ITEM 1 - DESCRIPTION OF BUSINESS
The Company
Attitude Drinks Incorporated (“Attitude,” “We,” “Company” or “Our”) was formed in Delaware on May 10, 1988 under the name International Sportfest, Inc. In January 1994, we acquired 100% of the issued and outstanding common stock of Pride Management Services Plc ("PMS"). PMS was a holding company of six subsidiaries in the United Kingdom engaged in the leasing of motor vehicles throughout the United Kingdom. Simultaneously with the acquisition of PMS, we changed our name to Pride, Inc. From January 1994 through October 1999, we engaged in the leasing of motor vehicles throughout the United Kingdom. On October 1, 1999, we acquired all of the issued and outstanding stock of Mason Hill & Co. and changed our name to Mason Hill Holdings, Inc. During the quarter ended June 30, 2001, our operating subsidiary, Mason Hill & Co., was liquidated by the Securities Investors Protection Corporation. As a result, we became a shell corporation whose principal business was to locate and consummate a merger with an ongoing business.
On September 19, 2007, we acquired Attitude Drink Company, Inc., a Delaware corporation (“ADCI”), under an Agreement and Plan of Merger among Mason Hill Holdings, Inc., MH 09122007, Inc. and ADCI. Pursuant to the Merger Agreement, each share of ADCI common stock was converted into 40 shares of Company common stock, resulting in the issuance of 4,000,000 shares of our common stock. The acquisition was accounted for as a reverse merger (recapitalization) with ADCI deemed to be the accounting acquirer, and Attitude deemed to be the legal acquirer. Accordingly, the financial information presented in the financial statements is that of ADCI as adjusted to give effect to any difference in the par value of the issuer’s and the accounting acquirer’s stock with an offset to capital in excess of par value. The basis of the assets, liabilities and retained earnings of ADCI, the accounting acquirer, has been carried over in the recapitalization. On September 30, 2007, we changed our name to Attitude Drinks Incorporated. Our wholly owned subsidiary, ADCI, was incorporated in Delaware on June 18, 2007. Our principal executive offices are located at 712 U.S. Highway 1, North Palm Beach, Florida 33408. The telephone number is 561-227-2727. Our company’s common stock shares (PINX: ATTD) began trading in June 2008. Our fiscal year ends on March 31.
Nature of Business
Currently, our plan of operation during the next 12 months is to focus on the non-alcoholic single serving beverage business, developing and marketing milk based products in two fast growing segments: sports recovery and functional dairy. We do not directly manufacture our products but instead outsource the manufacturing process to a third party contract packer.
The Business
From 2001 to 2007, we were a shell corporation, whose principal business was to locate and consummate a merger with an ongoing business which occurred on September 19, 2007. Once the merger was completed, we developed our first product which was a “healthful” energy drink called VisViva™. This particular product was formulated as a juice blend with our proprietary IQZOL™ energy formula in 12 ounce “slim” cans. This additive blend provided a unique energy boost with low calories, carbohydrates and caffeine levels, thereby revolutionizing the energy experience derived from energy drinks. Production began in January 2008 with the first generated sales in late March 2008. Our initial co-packer for the VisViva ™ product was Carolina Beer & Beverage LLC in Mooresville, North Carolina. We stopped the production and sale of the VisViva™ product during 2010 and will consider reintroducing this product as a “focus drink” in late 2014 or 2015. Our second product which is branded as “Phase III® Recovery” is a milk-based protein drink which is available in chocolate and vanilla flavors with expectation to produce a banana flavor in 2014. Our co-packer for our dairy based product is O-AT-KA Milk Products Cooperative, Inc. in Batavia, New York. As our company grows and matures, a disruption or delay in production of any of such products could significantly affect our revenues.
Our ability to estimate demand for our products is imprecise and may be less precise during periods of rapid growth, particularly in new markets. If we materially underestimate demand for our products or are unable to secure sufficient ingredients or raw materials, we might not be able to satisfy demand on a short-term basis. We completed development on our second product, “Phase III® Recovery”, in 2010 which was introduced to address the growing need for sophisticated, exercise recovery solutions while offering a natural protein/carbohydrate ratio optimal for fitness recovery. This product contains 35 grams of protein that are naturally inherent in ultra filtered milk. The product is packaged as retort processed shelf stable dairy-based 100% milk based sports recovery drink, currently in both chocolate and vanilla flavors, in new state of the art, eco-friendly convenient re-sealable 14.5 oz aluminum bottles. We began distribution of this product in early 2010. Storage, distribution and sale of this product can be done at room temperature while our current retail presence is predominantly in coolers.
Other products to be considered in the future will be Blenders™ ‘Meal on the Move’ which will be a lactose free milk based meal replacement in various flavors. This product is expected to be developed and marketed in 2015, depending on available capital.
In House Intellectual Property
We have a trademark for Phase III® from the United States Patent and Trademark Office that was registered December 28, 2010.
While working on trademark and brand development for the dairy platform of functional drinks and protein delivery, we were approached by the owners of the entire intellectual property portfolio once developed and commercialized at Bravo Brands, Inc. On August 8, 2008, we entered into an Asset Purchase Agreement with RFC BB Holdings, LLC (seller) with a $507,500 secured convertible promissory note to purchase the right, title, trademarks and interest to this intellectual property portfolio, notably “Slammers” and “Blenders”. As these particular brands have been marketed and sold in the past, it is anticipated that these products can be reintroduced into the market much quicker and less expensive than developing a brand new product.
Production Contracts/Administration
Our operations are only in the United States and are run directly by our subsidiary, Attitude Drink Company, Inc. On December 16, 2008, the Company signed a manufacturing co-packing agreement with O-AT-KA Milk Products Cooperative, Inc. for the production of our latest product, Phase III® Recovery and future new dairy-based products. The manufacturer shall manufacture, package and ship such products. The Company pays for all shipping of the products F.O.B., the facility, as title of the products is passed to the receiver once products are delivered and received on premise.
Industry Trends
We are an innovative beverage brand-development company that was formed to exploit the accelerating shift in beverage consumption patterns of Americans. Consumers are embracing two distinct trends which have redefined the ever-growing single serve beverage industry. First, consumers representing all demographics are purchasing fewer “empty-calorie”, sugar sweetened, carbonated beverages, a trend that has continued for the last ten years. Second, and according to the CSP 2012 Category Management Handbook, “we’ll definitely see more and more functional beverages offering nutrient, vitamins and probiotics”. In our opinion, consumers are demanding drinks with functionality, delivering either nutritional or experiential impact. During recent years, our experience has indicated beverage consumers have demonstrated growing enthusiasm to pay significant premiums for these functional beverages while exhibiting passionate brand loyalty to the brands.
Management has extensive experience innovating functional products and pioneered the milk-based platform of this beverage “revolution” previously at Bravo! Brands Inc. During that time, management worked with Coca-Cola Enterprises to launch branded milk beverages nationwide. We enjoy strategic relationships, know-how, creativity and perspective in this space. We believe that the two platforms that we will address, sports recovery and functional dairy, represent the fastest growing, most innovative and highest priced drinks ever seen in the beverage industry.
Market Analysis
While there may be more current information, the most recent data that we have analyzed is informative. According to data from Chicago based Mintel, the sports drink category grew 30 percent from $5.4 billion to nearly $7 billion between 2008 and 2013. The growth was driven by advertising and new product lines from brands between 2010 and 2012. Sports drinks face increasing competition from other beverage categories offering consumers increasingly comparable functionality. Mintel stated that sports drinks carry a positive health perception, with 39 percent of sports drink consumers viewing the beverage as a healthy alternative to carbonated soft drinks (“CSD’s”) or juices. Twenty-four percent of parents also indicated giving their children sports drinks as a replacement for CSD’s or juices. Functional claims are expanding across food and drink categories as brands seek to differentiate themselves from the competition, and consumers seek added value for their shopping dollars. Look for many more variations in flavor claims, packaging and messaging as ways for brands in this category to grow.
Chicago based Euromonitor noted that the U.S. sports drink market began to slow in 2012 and was essentially flat in 2013. The category has been subject to a confluence of external pressures with consumers open to exiting the category- for other hydration-focused packaged beverages which favor our Phase III® Recovery products. Euromonitor International continued to report that consumers have shied away from high-sugar, high-calorie packaged beverages over the past two years but despite the pressure they are facing from these outside categories, sports drinks still have opportunities to re-engage consumers as there is considerable opportunity for ‘natural’ alternative recovery and hydration beverages.
When it comes to sports drinks, two brands are synonymous with the category: Gatorade and Powerade. According to Siselk Purchasek, New York based PepsiCo Inc.’s Gatorade brand and Atlanta-based The Coca Cola Co,’s Powerade brand accounted for 96 percent of the category for the 52 weeks ending November 3, 2013. For the non-aseptic sports drink segment, the two accounted for 99 percent in IRI-measured channels ending March 23, 2014. Gatorade makes up 78 percent of that share. Although Gatorade makes up the majority, Powerade has gained traction over the years.
Sports drinks aren’t the only ready-to-drink (RTD) beverages that consumers are turning to in order to support their active, healthy lifestyles. According to Chicago-based The NPB Group’s “Protein Perceptions and Needs” report, 78 percent of U.S. consumers say that protein is important for a healthy diet. However, they are split on what the best sources of protein are, with half naming non-meat sources and the other half naming meat. Those non-meat sources included eggs, yogurt, nuts and seeds, but consumers also are finding favor in protein drinks. Smaller than the sports drinks category, nutritional drinks, including meal replacement beverages, accounted for less than half of the sales of sports drinks in 2013 at $3.2 billion, according to Mintel’s January report “Nutritional and Performance Drinks - US.” Even smaller than that was protein drinks, with $2.1 billion in sales in 2013; however, this is a 51.2 percent increase from 2011 when sales were $1.4 billion the report notes: “Protein RTDs within the sports nutrition category are growing strongly,” says Euromonitor’s Chris Schmidt, consumer health analyst. Their push into mainstream retailers and an increasing focus on lifestyle and functional nutrition branding - as opposed to hardcore sports recovery - along with the glowing praise heaped on protein by the popular media, is driving growth in both relatively mature and emerging markets.” Schmidt notes that Euromonitor defines protein drinks as beverages that contain 20 or more grams of protein and are positioned for sports performance and recovery. Schmidt notes that although RTD protein drinks have gained a bigger following n the past few years, the segment appeals more to everyday consumers versus hard-core athletes because of the price difference compared with protein powders.
Due to limited capital, we are not able to purchase the most updated data, but we consider the following information as very informative about the beverage industries. The CSP (convenience store/petroleum) recently released their “2012 Category Management Handbook.” In their release and according to the Nielsen Co. and Dr. Pepper Snapple Group, Inc., the Sports Drinks category represented 9.2% of the nonalcoholic beverages sector for the 52 weeks ended January 28, 2012. In addition and according to the Symphony/IRI Group, the Sports Drinks category reflected increases in unit sales in 2011 as follows: food - 9.6%; drug -10.4%; and convenience stores - 12.9%. In fact the pace of sports-drink sales increases held steady in 2011, with dollars up nearly 10% and units up almost 13%. In the last quarter of the year, the pace actually accelerated.
Further, findings from the Sports and Performance Nutrition 2011 Conference as published by Multi-Sport Research Ltd. on May 26, 2011 indicated the following:
- Combined enrollment at Ironman, IM 70.3 and ITU (World Cup & World Championship) events grew more than 20% on year in 2009 as this growth came amidst global recession.
- An online and TV push, notably by ITU in 2010, presents strong broadcast and revenue opportunities - particularly leading to 2012 and beyond.
- Sales are largely via specialty retail rather than ‘big box’ retail.
- Price segmentation fits within standard premium/mainstream/value pricing brands with some ‘super-premium’ pricing across product sectors.
- Interviews on sports nutrition usage indicated that 16% of athletes and coaches use the products daily, 24% use the products 4+ times a week and 23% use the products 2-3 times a week.
- Feedback indicated the top four factors that influence choice of sports nutrition: availability near training facilities; results published in peer review articles; research evidence and blind tests; and taste and consistency.
Market Segment Strategy
As we have operated for nearly seven years, our future strategy will be to develop our products in the two fast growing segments: sports recovery and functional milk. We produced our first product, VisViva™ which is an energy drink; however, that product has been tabled for now. Phase III® Recovery is our second product which is a protein sports recovery drink. We expect to develop two to three new products in the next two to three fiscal years, depending on available capital.
We know from experience that the largest retailers of milk products are demanding new and more diverse refreshment drinks, thus our response to consumer interest and demand with our dairy based product, “Phase III® Recovery” that was introduced in early 2010.
Competition
The beverage industry is highly competitive. The principal areas of competition are pricing, packaging, development of new products and flavors and marketing campaigns. Our products will compete with a wide range of drinks produced by a relatively large number of manufacturers, any of which have substantially greater financial, marketing and distribution resources than we do.
Important factors affecting our ability to compete successfully include taste and flavor of products, trade and consumer promotions, rapid and effective development of new, unique cutting edge products, attractive and different packaging, branded product advertising and pricing. We will also compete for distributors who will concentrate on marketing our products over those of our competitors, provide stable and reliable distribution and secure adequate shelf space in retail outlets. Competitive pressures in the sports beverage market could cause our products to be unable to gain market share, or we could experience price erosion, which could have a material adverse effect on our business and results. According to The Beverage Industry magazine for May 2012, the domestic sports drink category is now estimated at approximately $4.1 billion annual sales.
We compete not only for customer acceptance but for maximum marketing efforts by multi-brand licensed bottlers, brokers and distributors, many of which have a principal affiliation with competing companies and brands. Certain large companies such as The Coca-Cola Company and Pepsico Inc. market and/or distribute products in that market segment such as Muscle Milk® and other protein beverages.
Marketing
Management believes that the impact of the internet and the enhanced communication systems that it has enabled have dramatically changed the way we live our lives today. There is vastly improved access to information, and the public is bombarded with messages that have diminished the value and impact of traditional media advertising. There have been increases in interest in protein RTD “ready to drink” beverages.
Based on available capital, strong emphasis will be placed on public relations initiatives in an effort to capture and maintain consumer awareness. Validation of the advanced science behind each introduced brand will provide clear and reliable messaging behind each functional line. Carefully developed and executed focus groups will also be conducted, designed to raise awareness about the true functionality and lifestyle enhancement offered with each innovative line. We plan to focus on gorilla and grass roots marketing programs, investing in sponsorships and spokespeople in venues of competitive sports activities. This strategy allows promoters to develop brand essence, communicate directly with spectators and participants and promote trial with consumers directly. This marketing approach, best executed by the Red Bull energy drink brand, escapes the filters that consumers use to reduce messaging. When executed properly, as Red Bull has, this technique defines the brand image while consumers embrace the branding as trend setting entertainment. In addition, we intend to continue participating in nationwide events and programs supporting the unique causes.
Government Regulation
The production, distribution and sale in the United States of many of our products are subject to the Federal Food, Drug and Cosmetic Act; the Dietary Supplement Health and Education Act of 1994; the Occupational Safety and Health Act; various environmental statutes; and various other federal, state and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, labeling and ingredients of such products.
Measures have been enacted in various localities and states that require that a deposit be charged for certain non-refillable beverage containers. The precise requirements imposed by these measures vary. Other deposit, recycling or product stewardship proposals have been introduced in certain states and localities and in Congress, and we anticipate that similar legislation and regulations may be proposed in the future at the local, state and federal levels, both in the United States and elsewhere.
We do not expect that compliance with these provisions will have a material adverse effect upon our capital expenditures, net income or competitive position.
Employees
As of March 31, 2014, we currently have eight full time employees. Four of these individuals are employed at the corporate office with one sales representative in New York and, three sale representatives in Florida.
Research and Development
Over the last two years, the Company spent approximately $5,205 and $2,425, respectively, on research and development activities related to the Phase III® Recovery products. All costs were borne by the Company.
ITEM 2
ITEM 2 - DESCRIPTION OF PROPERTY
On February 7, 2013, we moved to our current office at 712 U.S. Highway 1, Suite 200, North Palm Beach, Florida 33408 from our previous address at 10415 Riverside Drive, Suite 101, Palm Beach Gardens, Florida 33410. We entered into a three-year lease that began on February 1, 2013 with two (2) year renewable terms with a termination date of January 31, 2016. The minimum monthly base rent for the first year is $1,602 plus operating expense of $2,670 for a total monthly amount of $4,272 (excluding certain variable operating expenses and taxes), and the lease provides for annual 3% increases throughout its term. The lease covers 3,333 square feet and includes our right of first refusal to contiguous space.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
On May 18, 2009, F&M Merchant Group, LLC commenced a lawsuit in the state of Texas to recover the balance owed by us under a Sales Agent Agreement entered by the parties on November 1, 2008. This agreement requires us to pay $5,000 per month and a 5% commission on all net sales. On September 3, 2009, a final judgment by default was approved by the district court in Denton County, Texas for a total sum of $22,348. This claim has been recorded on the Company’s records. Due to the lack of adequate capital financing, we have not been able to make any payments. We expect to resolve this matter as soon as practical.
On June 5, 2009, Tuttle Motor Sports, Inc. commenced a lawsuit in the state of Florida to recover the balance owed by us under a Letter of Agreement to sponsor a Top Fuel Dragster for the 2008 NHRA racing season in the amount of $803,750. Out of this total amount, only $300,000 is required to be paid in cash with the remainder to be paid in shares of common stock. This amount had already been recorded in our records. During May, 2010, Tuttle Motor Sports, Inc. dismissed the lawsuit without prejudice. Prior to that time, the parties went through mediation but were unable to settle. The likelihood of an unfavorable outcome cannot be evaluated as another lawsuit possibly could be filed against the Company.
On August 21, 2009, CH Fulfillment Services, LLC commenced a lawsuit in the state of Alabama to recover past due amounts owed by us under a contract to provide shipping and fulfillment services. The claim is for $2,106 plus interest and legal costs. This amount was already recorded on our records as well as projected interest costs of $682 and estimated court costs of $307 for a total of $3,095. A process of garnishment by the district court in Mobile County, Alabama was approved on September 25, 2009 for the total amount of $3,095. On October 26, 2009, the same court authorized a garnishment process to pay $657 which was done as part payment of the total due amount. Current outstanding balance due is $2,438. No other payments have been made.
On September 20, 2013, James N. Fuller, Jr. commenced a lawsuit in the state of Florida to recover past due amounts owed by us for rendered independent sales contracting services. The claim was for $18,300 plus filing fee of $460. The $18,300 was already recorded on our records. Due to lack of adequate capital financing, we have not been able to make any payments. We expect to resolve that matter as soon as practical.
