﬁcit). . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity (deﬁciency) . . . . . . . . . .

$ 6,917
17,084
54,526
18,779
29,566
23,553

$ 1,392
(799)
43,644
25,431
38,546
(26,024)

$ 5,676
5,665
42,926
16,362
26,511
(12,125)

$ 3,461
4,541
27,707
4,095
8,506
928

$

236
(229)
4,528
2,158
3,947
(1,436)

28

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our ﬁnancial condition and results of operations should

be read in conjunction with our consolidated ﬁnancial statements and the related notes included
elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of many factors, including, but not limited
to, those described under ‘‘Risk Factors’’ and elsewhere in this Annual Report on Form 10-K.

Overview

We develop and market premium branded spirits in several growing market categories, including
vodka, rum, whiskey and liqueurs, and we distribute these spirits in all 50 U.S. states and the District
of Columbia, in six key international markets, including Ireland, Great Britain, Northern Ireland,
Germany, Canada and the Duty Free markets, and in a number of other countries in continental
Europe. The brands we market include, among others, Boru vodka, Gosling’s rum, Clontarf Irish
Whiskey, Knappogue Castle Whiskey, Jefferson’s, Jefferson’s Reserve and Sam Houston bourbons and
the Pallini liqueurs.

Our current growth strategy focuses on: (a) aggressive brand development to encourage case sale

and revenue growth of our existing portfolio of brands through signiﬁcant investment in sales and
marketing activities, including advertising, promotion and direct sales personnel expense; and (b) the
selective addition of complementary premium brands through a combination of strategic initiatives,
including acquisitions, joint ventures and long-term exclusive distribution arrangements.

Corporate structure

Castle Brands Inc. is the successor to Great Spirits Company, LLC, a Delaware limited liability

company.

Great Spirits Company, LLC was formed in February 1998. In December 2002, Great Spirits
Company formed a wholly owned subsidiary, Great Spirits (Ireland) Limited, to market its products
internationally. Shortly thereafter, Great Spirits Company determined to convert from a limited
liability company to a C Corporation and to acquire two Irish operating companies, The Roaring
Water Bay Spirits Company Limited and The Roaring Water Bay Spirits Company (GB) Limited.

In order to effect these changes, in July 2003, Castle Brands Inc. was formed as a holding
company (initially called GSRWB, Inc.) and along with its wholly owned subsidiary, Castle Brands
(USA) Corp. (initially called Great Spirits Corp.), under the laws of Delaware. In December 2003, we
then merged Great Spirits Company into Castle Brands (USA) Corp., referred to as CB-USA, and
CB-USA became our U.S. operating subsidiary.

Simultaneously with the foregoing merger, Castle Brands Inc. acquired:

(a) The Roaring Water Bay Spirits Group Limited, the shell holding company that owned the
stock of The Roaring Water Bay Spirits Company Limited, and changed the names of this
shell holding company and its operating entity to Castle Brands Spirits Group Limited,
referred to as CB-Ireland, and Castle Brands Spirits Company Limited, respectively. In
connection with this acquisition, Castle Brands Spirits Company Limited became our Irish
operating subsidiary; and

(b) The Roaring Water Bay Spirits Marketing and Sales Company Limited, the shell holding

company that owned the stock of The Roaring Water Bay Spirits Company (GB) Limited,
and changed the names of this shell holding company and its operating entity to Castle
Brands Spirits Marketing and Sales Company Limited, referred to as CB-UK, and Castle
Brands Spirits Company (GB) Limited, respectively. In connection with this acquisition,
Castle Brands Spirits Company (GB) Limited became our UK operating subsidiary.

In February 2005, Castle Brands Inc. acquired 60% of the shares of Gosling-Castle Partners Inc.,
which holds the worldwide distribution rights (excluding Bermuda) to the Gosling’s rums and related
products.

29

In October 2006, Castle Brands Inc. acquired all of the outstanding shares of McLain & Kyne,

Ltd. (‘‘McLain & Kyne’’) pursuant to Stock Purchase Agreement. McLain & Kyne is a Louisville,
Kentucky based developer and marketer of three premium small batch bourbons: Jefferson’s Reserve,
Jefferson’s and Sam Houston.

Strategic transactions

A review and understanding of our historical growth during the past three ﬁscal years should

consider the timing of our strategic transactions. These transactions for our company and our
predecessor companies are outlined below. In addition to the impact of these transactions, we have
had signiﬁcant growth in our own brands and will continue to focus on developing those brands.

Roaring Water Bay acquisition. On December 1, 2003, in connection with our acquisition of The

Roaring Water Bay Spirits Group Limited and The Roaring Water Bay Spirits Company (GB)
Limited and their related entities, referred to collectively as Roaring Water Bay, described above, we
added the Boru vodka, Clontarf Irish whiskey and Brady’s Irish cream brands to our portfolio. While
we were already selling Boru vodka in the United States pursuant to the 2002 distribution agreement,
the acquisition added signiﬁcant Boru vodka sales internationally, principally in the Republic of
Ireland and the United Kingdom. This acquisition is reﬂected in our ﬁnancial results for the last four
months of our ﬁscal year ended March 31, 2004 and in all subsequent periods.

Pallini liqueur distribution agreement. On August 17, 2004, we signed an exclusive
U.S. marketing and distribution agreement for the Pallini liqueurs. Sales of those products are
reﬂected in our results for the ﬁscal year ended March 31, 2005, commencing as of August 2004, and
in all subsequent periods.

Gosling’s rum distribution agreement. On January 1, 2005, we signed an exclusive

U.S. distribution agreement for the Gosling’s rums. Gosling’s rum sales are reﬂected in our ﬁnancial
results for the last three months of the ﬁscal year ended March 31, 2005 and in all subsequent periods.

Gosling-Castle Partners export venture. On February 18, 2005, we reached agreement to expand

our Gosling’s relationship by acquiring a 60% interest in a newly formed global export venture with
the Gosling family, now named Gosling-Castle Partners, Inc., that had been formed to acquire,
through an export agreement, the exclusive distribution rights for Gosling’s rums worldwide, except
for the Gosling’s home market of Bermuda, including an assignment to such venture of the Gosling’s
rights under our January 2005 distribution agreement. This export agreement became effective on
April 1, 2005. The ﬁnancial results of Gosling- Castle Partners are included in our consolidated
ﬁnancial statements commencing as of our February 2005 purchase of such interest, with adjustments
for minority interest; however, it had no meaningful operations prior to the April 1, 2005
commencement of the export agreement.

McLain & Kyne acquisition. On October 12, 2006, as a result of our acquisition of all of the

outstanding stock of McLain & Kyne, Ltd (f/k/a McLain & Kyne Distillery, Ltd.), we added McLain
& Kyne’s premium small batch bourbons to our portfolio: Jefferson’s, Jefferson’s Reserve and Sam
Houston. The ﬁnancial results of this acquisition are included in our ﬁnancial statements commencing
October 13, 2006 and in all subsequent periods.

Operations overview

We generate revenue through the sale of our premium spirits to our network of wholesale
distributors or, in control states, state-owned agencies, which, in turn, distribute our premium brands
to retail outlets. A number of factors affect our overall level of sales, including the number of cases
sold, revenue per case, relative contribution by brand and geographic mix. Changes in any of these
factors may have a material impact on overall sales. We introduced the new Boru vodka bottle design
in April 2007 in the U.S., and will introduce it in the international markets starting in September 2007.
During ﬁscal 2007 we are launching an advertising campaign that will feature our new bottle design
for Boru vodka. This represents a signiﬁcant upgrade in packaging and brings the product more in line
with its brand positioning. In the United States, our sales price per case includes excise tax and import

30

duties, which are also reﬂected in a corresponding increase in our cost of sales. Most of our
international sales are sold ‘‘in bond,’’ with the excise taxes paid by our customers upon shipment,
thereby resulting in lower relative revenue as well as a lower relative cost of sales, although some of
our United Kingdom sales are sold ‘‘tax paid,’’ as in the United States. Our sales typically peak during
the months of October through December in anticipation of, and during, the holiday season. See
‘‘Risk Factors – Our quarterly operating results have ﬂuctuated in the past and may ﬂuctuate
signiﬁcantly in the future rendering quarter-to-quarter comparisons unreliable as indicators of
performance.’’ The difference between sales and net sales principally reﬂects adjustments for various
distributor incentives.

Our gross proﬁt is determined by the prices at which we are able to sell our products, our ability
to control our cost of sales, the relative mix of our case sales by brand and geography and the impact
of foreign currency ﬂuctuations. Our cost of sales is principally driven by our cost of procurement,
bottling and packaging, which differ by brand, as well as freight and warehousing costs. We purchase
certain of our products, such as the Gosling’s rums and Pallini liqueurs, as ﬁnished goods. For other
products, we purchase the components of our products, including the distilled spirits, bottles and
packaging materials, and have arrangements with third parties for bottling and packaging. Our
U.S. sales typically have a higher absolute gross margin than in other markets, as sales prices per case
are generally higher in the United States than elsewhere.

Selling expense principally includes advertising and marketing expenditures and compensation
paid to our marketing and sales personnel. Our selling expense, as a percentage of sales and per case,
is currently high compared to our competitors because of our brand development, level of marketing
spend and our established sales force versus our relatively small base of case sales and sales volumes.
However, we believe that our strategy of building an infrastructure capable of supporting our
anticipated future growth is the correct long-term approach for us. In anticipation of continuing
growth, we have added the following components that are included in selling costs:

•

•

•

hiring of a highly qualiﬁed and experienced sales force;

continuous improvement of our product distribution network and forging of strong distributor
relationships – beyond those a company of our size might be expected to maintain; and

implementation of a products depletion tracking system, by both brand and SKU (enabling us
to more effectively target our selling efforts).

While we expect the absolute level of selling expense to continue to increase in the coming years,

we also expect selling expense as a percentage of revenues and on a per case basis to continue to
decline, as our volumes expand and we employ our direct sales team over a larger number of brands.

General and administrative expenses include all corporate and administrative functions that

support our operations. These expenses consist primarily of administrative payroll, occupancy and
related expenses and professional services. While we expect these expenses to increase on an absolute
basis as our sales volumes continue to increase and we add additional personnel, we also expect our
general and administrative expenses as a percentage of sales to continue to decline due to economies
of scale.

We expect to signiﬁcantly increase our case sales in the U.S. and internationally over the next

several years through organic growth, and through the extension of our product line via acquisitions
and distribution agreements. We will seek to maintain strong liquidity and manage our working capital
and overall capital resources during this period of anticipated growth to be able to take advantage of
these opportunities and to achieve our long-term objectives, although there is no assurance that we
will be able to do so.

We believe continued investment in marketing and advertising to broaden customer awareness
and the hiring of salespeople to provide greater coverage of key geographic regions is important to
the improvement of operations. These efforts will lead to sizable increases in our absolute level of
selling expense and it is uncertain as to whether the investment will translate into increased customer
brand recognition for our spirits and therefore greater case sales. Given the competitive nature of the

31

spirits industry and the existence of well-established brands in each spirits category, we expect to incur
increased competition from existing and new competitors as we achieve greater case sales and market
share.

We believe a number of industry dynamics and trends will create growth opportunities for us to

broaden our spirits portfolio and increase our case sales, including:

•

•

•

•

the continued consolidation of brands among the major spirits companies is expected to result
in their divestiture of non-core brands, which may create an opportunity for us as we focus on
smaller and emerging brands;

the ongoing industry consolidation is expected to make it more difﬁcult for spirits companies
and new entrants to secure an attractive route to market, particularly in the United States,
while we already have established extensive U.S. and international distribution;

owners of small private and family-owned spirits brands will seek to partner with or be
acquired by a larger company with global distribution. We expect to be an attractive
alternative for these brand owners as one of the few modestly-sized publicly traded spirits
companies; and

particular opportunities in the premium end of the spirits market in which we participate,
given positive changes in customer preferences, demographics and expected growth rates in
the imported spirits segments.

Our growth strategy is based upon acquiring smaller and emerging brands and growing existing

brands. To identify potential acquisition candidates we plan to rely on our management’s industry
experience and our extensive network of contacts in the industry. We also plan to maintain and grow
our U.S. and international distribution channels so that we are more attractive to smaller spirits
companies who are looking for a route to market for their products. With respect to small private and
family-owned spirits brands, we will continue to be ﬂexible and creative in our acquisition proposals
and present an alternative to the larger spirits companies.

We also believe there will be growth opportunities for us as a result of the expected growth rates
in the imported spirits segments in which we compete. Given the historical and projected growth rates
for the imported spirits industry, and the imported vodka and imported rum segments in particular, we
are expecting growth in case sales for all of our products, with the most signiﬁcant increases in Boru
vodka and Gosling’s rum. We plan to increase our marketing and advertising initiatives to take full
advantage of this anticipated growth, including the launch of a consumer-oriented Boru advertising
campaign which was initiated in the ﬁrst quarter of 2007.

The pursuit of acquisitions and other new business relationships will require signiﬁcant
management attention and time commitment. There is uncertainty concerning our ability to
successfully identify attractive acquisition candidates, our ability to obtain ﬁnancing on favorable terms
and whether we will complete these types of transactions in a timely manner and on terms acceptable
to us, if at all.

To address the uncertainty regarding potential acquisition candidates, we plan to rely on, and

continue to grow, our extensive network of industry contacts to help us identify and evaluate spirits
products with growth potential. We plan to rely on our management team’s extensive experience in
the spirits industry to successfully integrate any products we acquire and, when appropriate, hire
additional personal.

32

Financial performance overview

The following table sets forth certain information regarding our case sales for the ﬁscal years

ending March 31, 2007, 2006 and 2005. The data in the following table is based on nine-liter
equivalent cases, which is a standard spirits industry metric.

Case Sales

Cases
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Vodka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liqueurs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Whiskey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Percentage of Cases
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Vodka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liqueurs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Whiskey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year ended March 31,
2006

2007

2005

188,997
125,647

314,644

160,069
78,552
53,404
22,619

314,644

149,898
117,154

267,052

127,894
65,060
56,156
17,942

267,052

74,190
95,870

170,060

107,122
9,038
38,153
15,747

170,060

60.1%
39.9
100.0%

50.9%
25.0
16.9
7.2
100.0%

56.1%
43.9
100.0%

47.9%
24.4
21.0
6.7
100.0%

43.6%
56.4
100.0%

63.0%
5.3
22.4
9.3
100.0%

Critical accounting policies and estimates

The preparation of consolidated ﬁnancial statements in conformity with U.S. generally accepted

accounting principles requires us to make a number of estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the ﬁnancial statements. Such estimates and assumptions affect the reported amounts of sales and
expenses during the reporting period. On an ongoing basis, we evaluate these estimates and
assumptions based upon historical experience and various other factors and circumstances. We believe
our estimates and assumptions are reasonable under the circumstances; however, actual results may
differ from these estimates under different future conditions.

We believe that the estimates and assumptions discussed below are most important to the
portrayal of our ﬁnancial condition and results of operations in that they require our most difﬁcult,
subjective or complex judgments and form the basis for the accounting policies deemed to be most
critical to our operations.

Revenue recognition

We recognize revenue from product sales when the product is shipped to a customer (generally

upon shipment to a distributor or to a control state entity), title and risk of loss has passed to the
customer in accordance with the terms of sale (FOB shipping point or FOB destination) and
collection is reasonably assured. We do not offer a right of return but will accept returns if we shipped
the wrong product or wrong quantity.

Accounts receivable

We record trade accounts receivable at net realizable value. This value includes an appropriate
allowance for estimated uncollectible accounts to reﬂect any loss anticipated on the trade accounts

33

receivable balances and charged to the provision for doubtful accounts. We calculate this allowance
based on our history of write-offs, level of past due accounts based on contractual terms of the
receivables and our relationships with, and economic status of, our customers.

Inventory

Our inventory, which consists of distilled spirits, packaging and ﬁnished goods, is valued at the

lower of cost or market, using the weighted average cost method. We assess the valuation of our
inventories and reduce the carrying value of those inventories that are obsolete or in excess of our
forecasted usage to their estimated realizable value. We estimate the net realizable value of such
inventories based on analyses and assumptions including, but not limited to, historical usage, future
demand and market requirements. Reduction to the carrying value of inventories is recorded in cost
of goods sold.

Goodwill and other intangible assets

Goodwill represents the excess of purchase price and related costs over the value assigned to the

net tangible and identiﬁable intangible assets of businesses acquired. As of March 31, 2007 and 2006
goodwill and other indeﬁnite lived intangible assets that arose from acquisitions were $13.6 and
$11.6 million, respectively. In accordance with SFAS 142, ‘‘Goodwill and Other Intangible Assets’’
(‘‘SFAS 142’’), goodwill and other 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.

We evaluate the recoverability of goodwill and indeﬁnite lived intangible assets using a two-step
impairment test approach at the reporting unit level. In the ﬁrst step the fair value for the reporting
unit is compared to its book value including goodwill. In the case that the fair value of the reporting
unit is less than the book value, a second step is performed which compares the implied fair value of
the reporting unit’s goodwill to the book value of the goodwill. The fair value for the goodwill is
determined based on the difference between the fair values of the reporting units and the net fair
values of the identiﬁable assets and liabilities of such reporting units. If the fair value of the goodwill
is less than the book value, the difference is recognized as an impairment.

SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to the estimated residual values and reviewed for impairment in
accordance with SFAS No. 144, ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets.’’

Stock-based awards

Effective April 1, 2006, we adopted Statement of Financial Accounting Standards No. 123
(revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’), applying the modiﬁed prospective method.
Prior to April 1, 2006, we accounted for stock options according to the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations, and therefore no related compensation expense was recorded for awards granted with
no intrinsic value.

Under the modiﬁed prospective transition method, compensation cost associated with stock

options recognized in the year ended March 31, 2007 includes: 1) amortization related to the
remaining unvested portion of all stock option awards granted prior to April 1, 2006 over the requisite
service period based on the grant-date fair value estimated in accordance with the original provisions
of SFAS 123, Accounting for Stock-Based Compensation ; and 2) amortization related to all stock
option awards granted on or subsequent to April 1, 2006, based on the grant-date fair value estimated
in accordance with the provisions of SFAS 123R. A compensation charge is recorded when it is
probable that performance or service conditions will be satisﬁed. The probability of vesting is updated
annually and compensation is adjusted via a cumulative catch-up adjustment or prospectively
depending upon the nature of the change. Under the modiﬁed prospective transition method, prior
period results have not been restated .

34

Stock based compensation for the year ended March 31, 2007 was $1.4 million. We used the
Black-Sholes option-pricing model to estimate the fair value of options granted. The assumptions used
in valuing the options granted during the years ended March 31, 2007, 2006 and 2005 are included in
Note 14 to the consolidated ﬁnancial statements.

Fair value of ﬁnancial instruments

SFAS No. 107, ‘‘Disclosures About Fair Value of Financial Instruments,’’ 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. We believe that there is no material difference between the fair value and the reported
amounts of ﬁnancial instruments in the balance sheets due to the short-term maturity of these
instruments, or with respect to the debt, as compared to the current borrowing rates available to us.

Results of operations

The following table sets forth, for the periods indicated, the percentage of net sales of certain

items in our ﬁnancial statements.

Sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Selling expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense. . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . .

Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . .

Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange gain/(loss) . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current credit/(charge) on derivative ﬁnancial

instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax beneﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less:

Years ended March 31,
2006

2005

2007

100.0%
66.7%
33.3%
66.6%
34.4%
4.0%
(71.7)%
0.0%
(0.2)%
5.4%
(5.4)%

0.5%
0.6%
5.0%
(65.8)%

100.0%
64.6%
35.4%
61.7%
26.0%
4.3%
(56.6)%
(0.0)%
(0.2)%
(1.6)%
(7.5)%

0.1%
0.7%
3.0%
(62.1)%

100.0%
69.3%
30.7%
91.7%
28.8%
2.6%
(92.4)%
1.0%
(0.4)%
1.0%
(7.9)%

(0.6)%
0.0%
0.0%
(99.3)%

Preferred stock and preferred membership unit

dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net loss attributable to common stockholders . . . . . . . . . .

0.2%
(66.0)%

7.5%
(69.6)%

9.9%
(109.2)%

Fiscal year ended March 31, 2007 compared with ﬁscal year ended March 31, 2006

Net sales. Net sales increased $4.1 million, or 19.0%, to $25.2 million in the ﬁscal year ended

March 31, 2007 from $21.1 million in the comparable prior period. There was no material change in
the selling prices of our existing products. Our increase in net sales reﬂects an increase in overall case
sales, primarily from existing brands. The weakening dollar vis-à-vis the euro and the British pound
also positively impacted our net sales as our international sales which are denominated in euros and
British pounds translated to U.S. dollars at a higher rate. However, some of these net sales gains were
offset by reduced net sales from direct imports into the U.S., whereby federal excise taxes are paid
directly by the distributor, resulting in lower revenue per case. In addition vodka case sales, which
have a lower revenue per case than most of our other brands, were a larger percentage of overall case
sales in the ﬁscal year ended March 31, 2007 than the comparable prior period, also resulting in a
lower net sales growth.

35

Our case sales, measured in nine-liter case equivalents, increased 47,592 cases, or 17.8%, to
314,644 cases versus the comparable prior period, resulting in our largest year of sales to date. Our
U.S. case sales as a percentage of total case sales increased to 60.1% during the ﬁscal year ended
March 31, 2007 from 56.1% in the prior ﬁscal year. This increase reﬂects the momentum of our
portfolio in the U.S., particularly for Boru vodka, Gosling’s rums and the Pallini liqueurs.

The table below presents the increase or decrease, as applicable, in our case sales by product
category for the ﬁscal year ended March 31, 2007 as compared to the prior ﬁscal year. Current period
Whiskey case sales include sales of bourbon products following our acquisition of McLain & Kyne on
October 12, 2006. In ﬁscal 2007, we elected to discontinue sales of a low-margin Irish cream, which
resulted in a decrease in the sales of liqueurs. A decrease in the liqueur sales in the ﬁscal year ended
March 31, 2007 as compared to the prior ﬁscal year was offset by increases in case sales of our other
brands, particularly Boru vodka, which sales increased 53.7% in the U.S. and 25.2% overall from the
prior ﬁscal year, primarily attributable to the launch of the new packaging in the U.S, resulting in
increased sales orders to ﬁll distributor inventories, and by sales of newly-acquired premium single
batch bourbon brands following our acquisition of McLain & Kyne on October 12, 2006.

Increase/(decrease)
in case sales

Overall

U.S.

Percentage
Increase/(decrease)
U.S.
Overall

Vodka. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Whiskey. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liqueurs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

32,175
13,492
4,677
(2,752)

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

47,592

25,257
8,971
3,320
1,551

39,099

25.2%
20.7%
26.1%
(4.9%)
17.8%

53.7%
17.4%
85.4%
3.3%
26.1%

Gross proﬁt. Gross proﬁt increased 11.9% to $8.4 million during the ﬁscal year ended March 31,

2007 from $7.5 million in the comparable prior period, while our gross margin decreased to 33.5%
during the ﬁscal year ended March 31, 2007 compared to 35.4% for the prior ﬁscal year.

The absolute increase in gross proﬁt reﬂected our increased level of sales. The decrease in gross
margin percentage reﬂects a shift in product mix and increased growth of some of the lower margin
products, including shifts in both brands and sizes. Our margins are lower on vodka, which was a
greater portion of overall case sales in the ﬁscal year ended March 31, 2007 than in the comparable
prior period. In addition, since the majority of our production is billed in euros, we were adversely
affected by the weakening dollar vis-à-vis the euro.

