Overview

We develop and market premium and super premium brands in the following beverage alcohol categories: rum, whiskey, liqueurs, vodka, tequila and wine. We distribute our products in all 50 U.S. states and the District of Columbia, in thirteen primary international markets, including Ireland, Great Britain, Northern Ireland, Germany, Canada, South Africa, Bulgaria, France, Russia, Finland, Norway, Sweden, China and the Duty Free markets, and in a number of other countries in continental Europe and Latin America. We market the following brands, among others, Gosling's Rum®, Gosling's Dark 'n Stormy® ready-to-drink cocktail, Jefferson's®, Jefferson's Reserve® and Jefferson's Presidential Select TM bourbons, Jefferson's Rye whiskey, Clontarf® Irish whiskey, Pallini® liqueurs, Boru® vodka, Knappogue Castle Whiskey®, Tierras TM tequila, Celtic Honey® liqueur, Brady's® Irish Cream, Travis Hasse's Original® Pie liqueurs, Gozio® amaretto, A. de Fussigny® cognacs and the CC: TM line of wines.

Our objective is to continue building a distinctive portfolio of global premium and super premium spirits and wine brands as we move towards profitability. To achieve this, we continue to seek to:

§ increase revenues from our more profitable brands. We continue to focus our distribution relationships, sales expertise and targeted marketing activities on our more profitable brands;

§ improve value chain and manage cost structure. We continue to review and analyze our supply chains and cost structures both on a company-wide and brand-by-brand basis, as well as control general and administrative costs in an effort to further reduce expense; and

§ selectively add new premium brands to our portfolio. We intend to continue developing new brands and pursuing strategic relationships, joint ventures and acquisitions to selectively expand our premium spirits and wine portfolio, particularly by capitalizing on and expanding our partnering capabilities. Our criteria for new brands focuses on underserved areas of the beverage alcohol marketplace, while examining the potential for direct financial contribution to our company and the potential for future growth based on development and maturation of agency brands. We evaluate future acquisitions and agency relationships on the basis of their potential to be immediately accretive and their potential contributions to our objectives of becoming profitable and further expanding our product offerings. We expect that future acquisitions, if consummated, would involve some combination of cash, debt and the issuance of our stock.

Recent Events

Keltic Facility

In July 2012, we entered into a First Amendment to the revolving loan agreement ("Loan Agreement") with Keltic Financial Partners II, LP ("Keltic"), which we refer to as the Keltic Facility, providing for availability (subject to certain terms and conditions) of a facility of up to $7.0 million for the purpose of providing working capital. The Loan Agreement amends the August 2011 facility between us and Keltic, which provided for a facility of up to $5.0 million. The Keltic Facility expires on August 19, 2014. We may borrow up to the maximum amount of the Keltic Facility, provided that we have a sufficient borrowing base (as defined in the Loan Agreement). The Keltic Facility interest rate is the rate that, when annualized, is the greatest of (a) the Prime Rate plus 3.25%,
(b) the LIBOR Rate plus 5.75%, and (c) 6.50%. Interest is payable monthly in arrears, on the first day of every month on the average daily unpaid principal amount of the Keltic Facility. After the occurrence and during the continuance of any "Default" or "Event of Default" (as defined under the Loan Agreement) we are required to pay interest at a rate that is 3.25% per annum above the then applicable Keltic Facility interest rate. Interest has been paid at 6.5% and there have been no Events of Default. In addition to a $100,000 commitment fee paid on the original Loan Agreement and a $40,000 commitment fee paid on the amended Loan Agreement, Keltic will also receive an annual facility fee and a collateral management fee. The Loan Agreement contains standard borrower representations and warranties for asset-based borrowing and a number of reporting obligations and affirmative and negative covenants. The Loan Agreement includes negative covenants that, among other things, restrict our ability to create additional indebtedness, dispose of properties, incur liens, and make distributions or cash dividends. At June 30, 2012, we were in compliance, in all material respects, with the covenants under the Keltic Facility.

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 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.