On October 1, 2013, Beanpot Broadcasting Corp. d/b/a WXRV-FM, commenced a lawsuit in the state of Massachusetts to recover past due amounts owed by us for rendered independent sales contracting services. The claim was for $15,500 for past due services, $4,169 in service charges, $363 for prejudgment interest and $200 court costs for a total of $20,232. The total $20,232 amount was already recorded on our records. On November 15, 2013, the Trial Court of Massachusetts entered a judgment for the plaintiff (“Beanpot”) for the total $20,232. Due to the lack of adequate capital financing, we have not been able to make any payments. We expect to resolve this matter as soon as practical.
On November 27, 2013, we received an order of the court from The Trial Court of Massachusetts Small Claims Session, to attend a hearing on December 12 2013 about a small claims amount of $5,000 from Marshfield Broadcasting Company, Inc. to recover past due amounts. A total of $5,500 was already recorded our records. On December 31, 2013, a judgment in the amount of $5,238 was entered in favor of Marshfield Broadcasting Inc. No payments have been made as we will resolve this matter as soon as practical.
On February 4, 2014, Philip Terrano commenced a lawsuit in the state of Florida to recover past due amounts owed by us for past compensation in the amount of approximately $17,000. We disagree with this amount as our records reflect a total amount owed of $6,974. On May 28, 2014, we entered into a settlement agreement with Terrano to pay him a total of $11,000, to be remitted 60 days of the effective date of this agreement. Due to a lack of capital financing, we expect to address this matter as soon as we can.
On June 9, 2014, North Palm Beach Broadcasting Company d/b/a/ WSVU-AM Radio filed a lawsuit in the state of Florida to recover past due services owed by us in the amount of $22,000 that is due with interest. We do not agree with that amount as we did make various payments in 2013 that totaled $8,000. We are working with that party to arrive at a mutual agreeable outstanding amount if any. We do not have any other outstanding balance that is recorded on our records. On August 6, 2014, we received a Default Final Judgment from Palm Beach County Circuit Court in Florida for a total amount of $23, 411. We are still contesting that amount and will resolve the matter as soon as possible.
On June 26, 2014, Innerworkings, Inc. filed a lawsuit in the state of Florida to recover past due services owed by us in the amount of $5,039 that is due with interest. This same amount has already been recorded on our records. We expect to address this issue as soon as practical.
On November 11, 2014, C.A. Courtesy Demos, Inc. commenced a lawsuit in the state of Florida to recover past due amounts owed by us for rendered services. The claim was for $5,803. We do not agree with this amount and have not recorded this amount on our records as services were supposed to be rendered, but a hurricane in the northeastern section of the United States occurred at that given time. We expect to resolve this matter as soon as practical.
On November 20, 2014, Pavilion Law Center, LLC filed a motion in the circuit court of Palm Beach County, Florida to enforce a settlement agreement for past due fees. We are contesting some of the amounts and will resolve this matter as soon as practical.
ITEM 4
ITEM 4 - Mine Safety Disclosures - (None)
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common stock market price
The Company’s common stock began trading on the OTC Electronic Bulletin Board (ticker symbol ATTD.OB) on June 19, 2008. The approximate number of record holders of the Company’s common stock at October 31, 2014 was 6,678.
The following quarterly quotations for common stock transactions on the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not represent actual transactions. Source is NASDAQ.COM:
Dividends
The holders of common stock are entitled to receive, pro rata, such dividends and other distributions as and when declared by our board of directors out of the assets and funds legally available therefore. We have not paid dividends on our common stock and do not anticipate paying dividends to holders of our common stock in the foreseeable future. Management intends to retain future earnings, if any, to finance working capital and to expand our operations.
Securities Authorized for Issuance under Equity Compensation Plans
Sale of Unregistered Securities
Quarter Ended March 31, 2014
During January, 2014, we issued a promissory convertible note dated January 1, 2014 in the principal amount of $25,000 as payment of the January, 2014 consulting services provided by Southridge Partners II, LP pursuant to the Consulting Agreement entered on July 19, 2012. We received no cash proceeds. The principal of this note is payable at the option of the holder at any time after the maturity date of May 31, 2015 in shares of the Company’s common stock. The note is not subject to interest and is convertible into shares of common stock in denominations of ten thousand dollars ($10,000) and integral multiples thereof, provided that the number of shares to be issued upon conversion is a minimum of 3,000. The note may be converted into common stock at a conversion price equal to the current market price multiplied by eighty percent (80%). Current market price means the average of the closing bid prices for the common stock as reported by Bloomberg, LP or, if not so reported, as reported on the over-the-counter market, for the five (5) trading days ending on the trading day immediately before the relevant conversion date. The holder of this note may not convert this note to the extent such conversion would result in excess of 9.99% of the then issued and outstanding shares of common stock held by such holder. No conversions have been made for this note.
During February, 2014, we issued a promissory convertible note dated February 1, 2014 in the principal amount of $25,000 as payment of the February, 2014 consulting services provided by Southridge Partners II, LP pursuant to the Consulting Agreement entered on July 19, 2012. We received no cash proceeds. The principal of this note is payable at the option of the holder at any time after the maturity date of June 30, 2015 in shares of the Company’s common stock. The note is not subject to interest and is convertible into shares of common stock in denominations of ten thousand dollars ($10,000) and integral multiples thereof, provided that the number of shares to be issued upon conversion is a minimum of 3,000. The note may be converted into common stock at a conversion price equal to the current market price multiplied by eighty percent (80%). Current market price means the average of the closing bid prices for the common stock as reported by Bloomberg, LP or, if not so reported, as reported on the over-the-counter market, for the five (5) trading days ending on the trading day immediately before the relevant conversion date. The holder of this note may not convert this note to the extent such conversion would result in excess of 9.99% of the then issued and outstanding shares of common stock held by such holder. No conversions have been made for this note.
On February 11, 2014, we entered into an allonge number 16 to a secured note held by Alpha Capital Anstalt which was issued February 22, 2012 in the amount of $55,000 less a finder’s fee of $5,000 for net proceeds received in the amount of $50,000.
During March, 2013, we issued a promissory convertible note dated March 1, 2014 in the principal amount of $25,000 as payment of the March, 2013 consulting services provided by Southridge Partners II, LP pursuant to the Consulting Agreement entered on July 19, 2012. We received no cash proceeds. The principal of this note is payable at the option of the holder at any time after the maturity date of July 31, 2015 in shares of the Company’s common stock. The note is not subject to interest and is convertible into shares of common stock in denominations of ten thousand dollars ($10,000) and integral multiples thereof, provided that the number of shares to be issued upon conversion is a minimum of 3,000. The note may be converted into common stock at a conversion price equal to the current market price multiplied by eighty percent (80%). Current market price means the average of the closing bid prices for the common stock as reported by Bloomberg, LP or, if not so reported, as reported on the over-the-counter market, for the five (5) trading days ending on the trading day immediately before the relevant conversion date. The holder of this note may not convert this note to the extent such conversion would result in excess of 9.99% of the then issued and outstanding shares of common stock held by such holder. No conversions have been made for this note.
These securities were issued in reliance upon an exemption from registration under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended. All of the investors were accredited investors and/or had preexisting relationships with the Company, there was no general solicitation or advertising in connection with the offer or sale of securities and the securities were issued with a restrictive legend.
During the three months ended March 31, 2014, the Company did not issue any new shares of common stock, mainly due to the Company’s hold on conversions while the Company was restating its Form 10-K for March 31, 2013 and its Form 10-Q for June 30, 2013.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
Not applicable.
ITEM 7
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
EXECUTIVE LEVEL OVERVIEW
Our Business Model
Our plan of operation during the next 12 months is to focus on the non-alcoholic single serving beverage business, developing and marketing milk based products in two fast growing segments: sports recovery and functional dairy. We do not directly manufacture our products but instead outsource the manufacturing process to a third party contract packer. Our efforts were focused in our first full year operations primarily on developing our first energy drink which is called VisViva™ which sales began in late March 2008. We have since tabled that product.
Milk, while the second highest beverage consumed in America in terms of overall volume, is still under-represented in the American single serve ready-to-drink beverage industry. While known for generations by nutritionists and more recently identified by sports, hydration, metabolism and protein professionals and scientists as “mother nature’s most perfect food”, milk has yet to be successfully branded and commercialized.
We completed research and development work in developing our latest dairy based product which is called “Phase III® Recovery” and is designed for the third phase of exercise, the “after phase” of before, during and after. This product is the first milk based protein drink ever to be produced in America and is shelf-stable with a twelve (12) months long shelf life. We started to sell this new product in February, 2010. Our co-pack partner, O-AT-KA Milk Products, is the largest retort milk processor in America, located in Batavia, New York and has the most advanced retort processor and know-how to produce this product with state-of-the-art milk filtration systems as well as the packaging of this product in new Ball Container aluminum eco-friendly re-sealable bottles. The primary target for Phase III Recovery® is active sports minded males and females from ages 15 to 35, but we will target active sports and exercise consumers at all levels. Gyms, sports teams, body builders and even high-endurance athletes are all beginning to focus on sports recovery drinks which we consider the “next generation” sports drink. We anticipate the development of other dairy based drink products in late 2014 or early 2015, depending upon available capital.
We organized a Scientific Advisory Board of three well known experts that have extensive experience in sports nutrition. This board is helpful in communicating the scientific benefits of our sports recovery drink as well as new functional milk drinks. Their contacts in the world of sports will be very important in our sales efforts, especially in the early days.
We plan to initially focus on the largest markets for beverages in the eastern United States. We intend to develop key working partnerships with regional direct store delivery (DSD) beverage distributors in these markets and will support them, based on available capital, with field representatives to assure sufficient shelf compliance. Regional distributors have lost four major beverage lines in the last couple of years including Monster Energy (moved to Anheuser Bush), Fuze (purchased by Coca-Cola), Vitamin Water (purchased by Coca-Cola, and the V-8 brands (now distributed by Coca-Cola). We will develop regionally exclusive DSD agreements that are desperately needed by the distributors to replace these losses as well as shipping direct to our customers via our own storage system.
We will pre-sell in four sales channels; grocery, convenience, drug and sports and gym specialty. Certain accounts like chained convenience stores, grocery and drug stores will require warehouse distribution. The shelf-stable and long shelf life attributes of our products will accommodate any and all distribution and warehouse systems. To accommodate this business, we will employ beverage brokers and work with the “tobacco & candy” and food service warehouse distributors like McLane Company and Sysco Foods.
The pricing and gross profit margin for the products will vary. Each product delivers different functionality and utilizes different types of packaging and package sizes. Without exception, these products will command premium pricing due to the functionality and value-added formulation and will therefore be priced according to the nearest competitive brands in their respective spaces. The functional milk drinks are also expected to command approximately the same percentage margin due to the premium pricing commanded by the experiential functionality. Singles will obtain higher margin than multi-packs.
Plan of Operations
We are continuing to seek other sources of financing to develop our business plan, implement our sales and marketing plan and to meet other operational expense requirements. Historically, we have had to rely on convertible debt financings to cover operating costs. Based on the available cash, we have no assurance that we will be able to obtain additional funding to sustain our limited operations. If we do not obtain additional funding, we may need to cease operations until we do so and, in that event, may consider a sale of the rights to our product line(s) and intangible assets such as our trademarks or a joint venture partner that will provide funding to the enterprise. However, certain of our convertible debt obligations totaling $5,991,182 are secured by our assets. Failure to fulfill our obligations under these notes and related agreements could lead to the loss of these assets, which would be detrimental to our operations.
Our future operations are totally dependent upon obtaining additional funding. Past fundings have been subject to defaults by the company’s inability to meet due dates for certain notes payable, thereby triggering anti-dilution rights which created the need to issue additional shares of common stock and/or additional warrants to purchase additional shares of common stock in order to extend the applicable due dates for certain notes payable. There can be no assurance that these defaults will not happen again in the future, thereby creating the potential need for additional issuances of shares of common stock and/or warrants, assuming the holders agree to further extensions.
We will consider equity and/or convertible debt financings, either or both of a private sale or a registered public offering of our common stock; however, at this time and with the current economy, it seems unlikely that we can obtain an underwriter.
We anticipate that, depending on market conditions and our plan of operations, we may incur operating losses in the future based mainly on the fact that we may not be able to generate enough gross profits from our sales to cover our operating expenses and to increase our sales and marketing efforts. Our most recently developed “Phase III® Recovery” drink product was introduced in early 2010 and based on historical spending, we anticipate a need of funding in the range of $1,500,000 to $1,900,000 for the next twelve months to meet our business plan and operating needs only. This figure does not include any new product research and development activities.
This discussion and analysis of our consolidated financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles that are generally accepted in the United States of America. Our fiscal year end is March 31.
Increase in Authorized Shares and Reverse Stock Split
The state of Delaware approved on January 30, 2013 the increase in our authorized shares of common stock from five billion (5,000,000,000) to twenty billion (20,000,000,000). As such, we are reflecting the twenty billion number in our financial statements for the year ended March 31, 2014 and March 31, 2013.
We implemented a 1-for-500 reverse stock split on July 1, 2013. This change occurred before the release of our March 31, 2013 audited financial statements. As such, we restated all applicable financial data throughout this report for the year ended March 31, 2013 for proper disclosure and comparability purposes.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP 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. The most critical estimates included in our financial statements are the following:
Financial Instrument Valuation
In estimating the fair value of our derivative financial instruments that are required to be carried as liabilities at fair value pursuant to the FASB Accounting Standards Codification for the period ended March 31, 2014, we use all available information and appropriate techniques including outside consultants to develop our estimates. However, actual results could differ from our estimates.
Derivative Financial Instruments
We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have and will frequently enter into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts or (iii) may be net-cash settled by the counterparty to a financing transaction. As required by the FASB Accounting Standards Codification, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements. However, in the past, we were allowed to elect fair value measurement of the hybrid financial instruments, on a case-by-case basis, rather than bifurcate the derivative for all of our previous convertible notes up to February 21, 2013 when we issued new consolidated exchange convertible notes under different terms and language. We believed that fair value measurement of the hybrid convertible promissory notes arising from our various financing arrangements provided a more meaningful presentation of that financial instrument; however, as just previously mentioned on February 21 2013, we consolidated all the past outstanding convertible notes into new consolidated exchange notes that contained different language and eliminated many of the toxic elements listed in the old convertible notes.
We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring of fair values. In selecting the appropriate technique(s), we consider, among other factors, the nature of the instrument, the market risks that such instruments embody and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes-Merton option valuation technique, since it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. For complex hybrid instruments, such as convertible promissory notes that include embedded conversion options, puts and redemption features embedded in them, we generally use techniques that embody all of the requisite assumptions (including credit risk, interest-rate risk, dilution and exercise/conversion behaviors) that are necessary to fair value these more complex instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, we project and discount future cash flows applying probability-weightage to multiple possible outcomes. After consulting with a new outside valuation firm, we found that many companies are using other valuation models, primarily the lattice model to bifurcate the derivative and record the derivatives at fair value. We elected to use this new valuation model for the new consolidated notes because that model would value all convertible notes based on a probability weighted scenario model and future projections of the various potential outcomes on all assumptions, observable inputs and inherent valuation of risk, The embedded derivatives that were analyzed and incorporated into our model included the conversion feature with the variable market based conversion and the default provisions. This lattice model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur and the specific terms that would be in effect at the time (i.e. interest rates, stock price, conversion price, etc.). Projections were then made on these underlying factors which led to a set of potential scenarios. Probabilities were assigned to each of these scenarios based on management projections. This led to a cash flow projection and a probability associated with that cash flow. A discounted weighted average cash flow over the various scenarios was completed, and it was compared to the discounted cash flow of the 2 year 4% instrument without the embedded derivatives, thus determining a value for the compound embedded derivatives at the point of issue. These derivative liabilities need to be marked-to-market each reporting period with the change in fair value to be recorded in the profit/loss statement. Fair value is defined as the amount for which an asset (or liability) could be exchanged in a current transaction between knowledgeable, unrelated willing parties when neither party is acting under compulsion.
Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility.
Impairment of Long-Lived Assets
Our long-lived assets consist principally of intangible assets, and to a much lesser extent, furniture and equipment. We evaluate the carrying value and recoverability of our long-lived assets when circumstances warrant such evaluation by applying the provisions of the FASB Accounting Standards Codification which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. We did record an expense of $18,722 for the year ended March 31, 2013 for old trademarks that are not currently used.
Recent accounting pronouncements
In December 2011, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”) that provides amendments for disclosures about offsetting assets and liabilities. The amendments require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, securities borrowing and securities lending arrangements. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required by the amendments should be provided retrospectively for all comparative periods presented. For the Company, the amendment is effective for fiscal year 2014. The Company’s evaluation determined that there is no restatement impact on the Company’s financial statements.
In October, 2012, the Financial Accounting Standards Board issued an ASU that contained amendments that affect a wide variety of topics in the Codification and represent changes to clarify the Codifications, correct unintended application of guidance or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. These amendments will be effective for fiscal periods beginning after December 15, 2012. The effect of adoption will have a minimum impact on the Company.
In January, 2013, the Financial Accounting Standards Board issued an ASU that contained amendments to apply to derivatives accounted for in accordance with Topic 815, Derivative and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. These amendments should be applied for fiscal years beginning on or after January 1, 2013 and interim periods within those annual periods. The Company has implemented such procedures for its convertible notes issued at February 21, 2013 and any other issued convertible notes payable subsequent to that date.
In February, 2013, the Financial Accounting Standard Board issued an ASU that contained amendments that provide guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. Examples of obligations within the scope of this ASU include debt arrangements, other contractual obligations and settled litigation and judicial rulings. These amendments will be effective for fiscal periods and interim periods within those years beginning after December 15, 2013. The effect of adoption will have a minimum impact on the Company.
RESULTS OF OPERATIONS
Revenues
Consolidated Revenues
All revenues were generated in the United States. The decrease in our revenues for the year ended March 31, 2014 as compared to the prior year ended March 31, 2013 is the result of decreased customer accounts mainly for our Phase III® Recovery products in the Florida Walgreens’ stores.
Slotting fees are common in the large store channels and represent cash payments made for rights to place our products on customer retail shelves for a stipulated period of time. A component of our growth plan includes increasing penetration in the large store channel which may be subject to future slotting fees. We recorded a total of $875 for slotting fees for the year ended March 31, 2014 and $2,625 for slotting fees for the year ended March 31, 2013.
Based on available capital, we plan to increase our revenues during the next twelve months by implementing marketing and sales promotion programs to introduce our “Phase III® Recovery” drink to new markets in the 2014 calendar year, increasing our internal sales force, securing additional national distributors, expanding our products offering, increasing our volume per outlet and implementing new grass roots marketing and sample programs.