Selling expense. Selling expense increased 28.5% to $16.8 million in the ﬁscal year ended

March 31, 2007 from $13.0 million in the comparable prior period. This increase in selling expense was
attributable to the expansion, growth and continued support of our brands and increased case sales,
including increases in distributor incentives and sales support costs and increased expenses in
connection with the Gosling’s rum advertising campaign. In order to strengthen our sales and
marketing team, we added new personnel, which resulted in an increase in consultancy and
compensation expense. We adopted SFAS 123(R), Share-Based Payment on April 1, 2006, which
resulted in stock-based compensation expense attributable to sales and marketing personnel of $0.4
million in the ﬁscal year ended March 31, 2007. As a result of the foregoing, selling expense as a
percentage of net sales increased to 66.6% in the ﬁscal year ended March 31, 2007 as compared to
61.7% for the comparable prior year period.

General and administrative expense. General and administrative expense increased 57.4% to
$8.6 million in the ﬁscal year ended March 31, 2007 from $5.5 million in the comparable prior period.
This increase in general and administrative expense was in part attributable to the increased costs of
being a public company. These public company costs include increases in professional fees and public
company directors and ofﬁcers’ liability insurance of $1.0 million, as compared to the prior ﬁscal year.
In addition to increased compensation for existing personnel, we hired several new employees,
resulting in an increase in compensation expense of $0.9 million. We also adopted SFAS 123(R),
Share-Based Payment on April 1, 2006, which resulted in stock-based compensation expense

36

attributable to personnel other than those in sales and marketing of $1.0 million in the ﬁscal year
ended March 31, 2007. As a result of the foregoing, general and administrative expense as a
percentage of net sales increased to 34.4% in the ﬁscal year ended March 31, 2007 compared to 26.0%
for the comparable prior year period.

Depreciation and amortization. Depreciation and amortization increased 10.3% to $1.0 million in

the ﬁscal year ended March 31, 2007 from $0.9 million in the comparable prior year period. This
increase was primarily attributable to our acquisition of additional ﬁxed and intangible assets and the
accelerated amortization expense resulting from our termination of the Comans distribution
agreement, such termination to be effective in September 2007.

Other Income/(Expense), Net. Other income/(expense), net, increased 30.2% to $1.5 million

during the ﬁscal year ended March 31, 2007 from $1.1 million in the comparable prior period. The
major components of this category include a change in foreign exchange, net interest
income/(expense) and minority interest.

Foreign exchange gain during the ﬁscal year ended March 31, 2007 was $1.4 million as compared

to a loss of ($0.3) million in the comparable prior period. The current period gain is attributable to
the effects of the strengthening of the euro and the British pound against the dollar on our
intercompany loans to our foreign subsidiaries.

Interest income during the ﬁscal year ended March 31, 2007 was $1.0 million as compared to zero

in the comparable prior period. The source of this income is the investment of the proceeds of our
initial public offering in April 2006. Interest expense during the ﬁscal year ended March 31, 2007 was
$2.4 million versus $1.6 million in the comparable prior period. The increase in interest expense is
primarily attributable to the write off of deferred ﬁnancing costs in connection with the conversion of
40% of our convertible notes upon completion of our initial public offering in April 2006 of
$0.3 million, the vesting of certain warrants treated as interest expense of $0.3 million, as well as the
expansion of our senior notes to $10.0 million from $4.6 million in November 2006, resulting in
$0.3 million of additional interest expense.

Minority interest during the ﬁscal year ended March 31, 2007 amounted to a credit of $1.3 million

as compared to a credit of $0.7 million in the comparable prior period as a result of a larger loss
recorded by our 60%-owned subsidiary, Gosling-Castle Partners, Inc.

Net loss attributable to common stockholders. The net loss attributable to common stockholders

for the ﬁscal year ended March 31, 2007 increased 13.1% to $16.6 million from $14.7 million in the
comparable prior period. Net loss per common share basic and diluted was positively affected by the
increase in shares outstanding resulting from the shares issued and converted in our initial public
offering. As previously discussed, we adopted SFAS 123(R), Share-Based Payment on April 1, 2006,
which resulted in total stock-based compensation expense of $1.4 million in the ﬁscal year ended
March 31, 2007 as compared to none in the comparable prior period. The net loss per common share
included $0.1 million of preferred stock dividends accrued during the ﬁscal year ended March 31, 2007
as compared to $1.6 million in the comparable prior period.

EBITDA. EBITDA decreased 20.4% to negative $12.9 million for the year ended March 31,

2007 versus negative $10.7 million the comparable prior period. EBITDA represents net income
before deducting interest expense (including expensing of deferred ﬁnancing costs), income taxes,
depreciation and amortization and the impact of the non-cash charge for stock-based compensation
reported under SFAS 123(R). We use EBITDA as the primary internal management measure for
evaluating performance on a period over period analysis, when comparing actual results to budgeted
performance and when allocating additional resources. This non-GAAP ﬁnancial measure is presented
in order to assist industry analysts and investors in assessing our liquidity, our ability to incur and
service debt, make capital expenditures and meet working capital requirements. EBITDA should not
be considered as an alternative to operating income as an indicator of our performance, as an
alternative to cash ﬂows from operating activities as a measure of liquidity, or as an alternative to any
other measure determined in accordance with GAAP. Unlike net income, EBITDA does not include
depreciation or interest expense and therefore does not reﬂect current or future capital expenditures

37

or the cost of capital. We compensate for these limitations by using EBITDA as only one of several
comparative tools, together with GAAP measurements, to assist in the evaluation of operating
performance. Such GAAP measurements include operating income (loss), net income (loss), cash
ﬂows from operations and cash ﬂow data. We have signiﬁcant uses of cash ﬂows, including interest
payments, debt principal repayments, and other non-recurring charges, which are not reﬂected in
EBITDA. Because EBITDA as determined by us excludes some, but not all, items that affect net
income, it may not be comparable to EBITDA or similarly titled measures used by other companies.

The following table sets forth our reconciliation of EBITDA to net loss (the most directly

comparable ﬁnancial measure):

(Dollars in thousands)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (subtract):

Income tax beneﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net, including expensing of deferred
ﬁnancing costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . .
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . .

Years ended March 31,
2006
2007

(16,557)

(13,084)

(148)

(148)

1,380
1,001
1,388

1,579
907
—

EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(12,936)

(10,746)

Fiscal year ended March 31, 2006 compared with ﬁscal year ended March 31, 2005

Net sales. Net sales increased $8.5 million, or 67.6%, to $21.1 million in the ﬁscal year ended
March 31, 2006 from $12.7 million in the comparable prior period. Approximately $3.3 million, or
38.8%, and $5.2 million, or 61.2%, of this increase reﬂected an increase in case sales of new and
existing brands, respectively. There was no material change in the selling prices of our existing
products. Our case sales, measured in nine-liter case equivalents, increased 96,992 cases, or 57.0%, to
267,052 cases versus the comparable prior period, with the increase comprised of:

•

55,523 cases related to our Gosling-Castle Partners global export venture which commenced
in April 2005 and 9,084 cases related to our Pallini agency agreement which commenced in
August 2004; and

•

32,385 incremental case sales of our other existing brands, particularly Boru vodka.

Our U.S. case sales as a percentage of total case sales increased to 56.1% during the ﬁscal year
ended March 31, 2006 from 43.2% in the prior ﬁscal year. This increase reﬂects the addition of the
Gosling’s rums and Pallini liqueurs, as well as increased U.S. sales of our other brands, particularly
Boru vodka.

The table below presents the increase in case sales by product category for the ﬁscal year ended

March 31, 2006 compared to the prior ﬁscal year.

Vodka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liqueurs/cordials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Irish Whiskey. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Increase in
case sales

Percentage
increase

Overall

20,770
55,464
19,068
1,690

96,992

U.S.

Overall

U.S.

17,754
42,410
14,605
1,609

76,377

19.4%
60.7%
578.0% 462.0%
44.5%
51.4%
53.8%
—
57.0% 103.9%

Gross proﬁt. Gross proﬁt increased 93.5% to $7.5 million during the ﬁscal year ended March 31,

2006 from $3.9 million in the prior ﬁscal year, and our gross margin increased to 35.4% during the
ﬁscal year ended March 31, 2006 compared to 30.7% for the prior ﬁscal year. The absolute increase in
gross proﬁt reﬂected our increased level of sales and the increase in gross margin reﬂected higher

38

margins attributable to Gosling’s rums and Pallini liqueurs as well as to a shift in our product mix to
products which are produced by others. Although gross margins are less on our vodka sales, the
increase in case sales has offset the lower margin achieved.

Selling expense. Selling expense increased 12.8% to $13.0 million in the ﬁscal year ended March

31, 2006 from $11.6 million in the prior ﬁscal year. The change in selling expense was primarily
attributable to an increase of $1.1 million in compensation expense due to the hiring of additional
sales personnel, including sales personnel hired by the new Gosling-Castle Partners global export
venture in which the company has a 60% interest, to an increase in distributor incentives and sales
support costs of $0.2 million and to increases in selling related shipping costs and sales commissions of
$0.1 million and $0.2 million, respectively. As a percentage of net sales, selling expense decreased to
61.7% compared to 91.7% for the comparable prior year period. This decrease is principally due to
leveraging our sales force and marketing expenditures across increased sales volumes.

General and administrative expense. General and administrative expense increased 51.9% to $5.5

million for the ﬁscal year ended March 31, 2005 from $3.6 million in the prior ﬁscal year. Major
components of this increase included an increase of $1.0 million in compensation expense due to the
hiring of additional corporate personnel, including several accounting personnel and our president and
chief operating ofﬁcer, increased professional and recruiting fees of $0.5 million, increased occupancy,
insurance and other ofﬁce expenses of $0.1 million and an increase in our provision for doubtful
accounts of $0.3 million. As a percentage of net sales, general and administrative expense decreased to
26.0% for the ﬁscal year ended March 31, 2006 compared to 28.8% for the comparable prior year
period, due to economies of scale with higher sales volumes.

Depreciation and amortization. Depreciation and amortization increased 181% to $0.9 million in

the ﬁscal year ended March 31, 2005 from $0.3 million in the comparable prior year period. This
increase was primarily attributable to amortization of the Gosling worldwide (except Bermuda)
distribution agreement which became effective during February 2005.

Net loss attributable to common stockholders. The net loss attributable to common stockholders

for the ﬁscal year ended March 31, 2006 increased 6.5% to $14.7 million from $13.8 million in the
prior ﬁscal year. These net losses included $1.6 million and $1.3 million in preferred stock dividends
accrued during the ﬁscal years ended March 31, 2006 and 2005, respectively.

Potential ﬂuctuations in quarterly results and seasonality

Our industry is subject to seasonality with peak sales in each major category generally occurring

in the fourth calendar quarter, which is our third ﬁscal quarter. See ‘‘Risk Factors – Our quarterly
operating results have ﬂuctuated in the past and may ﬂuctuate signiﬁcantly in the future rendering
quarter-to-quarter comparisons unreliable as indicators of performance.’’

39

Quarterly results of operations

The following table presents unaudited consolidated statements of operations data for each of the

eight quarters concluding with the quarter ended March 31, 2007. We believe that all necessary
adjustments have been included to present fairly the quarterly information when read in conjunction
with our annual ﬁnancial statements and related notes. The operating results for any quarter are not
necessarily indicative of the results for any subsequent quarter.

March 31,
2007

December 31,
2006

September 30,
2006

June 30,
2006

Consolidated statement of operations data
(in thousands, except per share amounts):

Sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Selling expense . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense . . . . . . .
Depreciation and amortization. . . . . . . . . . . .

$

6,071
4,046

2,025

3,930
2,410
258

$

7,381
4,938

2,443

4,600
2,101
263

$

6,252
4,231

2,021

4,694
1,899
246

5,460
3,564

1,896

3,543
2,236
234

Loss from continuing operations . . . . . . . . . .

(4,573)

(4,521)

(4,818)

(4,117)

Other income. . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency gain/(loss) . . . . . . . . . . . . . .
Current credit/(charge) on derivative

ﬁnancial instrument . . . . . . . . . . . . . . . . . . .
Income tax beneﬁt . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . .
Minority interests . . . . . . . . . . . . . . . . . . . . . . .

(0)
(10)
217

(3)
37
(378)
166

1
(21)
484

132
37
(208)
366

3
(10)
262

(9)
37
(76)
392

1
(6)
397

(2)
37
(718)
343

Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4,544)

(3,730)

(4,219)

(4,065)

Less: preferred stock and preferred

membership unit dividends . . . . . . . . . . . . . . .

0

0

0

48

Net loss attributable to common

stockholders . . . . . . . . . . . . . . . . . . . . . . . . . .

Net loss per common share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted average shares used in

computation:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

$

(4,544) $

(3,730) $

(4,219) $

(4,113)

(0.38) $

(0.31) $

(0.35) $

(0.38) $

(0.31) $

(0.35) $

(0.36)

(0.36)

12,109,741

12,051,045

12,009,741

11,422,725

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,109,741

12,051,045

12,009,741

11,422,725

40

March 31,
2006

December 31,
2005

September 30,
2005

June 30,
2005(1)

Consolidated statement of operations data
(in thousands, except per share amounts):

Sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,699
2,343

Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Selling expense . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense . . . . . . .
Depreciation and amortization. . . . . . . . . . . .

1,356

3,082
1,461
232

$ 7,360
4,998

2,362

3,616
1,659
233

$ 5,175
3,162

2,013

3,213
1,236
220

$ 4,916
3,153

1,763

3,137
1,137
222

Loss from continuing operations . . . . . . . . . .

(3,419)

(3,146)

(2,656)

(2,733)

Other income. . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency gain/(loss) . . . . . . . . . . . . . .
Current credit/(charge) on derivative

ﬁnancial instrument . . . . . . . . . . . . . . . . . . .
Income tax beneﬁt . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . .
Minority interests . . . . . . . . . . . . . . . . . . . . . . .

—
(9)
219

(3)
37
(541)
228

(30)
(10)
(259)

4
37
(415)
204

34
(9)
15

(2)
37
(364)
95

—
(9)
(313)

17
37
(259)
129

Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3,488)

(3,615)

(2,850)

(3,131)

Less: preferred stock and preferred

membership unit dividends . . . . . . . . . . . . . . .

482

422

387

305

Net loss attributable to common

stockholders . . . . . . . . . . . . . . . . . . . . . . . . . .

$(3,970)

$(4,037)

$(3,237)

$(3,436)

Net loss per common share: (2)

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (1.28)

$ (1.30)

$ (1.04)

$ (1.11)

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (1.28)

$ (1.30)

$ (1.04)

$ (1.11)

Weighted average shares used in

computation: (2)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,107

3,107

3,107

3,107

3,107

3,107

3,107

3,107

(1) Our quarterly results of operations include the results of operations of Gosling-Castle Partners,

our 60%-owned strategic venture, commencing as of the February 18, 2005 closing date of our
investment in such entity, with adjustments for minority interest; however, Gosling-Castle Partners
had no meaningful operations prior to April 1, 2005.

(2) Net loss per common share basic and diluted was positively affected by the increase in shares
outstanding resulting from the shares issued and converted in our initial public offering.

Liquidity and capital resources

Our primary uses of cash have been for selling and marketing expense, employee compensation,
new product development and working capital. Our main sources of cash have been from the sale of
common and preferred stock, the sale of convertible and senior notes and borrowings under bank
credit facilities.

Our balance of cash equivalents and short-term investments was $6.9 million at March 31, 2007 as
compared to $1.4 million at March 31, 2006. This increase is attributable to the receipt of net proceeds
of approximately $26.3 million upon our initial public offering in April 2006. Our balance of cash
equivalents and short-term investments increased to $25.0 million in May 2007 as a result of the

41

closing of a $21.0 million private placement of common stock and warrants sold to certain institutional
investors. The net proceeds of the private placement are $19.9 million, after giving effect to the
placement fee of $1.1 million.

The following trends are reasonably likely to result in a material decrease in our liquidity over

the near-to-mid term:

•

•

•

•

•

•

•

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

addition of administrative and sales personnel as our business expands;

increases in advertising, public relations and sales promotions for existing and new brands and
as we expand within existing markets or enter new markets;

acquisition of additional spirits brands;

ﬁnancing the operations of our 60%-owned Gosling-Castle Partners strategic export venture;

the continued cost of being a public company and Sarbanes-Oxley compliant; and

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

We expect that we will require increasing amounts of working capital to ﬁnance our inventory
levels in the United States. Except for Gosling’s rums, which are bottled in the United States, all of
our products are imported from Europe. In the case of our wholly-owned brands, there is a
three-to-four month production and shipping lead time between the time of order placement and the
time the product is available for sale. This lead time has required us to ensure that we maintain
sufﬁcient inventories to properly service our customers.

We expect to experience a lengthening of the revenue collection cycle due to the need to extend

payment terms as an incentive to encourage customers to make container-sized purchases of our
products on which title passes to the customer at the shipping point in Ireland. A lengthening of the
revenue collection cycle will require a signiﬁcant amount of working capital.

Cash ﬂows

The following table summarizes our primary sources and uses of cash during the periods

presented (in thousands):

Year ended March 31,
2006

2005

2007

Net cash provided by (used in):

Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(21,628)
(7,688)
28,929

$(14,269)
(406)
10,392

$(13,331)
(598)
16,142

Net increase (decrease) in cash and cash equivalents . .

$

(387)

$ (4,283)

$ 2,213

Operating activities. A substantial portion of our available cash has been used to fund our
operating activities. In general, these cash funding requirements are based on operating losses, driven
chieﬂy by our sizable investment in selling and marketing. With increases in our overall sales volumes,
we have also utilized cash to fund our receivables and inventories. In general, these increases are only
partially offset by increases in our accounts payable to our suppliers and accrued expenses. Our
business has incurred signiﬁcant losses since inception.

On average, the production cycle for our owned brands can take as long as 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, which is impacted by the international nature of our
business. With respect to Gosling’s rums and Pallini liqueurs, we do not produce the ﬁnished product
and, instead, receive the ﬁnished product directly from the owners of such brands. From the time we

42

have products available for sale, an additional three to four months may be required before we sell
our inventory and collect payment from our customers.

In the ﬁscal year ended March 31, 2007, net cash used in operating activities was $21.6 million,

consisting primarily of losses from our operations of $16.6 million, increases in inventory of $3.8
million, increases in accounts receivable of $2.8 million and the effects of changes in foreign exchange
of $1.1 million, and decreases in due to related parties of $1.1 million and minority interest in the net
loss of our 60%-owned subsidiary Gosling-Castle Partners of $1.3 million. These uses of cash were
offset, in part, by a decrease in debt due from related parties of $0.9 million, amortization of deferred
ﬁnancing cost of $0.4 million, a write-off of deferred ﬁnancing costs in connection with the conversion
of 6% subordinated convertible notes of $0.3 million, as well as depreciation and amortization expense
of $1.0 million, non-cash interest charges and stock-based compensation expense $0.3 million and
stock based compensation expense of $1.4 million.

In the ﬁscal year ended March 31, 2006, net cash used in operating activities was $14.3 million,
consisting primarily of losses from our operations of $13.1 million, increases in inventory, amounts due
from afﬁliates, prepaid expense, deferred ﬁnancing costs in connection with our initial public offering,
and other assets, and minority interest in the net loss of our 60%-owned subsidiary Gosling-Castle
Partners. These uses of cash were offset, in part, by an increase in accounts payable and accrued
expenses, a decrease in accounts receivable and depreciation expense and non-cash interest charges.

In the ﬁscal year ended March 31, 2005, net cash used in operating activities was $13.3 million,

consisting primarily of losses from our operations of $12.5 million, increases in trade accounts
receivable, inventory and other assets, offset, in part, by an increase in accounts payable and accrued
expenses.

Investing Activities. We fund certain acquisitions and operating activities primarily with cash and

short-term investments. Net cash used for investing activities was $7.7 million during 2007, reﬂecting
initial investments of $25.0 from the proceeds of our initial public offering against acquisitions of
property and equipment $0.4 million and intangible assets of $0.1 million. In addition, in October
2006, Castle Brands Inc. acquired 100% of the outstanding shares of McLain & Kyne, Ltd. Cash used
in investing activities for this business acquisition was $1.3 million, net of cash acquired. Investing
activities during 2007 also include proceeds of $19.0 million from the sale of investments to fund
certain acquisitions and operating activities.

Financing activities. During the three years ending March 31, 2007, in order to fund the above

operating and investing activities, our total net cash from ﬁnancing activities was approximately
$55.5 million, which came primarily from our issuances of common stock, convertible preferred stock,
senior notes and convertible subordinated debt.

Net cash provided by ﬁnancing activities during the year ended March 31, 2007 was $28.9 million,
consisting primarily of funds raised from our initial public offering on April 6, 2006. Net cash received
from the issuance of common stock in our initial public offering was $26.4 million, after making the
following payments:

•

•

•

•

•

repayment of u133,323 ($159,961, calculated at the conversion rate at the time of repayment),
of the principal amount of non-interest bearing indebtedness owed by us to former
stockholders of Roaring Water Bay;
repayment of u290,328 ($357,454, calculated at the conversion rate at the time of repayment)
of the principal amount of indebtedness and accrued interest owed by us to former
stockholders of Roaring Water Bay;

repayment of the $2.0 million principal amount of indebtedness outstanding under the
February 2006 credit facility provided to us by Frost Nevada Investments Trust, an entity
controlled by one of our directors;

payment of interest of $5,000 accrued from April 1, 2006 through the closing date of the
initial public offering for the February 2006 credit facility; and

payment of $204,952 in dividends accrued on preferred membership units in our predecessor
company, Great Spirits Company, LLC, through December 1, 2003.

43

Net cash provided by ﬁnancing activities during the ﬁscal year ended March 31, 2006 was

$10.4 million and consisted primarily of funds raised from the second and third tranches of our
6% convertible note ﬁnancing, netted against the following: payments of deferred registration costs in
connection with the company’s prospective initial public offering of $1.3 million, repayment of notes
payable of $3.0 million and payments made in connection with the issuance cost of our 6% convertible
note ﬁnancing of $0.2 million. A portion of these funds was used during that period to fund our
capital investments in Gosling-Castle Partners of $2.2 million.

We believe that we will be able to fund our operations from the proceeds of our recent private
placement, our projected cash ﬂow from operations, and current cash and cash equivalents for at least
twelve months following the closing of our private placement, which occurred on May 10, 2007.
Beyond that, additional ﬁnancing may be needed to fund working capital and other requirements.
Changes in our operating plans, acquisitions or other additions of brands, lower than anticipated sales,
increased expenses, or other events, including those described in ‘‘Risk Factors,’’ may require us to
seek additional debt or equity ﬁnancing on an accelerated basis. Financing may not be available on
acceptable terms, or at all, and our failure to raise capital when needed could impact negatively our
growth plans, ﬁnancial condition and results of operations. Additional equity ﬁnancing may be dilutive
to the holders of our common stock, and debt ﬁnancing, if available, may involve signiﬁcant cash
payment obligations or ﬁnancial covenants and ratios that restrict our ability to operate our business.