Where in this report we refer to amounts in Euros or British Pounds, we have for your convenience also in certain cases provided a conversion of those amounts to U.S. Dollars in parentheses. Where the numbers refer to a specific balance sheet account date or financial statement account period, we have used the exchange rate that was used to perform the conversions in connection with the applicable financial statement. In all other instances, unless otherwise indicated, the conversions have been made using the exchange rates as of June 30, 2012, each as calculated from the Interbank exchange rates as reported by Oanda.com. On June 30, 2012, the exchange rate of the Euro and the British Pound in exchange for U.S. Dollars was €1.00 = U.S. $1.25765 (equivalent to U.S. $1.00 = €0.79503) and £1.00 = U.S. $1.56148 (equivalent to U.S. $1.00 = £0.64032).

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

Critical Accounting Policies

There are no material changes from the critical accounting policies set forth in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year ended March 31, 2012, as amended, which we refer to as our 2012 Annual Report. Please refer to that section for disclosures regarding the critical accounting policies related to our business.

Financial performance overview

The following table provides information regarding our case sales for the periods presented based on nine-liter equivalent cases, which is a standard spirits industry metric (table excludes related non-beverage alcohol products):

Three Months ended

                             June 30,
                         2012          2011
Cases
United States             70,170       56,184
International             15,960       13,935

Total                     86,130       70,119

Rum                       42,442       30,792
Vodka                     17,080       18,165
Liqueurs                  15,085       13,281
Whiskey                    9,388        5,481
Tequila                      536          479
Wine                       1,449        1,766
Other                        150          155

Total                     86,130       70,119

Percentage of Cases
United States               81.5 %       80.1 %
International               18.5 %       19.9 %

Total                      100.0 %      100.0 %

Rum                         49.3 %       43.9 %
Vodka                       19.8 %       25.9 %
Liqueurs                    17.5 %       18.9 %
Whiskey                     10.9 %        7.8 %
Tequila                      0.6 %        0.7 %
Wine                         1.7 %        2.5 %
Other                        0.2 %        0.2 %

Total                      100.0 %      100.0 %

The following table provides information regarding our case sales of non-beverage alcohol products for the periods presented:

                  Three Months ended
                        June 30,
                   2012           2011
Cases
United States        63,630       37,083
International         5,726        2,396

Total                69,356       39,479

United States          91.7 %       93.9 %
International           8.3 %        6.1 %

Total                 100.0 %      100.0 %

Results of operations

The table below provides, for the periods indicated, the percentage of net sales of certain items in our consolidated financial statements:

                                                              Three Months ended
                                                                   June 30,
                                                              2012           2011
Sales, net                                                      100.0 %       100.0 %
Cost of sales                                                    64.7 %        62.8 %

Gross profit                                                     35.3 %        37.2 %

Selling expense                                                  27.0 %        35.3 %
General and administrative expense                               13.7 %        17.2 %
Depreciation and amortization                                     2.4 %         3.1 %

Loss from operations                                             (7.7 )%      (18.4 )%

Loss from equity investment in non-consolidated affiliate        (0.0 )%       (0.2 )%
Foreign exchange gain (loss)                                      2.0 %        (1.7 )%
Interest expense, net                                            (1.1 )%       (2.4 )%
Net change in fair value of warrant liability                    (0.9 )%       (0.3 )%
Income tax benefit                                                0.4 %         0.5 %

Net loss                                                         (7.4 )%      (22.5 )%
Net income attributable to noncontrolling interests              (1.1 )%       (1.4 )%

Net loss attributable to controlling interests                   (8.5 )%      (23.9 )%

Dividend to preferred shareholders                               (1.9 )%       (4.5 )%

Net loss attributable to common shareholders                    (10.4 )%      (28.4 )%

The following is a reconciliation of net loss attributable to common shareholders to EBITDA, as adjusted:

                                                                  Three Months ended
                                                                       June 30,
                                                                 2012             2011
Net loss attributable to common shareholders                 $ (1,009,452 )   $ (2,096,471 )
Adjustments:
Interest expense, net                                             111,020          177,541
Income tax benefit                                                (37,038 )        (37,038 )
Depreciation and amortization                                     231,082          228,145
EBITDA (loss)                                                    (704,388 )     (1,727,823 )
Allowance for doubtful accounts                                     6,000            6,911
Stock-based compensation expense                                   59,180           31,777
(Gain) loss from equity investment in non-consolidated
affiliate                                                            (348 )         17,457
Foreign exchange (gain) loss                                     (195,941 )        122,076
Net change in fair value of warrant liability                      91,328           24,874
Net income attributable to noncontrolling interests               110,458          105,064
Dividend to preferred shareholders                                179,951          329,460
EBITDA, as adjusted                                              (453,760 )     (1,090,204 )

Earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted for allowance for doubtful accounts, non-cash compensation expense, gain (loss) from equity investment in non-consolidated affiliate, foreign exchange, net change in fair value of warrant liability, net income attributable to noncontrolling interests and dividend to preferred shareholders is a key metric we use in evaluating our financial performance. EBITDA is considered a non-GAAP financial measure as defined by Regulation G promulgated by the SEC under the Securities Act of 1933, as amended. We consider EBITDA, as adjusted, important in evaluating our performance on a consistent basis across various periods. Due to the significance of non-cash and non-recurring items, EBITDA, as adjusted, enables our Board of Directors and management to monitor and evaluate the business on a consistent basis. We use EBITDA, as adjusted, as a primary measure, among others, to analyze and evaluate financial and strategic planning decisions regarding future operating investments and allocation of capital resources. We believe that EBITDA, as adjusted, eliminates items that are not indicative of our core operating performance, or do not involve a cash outlay, such as stock-based compensation expense. Our presentation of EBITDA, as adjusted, should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items or by non-cash items, such as non-cash compensation, which is expected to remain a key element in our long-term incentive compensation program. EBITDA, as adjusted, should be considered in addition to, rather than as a substitute for, income from operations, net income and cash flows from operating activities.

Our EBITDA, as adjusted, improved 58.4% to ($0.5) million for the three months ended June 30, 2012, as compared to ($1.1) million for the comparable prior-year period, primarily as a result of our increased sales.

Three months ended June 30, 2012 compared with three months ended June 30, 2011

Net sales. Net sales increased 31.5% to $9.7 million for the three months ended June 30, 2012, as compared to $7.4 million for the comparable prior-year period. Our U.S. case sales as a percentage of total case sales increased to 81.5% for the three months ended June 30, 2012, as compared to 80.1% for the comparable prior-year period due to the organic growth of certain brands and the introduction of new brands into the U.S. market, partially offset by a decrease in wine sales. Our wine sales decreased due to the unavailability of certain vintages and production timing, as well as our decision to increase sales efforts on our spirits portfolio. Our international case sales grew due to strong growth in our Gosling's and Irish whiskey sales, offset by a decrease in our vodka sales due to increased price competition and overall market conditions. We continue to focus on our faster growing brands and markets, both in the U.S. and internationally. Net sales for the three months ended June 30, 2012 include $0.2 million in revenue from Gozio amaretto, which we launched in January 2012, and $0.3 million in revenue from our Gosling's Dark 'n Stormy pre-mixed cocktail, which we launched in February 2012. The growth in U.S. sales also reflects the momentum for our Gosling's rums, Jefferson's bourbons and our Irish whiskeys.

The table below presents the increase or decrease, as applicable, in case sales by product category for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011:

             Increase/(decrease)               Percentage
                in case sales             increase/(decrease)
             Overall         U.S.        Overall          U.S.
Rum             11,650        8,701           37.8 %        37.8 %
Vodka           (1,085 )      1,004           (6.0 )%        7.1 %
Liqueurs         1,804        1,721           13.6 %        13.2 %
Whiskey          3,907        2,825           71.3 %        79.8 %
Tequila             57           57           11.9 %        11.9 %
Wine              (317 )       (317 )        (18.0 )%      (18.0 )%
Other               (5 )         (5 )         (3.2 )%       (3.2 )%

Total           16,011       13,986           22.8 %        24.9 %

Gross profit. Gross profit increased 25.0% to $3.4 million for the three months ended June 30, 2012 from $2.7 million for the comparable prior-year period, while our gross margin decreased to 35.3% for the three months ended June 30, 2012 compared to 37.2% for the comparable prior-year period. The increase in gross profit was the result of increased sales, while the decrease in our gross margin was primarily due to changes in products sold and the markets in which they are sold.