The computation of the percentage of expenses to revenues is not meaningful at this time and is not representative of expected future operations.
Product and shipping costs for the year ended March 31, 2014 were less than the year ended March 31, 2013 mainly due to the lower sales of the Phase III® Recovery product.
Salaries, taxes and employee benefit costs
For the year ended March 31, 2014, total expenses of $883,306 were lower by $336,981 over last year’s comparable figures of $1,220,287 mainly due to fewer employees and no further corrections for prior years’ salary lock-out agreements.
Marketing and promotion
For the year ended March 31, 2014, we incurred total marketing and promotion costs of $52,659 as compared to $205,036 for the year ended March 31, 2013 for a decrease of $152,377 or 74.3%. This decrease was due primarily to the decision to spend fewer marketing dollars for the year ended March 31, 2014 due to limited resources and capital.
Consulting fees
Consulting fees of $312,500 for the year ended March 31, 2014 were $110,389 or 54.6% higher than last year’s figures mainly due to the use of an outside financial services consulting firm for a full year ended March 31, 2014 as compared to a partial year for the year ended March 31, 2013.
Professional and legal fees
These costs related to the use of outside legal, accounting and auditing firms. Total costs for the year ended March 31, 2014 of $196,071 were $51,011 lower than the previous year’s comparable costs of $247,082 mainly due to lower legal requirement costs.
Travel and entertainment
These costs decreased over the prior year ending March 31, 2013 by $27,566 mainly due to decreased travel activities by fewer sales employees and consultants due to limited capital and promotional spending for new markets.
Stock compensation expense
For the year ended March 31, 2014, we recorded stock compensation expense of $26,997 for the issuance of 10,000,000 fully vested non-qualified common stock options as compared to $99,504 for the issuance of common stock mainly for services rendered by professional athletes to promote our products for the year ended March 31, 2013.
Other operating expenses
The other operating expenses decreased by $104,871 or 28.9% over the prior year mainly due to decreased investor relations costs and lower office rent expense due to the move to a new office location. The other main components in this category represent insurance expense and Board of Directors’ fees.
Other Income (Expense)
Derivative income/(expense)
Derivative income/(expense) arises from changes in the fair value of our derivative financial instruments and, in rare instances, day-one losses when the fair value of embedded and freestanding derivative financial instruments issued or included in financing transactions exceed the proceeds or other basis. In addition, the fair value of our financial instruments that are recorded at fair value will change in future periods based upon changes in our trading market price and changes in other assumptions and market indicators used in the valuation techniques. Future changes in these underlying internal and external market conditions will have a continuing effect on derivative income/expense associated with our derivative financial instruments.
The following table summarizes the effects on our income (expense) associated with changes in the fair values of our financial instruments that are carried at fair value from the twelve months ended March 31, 2014 and the twelve months ended March 31, 2013:
Our financial instruments that are recorded at fair value will change in future periods based upon changes in our trading market price and changes in other assumptions and market indicators used in the valuation techniques.
Loss on extinguishment of debt
We recorded a loss on extinguishment of debt for the fiscal year ended March 31, 2013 for $2,838,522 as these costs represent the changes caused to common stock equivalents from certain modifications of terms normally associated with extending the due dates of certain debts, especially for the consolidation of various previous note financings into one set of notes with same terms and a new extension of the due dates to February 21, 2015. There was no loss on extinguishment of debt for the fiscal year ended March 31, 2014 due to no term modifications of existing debt instruments.
Interest and Other Financing Costs:
We recorded interest income for the fiscal year ended March 31, 2014 for $1,535,402 and interest income for $2,318,195 for the year ended March 31, 2013 in connection with our debt obligations at interest rates from 10% to 15%. The change of $782,793 over the prior fiscal year was attributed to the recording of debt instruments at fair value (debt discount expense) due to the changes in the stock price. We recorded the amortization of debt discounts for $1,492,964 and $513,301for the years ended March 31, 2014 and March 31, 2013, respectively.
Net Loss
We reported a net loss for the year ended March 31, 2014 of $212,015 and a net loss of $3,025,279 for the year ended March 31, 2013. The majority of the expenses for the year ended March 31, 2014 related to salary related costs, consulting fees, professional and legal fees and recognition of interest income reflecting the changes in the fair value of the convertible debts. Most of the costs incurred in the prior year ended March 31, 2013 related to salary related costs, marketing and promotion costs for promotion of our Phase III® Recovery drink, consulting fees, professional and legal fees and recognition of interest income reflecting changes in the fair value of the convertible debts.
Loss per Common Share Applicable to Common Stockholders
The Company’s basic and diluted loss per common share applicable to common stockholders for the period ended March 31, 2014 was $(0.00), and the basic and diluted loss per common share for the period ended March 31, 2013 was $(0.56). Because the Company experienced a net loss for the period ended March 31, 2014, all potential common share conversions existing in our financial instruments would have an anti-dilutive impact on earnings per share; therefore, diluted loss per common share equals basic loss per common share for this period. The weighted average common shares outstanding for the period ended March 31, 2014 and 2013 were 102,827,957 and 5,374,096, respectively for the basic and diluted loss calculation.
LIQUIDITY AND CAPITAL RESOURCES
Being a company with less than seven years of operations, we have yet to achieve any substantial revenues or profitability, and our ability to continue as a going concern will be dependent upon receiving additional third party financings to fund our business at least throughout the next twelve months in our new fiscal year. Ultimately, our ability to continue is dependent upon the achievement of profitable operations. We anticipate that, depending on market conditions and our plan of operations, we may incur operating losses in the future based mainly on the fact that we may not be able to generate enough gross profits from our sales to cover our operating expenses and to increase our sales and marketing efforts. There is no assurance that further funding will be available at acceptable terms, if at all, or that we will be able to achieve profitability or receive adequate funding for new product research and development activities. These conditions raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not reflect any adjustments that may result from the outcome of this uncertainty.
Working Capital Needs and Major Cash Expenditures
We currently have monthly working capital needs of approximately $125,000 to $160,000. This amount is, however, expected to increase in the next fiscal year, primarily due to the following factors:
· Increased employees and related travel costs
· Required interest payments on our convertible promissory notes payable
· Increased product development costs for new products, packaging and marketing materials
External Sources of Liquidity-External Debt Financing and Use of Common Stock for the last two years:
External Debt Financing:
On June 14, 2012, we entered into two promissory notes, one for $100,000 with Alpha Capital Anstalt with receipt of payment on June 27, 2012 and the other one for $40,000 with Whalehaven Capital Fund, Ltd with receipt of payment on July 9, 2012. These notes are subject to an interest rate of ten percent (10%) and are due the sooner of (i) October 14, 2012 or (ii) from the proceeds of the next funding. As these notes are still outstanding, the interest rate is now 18%. The Company plans to transfer these amounts into long-term convertible notes.
On June 26, 2012, we entered into a promissory note of $110,000 with Centaurian Fund LP with receipt of payment on June 28, 2012. We agreed to pay a finder’s fee of $10,000 as we received the net payment of $100,000 on June 28, 2012. The note is subject to an interest rate of ten percent (10%) and is due the sooner of (i) October 14, 2012 or (ii) from the proceeds of the next funding. As this note is still outstanding, the interest rate is now 18%. The Company plans to transfer this amount into a long-term convertible note.
On August 22, 2012, we executed a $75,000 allonge #1 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received the full $75,000 amount on the same date. The total outstanding amount including the allonge is $250,000.
On October 18, 2012, we executed a $150,000 allonge #2 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $135,000 as $15,000 was paid as a finder’s fee. The total outstanding amount including all allonges is $400,000.
On November 9, 2012, we executed a $135,000 allonge #3 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $125,000 as $10,000 was paid as a finder’s fee. The total outstanding amount including all allonges is $535,000.
On December 6, 2012, we executed a $165,000 allonge #4 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $150,000 as $15,000 was paid as a finder’s fee. The total outstanding amount including all allonges is $700,000.
On December 13, 2012, we executed a $165,000 allonge #5 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $150,000 as $15,000 was paid as a finder’s fee. The total outstanding amount including all allonges is $865,000.
On January 14, 2013, we executed a $220,000 allonge #6 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $200,000 as $20,000 was paid as a finder’s fee. The total outstanding amount including all allonges is $1,085,000.
On February 15, 2013, we executed a $40,000 allonge #7 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $35,000 as $5,000 was paid as a finder’s fee. The total outstanding amount including all allonges is $1,125,000.
On April 11, 2013, we executed a $71,500 allonge #8 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $65,000 as $6,500 was paid as a finder’s fee. The total outstanding amount including all allonges is $1,196,500.
On June 5, 2013, we executed an $88,000 allonge #9 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $80,000 as $8,000 was paid as a finder’s fee. The total outstanding amount including all allonges is $1,284,500.
On June 7, 2013, we entered into a promissory note with conversion rights with outside legal counsel (Jeffrey Stein) for past due services in the amount of $37,000. This note is not subject to any interest rate and is payable on June 7, 2014. The note maybe converted into shares of common stock after a six month holding period at a conversion price to equal the current market price multiplied by eighty percent (80%). Current market price means the average of the closing bid prices for the common stock for the five (5) trading days ending on the trading day immediately before the relevant conversion date. No conversions have been made on this convertible note payable.
On June 21, 2013, we executed an $88,000 allonge #10 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $80,000 as $8,000 was paid as a finder’s fee. The total outstanding amount including all allonges is $1,372,500.
On July 23, 2013, we executed an $82,500 allonge #11 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $75,000 as $7,500 was paid as a finder’s fee. The total outstanding amount including all allonges is $1,455,000.
On August 8, 2013, we executed an $110,000 allonge #12 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $100,000 as $10,000 was paid as a finder’s fee. The total outstanding amount including all allonges is $1,565,000.
On September 18, 2013, we executed an $110,000 allonge #13 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $100,000 as $10,000 was paid as a finder’s fee. The total outstanding amount including all allonges is $1,675,000.
On October 28, 2013, we executed a $55,000 allonge #14 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $50,000 as $5,000 was paid as a finder’s fee. The total outstanding amount including all allonges is $1,730,000.
On November 15, 2013, we executed a $55,000 allonge #15 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $50,000 as $5,000 was paid as a finder’s fee. The total outstanding amount is $1,785,000.
From December 19, 2013 through December 24, 2013, we entered into four non-convertible promissory notes with the following accredited investors: Centaurian Fund - $12,500; Alpha Capital - $15,005; Tarpon Bay Partners - $5,000; and Whalehaven Capital - $13,000. These amounts are due December 31, 2014 and are not subject to any interest rates. These notes are exchangeable for equal aggregate amounts of notes of different authorized denominations, as requested by the holders surrendering the same. No service charge will be made for such registration or transfer or exchange.
On February 11, 2014, we executed a $55,000 allonge #16 with Alpha Capital Anstalt to a secured convertible note for $175,000 dated February 22, 2012 in which we received $50,000 as $5,000 was paid as a finder’s fee. The total outstanding amount including all allonges is $1,840,000.
On March 24, 2014, we entered into three non-convertible promissory notes with the following accredited investors: Centaurian Fund - $15,000; Southridge Partners II LP - $20,000; and Whalehaven Capital - $15,000. These amounts are due February 28, 2015 and are not subject to any interest rates. These notes are exchangeable for equal aggregate amounts of notes of different authorized denominations, as requested by the holders surrendering the same. No service charge will be made for such registration or transfer or exchange.
All of the net proceeds from the above new financings were used for working capital purposes.
The foregoing securities were issued in reliance upon an exemption from registration under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended. All of the investors were accredited investors and/or had preexisting relationships with the Company, there was no general solicitation or advertising in connection with the offer or sale of securities and the securities were issued with a restrictive legend.
Commitments for Common Stock for the last two years (not reflective for the 1 for 500 reverse stock split):
Note: Common stock issued for conversions of convertible notes payable are not listed.
During July, 2012, we issued 363,056 shares of common stock for a cashless exercise of 1,000,000 warrants.
On August 8, 2012, we issued 4,950,000 shares of common stock to outside professional athletes as part of an endorsement athletic contract.
Information about our cash flows
For the year ended March 31, 2014, we reported a net loss of $212,015 which was affected by recording the fair value adjustment of the convertible notes for $3,359,968, offset by the amortization of debt discount for $990,842 as well as changes in accounts payable and accrued expenses for $1,426,981. Cash flows generated from our operating activities were inadequate to cover our cash disbursement needs as we had to rely on new convertible debt financings and bridge loans to cover operating costs. Cash used by investing activities were attributed mainly to the purchase of a company vehicle. Cash provided by financing activities increased due to the proceeds from the issuance of additional convertible debt financings and short-term bridge loans payable for gross proceeds of $810,505.
For the year ended March 31, 2013, we reported a net loss of $3,025,279 which was caused by recording the fair value adjustment of the convertible notes for $3,105,515 offset by derivative expense of $141,235, loss on debt extinguishment for $2,838,522, recording of $99,504 for compensatory stock and changes in accounts payable and accrued expenses for $752,947. Cash flows generated from our operating activities were inadequate to cover our cash disbursement needs as we had to rely on new convertible debt financings and bridge loans to cover operating costs. Cash used by investing activities were attributed mainly to the purchase of a company vehicle. Cash provided by financing activities increased due to the proceeds from the issuance of additional convertible debt financings and short-term bridge loans payable for proceeds of $1,200,000.
Defaults for Short-Term Non-Convertible Loans for the Year Ended March 31, 2014:
At March 31, 2014, two short-term bridge notes for a total of $115,000 were past due. One of these notes is held by one of our Board of Directors and will extend the due date once we locate the other debt holder.
The following table sets forth various details of all convertible notes and short-term bridge loans including applicable interest and default rates for the period ended March 31, 2014:
RECAP ANALYSIS OF ALL CONVERTIBLE NOTES PAYABLE
AND SHORT-TERM BRIDGE NON-CONVERTIBLE LOANS
FOR THE TWELVE MONTHS ENDED MARCH 31, 2014
(a) Notes indicated in default are in default because they are past due. One of the debt holders is a Board Director and will extend the maturity date as soon as we can locate the other debt holder.
CERTAIN BUSINESS RISKS:
Investing in our securities involves a high degree of risk. You should carefully consider the risk factors discussed below, together with all the other information contained or incorporated by reference in this report and in our filings under the Securities Exchange Act of 1934, as amended, or the Exchange Act, before deciding whether to purchase any of our securities. Each of the risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our securities, and the occurrence of any of these risks might cause you to lose all or part of your investment.
Risks Relating to Our Business
We have a history of operating losses. If we continue to incur operating losses, we eventually may have insufficient working capital to maintain or expand operations according to our business plan.
As of March 31, 2014, we had a total shareholders’ deficit of $12,335,519 and a working capital deficit of $12,266,740, compared to a total shareholders’ deficit of $12,855,297 and a working capital deficit of $12,264,236 at March 31, 2013. Cash and cash equivalents were $20,615 as of March 31, 2014 as compared to $7,415 at March 31, 2013. The main contributing factor to the working capital deficit was primarily attributable to the changes in the fair value calculations for the valuation of our convertible notes payable as well as changes in the derivative liabilities.
Ability to continue as a going concern.
Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
For the foreseeable future, we will have to fund all of our operations and capital expenditures from the net proceeds of equity or debt offerings we may have and cash on hand. Although we plan to pursue additional financing, there can be no assurance that we will be able to secure financing when needed or obtain such financing on terms satisfactory to us, if at all, or that any additional funding we do obtain will be sufficient to meet our needs in the long term. Obtaining additional financing may be more difficult because of the uncertainty regarding our ability to continue as a going concern. If we are unable to secure additional financing in the future on acceptable terms, or at all, we may be unable to complete planned development of certain products.
To date, we have generated no material product revenues. Our operating losses have negatively impacted our liquidity, and we are continuing our efforts to develop new products, while focusing on increasing net sales. However, changes may occur that would consume our existing capital at a faster rate than projected, including, among others, the progress of our research and development efforts and hiring of additional key employees. If we continue to suffer losses from operations, our working capital may be insufficient to support our ability to expand our business operations as rapidly as we would deem necessary at any time, unless we are able to obtain additional financing. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to pursue our business objectives and would be required to reduce our level of operations, including reducing infrastructure, promotions, personnel and other operating expenses. These events could adversely affect our business, results of operations and financial condition. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage of opportunities, develop products or services or otherwise respond to competitive pressures, could be curtailed or significantly limited. Any additional sources of financing will likely involve the sale of our equity securities, which will have a dilutive effect on our stockholders. If we are unable to achieve profitability, the market value of our common stock will decline, and there would be a material adverse effect on our financial condition.
At March 31, 2014, we were in default on certain of our short-term bridge notes.
At March 31, 2014, we were in default on short term bridge notes totaling $115,000 in principal. One of the two note holders is on our Board of Directors and will extend the due date once we locate the other note holder which we have been doing for some time. The remedy for default under the notes is acceleration of principal and interest due thereunder. Further, we have secured convertible notes outstanding totaling $5,991,182 in principal face value at March 31, 2014. Although we have been able to extend the maturity dates of the consolidated convertible notes payable to February 21, 2015, there is no assurance that we will be able to continue to extend these obligations. Penalties for default under our convertible notes include but are not limited to acceleration of principal and interest and default interest rates up to 20%. As of March 31, 2014, we are not in default in our convertible notes payable as most of them have a maturity date of February 21, 2015.
Defaults on these obligations could materially adversely affect our business operating results and financial condition to such extent that we may be forced to restructure, file for bankruptcy, sell assets or cease operation. Further, certain of these obligations are secured by our assets. Failure to fulfill our obligations under these notes and related agreements could lead to the loss of these assets, which would be detrimental to our operations.
We may not be able to develop successful new beverage products which are important to our growth.
An important part of our strategy is to increase our sales through the development of new beverage products. We cannot assure you that we will be able to continue to develop, market and distribute future beverage products that will have market acceptance. The failure to continue to develop new beverage products that gain market acceptance could have an adverse impact on our growth and materially adversely affect our financial condition. Further, we may have higher obsolescent product expense if new products fail to perform as expected due to the need to write off excess inventory of the new products.
Our results of operations may be impacted in various ways by the introduction of new products, even if they are successful, including the following:
●sales of new products could adversely impact sales of existing products;
●we may incur higher cost of goods sold and selling, general and administrative expenses in the periods when we introduce new products due to increased costs associated with the introduction and marketing of new products, most of which are expensed as incurred; and
●when we introduce new platforms and bottle sizes, we may experience increased freight and logistics costs as our co-packers adjust their facilities for the new products.