Obligations and commitments

Irish bank facilities. We have credit facilities with availability aggregating approximately
u1.4 million ($1.9 million) with two afﬁliated Irish banks, including overdraft, customs and excise
guaranty, forward currency dealing, revolving credit and accounts receivable facilities. These facilities,
which are payable on demand and continue until terminated by either party on not less than three
months prior written notice, have interest rates ranging from prime plus 3% to 7.85%. We also have
revolving credit facilities aggregating approximately £242,000 ($474,992) with one of these lenders for
working capital purposes. These other banking facilities, which are also payable on demand and renew
annually subject to certain provisions, have interest rates ranging from prime plus 2% to prime plus
2.25%. We also secured a u190,000 ($253,365) term note with one of these lenders. We have deposited
u375,000 ($502,643) with the banks to secure these borrowings and both we and our subsidiaries,
CB-UK and CB-Ireland, have agreed to provide an intercompany guarantee of these facilities up to
an amount of u860,000 ($1,146,810). The term note carries an interest rate of 5.2% and calls for
monthly payments of principal and interest of u6,377 through July 2007.

We believe we are in compliance with the ﬁnancial covenants of our Irish bank facilities and that

the completion of this offering will not cause us to fail to be in compliance with any of the ﬁnancial
covenants with respect to the Irish bank facilities.

February 2006 credit facility. On February 17, 2006, we entered into a credit facility with Frost

Nevada Investments Trust, an entity controlled by Phillip Frost, M.D., one of our directors, which
enabled us to borrow up to $5.0 million. We borrowed $2.0 million under this facility at an interest
rate of 9% per annum payable quarterly, plus a facility fee of $100,000 paid at the time of the
drawdown. Interest under this facility was payable quarterly. We repaid all outstanding principal and
accrued interest under this note in the amount of $2,026,000 in April 2006.

February 2007 credit facility. On February 12, 2007, we entered into a credit agreement with

Frost Nevada Investments Trust, which is controlled by Dr. Phillip Frost, one of our directors, which
enabled us to borrow up to $5.0 million. We paid a facility fee of $150,000 upon entering into the
credit agreement. We never made any borrowings under this facility. The facility was terminated
pursuant to its terms following the closing of our May 2007 private placement of common stock..

9% senior notes. On June 9, September 28 and October 13, 2004, our wholly owned subsidiary

Castle Brands (USA), issued to 27 individuals $4.6 million of senior notes secured by accounts
receivable and inventories of Castle Brands (USA). As issued, these senior notes bore an interest rate
of 8%, payable semi-annually on November 30th and May 31st, and were to mature on May 31, 2007.
The senior notes are guaranteed as to payment by us. In addition, these notes were accompanied by

44

warrants to purchase 25 shares of our common stock at $8.00 a share for every $1,000 principal
amount of such notes for an aggregate of 116,500 shares. Effective August 15, 2005, the terms of these
notes were modiﬁed with the consent of the note holders to mature on May 31, 2009 in exchange for
an interest rate adjustment to 9%.

On November 10, 2006, we issued an aggregate of $5.4 million of additional senior notes secured
by accounts receivable and inventories of Castle Brands (USA). These notes also mature on May 31,
2009 and bear interest at 9% payable semi-annually. In addition, each holder of senior notes received
warrants to purchase 40 shares of common stock at $8.00 per share for each $1,000 of additional
principal purchased by such holder. There were 213,600 warrants issued in conjunction with the
issuance of the additional senior notes. These warrants have been fair valued at $706,944 in the
aggregate and have been treated as a discount to the notes payable based upon their relative fair
value.

The senior notes are subject to customary restrictive covenants. In addition, the consent of
holders of a requisite majority of the aggregate principal amount of these notes is required for Castle
Brands (USA) to take any of the following actions: merge or consolidate or sell all or substantially all
of its assets other than with an entity formed in the United States or to a person or entity that
assumes all of our obligations under the senior notes, engage in a transaction with an afﬁliate unless
the transaction is on fair and reasonable terms, or change our jurisdiction of incorporation without
giving 60 days prior notice.

If we or Castle Brands (USA) were to default on the payment of principal or interest on our

senior notes and the default continues for 20 business days, breach any representation, warranty or
certiﬁcation made in the senior note documents, default in the performance of the material obligations
under the senior note documents, which default is unremedied for a period of 60 days after we receive
notice of such default, enter into any arrangement for the beneﬁt of creditors or otherwise wind-up or
dissolve, then the holders of our senior notes could declare all principal and interest to be
immediately payable.

We believe that we are in compliance with the ﬁnancial covenants related to our senior notes and

will continue to be in compliance upon completion of this offering.

6% subordinated convertible notes. On March 1, 2005, we entered into a convertible note

purchase agreement for up to $10.0 million, with the principal amount convertible, at the option of the
holder, at a conversion price of $8.00 per share. The convertible note agreement was amended on
August 16, 2005 to (a) increase the amount of loans under such agreement to $15.0 million and
(b) provide for 40% of the outstanding principal amount of the notes to convert automatically into
common stock upon an initial public offering of our common stock at a conversion price of $7.00 per
share. As of March 31, 2006, there were three 6% convertible promissory notes outstanding for
$5.0 million each. These notes were issued on March 1, 2005, June 27, 2005 and August 16, 2005 and
mature on March 1, 2010. They bear interest at the rate of 6% per annum, payable quarterly, at our
option for a period of two years from the date of the note, in cash or in additional notes bearing an
interest rate of 7.5% per annum. We may not prepay our 6% convertible notes without the consent of
the holders.

In accordance with the amended terms, $6.0 million of our 6% convertible notes automatically

converted into 857,143 shares of our common stock at a price of $7.00 per share upon the closing of
the initial public offering of our common stock on April 10, 2006. The outstanding balance of our
6% convertible notes may be converted into common stock at any time at the option of the holders at
a conversion rate of $8.00 per share and will automatically convert at such time as the closing price of
our common stock is $20.00 per share or more for thirty consecutive days at any time after March 1,
2008. The 6% convertible notes are unsecured.

These 6% convertible notes are subject to a number of customary restrictive covenants and
certain potential limits on future indebtedness, excluding qualiﬁed brand acquisition indebtedness, and
which are impacted by our aggregate equity market capitalization. As long as there is at least
$1.5 million aggregate principal amount outstanding under these notes: (a) the approval of holders of

45

at least a majority of the aggregate principal amount of the 6% convertible notes outstanding is
required before we may pay dividends or make a distribution or payment on our equity securities or
redeem or repurchase our equity securities (other than repurchases from employees upon termination
of their employment) and (b) the approval of holders of at least 70% of the aggregate principal
amount of the 6% convertible notes outstanding is required before we may engage in a transaction
with an afﬁliate or incur indebtedness in excess of $30.0 million; provided, however, that the
indebtedness covenant will no longer be applicable if the product of our fully diluted securities
multiplied by the average of the highest bid and lowest asked prices on the exchange or
over-the-counter quotation system on which our common stock is listed is at least $100.0 million for a
period of at least 90 days. The limit on indebtedness does not include indebtedness that is incurred in
connection with the acquisition of a brand related to, or an entity doing business in or related to, the
beverage alcohol market, to the extent such indebtedness (including costs and fees associated with
incurring such debt) does not exceed an amount equal to three times the target’s earnings before
interest, taxes, depreciation and amortization.

If we were to default on the payment of principal or interest on our 6% convertible notes, fail to

pay any other debt for borrowed money in excess of $250,000 when it is due and payable, fail to
perform the afﬁrmative covenants contained in the convertible note purchase agreement, and fail to
cure such failure within 10 business days or fail to perform, keep or observe any material term,
provision, covenant or agreement contained in the convertible note purchase agreement or any of the
notes issued under the agreement and fail to cure within 20 days, then the holders of our
6% convertible notes could declare all principal and interest to be immediately payable.

We believe that we are currently in compliance with all of the ﬁnancial covenants related to our

6% convertible notes.

Gosling’s export venture. On February 18, 2005, in connection with our investment in the

Gosling-Castle Partners Inc. strategic export venture with the Gosling’s family, we issued a promissory
note to Gosling-Castle Partners (now our 60% owned subsidiary) in the amount of $4.9 million. This
promissory note, which bore interest at the rate of 4% per annum beginning October 1, 2005, had no
restrictive covenants and was due in installments as follows, and has now been fully paid:

•

•

•

•

•

$1,025,000 was due April 1, 2005 and was paid;

$1,125,000 was due October 1, 2005 and was paid;

$1,000,000 was due April 1, 2006 and was paid;

$1,000,000 was due October 1, 2006 and was paid; and

$750,000 was due April 1, 2007 and was paid.

Under Gosling-Castle Partners’ exclusive export agreement with Gosling’s Export (Bermuda)
Limited, Gosling-Castle Partners was required to pay $2.5 million to Gosling’s Export (Bermuda)
Limited in exchange for the distribution rights set forth in such agreement in four equal installments
on April 1, 2005, October 1, 2005, April 1, 2006 and October 1, 2006. As of March 31, 2007,
Gosling-Castle Partners has no payments remaining.

5% Euro denominated convertible subordinated notes.

In connection with the acquisition of
Roaring Water Bay on December 1, 2003, we issued an aggregate principal amount of u1,374,750
(recorded as $1,660,148 in our consolidated ﬁnancial statements as of March 31, 2006) of our 5% euro
denominated convertible subordinated notes due December 1, 2006.

Upon the closing of the initial public offering in April 2006, all of our 5% euro denominated
convertible subordinated notes automatically converted into 263,362 shares of our common stock, and
all of the interest accrued on these notes (except for $2,500 of accrued interest, which will be paid on
June 30, 2006) was paid out of the proceeds of the initial public offering.

The Roaring Water Bay related notes.

In December 2003, in connection with our acquisition of
Roaring Water Bay, we issued to the stockholders of Roaring Water Bay subordinated non-interest
bearing notes in the principal amount of u444,389 ($576,372, calculated at the conversion rate at such

46

time). In connection with the acquisition, we also issued 5.7% subordinated notes due July 11, 2007, in
the principal amount of u255,000 ($302,022, calculated at the conversion rate at such time) in
exchange for the elimination of certain common share rights of the Roaring Water Bay stockholders.

We used $517,395 from the proceeds of the initial public offering to prepay all of the remaining
principal balance outstanding under both the non-interest bearing notes and the 5.7% subordinated
notes. We also paid from such proceeds all accrued and unpaid interest on the 5.7% subordinated
notes through the closing date of the initial public offering.

Ofﬁce equipment leases. We ﬁnanced the purchase of certain ofﬁce equipment totaling $17,872.

The equipment leases call for monthly payments of principal and interest at the rate of 5% per
annum, to be paid through July 2009. As of March 31, 2007, we owed $8,891 under this lease.

Future commitments – notes and capital lease. Principal payments due over the next ﬁve years

for the above listed notes payable and capital lease are due as follows (as translated at the exchange
rate in effect on March 31, 2007):

For the years ending March 31,

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . .

Non-current portion. . . . . . . . . . . . . . . . . . . . .

Amount
(in thousands)

$

419
4
18,356

18,779
419

$18,360

Convertible preferred stock. All of our Series A preferred stock, Series B preferred stock and
Series C preferred stock automatically converted into an aggregate of 4,089,463 shares of our common
stock, and all of the dividends accrued on our preferred stock through April 9, 2006 were converted
into 193,107 shares of our common stock.

Contractual obligations

The following table sets forth our contractual commitments as of March 31, 2007 for each of the

following quarters:

Payments due during quarter ending March 31,

2008

2009

2010

2011

2012

Thereafter

Total

(in thousands)

Long-term notes payable, including
current portion and estimated
interest
Ulster Bank facilities . . . . . . . . . . . . .
9% senior notes. . . . . . . . . . . . . . . . . .
6% convertible subordinated notes .
Capital leases . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . .

Impact of inﬂation

$416
—
—
4
322

$742

$— $ — $— $ —

$ —

10,000
9,000
1
—

—
—
—
—

—
4
5

—

—

—

—

$ 9

$19,001

$— $ —

$ —

$
416
10,000
9,000
9
327

$19,752

We believe that our results of operations are not materially impacted by moderate changes in the

inﬂation rate. Inﬂation and changing prices did not have a material impact on our operations during
ﬁscal 2005, 2006 or 2007. Severe increases in inﬂation, however, could affect the global and
U.S. economies and could have an adverse impact on our business, ﬁnancial condition and results of
operations.

47

Recent accounting pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation

No. 48, ‘‘Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement
No. 109’’ (‘‘FIN 48’’), which clariﬁes the accounting and disclosure for uncertainty in tax positions, as
deﬁned. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the
recognition and measurement related to accounting for income taxes. This interpretation will apply to
our ﬁscal year beginning April 1, 2007. We do not expect the interpretation will have a material
impact on its results from operations or ﬁnancial position.

In September 2006, the Securities and Exchange Commission (‘‘SEC’’) issued Staff Accounting

Bulletin 108, ‘‘Considering the Effects on Prior Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements,’’ (‘‘SAB 108’’). SAB 108 requires registrants to quantify errors
using both the income statement method (i.e. iron curtain method) and the rollover method and
requires adjustment if either method indicates a material error. If a correction in the current year
relating to prior year errors is material to the current year, then the prior year ﬁnancial information
needs to be corrected. A correction to the prior year results that are not material to those years would
not require a ‘‘restatement process’’ where prior ﬁnancials would be amended. SAB 108 is effective
for ﬁscal years ending after November 15, 2006. We determined that SAB 108 did not have a material
effect on its ﬁnancial position, results of operations or cash ﬂows.

In September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value Measurements,’’ to deﬁne fair

value, establish a framework for measuring fair value in accordance with generally accepted
accounting principles, and expand disclosures about fair value measurements. SFAS No. 157 will be
effective for ﬁscal years beginning after November 15, 2007, our ﬁscal year beginning April 1, 2008.
We are assessing the impact the adoption of SFAS No. 157 will have on our consolidated ﬁnancial
statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 159,

‘‘The Fair Value Option for Financial Assets and Financial Liabilities’’ (SFAS 159), which allows an
entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain
ﬁnancial assets and liabilities on a contract-by-contract basis. Subsequent changes in fair value of these
ﬁnancial assets and liabilities would be recognized in earnings when they occur. SFAS 159 further
establishes certain additional disclosure requirements. SFAS 159 is effective for ﬁscal years beginning
after November 15, 2007, with earlier adoption permitted. Management is currently evaluating the
impact and timing of the adoption of SFAS 159 on our consolidated ﬁnancial statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

As of March 31, 2007, we did not participate in any derivative ﬁnancial instruments, or other

ﬁnancial or commodity instruments for which fair value disclosure would be required under
SFAS No. 107, ‘‘Disclosure About Fair Value of Financial Investments.’’ We hold no investment
securities that would require disclosure of market risk.

We do participate in certain foreign exchange currency future contracts programs to limit our risk
and the potential impact of currency ﬂuctuations on our product costs. When placing a product order,
we attempt to lock in its cost by buying forward contracts on euros coinciding with the projected
payment dates for such purchases. Individual forward contracts rarely extend for more than six
months or exceed u300,000 ($400,500). At March 31, 2007 total forward contracts outstanding
amounted to u600,000 ($723,700, calculated at the weighted average conversion rate in such contracts).
Depending upon the term of the contract, the cost of these transactions can vary between
approximately 50 to 150 basis points.

48

Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of March 31, 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the years in the three year period ended

March 31, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Stockholders Equity (Deﬁciency) for each of the years
in the three year period ended March 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows for each of the years in the three year period ended

March 31, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

50
51

52

53

54
56

49

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Castle Brands Inc.

We have audited the accompanying consolidated balance sheets of Castle Brands Inc. and subsidiaries
as of March 31, 2007 and 2006, and the related consolidated statements of operations, changes in
stockholders’ equity (deﬁciency) and cash ﬂows for each of the years in the three-year period ended
March 31, 2007. These ﬁnancial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these ﬁnancial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
ﬁnancial statements. An audit also includes assessing the accounting principles used and signiﬁcant
estimates made by management, as well as evaluating the overall ﬁnancial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the ﬁnancial statements referred to above present fairly, in all material respects, the
consolidated ﬁnancial position of Castle Brands Inc. and subsidiaries as of March 31, 2007 and 2006,
and the consolidated results of their operations and their consolidated cash ﬂows for each of the years
in the three-year period ended March 31, 2007 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related consolidated ﬁnancial
statement schedule, when considered in relation to the basic ﬁnancial statements taken as a whole,
present fairly in all material respects the information set forth therein.

As discussed in Note 1[R] to the consolidated ﬁnancial statements, effective April 1, 2006, the
Company changed its method of accounting for stock-based compensation in accordance with
Statement of Financial Accounting Standards No. 123(R), ‘‘Share-Based Payment’’.

/s/ EISNER LLP

Eisner LLP

New York, New York
June 27, 2007

50

CASTLE BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS
CURRENT ASSETS

Cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable – net of allowance for doubtful accounts of $352,458 and

$395,207. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from afﬁliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EQUIPMENT – net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER ASSETS

Intangible assets – net of accumulated amortization of $2,233,808 and

$1,379,389 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred registration costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
CURRENT LIABILITIES

Current maturities of notes payable and capital leases . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses, put warrant payable and derivative instrument . . . . . . . . . . .
Due to stockholders and afﬁliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible stockholder notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholder notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

LONG TERM LIABILITIES

Senior notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable and capital leases, less current maturities. . . . . . . . . . . . . . . . . . .
Preferred stock and preferred membership units dividends payable . . . . . . . . . .
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

REDEEMABLE CONVERTIBLE PREFERRED STOCK

Redeemable convertible preferred stock Series A, B, C; 4,103,750 shares

designated; issued and outstanding 0 and 4,089,463 shares at March 31, 2007
and 2006, respectively, liquidation preference of $33,326,484. . . . . . . . . . . . . .

COMMITMENTS AND CONTINGENCIES (Note 16)
MINORITY INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
STOCKHOLDERS’ EQUITY (DEFICIENCY)

Preferred stock, $.01 par value, 5,000,000 shares authorized, none outstanding
Common stock, $.01 par value, 45,000,000 shares authorized, 12,109,741 and

3,106,666 shares issued and outstanding at March 31, 2007 and 2006,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deﬁciency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive (loss)/income . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL STOCKHOLDERS’ EQUITY (DEFICIENCY) . . . . . . . . . . . . . . . . .
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY) . .

March 31,

2007

2006

$ 1,004,957
5,912,464

$ 1,392,016
—

6,503,449
10,328
10,716,983
1,585,901
25,734,082
643,753

3,511,215
953,616
6,673,235
1,021,369
13,551,451
407,983

13,813,596
13,036,650
—
502,643
795,237
$ 54,525,961

13,936,427
11,649,430
2,823,594
362,293
913,032
$ 43,644,210

$

419,308
5,150,535
1,987,669
1,092,755
—
—
8,650,267

9,354,861
9,005,207
—
2,555,368
29,565,703

$ 3,678,547
3,757,515
2,986,188
2,121,334
1,660,148
147,113
14,350,845

4,594,791
15,350,640
1,546,480
2,703,515
38,546,271

—

28,447,683

1,407,645

2,674,731

121,098
84,086,710
(59,962,237)
(692,958)
23,552,613
$ 54,525,961

31,067
17,182,405
(43,404,887)
166,940
(26,024,475)
$ 43,644,210

See accompanying notes to the consolidated ﬁnancial statements.

51

CASTLE BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended March 31,

2007

2006

2005

Sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 25,164,038
16,779,694

$ 21,149,635
13,655,772

$ 12,617,863
8,744,859

Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,384,344

7,493,863

3,873,004

Selling expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16,766,119
8,646,147
1,000,888

13,047,580
5,492,925
907,409

11,568,997
3,636,626
323,485

Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(18,028,810)

(11,954,051)

(11,656,104)

Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange gain/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of deferred ﬁnancing costs in connection with

conversion of 6% subordinated convertible notes . . . . . . . . . . . .
Current credit/(charge) on derivative ﬁnancial instrument . . . . . . .
Income tax beneﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,040
(46,831)
1,360,500
(1,085,035)

(295,368)
117,921
148,147
1,267,086

4,279
(37,099)
(337,990)
(1,579,283)

—
15,828
148,151
655,946

123,601
(45,346)
120,500
(998,096)

—
(76,825)
—
4,721

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock and preferred membership unit dividends . . . . . . .

(16,557,350)
48,238

(13,084,219)
1,596,027

(12,527,549)
1,252,118

Net loss attributable to common stockholders. . . . . . . . . . . . . . . . .

$(16,605,588)

$(14,680,246)

$(13,779,667)

Net loss attributable to common stockholders per common share

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

(1.40)

(1.40)

$

$

(4.73)

(4.73)

$

$

(4.44)

(4.44)

Weighted average shares used in computation

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,898,313

3,106,666

3,106,666

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,898,313

3,106,666

3,106,666

See accompanying notes to the consolidated ﬁnancial statements.

52

CASTLE BRANDS INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (Deﬁciency)

BALANCE, MARCH 31, 2004 . . . . . . . . . . . . .

3,106,666

31,067

$18,732,301 $(17,793,119)

$ (41,946)

$

928,303

Common Stock

Shares

Amount

Additional
Paid in
Capital

Accumulated
Deﬁciency

Accumulated
Other
Comprehensive
Income/(Loss)

Total
Stockholders’
Equity
(Deﬁciency)

Comprehensive loss

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . .

Total comprehensive loss. . . . . . . . . . . . . . . . . .

Warrants issued in connection with senior notes .
Imputed interest on note payable in connection

with acquisition of intangible assets. . . . . . . . .

Estimated fair value ascribed to warrants issued

in connection with redeemable preferred stock.
Acquisition of minority interests . . . . . . . . . . . .
Increasing rate dividend on Series C preferred

stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued preferred stock dividends . . . . . . . . . . .

(12,527,549)

(152,627)

(12,527,549)
(152,627)

(12,680,176)

129,195

126,152

164,144
(2,065)

297,264
(1,087,974)

129,195

126,152

164,144
(2,065)

297,264
(1,087,974)

BALANCE, MARCH 31, 2005 . . . . . . . . . . . . .

3,106,666

31,067

18,359,017

(30,320,668)

(194,573)

(12,125,157)

Comprehensive loss

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . .

Total comprehensive loss. . . . . . . . . . . . . . . . . .

Vesting of stock options as consultancy expense. .
Estimated fair value ascribed to warrants issued

in connection with distribution agreement . . . .

Estimated fair value ascribed to warrants issued

in connection with redeemable preferred stock.

Increasing rate dividend on Series C preferred

Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued preferred stock dividends . . . . . . . . . . .

(13,084,219)

361,513

(13,084,219)
361,513

(12,722,706)

53,440

220,000

43,815

38,344
(1,532,211)

53,440

220,000

43,815

38,344
(1,532,211)

BALANCE, MARCH 31, 2006 . . . . . . . . . . . . .

3,106,666

$31,067

$17,182,405 $(43,404,887)

$ 166,940

$(26,024,475)

(16,557,350)

(859,898)

Comprehensive loss

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . .

Total comprehensive loss. . . . . . . . . . . . . . . . . .

Accrued preferred stock dividends . . . . . . . . . . .
Issuance of common stock in initial public

offering, net of issuance costs . . . . . . . . . . . . .

Conversion of redeemable convertible preferred

stock, net of fractional shares . . . . . . . . . . . . .
Issuance of common stock in payment of accrued
dividends . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conversion of 5% euro denominated convertible
subordinated notes . . . . . . . . . . . . . . . . . . . .

Conversion of 40% of 6% convertible

(48,238)

3,500,000

35,000

26,393,889

4,089,463

40,895

28,406,772

193,107

1,931

1,387,834

263,362

2,634

1,660,539

subordinated notes . . . . . . . . . . . . . . . . . . . .