Selling expense. Selling expense was $2.6 million for each of the three-month periods ended June 30, 2012 and 2011, with a $0.1 million decrease in advertising, marketing and promotion expense offset by a $0.07 million increase in freight out and a $0.03 million increase in employee-related charges, including salaries and entertainment expense. The increase in sales resulted in a net decrease of selling expense as a percentage of net sales to 27.0% for the three months ended June 30, 2012 as compared to 35.3% for the comparable prior-year period.

General and administrative expense.General and administrative expense was $1.3 million for the each of the three-month periods ended June 30, 2012 and 2011. The increase in sales in the current period resulted in general and administrative expense as a percentage of net sales decreasing to 13.7% for the three months ended June 30, 2012 as compared to 17.2% for the comparable prior-year period.

Depreciation and amortization. Depreciation and amortization was $0.2 million for each of the three-month periods ended June 30, 2012 and 2011.

Loss from operations. As a result of the foregoing, loss from operations improved 44.7% to ($0.8) million for the three months ended June 30, 2012 from ($1.4) million for the comparable prior-year period. As a result of our focus on our stronger growth markets and better performing brands, and expected growth from our existing brands and recently acquired brands, we anticipate improved results of operations in the near term as compared to comparable prior-year periods, although there is no assurance that we will attain such results.

Net change in fair value of warrant liability. We recorded the fair market value of the 2011 Warrants issued in connection with the June 2011 private placement at their initial fair value. Changes in the fair value of the 2011Warrants are recognized in earnings for each reporting period. For the three months ended June 30, 2012, we recorded a loss for the change in the value of the 2011 Warrants of $0.09 million, as compared to a loss of $0.02 million for the comparable prior-year period.

Gain (loss) from equity investment in non-consolidated affiliate. We have accounted for our investment in DP Castle Partners, LLC on the equity method of accounting. We realized a de minimis gain from this investment in the three months ended June 30, 2012 as compared to a loss of $0.02 million for the comparable prior-year period.

Foreign exchange gain (loss). Foreign exchange gain for the three months ended June 30, 2012 was $0.2 million as compared to a loss of ($0.1) million for the three months ended June 30, 2011 due to the net effects of fluctuations of the U.S. dollar against the Euro and their effects on our Euro-denominated intercompany balances due to our foreign subsidiaries for inventory purchases.

Interest expense, net. We had interest expense, net of ($0.1) million for the three months ended June 30, 2012 as compared to interest expense, net of ($0.2) million for the comparable prior-year period. The decrease in interest expense is due to the outstanding balances then due on notes payable at June 30, 2011.

Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests during each of the three-month periods ended June 30, 2012 and 2011 was a loss of ($0.1) million, both the result of allocated net results recorded by our 60%-owned subsidiary, Gosling-Castle Partners, Inc.

Dividend to preferred shareholders. For the three months ended June 30, 2012, we recognized a dividend on our Series A Preferred Stock of $0.2 million, as required by the terms of the preferred stock. For the three month ended June 30, 2011, we recognized a dividend of $0.3 million on our preferred stock. Included in such amount is a $0.3 million charge for the associated beneficial conversion feature. Accrued dividends on our Series A Preferred Stock are only payable in common stock upon conversion or liquidation.

Net loss attributable to common shareholders.As a result of the net effects of the foregoing, net loss attributable to common shareholders improved 51.8% to
($1.0) million for the three months ended June 30, 2012 as compared to ($2.1)
million for the comparable prior-year period. Net loss per common share, basic and diluted, was ($0.01) per share for the three months ended June 30, 2012, as compared to ($0.02) for the comparable prior-year period.

Liquidity and capital resources

Overview

Since our inception, we have incurred significant operating and net losses and have not generated positive cash flows from operations. For the three months ended June 30, 2012, we had a net loss of $1.0 million, and used cash of $0.7 million in operating activities. As of June 30, 2012, we had cash and cash equivalents of $0.3 million and had an accumulated deficit of $125.1 million.

In July 2012, we entered into a First Amendment to the Keltic Facility, providing for availability of a facility of up to $7.0 million for the purpose of providing working capital. The Loan Agreement amends the August 2011 facility between us and Keltic, which provided for a facility of up to $5.0 million.

We believe that our current cash and working capital, and the availability under the Keltic Facility, will enable us to fund our losses until profitability, ensure continuity of supply of certain of our brands, fund future acquisitions and agency relationships, and support new brand initiatives and marketing programs.