The beverage business is highly competitive.
The premium and functional beverage drink industries are highly competitive. Many of our competitors have substantially greater financial, marketing, personnel and other resources than we do. Competitors in these industries include bottlers and distributors of nationally advertised and marketed products, as well as chain store and private label drinks. The principal methods of competition include brand recognition, price and price promotion, retail space management, service to the retail trade, new product introductions, packaging changes, distribution methods and advertising. We also compete for distributors, shelf space and customers primarily with other premium beverage companies. As additional competitors enter the field, our market share may fail to increase or may decrease.
The growth of our revenues is dependent on acceptance of our products by mainstream consumers.
We have limited resources to introduce our products to the mainstream consumer. As such, we will need to increase our sales force and execute agreements with distributors who, in turn, distribute to mainstream consumers at grocery stores, club stores and other retailers. If our products are not accepted by the mainstream consumer, our business could suffer.
Our failure to accurately estimate demand for our products could adversely affect our business and financial results.
We may not correctly estimate demand for our products. Our ability to estimate demand for our products is imprecise, particularly with new products, and may be less precise during periods of rapid growth, particularly in new markets. If we materially underestimate demand for our products or are unable to secure sufficient ingredients or raw materials including, but not limited to, containers, labels, flavors or packing arrangements, we might not be able to satisfy demand on a short-term basis. Moreover, industry-wide shortages of certain ingredients have been and could, from time to time in the future, be experienced, which could interfere with and/or delay production of certain of our products and could have a material adverse effect on our business and financial results. We do not use hedging agreements or alternative instruments to manage this risk.
The loss of our third-party distributors could impair our operations and substantially reduce our financial results.
We continually seek to expand distribution of our products by entering into distribution arrangements with regional bottlers or other direct store delivery distributors having established sales, marketing and distribution organizations. Many distributors are affiliated with and manufacture and/or distribute other beverage products. In many cases, such products compete directly with our products.
The marketing efforts of our distributors are important for our success. If our brands prove to be less attractive to our existing distributors and/or if we fail to attract additional distributors and/or our distributors do not market and promote our products above the products of our competitors, our business, financial condition and results of operations could be adversely affected.
Inability to secure co-packers for our products could impair our operations and substantially reduce our financial results.
We rely on third parties, called co-packers in our industry, to produce our products. We currently have only one co-packing agreement for our products and at this time have only one milk-based product commercially available (Phase III® Recovery). Our co-packing agreement with our principal co-packer was signed on December 16, 2008 and had an initial term of three (3) years which has now expired. This agreement shall automatically renew for consecutive one (1) year periods (next renewal date of December 16, 2014) unless either party provides notice of cancellation at least one hundred twenty (120) calendar days prior to the end of the initial term or subsequent extension period. Our dependence on one co-packer puts us at substantial risk in our operations. If we lose this relationship and/or require new co-packing relationships for other products, we may be unable to establish such relationships on favorable terms, if at all. Further, co-packing arrangements with potential new companies may be on a short term basis, and such co-packers may discontinue their relationship with us on short notice. Our dependence on co-packing arrangements exposes us to various risks, including:
●if any of those co-packers were to terminate our co-packing arrangement or have difficulties in producing beverages for us, our ability to produce our beverages would be adversely affected until we were able to make alternative arrangements; and
●our business reputation would be adversely affected if any of the co-packers were to produce inferior quality products.
We compete in an industry that is brand-conscious so brand name recognition and acceptance of our products are critical to our success.
Our business is substantially dependent upon awareness and market acceptance of our products and brands by our targeted consumers. In addition, our business depends on acceptance by our independent distributors of our brands as beverage brands that have the potential to provide incremental sales growth rather than reduce distributors’ existing beverage sales. We believe that the success of our product name brands will also be substantially dependent upon acceptance of our product name brands. Accordingly, any failure of our brands to maintain or increase acceptance or market penetration would likely have a material adverse affect on our revenues and financial results.
We compete in an industry characterized by rapid changes in consumer preferences and public perception so our ability to continue to market our existing products and develop new products to satisfy our consumers’ changing preferences will determine our long-term success.
Consumers are seeking greater variety in their beverages. Our future success will depend, in part, upon our continued ability to develop and introduce different and innovative beverages. In order to retain and expand our market share, we must continue to develop and introduce different and innovative beverages and be competitive in the areas of quality and health, although there can be no assurance of our ability to do so. There is no assurance that consumers will continue to purchase our products in the future. Additionally, many of our products are considered premium products and to maintain market share during recessionary periods, we may have to reduce profit margins, which would adversely affect our results of operations. Product lifecycles for some beverage brands and/or products and/or packages may be limited to a few years before consumers’ preferences change. The beverages we currently market are in their early lifecycles, and there can be no assurance that such beverages will become or remain profitable for us. The beverage industry is subject to changing consumer preferences, and shifts in consumer preferences may adversely affect us if we misjudge such preferences. We may be unable to achieve volume growth through product and packaging initiatives. We also may be unable to penetrate new markets. If our revenues decline, our business, financial condition and results of operations will be materially and adversely affected.
Our quarterly operating results may fluctuate significantly because of the seasonality of our business.
As our products are relatively new, there may be seasonality issues that could cause our financial performance to fluctuate. In addition, beverage sales can be adversely affected by sustained periods of bad weather.
Our business is subject to many regulations, and noncompliance is costly.
The production, marketing and sale of our unique beverages, including contents, labels, caps and containers, are subject to the rules and regulations of various federal, provincial, state and local health agencies. If a regulatory authority finds that a current or future product or production run is not in compliance with any of these regulations, we may be fined, or production may be stopped, thus adversely affecting our financial conditions and operations. Similarly, any adverse publicity associated with any noncompliance may damage our reputation and our ability to successfully market our products. Furthermore, the rules and regulations are subject to change from time to time and while we closely monitor developments in this area, we have no way of anticipating whether changes in these rules and regulations will impact our business adversely. Additional or revised regulatory requirements, whether labeling, environmental, tax or otherwise, could have a material adverse effect on our financial condition and results of operations.
We face risks associated with product liability claims and product recalls.
Other companies in the beverage industry have experienced product liability litigation and product recalls arising primarily from defectively manufactured products or packaging. Our co-packer maintains product liability insurance insuring our operations from any claims associated with product liability. This insurance may or may not be sufficient to protect us. We do not maintain product recall insurance. In the event we were to experience additional product liability or product recall claim, our business operations and financial condition could be materially and adversely affected.
Our intellectual property rights are critical to our success; the loss of such rights could materially, adversely affect our business.
We regard the protection of our trademarks, trade dress and trade secrets as critical to our future success. We have registered our trademarks in the United States that are very important to our business. We also own the copyright in and to portions of the content on the packaging of our products. We regard our trademarks, copyrights and similar intellectual property as critical to our success and attempt to protect such property with registered and common law trademarks and copyrights, restrictions on disclosure and other actions to prevent infringement. Product packages, mechanical designs and artwork are important to our success, and we would take action to protect against imitation of our packaging and trade dress and to protect our trademarks and copyrights, as necessary. We also rely on a combination of laws and contractual restrictions, such as confidentiality agreements, to establish and protect our proprietary rights, trade dress and trade secrets. However, laws and contractual restrictions may not be sufficient to protect the exclusivity of our intellectual property rights, trade dress or trade secrets. Furthermore, enforcing our rights to our intellectual property could involve the expenditure of significant management and financial resources. There can be no assurance that other third parties will not infringe or misappropriate our trademarks and similar proprietary rights. If we lose some or all of our intellectual property rights, our business may be materially and adversely affected.
If we are not able to retain the full time services of our management team, including Roy G. Warren, it will be more difficult for us to manage our operations and our operating performance could suffer.
Our business is dependent, to a large extent, upon the services of our management team, including Roy G. Warren, our founder and Chief Executive Officer and Chairman of the Board. We depend on our management team, but especially on Mr. Warren’s creativity and leadership in running or supervising virtually all aspects of our day-to-day operations. We do not have a written employment agreement with any member of our management team or Mr. Warren. In addition, we do not maintain key person life insurance on any of our management team or Mr. Warren. Therefore, in the event of the loss or unavailability of any member of the management team to us, there can be no assurance that we would be able to locate in a timely manner or employ qualified personnel to replace him. The loss of the services of any member of our management team or our failure to attract and retain other key personnel over time would jeopardize our ability to execute our business plan and could have a material adverse effect on our business, results of operations and financial condition.
We need to manage our growth and implement and maintain procedures and controls during a time of rapid expansion in our business.
If we are to expand our operations, such expansion would place a significant strain on our management, operational and financial resources. Such expansion would also require improvements in our operational, accounting and information systems, procedures and controls. If we fail to manage this anticipated expansion properly, it could divert our limited management, cash, personnel, and other resources from other responsibilities and could adversely affect our financial performance.
Our business may be negatively impacted by a slowing economy or by unfavorable economic conditions or developments in the United States and/or in other countries in which we may operate.
A general slowdown in the economy in the United States or unfavorable economic conditions or other developments may result in decreased consumer demand, business disruption, supply constraints, foreign currency devaluation, inflation or deflation. A slowdown in the economy or unstable economic conditions in the United States or in the countries in which we operate could have an adverse impact on our business results or financial condition. Currently we do not have any international operations.
Risks Relating to Our Securities
There has been a very limited public trading market for our securities, and the market for our securities may continue to be limited and be sporadic and highly volatile.
There is currently a limited public market for our common stock. Our common stock has been listed for trading on the OTC Pink. We cannot assure you that an active market for our shares will be established or maintained in the future. Holders of our common stock may, therefore, have difficulty selling their shares, should they decide to do so. In addition, there can be no assurances that such markets will continue or that any shares, which may be purchased, may be sold without incurring a loss. Any such market price of our shares may not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value and may not be indicative of the market price for the shares in the future.
In addition, the market price of our common stock may be volatile, which could cause the value of our common stock to decline. Securities markets experience significant price and volume fluctuations. This market volatility, as well as general economic conditions, could cause the market price of our common stock to fluctuate substantially. Many factors that are beyond our control may significantly affect the market price of our shares. These factors include:
●price and volume fluctuations in the stock markets;
●changes in our revenues and earnings or other variations in operating results;
●any shortfall in revenue or increase in losses from levels expected by us or securities analysts;
●changes in regulatory policies or law;
●operating performance of companies comparable to us; and
●general economic trends and other external factors.
Even if an active market for our common stock is established, stockholders may have to sell their shares at prices substantially lower than the price they paid for it or might otherwise receive than if a broad public market existed.
Future financings could adversely affect common stock ownership interest and rights in comparison with those of other security holders.
Our board of directors has the power to issue additional shares of common or preferred stock without stockholder approval. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. In addition, as of March 31, 2014, we had issued and outstanding options and warrants that may be exercised into 10,058,376 shares of common stock, 9,000,000 shares of Series A Convertible Preferred Stock and 51 shares of Series A-1 Convertible Preferred Stock that may be converted into 54,000,306 shares of common stock, outstanding principal convertible notes totaling $5,991,182 and accrued interest payable of $1,254,729 which together may be converted into 5,661,645,817shares of common stock (subject to 4.99-9.99% beneficial ownership limitations) at a maximum conversion cap rate of $.02 per share. The Series A and A-1 Preferred Stock vote with the common stock on an as converted basis. Pursuant to the terms and conditions of the Company’s outstanding Series A and Series A-1 Preferred Stock, the conversion rate and the voting rights of the Series A and A-1 will not adjust as a result of any reverse stock split. Further, the authorized but unissued Series A will not adjust as a result of any reverse split. As a result, in the event of a reverse split of our common stock, the voting power would be concentrated with the Series A holder.
Further, if we issue any additional common stock or securities convertible into common stock, such issuance will reduce the proportionate ownership and voting power of each other stockholder. In addition, such stock issuances might result in a reduction of the book value of our common stock.
A substantial number of our shares are available for sale in the public market, and sales of those shares could adversely affect our stock price and our ability to obtain financing.
Sales of a substantial number of shares of common stock into the public market, or the perception that such sales could occur, could substantially reduce our stock price in the public market for our common stock and could impair our ability to obtain capital through a subsequent financing of our securities. We have 181,714,134 shares of common stock outstanding as of March 31, 2014 of which 181,683,564 shares are held by non-affiliates. Further, the Company has outstanding convertible notes in the face value of $5,991,182 which may be converted into 4,677,544,706 shares of common stock. Generally, the holders of the securities convertible or exercisable into our common stock may be able to sell the common stock issued upon conversion or exercise after a six month holding period under Rule 144 adopted under the Securities Act of 1933 (as amended, the “Securities Act”). As such, you should expect a significant number of such shares of common stock to be sold. Depending upon market liquidity at the time our common stock is resold by the holders thereof, such re-sales could cause the trading price of our common stock to decline. In addition, the sale of a substantial number of shares of our common stock, an anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales. On June 14, 2013, the Company approved a reverse stock split of 1-500 shares of common stock that became effective for trading on July 1, 2013.
EFFECTS OF INFLATION
We believe that inflation has not had any material effect on our net sales and results of operations.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS
The consolidated financial statements for the years ended March 31, 2014 and 2013 are contained on Pages to which follows.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2014. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting. Under the supervision and with the participation of our management, including our chief executive officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting using framework similar to criteria referenced in the initial steps of the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of the year ended March 31, 2014.
A material weakness is a significant deficiency (as defined in the Public Company Accounting Oversight Board’s Auditing Standard No. 2), or a combination of significant deficiencies, that results in reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of the Company’s internal controls over financial reporting, management determined that there were control deficiencies as of the year ended March 31, 2014 that constituted material weaknesses, as described below.
* We have noted that there may be an insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing internal controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis.
* We do not have an audit committee or an independent audit committee financial expert. While not being legally obligated to have an audit committee or independent audit committee financial expert, it is the management’s view that to have an audit committee, comprised of independent board members and an independent audit committee financial expert, is an important entity-level control over the Company's financial statements. Currently, the Board does not have sufficient independent directors to form such an audit committee. Also, the Board of Directors does not have an independent director with sufficient financial expertise to serve as an independent financial expert.
* Due to the complex nature of recording derivatives and similar financial instruments, we noted a need for increased coordination and review of techniques and assumptions used in recording derivatives to ensure accounting in conformity with generally accepted accounting principles.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report.
Remediation Efforts to Address Deficiencies in Internal Control over Financial Reporting
As a result of the findings from the evaluation conducted of the effectiveness of our internal control over financing reporting as set forth above, management intends to take practical, cost-effective steps in implementing internal controls, including the following remedial measures:
* Interviewing and potentially hiring outside consultants that are experts in designing internal controls over financial reporting based on criteria established in Internal Control-Integrated Framework issued by COSO.
* The Company has hired an outside consultant to assist with controls over the review and application of derivatives to ensure accounting in conformity with generally accepted accounting principles.
* Board to review and make recommendations to shareholders concerning the composition of the Board of Directors, with particular focus on issues of independence. The Board of Directors to consider nominating an audit committee and audit committee financial expert, which may or may not consist of independent members as funds allow.
Due to inadequate financing, the Company has not hired any outside experts to design additional internal controls over financial reporting or recommended a new board director that is a financial expert.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2014, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B
ITEM 9B - OTHER INFORMATION
None
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers as of March 31, 2014 are as follows. Our directors serve until their successors are elected and qualified.
* Mr. Kee resigned as CFO in July 2009 but rejoined the Company in April 2010.
The experience and background of the Company’s directors, executive officers and significant employees follow:
Mr. Roy Warren - Chairman, Chief Executive Officer and President since September, 2007
Mr. Warren serves as our Chairman of the Board, Chief Executive Officer and President. As Chief Executive Officer, Mr. Warren provides overall company leadership and strategy. Mr. Warren also serves as a director of our wholly owned subsidiary, Attitude Drink Company, Inc. For 15 years from 1981 through 1996, Mr. Warren was in the securities brokerage industry. During those years, Mr. Warren acted as executive officer, principal, securities broker and partner with brokerage firms in Florida, most notably Kemper Financial Companies, Alex Brown & Sons and Laffer Warren & Company. From 1999 to 2007, Mr. Warren was Chief Executive Officer of Bravo! Brands, Inc. in Florida, a public company which was a beverage brand-development company, similar to Attitude Drinks Incorporated. This experience in the beverage industry as well as with a public company led to the conclusion that he should serve as a director of the Company.
Mr. Michael Edwards - Director since 2007
Mr. Edwards serves on the Board of Directors. He currently is the sole proprietor of a chain of automobile car washes in Martin County, Florida. Prior to this, he served as Chief Revenue Officer for Bravo! Brands, Inc. for over five years in which he led the sales team force for introduction and sales of the company’s various developed beverage brands and products. This expertise in the development and sales of beverage products led to the conclusion that he should serve as a director of the Company. Prior to that time, he worked for 5 years in beverage marketing research for Message Factors, Inc., a Memphis, Tennessee marketing research firm. Mr. Edwards has a BS degree from Florida State University in Management and Marketing and spent 13 years in the banking industry, leaving CitiBank to join Message Factors in 1995.
Mr. H. John Buckman - Director since 2007
Mr. Buckman serves on the Board of Directors. He is a principal and majority shareholder of Buckman, Buckman and Reid, a licensed broker-dealer co-founded by Mr. Buckman in 1988. Mr. Buckman also joined the Board of Center for Vocational Rehabilitation (CVR) in 1994 and was a member for ten years. Presently, Mr. Buckman is President of the Board of Directors for Asian Youth Ministries in New Jersey. His many years of broker-dealer experience, which provide valuable direction in the Company’s interactions in the securities market as well as his management and director experience, supports his role as director of the Company.
Mr. Tommy Kee -Chief Financial Officer since 2007
Tommy Kee joined our company in November, 2007 as Chief Financial Officer. Mr. Kee was previously the Chief Accounting Officer of Bravo! Brands, Inc. He graduated with an MBA from the University of Memphis and a BS degree in accounting from the University of Tennessee. Before joining us, he served for several years as CFO for Allied Interstate, Inc. in the West Palm Beach area. Prior to that, Mr. Kee served as CFO and Treasurer for Hearx Ltd. a West Palm Beach, Florida public company. He also served 18 years as International Controller and Financial Director with the Holiday Inns Inc. organization in Memphis and Orlando. Mr. Kee gave his letter of resignation as CFO, effective July 10, 2009 but rejoined the Company in April, 2010.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of the appropriate Forms 3, 4 and 5 and any amendments to such forms filed pursuant to Section 16(a) during the most recent fiscal year, there are no late filings.