857,143

8,571

5,991,429

Issuance of common stock in connection with

acquisition of McLain & Kyne, Ltd. . . . . . . . .
Vesting of stock options as consultancy expense. .
Estimated fair value ascribed to warrants issued

to ﬁnancial consultant . . . . . . . . . . . . . . . . . .

Estimated fair value ascribed to warrants issued

in connection with issuance of senior notes . . .
Stock-based compensation. . . . . . . . . . . . . . . . .

100,000

1,000

704,200
29,032

283,727

706,944
1,388,177

(16,557,350)
(859,898)

(17,417,248)

(48,238)

26,428,889

28,447,667

1,389,765

1,663,173

6,000,000

705,200
29,032

283,727

706,944
1,388,177

BALANCE, MARCH 31, 2007 . . . . . . . . . . . . . 12,109,741 $121,098 $84,086,710 $(59,962,237)

$(692,958)

$ 23,552,613

See accompanying notes to the consolidated ﬁnancial statements.

53

CASTLE BRANDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net loss to net cash used in

operating activities

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .
Minority interest in net loss of consolidated subsidiary. .
Loss on disposal of ﬁxed assets . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred ﬁnancing costs . . . . . . . . . . . . . .
Current (credit)/charge on derivative ﬁnancial

instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax beneﬁt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of changes in foreign exchange . . . . . . . . . . . . . . . .
Stock-based compensation expense. . . . . . . . . . . . . . . . . . .
Non-cash interest charge . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of deferred ﬁnancing costs in connection with
conversion of 6% subordinated convertible notes . . . .

Changes in operations, assets and liabilities

Increase in accounts receivable . . . . . . . . . . . . . . . . . . . .
(Decrease)/increase in due from afﬁliates . . . . . . . . . . .
Increase in inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in prepaid expenses and supplies. . . . . . . . . . .
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accounts payable and accrued expenses . .
(Decrease)/increase in due to related parties . . . . . . . .

Years Ended March 31,
2006

2005

2007

$(16,557,350) $(13,084,219) $(12,527,549)

1,000,888
(1,267,086)
—
390,756

(117,921)
(148,147)
(1,115,522)
1,388,178
283,727

907,409
(655,946)
1,184
470,848

(15,828)
(148,151)
290,435
—
—

323,485
(4,721)
8,316
387,698

76,825
—
118,476
—
—

295,368

—

—

(2,792,260)
944,254
(3,764,136)
(550,933)
(359,051)
1,823,622
(1,082,907)

(24,046)
(599,400)
(1,459,956)
(704,739)
(355,744)
572,970
536,249

(1,775,404)
(355,161)
(1,569,612)
51,615
(878,568)
1,572,920
1,241,179

Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5,071,170)

(1,184,715)

(802,952)

NET CASH USED IN OPERATING ACTIVITIES . . . . .

(21,628,520)

(14,268,934)

(13,330,501)

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment . . . . . . . . . . . . . . . . .
Acquisition of intangible assets . . . . . . . . . . . . . . . . . . . . . . . .
Business acquisitions – net of cash acquired . . . . . . . . . . . . .
Short-term investments purchased . . . . . . . . . . . . . . . . . . . . .
Short-term investments – sales. . . . . . . . . . . . . . . . . . . . . . . . .

(359,432)
(133,816)
(1,282,021)
(25,000,000)
19,087,536

NET CASH USED IN INVESTING ACTIVITIES . . . . . .

(7,687,733)

(197,315)
(194,874)
(13,379)
—
—

(405,568)

(165,725)
(25,988)
(406,116)
—
—

(597,829)

CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from notes payable and warrants . . . . . . . . . . . . . .
Payments of obligations under capital leases . . . . . . . . . . . .
Increase in restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of redeemable convertible preferred stock and

warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for costs of stock issuances . . . . . . . . . . . . . . . . . . .
Dividends paid on preferred membership shares . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for costs of stock issuance. . . . . . . . . . . . . . . . . . . .

(25,421,773)
26,909,459
(3,504)
(98,548)

(24,256,571)
33,318,866
(3,603)
—

(6,694,880)
16,421,697
(1,823)
(377,828)

—
—
(204,952)
31,500,000
(3,751,537)

2,900,000
(247,466)
—
—
(1,319,574)

7,500,000
(705,522)
—
—
—

54

Years Ended March 31,
2006

2005

2007

NET CASH PROVIDED BY FINANCING

ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28,929,145

10,391,652

16,141,644

EFFECTS OF FOREIGN CURRENCY

TRANSLATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS – BEGINNING . . .

49

(1,532)

1,643

(387,059)
1,392,016

(4,282,850)
5,676,398

2,213,314
3,461,441

CASH AND CASH EQUIVALENTS – ENDING. . . . . . .

$ 1,004,957

$ 1,392,016

$ 5,676,398

SUPPLEMENTAL DISCLOSURES
Schedule of non-cash investing and ﬁnancing activities

Acquisition of intangible assets . . . . . . . . . . . . . . . . . . . . . .
Note payable – intangible assets . . . . . . . . . . . . . . . . . . . . .
Value ascribed to minority interests . . . . . . . . . . . . . . . . . .
Value ascribed to deferred tax liability on intangible

assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of property and equipment . . . . . . . . . . . . . . .
Increase in capital leases payable . . . . . . . . . . . . . . . . . . . .
Reduction in cost of business acquisition. . . . . . . . . . . . . .
Surrender of redeemable convertible preferred . . . . . . . .
Senior notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of put warrants issued in connection with

$
$
$

— $
— $
— $

$
$
$
$
$
$ (706,944)

— $
— $
— $
— $
— $
$

senior notes – net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

706,944

Conversion of redeemable convertible preferred stock,

net of fractional shares, by issuance of common
stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issuance of common stock in payment of accrued

$28,447,667

dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,389,765

Conversion of 5% euro denominated convertible

subordinated notes by issuance of common stock . . . .

$ 1,663,173

Conversion of 40% of 6% convertible subordinated

notes by issuance of common stock . . . . . . . . . . . . . . . .

$ 6,000,000

$

$

$

$

$

$

McLain & Kyne acquisition-net of cash acquired, by

issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . .
Increase in deferred registration costs . . . . . . . . . . . . . . . .
Increase in accounts payable, accrued expenses, put

warrant payable and derivative instrument . . . . . . . . . .
Increase in intangible assets . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value ascribed to warrants issued in

$
$

$
$

705,200

— $ (1,047,477)

— $ 1,047,477
— $ (220,000)

connection with distribution agreement . . . . . . . . . . . . .
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$ 1,090,962

— $

220,000
$ 1,178,166

See accompanying notes to the consolidated ﬁnancial statements.

55

— $ (8,051,555)
— $ 2,500,000
— $ 3,329,333

— $ 2,222,222
(17,821)
— $
— $
17,821
— $ (120,000)
120,000
— $
— $ (129,194)

— $

129,194

— $

— $

— $

— $

— $
$

$
$

$
$

—

—

—

—

—
—

—
—

—
343,236

CASTLE BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements March 31, 2007

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Description of business and business combination – Castle Brands Inc. is the successor to
Great Spirits Company, LLC, a Delaware limited liability company (‘‘GSC’’). GSC was
formed in February 1998. In May 2003, Great Spirits (Ireland) Limited (‘‘GSI’’), a wholly
owned subsidiary of GSC, began operations in Ireland to market GSC’s products
internationally. GSI has been an inactive entity since December 2003 and was dissolved as of
September 30, 2006. In July 2003, GSRWB, Inc. (renamed Castle Brands Inc.) and its wholly
owned subsidiary, Great Spirits Corp. (renamed Castle Brands (USA) Corp.) (‘‘CB-USA’’),
were formed under the laws of Delaware in contemplation of a pending acquisition. On
December 1, 2003, Castle Brands Inc. acquired The Roaring Water Bay Spirits Group
Limited and The Roaring Water Bay Spirits Marketing and Sales Company Limited and their
related entities (collectively, ‘‘Roaring Water Bay’’). The acquisition has been accounted for
under purchase accounting. Simultaneously, GSC was merged into CB-USA, and Castle
Brands Inc. issued stock to GSC’s members in exchange for their membership interests in
GSC. Subsequent to the acquisition, The Roaring Water Bay Spirits Group Limited was
renamed Castle Brands Spirits Group Limited (‘‘CB Ireland’’) and The Roaring Water Bay
Spirits Marketing and Sales Company Limited was renamed Castle Brands Spirits Marketing
and Sales Company Limited (‘‘CB-UK’’).

In February 2005, Castle Brands Inc. acquired 60% of the shares of Gosling-Castle Partners
Inc. (‘‘GCP’’), which holds the worldwide distribution rights (excluding Bermuda) to
Gosling’s rum and related products.

In October 2006, Castle Brands Inc. acquired all of the outstanding capital stock of McLain
& Kyne, Ltd. (‘‘McLain & Kyne’’), pursuant to a Stock Purchase Agreement. McLain &
Kyne is a Louisville, Kentucky based developer and marketer of three premium small batch
bourbons: Jefferson’s Reserve, Jefferson’s and Sam Houston.

As used herein, the ‘‘Company’’ refers to Castle Brands Inc. and, where appropriate, it also
refers collectively to Castle Brands Inc. and its direct and indirect subsidiaries, including its
majority owned GCP subsidiary.

B. Organization and Operations – The Company is principally engaged in the manufacture,

marketing and sale of ﬁne spirit brands of vodka, Irish whiskey, rums and liqueurs (the
‘‘products’’) in the United States, Canada, Europe, and the Caribbean.

C. Brands – Vodka – Boru vodka, is an ultra-pure, quadruple distilled and specially ﬁltered

premium vodka. Boru is produced in Ireland and has three ﬂavor extensions (citrus, orange
and Crazzberry).

Rum – Gosling’s rums, a family of premium rums with a 150-year history, for which the
Company is, through its export venture GCP, the exclusive marketer outside of Bermuda,
including the award-winning Gosling’s Black Seal rum; and Sea Wynde, a premium rum
developed and introduced by the Company in 2001.

Whiskey – Knappogue Castle Whiskey, a vintage-dated premium single-malt Irish whiskey;
Knappogue Castle 1951, a pure pot-still whiskey that has been aged for 36 years; and the
Clontarf Irish whiskeys, a family of premium Irish whiskeys, available in single malt, reserve
and classic pure grain versions; three premium small batch bourbons: Jefferson’s Reserve,
Jefferson’s and Sam Houston.

Liqueurs – Brady’s Irish cream, a premium Irish cream liqueur; Celtic Crossing, a premium
Irish liqueur; and, pursuant to an exclusive U.S. marketing arrangement, Pallini Limoncello,
Raspicello and Peachello premium Italian liqueurs.

56

D. Basis of presentation – The consolidated ﬁnancial statements include the accounts of Castle

Brands Inc., its wholly-owned subsidiaries, CB-USA and McLain and Kyne, and its
wholly-owned foreign subsidiaries, CB Ireland and CB-UK, and its majority owned
Gosling-Castle Partners, Inc. with adjustments for income or loss allocated based upon
percentage of ownership. The accounts of the subsidiaries have been included as of the date
of acquisition. All signiﬁcant intercompany transactions and balances have been eliminated.

E. Cash equivalents – The Company considers all highly liquid instruments with a maturity at

date at acquisition of three-months or less to be cash equivalents.

F.

Investments – The Company follows Statement of Financial Accounting Standards (‘‘SFAS’’)
No. 115, Accounting for Certain Investments in Debt and Equity Securities, classifying its
investments based on the intended holding period. The Company currently classiﬁes its
investments as available-for-sale. Available-for-sale securities are carried at estimated fair
value, based on available market information, with unrealized gains and losses, if any,
reported as a component of stockholders’ equity. Investments consist primarily of auction rate
corporate debt, auction rate municipal securities, government bonds, mutual funds and
corporate securities that are highly liquid in nature and represent the investment of cash that
is available for current operations. Although original maturities of the Companies auction
rate securities are generally longer than one year, the Company has the right to sell these
securities each auction date subject to the availability of buyers. Interest rates on these
securities reset at every auction date, generally every twenty eight days.

G. Trade accounts receivable – The Company records trade accounts receivable at net realizable
value. This value includes an appropriate allowance for estimated uncollectible accounts to
reﬂect anticipated losses on the trade accounts receivable balances. The Company calculates
this allowance based on its history of write-offs, level of past due accounts based on
contractual terms of the receivables and its relationships with and economic status of the
Company’s customers.

H. Revenue recognition – Revenue from product sales is recognized when the product is shipped
to a customer (generally a distributor), title and risk of loss has passed to the customer in
accordance with the terms of sale (FOB shipping point or FOB destination), and collection is
reasonably assured. Revenue is not recognized on shipments to control states in the United
States until such time as product is sold through to the retail channel.

I.

Inventories – Inventories, which comprise distilled spirits, raw materials (bulk spirits, bottles,
labels and caps), packaging and ﬁnished goods, are valued at the lower of cost or market,
using the weighted average cost method. The Company assesses the valuation of its
inventories and reduces the carrying value of those inventories that are obsolete or in excess
of the Company’s forecasted usage to their estimated net realizable value. The Company
estimates the net realizable value of such inventories based on analyses and assumptions
including, but not limited to, historical usage, expected future demand and market
requirements. Reductions to the carrying value of inventories are recorded in cost of goods
sold.

J. Equipment – Equipment consists of ofﬁce equipment, computers and software and furniture

and ﬁxtures. When assets are retired or otherwise disposed of, the cost and related
depreciation is removed from the accounts, and any resulting gain or loss is recognized in the
statement of operations. Equipment is depreciated using the straight-line method over the
estimated useful lives of the assets ranging from three to ﬁve years.

K. Goodwill and other intangible assets – Goodwill represents the excess of purchase price

including related costs over the value assigned to the net tangible and identiﬁable intangible
assets of businesses acquired. As of March 31, 2007 and 2006, goodwill and other indeﬁnite
lived intangible assets that arose from acquisitions were $13.6 million and $11.6 million,
respectively. Goodwill and other intangible assets with indeﬁnite lives are not amortized, but
instead are tested for impairment annually, or more frequently if circumstances indicate a

57

possible impairment may exist. Intangible assets with estimable useful lives are amortized
over their respective estimated useful lives to the estimated residual values and reviewed for
impairment whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. The Company performed its annual impairment assessment on long-lived
assets, including intangible assets and goodwill. The Company concluded that there was no
impairment during the years ended March 31, 2007, 2006 and 2005.

L. Shipping and handling – The Company reﬂects as inventory costs freight-in and related

external handling charges relating to the purchase of raw materials and ﬁnished goods. These
costs are charged to cost of sales at the time the underlying product is sold. The Company
also incurs shipping costs in connection with its various marketing activities, including the
shipment of point of sale materials to the Company’s regional sales managers and customers,
and the costs of shipping product in connection with its various marketing programs and
promotions. These shipping charges are included in selling expense. Shipping charges included
in selling expense amounted to $210,256, $398,202 and $280,000 for the years ended
March 31, 2007, 2006 and 2005, respectively.

M. 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 Great Britain 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. During the years ended
March 31, 2007, 2006 and 2005, the line items for the Company’s revenues and cost of sales
included the amounts of excise tax and duties presented in the table below:

Year ended March 31,
2006

2005

2007

Sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of Sales . . . . . . . . . . . . . . . . . . . . . . . . . . .

$6,095,939
$6,095,939

$3,776,049
$3,776,049

$1,913,450
$1,913,450

N. Distributor charges and promotional goods – The Company incurs charges from its

distributors for a variety of transactions and services rendered by the distributor, including
product depletions, product samples for various promotional purposes, in-store tastings and
training where legal, and local advertising where legal. Such charges are reﬂected as selling
expense as incurred. In addition, for certain of its distributors, the Company has entered into
arrangements whereby the purchase of a particular product or products by a distributor is
accompanied by a percentage of the sale being composed of promotional goods or as a
predetermined discount percentage of dollars off invoice. In such cases, the cost of the
promotional goods is charged to cost of sales and dollars off invoice are a reduction to
revenue.

O. Foreign currency translation – The functional currency for the Company’s foreign operations
is the euro in Europe, excluding the United Kingdom, the British pound in the United
Kingdom, and the Canadian dollar in Canada. The translation from the applicable foreign
currencies to U.S. dollars is performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during the period. The resulting translation adjustments are
recorded as a component of other comprehensive income. Gains or losses resulting from
foreign currency transactions are shown as a separate line item in accompanying consolidated
statements of operations.

P. Fair Value of Financial Instruments – SFAS No. 107, ‘‘Disclosures About Fair Value of

Financial Instruments,’’ 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

58

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 balance sheets due to the short term maturity of these
instruments, or with respect to the debt, as compared to the current borrowing rates available
to the Company.

Q. Income Taxes – Under the asset and liability method of SFAS No. 109 ‘‘Accounting for
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.

R. Stock-based compensation – Effective April 1, 2006, the Company began recording

compensation expense associated with stock options and other forms of equity compensation
in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123R), as interpreted by SEC Staff Accounting Bulletin No. 107.
See Note 14.

S. Research and Development Costs – The costs of research, development and product
improvement are charged to expense as incurred and are included in selling expense.

T. Advertising – Advertising costs are expensed when the advertising ﬁrst appears in its

respective medium. Advertising expense, which is included in selling expense, was $4,187,542,
$3,281,348 and $4,032,061 for the years ended March 31, 2007, 2006 and 2005, respectively.

U. Impairment of Long-Lived Assets – The Company periodically reviews whether changes have
occurred that would require revisions to the carrying amounts of its long-lived assets. When
the sum of the expected future cash ﬂows is less than the carrying amount of the asset, an
impairment loss is recognized based on the fair value of the asset. The Company concluded
that there was no impairment during the years ended March 31, 2007, 2006 and 2005.

V. Use of estimates – The preparation of ﬁnancial statements in conformity with accounting

principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the ﬁnancial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Estimates include the accounting for items such as evaluating
annual impairment tests, fair value of put warrants, derivative instruments and other equity
issuances, allowance for doubtful accounts, depreciation, amortization and expense accruals.

W. Recent accounting pronouncements – In March 2006, the FASB issued SFAS No. 156,

‘‘Accounting for Servicing of Financial Assets’’. This standard is required to be adopted as of
the ﬁrst ﬁscal year beginning after September 15, 2006. The Company determined that SFAS
No. 156 did not have a material impact on its ﬁnancial position or results of operations.

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, ‘‘Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement
No. 109’’ (‘‘FIN 48’’), which clariﬁes the accounting and disclosure for uncertainty in tax
positions, as deﬁned. FIN 48 seeks to reduce the diversity in practice associated with certain
aspects of the recognition and measurement related to accounting for income taxes. This
interpretation will apply to the Company’s ﬁscal year beginning April 1, 2007. The Company
does not expect the interpretation will have a material impact on its results from operations
or ﬁnancial position.

In September 2006, the Securities and Exchange Commission (‘‘SEC’’) issued Staff
Accounting Bulletin 108, ‘‘Considering the Effects on Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements,’’ (‘‘SAB 108’’). SAB 108
requires registrants to quantify errors using both the income statement method (i.e. iron
curtain method) and the rollover method and requires adjustment if either method indicates

59

a material error. If a correction in the current year relating to prior year errors is material to
the current year, then the prior year ﬁnancial information needs to be corrected. A correction
to the prior year results that are not material to those years would not require a
‘‘restatement process’’ where prior ﬁnancials would be amended. SAB 108 is effective for
ﬁscal years ending after November 15, 2006. The Company determined that SAB 108 did not
have a material effect on its ﬁnancial position, results of operations or cash ﬂows.

In September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value Measurements,’’ to deﬁne
fair value, establish a framework for measuring fair value in accordance with generally
accepted accounting principles, and expand disclosures about fair value measurements.
SFAS No. 157 is effective for ﬁscal years beginning after November 15, 2007, the beginning
of the Company’s 2008 ﬁscal year. The Company is assessing the impact the adoption of
SFAS No. 157 will have on the Company’s ﬁnancial position and results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 159, ‘‘The Fair Value Option for Financial Assets and Financial Liabilities’’
(SFAS 159), which allows an entity the irrevocable option to elect fair value for the initial
and subsequent measurement for certain ﬁnancial assets and liabilities on a
contract-by-contract basis. Subsequent changes in fair value of these ﬁnancial assets and
liabilities would be recognized in earnings when they occur. SFAS 159 further establishes
certain additional disclosure requirements. SFAS 159 is effective for ﬁscal years beginning
after November 15, 2007, with earlier adoption permitted. Management is currently
evaluating the impact and timing of the adoption of SFAS 159 on the Company’s
consolidated ﬁnancial statements.

X. Reclassiﬁcations – Certain prior year balances have been reclassiﬁed to conform to the

current year presentation.

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, contingent conversion of debentures and convertible preferred stock
outstanding. In computing diluted net loss per share for the years ended March 31, 2007, 2006 and
2005, 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 preferred stock
and convertible debentures is anti-dilutive.

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

Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible preferred stock. . . . . . . . . . . . . . . . . . . . . . . .

2007

March 31,
2006

1,294,125
812,218
1,125,000

888,500
598,618
2,245,505
— 4,089,463

2005

745,500
390,493
888,375
3,741,965

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,231,343

7,822,086

5,766,333

60

NOTE 3 — INVESTMENTS

The following is a summary of available-for-sale securities:

Adjusted Cost

Gross
Unrealized
Gain/(Loss)

March 31, 2006
Mutual funds . . . . . . . . . . . . . . . . . . . . . .
Auction rate municipal securities . . . .
Auction rate corporate debt . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,912,464
2,000,000
1,000,000
1,000,000

5,912,464

—
—
—
—

—

Estimated
Fair Value

1,912,464
2,000,000
1,000,000
1,000,000

5,912,464

NOTE 4 — INVENTORIES

Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,501,455
9,215,528

$1,339,697
5,333,538

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,716,983

$6,673,235

March 31,

2007

2006

As of March 31, 2007 and 2006, 99% and 100%, respectively of the raw materials and 13.0% and

23.5%, respectively, of ﬁnished goods were located outside of the United States.

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

NOTE 5 — INVESTMENTS AND ACQUISITIONS

Acquisition of McLain & Kyne, Ltd.

On October 12, 2006, the Company acquired all of the outstanding capital stock of McLain &
Kyne, Ltd., pursuant to a Stock Purchase Agreement (the ‘‘Agreement’’). McLain & Kyne is a
Louisville, Kentucky-based developer and marketer of three premium small batch bourbons:
Jefferson’s Reserve, Jefferson’s and Sam Houston. As consideration for the acquisition, the
Company has paid $2,000,000, consisting of $1,294,800 in cash and issued 100,000 shares of its
common stock, valued at $705,200. The Company will also pay an earn-out to the sellers based on
the ﬁnancial performance of the acquired business. The aggregate amount of such earn-out
payments, which shall not exceed $4,000,000, will be determined by a calculation based on the
gross margin (as deﬁned in the Agreement) recognized by the Company from the sales of McLain
& Kyne’s bourbons through March 31, 2011. As a result of the initial purchase price allocation,
the Company recorded goodwill of $1,387,220. 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 liabilities assumed and may be revised as additional information becomes available.
The preliminary fair values allocated to McLain & Kyne’s net tangible and intangible assets are as
follows: current assets of $100,021, inventory of $53,866, intangible assets of $600,000 and current
liabilities of $32,692. 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 McLain & Kyne
business are reﬂected in the accompanying consolidated ﬁnancial statements from the date of
acquisition and were not material.

The Agreement also provides for, among other things, representations, warranties, indemnities
and ‘‘piggyback’’ registration rights for the shares issued.