Existing Financing

In July 2012, we entered into a First Amendment to the Loan Agreement with Keltic as described above in Recent Events.

In December 2009, Gosling-Castle Partners, Inc., a 60% owned subsidiary, issued a promissory note (the "GCP Note") in the aggregate principal amount of $0.2 million to Gosling's Export (Bermuda) Limited in exchange for credits issued on certain inventory purchases. This note matures on April 1, 2020, is payable at maturity, subject to certain acceleration events, and calls for annual interest of 5%, to be accrued and paid at maturity.

Liquidity Discussion

As of June 30, 2012, we had shareholders' equity of $17.2 million as compared to $18.0 million at March 31, 2012. This decrease is primarily due to our total comprehensive loss for the three months ended June 30, 2012.

We had working capital of $11.6 million at June 30 and March 31, 2012, with an increase in inventory offset by a decrease in accounts receivable and an increase in due to shareholders and affiliates.

As of June 30, 2012, we had cash and cash equivalents of approximately $0.3 million, as compared to $0.5 million as of March 31, 2012. The decrease is primarily attributable to the funding of our operations and working capital needs for the three months ended June 30, 2012, offset by the $0.5 million drawn on the Keltic Facility. At June 30, 2012, we also had approximately $0.4 million of cash restricted from withdrawal and held by a bank in Ireland as collateral for overdraft coverage, creditors' insurance, revolving credit and other working capital purposes.

The following may result in a material decrease in our liquidity over the near-to-mid term:

§ continued significant levels of cash losses from operations; § our ability to obtain additional debt or equity financing should it be required;
§ an increase in working capital requirements to finance higher levels of inventories and accounts receivable; § our ability to maintain and improve our relationships with our distributors and our routes to market; § our ability to procure raw materials at a favorable price to support our level of sales;
§ potential acquisitions of additional brands; and § expansion into new markets and within existing markets in the U.S.
and internationally.

We continue to implement a plan to support the growth of existing brands through sales and marketing initiatives that we expect will generate cash flows from operations in the next few years. As part of this plan, we seek to grow our business through expansion to new markets, growth in existing markets and strengthened distributor relationships. Further, we are actively seeking to reduce certain inventory levels while supporting growth in others in an effort to improve our working capital and provide improved cash flow from operations. We are also seeking additional brands and agency relationships to leverage our existing distribution platform. We intend to finance our brand acquisitions through a combination of our available cash resources, borrowings and, in appropriate circumstances, additional issuances of equity and/or debt securities. Acquiring additional brands could have a significant effect on our financial position, could materially reduce our liquidity and could cause substantial fluctuations in our quarterly and yearly operating results. We continue to look to reduce expense, seek improvements in routes to market and contain production costs to improve cash flows.

As of June 30, 2012, we had borrowed $4.4 million of the $7.0 million available under the Keltic Facility, leaving $2.6 million in then potential availability for working capital needs. We believe our current cash and working capital, and the availability under the Keltic Facility, will enable us to fund our losses until we achieve profitability, ensure continuity of supply of our brands, and support new brand initiatives and marketing programs through at least June 2013.

Cash flows

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

                                                         Three Months ended
                                                              June 30,
                                                         2012           2011
                                                           (in thousands)
Net cash provided by (used in):
Operating activities                                   $    (654 )    $ (1,415 )
Investing activities                                         (78 )         (63 )
Financing activities                                         529         2,872

Effect of foreign currency translation                        (7 )           4

Net (decrease) increase in cash and cash equivalents   $    (210 )    $  1,398

Operating activities. A substantial portion of available cash has been used to fund our operating activities. In general, these cash funding requirements are based on operating losses, driven chiefly by the costs in maintaining our distribution system and our sales and marketing activities. We have also utilized cash to fund our receivables and inventories. In general, these cash outlays for receivables and inventories are only partially offset by increases in our accounts payable to our suppliers.

On average, the production cycle for our owned brands is up to three months from the time we obtain the distilled spirits, bulk wine and other materials needed to bottle and package our products to the time we receive products available for sale, in part due to the international nature of our business. We do not produce Gosling's rums, Pallini liqueurs, Tierras tequila, Gozio amaretto, or A. de Fussigny cognacs. Instead, we receive the finished product directly from the . . .