Code of Ethics
On May 14, 2009, the Board of Directors approved and ratified a Code of Ethics that is applicable to all directors, officers and employees. A copy of the Code of Ethics was attached an Exhibit 14 in the Form 10-K/A-2 that was filed for the fiscal year that ended March 31, 2009. The Code of Ethics is also available for review on our website at www.attitudedrinks.com. Furthermore, a copy of the code is available to any person free of charge upon request by writing to our company at 712 U.S. Highway 1, Suite 200, North Palm Beach, Florida 33408.
Committees
Although we have a majority of independent directors, we do not have a separately designated audit committee, nominating committee, compensation committee or a person designated as an audit committee member financial expert. We do not have a separately designated audit committee or an audit committee member financial expert because the cost of identifying, interviewing, appointing, educating, and compensating such persons would outweigh the benefits to our stockholders at the present time. If we are successful in our efforts to secure additional capital, the resources may be available to appoint additional directors, have a separately designated audit committee, nominating committee, compensation committee and a person designated as an audit committee member financial expert. All directors participate in nominations of directors, and there is no formal nomination charter or policy in regard to recommendation of directors by shareholders due to the Company’s size and operations.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation earned during the last two fiscal years by our executive officers as well as any unpaid compensation for the applicable years with the company. Please note that the company did not have sufficient capital to make regular compensation payments to these officers, and unpaid amounts have been accrued and reflected as expense:
(a) For the year ended March 31, 2014, Roy Warren, CEO, earned a salary of $208,373 plus annual director’s fees of $12,000 for a total of $220,373. His base salary is now accrued at the same $208,373 amount, although there is no assurance the Company will have sufficient capital to pay this amount. Of the total $220,373 amount, a total amount of $71,079 was not paid.
(b) For the year ended March 31, 2013, Roy Warren, CEO, received 51 shares of Series A-1 Preferred Stock for past due services as the value of the stock is less than $1.00 (51 preferred shares converted at 6 common shares per preferred share = 306 shares of common stock x market price of $.0003 = $0.09).
(c) For the year ended March 31, 2013, Roy Warren, CEO, earned an income of $165,113. The $215,662 amount reflects his just mentioned earned income plus additional compensation of $38,549 and unpaid annual director’s fees of $12,000. His base salary was accrued at $180,000, although there is no assurance the Company will have sufficient capital to pay this amount.
(d) For the year ended March 31, 2014, Tommy Kee, CFO, earned an annual base salary of $173,644 which is the same amount that is used for his accrual. There is no assurance the Company will have sufficient capital to pay this amount. Of the total earned amount of $173,644, a total amount of $125,289 was not paid.
(e) For the year ended March 31, 2013, Tommy Kee, CFO, earned an annual base salary of $99,851. His 2013 base salary was accrued at $120,000, although there is no assurance the Company will have sufficient capital to pay this amount. The $99,851 amount reflects his salary in which $65,208 was not paid.
(f) This amount represents the aggregate grant date fair value that was computed in accordance with FASB Topic 718 for the grant of non-qualified stock options to Roy Warren, CEO and Tommy Kee, CFO. These options were granted in September, 2013 and have an exercise price of $.004 and vest immediately with an expiration life of five (5) years. The stock options were valued at $.0027 per stock option for Roy Warren (500,000 stock options at $.0027 = $1,350) and the same value of $.0027 per stock option for Tommy Kee (1,806,426 stock options at $.0027 = $4,877).
(g) Neither executive has an employment or a consulting agreement. The Company intends to pay accrued but unpaid amounts either by conversions of certain past due amounts in the Company’s common stock and/or cash once the Company’s fundings and financial position will allow such payments. Since the Company was not able to consistently make salary payments to these two named executives, the Company had to treat some of these payments as consulting fees.
(h) All other compensation figures represent company paid medical insurance for the above named executives.
Outstanding Equity Awards at March 31,
(a) All 500,000 stock options were granted during September, 2013.
(b) Stock options were granted as follows: 11,313 stock options during December, 2011 and 1,806,426 stock options during September, 2013.
(c) Roy Warren was issued 51 shares of Series A-1 Preferred Stock during the year ended March 31, 2013.
(d) During September 2013. Roy Warren was granted 500,000 non-qualified stock options at an exercise price of $.004 with an expiration date of September 16, 2018.
(e) On March 2009, Tommy Kee was granted 11,313 non-qualified stock options at an exercise price of $10.00 with an expiration date of December 31, 2016 and 1,806,426 non-qualified stock options at an exercise price of $.004 with an expiration date of September 16, 2018.
Director Compensation Table
Roy G. Warren, CEO, is the Chairman of the Board of Directors. His director compensation is reported in the Summary Compensation Table.
(a) Each above director is compensated $1,000 per month for their role as directors; however, no cash payments have been made for the year ended March 31, 2014. Roy G. Warren is the only non-independent director. The Company intends to pay these past due amounts either by issuing shares of the Company’s common stock and/or cash once the Company’s financial position will allow such payments. Total past due director fees are $66,000 for H. John Buckman and $62,792 for Mike Edwards.
(b) In addition to H. John Buckman being a Director, he also is an investor and debt holder of the Company whereas the Company issued him a note payable at face value of $55,000. He also received 22 shares of restricted stock that related to his note payable, 2 shares were issued to him in 2009 for his Director services, and he received 300 shares of restricted stock in November 2009 for his efforts in a financing during that month (total of 324 restricted shares). In September, 2013, he received 500,000 non-qualified stock options at an exercise price of $.004 with immediate vesting. The stock options have a life of five (5) years. We recorded the value of these stock options at $1,350 (500,000 options x $.0027 = $1,350).
(c) In September, 2013, Mike Edwards received 500,000 non-qualified stock options at an exercise price of $.004 with immediate vesting. The stock options have a life of five (5) years. We recorded the value of these stock options at $1,350 (500,000 options x $.0027 = $1,350).
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our company’s common stock as of March 31, 2014 as to:
·each person known to beneficially own more than 5% of our issued and outstanding common stock
·each of our directors
·each executive officer
·all directors and officers as a group
Except as otherwise noted, the named beneficial owners have direct ownership of the stock and have sole voting and
investment power with respect to the shares shown
Beneficial Owners
(1) 	Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.
(2) 	Percentage calculated from base of 181,714,134 shares of common stock outstanding at March 31, 2014 plus shares subject to convertible debt, convertible accrued interest, or preferred stock currently exercisable or convertible within 60 days of March 31, 2014 that are deemed outstanding for computing the percentage of the person holding such convertible instrument but are not deemed outstanding for computing the percentage of any other person.
(3) This owner is contractually limited to a beneficial ownership of our equity not to exceed 9.99%. Equity listed consists of common stock, convertible notes and convertible accrued interest.
(4) 	Equity listed consists of common stock, preferred stock and stock options to purchase common stock. Due to the Company’s stockholders’ deficit, conversion of the preferred stock cannot be converted at this time.
Management Owners
(1)Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options currently exercisable or exercisable within 60 days of March 31, 2014 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person.
(2)Percentage calculated from base of 181,714,134 shares of common stock outstanding at March 31, 2014 plus shares subject to options or preferred stock currently exercisable or convertible within 60 days of March 31, 2014 that are deemed outstanding for computing the percentage of the person holding such option but are not deemed outstanding for computing the percentage of any other person.
(3)The total amount relates to 30,242 shares of common stock, 500,000 non-qualified stock options and 54,000,306 shares of common stock from the potential conversion of 9,000,000 Series A Preferred Stock and 51 shares of Series A-1 Preferred Stock (conversion of 6 common shares to 1 preferred share)
(4)Represents 1,817,739 non-qualified stock options and 2 shares of common stock
(5)Includes 324 shares of common stock and 500,000 non-qualified stock options
(6)Represents 2 shares of common stock and 500,000 non-qualified stock options
Changes in Control
None
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The Company issued aggregate notes of $100,000 ($50,000 in October 2007 and $50,000 in February 2008) to Roy Warren, the Company’s CEO, an accredited investor with whom the Company entered into subscription agreements for 10% convertible notes. Roy Warren assigned the $100,000 notes to another party. During the quarter ended September 30, 2009, 9,000,000 shares of Series A Preferred, convertible into 54,000,000 shares of common stock at the option of the holder, were granted to Roy Warren for services rendered. We recorded a non-cash expense for $1,620,000 which is based on the then market price of $0.03 per common share times the convertible stock equivalents (9,000,000 preferred shares x 6 = 54,000,000 common stock equivalents). These shares vote with the common stock at a rate of 6 votes per share (54,000,000 total votes). During the quarter ended March, 31, 2013, 51 shares of Series A-1 Preferred, convertible into 306 shares of common stock at the option of the holder, were granted to Roy Warren for services rendered. We recorded a non-cash expense for $0.09 which is based on the then market price of $0.0003 per common share times the convertible stock equivalents (51 preferred shares x 6 = 306 common stock equivalents).
H. John Buckman is a board director of the company and is a debt holder of the company of a note payable at the face value of $55,000. He also received 22 shares of restricted stock that related to this note payable, 3 shares of restricted stock for being a Director and 300 shares of restricted stock for his services related to a November 2009 financing (total of 325 shares of restricted stock). He also received 500,000 non-qualified stock options at an exercise price of $.004 with full vestment as the life of the stock options is five (5) years.
Director Independence
H. John Buckman and Mike Edwards are independent directors as defined by Rule 10A-3 of the Exchange Act under NASDAQ rules. Roy G. Warren is not independent as he is an officer of the Company.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed for the year ended March 31, 2014 for professional services rendered by the principal accountant for the review of financial statements included in our Form 10-Q’s were approximately $36,000.. We have accrued expected audit fees for the year ended March 31, 2014 in the amount of $40,000. Total audit fees for the previous year ended March 31, 2013 were approximately $56,000.
Audit Related Fees
None.
Tax Fees
None
All Other Fees
None
Audit Committee Pre-Approval Policies
The Company does not have an audit committee and therefore the board considers and has approval authority over all engagements of the independent auditors. All of the engagements resulting in the fees disclosed above for fiscal 2013-2014 were approved by the Chairman of the Board prior to the engagement.
PART IV
ITEM 15
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements
The following financial statements are included in Part II, Item 8 of this Form 10-K:
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statement of Stockholders’ Deficit
Consolidated Statement of Cash flows
2. Exhibits
The exhibits listed in the Exhibit Index are incorporated herein by reference and are filed as part of this Form 10-K,
(10)(11)
Notice of Waiver of Certain Conditions effective February 15, 2008
(1)
(10)(12)
Notice of Waiver effective February 15, 2008
(1)
(10)(13)
Notice of Waiver of Conditions effective April 8, 2008
(1)
(10)(14)
Modification and Waiver Agreement dated June 30, 2008
(11)
(10)(15)
Asset Purchase Agreement and Secured Convertible Promissory Note August 2008
(11)
(10)(16)
Sublicense Agreement, Termination Agreement, Promissory Note with Nutraceutical Discoveries, Inc. - August, 2008 and February, 2010
(11)
(10)(17)
Form of Modification Waiver and Consent Agreement, September 2008
(3)
(10)(18)
Subscription Agreement Securities September 2008
(11)
(10)(19)
Funds Escrow Agreement September 2008-Exhibit C in Exhibit (10)(19)-(c)
(11)
(10)(20)
Form of Note September 2008-Exibit A in Exhibit A in Exhibit (10)(19)-(c)
(3)
(10)(21)
Form of Class A and B Warrant- September 2008 - Exhibit B in Exhibit (10)(19)-(c)
(3)
(10)(22)
Manufacturing Agreement dated December 16, 2008 with O-AT-KA Milk Products Cooperative, Inc.
(4)
(10)(23)
Form of Note and Warrant and Modification, Waiver and Consent Agreement December 2008
(11)
(10)(24)
Subscription Agreement, Form of Note and Warrant, Funds Escrow Agreement, Form of Legal Opinion and Second Modification Waiver and Consent Agreement , January 2009 (d)
(11)
(10)(25)
Amendment, Waiver and Consent Agreement Form of Allonge No. 1 to January 09 Notes, Form of Warrant February 2009
(11)
(10)(26)
Subscription Agreement, Funds Escrow Agreement, Form of Note and Warrant and Legal Opinion, March 2009
(11)
(10)(27)
Third Modification, Waiver and Consent Agreement, Form of Allonge No. 1 to March 09 Notes, Form of Warrant July 2009
(11)
(10)(28)
Form of Note, November 2009
(11)
(10)(29)
Modification and Amendment Letters, Form of Warrant January 2010
(11)
(10)(30)
2010 Stock Compensation and Incentive Plan
(7)
(10)(31)
Warrant and Allonge to March 2009 Note dated May 13, 2010
(15)
(10)(32)
Promissory Note, dated June 17, 2010
(15)
(10)(33)
Warrants to extend short-term bridge loan June 30, 2010
(15)
(10)(34)
Subscription Agreement dated July 15, 2010 ((Exhibits A-B (Form of Note and Warrant) filed with Form 8-K dated July 21, 2010, Exhibit C (Escrow Agreement) filed as Exhibit 10.38 to Form 10-Q as amended for quarter ended September 30, 2010 filed June 1, 2011))
(14)
(10)(35)
Form of Convertible Promissory Note dated July 15, 2010
(10)
(10)(36)
Form of Class A Warrant dated July 15, 2010
(10)
(10)(37)
First Amendment and Consent Agreement dated July 15, 2010
(10)
(10)(38)
Escrow Agreement dated July 15, 2010
(14)
(10)(39)
Placement Agent Agreement for July 2010 financing
(14)
(10)(40)
Promissory Note dated December 21, 2010
(15)
(10)(41)
Placement Agent Agreement dated December 21, 2010 for January 2011 Financing
(15)
(10)(42)
Form of Bridge Loan Extension Letter and Form of Warrant dated January 11, 2011
(12)
(10)(43)
Subscription Agreement dated January 21, 2011 to include cap table, all exhibits (forms of note and warrant, escrow agreement, forms of legal opinions and lockup agreements) and other schedules
(16)
(10)(44)
Second Amendment and Consent Agreement dated January 21, 2011
(16)
(10)(45)
Form of Note with previous Landlord dated January 26, 2011
(12)
(10)(46)
Subscription Agreement dated February 1, 2011 to include cap table, all exhibits (forms of note and warrant), escrow agreement, forms of legal opinion and lockup agreements) and other schedules
(16)
(10)(47)
Placement Agent Agreement dated March 8, 2011
(13)
(10)(48)
Subscription Agreement dated March 17, 2011 to include cap table, all exhibits (forms of note and warrant), escrow agreement, forms of legal opinion and lockup agreements) and other schedules
(16)
(10)(49)
Third Amendment and Consent Agreement dated March 17, 2011
(16)
(10)(50)
Form of Promissory Note dated June 3, 2011
(18)
(10)(51)
Form of Promissory Note dated June 30, 2011
(18)
(10)(52)
Placement Agent Agreement dated June 22, 2011
(17)
(10)(53)
Form of Debt Exchange Agreement dated June 30, 2011
(18)
(10)(54)
Subscription Agreement dated July 15, 2011 to include cap table, all exhibits (forms of note and warrant, escrow agreement, forms of legal opinion) and other schedules
(17)
(10)(55)
Form of Promissory Note dated October 7, 2011 (Alpha)
(19)
(10)(56)
Form of Promissory Note dated October 7, 2011 (Centaurian)
(19)
(10)(57)
Form of Promissory Note with conversion rights November 3, 2011
(19)
(10)(58)
Form of Promissory Note dated December 1, 2011 (Centaurian)
(20)
(10)(59)
Form of Promissory Note dated December 1, 2011 (Alpha)
(20)
(10)(60)
Form of Note dated December 28, 2011 (Alpha)
(20)
(10)(61)
Cause Marketing Endorsement Partnership Agreement dated October 13, 2011
(20)
(10)(62)
Commission Agreement dated June 29, 2011
(20)
(10)(63)
Form of Approval of Grant of Stock Options at December 21, 2011
(20)
(10)(64)
Subscription Agreement dated February 22, 2012 to include cap table, all exhibits (forms of note and warrant, escrow agreement, forms of legal Opinion) and other schedules
(21)
(10)(65)
Fifth Amendment and Consent Agreement dated February 22, 2012
(21)
(10)(66)
Placement Agent Agreement dated February 6, 2012
(21)
(10)(67)
Extension Agreement and Form of Note dated March 31, 2012
(22)
(10)(68)
Certificate of Amendment to the Certificate of Incorporation May 1, 2012
(23)
(10)(69)
Promissory Notes June, 2012
(23)
(10)(70)
First Amendment to Lease Agreement May 31, 2012
(24)
(10)(71)
Equity Financing and Debt Retirement Agreement dated July 19, 2012
(24)
(10)(72)
Form of Assignment and Escrow Agreement dated August 15, 2012
(24)
(10)(73)
Allonge No. 1 to Secured Note Issued March, 2009
(24)
(10)(74)
Copy of Form of Note Referenced as Exhibit A in the above Form of Assignment and Escrow Agreement dated August 15, 2012 ((see exhibit (10)(72))
(25)
(10)(75)
Form of Convertible Promissory Note for $125,000 dated August 31, 2012
(25)
(10)(76)
Form of Registration Rights Agreement dated August 31, 2012
(29)
(10)(77)
Form of Convertible Promissory Note for $75,000 dated September 26, 2012
(25)
(10)(78)
Extension Agreement Dated September 30, 2012
(25)
(10)(79)
Securities Transfer Agreement dated October 12, 2012
(25)
(10)(80)
Allonge No. 2 dated October 18, 2012 to Secured Note Issued March, 2009
(25)
(10)(81)
Assignment and Escrow Agreement dated October 26, 2012
(25)
(10)(82)
Promissory Note November 1, 2012
(25)
(10)(83)
Allonge No. 3 dated November 9, 2012 to Secured Note Issued March, 2009
(25)
(10)(84)
Assignment and Escrow Agreement dated November 28, 2012
(29)
(10)(85)
Promissory Note December 1, 2012
(32)
(10)(86)
Assignment and Escrow Agreement dated December 13, 2012
(29)
(10)(87)
Promissory Note January 1, 2013
(32)
(10)(88)
Assignment and Escrow Agreement dated January 8, 2013
(32)
(10)(89)
Amendment to the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock January 9, 2013
(29)
(10)(90)
Submission of Matters to a Vote of Security Holders to Approve Increase in Authorized Shares for Common Stock to Twenty Billion Shares and to Decrease Par Value of Common Stock and Preferred Stock from $.001 to $.00001 plus Ratification of the 2013 Equity Incentive Plan-January 29, 2013
(28)
(10)(91)
Certificate of Amendment of Certificate of Incorporation January 30, 2013
(29)
(10)(92)
Promissory Note February 1, 2013
(32)
(10)(93)
Form of New Office Lease Agreement, Commencing February 1, 2013
(28)
(10)(94)
Allonge No. 4 dated December 6, 2012 to Secured Note Issued March, 2009
(29)
(10)(95)
Allonge No. 5 dated December 13, 2012 to Secured Note Issued March, 2009
(29)
(10)(96)
Allonge No. 6 dated January 14, 2013 to Secured Note Issued March, 2009
(29)
(10)(97)
Allonge No. 7 dated February 15, 2013 to Secured Note Issued March, 2009
(29)
(10)(98)
Allonge No. 8 dated April 11, 2013 to Secured Note Issued February 22, 2013
(32)
(10)(99)
Form of Exchange Agreement (Surrendered Notes) February 21, 2013
(32)
(10)(100)
Form of Exchange Agreement (Surrendered Warrants) February 21, 2013
(32)
(10)(101)
Form of Consolidated Note at February 21, 2013
(32)
(10)(102)
Convertible Note for Services Provided at February 21, 2013
(32)
(10)(103)
Promissory Note March 1, 2013
(32)
(10)(104)
Promissory Note April 1, 2013
(32)
(10)(105)
Assignment and Escrow Agreement April 9, 2013