The following table presents unaudited pro forma information about sales and net loss had the
operations of the above described acquisition been combined with the Company’s business as of
the ﬁrst day of the period shown. This information has not been adjusted to reﬂect any changes in

61

the operations of McLain & Kyne subsequent to its acquisition by the Company. Changes in
operations of the acquired business includes, but are not limited to, discontinuation of products
changes in trade practices, application of the Company’s credit policies, changes in manufacturing
processes or locations, changes in marketing and advertising programs and integration of systems
and personnel. Had any of these changes been implemented by the former management of the
business acquired prior to acquisition by the Company, the sales and net income information
might have been materially different than the actual results achieved and from the pro forma
information provided below.

For the Years Ended March 31,
2006

2005

2007

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 25,621,644

$ 21,510,515

$ 13,040,270

Operating loss. . . . . . . . . . . . . . . . . . . . . . . . . .

$(17,970,822)

$(11,952,586)

$(11,690,367)

Net loss attributable to common stock

holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(16,547,600)

$(14,678,781)

$(13,813,930)

Net loss attributable to common stock

holders per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted average shares:

$

$

(1.39)

(1.39)

$

$

(1.23)

(1.23)

$

$

(1.16)

(1.16)

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,898,313

11,898,313

11,898,313

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,898,313

11,898,313

11,898,313

In management’s opinion, the unaudited pro forma results of operations are not indicative of the
actual results that would have occurred had the above acquisitions been consummated at the
beginning of the periods presented or of future operations of the combined companies under our
management.

Investment in Gosling-Castle Partners Inc.

In February 2005, the Company entered into a stock subscription agreement for 60% of the stock
of Gosling Partners, Inc., whose name was subsequently changed to Gosling-Castle Partners Inc.

The Company agreed to pay GCP $5,000,000 for its 60% interest: $100,000 in cash and issuance of
a promissory note of $4,900,000 to GCP for the balance owed. The promissory note was payable
in ﬁve installments with one remaining payment of $750,000 due April 1, 2007.

Effective with the payment of the second installment on October 1, 2005, this promissory note
began accruing interest on the unpaid principal amount at the rate of 4% per annum until the
note is repaid in full. As of March 31, 2007 and 2006, $105,000 and $55,000, respectively, in
interest on this note has been accrued and remains unpaid.

The global distribution agreement commenced on April 1, 2005 and has a 15 year term. It is
renewable for additional 15 year terms as long as GCP meets certain case sale targets during the
initial term as set forth in the agreement. (See Note 18 – Gosling-Castle Partners Inc. Export
Agreement with Gosling’s Export (Bermuda) Limited). The Company ascribed the entire
purchase of $5,000,000 to the Gosling global distribution agreement described above. In
conjunction with this transaction the Company recorded a deferred tax liability of $2,222,222 to
reﬂect the difference between the adjusted book value and tax basis. This deferred tax liability
was recorded as an increase to the value of the distribution agreement and is included in
intangible assets.

Castle Brands Inc. has agreed to fund certain operating losses of GCP. The balance funded at
March 31, 2007 is approximately $2,800,000.

62

NOTE 6 — EQUIPMENT

Equipment consists of the following:

Equipment and software . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and ﬁxtures. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . .

Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . .

March 31,

2007

$1,248,871
45,898
—

1,294,769
651,016

2006

$827,628
32,478
4,733

864,839
456,856

$ 643,753

$407,983

Depreciation expense for the years ended March 31, 2007, 2006 and 2005 totaled $162,625,

$125,014, and $81,724 respectively.

NOTE 7 — GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the years ended March 31, 2007, 2006 and

2005 were as follows:

Balance as of March 31, 2005 . . . . . . . . . . . .
Acquisition of minority interests . . . . . . . . . .

Balance as of March 31, 2006 . . . . . . . . . . . .
Acquisition of McLain & Kyne, Ltd . . . . . .

Amount

$11,636,051
13,379

11,649,430
1,387,220

Balance as of March 31, 2007 . . . . . . . . . . . .

$13,036,650

Intangible assets consist of the following:

March 31,

2007

2006

Deﬁnite life brands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution relationship . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

308,909
408,222
9,036,793
825,000
416,000
732,000
28,480

$

194,159
341,604
9,036,793
825,000
416,000
732,000
78,260

Less: accumulated amortization . . . . . . . . . . . . . . . . . . . .

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other identiﬁable intangible assets – indeﬁnite life

11,755,404
2,233,808

11,623,816
1,379,389

9,521,596

10,244,427

Trade names and formulations . . . . . . . . . . . . . . . . . . .

4,292,000

3,692,000

$13,813,596

$13,936,427

63

Accumulated amortization consists of the following:

March 31,

2007

2006

Brands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution relationship . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 230,992
25,790
1,220,093
183,333
329,600
244,000

$ 101,902
116,071
668,150
128,333
194,133
170,800

Accumulated amortization. . . . . . . . . . . . . . . . . . . . . . . . .

$2,233,808

$1,379,389

Amortization expense for the years ended March 31, 2007, 2006 and 2005 totaled $838,263,

$782,395 and $241,761, respectively.

On September 1, 2006, the Company delivered notice to Comans Wholesale Limited that it was

terminating its distribution agreement. As a result of the delivery of the notice, the distribution
agreement will terminate, as provided for by its terms, as of September 15, 2007. The Company has
adjusted the estimated useful life of the underlying intangible asset to agree to the termination date.
The change in estimated useful life resulted in an additional $52,300 in amortization expense for the
year ended March 31, 2007.

Estimated aggregate amortization expense for each of the ﬁve succeeding ﬁscal years is as follows:

For the years ending March 31,

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount

$ 789,326
760,106
704,639
704,639
704,639

$3,663,349

NOTE 8 — RESTRICTED CASH

In connection with the credit facilities as described in Note 10, personal guarantees of the two
former managing directors of CB Ireland and CB-UK in the amount of u158,717 were cancelled and
replaced with a deposit of cash collateral of u300,000, or $400,050 (as translated at the exchange rate
in effect on March 31, 2007). For purposes of increasing the Company’s creditors insurance in Ireland,
this deposit of cash collateral has subsequently been increased to u376,935, or $502,643 (as translated
at the exchange rate in effect on March 31, 2007).

NOTE 9 — OVERDRAFT ACCOUNTS

CB Ireland and CB-UK maintain overdraft coverage with a ﬁnancial institution in Ireland of up

to u400,000 ($533,400) and £20,000 ($39,250), respectively. Overdraft balances included in notes
payable totaled $380,334 and $98,327 at March 31, 2007 and 2006, respectively.

64

NOTE 10 — SENIOR NOTES PAYABLE, NOTES PAYABLE AND CAPITAL LEASE

Notes payable consist of the following:

Revolving credit facilities(A) . . . . . . . . . . . . . . . . . . . . .
Revolving credit facilities(B) . . . . . . . . . . . . . . . . . . . . .
Subordinated notes(C). . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior notes(D). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated convertible notes(E) . . . . . . . . . . . . . . . .
Non-interest bearing notes(F) . . . . . . . . . . . . . . . . . . . .
9% Promissory note(G) . . . . . . . . . . . . . . . . . . . . . . . . . .

Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

March 31,

2007

2006

$

407,261
8,363
—
9,354,861
9,000,000
—
—

18,770,485
8,891

$

332,409
166,283
307,938
4,594,791
15,000,000
1,210,162
2,000,000

23,611,583
12,395

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$18,779,376

$23,623,978

(A) The Company has arranged revolving credit facilities aggregating approximately u1,412,303

($1,883,306) with a lender for working capital purposes. These facilities are payable on demand,
continue until terminated by either party on not less than three months prior written notice, and
call for interest at rates ranging from prime plus 3% to prime plus 7.85%. The Company also
maintains a u190,000 ($253,365) term note with the same lender. The note carries an interest rate
of 5.2%, is payable on demand and subject to annual review and renewal by the lender, and calls
for monthly payments of principal and interest of u6,377 through 2007.

(B) The Company has arranged revolving credit facilities aggregating approximately £242,000

($474,992). The facilities, which are payable on demand and subject to annual review and renewal
by the lender, call for interest at rates ranging from prime plus 2% to prime plus 2.25%.

(C) In connection with the Company’s acquisition of CB Ireland, the Company issued to the former

minority shareholders of CB Ireland u255,000 ($307,937) of subordinated notes, which were set to
mature on July 11, 2007. The notes accrued interest at the rate of 5.7% per annum with the
aggregate interest payable being limited to u51,000 ($61,588). All outstanding principal and
accrued interest on these notes in the amount of u290,328 ($350,600) were paid in April 2006.

(D) On June 9, September 28 and October 13, 2004, the Company issued $3,555,000, $1,005,000 and

$100,000, respectively, of senior notes secured by accounts receivable and inventories of CB-USA.
As issued, these senior notes bore an interest rate of 8%, payable semi-annually on November 30
and May 31, with an original maturity date of May 31, 2007. In addition, each holder of $1,000 of
senior notes received warrants to purchase 25 shares of the Company’s common shares at $8.00
per share, expiring May 31, 2009. There were 116,500 warrants issued in conjunction with the
issuance of the senior notes. These warrants have been valued at $129,195 in the aggregate and
have been treated as a discount to the notes payable. Effective August 15, 2005, the terms of
these notes were modiﬁed with the consent of the note holders to mature on May 31, 2009 in
exchange for an interest rate adjustment to 9%. Interest expense pertaining to the discount to the
notes payable is recognized, and the notes payable accreted, over the adjusted term of the notes.

On November 10, 2006, CB-USA issued to 11 individuals an aggregate of $5,340,000 of additional
senior notes secured by accounts receivable and inventories of CB-USA. These notes mature on
May 31, 2009 and bear interest at 9% payable semi-annually. In addition, each holder of senior
notes received warrants to purchase 40 shares of the Company’s common stock at $8.00 per share,
expiring May 31, 2009, for each $1,000 of principal purchased by such holder. There were 213,600
warrants issued in conjunction with the issuance of the additional senior notes. These warrants
have been valued at $706,944 in the aggregate and have been treated as a discount to the notes

65

payable. Interest expense pertaining to this discount is recognized, and the notes payable
accreted, over the term of the notes. The total assets securing these notes aggregated $12,108,958
at March 31, 2007.

(E) On March 1, 2005, the Company entered into an agreement to issue up to $10,000,000 of

subordinated convertible notes to a single investor. As of March 31, 2005, $5,000,000 of
convertible notes were issued. In June 2005, the Company issued the remaining $5,000,000 of
convertible notes. The notes, which mature on March 1, 2010, bear interest at the rate of 6% per
annum which is payable quarterly. The Company has the option for the ﬁrst two years from the
date of issuance to pay interest in kind at the rate of 7.5% per annum. Through March 31, 2007,
the Company has accrued and paid all interest in cash at the 6% percent rate pursuant to the
terms of the note and has the means and intent to continue to do so. The notes may be converted
into common stock at $8 per share at any time, and shall be converted at the option of the holder
or automatically after the third year from the date of issuance and upon the 30th consecutive
trading day on which the closing price of the common stock is no less than $20 per share. Upon
the completion of our initial public offering on April 10, 2006, 40% of the notes converted
automatically into common stock at a price of $7.00 per share.

In July 2005, the Company entered into an agreement with an investor to issue $5,000,000 of
subordinated convertible notes. The closing was completed in August 2005. The notes, which
mature on March 1, 2010, bear interest at the rate of 6% per annum. The Company has the
option for the ﬁrst two years from the date of issuance to pay interest in kind at the rate of
7.5% per annum. Through March 31, 2007, the Company has accrued and paid all interest in cash
at the 6% percent rate pursuant to the terms of the note and has the means and intent to
continue to do so. The notes may be converted into common stock at $8 per share at any time,
and shall be converted automatically after the third year from the date of issuance and upon the
30th consecutive trading day on which the closing price of the common stock is no less than
$20 per share. 40% of the notes converted automatically into common stock upon the completion
of our initial public offering on April 10, 2006, at a price of $7.00 per share.

In July 2005, the original $10,000,000 of convertible notes were amended to be equivalent in
terms to those of the new $5,000,000 investor. The automatic conversion of 40% of the combined
$15,000,000 of convertible notes at the $7.00 conversion price upon the closing of the initial public
offering resulted in the issuance of 107,143 more shares than would have been issued at the $8.00
conversion price.

(F) On February 14, 2005, the Company, through its interest in GCP, entered into an agreement with
Gosling’s Export (Bermuda) Limited (‘‘GXB’’) to acquire the global distribution rights (excluding
Bermuda) to GXB’s portfolio of products in exchange for $2,500,000 in non-interest bearing notes
due in four equal semi-annual installments. These notes have been paid in full as of March 31,
2007.

(G) On February 17, 2006, the Company entered into a $5 million credit agreement with an

investment trust which is a stockholder and controlled by one of the Company’s directors. On
February 17, 2006, the Company borrowed $2.0 million under this credit agreement and issued a
promissory note bearing interest at the rate of 9% per annum, payable at maturity. In addition,
the Company paid a $100,000 facility fee upon receipt of these funds. The Company repaid all
outstanding principal and accrued interest under this note in the amount of $2,026,000 in
April 2006.

The Company ﬁnanced the purchase of certain ofﬁce equipment totaling $17,821 included in
equipment. The lease calls for monthly payments of $337 in principal and interest at the rate of
5% per annum, to be paid through July 2009. As of March 31, 2007 and 2006, the Company owed
$8,891 and $12,395, respectively, under this lease. Future minimum lease payments equal $9,442
including interest.

66

Principal payments due over the next ﬁve years for the above listed notes payable and capital

lease are due as follows (as translated at the exchange rate in effect on March 31, 2007):

For the years ending March 31,

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . .

$

419,308
3,873
18,356,195

18,779,376
419,308

Non current portion. . . . . . . . . . . . . . . . . . . . .

$18,360,068

NOTE 11 — COMMON STOCK

On April 10, 2006, the Company completed its initial public offering by issuing 3,500,000 shares

of common stock at $9.00 per share.

Net proceeds to the Company after payment of issuance costs not already paid as of April 10,

2006 were $26,428,889, determined as follows:

Aggregate offering proceeds to the Company . . $31,500,000

Underwriting discounts and commissions . . . . . .
Other fees and expenses . . . . . . . . . . . . . . . . . . . .

2,205,000
2,866,111

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,071,111

Net proceeds to the company . . . . . . . . . . . . . . . . $26,428,889

Concurrently with the initial public offering, the following transactions occurred:

•

•

•

•

The conversion of all of the Company’s outstanding Series A convertible preferred stock into
535,715 shares of common stock;

The conversion of all of the Company’s outstanding Series B convertible preferred stock into
200,000 shares of common stock;

The conversion of all of the Company’s outstanding Series C convertible preferred stock into
3,353,748 shares of common stock;

193,107 shares of common stock were issued in payment of all of the dividends accrued on
preferred stock through April 9, 2006;

• All of the u1,374,750 ($1,660,148) principal amount of the Company’s 5% euro denominated

convertible subordinated notes was converted into 263,362 shares of common stock;

•

$6.0 million (40%) of the $15.0 million principal amount of the Company’s 6% convertible
notes was converted into 857,143 shares of common stock;

On November 24, 2006, the Company issued 100,000 shares of common stock in connection with

the acquisition of all of the outstanding capital stock of McLain & Kyne, Ltd.

NOTE 12 — FOREIGN CURRENCY FORWARD CONTRACTS

The Company enters into forward contracts to attempt to limit its exposure to foreign currency

ﬂuctuations. The Company recognizes in the balance sheet derivative contracts at fair value, and
reﬂects any net gains and losses currently in earnings. At March 31, 2006, the Company held
outstanding forward exchange positions for the purchase of euros, expiring through July 2006, in the
amount of $723,700 with a weighted average conversion rate of u1 = $1.2062 as compared to the spot
rate at March 31, 2006 of u1 = $1.2076. At March 31, 2007, the Company held outstanding forward
exchange positions for the purchase of euros, expiring through June 2007, in the amount of $1,137,824
with a weighted average conversion rate of u1 = $1.3292 as compared to the spot rate at March 31,
2007 of u1 = $1.3335. Gain or loss on foreign transactions, which was de minimus, is included in other
income and expense.

67

NOTE 13 — PROVISION FOR INCOME TAXES

The Company’s income taxes beneﬁt (expense) for the years ended March 31, 2007, 2006 and

2005 consists of federal and state and local taxes attributable to GCP, which does not ﬁle a
consolidated income tax return with the Company, and foreign taxes. As of March 31, 2007, the
Company had federal net operating loss carry forwards of approximately $31,760,000 for U.S. tax
purposes, which expire through 2027 and foreign net operating loss carry forwards of approximately
$13,290,000 which carry forward without limit of time.

The pre-tax loss, on a ﬁnancial statement basis, from foreign sources totaled ($4,111,657),
($2,255,627), and ($4,026,096) for the years ended March 31, 2007, 2006, and 2005, respectively.

The Company does not have any undistributed earnings from foreign subsidiaries at March 31,

2007, 2006 and 2005.

The following table reconciles the income tax (beneﬁt) expense and the federal statutory rate of

34%.

Computed expected tax beneﬁt, at 34%. . . . . . . . . . . . . . . . . . . . . .
Increase in valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of foreign rate differential . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local taxes, net of federal beneﬁt . . . . . . . . . . . . . . . . . .

For the years ended March 31,
2005
2006
2007
%
%
%
34.00
34.00
34.00
(28.34)
(30.47)
(41.41)
(8.22)
(4.11)
(5.96)
8.38%
—
—
(3.44)
(6.54)
(1.91)
6.00
6.00
6.00

Income tax beneﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(0.90)

(1.12)

—

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 years ended March 31, 2007, 2006 and
2005, the Company recognized $148,147, $148,151 and $0, respectively.

On December 1, 2003, the Company recorded a deferred tax liability of $629,444 as the amount

ascribed to the difference between the book and tax basis of the tangible and intangible assets
acquired as additional goodwill.

68

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax

liabilities are presented below.

March 31,

2007

2006

Deferred income tax asset

Foreign currency transactions . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . .
. . . . . . . .
Net operating loss carryforwards – U.S.
Net operating loss carryforwards – foreign . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

50,000
35,000
555,000
312,000
12,705,000
1,328,000
2,000

$

66,000
—
—
—
8,117,000
917,000
—

Total gross assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Valuation allowance . . . . . . . . . . . . . . . . . . . . .

14,987,000
(14,987,000)

9,100,000
(9,100,000)

Net deferred asset . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

—

$

—

Deferred income tax liability

Intangible assets acquired in acquisition of
subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets acquired in investment in

$

(629,444)

$ (629,444)

strategic-venture . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,925,924)

(2,074,071)

Net deferred income tax liability . . . . . . . . . . . . . . .

$ (2,555,368)

$(2,703,515)

The Company has recorded a full valuation allowance against its deferred tax assets as it believes

it is more likely that such deferred tax assets will not be realized. The valuation allowance for
deferred tax assets as of March 31, 2007, 2006 and 2005 was approximately $14,987,000, $9,100,000 and
$5,000,000 respectively. The net change in the total valuation allowance for the years ended March 31,
2007, 2006 and 2005 was $5,887,000, $4,100,000 and $3,550,000, respectively. The Company does not
offset its deferred tax assets and liabilities because its deferred tax assets and liabilities are in different
taxable entities which do not ﬁle consolidated returns.

NOTE 14 — STOCK OPTIONS AND WARRANTS

A. Stock Options – In July 2003, the Company implemented the 2003 Stock Incentive Plan (‘‘the
Plan’’) which provides for awards of incentive and non-qualiﬁed stock options, restricted
stock and stock appreciation rights for its ofﬁcers, employees, consultants and directors in
order to attract and retain such individuals who contribute to the Company’s success by their
ability, ingenuity and industry knowledge, and to enable such individuals to participate in the
long-term success and growth of the Company by giving them an equity interest in the
Company. There are 2,000,000 common shares reserved and available for distribution under
the Plan, of which 705,875 remain available. Stock options granted under the Plan are
granted with an exercise price at or above the fair market value of the underlying common
stock at the date of grant, generally vest over a four or ﬁve year period and expire ten years
after the grant date.

Prior to April 1, 2006, the Company accounted for stock options according to the provisions
of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25), and related interpretations, and therefore no related compensation expense was
recorded for awards granted with no intrinsic value. The Company adopted the modiﬁed
prospective transition method provided for under SFAS 123R, and consequently, had not
retroactively adjusted results from prior periods. Under this transition method, compensation
cost associated with stock options recognized in the year ended March 31, 2007 includes:
1) amortization related to the remaining unvested portion of all stock option awards granted
prior to April 1, 2006 over the requisite service period based on the grant-date fair value

69

estimated in accordance with the original provisions of SFAS 123, Accounting for
Stock-Based Compensation ; and 2) amortization related to all stock option awards granted
on or subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123R. A compensation charge is recorded when it is probable
that performance or service conditions will be satisﬁed. The probability of vesting is updated
annually and compensation is adjusted via a cumulative catch-up adjustment or prospectively
depending upon the nature of the change.

For stock options granted prior to the adoption of SFAS 123R, if compensation expense for
the Company’s stock option plan had been determined based upon estimated fair values at
the grant dates in accordance with SFAS No. 123R, the Company’s pro forma net loss and
pro forma basic and diluted net loss per common share would have been as follows:

Net loss attributable to common stockholders, as

reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense determined under
fair value method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pro forma net loss attributable to common

For the years ended March 31,

2006

2005

$(14,680,246)

$(13,779,667)

(354,556)

(370,068)

stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(15,034,802)

$(14,149,735)

Loss per share: Basic and diluted – as reported . . . . . .

Basic and diluted – pro forma . . . . . . . . . . . . . . . . . . . . .

$

$

(4.73)

(4.84)

$

$

(4.44)

(4.55)

As a result of the adoption of SFAS 123R, incremental compensation expense for the year
ended March 31, 2007 amounted to $1,388,178, of which $390,931 is included in selling
expense and $997,247 is included in general and administrative expense in the accompanying
consolidated statements of operations. At March 31, 2007 total unrecognized compensation
cost amounted to approximately $2,677,765, representing 720,500 unvested options. There
were no options exercised under the share-based payment arrangements for the year ended
March 31, 2007.

The fair value of each option award is estimated on the date of grant using the Black-Scholes
option pricing model and is affected by assumptions regarding a number of highly complex
and subjective variables. The use of an option pricing model also requires the use of a
number of complex assumptions including expected volatility, risk-free interest rate, expected
dividends, and expected term. Expected volatility is based on the historical volatility of a
peer group of companies over the expected life of the option as the Company does not have
enough history trading as a public company to calculate its own stock price volatility. The
expected term and vesting of the options represents the estimated period of time until
exercise and is based on historical experience of similar awards, giving consideration to the
contractual terms, vesting schedules and expectations of future employee behavior. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant
for the expected term of the option. The Company has not paid dividends in the past and
does not plan to pay any dividends in the near future. SFAS 123R also requires the Company
to estimate forfeitures at the time of grant and revise these estimates, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. The Company estimates
forfeitures based on its expectation of future experience while considering its historical
experience.

70

A summary of the options outstanding under the stock option plan is as follows:

2007

Year ended March 31,
2006

2005

Outstanding at beginning of year . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shares

888,500
713,125
(307,500)

Outstanding at end of period . . . . . . . . . .

1,294,125

Weighted
Average
Exercise
Price

$6.82
7.44
6.70

7.19

Weighted
Average
Exercise
Price

$6.47
8.00
6.00

6.82

Weighted
Average
Exercise
Price

$6.00
7.26
6.00

6.47

Shares

563,000
279,500
(97,000)

745,500

Shares

745,500
190,000
(47,000)

888,500

Options exercisable at period end . . . . . .

573,625

$7.07

301,767

$6.40

174,533

$6.36

Weighted average fair value of options

granted during the period . . . . . . . . . . .

$5.02

$3.05

$2.69

The following table represents information relating to stock options outstanding at March 31,

2007:

Range of
Exercise Prices

$5.00 – $6.00. . . . . . . . . . . . . . . . . . . . . . . . .
$6.01 – $7.00. . . . . . . . . . . . . . . . . . . . . . . . .
$7.01 – $8.00. . . . . . . . . . . . . . . . . . . . . . . . .
$8.01 – $9.00. . . . . . . . . . . . . . . . . . . . . . . . .

Options Outstanding

Weighted
Average Remaining
Life in
Years

7.01
9.85
8.47
9.29

Shares

465,500
81,000
547,000
200,625

1,294,125

Options Exercisable
Weighted
Average
Exercise
Price

Shares

296,500
—
181,500
95,625

573,625

$5.98
6.07
7.73
9.00

Aggregate
Intrinsic
value

$275,745
—
—
—

$275,745

As of March 31, 2007, the total stock options outstanding were 1,294,125. The weighted average
exercise price of these options was $7.19. Total stock options exercisable as of March 31, 2007 were
573,625. The weighted average remaining life of the options outstanding and exercisable was 8.15 and
7.78, respectively. The weighted average exercise price of these options was $7.07.

The fair value of options at date of grant was estimated using the Black-Scholes option-pricing

model utilizing the following weighted average assumptions:

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected options life in years . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility. . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

March 31,
2007

March 31,
2006

March 31,
2005

4.61%
7.00

66%
0%

4.41%
7.00

25%
0%

4.42%
6.79

25%
0%

71

The following summarizes the activity of the Company’s stock options that have not vested for

the years ended March 31, 2007, 2006 and 2005:

Nonvested at April 1, 2004 . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Nonvested at March 31, 2005 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Nonvested at March 31, 2006 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Nonvested at March 31, 2007 . . . . . . . . . . . . . . . . . . . .

Shares

563,000
279,500
(97,000)
(174,533)

570,967
190,000
(47,000)
(127,234)

586,733
713,125
(307,500)
(271,858)

720,500

Weighted
Average
Exercise
Price

$6.00
7.26
6.00
6.36

6.50
8.00
6.00
6.45

7.04
7.44
6.70
7.81

$7.21

As of March 31, 2007, there was $2,677,765 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under existing stock option plans. This
cost is expected to be recognized over a weighted-average period of 4.20 years. The total fair value of
shares vested during the years ended March 31, 2007, 2006 and 2005 was $1,154,377, $354,556 and
$370,068, respectively.

Since no options were exercised, the Company did not recognize any tax beneﬁt for the years

ended March 31, 2007, 2006 and 2005.

B. Stock Warrants – The Company has entered into various warrant agreements.

Common Stock Warrant Issued to the Financing Agent

On August 29, 2002, in connection with a revolving credit facility, the Company granted to the
lender, Keltic Financial Partners, LP (‘‘Keltic’’), a warrant to acquire 100,000 shares of the
Company’s common stock at an exercise price of $6.00. The warrant is subject to anti-dilution
provisions, upon the occurrence of certain events such as stock splits and stock dividends, vests
immediately and is exercisable through September 1, 2014. The warrant is exercisable at any time
and includes a cashless exercise provision. The Company was not obligated to register the warrant
or the underlying shares, except to the extent that, if the Company elected to ﬁle a registration
statement, Keltic could have the shares underlying its warrant included in that registration
statement and the Company would assume all registration costs and other expenses in connection
with such registration. The Company ﬁled such registration statement on May 31, 2007, and Keltic
elected to have the shares underlying its warrant included in such registration statement.

From the date of issuance through September 27, 2005, when the warrant was amended, the
warrant contained a put option right based on the intrinsic value of the warrants exercised that
could be exercised by the holder at any time commencing as of September 2006 and ending on
the warrant expiration date.

The $282,295 fair value assigned to the warrant was recorded as a ﬁnancing cost reduction in the
value assigned to the loan’s credit facility (debt discount amount). Such amount was to be
recognized over the three-year life of the credit facility as additional interest expense. The
Company has recorded interest expense for the year ended March 31, 2005 of $133,307. The
credit facility was closed in June 2004 and the unaccreted balance recognized as additional
interest expense at that time.

72

The Company accounted for the warrant and the put option rights as a compound ﬁnancial
instrument in the consolidated ﬁnancial statements at fair value following the guidelines of EITF
00-19, paragraphs 44 and 45, and paragraphs 11 and 24 of SFAS 150. Changes in the fair value of
the compound instrument are recognized in earnings for each reporting period. For the years
ended March 31, 2007, 2006 and 2005, the Company recorded a (credit)/charge for the change in
the value of the compound ﬁnancial instrument of ($117,921), ($15,828) and $76,825, respectively.
The Company recorded a (credit) of ($18,752) as of September 30, 2005 to reﬂect the change in
fair value of the compound instrument as a result of the amendment discussed below.

On September 27, 2005, the warrant was amended to eliminate the cash put feature and replace it
with certain penalties (up to $200,000) if the shares underlying the warrant have not been
registered by June 1, 2007 and June 1, 2008. The Company agreed that if on either June 1, 2007
or June 1, 2008 (a) there are shares of common stock received or issuable upon the exercise of
the warrant that have not been registered, and (b) it has not ﬁled a registration statement with
respect to which Keltic had the opportunity to register the unregistered shares, the Company
would pay Keltic $100,000 within ten (10) days of such dates.

The Company accounted for the warrant and the registration rights penalty as a derivative
following the guidance of EITF 00-19. The Company has concluded that the amendment to the
warrant agreement obligating the Company to issue registered shares by the stated dates is
dependent both on the Commission’s acceptance of the Company’s registration and on the
underwriters’ ability to successfully market the shares. Since these factors are beyond the control
of the Company, it has accounted for the instrument as if it would be required to be net-cash
settled.

The Company applied EITF 05-04, View A, concluding that the registration rights are inseparable
from the underlying warrant and should be accounted for together as a unit (the delivery of
unregistered shares, plus the cash penalty, in exchange for the exercise price) and recorded as a
liability at fair value at each reporting date with changes in fair value reported in earnings.

The Company has reﬂected the fair value of the combined instrument at March 31, 2007 and 2006
included in the balance sheet caption accrued expenses, put warrants payable and derivative
instrument of approximately $189,000 and $307,000, respectively.

Common Stock Warrants Issued to Senior Note Holders

In connection with the issuance of the senior notes in November 2006, the Company entered into
a warrant agreement to grant the right to purchase 213,600 shares of the Company’s common
stock at an exercise price of $8.00 per share at any time through May 31, 2009. These warrants
were recorded at relative fair value and accounted for as a discount to the face value of the
senior notes and a credit to additional paid-in capital in the amount of $706,944. This discount
will be recognized over the adjusted term of the senior notes with a charge to interest expense
and a credit to senior notes payable. For the years ended March 31, 2007, 2006 and 2005, the
Company recorded $127,014, $28,081 and $30,668 of additional senior note accretion as additional
interest expense.

Common Stock Warrants Issued to Financial Advisor

In July 2005, the Company granted to a ﬁnancial advisor warrants to purchase up to 100,000
shares of common stock at $8.00 per share. The warrants are subject to anti-dilution provisions,
such as stock splits and stock dividends, and vested upon the completion of the initial public
offering in April 2006. The Company fair valued the warrant at $283,727 and recorded a charge
upon vesting. The charge is included in interest expense on the accompanying consolidated
statements of operations.

73

The following is a summary of the company’s outstanding warrants:

Warrants outstanding, April 1, 2004 . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Warrants outstanding, March 31, 2005 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Warrants outstanding and exercisable, March 31, 2006. . .

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Warrants outstanding and exercisable, March 31, 2007. . .

Weighted
Average
Exercise
Price
Per Warrant

7.03
8.00
—
—

7.49
8.00
—
—

$7.67

8.00
—
—

$7.75

Warrants

207,118
183,375
—
—

390,493
208,125
—
—

598,618

213,600
—
—

812,218

NOTE 15 — RELATED PARTY TRANSACTIONS

A. The Company is operating under an agreement with MHW, Ltd. (‘‘MHW’’) whereby MHW
acts as the Company’s agent in the distribution of its products across the United States.
MHW’s president also serves as a director of the Company and has a de minimis indirect
ownership interest in the Company. In addition, MHW has a 10% ownership interest in the
Celtic Crossing brand, one of the Company’s products, in the United States and its territories,
Canada, Mexico, and the Caribbean.

Pursuant to the MHW distribution agreement, MHW receives sales orders from the
Company’s domestic wholesalers at prices agreed upon with the Company. MHW
simultaneously purchases Company inventory necessary to ﬁll those orders and ships that
inventory to the various wholesalers. MHW then invoices, collects, and deposits remittances
from those wholesalers into an MHW bank account designated for the Company. The funds
are remitted to the Company on a bi-weekly basis. Although MHW is responsible for the
billing function, the collected funds are the property of the Company and MHW is not liable
to the Company for any unpaid balances due from wholesalers.

In addition to the distribution services provided for the Company, MHW also provides
administrative and support services on behalf of the Company. For the years ended
March 31, 2007, 2006 and 2005, aggregate charges recorded for all services provided were
approximately $268,826, $227,303, and $121,393, respectively, which have been included in
general and administrative expenses on the accompanying consolidated statements of
operations.

B. The Company had transactions with Knappogue Corp., a shareholder in the Company.
Knappogue Corp. is controlled by the Company’s CEO and his family. The transactions
primarily involved rental fees for use of Knappogue Corp.’s interest in the Knappogue Castle
for various corporate purposes including Company meetings and to entertain customers. For
the years ended March 31, 2007, 2006 and 2005, fees incurred by the Company to Knappogue
Corp. amounted to $21,000, $15,018 and $18,620 respectively. These charges have been
included in selling expense in the accompanying consolidated statements of operations.

C.

In April 2004, the Company contracted with BPW, Ltd., for business development services
including providing introductions for the Company to agency brands that would enhance the

74

Company’s portfolio of products and assisting the Company in successfully negotiating agency
agreements with targeted brands. BPW, Ltd. is controlled by a director of the Company. The
contract provides for a monthly retainer to BPW, Ltd. of $3,500, a bonus payable to BPW
Ltd. in equal quarterly installments upon the ﬁnalization of an agency brand agreement based
upon estimated annual case sales by the Company during the ﬁrst year of operations at the
rate of $1 per 9-liter case of volume, less any retainer previously paid, and a commission
based upon actual future sales of the agency brand while under the Company’s management.
This contract is cancelable by either party, at their convenience, upon 30 days written notice.
For the years ended March 31, 2007 , 2006 and 2005, BPW, Ltd. was paid $61,978, $63,364
and $41,802, respectively, under this contract. These charges have been included in general
and administrative expense on the accompanying consolidated statements of operations.

D. For the years ended March 31, 2007, 2006 and 2005, the Company purchased goods and

services from Terra Manufacturing Limited (‘‘Terra’’) and Carbery Milk Products Limited
(‘‘Carbery’’) of approximately $3,301,943, $2,738,678 and $2,501,600, respectively. The
Company had assumed the underlying supplier agreements with Terra and Carbery from
CB-Ireland. Terra’s afﬁliate, Tanis Investments, and Carbery are both shareholders in the
Company. As of March 31, 2007 and 2006, the Company was indebted to these two afﬁliates
in the amount of approximately $668,097 and $367,678 respectively, which is included in due
to stockholders and afﬁliates on the accompanying consolidated balance sheet.

E. For the years ended March 31, 2007, 2006 and 2005, the Company made royalty payments of
approximately $39,742, $36,228 and $37,500, respectively, for use of a patent, to an entity that
is owned by two stockholders in the Company. These charges have been included in other
expense on the accompanying consolidated statements of operations. The royalty agreement
also includes the right to acquire the patent for the Trinity Bottle for u90,000 ($120,015) for
the duration of the licensing period, which expires on December 1, 2008.

F.

In February and August 2005, the Company executed agreements with the two Co-Managing
Directors of CB Ireland whereby, effective March 11, 2005 and December 1, 2005,
respectively, each individual resigned his position in CB Ireland in exchange for a consultancy
agreement consisting of ﬁfteen monthly payments totaling u196,875, plus Value Added Tax
(‘‘VAT’’). The balance due, net of payments made, was $0 and $256,925 at March 31, 2007
and 2006, respectively. In addition, under the terms of these agreements, the stock options of
these individuals were deemed to have accrued two years’ vesting at the end of the
consultancy period, the exercise period for their stock options was extended to December 1,
2008, and the Company agreed to pay off the outstanding balance of their 5% Convertible
Subordinated Notes, each dated December 1, 2003, and each in the amount of u465,550 and
their Subordinated Note, each dated December 1, 2003, and each in the amount of u133,323
at the earlier of one month following the completion of the Company’s initial public offering
or in four quarterly installments beginning January 1, 2006. The Company paid the
outstanding balance on each of these subordinated notes in the amount of $159,961 on April
19, 2006. The Company also reimbursed these individuals the legal fees incurred in
connection with their consultancy agreements in the amounts of u8,000 and u5,000,
respectively, plus VAT. For the years ended March 31, 2007, 2006 and 2005, the Company
made payments of $257,575, $261,567 and $20,000, respectively pursuant to these agreements.
These charges have been included in general and administrative expense on the
accompanying consolidated statements of operations. In September 2005, the Company
consented to the sale of the 5% Convertible Notes held by the two Co-Managing Directors of
CB Ireland and shares of common stock held by one of the Co-Managing Directors to third
parties.

NOTE 16 — 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 automatic ﬁve year extensions thereafter. Under this agreement, the

75

Company is obligated to notify Irish Distillers annually of the amount of liters of pure alcohol
it requires for the current year and contracts to purchase that amount. For the calendar year
ended December 31, 2007, the Company has contracted to purchase approximately u566,349
in bulk Irish whiskey. The Company is not liable to Irish Distillers for any product not yet
received. During the term of this supply agreement Irish Distillers has the right to limit
additional purchases above the commitment amount.

B. The Company has entered into a distribution agreement with Gaelic Heritage Corporation,
Ltd. (‘‘Gaelic’’), an international supplier, to be the sole-producer of Celtic Crossing, one of
the Company’s products, for an indeﬁnite period.

C.

In August 2004, Castle Brands entered into an agency agreement with I.L.A.R. S.p.A., the
producer of Pallini Limoncello and its ﬂavor extensions, to be the sole and exclusive importer
of Pallini Limoncello and its ﬂavor extensions throughout the United States and its territories
and possessions. This agreement is subject to automatic renewal for as much as ﬁve years per
renewal period upon Castle Brands achievement of contractual case sale targets. The
agreement expires on December 31, 2009.

Under this agreement, Castle Brands is permitted to import Pallini Limoncello and its ﬂavor
extensions at a set price, updated annually, and is obligated to set aside a portion of the gross
margin toward a marketing fund for Pallini. The agreement also encompasses the hiring of a
Pallini Brand Manager at Castle Brands with Pallini reimbursing the costs of this position up
to a stipulated annual amount. These reimbursements are included in the accompanying
consolidated ﬁnancial statements as a reduction in selling expense.

D. In September 2004, CB-USA entered into an exclusive distribution agreement with Gosling’s
Export (Bermuda) Limited (‘‘GXB’’) to be the sole and exclusive importer of Gosling’s rum
brands within the United States. Under this agreement, CB-USA will receive a net sales
commission on each case sold. In February 2005, GXB sold its interest in the distribution
agreement to Gosling-Castle Partners Inc.

CB-USA will receive a stipulated commission per case, subject to adjustment, provided
certain case sales are achieved, for all sales in calendar years under the distribution
agreement. The sales commission is net of agreed reimbursements, including taxes and
payments to the marketing afﬁliate, GCP. This distribution agreement is for ﬁfteen years,
subject to extension.

E. The Company subleases ofﬁce space in Dublin, Ireland and New York, NY and leases ofﬁce
space in Houston, TX and Louisville, KY. The Dublin ofﬁce lease commenced on June 1,
2004 and extends through February 28, 2009. Rent is payable quarterly in advance. The New
York City lease commenced on August 15, 2004 and extends through March 30, 2008. The
Houston lease commenced on February 24, 2000 and extends through March 31, 2008. The
Louisville lease commenced June 1, 2004, became effective for the Company concurrent with
the acquisition of McLain & Kyne, Ltd., and expires May 31, 2009. The Company has also
entered into non-cancelable operating leases for certain ofﬁce equipment.

Future minimum lease payments are as follows:

For the years ending March 31,

Amount

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$322,353
5,265

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$327,618

In addition to the above annual rental payments, the Company is obligated to pay its
pro-rata share of utility and maintenance expenses on the leased premises. Rent expense
under operating leases amounted to approximately $410,551, $368,065 and $290,000 for the
years ended March 31, 2007, 2006 and 2005, respectively, and is included in general and
administrative expense on the accompanying consolidated statements of operations.

76

F. Pursuant to the distribution agreement signed in March 1998 between the Company and

Gaelic, which was amended and restated in April 2001, the Company, which currently owns
60% of the Celtic Crossing trademark in the United States, has the option to purchase 70% of
the trademark outside the United States from Gaelic at a speciﬁed price adjusted by interim,
annual changes in the Irish Consumer Price Index.

In the event of the sale of the brand rights by either the Company or Gaelic, the non-selling
party shall have the right of ﬁrst refusal to purchase the interest at the same price as the
proposed sale and the right to sell alongside the other party.

Pursuant to the agreement, the Company is required to pay royalties to Gaelic for each case
purchased, such royalties are included within cost of sales in the accompanying consolidated
statements of operations.

G. Pursuant to a composite inter-company guarantee in the amount of u860,000 ($1,146,810)

completed in February 2005 between the Company, Castle Brands Spirits Company Limited
and Castle Brands Spirits (GB) Limited, the Company has guaranteed the loans from Ulster
Bank to the Company’s European subsidiaries.

H. The Company is subject to strict federal and state government regulations associated with the

marketing, import, warehouse, transport, and distributions of spirits.

I. On February 12, 2007, the Company entered into a credit agreement with Frost Nevada

Investments Trust, which is controlled by Dr. Phillip Frost, one of its directors, which enables
the Company to borrow up to $5.0 million. Upon entering into the credit agreement, the
Company paid the lender a facility fee of $150,000. We never made any borrowings under this
facility. The facility was terminated pursuant to its terms following the closing of our
May 2007 private placement of common stock.

Upon entering into the credit agreement, the Company paid the lender a facility fee of
$150,000.

NOTE 17 — CONCENTRATIONS

A. Credit Risk – The Company maintains its cash balances at various large ﬁnancial institutions
that, at times, may exceed federally and internationally insured limits. As of March 31, 2007
and 2006, the Company exceeded the insured limit by approximately $6,400,000 and
$1,300,000, respectively. Management believes the Company is not exposed to any signiﬁcant
credit risk because the institutions are international money center banking institutions with
strong ﬁnancial positions.

B. Suppliers – The Company has entered into a supplier agreement with Irish Distillers, Ltd.,
which provides for the production of single malt, blended and grain Irish whiskeys for the
Company through 2015, with automatic renewal thereafter for successive ﬁve (5) calendar
year renewal terms.

The Company has entered into a distribution agreement with Gaelic Heritage Corporation,
Ltd. (‘‘Gaelic’’), an international supplier, to be the sole-producer of Celtic Crossing, one of
the Company’s products, for an indeﬁnite period.

The Company has entered into a distribution agreement with ILAR, SPA (‘‘ILAR’’), an
international supplier, to be the sole-producer of the Pallini premium Italian, expiring
December 31, 2009, subject to a three or ﬁve year renewal, depending on case purchase.

The Company has entered into a distribution agreement with Gosling’s Export (Bermuda)
limited, an international supplier, to be the sole-producer of the Gosling’s family of rum
products for 15 years.

The Company has entered into a supplier agreement with Carbery Milk Products Limited, an
international supplier, which provides for the production of the Company’s vodka and cream
products through December 31, 2008.

77

The Company has entered into a bottling and services agreement with Terra Limited which
provides for the bottling of the Company’s vodka, whiskey and cream products through
February 28, 2009.

C. Customers – Sales to one customer accounted for approximately 21.2% of the Company’s

revenues for the year ended March 31, 2007 and approximately 20.9% of accounts receivable
at March 31, 2007.

NOTE 18 — GOSLING-CASTLE PARTNERS INC. EXPORT AGREEMENT WITH GOSLING’S

EXPORT (BERMUDA) LIMITED

In February 2005, Gosling-Castle Partners Inc. secured the GXB global distribution rights under

an Export Agreement (the ‘‘Agreement’’) with GXB. This agreement called for GCP to pay
$2,500,000 to GXB for the assignment of its global distribution rights in four equal installments at
April 1, 2005, October 1, 2005, April 1, 2006 and October 1, 2006. All payments have been made in
full as of March 31, 2007.

NOTE 19 — GEOGRAPHIC INFORMATION

The Company operates in one business – premium branded spirits. The Company’s product

categories are vodka, rum, liqueurs, and whiskey. 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 foreign

countries. The following table sets forth the percentage of consolidated revenue from continuing
operations and consolidated assets from foreign countries.

2007

For the years ended March 31,
2006

2005

Consolidated Revenue:

International . . . . . . . . . . . . . . .
United States . . . . . . . . . . . . . . .

$ 8,478,474
16,685,564

Total Consolidated Revenue. .

$25,164,038

33.7% $ 7,879,070
66.3% 13,270,565
100% $21,149,635

37.3% $ 5,891,000
62.7%
6,726,863
100% $12,617,863

46.7%
53.3%
100%

Consolidated Depreciation and

Amortization
International . . . . . . . . . . . . . . .
United States . . . . . . . . . . . . . . .

Total Consolidated
Depreciation and
Amortization . . . . . . . . . . . . .

Income Tax Beneﬁt

$

72,311
928,577

7.2% $
92.8%

74,874
832,535

8.3% $
91.7%

90,326
233,159

27.9%
72.1%

$ 1,000,888

100% $

907,409

100% $

323,485

100%

United States . . . . . . . . . . . . . . .

148,147

100% $

148,151

100%

—

0%

Vodka . . . . . . . . . . . . . . . . . . . . .
Rum . . . . . . . . . . . . . . . . . . . . . .
Liqueurs . . . . . . . . . . . . . . . . . . .
Whiskey . . . . . . . . . . . . . . . . . . .
Other*. . . . . . . . . . . . . . . . . . . . .

$ 8,802,691
7,479,252
5,027,252
3,657,178
197,665

Total Consolidated Revenue. .

$25,164,038

35.0% $ 7,787,351
29.7%
5,798,258
20.0%
4,301,351
14.5%
3,021,435
0.8%
241,240
100% $21,149,635

36.8% $ 6,984,010
27.4%
827,504
20.3%
2,063,630
14.3%
2,742,719
1.2%
—
100.0% $12,617,863

55.4%
6.6%
16.4%
21.6%
—%
100.0%

Consolidated Assets:

International . . . . . . . . . . . . . . .
United States . . . . . . . . . . . . . . .

$ 5,966,448
48,559,894

Total Consolidated Assets . . . .