(32)
(10)(106)
Reserved for possible future use (no document filed)
(10)(107)
Submission of Matters to a Vote of Security Holders on April 30, 2013 that Approved the Amendment of the Company's Certificate of Incorporation to Effect a Reverse Stock Split of a ratio of One-For-500 Subject to Regulatory Approval (to be effective July 1, 2013)
(31)
(10)(108)
Promissory Note May 1, 2013
(32)
(10)(109)
Promissory Note June 1, 2013
(32)
(10)(110)
Allonge No. 9 dated June 5, 2013 to Secured Note Issued February 22, 2013
(32)
(10)(111)
Assignment and Escrow Agreement June 5, 2013
(32)
(10)(112)
Promissory Note June 7, 2013
(32)
(10)(113)
Allonge No. 10 dated June 21, 2013 to Secured Note Issued February 22, 2013
(32)
(10)(114)
Promissory Note July 1, 2013
(32)
(10)(115)
Debt amendments for extension of maturity dates to December 31, 2014
(32)
(10)(116)
Allonge No. 11 dated July 23, 2013 to Secured Note Issued February 22, 2013
(33)
(10)(117)
Promissory Note August 1, 2013
(33)
(10)(118)
Allonge No. 12 dated August 8, 2013 to Secured Note Issued February 22, 2013
(33)
(10)(119)
Promissory Note September 1, 2013
(34)
(10)(120)
Form of Approval of Grant of Stock Options at September 13, 2013
(34)
(10)(121)
Allonge No. 13 dated September 18, 2013 to Secured Note Issued February 22, 2013
(34)
(10)(122)
Promissory Note October 1, 2013
(34)
(10)(123)
Allonge No. 14 dated October 28, 2013 to Secured Note Issued February 22, 2013
(34)
(10)(124)
Promissory Note November 1, 2013
(34)
(10)(125)
Allonge No. 15 dated November 15, 2013 to Secured Note Issued February 22, 2013
(34)
(10)(126)
Promissory Note December 1, 2013
(34)
(10)(127)
Form of Promissory Notes between December 23 and 24, 2013
(34)
(21)
Subsidiaries of Registrant
*
(31)(i)
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
(31)(ii)
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
(32)(1)
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
*previously filed with the Commission on December 13, 2007 as an exhibit to Form SB-2 (SEC Accession Number 0001144204-07-067319)
**previously filed with the Commission on August 14, 2009 as an exhibit to Form 10-K (SEC Accession Number 0001213900-09-002104)
(1)previously filed with the Commission on April 11, 2008 as an exhibit to Form S-1/A (SEC Accession Number 0001144204-08-021783)
(2)previously filed with the Commission on February 14, 2008 as Exhibit 10.3 to Form 10-Q (SEC Accession Number 0001144204-08-008934)
(3)previously filed with the Commission on November 19, 2008 as an exhibit to Form 10-Q (SEC Accession Number 0001144204-08-0063995)
(4)previously filed with the Commission on March 5, 2009 as Exhibit 10.18 to Form 10-Q (SEC Accession Number 0001213900-09-0005)
(5)previously filed with the Commission on November 23, 2009 as Exhibit 4.6 to Form 10-Q (SEC Accession No. 0001213900-09-003372)
(6)previously filed with the Commission on August 14, 2009 as Exhibit 14.1 to Form 10-K (SEC Accession No. 0001213900-09-002104)
(7)previously filed with the Commission on May 25, 2010 as Exhibit 10.1 to Form S-8 (SEC Accession No. 0001213900-10-002206)
(8)previously filed with the Commission on July 14, 2010 as Exhibit 3(1)(ii) to Form 10-K (SEC Accession No. 0001213900-10-002857)
(9)previously filed with the Commission on July 7, 2010 as Exhibit 3.1 to Form 8-K (SEC Accession No. 0001213900-10-002769)
(10)previously filed with the Commission on July 21, 2010 as an exhibit to the Company's Form 8-K (SEC Accession No. 0001213900-10-002955)
(11)previously filed with the Commission on April 21, 2011 as an exhibit to Form 10-K/A (SEC Accession No. 0001213900-11-002129)
(12)previously filed with the Commission on May 9, 2011 as an exhibit to Form 8-K/A (SEC Accession No. 0001213900-11-002409)
(13)previously filed with the Commission on May 10, 2011 as an exhibit to Form S-K/A (SEC Accession No. 0001213900-11-002431)
(14)previously filed with the Commission on June 1, 2011 as an exhibit to Form 10-Q/A (SEC Accession No. 0001213900-11-003038)
(15)previously filed with the Commission on July 6, 2011 as an exhibit to Form 10-Q/A (SEC Accession No. 0001213900-11-003542)
(16)previously filed with the Commission on July 14, 2011 as an exhibit to Form 10-K (SEC Accession No. 0001213900-11-003662)
(17)previously filed with the Commission on July 20, 2011 as an exhibit to Form 8-K (SEC Accession No. 0001213900-11-003757)
(18)previously filed with the Commission on August 22, 2011 as an exhibit to Form 10-Q (SEC Accession No. 0001213900-11-004667)
(19)previously filed with the Commission on November 21, 2011 as an exhibit to Form 10-Q (SEC Accession No. 0001213900-11-006291)
(20)previously filed with the Commission on February 21, 2012 as an exhibit to Form 10-Q (SEC Accession No. 0001213900-12-000838)
(21)previously filed with the Commission on February 24, 2012 as an exhibit to Form 8-K (SEC Accession No. 0001213900-12-000890)
(22)previously filed with the Commission on April 5, 2012 as an exhibit to Form 8-K (SEC Accession No. 0001213900-12-001638)
(23)previously filed with the Commission on July 13, 2012 as an exhibit to Form 10-K (SEC Accession No. 0001213900-12-003795)
(24)previously filed with the Commission on August 28, 2012 as an exhibit to Form 10-Q (SEC Accession No. 0001213900-12-004963)
(25)previously filed with the Commission on November 19, 2012 as an exhibit to Form 10-Q (SEC Accession No. 0001213900-12-006345)
(26)previously filed with the Commission on January 10, 2013 as an exhibit to Form 8-K (SEC Accession No. 0001213900-13-000118)
(27)previously filed with the Commission on January 28, 2013 as Appendix A to Definitive 14C (SEC Accession No. 0001213900-13-000370)
(28)previously filed with the Commission on January 30, 2013 as an item to Form 8-K (SEC Accession No. 0001213900-13-000407)
(29)previously filed with the Commission on February 19, 2013 as an exhibit to Form 10-Q (SEC Accession No. 0001213900-13-000797)
(30)previously filed with the Commission on May 14, 2013 as Appendix A Definitive 14C (SEC Accession No. 0001213900-13-002476)
(31)previously filed with the Commission on July 1, 2013 as a Form 8-K (SEC Accession No. 0001213900-13-003367)
(32)previously filed with the Commission on July 15, 2013 as an exhibit to Form 10-K (SEC Accession No. 0001213900-13-0003610)
(33)previously filed with the Commission on August 19, 2013 as an exhibit to Form 10-Q (SEC Accession No. 0001213900-13-004654)
(34)previously filed with the Commission on March 19, 2014 as an exhibit to Form 10-Q (SEC Accession No. 0001213900-14-001532)
(35)previously filed with the Commission on April 15, 2014 as an exhibit to From 10-Q (SEC Accession No. 0001213900-14-002397)
(36)previously filed with the Commission on December 31, 2014 as a Form 8-K (SEC Accession No. 0001144204-14-076573)
(a)This exhibit is referenced in the October 23, 2007 Subscription Agreement.
(b)This exhibit is referenced in the January 8, 2008 Subscription Agreement.
(c)This exhibit is referenced n the September 29, 2008 Subscription Agreement.
(d)Schedule 9(s) for Lockup Agreement Providers, referenced in the exhibit index to the Subscription Agreement, was not included in this Subscription Agreement because this schedule was not assembled or produced although Exhibit E, Form of Lock Up Agreement, was included in the Subscription Agreement.
3. Financial Statement Schedules
Financial statement schedules are omitted because they are not required or are not applicable, or the required information is provided in the consolidated financial statements or notes described in Item 15(a)(1) above.
SIGNATURES
Pursuant to the requirements 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.
ATTITUDE DRINKS INCORPORATED
(Registrant)
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
Title
/s/ Roy G. Warren
President and Chief Executive Officer
Roy G. Warren
Name
/s/ Tommy E. Kee
Tommy E. Kee
Chief Financial Officer and Principal Accounting Officer
Name
/s/ H. John Buckman
Director
H. John Buckman
Name
/s/ Mike Edwards
Mike Edwards
Director
Name
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Attitude Drinks Incorporated
We have audited the accompanying balance sheet of Attitude Drinks Incorporated as of March 31, 2014 and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Attitude Drinks Incorporated at March 31, 2014, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that Attitude Drinks Incorporated will continue as a going concern. As more fully described in Note 2, the Company had an accumulated deficit at March 31, 2014, a net loss and net cash used in operating activities for the fiscal year then ended. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
/s/ John Scrudato CPA
Califon, New Jersey
January 5, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Attitude Drinks Incorporated and Subsidiary
Palm Beach Gardens, Florida
We have audited the accompanying consolidated balance sheet of Attitude Drinks Incorporated and subsidiary (the Company) as of March 31, 2013, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the year ended March 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal controls over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal controls over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Attitude Drinks Incorporated and subsidiary as of March 31, 2013, and the results of their operations and cash flows for the year ended March 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements and discussed in Note 2 of the accompanying financial statements, the Company has incurred significant recurring losses from operations since inception and is dependent on outside sources of financing for continuation of its operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
/s/Thomas Howell Ferguson P.A.
Tampa, Florida
January 23, 2014
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
See accompanying notes to condensed consolidated financial statements
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
See accompanying notes to consolidated financial statements
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED MARCH 31, 2014 AND
See accompanying notes to consolidated financial statements
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASHFLOWS
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASHFLOWS (CONTINUED)
See accompanying notes to consolidated financial statements
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Nature of Business:
Attitude Drinks Incorporated, a Delaware corporation, and subsidiary (“the Company”) is engaged in the development and sale of functional beverages, primarily in the United States.
The Company's fiscal year end is March 31. Its plan of operation during the next twelve months is to focus on the non-alcoholic single serving beverage business, developing and marketing products in two fast growing segments: sports recovery and functional dairy.
The state of Delaware approved on January 30, 2013 the increase in our authorized shares of common stock from five billion (5,000,000,000) to twenty billion (20,000,000,000). As such, we are reflecting the twenty billion number in our financial statements for the year ended March 31, 2013.
We implemented a 1-for-500 reverse stock split on July 1, 2013. We have restated all applicable financial information for both years ended March 31, 2014 and 2013.
Note 2 - Going Concern and Management’s Plans:
As reflected in the accompanying consolidated financial statements, the Company has incurred accumulated operating losses of $31,753,844 and negative cash flows from operations and has a significant working capital deficiency in the amount of $12,266,740 at March 31, 2014. The Company has been dependent upon third party financing and will continue to depend on additional financing for at least the next twelve months. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
During 2015, the Company plans to file a registration statement to provide working capital as needed to increase operations and sales efficiencies through the need to implement sales and marketing programs to increase awareness of the Company’s products as well as to pay for slotting fees for certain retail channels of revenues. The Company plans to increase its sales, primarily by significantly increasing its sales force and partnering with new distributors, as well as offering new products in the next twelve months. The Company’s margins are expected to improve as a result of increased sales, expected economies of scale due to anticipated lower product costs based on increased volumes per production run and lower transportation costs from the expected shipment of full truck loads. However, the Company expects to reduce its dependency on third party financing during the next twelve months. There is no assurance that further funding will be available at acceptable terms, if at all, or that the Company will be able to achieve profitability. Ultimately, the Company’s ability to continue as a going concern is dependent upon the achievement of profitable operations. The accompanying financial statements do not reflect any adjustments that may result from the outcome of this uncertainty.
Note 3 - Significant Accounting Policies:
(a) Principles of Consolidation:
The Company’s consolidated financial statements include the accounts of Attitude Drinks Incorporated and its wholly-owned subsidiary, Attitude Drink Company, Inc. All material intercompany balances and transactions have been eliminated.
(b) 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. The most significant estimate included in the Company’s financial statements is the following: Fair value of the Company’s financial instruments that are required to be carried at fair value. The Company uses all available information and appropriate techniques to develop its estimates, including the use of outside consultants. However, actual results could differ from the Company’s estimates.
Note 3 - Significant Accounting Policies (continued):
(c) Business Segment and Geographic Information:
The Company currently operates in one dominant industry segment that it has defined as the sports-recovery drink industry. However, its next two products will enter into the functional milk category. Presently, there is no international business, although the Company may pursue the sale of its products in international markets during the next fiscal year.
(d) Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents.
(e) Inventories:
Inventories, which consist of finished goods and raw materials, are stated at the lower of cost on the first in, first-out method or market. Further, the Company’s inventories are perishable. The Company estimates for each fiscal quarter any unsalable inventory reserves based upon a specific identification basis. The components of inventories as of March 31, 2014 and March 31, 2013 are below:
(a) Net of reserve for obsolescence for $44,107 for March 31,
(f) Fixed Assets:
Fixed assets are stated at cost. Depreciation is computed using the straight-line method over a period of ten years for furniture, three years for computer equipment and three years for purchased software. Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Additions and betterments to property and equipment are capitalized. When assets are disposed of, the related cost and accumulated depreciation thereon are removed from the accounts, and any resulting gain or loss is included in the statement of operations.
(g) Trademarks:
Trademarks are being amortized on a straight-line basis over fifteen years. The following table summarizes the components of the Company’s trademarks:
Amortization expense amounted to $407 and $20,620 for the years ended March 31, 2014 and March 31, 2013, respectively. We recorded an additional $18,723 in trademark amortization expense in the total $20,620 expense for the impairment of unamortized trademarks that are currently not used for the year ended March 31, 2013.
Note 3 - Significant Accounting Policies (continued):
(h) Impairment of Long-Lived Assets:
Our long-lived assets consist principally of trademarks, furniture and equipment. We evaluate the carrying value and recoverability of our long-lived assets when circumstances warrant such evaluation by applying the provisions of the FASB Accounting Standards Codification which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. See the note above (g) for further explanation.
(i) Financial Instruments:
Financial instruments, as defined in the FASB Accounting Standards Codification, consist of cash, evidence of ownership in an entity and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, notes payable, derivative financial instruments, convertible debt and redeemable preferred stock that we have concluded the notes payable and derivative financial instruments are more akin to debt than equity.
Derivative financial instruments, as defined in the FASB Accounting Standards Codification, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, prior to February 21, 2013, derivative financial instruments were measured at fair value and recorded as liabilities or, in rare instances, assets. Fair value represents the price at which the property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as debt financing arrangements, redeemable preferred stock arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by the FASB Accounting Standards Codification, these instruments, prior to February 21, 2013, were required to be carried as derivative liabilities, at fair value, in our financial statements as we were allowed to elect fair value measurement of the hybrid financial instruments, on a case-by-case basis, rather than bifurcate the derivative. We believed that fair value measurement of the various hybrid convertible promissory notes financing arrangements prior to February 21, 2013 provided a more meaningful presentation of that financial instrument
Fair Value of Financial Instruments - Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. We believe that the carrying amounts of the financial instruments approximate their respective current fair values due to their relatively short maturities.
Pursuant to the requirements of the Fair Value Measurements and Disclosures Topic of the FASB Codification, the Company’s financial assets and liabilities measured at fair value on a recurring basis are classified and disclosed in one of the following three categories:
Level 1: Financial instruments with unadjusted quoted prices listed on active market exchanges.
Level 2: Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over the counter traded financial instruments. The prices for the financial instruments are determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3: Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation techniques.
All cash and cash equivalents are considered Level 1 measurements for all periods presented. We do not have any financial instruments classified as Level 2. We have recorded a conversion feature liability in regards to a convertible note issued in the twelve months ended March 31, 2013, which are Level 3 and are further described below in note 6.
Note 3 - Significant Accounting Policies (continued)
(i) Financial Instruments (continued):
The Company carries cash and cash equivalents, inventory, and accounts payable and accrued expense at historical cost which approximates the fair value because of the short-term nature of these instruments.
(j) Revenue Recognition:
The Company recognizes revenue in accordance with the FASB Accounting Standards Codification. Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectability is reasonably assured. Revenues are recognized pursuant to formal revenue arrangements with the Company’s customers, at contracted prices, when the Company’s product is delivered to their premises, and collectability is reasonably assured. The Company extends merchantability warranties to its customers on its products but otherwise does not afford its customers with rights of return. Warranty costs have been insignificant to date. In determining revenue recognition for products shipped to this customer, the Company follows the guidance in ASC 605, “Revenue Recognition” (“ASC 605”). For any products which are shipped are under a “pay on scan” model (none for 2014 and 2013), revenue is deferred by the Company until such time as the customer sells through such products to the end consumer. .
The Company’s revenue arrangements often provide for industry-standard slotting fees where the Company makes cash payments to the respective customer to obtain rights to place the Company’s products on their retail shelves for a stipulated period of time. We did record slotting fees for $875 and $2,625 for the years ended March 31, 2014 and 2013, respectively, which are recorded as reductions to the reported revenues. The Company also engages in other promotional discount programs in order to enhance its sales activities. The Company believes its participation in these arrangements is essential to ensuring continued volume and revenue growth in the competitive marketplace. These payments, discounts and allowances are recorded as reductions to the Company’s reported revenue and were $8,002 and $53,046 for the year ended March 31, 2014 and March 31, 2013, respectively.