$54,526,342

10.9% $ 4,488,329
89.1% 39,155,881
100.0% $43,644,210

10.3%
89.7%
100.0%

*

Includes related food products.

78

NOTE 20 — SUBSEQUENT EVENTS

Unregistered Sales of Equity Securities – On April 18, 2007, the Company entered into a
Securities Purchase Agreement (the ‘‘Securities Purchase Agreement’’) with selected investors (each
an ‘‘Investor’’ and collectively, the ‘‘Investors’’). Pursuant to the terms of the Securities Purchase
Agreement, the Company has sold in a private placement a total of 3,520,035 shares of its common
stock, (the ‘‘Common Stock’’), for aggregate gross proceeds of $21,014,609. The transaction closed on
May 9, 2007. The Investors included, among others, Frederick M. R. Smith and Phillip Frost, MD,
each a director of the Company, and CNF Investments II, LLC, of which Robert J. Flanagan, a
director of the Company, is a manager.

As part of the transaction, investors received warrants to purchase approximately 1,408,014
additional shares at an exercise price of $6.57 per share (the ‘‘Warrants’’). The Warrants will remain
exercisable for a period of ﬁve years from the closing of the offering. The Warrants contain
anti-dilution protection for stock splits and similar events, but do not contain any price-based
anti-dilution adjustments.

Pursuant to the Securities Purchase Agreement, the Company and the Investors have made
representations and warranties regarding matters that are customarily included in ﬁnancings of this
nature. Subject to time-related conditions or qualiﬁcations, such representations and warranties shall
survive the closing. The Securities Purchase Agreement also contains indemniﬁcation agreements
among the parties in the event of certain liabilities.

Registration Rights Agreement – On April 18, 2007, the Company entered into a Registration

Rights Agreement (the ‘‘Registration Rights Agreement’’) with the Investors. Pursuant to the
Registration Rights Agreement, the Company has agreed to register the resale of the shares of
Common Stock sold to the Investors pursuant to the Securities Purchase Agreement, including the
shares issuable upon exercise of the Warrants. The Company has agreed to ﬁle with the SEC a
registration statement with respect to this registration within 30 days after closing. The Company ﬁled
such registration statement on May 31, 2007, within this 30 day timeframe. If certain of its obligations
under the Registration Rights Agreement are not met, the Company has agreed to make pro-rata
liquidated damages payments to each Investor.

Litigation – Our subsidiary, Castle Brands Spirits Company Limited, is the holder of a trademark

registration for the mark ‘‘BORU’’ with the United States Patent and Trademark Ofﬁce. On May 9,
2007, Distillerie Stock U.S.A. Ltd. ﬁled a Petition for Cancellation with the United States Patent and
Trademark Ofﬁce for the cancellation of the trademark registration for BORU on several grounds,
including potential confusion between BORU and its existing registered trademark ‘‘BORA’’. We have
various defenses on the merits as well as procedural defenses which we expect to ﬁle in a timely
manner against Distillerie Stock’s claims. We intend to vigorously pursue these defenses as
appropriate. Currently, the matter is pending at the United States Patent and Trademark Ofﬁce before
the Trademark Trial and Appeal Board. While matters before the Trademark Trial and Appeal Board
cannot result in monetary damages or directly affect the right to use a trademark, they can result in
the cancellation of a trademark registration. Thus, it is possible this matter could result in the
cancellation of our trademark registration for BORU in the United States. As a result, it is not
feasible to predict the ﬁnal outcome, and there can be no assurance that these claims might not be
ﬁnally resolved adversely to us, resulting in material liability to our operations.

79

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of disclosure controls and procedures.

We maintain disclosure controls and procedures (as deﬁned in Rule 13a-15(e) promulgated under

the Security Exchange Act of 1934, as amended (the ‘‘Exchange Act’’)) that are designed to ensure
that information that would be required to be disclosed in Exchange Act reports is recorded,
processed, summarized and reported within the time periods speciﬁed in the Security Exchange
Commission’s rules and forms, and that such information is accumulated and communicated to our
management, including the Chief Executive Ofﬁcer, President and Chief Operating Ofﬁcer and
Principal Financial Ofﬁcer, as appropriate, to allow timely decisions regarding required disclosure.

As of March 31, 2007, we carried out an evaluation, under the supervision and with the
participation of our management, including the Chief Executive Ofﬁcer, President and Chief
Operating Ofﬁcer and Principal Financial Ofﬁcer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on the foregoing, our Chief Executive Ofﬁcer, President
and Chief Operating Ofﬁcer and Principal Financial Ofﬁcer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this annual report.

Section 404 compliance project.

Beginning with our ﬁscal year ending March 31, 2008, Section 404 of the Sarbanes-Oxley Act of

2002 will require us to include management’s report on our internal control over ﬁnancial reporting in
our Annual Report on Form 10-K. The internal control report must contain (1) a statement of
management’s responsibility for establishing and maintaining adequate internal control over our
ﬁnancial reporting, (2) a statement identifying the framework used by management to conduct the
required evaluation of the effectiveness of our internal control over ﬁnancial reporting,
(3) management’s assessment of the effectiveness of our internal control over ﬁnancial reporting as of
the end of our most recent ﬁscal year, including a statement as to whether or not our internal control
over ﬁnancial reporting is effective, and (4) at March 31, 2009, a statement that our registered
independent public accounting ﬁrm has issued an attestation report on management’s assessment of
our internal control over ﬁnancial reporting.

In order to achieve compliance with Section 404 within the prescribed period, management has

commenced a Section 404 compliance project under which management will engage outside
consultants and adopt a detailed project work plan to assess the adequacy of our internal control over
ﬁnancial reporting, remediate any control deﬁciencies that may be identiﬁed, validate through testing
that controls are functioning as documented and implement a continuous reporting and improvement
process for internal control over ﬁnancial reporting. During the fourth quarter of ﬁscal year ended
March 31, 2007, there have been no changes in our internal control over ﬁnancial reporting that have
materially affected, or are reasonably likely to materially affect, our internal control over ﬁnancial
reporting.

Item 9B. Other Information

None

80

PART III

Item 10. Directors, Executive Ofﬁcers and Corporate Governance

The information required by this Item 10 is incorporated by reference from our deﬁnitive proxy

statement for our 2007 annual meeting of stockholders, which will be ﬁled no later than 120 days after
March 31, 2007.

Item 11. Executive Compensation

The information required by this Item 11 is incorporated by reference from our deﬁnitive proxy

statement for our 2007 annual meeting of stockholders, which will be ﬁled no later than 120 days after
March 31, 2007.

Item 12.

Security Ownership of Certain Beneﬁcial Owners and Management

The information required by this Item 12 is incorporated by reference from our deﬁnitive proxy

statement for our 2007 annual meeting of stockholders, which will be ﬁled no later than 120 days after
March 31, 2007.

Item 13. Certain Relationships and Related Transactions and Director Independence

The information required by this Item 13 is incorporated by reference from our deﬁnitive proxy

statement for our 2007 annual meeting of stockholders, which will be ﬁled no later than 120 days after
March 31, 2007.

Item 14.

Principal Accountant Fees and Services

The information required by this Item 14 is incorporated by reference from our deﬁnitive proxy

statement for our 2007 annual meeting of stockholders, which will be ﬁled no later than 120 days after
March 31, 2007.

81

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)

The following documents are ﬁled as part of this Report:

1. Financial Statements – See Index to Consolidated Financial Statements and Financial
Statement Schedule at Item 8 on page 49 of this Annual Report on Form 10-K.

2. Financial Statement Schedules – See Financial Statement Schedule at Item 15(c) on

page 87 of this Annual Report on Form 10-K. All other schedules are omitted because
they are not applicable or not required.

3. Exhibits – The following exhibits are ﬁled as part of, or incorporated by reference into,

this Annual Report on Form 10-K:

(b)

Exhibit
Number

2.1

2.2

3.1

3.2

4.1

4.2

10.1

10.2

10.3

10.4

10.5

10.6

Exhibit

Agreement of Merger and Acquisitions, dated as of July 31, 2003, by and among
GSRWB, Inc., The Roaring Water Bay Spirits Group Limited, The Roaring Water Bay
Spirits Marketing and Sales Company Limited, Great Spirits Company LLC, Great
Spirits Corp., Patrick Rigney, David Phelan, Carbery Milk Products Limited and Tanis
Investments Limited(1)

Amendment to Agreement of Merger and Acquisitions, dated as of October 1, 2003, by
and among GSRWB, Inc., The Roaring Water Bay Spirits Group Limited, The Roaring
Water Bay Spirits Marketing and Sales Company Limited, Great Spirits Company LLC,
Great Spirits Corp., Patrick Rigney, David Phelan, Carbery Milk Products Limited and
Tanis Investments Limited(1)

Form of Amended and Restated Certiﬁcate of Incorporation of the Company(1)

Form of Amended and Restated Bylaws of the Company(1)

Form of Common Stock Certiﬁcate(1)

Shareholders Agreement, dated as of December 1, 2003, by and among GSRWB, Inc.
and the holders of shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock and the Common Stockholders(1)

Export Agreement, dated as of February 14, 2005 between Gosling Partners Inc. and
Gosling’s Export (Bermuda) Limited(1)(2)

Amendment No. 1 to Export Agreement, dated as of February 18, 2005, by and among
Gosling-Castle Partners Inc. and Gosling’s Export (Bermuda) Limited(1)(2)

National Distribution Agreement, dated as of September 3, 2004, by and between
Castle Brands (USA) Corp. and Gosling’s Export (Bermuda) Limited(1)(2)

Subscription Agreement, dated as of February 18, 2005, by and between Castle Brands
Inc. and Gosling-Castle Partners Inc.(1)

Stockholders Agreement, dated February 18, 2005, by and among Gosling-Castle
Partners Inc. and the persons listed on Schedule I thereto.(1)

Promissory Note, dated February 18, 2005, issued by Castle Brands Inc. in favor of
Gosling-Castle Partners Inc.(1)

82

Exhibit
Number

Exhibit

10.7

10.8

10.9

10.10

10.11

10.12

10.13

10.14

10.15

10.16

10.17

10.18

10.19

10.20

10.21

10.22

10.23

Agreement, dated as of August 27, 2004, between I.L.A.R. S.p.A. and Castle Brands
(USA) Corp.(1)(2)

Supply Agreement, dated as of January 1, 2005, between Irish Distillers Limited and
Castle Brands Spirits Group Limited and Castle Brands (USA) Corp.(1)(2)

Amendment No. 1 to Supply Agreement, dated as of September 20, 2005, to the
Supply Agreement, dated as of January 1, 2005, among Irish Distillers Limited and
Castle Brands Spirits Group Limited and Castle Brands (USA) Corp.(1)

Amended and Restated Worldwide Distribution Agreement, dated as of April 16, 2001,
by and between Great Spirits Company LLC and Gaelic Heritage Corporation
Limited(1)

Bottling and Services Agreement, dated as of September 1, 2002, by and between Terra
Limited and The Roaring Water Bay Spirits Company Limited(1)(2)

Amendment to Bottling and Services Agreement, dated as of March 1, 2005, by and
between Terra Limited and Castle Brands Spirit Company Limited(1)

Amended and Restated Convertible Note Purchase Agreement, dated as of August 16,
2005, by and between Castle Brands Inc., Mellon HBV SPV LLC and Black River
Global Credit Fund Ltd.(1)

Amended and Restated Convertible Promissory Note, dated March 1, 2005, issued by
Castle Brands Inc. in favor of Mellon HBV SPV LLC.(1)

Amended and Restated Convertible Promissory Note, dated June 27, 2005, issued by
Castle Brands Inc. in favor of Mellon HBV SPV LLC.(1)

Convertible Promissory Note, dated August 16, 2005, issued by Castle Brands Inc. in
favor of Black River Global Credit Fund Ltd.(1)

License Agreement, dated December 1, 2003, between The Roaring Water Bay
(Research and Development) Company Limited and GSRWB, Inc.(1)

Amended and Restated Employment Agreement, effective as of May 2, 2005, by and
between Castle Brands Inc. and Mark Andrews(1)

Amended and Restated Employment Agreement, effective as of May 2, 2005, by and
between Castle Brands Inc. and T. Kelley Spillane(1)

Employment Agreement, dated as of May 2, 2005 by and between Castle Brands Inc.
and Keith A. Bellinger(1)

Summary of employment agreement with Matthew F. MacFarlane(1)

Non-Competition Deed, dated December 1, 2003, between GSRWB, Inc. and David
Phelan(1)

Letter Agreement, dated August 4, 2005, between Castle Brands Inc. and David
Phelan(1)

10.23.1

10.24

Amendment, dated October 17, 2005, to the Letter Agreement, dated August 4, 2005,
between Castle Brands Inc. and David Phelan.(1)

Letter Agreement, dated February 15, 2005, between Castle Brands Inc. and Patrick
Rigney(1)

83

Exhibit
Number

10.25

10.26

10.27

10.28

10.29

10.30

10.31

10.32

10.33

10.34

10.35

10.36

10.37

10.38

10.39

10.40

10.41

10.42

10.43

10.44

10.45

Exhibit

Letter Consulting Agreement, dated August 4, 2005, between Castle Brands Inc. and
David Phelan(1)

Letter Consulting Agreement, dated August 2, 2005, between Castle Brands Inc. and
Patrick Rigney(1)

Supply Agreement, dated January 19, 1998, by and between Carbery Milk Products
Limited and The Roaring Water Bay Spirits Company Limited(1)(2)

Amendment and Consent, dated March 1, 2003, to Supply Agreement, dated
January 19, 1998, by and between Carbery Milk Products Limited and Castle Brands
Inc.(1)(2)

Castle Brands Inc. 2003 Stock Incentive Plan, as amended(1)

Amendment to Castle Brands Inc. 2003 Stock Incentive Plan(1)

Letter Agreement, dated as of December 1, 2004, between MHW, Ltd. and Castle
Brands (USA) Corp.(1)

Sublease, dated as of June 24, 2004,by and between Silvercrest Asset Management
Group, LLC, as successor in interest to James C. Edwards & Co., Inc. and Castle
Brands (USA) Corp.(1)

Indenture of Sublease, dated June 2004, by and between Jennifer Dunne and Castle
Brand Spirits Company Limited(1)

Ofﬁce Lease, dated as of February 24, 2000, by and between Great Spirits Company
LLC and Crescent HC Investors L.P.(1)

First Amendment to Ofﬁce Lease, dated March 14, 2001 (1)

Second Amendment to Ofﬁce Lease, dated January 30, 2002 (1)

Third Amendment to Ofﬁce Lease, dated March 28, 2003 (1)

Fourth Amendment to Ofﬁce Lease, dated March 23, 2004 (1)

Fifth Amendment to Ofﬁce Lease, dated June 21, 2005 (1)

First Supplemental Trust Indenture, dated as of August 15, 2005, by and between
Castle Brands (USA) Corp. and JPMorgan Chase Bank, as trustee and MHW Ltd., as
collateral agent(1)

First Amended and Restated Trust Indenture, dated as of August 15, 2005, by and
between Castle Brands (USA)Corp., JPMorgan Chase Bank, as trustee and MHW Ltd.,
as collateral agent(1)

9% Secured Note dated August 15, 2005 issued by Castle Brand (USA) Corp. in favor
of JPMorgan Chase Bank, as trustee(1)

General Security Agreement, dated as of June 1, 2004, by and between Castle Brands
(USA) Corp. and JPMorgan Chase Bank, as trustee(1)

First Amendment to General Security Agreement, dated as of August 15, 2005, by and
between Castle Brands (USA)Corp. and JPMorgan Chase Bank, as trustee(1)

Guaranty of Payment and Performance, dated June 1, 2004, from Castle Brands Inc. to
JPMorgan Chase Bank, as trustee(1)

84

Exhibit
Number

10.46

10.47

10.48

10.49

10.50

10.51

10.52

10.53

10.54

10.55

10.56

10.57

10.58

10.59

10.60

10.61

10.62

10.63

Exhibit

First Amendment to Guarantee of Payment and Performance, dated as of August 15,
2005, by and between Castle Brands Inc. to JPMorgan Chase Bank, as trustee(1)

Collateral Agreement, dated as of June 1, 2004, by and among MHW Ltd., Castle
Brands (USA) Corp. and JPMorgan Chase Bank, as trustee(1)

First Amendment to Collateral Agreement, dated as of August 15, 2005, by and among
MHW Ltd., Castle Brands (USA) Corp. and JPMorgan Chase Bank, as trustee(1)

Credit Facility Agreement, dated as of December 16, 2004, by and among Ulster Bank
Ireland Limited, Ulster Bank Ltd. and Castle Brands Spirits Company Limited(1)

Accounts Receivable Credit Facility Agreement, dated as of April 4, 2005, by and
among Ulster Bank Ireland Limited, Ulster Bank Ltd. and Castle Brands Spirits
Company Limited(1)

Contract, dated as of April 1, 2005,by and between Castle Brands Inc. and BPW
LLC(1)

Amended and Restated Warrant Agreement, dated September 27, 2005, by and
between Castle Brands Inc. and Keltic Financial Partners, LP(1)

Distribution Agreement by and between The Roaring Water Bay Spirits Company
Limited and Comans Wholesale Limited dated as of September 15, 2000(1)

Form of Indemniﬁcation Agreement to be entered into with directors(1)

Agreement, dated October 26, 2000, by and between Ulster Bank Commercial Services
Limited and The Roaring Water Bay Spirits Company Limited(1)

Agreement, dated May 2, 2003, by and between Ulster Bank Commercial Services
Limited and The Roaring Water Bay Spirits Company (GB) Limited(1)

Employment Agreement, dated February 24, 2006, by and between Castle Brands Inc.
and Seth B. Weinberg(1)

Employment Agreement, dated February 24, 2006, by and between Castle Brands Inc.
and John Soden(1)

Credit Agreement, dated February 17, 2006, by and between Castle Brands Inc. and
Frost Nevada Investments Trust(1)

9% Promissory Note, dated February 17, 2006, issued by Castle Brands Inc. in favor of
Frost Nevada Investments Trust(1)

Form of Castle Brands Inc. Stock Option Grant Agreement (incorporated by reference
to Exhibit 10.1 to our Current Report on Form 8-K (File No. 001-32849), ﬁled with the
Securities and Exchange Commission on June 16, 2006)

Employment Agreement, dated July 1, 2006, between Castle Brands Inc. and
Constantine Constandis (incorporated herein by reference to Exhibit 10.1 to our
Current Report on Form 8-K (File No. 001-32849) ﬁled with the Securities and
Exchange Commission on July 5, 2006).

Stock Purchase Agreement, dated as of October 12, 2006, among Chester F. Zoeller III,
Brittany Lynn Zoeller Carlson and Beth Allison Zoeller Willis and the Company.
(incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K
(File No. 001-32849) ﬁled with the Securities and Exchange Commission on
October 16, 2006).

85

Exhibit
Number

10.64

10.65

10.66

10.67

10.68

10.69

10.70

10.71

10.72

10.73

21.1

23.1

24.1

31.1

31.2

Exhibit

9% Senior Note of Castle Brands (USA) Corp. (incorporated herein by reference to
Exhibit 10.64 to our Quarterly Report on Form 10-Q (File No. 001-32849) ﬁled with
the Securities and Exchange Commission on November 14, 2006).

Form of Warrant (incorporated herein by reference to Exhibit 10.65 to our Quarterly
Report on Form 10-Q (File No. 001-32849) ﬁled with the Securities and Exchange
Commission on November 14, 2006).

Employment Agreement, dated December 5, 2006, by and between Castle Brands Inc.
and Herbert Roberts (incorporated herein by reference to Exhibit 10.66 to our
Quarterly Report on Form 10-Q (File No. 001-32849) ﬁled with the Securities and
Exchange Commission on February 14, 2006).

Credit Agreement, dated as of February 12, 2007, by and among Castle Brands Inc.
and Frost Nevada Investments Trust (incorporated herein by reference to Exhibit 10.67
to our Quarterly Report on Form 10-Q (File No. 001-32849) ﬁled with the Securities
and Exchange Commission on February 14, 2006).

Promissory Note, dated February 12, 2007, made by Castle Brands Inc. in favor of
Frost Nevada Investments Trust . (incorporated herein by reference to Exhibit 10.68 to
our Quarterly Report on Form 10-Q (File No. 001-32849) ﬁled with the Securities and
Exchange Commission on February 14, 2006).

Separation Agreement, dated March 20, 2007, between Castle Brands Inc. and Herbert
Roberts (incorporated herein by reference to Exhibit 10.1 to our Current Report on
Form 8-K (File No. 001-32849) ﬁled with the Securities and Exchange Commission on
March 20, 2007).

Employment Agreement, dated March 20, 2007, between Castle Brands Inc. and Alfred
J. Small (incorporated herein by reference to Exhibit 10.2 to our Current Report on
Form 8-K (File No. 001-32849) ﬁled with the Securities and Exchange Commission on
March 20, 2007).

Form of Securities Purchase Agreement (incorporated herein by reference to
Exhibit 10.1 to our Current Report on Form 8-K (File No. 001-32849) ﬁled with the
Securities and Exchange Commission on April 20, 2007).

Form of Registrations Rights Agreement (incorporated herein by reference to
Exhibit 10.1 to our Current Report on Form 8-K (File No. 001-32849) ﬁled with the
Securities and Exchange Commission on April 20, 2007).

Form of Warrant to be issued by Castle Brands Inc. to the investors in connection with
the April, 2007 private offering (incorporated herein by reference to Exhibit 10.1 to our
Current Report on Form 8-K (File No. 001-32849) ﬁled with the Securities and
Exchange Commission on April 20, 2007).

List of Subsidiaries of the Registrant

Consent of Eisner LLP, Independent Registered Public Accounting Firm

Power of Attorney (included on the Signature Page of the Registration Statement)

Certiﬁcation of CEO Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

Certiﬁcation of CFO Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

86

Exhibit
Number

32.1

Certiﬁcation of CEO and CFO Pursuant to18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit

99.1

Castle Brands Inc. Code of Business Conduct(1)

(1) Incorporated herein by reference to the exhibit with the same number to our Registration

Statement on Form S-1 (File No. 333-128676), which was declared effective on April 5, 2006.

(2) Conﬁdential portions of this document are omitted pursuant to a request for conﬁdential

treatment that has been granted by the Commission, and have been ﬁled separately with the
Commission.

(c)

Valuation and Qualifying Accounts (in thousands)

Description

Valuation reserve deducted in the balance sheet from

the asset to which it applies:
Accounts receivable:

Additions
Charged
to cost
and

expenses Deductions

Balance at
beginning of
period

Balance at
end of period

2007 Allowance for doubtful accounts. . . . . . . . . . . .
2006 Allowance for doubtful accounts. . . . . . . . . . . .
2005 Allowance for doubtful accounts. . . . . . . . . . . .

Inventory:

2007 Allowance for excess and obsolescence . . . . . .
2006 Allowance for excess and obsolescence . . . . . .
2005 Allowance for excess and obsolescence . . . . . .

Deferred Taxes:

2007 Valuation reserve . . . . . . . . . . . . . . . . . . . . . . . . .
2006 Valuation reserve . . . . . . . . . . . . . . . . . . . . . . . . .
2005 Valuation reserve . . . . . . . . . . . . . . . . . . . . . . . . .

$ 395
81
$
58

$ 261
$ 164
90

$9,100
$5,000
1,450

108
314
64

—
97
74

6,857
4,100
3,550

151
—
41

—
—
—

—
—
—

$
$

$
$

352
395
81

261
261
164

$15,957
$ 9,100
5,000

87

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the

registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on June 29, 2007.