(k) Shipping and Handling Costs:
Shipping and handling costs incurred to deliver products to our customers are included as a component of cost of sales. These costs amounted to $22,267 and $38,164 for the year ended March 31, 2014 and March 31, 2013, respectively.
(l) Income Taxes:
We utilize the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and the tax basis of the assets and liabilities and are measured using enacted tax rates and laws that will be in effect, when the differences are expected to reverse. An allowance against deferred tax assets is recognized, when it is more likely than not, that such tax benefits will not be realized. We have recorded a 100% valuation allowance against net deferred tax assets due to uncertainty of their realization. The Company’s open tax years are from 2009 through 2014.
Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. For the year ended March 31, 2014 and 2013, we had no accrued interest or penalties related to income taxes. We currently have no federal or state tax examinations in progress.
(m) Loss Per Common Share:
Our basic loss per common share is computed by dividing loss applicable to common stockholders by the weighted average number of common shares outstanding during the reporting period. Diluted loss per common share is computed similar to basic loss per common share except that diluted loss per common share includes dilutive common stock equivalents, using the treasury stock method, and assumes that the convertible debt instruments were converted into common stock upon issuance, if dilutive. For the year ended March 31, 2014 and 2013, respectively, potential common shares arising from the our stock warrants, stock options, convertible preferred stock and convertible debt and accrued interest payable amounted to 5,725,704,499 shares for 2014 and 814,506 shares for 2013 and were not included in the computation of diluted loss per share because their effect was anti-dilutive.
Note 3 - Significant Accounting Policies (continued)
(n) Recent Accounting Pronouncements Affecting the Company:
In December 2011, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”) that provides amendments for disclosures about offsetting assets and liabilities. The amendments require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, securities borrowing and securities lending arrangements. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required by the amendments should be provided retrospectively for all comparative periods presented. For the Company, the amendment is effective for fiscal year 2014. The Company’s evaluation determined that there is no restatement impact on the Company’s financial statements.
In October, 2012, the Financial Accounting Standards Board issued an ASU that contained amendments that affect a wide variety of topics in the Codification and represent changes to clarify the Codifications, correct unintended application of guidance or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. These amendments will be effective for fiscal periods beginning after December 15, 2012. The effect of adoption will have a minimum impact on the Company.
In January, 2013, the Financial Accounting Standards Board issued an ASU that contained amendments to apply to derivatives accounted for in accordance with Topic 815, Derivative and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. These amendments should be applied for fiscal years beginning on or after January 1, 2013 and interim periods within those annual periods. The effect of adoption will have a minimum impact on the Company.
In February, 2013, the Financial Accounting Standard Board issued an ASU that contained amendments that provide guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligations is fixed at the reporting date. Examples of obligations within the scope of this ASU include debt arrangements, other contractual obligations and settled litigation and judicial rulings. These amendments will be effective for fiscal periods and interim periods within those years beginning after December 15, 2013. The effect of adoption will have a minimum impact on the Company.
(o) Advertising Costs
Advertising costs are charged to operations when incurred and are included in operating expenses. Advertising costs for the years ended March 31, 2014 and 2013 were $17,732 and $7,135, respectively.
(p) Concentration of Sales to Certain Clients
During fiscal 2013-2014, the Company had sales to one client that represented 45% of total revenues in the amount of $93,093. There were no outstanding receivables from this entity at March 31, 2014.
Note 4 - Fixed Assets:
The Company’s fixed assets are comprised of the following as of March 31, 2014 and 2013:
Depreciation expense aggregated $7,278 and $6,498 for the year ended March 31, 2014 and 2013, respectively. During the year ended March 31, 2013, we moved our office to another location and wrote off the leasehold improvement of the old office location for gross assets of $3,954 less accumulated depreciation of $3,756 for a net loss of $198 due to abandonment.
Note 5 - Accrued Liabilities:
Accrued liabilities consist of the following as of March 31, 2014 and 2013:
Note 6 - Convertible Notes Payable:
All convertible notes payable are recorded at fair value as prescribed by the FASB Accounting Standards Codification (see Note 9 for more details). Convertible debt carrying values consist of the following:
(1) All previous convertible notes prior to February 21, 2013 were surrendered to the Company through a February 21, 2013 exchange agreement whereas the Company issued new face value consolidated notes per debt holder for a total amount of $5,020,944, $350,000 face value in new notes for the surrender of 425,003 (after reverse stock split) Class A warrants plus $121,327 in a new note for work rendered for this consolidated financing for a grand total of $5,492,271.
Note 6 - Convertible Notes Payable (continued):
(2) Monthly retainer fee of $25,000 face value for December, 2012 through March 31, 2014 (total of $400, 000)
(3) Retainer fee of $37,000 face value issued June 7, 2013
(4) The consolidated notes required a new lattice valuation model that required the recording of a discount that will be amortized (accretion) over the life of the convertible notes payable.
Since these new consolidated notes contained new language as compared to the previous notes, we needed to use a different valuation model for applicable valuations, derivatives and fair market value. In order to determine the fair market value, we analyzed the various securities agreements and exchange agreements, compared the Company to comparable companies to determine industry factors for volatility, growth and future financing, developed a lattice model that valued the convertible notes on a probability weighted scenario model as well as future projections of the various potential outcomes and valued the convertible notes at issuance and at the end of the reporting period to account for the derivative liability. Based on our analysis in determining the proper accounting treatment and valuation as set forth in the Statement of Financial Accounting Standard ASC 820-10-35-37 (Fair Value in Financial Instruments), Statement of Financial Accounting Standard ASC 815 (Accounting for Derivative Instruments and Hedging Activities), Emerging Issues Task (“EITF”) For Issue No. 00-10 and EITF 07-05, the embedded derivatives are bundled and valued as a single, compound embedded derivative, bifurcated from the debt host and treated as a liability. The single compound embedded derivative features valued include the variable conversion feature, and the value of these embedded derivatives for the convertible notes is treated as a liability. These derivative liabilities are marked-to-market each quarter with the change in fair value recorded in the Statement of Operations.
Long-term Convertible Debt Maturities:
Annual maturities of long-term outstanding convertible debt (face value) as of March 31, 2014 are as follows:
Note 6 - Convertible Notes Payable (continued):
(a) 	 February 21, 2013 Consolidated Convertible Notes
On February 21, 2013, all previous convertible notes payable with outstanding balances totaling $5,020,944 were surrendered by the debt holders to the Company through exchange agreements whereas the Company issued one consolidated note to each debt holder for the total outstanding convertible note amounts. In addition and on the same date, all outstanding Class A warrants associated with these convertible note payables totaling 425,003 Class A warrants were surrendered by the debt holders to the Company in which the Company issued additional convertible notes payable for the total amount of $350,000. All applicable 364 Class B warrants were cancelled as well. Both the surrendered convertible notes payable for $5,020,944 and warrants for $350,000 were combined into one new convertible note payable per debt holder for a grand total of $5,370,944. All of these consolidated notes contain the same terms, maturity dates and conversion criteria and replace all terms, conditions and conversion criteria contained in the surrendered notes. These notes have a maturity date of February 21, 2015 and an interest rate of 4%. The conversion price per share shall be equal to seventy-five percent (75%) of the average of the three lowest closing bid prices for the Common stock as reported by Bloomberg L.P. for the principal market for the twenty trading days preceding a conversion date but in no event greater than $10.00. Each conversion submitted by a holder must be at least the lesser of (i) $10,000 of principal and interest or (ii) the balance due on the note. In addition, another new convertible note was issued for $121,327 to one of the accredited debt holders for their efforts in assisting the Company with these consolidated notes, warrants and modifications. The amount was determined at 5% of the then outstanding balance of all the convertible notes payable held by the debt holder. This note is identical to the above notes for the terms, conversion criteria and maturity date. No accrued interest payable amounts were added to these new notes. A total of $652,606 in principal and $153,881 in accrued interest were converted into shares of common stock from February 21, 2013 through March 31, 2014. In addition, nine allonges (allonge #8 for $71,500 dated April 11, 2013, allonge #9 for $88,000 dated June 5, 2013, allonge #10 for $88,000 dated June 21, 2013, allonge #11 for $82,500 dated July 23, 2013, allonge #12 for $110,000 dated August 8, 2013, allonge #13 for $110,000 dated September 18, 2013, allonge #14 for $55,000 dated October 28, 2013, allonge #15 for $55,000 dated November 15, 2013 and allonge #16 for $55,000 dated February 11, 2014 ) were added into these consolidated notes.
Southridge Partners II LP purchased from another debt- holder $100,000 on April 9, 2013 and another $100,000 on June 5, 2013 from these February 21, 2013 notes. These new replacement notes contain the same terms as in the February 21, 2013 consolidated convertible notes. A total of $27,970 to date was converted from the original $100,000 balance, but no conversions have been made on the second $100,000 note.
(b) Monthly $25,000 Retainer Fee Convertible Notes
We issue each month a convertible note for $25,000 to SC Advisors as part of their consulting fees. Previously issued convertible notes from August, 2012 through November, 2012 were consolidated in the above February 21, 2013 convertible note. From December, 2012 through March, 2014, we issued $25,000 monthly convertible notes for a total of $400,000. All of these notes have maturity dates from December 31, 2014 to July 31, 2015. The notes can be converted into shares of Common Stock after six months of holding at a conversion price to equal the current market price multiplied by eighty percent (80%). Current market price means the average of the closing bid prices for the common stock for the five (5) trading days ending on the trading day immediately before the relevant conversion date. No conversions have been made on these notes.
(c) June 7, 2013 Convertible Note
We issued a $37,000 convertible note on June 7, 2013 for past due services. The maturity date of this note is June 7, 2014. The note maybe converted into shares of common stock after a six month holding period at a conversion price to equal the current market price multiplied by eighty percent (80%). Current market price means the average of the closing bid prices for the common stock for the five (5) trading days ending on the trading day immediately before the relevant conversion date. No conversions have been made on these notes.
Note 7 - Short Term Bridge Loans:
Summary of short-term bridge loan balances is as follows:
Note 7 - Short Term Bridge Loans (continued):
April 14, 2008 financing:
(a) On April 14, 2008, the Company entered into a financing arrangement that provided for the issuance of a $60,000 face value short-term bridge loan note payable due July 15, 2008 plus warrants to purchase (i) 5,000 shares of our common stock and (ii) additional warrants to purchase 5,000 shares of our common stock, representing an aggregate 10,000 shares. We determined that the warrants issued in this financing arrangement meet the conditions for equity classification so we allocated the proceeds of the debt between the debt and the detachable warrants based on the relative fair value of the debt security and the warrants in accordance with the FASB Accounting Standards Codification as the exercise date for these warrants has now expired.
We entered into the following Modification and Waiver Agreements related to the April 14, 2008 financing:
Date
Terms
Consideration
June 2008
Extend maturity to July 19, 2008
Warrants indexed to 5 shares of common stock (warrants have expired)
September 2008
Extend maturity to December 15, 2008
12 shares of restricted stock
January 2009
Extend maturity date to April 30, 2009
1) Warrants indexed to 12 shares of common stock
2)12 shares of restricted stock
The modifications resulted in a loss on extinguishment of $171,622 in accordance with the Financial Accounting Standards Codification. On December 15, 2008, we were in default on the notes for non-payment of the required principal payment. The remedy for event of default was acceleration of principal and interest so they were recorded at face value. As of March 31, 2013, this April 14, 2008 note was considered in default for non-payment. The Company is trying to find the debt holder to extend the due date of the note as the previous address is no longer valid. It was determined that the extension warrants required liability accounting and are being recorded at fair value with changes in fair value being recorded in derivative (income) expense. The exercise dates for all warrants other than 12 warrants granted on January 27, 2009 have expired. The exercise price of the 12 warrants was changed again to $500 when the Company issued additional convertible instruments with a lower conversion rate on January 27, 2009. Associated warrants are recorded at fair value for each reporting period.
August 5, 2008 financing:
(b) On August 5, 2008, the Company entered into a financing arrangement that provided for the issuance of a $55,000 face value short term bridge loan, due September 5, 2008, plus warrants to purchase (i) 5,000 shares of our common stock, and (ii) additional warrants to purchase 5,000 shares of our common stock, representing an aggregate of 10,000 shares (before any reverse stock splits) as the exercise dates for these warrants have now expired. The due date of the loan was extended to December 15, 2008 with 11 restricted shares of common stock issued as consideration. On December 15, 2008, we were in default on the notes for non-payment of the required principal payment. Remedies for an event of default are acceleration of principal and interest. There were no incremental penalties for the event of default; however the notes were recorded at face value. Remedies for an event of default are acceleration of principal and interest.
On January 15, 2009, we extended the term on the note from December 15, 2008 to April 30, 2009, and we issued investor warrants to purchase 11 shares of our common stock and 11 shares of restricted common stock as consideration for the extension. We recorded a loss on extinguishment of debt of $2,112 in accordance with the FASB Accounting Standards Codification. As of December 31, 2012, this note was considered in default for non-payment. The debt holder is a board director and will extend the note once we locate the debt holder of the above April 14, 2008 debt.
The exercise price of the warrants was adjusted to $1,650 when the Company issued additional convertible instruments with a lower conversion rate on December 18, 2008. The exercise price of the warrants was adjusted again to $500 when the Company issued additional convertible instruments with a lower conversion rate on January 27, 2009. Associated warrants are recorded at fair value for each reporting period.
Note 8 - 	 Non-convertible Notes Payable:
On January 26, 2011, we entered into a promissory note with our previous landlord in the principal amount of $75,762. This amount was due June 30, 2011 together with interest of 10% computed on the basis of the actual number of days elapsed over a 360-day year on the unpaid balance. The default rate shall be a per annum interest rate equal to the maximum amount permitted by applicable law as we currently use 15%. Although we have not paid this note yet, we anticipate making a payment pending a future financing. On October 12, 2012, the previous landlord sold $20,000 of the promissory note to another accredited investor resulting in an outstanding amount of $55,762. The sold $20,000 note has since been fully converted into shares of common stock.
On June 14, 2012, we entered into two promissory notes for $100,000 and $40,000, respectively, with two current accredited investors. These notes are subject to an interest rate of ten percent (10%) and are due the sooner of (i) October 14, 2012 or (ii) from the proceeds of the next funding. We received the $100,000 payment on June 27, 2012 and the $40,000 payment on July 9, 2012. The amounts are still outstanding.
On June 26, 2012, we entered into a promissory note of $110,000 with a current accredited investor. We agreed to pay a finder’s fee of $10,000 as we received the net payment of $100,000 on June 28, 2012. The note is subject to an interest rate of ten percent (10%) and is due the sooner of (i) October 14, 2012 or (ii) from the proceeds of the next funding. The amount is still outstanding.
On December 23, 2013, we entered into promissory notes with four current investors in the total principal amount of $45,505. These amounts are due December 31, 2014 and are not subject to any interest rates. These notes are exchangeable for equal aggregate amounts of notes of different authorized denominations, as requested by the holder surrendering the same. No service charge will be made for such registration or transfer or exchange.
On March 24, 2014, we entered into promissory notes with three current investors in the total principal amount of $50,000. These amounts are due February 28, 2015 and are not subject to any interest rates. These notes are exchangeable for equal aggregate amounts of notes of different authorized denominations, as requested by the holder surrendering the same. No service charge will be made for such registration or transfer or exchange.
Note 9 - Derivative Liabilities:
Fair Value Measurement
Valuation Hierarchy
ASC 820, “Fair Value Measurements and Disclosures,” establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the liabilities carried at fair value measured on a recurring basis as of March 31, 2014:
The carrying amounts of cash, accounts receivable, prepaid expenses, accounts payable, and accrued liabilities approximate their fair value due to their short maturities. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
Note 9 - Derivative Liabilities (continued):
Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting department, who reports to the Principal Financial Officer, determines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting department and are approved by the Principal Financial Officer.
Level 3 Valuation Techniques
Level 3 financial liabilities consist of the conversion feature liability for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate. A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement.
As of March 31, 2014, there were no transfers in or out of level 3 from other levels in the fair value hierarchy. Starting with the consolidated convertible notes payable as of February 21, 2013, we used a new lattice valuation model which required the embedded derivatives to be bundled and valued as a single compound embedded derivative, bifurcated from the debt host and treated as a liability at fair value.
Note 10 - Transactions with Related Parties:
In connection with the reverse merger (see Note 1), we assumed $47,963 in advances payable to the officers of MHHI in which we paid $1,500 in January, 2009 and issued 50 shares of common at $500.00 per share or $25,000, resulting in an outstanding balance of $21,463 that is due. These advances are non-interest bearing and payable upon demand.
During the quarter ended September 30, 2009, 9,000,000 shares of Series A Preferred, convertible into 54,000,000 shares of common stock at the option of the holder, were granted to Roy Warren (see Note 11). During the quarter ended March, 31, 2013, 51 shares of Series A-1 Preferred, convertible into 306 shares of common stock at the option of the holder, were granted to Roy Warren for services rendered (see Note 11(a)).
H. John Buckman is a board director of the company and is a debt holder of the company whereas the Company issued him a note payable at the face value of $55,000. He also received 22 shares of restricted stock that related to this note payable, 3 shares of restricted stock for being a Director and 300 shares of restricted stock for his services related to a November, 2009 financing (total of 325 shares of restricted stock).
Note 11 - Stockholders’ Deficit:
(a) Series A Preferred Stock:
The Company’s articles of incorporation authorize the issuance of 20,000,000 shares of preferred stock which the Company has designated as Series A Preferred (“Series A” and “Series A-1”), $.00001 par value. Each share of Series A and A-1 is convertible into six shares of the Company’s common stock for a period of five years from the date of issue. The conversion basis is not adjusted for any stock split or combination of the common stock. The Company must at all times have sufficient common shares reserved to effect the conversion of all outstanding Series A and A-1 Preferred. The holders of the Series A and A-1 Preferred shall be entitled to receive common stock dividends when, as, if and in the amount declared by the directors of the Company to be in cash or in market value of the Company’s common stock. The Company is restricted from paying dividends or making distributions on its common stock without the approval of a majority of the Series A and A-1 holders. The Series A and A-1 shall be senior to the Common Stock and any other series or class of the Company’s Preferred Stock. The Series A and A-1 has liquidation rights in the event of any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, the holders of the Series A and A-1 then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its shareholders, before any payment or declaration and setting apart for payment of any amount shall be made in respect of any outstanding capital stock of the Company, an amount equal to $.00001 per share, The Company, at the option of its directors, may at any time or from time to time redeem the whole or any part of the outstanding Series A. Upon redemption, the Company shall pay for each share redeemed the amount of $2.00 per share, payable in cash, plus a premium to compensate the original purchaser(s) for the investment risk and cost of capital equal to the greater of (a) $2.00 per share, or (b) an amount per share equal to fifty percent (50%) of the market capitalization of the Company on the date of notice of such redemption divided by 2,000,000. We have evaluated our Series A Preferred Stock and determined these shares required equity classification because the number of shares convertible into common stock is fixed and reserved. Redemption of these preferred shares cannot be affected because of the Company’s stockholders’ deficit.