SIGNATURES

CASTLE BRANDS INC.

By:

/s/ MARK ANDREWS

Mark Andrews
Chairman of the Board and
Chief Executive Ofﬁcer

POWER OF ATTORNEY

Each individual whose signature appears below constitutes and appoints each of Mark Andrews,
Keith Bellinger and Seth Weinberg, such person’s true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for such person and in such person’s name, place and stead,
in any and all capacities, to sign any and all amendments to this report on Form 10-K, and to ﬁle the
same, with all exhibits thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do in person, hereby
ratifying and conﬁrming all that any said attorney-in-fact and agent, or any substitute or substitutes of
any of them, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed

below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.

Signature

/s/ MARK ANDREWS
Mark Andrews

/s/ KEITH A. BELLINGER
Keith A. Bellinger
/s/ ALFRED J. SMALL
Alfred J. Small
/s/ JOHN F. BEAUDETTE
John F. Beaudette
/s/ ROBERT J. FLANAGAN
Robert J. Flanagan
/s/ COLM LEEN
Colm Leen
/s/ PHILLIP FROST, M.D.
Phillip Frost, M.D.
/s/ RICHARD MORRISON
Richard Morrison
/s/ FREDERICK M.R. SMITH
Frederick M.R. Smith
/s/ KEVIN P. TIGHE
Kevin P. Tighe

Title

Chairman of the Board and
Chief Executive Ofﬁcer
(Principal Executive Ofﬁcer)
President and Chief Operating Ofﬁcer
(Principal Financial Ofﬁcer)

Date

June 29, 2007

June 29, 2007

Vice President – Controller

June 29, 2007

Director

Director

Director

Director

Director

Director

Director

June 29, 2007

June 29, 2007

June 29, 2007

June 29, 2007

June 29, 2007

June 29, 2007

June 29, 2007

Exhibit
Number

2.1

2.2

3.1

3.2

4.1

4.2

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

10.9

10.10

10.11

EXHIBIT INDEX

Exhibit

Agreement of Merger and Acquisitions, dated as of July 31, 2003, by and among
GSRWB, Inc., The Roaring Water Bay Spirits Group Limited, The Roaring Water Bay
Spirits Marketing and Sales Company Limited, Great Spirits Company LLC, Great Spirits
Corp., Patrick Rigney, David Phelan, Carbery Milk Products Limited and Tanis
Investments Limited(1)

Amendment to Agreement of Merger and Acquisitions, dated as of October 1, 2003, by
and among GSRWB, Inc., The Roaring Water Bay Spirits Group Limited, The Roaring
Water Bay Spirits Marketing and Sales Company Limited, Great Spirits Company LLC,
Great Spirits Corp., Patrick Rigney, David Phelan, Carbery Milk Products Limited and
Tanis Investments Limited(1)

Form of Amended and Restated Certiﬁcate of Incorporation of the Company(1)

Form of Amended and Restated Bylaws of the Company(1)

Form of Common Stock Certiﬁcate(1)

Shareholders Agreement, dated as of December 1, 2003, by and among GSRWB, Inc. and
the holders of shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock and the Common Stockholders(1)

Export Agreement, dated as of February 14, 2005 between Gosling Partners Inc. and
Gosling’s Export (Bermuda) Limited(1)(2)

Amendment No. 1 to Export Agreement, dated as of February 18, 2005, by and among
Gosling-Castle Partners Inc. and Gosling’s Export (Bermuda) Limited(1)(2)

National Distribution Agreement, dated as of September 3, 2004, by and between Castle
Brands (USA) Corp. and Gosling’s Export (Bermuda) Limited(1)(2)

Subscription Agreement, dated as of February 18, 2005, by and between Castle Brands
Inc. and Gosling-Castle Partners Inc.(1)

Stockholders Agreement, dated February 18, 2005, by and among Gosling-Castle Partners
Inc. and the persons listed on Schedule I thereto.(1)

Promissory Note, dated February 18, 2005, issued by Castle Brands Inc. in favor of
Gosling-Castle Partners Inc.(1)

Agreement, dated as of August 27, 2004, between I.L.A.R. S.p.A. and Castle Brands
(USA) Corp.(1)(2)

Supply Agreement, dated as of January 1, 2005, between Irish Distillers Limited and
Castle Brands Spirits Group Limited and Castle Brands (USA) Corp.(1)(2)

Amendment No. 1 to Supply Agreement, dated as of September 20, 2005, to the Supply
Agreement, dated as of January 1, 2005, among Irish Distillers Limited and Castle Brands
Spirits Group Limited and Castle Brands (USA) Corp.(1)

Amended and Restated Worldwide Distribution Agreement, dated as of April 16, 2001,
by and between Great Spirits Company LLC and Gaelic Heritage Corporation Limited(1)

Bottling and Services Agreement, dated as of September 1, 2002, by and between Terra
Limited and The Roaring Water Bay Spirits Company Limited(1)(2)

Exhibit
Number

10.12

10.13

10.14

10.15

10.16

10.17

10.18

10.19

10.20

10.21

10.22

10.23

Exhibit

Amendment to Bottling and Services Agreement, dated as of March 1, 2005, by and
between Terra Limited and Castle Brands Spirit Company Limited(1)

Amended and Restated Convertible Note Purchase Agreement, dated as of August 16,
2005, by and between Castle Brands Inc., Mellon HBV SPV LLC and Black River Global
Credit Fund Ltd.(1)

Amended and Restated Convertible Promissory Note, dated March 1, 2005, issued by
Castle Brands Inc. in favor of Mellon HBV SPV LLC.(1)

Amended and Restated Convertible Promissory Note, dated June 27, 2005, issued by
Castle Brands Inc. in favor of Mellon HBV SPV LLC.(1)

Convertible Promissory Note, dated August 16, 2005, issued by Castle Brands Inc. in
favor of Black River Global Credit Fund Ltd.(1)

License Agreement, dated December 1, 2003, between The Roaring Water Bay (Research
and Development) Company Limited and GSRWB, Inc.(1)

Amended and Restated Employment Agreement, effective as of May 2, 2005, by and
between Castle Brands Inc. and Mark Andrews(1)

Amended and Restated Employment Agreement, effective as of May 2, 2005, by and
between Castle Brands Inc. and T. Kelley Spillane(1)

Employment Agreement, dated as of May 2, 2005 by and between Castle Brands Inc. and
Keith A. Bellinger(1)

Summary of employment agreement with Matthew F. MacFarlane(1)

Non-Competition Deed, dated December 1, 2003, between GSRWB, Inc. and David
Phelan(1)

Letter Agreement, dated August 4, 2005, between Castle Brands Inc. and David
Phelan(1)

10.23.1

Amendment, dated October 17, 2005, to the Letter Agreement, dated August 4, 2005,
between Castle Brands Inc. and David Phelan.(1)

10.24

10.25

10.26

10.27

10.28

10.29

10.30

10.31

Letter Agreement, dated February 15, 2005, between Castle Brands Inc. and Patrick
Rigney(1)

Letter Consulting Agreement, dated August 4, 2005, between Castle Brands Inc. and
David Phelan(1)

Letter Consulting Agreement, dated August 2, 2005, between Castle Brands Inc. and
Patrick Rigney(1)

Supply Agreement, dated January 19, 1998, by and between Carbery Milk Products
Limited and The Roaring Water Bay Spirits Company Limited(1)(2)

Amendment and Consent, dated March 1, 2003, to Supply Agreement, dated January 19,
1998, by and between Carbery Milk Products Limited and Castle Brands Inc.(1)(2)

Castle Brands Inc. 2003 Stock Incentive Plan, as amended(1)

Amendment to Castle Brands Inc. 2003 Stock Incentive Plan(1)

Letter Agreement, dated as of December 1, 2004, between MHW, Ltd. and Castle Brands
(USA) Corp.(1)

Exhibit
Number

10.32

10.33

10.34

10.35

10.36

10.37

10.38

10.39

10.40

10.41

10.42

10.43

10.44

10.45

10.46

10.47

10.48

10.49

10.50

10.51

10.52

Exhibit

Sublease, dated as of June 24, 2004, by and between Silvercrest Asset Management
Group, LLC, as successor in interest to James C. Edwards & Co., Inc. and Castle Brands
(USA) Corp.(1)

Indenture of Sublease, dated June 2004, by and between Jennifer Dunne and Castle
Brand Spirits Company Limited(1)

Ofﬁce Lease, dated as of February 24, 2000, by and between Great Spirits Company LLC
and Crescent HC Investors L.P.(1)

First Amendment to Ofﬁce Lease, dated March 14, 2001(1)

Second Amendment to Ofﬁce Lease, dated January 30, 2002(1)

Third Amendment to Ofﬁce Lease, dated March 28, 2003(1)

Fourth Amendment to Ofﬁce Lease, dated March 23, 2004(1)

Fifth Amendment to Ofﬁce Lease, dated June 21, 2005(1)

First Supplemental Trust Indenture, dated as of August 15, 2005, by and between Castle
Brands (USA) Corp. and JPMorgan Chase Bank, as trustee and MHW Ltd., as collateral
agent(1)

First Amended and Restated Trust Indenture, dated as of August 15, 2005, by and
between Castle Brands (USA)Corp., JPMorgan Chase Bank, as trustee and MHW Ltd.,
as collateral agent(1)

9% Secured Note dated August 15, 2005 issued by Castle Brand (USA) Corp. in favor of
JPMorgan Chase Bank, as trustee(1)

General Security Agreement, dated as of June 1, 2004, by and between Castle Brands
(USA) Corp. and JPMorgan Chase Bank, as trustee(1)

First Amendment to General Security Agreement, dated as of August 15, 2005, by and
between Castle Brands (USA)Corp. and JPMorgan Chase Bank, as trustee(1)

Guaranty of Payment and Performance, dated June 1, 2004, from Castle Brands Inc. to
JPMorgan Chase Bank, as trustee(1)

First Amendment to Guarantee of Payment and Performance, dated as of August 15,
2005, by and between Castle Brands Inc. to JPMorgan Chase Bank, as trustee(1)

Collateral Agreement, dated as of June 1, 2004, by and among MHW Ltd., Castle Brands
(USA) Corp. and JPMorgan Chase Bank, as trustee(1)

First Amendment to Collateral Agreement, dated as of August 15, 2005, by and among
MHW Ltd., Castle Brands (USA) Corp. and JPMorgan Chase Bank, as trustee(1)

Credit Facility Agreement, dated as of December 16, 2004, by and among Ulster Bank
Ireland Limited, Ulster Bank Ltd. and Castle Brands Spirits Company Limited(1)

Accounts Receivable Credit Facility Agreement, dated as of April 4, 2005, by and among
Ulster Bank Ireland Limited, Ulster Bank Ltd. and Castle Brands Spirits Company
Limited(1)

Contract, dated as of April 1, 2005,by and between Castle Brands Inc. and BPW LLC(1)

Amended and Restated Warrant Agreement, dated September 27, 2005, by and between
Castle Brands Inc. and Keltic Financial Partners, LP(1)

Exhibit
Number

10.53

10.54

10.55

10.56

10.57

10.58

10.59

10.60

10.61

10.62

10.63

10.64

10.65

10.66

10.67

Exhibit

Distribution Agreement by and between The Roaring Water Bay Spirits Company
Limited and Comans Wholesale Limited dated as of September 15, 2000(1)

Form of Indemniﬁcation Agreement to be entered into with directors(1)

Agreement, dated October 26, 2000, by and between Ulster Bank Commercial Services
Limited and The Roaring Water Bay Spirits Company Limited(1)

Agreement, dated May 2, 2003, by and between Ulster Bank Commercial Services
Limited and The Roaring Water Bay Spirits Company (GB) Limited(1)

Employment Agreement, dated February 24, 2006, by and between Castle Brands Inc.
and Seth B. Weinberg(1)

Employment Agreement, dated February 24, 2006, by and between Castle Brands Inc.
and John Soden(1)

Credit Agreement, dated February 17, 2006, by and between Castle Brands Inc. and Frost
Nevada Investments Trust(1)

9% Promissory Note, dated February 17, 2006, issued by Castle Brands Inc. in favor of
Frost Nevada Investments Trust(1)

Form of Castle Brands Inc. Stock Option Grant Agreement (incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K (File No. 001-32849), ﬁled with the
Securities and Exchange Commission on June 16, 2006)

Employment Agreement, dated July 1, 2006, between Castle Brands Inc. and Constantine
Constandis (incorporated herein by reference to Exhibit 10.1 to our Current Report on
Form 8-K (File No. 001-32849) ﬁled with the Securities and Exchange Commission on
July 5, 2006).

Stock Purchase Agreement, dated as of October 12, 2006, among Chester F. Zoeller III,
Brittany Lynn Zoeller Carlson and Beth Allison Zoeller Willis and the Company.
(incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K
(File No. 001-32849) ﬁled with the Securities and Exchange Commission on
October 16, 2006).

9% Senior Note of Castle Brands (USA) Corp. (incorporated herein by reference to
Exhibit 10.64 to our Quarterly Report on Form 10-Q (File No. 001-32849) ﬁled with the
Securities and Exchange Commission on November 14, 2006).

Form of Warrant (incorporated herein by reference to Exhibit 10.65 to our Quarterly
Report on Form 10-Q (File No. 001-32849) ﬁled with the Securities and Exchange
Commission on November 14, 2006).

Employment Agreement, dated December 5, 2006, by and between Castle Brands Inc.
and Herbert Roberts (incorporated herein by reference to Exhibit 10.66 to our Quarterly
Report on Form 10-Q (File No. 001-32849) ﬁled with the Securities and Exchange
Commission on February 14, 2006).

Credit Agreement, dated as of February 12, 2007, by and among Castle Brands Inc. and
Frost Nevada Investments Trust (incorporated herein by reference to Exhibit 10.67 to our
Quarterly Report on Form 10-Q (File No. 001-32849) ﬁled with the Securities and
Exchange Commission on February 14, 2006).

Exhibit
Number

10.68

10.69

10.70

10.71

10.72

10.73

21.1

23.1

24.1

31.1

31.2

32.1

Exhibit

Promissory Note, dated February 12, 2007, made by Castle Brands Inc. in favor of Frost
Nevada Investments Trust . (incorporated herein by reference to Exhibit 10.68 to our
Quarterly Report on Form 10-Q (File No. 001-32849) ﬁled with the Securities and
Exchange Commission on February 14, 2006).

Separation Agreement, dated March 20, 2007, between Castle Brands Inc. and Herbert
Roberts (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form
8-K (File No. 001-32849) ﬁled with the Securities and Exchange Commission on
March 20, 2007).

Employment Agreement, dated March 20, 2007, between Castle Brands Inc. and Alfred J.
Small (incorporated herein by reference to Exhibit 10.2 to our Current Report on
Form 8-K (File No. 001-32849) ﬁled with the Securities and Exchange Commission on
March 20, 2007).

Form of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1
to our Current Report on Form 8-K (File No. 001-32849) ﬁled with the Securities and
Exchange Commission on April 20, 2007).

Form of Registrations Rights Agreement (incorporated herein by reference to Exhibit
10.1 to our Current Report on Form 8-K (File No. 001-32849) ﬁled with the Securities
and Exchange Commission on April 20, 2007).

Form of Warrant to be issued by Castle Brands Inc. to the investors in connection with
the April, 2007 private offering (incorporated herein by reference to Exhibit 10.1 to our
Current Report on Form 8-K (File No. 001-32849) ﬁled with the Securities and Exchange
Commission on April 20, 2007).

List of Subsidiaries of the Registrant

Consent of Eisner LLP, Independent Registered Public Accounting Firm

Power of Attorney (included on the Signature Page of the Registration Statement)

Certiﬁcation of CEO Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.

Certiﬁcation of CFO Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.

Certiﬁcation of CEO and CFO Pursuant to18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1

Castle Brands Inc. Code of Business Conduct(1)

(1) Incorporated herein by reference to the exhibit with the same number to our Registration

Statement on Form S-1 (File No. 333-128676), which was declared effective on April 5, 2006.

(2) Conﬁdential portions of this document are omitted pursuant to a request for conﬁdential

treatment that has been granted by the Commission, and have been ﬁled separately with the
Commission.

EXHIBIT 21.1

Castle Brands Inc. Subsidiaries

Name

State/Country of Incorporation

Jurisdiction(s)

Castle Brands (USA) Corp.

Delaware, USA

Gosling-Castle Partners Inc.

McLain & Kyne Ltd.

Delaware, USA

Kentucky, USA

New York
Texas (d/b/a ‘‘Delaware Great
Spirits Corp.’’)

Georgia
Alabama

Castle Brands Spirits Group

Limited

Castle Brands Spirits Company

Limited

The Boru Vodka Company

Limited

The Clontarf Irish Whiskey

Company Limited

Castle Brands Whiskey Company

Limited

Castle Brands Spirits Marketing
and Sales Company Limited

Great Spirits (Ireland) Limited

Ireland

Ireland

Ireland

Ireland

Ireland

Ireland

Ireland

Castle Brands Spirits Company

United Kingdom

(GB) Limited

The Roaring Water Bay Spirits

Northern Ireland

Company (NI) Limited

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement of Form S-8
(No. 333-133567) and the Registration Statement on Form S-3 (No. 333-143422) of our report dated
June 27, 2007 relating to our audits of the consolidated ﬁnancial statements and ﬁnancial statement
schedule of Castle Brands Inc. and subsidiaries as of March 31, 2007, which is included in the Annual
Report on Form 10-K for the year ended March 31, 2007. Our report on the March 31, 2007 ﬁnancial
statements included an explanatory paragraph regarding the Company’s change in accounting principle
for transactions in which the Company exchanges its equity instruments for goods and services. We
also consent to the reference to us as Experts in the Registration Statement on Form S-3.

/s/ EISNER LLP
Eisner LLP

New York, New York
June 27, 2007

EXHIBIT 31.1

SECTION 302 CERTIFICATION

I, Mark Andrews, certify that:

1. I have reviewed this annual report on Form 10-K of Castle Brands Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;

3. Based on my knowledge, the ﬁnancial statements, and other ﬁnancial information included in this
report, fairly present in all material respects the ﬁnancial condition, results of operations and cash
ﬂows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying ofﬁcers and I are responsible for establishing and maintaining
disclosure controls and procedures (as deﬁned in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;

(b) [Reserved]

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and

presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over ﬁnancial reporting
that occurred during the registrant’s most recent ﬁscal quarter (the registrant’s fourth ﬁscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over ﬁnancial reporting.

5. The registrant’s other certifying ofﬁcers and I have disclosed, based on our most recent evaluation
of internal control over ﬁnancial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors or (or persons performing the equivalent functions):

(a) All signiﬁcant deﬁciencies and material weaknesses in the design or operation of internal

control over ﬁnancial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report ﬁnancial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have

a signiﬁcant role in the registrant’s internal control over ﬁnancial reporting.

Date: June 29, 2007

/s/ Mark Andrews
Mark Andrews
Chairman & Chief Executive Ofﬁcer
(Principal Executive Ofﬁcer)

EXHIBIT 31.2

SECTION 302 CERTIFICATION

I, Keith A. Bellinger, certify that:

1. I have reviewed this annual report on Form 10-K of Castle Brands Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;

3. Based on my knowledge, the ﬁnancial statements, and other ﬁnancial information included in this
report, fairly present in all material respects the ﬁnancial condition, results of operations and cash
ﬂows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying ofﬁcers and I are responsible for establishing and maintaining
disclosure controls and procedures (as deﬁned in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;

(b) [Reserved]

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and

presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over ﬁnancial reporting
that occurred during the registrant’s most recent ﬁscal quarter (the registrant’s fourth ﬁscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over ﬁnancial reporting.

5. The registrant’s other certifying ofﬁcers and I have disclosed, based on our most recent evaluation
of internal control over ﬁnancial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors or (or persons performing the equivalent functions):

(a) All signiﬁcant deﬁciencies and material weaknesses in the design or operation of internal

control over ﬁnancial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report ﬁnancial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have

a signiﬁcant role in the registrant’s internal control over ﬁnancial reporting.

Date: June 29, 2007

/s/ Keith A. Bellinger
Keith A. Bellinger
President and Chief Operating Ofﬁcer
(Principal Financial Ofﬁcer)

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, Mark Andrews, the Chairman and Chief Executive Ofﬁcer of Castle Brands Inc. (the
‘‘Registrant’’) and Keith A. Bellinger, the President and Chief Operating Ofﬁcer of the Registrant,
each hereby certiﬁes that:

1. The Registrant’s Annual Report on Form 10-K for the period ended March 31, 2007, (the ‘‘Periodic
Report’’), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934, as amended; and

2. The information contained in the Periodic Report fairly presents, in all material respects, the
ﬁnancial condition and results of operations of the Registrant.

Date: June 29, 2007

/s/ Mark Andrews

Mark Andrews
Chairman and Chief Executive Ofﬁcer
(Principal Executive Ofﬁcer)

/s/ Keith A. Bellinger

Keith A. Bellinger
President and Chief Operating Ofﬁcer
(Principal Financial Ofﬁcer)

Corpor at e  I nfor m ation

c O M M O N   s T O c K

The common stock of castle 
Brands inc. is traded on the 
American stock exchange under 
the symbol “rOX.”

D i s c L A i M e r

This Annual report contains  
forward-looking information. 
These forward-looking statements 
are made pursuant to the safe  
harbor provisions of the Private 
securities Litigation reform Act  
of 1995. forward-looking state-
ments may be significantly 
impacted by certain risks and 
uncertainties described herein  
and in the company’s Annual 
report on form 10-K for the  
year ended March 31, 2007 filed 
with the securities and exchange 
commission.
###

O f f i c e r s

Mark Andrews
Chairman of the Board and  
Chief Executive Officer

Keith A. Bellinger
President and  
Chief Operating Officer

claes fick
Chief Commercial and  
Marketing Officer
Castle Brands Spirits  
Company Limited

John soden
SVP—Managing Director—
International Operations

T. Kelley spillane
SVP—U.S. Sales

seth B. Weinberg
SVP and General Counsel

Alfred small
VP—Controller

D i r e c T O r s

Mark Andrews
Chairman of the Board and  
Chief Executive Officer
Castle Brands Inc.

John f. Beaudette
President
MHW, Ltd.

robert J. flanagan
Executive Vice President
Clark Enterprises Inc.

Phillip frost, M.D.
Chairman and  
Chief Executive Officer
Opko Health, Inc.

colm Leen
Group Finance Director  
and Secretary
Carbery Group

richard c. Morrison
Former Managing Director
Babson Capital Management

frederick M.r. smith
Consultant
Credit Suisse

Kevin P. Tighe
Partner
Tighe Patton Armstrong  
Teasdale, PLLC

N O T i c e   O f   A N N u A L 

M e e TiN g

The annual meeting of stockholders 
will be held on september 12, 2007 
at 10:00 a.m., eT at the American 
stock exchange, 86 Trinity Place, 
New York, NY 10006

T r A N s f e r   A g e N T

continental stock Transfer  
and Trust company 
17 Battery Place, 8th floor  
New York, NY 10004  
(212) 509-4000

c Or P Or A T e 

H e A D q u Ar Te r s

castle Brands inc. 
570 Lexington Ave, 29th floor  
New York, NY 10022  
(646) 356-0200

designed by curran & connors, inc. / www.curran-connors.com

Castle Brands Inc. | 570 Lexington Avenue, 29th Floor | new York, nY  10022 | 646-356-0200

www.castlebrandsinc.com