Note 11 - Stockholders’ Deficit (continued):
(a) Series A Preferred Stock (continued):
During the quarter ended September 30, 2009, 9,000,000 shares of Series A Preferred were granted to Roy Warren. We recorded a non-cash expense for $1,620,000 which is based on the then market price of $0.03 per common share times the convertible stock equivalents (9,000,000 preferred shares x 6 = 54,000,000 common stock equivalents). These shares have specific voting power in that Roy Warren has voting rights for the 54,000,000 common stock equivalents. The Board of Directors on September 4, 2009 approved an amendment whereas Section 2(A) of the Certificate of Designation is hereby declared in its entirety, and the following shall be substituted in lieu thereof-Rights, Powers and Preferences: The Series A shall have the voting powers, preferences and relative, participating, optional and other special rights, qualifications, limitations and restrictions as follows: Designation and Amount - Out of the Twenty Million (20,000,000) shares of the $0.00001 par value authorized preferred stock, all Twenty Million (20,000,000) shares shall be designated as shares of “Series A.”
During the quarter ended March, 31, 2013, 51 shares of Series A-1 Preferred, convertible into 306 shares of common stock at the option of the holder, were granted to Roy Warren for services rendered. We recorded a non-cash expense for $0.09 which is based on the then market price of $0.0003 per common share times the convertible stock equivalents (51 preferred shares x 6 = 306 common stock equivalents).
(b) Common Stock Warrants:
As of March 31, 2014, the Company did not have any outstanding warrants as all of the warrants expired. No warrants were exercised during the fiscal year ended March 31, 2014.
(c) Common Stock:
At March 31, 2014, we had issued and outstanding 181,714,134 shares of common stock of which 30,244 shares are owned by our two officers. Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the shareholders. Holders of common stock have no cumulative voting rights. In the event of liquidation, dissolution or winding down of the Company, the holders of shares of common stock are entitled to share, pro rata, all assets remaining after payment in full of all liabilities. Holders of common stock have no preemptive rights to purchase our common stock. There are no conversion rights or redemption or sinking fund provisions with respect to the common stock. All of the outstanding shares of common stock are validly issued, fully paid and non-assessable.
Common Stock Issued for the Year Ended March 31, 2014:
All issued shares and conversion rates are reflected at the values after the reverse stock split.
On April 3, 2013, we issued 300,000 shares of common stock pursuant to a conversion for $11,250 of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 4, 2013, we issued 438,400 shares of common stock pursuant to a conversion for $16,440 of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 4, 2013, we issued 1,166,667 shares of common stock pursuant to a conversion for $43,750 of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 9, 2013, we issued 400,000 shares of common stock pursuant to a conversion for $15,000 accrued interest of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 9, 2013, we issued 179,093 shares of common stock pursuant to a conversion for $6,716 accrued interest of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 10, 2013, we issued 439,067 shares of common stock pursuant to a conversion for $16,465 of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 11, 2013, we issued 320,000 shares of common stock pursuant to a conversion for $12,000 of February, 2013 consolidated convertible notes at a conversion price of $.0375.
Note 11.	 Stockholders’ Deficit (Continued):
(c) Common Stock Issued For the Year Ended March 31, 2014 (Continued):
On April 15, 2013, we issued 400,000 shares of common stock pursuant to a conversion for $15,000 accrued interest of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 16, 2013, we issued 1,273,333 shares of common stock pursuant to a conversion for $47,750 of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 22, 2013, we issued 124,867 shares of common stock pursuant to a conversion for $4,675 accrued interest of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 22, 2013, we issued 400,000 shares of common stock pursuant to a conversion for $15,000 accrued interest of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 29, 2013, we issued 500,000 shares of common stock pursuant to a conversion for $18,750 accrued interest of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 30, 2013, we issued 320,000 shares of common stock pursuant to a conversion for $12,000 of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On July 2, 2013, we issued 1,918,462 shares of common stock pursuant to a conversion for $62,350 of February, 2013 consolidated convertible notes at a conversion price of $.0325.
On July 2, 2013, we issued 524,154 shares of common stock pursuant to a conversion for $17,035 of February, 2013 consolidated convertible notes at a conversion price of $.0325.
On July 15, 2013, we issued 609,756 shares of common stock pursuant to a conversion for $10,000 of February, 2013 consolidated convertible notes at a conversion price of $.0164.
On July 23, 2013, we issued 1,353,000 shares of common stock pursuant to a conversion for $5,412 of accrued interest at a conversion price of $.004.
On July 29, 2013, we issued 2,686,667 shares of common stock pursuant to a conversion for $10,075 of February, 2013 consolidated convertible notes at a conversion price of $.00375.
On August 5, 2013, we issued 2,352,941 shares of common stock pursuant to a conversion for $10,000 of February, 2013 consolidated convertible notes at a conversion price of $.00425.
On August 16, 2013, we issued 1,183,908 shares of common stock pursuant to a conversion for $2,575 of February, 2013 consolidated convertible notes at a conversion price of $.002175.
On August 16, 2013, we issued 1,498.851 shares of common stock pursuant to a conversion for $3,260 of February, 2013 consolidated convertible notes at a conversion price of $.002175.
On August 19, 2013, we issued 2,000,000 shares of common stock pursuant to a conversion for $4,350 of February, 2013 consolidated convertible notes at a conversion price of $.002175.
On August 19, 2013, we issued 1,500,000 shares of common stock pursuant to a conversion for $3,300 of February, 2013 consolidated convertible notes at a conversion price of $.0022.
On August 21, 2013, we issued 1,702,529 shares of common stock pursuant to a conversion for $3,703 of accrued interest at a conversion price of $.002175.
On August 22, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $6,525 of February, 2013 consolidated convertible notes at a conversion price of $.002175.
Note 11.	 Stockholders’ Deficit (Continued):
(c) Common Stock Issued During the Year Ended March 31, 2014 (Continued):
On August 22, 2013, we issued 1,818,182 shares of common stock pursuant to a conversion for $4,000 of February, 2013 consolidated convertible notes at a conversion price of $.0022.
On August 28, 2013, we issued 1,818,182 shares of common stock pursuant to a conversion for $4,000 of February, 2013 consolidated convertible notes at a conversion price of $.0022.
On September 6, 2013, we issued 4,256,098 shares of common stock pursuant to a conversion for $8,725 of February, 2013 consolidated convertible notes at a conversion price of $.00205.
On September 11, 2013, we issued 2,500,000 shares of common stock pursuant to a conversion for $5,250 of February, 2013 consolidated convertible notes at a conversion price of $.0021.
On September 12, 2013, we issued 2,500,000 shares of common stock pursuant to a conversion for $5,000 of February, 2013 consolidated convertible notes at a conversion price of $.002.
On September 12, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $5,850 of February, 2013 consolidated convertible notes at a conversion price of $.002.
On September 12, 2013, we issued 2,500,000 shares of common stock pursuant to a conversion for $5,000 of February, 2013 consolidated convertible notes at a conversion price of $.002.
On September 12, 2013, we issued 2,500,000 shares of common stock pursuant to a conversion for $5,000 of February, 2013 consolidated convertible notes at a conversion price of $.002.
On September 12, 2013, we issued 2,500,000 shares of common stock pursuant to a conversion for $5,000 of February, 2013 consolidated convertible notes at a conversion price of $.002.
On September 13, 2013, we issued 4,256,410 shares of common stock pursuant to a conversion for $8,300 of February, 2013 consolidated convertible notes at a conversion price of $.00195.
On September 13, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $6,300 of February, 2013 consolidated convertible notes at a conversion price of $.0021.
On September 14, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $6,000 of February, 2013 consolidated convertible notes at a conversion price of $.002.
On September 17, 2013, we issued 2,500,000 shares of common stock pursuant to a conversion for $5,000 of February, 2013 consolidated convertible notes at a conversion price of $.002.
On September 18, 2013, we issued 2,500,000 shares of common stock pursuant to a conversion for $4,750 of February, 2013 consolidated convertible notes at a conversion price of $.0019.
On September 20, 2013, we issued 3,286,842 shares of common stock pursuant to a conversion for $6,245 of accrued interest at a conversion price of $.0019.
On September 23, 2013, we issued 2,600,000 shares of common stock pursuant to a conversion for $4,940 of February, 2013 consolidated convertible notes at a conversion price of $.0019.
On September 24, 2013, we issued 2,481,579 shares of common stock pursuant to a conversion for $4,715 of February, 2013 consolidated convertible notes at a conversion price of $.0019.
On September 24, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $5,700 of February, 2013 consolidated convertible notes at a conversion price of $.0019.
Note 11	 Stockholders’ Deficit (Continued):
(c) Common Stock Issued During the Year Ended March 31, 2014 (Continued):
On September 24, 2013, we issued 4,326,316 shares of common stock pursuant to a conversion for $8,220 of February, 2013 consolidated convertible notes at a conversion price of $.0019.
On September 30, 2013, we issued 8,500,000 shares of common stock pursuant to a conversion for $15,300 of February, 2013 consolidated convertible notes at a conversion price of $.0018.
On October 3, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $4,800 of February, 2013 consolidated convertible notes at a conversion price of $.0016.
On October 9, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $3,600 of February, 2013 consolidated convertible notes at a conversion price of $.0012.
On October 10, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $3,600 of February, 2013 consolidated convertible notes at a conversion price of $.0012.
On October 14, 2013, we issued 9,150,000 shares of common stock pursuant to a conversion for $9,150 of February, 2013 consolidated convertible notes at a conversion price of $.001.
On October 17, 2013, we issued 5.000,000 shares of common stock pursuant to a conversion for $4,500 of February, 2013 consolidated convertible notes at a conversion price of $.0009.
On October 29, 2013, we issued 8.000,000 shares of common stock pursuant to a conversion for $7,200 of February, 2013 consolidated convertible notes at a conversion price of $.0009.
On November 1, 2013, we issued 5.000,000 shares of common stock pursuant to a conversion for $4,500 of February, 2013 consolidated convertible notes at a conversion price of $.0009.
On November 6, 2013, we issued 5.000,000 shares of common stock pursuant to a conversion for $4,500 of February, 2013 consolidated convertible notes at a conversion price of $.0009.
On November 6, 2013, we issued 11,777,778 shares of common stock pursuant to a conversion for $10,600 of February, 2013 consolidated convertible notes at a conversion price of $.0009.
On November 6, 2013, we issued 6,935,556 shares of common stock pursuant to a conversion for $6,242 of accrued interest at a conversion price of $.0009.
On November 6, 2013, we issued 8.000,000 shares of common stock pursuant to a conversion for $7,200 of February, 2013 consolidated convertible notes at a conversion price of $.0009.
On November 13, 2013, we issued 6.000,000 shares of common stock pursuant to a conversion for $4,800 of February, 2013 consolidated convertible notes at a conversion price of $.0008.
(c) Common Stock Issued During the Year Ended March 31, 2013:
These figures were not restated for the reverse stock split that occurred July 1, 2013.
On April 3, 2012, we issued 6,000,000 shares of common stock pursuant to two conversions of January, 2011 convertible notes for $10,443 and accrued interest for $2,877 at a conversion price of $.00222.
On April 4, 2012, we issued 663,800 shares of common stock pursuant to a conversion of July, 2010 convertible notes for $1,444 at a conversion price of $.002175.
On April 5, 2012, we issued 62,332 shares of common stock pursuant to a conversion of March, 2011 convertible notes for $132 at a conversion price of $.002123.
Note 11	 Stockholders’ Deficit (Continued):
(c) Common Stock Issued During the Year Ended March 31, 2013 (Continued):
On April 5, 2012, we issued 2,843,146 shares of common stock pursuant to a conversion of January, 2011 convertible notes for
$873 and $5,163 accrued interest at a conversion price of $.002123.
On April 10, 2012, we issued 23,809,524 shares of common stock pursuant to a conversion of July, 2010 convertible notes for $50,000 at a conversion price of $.0021.
On April 10, 2012, we issued 3,225,000 shares of common stock pursuant to a conversion of January, 2011 convertible notes for $6,702 at a conversion price of $.002078.
On April 10, 2012, we issued 3,225,000 shares of common stock pursuant to a conversion of March, 2011 convertible notes for $6,702 at a conversion price of $.002078.
On April 11, 2012, we issued 3,250,000 shares of common stock pursuant to a conversion of March, 2011 convertible notes for $6,347 at a conversion price of $.002603.
On April 16, 2012, we issued 1,900,000 shares of common stock pursuant to a conversion of June, 2011 convertible notes for $3,178 at a conversion price of $.0016725.
On April 26, 2012, we issued 5,800,000 shares of common stock pursuant to a conversion of June, 2011 convertible notes for $7,076 at a conversion price of $.00122.
On May 17, 2012, we issued 2,000,000 shares of common stock pursuant to a conversion of June, 2011 convertible notes for $2,536 at a conversion price of $.001268.
On May 17, 2012, we issued 6,500,000 shares of common stock pursuant to a conversion of July, 2010 convertible notes accrued interest for $8,242 at a conversion price of $.001268.
On May 17, 2012, we issued 60,000,000 shares of common stock pursuant to a conversion of February, 2008 convertible notes for $76,140 at a conversion price of $.001269.
On May 17, 2012, we issued 44,970,414 shares of common stock pursuant to a conversion of June, 2011 convertible notes accrued interest for $57,000 at a conversion price of $.0012675.
On May 25, 2012, we issued 3,000,000 shares of common stock pursuant to a conversion of March, 2011 convertible notes for $3,285 at a conversion price of $.001095.
On May 29, 2012, we issued 46,728,972 shares of common stock pursuant to a conversion of November, 2011 convertible notes for $50,000 at a conversion price of $.00107.
On May 31, 2012, we issued 2,500,000 shares of common stock pursuant to a conversion of March, 2011 convertible notes for $2,588 at a conversion price of $.001035.
On June 1, 2012, we issued 363,056 shares of common stock pursuant to a cashless exercise of 1,000,000 warrants from the March, 2011 financing.
On June 5, 2012, we issued 5,100,000 shares of common stock pursuant to a conversion of June, 2011 convertible notes for $4,549 and accrued interest for $806 at a conversion price of $.00105.
On June 11, 2012, we issued 4,900,000 shares of common stock pursuant to a conversion of July, 2010 convertible notes for $5,145 at a conversion price of $.00105.
On June 19, 2012, we issued 40,000,000 shares of common stock pursuant to a conversion of February, 2008 convertible notes for $40,000 at a conversion price of $.001.
On June 22, 2012, we issued 6,900,000 shares of common stock pursuant to conversion of July, 2010 accrued interest for $8,211 at a conversion price of $.00119.
Note 11.	 Stockholders’ Deficit (continued):
(c) Common Stock Issued for the Year Ended March 31, 2013 (continued):
On June 25, 2012, we issued 5,000,000 shares of common stock pursuant to a conversion of March, 2011 convertible notes for $4,000 at a conversion price of $.0008.
On July 1, 2012, we issued 36,000,000 shares of common stock pursuant to two conversions of July, 2010 convertible notes for a total of $24,000 and $4,800 accrued interest at a conversion price of $.0008.
On July 27, 2012, we issued 50,000,000 shares of common stock pursuant to a conversion of February, 2008 convertible notes for $29,300 at a conversion price of $.000586.
On August 8, 2012, we issued 4,950,000 shares of common stock pursuant to terms of certain athlete contracts valued at $99,000 with conversion at the contracted $.02 conversion price.
On August 15, 2012, we issued 8,853,333 shares of common stock pursuant to a conversion of March, 2011 debt for $805 and $3,179 accrued interest at a conversion price of $.00045.
On August 15, 2012, we issued 16,626,267 shares of common stock pursuant to a conversion of July, 2010 debt of $7,482 at a conversion price of $.00045.
On August 16, 2012, we issued 4,000,000 shares of common stock pursuant to a conversion of March, 2011 debt of $1,720 at a conversion price of $.00043.
On August 22, 2012, we issued 40,000,000 shares of common stock pursuant to a conversion of February, 2008 debt of $16,000 at a conversion price of $.0004.
On September 5, 2012, we issued 60,000,000 shares of common stock pursuant to a conversion of July, 2011 debt that was purchased in August, 2012 by another accredited investor of $24,000 at a conversion price of $.0004.
On September 5, 2012, we issued 60,000,000 shares of common stock pursuant to a conversion of July, 2010 debt of $24,000 at a conversion price of $.0004.
On September 6, 2012, we issued 10,000,000 shares of common stock pursuant to a conversion of March, 2011 debt of $4,000 at a conversion price of $.0004.
On September 19, 2012, we issued 15,000,000 shares of common stock pursuant to a conversion of March, 2011 debt of $10,125 at a conversion price of $.000675.
On September 18, 2012, we issued 5,000,000 shares of common stock pursuant to a conversion of July, 2010 debt of $3,375 at a conversion price of $.000675.
On September 27, 2012, we issued 60,000,000 shares of common stock pursuant to a conversion of July, 2011 debt that was purchased in August, 2012 by another accredited investor of $22,500 at a conversion price of $.000375.
On October 5, 2012, we issued 10,666,667 shares of common stock pursuant to a conversion of July, 2010 accrued interest for $4,000 at a conversion price of $.000375.
On October 5, 2012, we issued 64,733,333 shares of common stock pursuant to a conversion of July, 2011 debt that was purchased in August, 2012 by another accredited investor of $24,275 at a conversion price of $.000375.
On October 8, 2012, we issued 26,246,627 shares of common stock pursuant to a conversion of November, 2011 debt of $9,360 and accrued interest of $1,926 at a conversion price of $.00043.
On October 10, 2012, we issued 50,000,000 shares of common stock pursuant to a conversion of February, 2008 debt of $20,000 at a conversion price of $.0004.
On October 10, 2012, we issued 20,000,000 shares of common stock pursuant to a conversion of June, 2011 debt of $8,000 at a conversion price of $.0004.
Note 11.	 Stockholders’ Deficit (continued):
(c) Common Stock Issued for the Year Ended March 31, 2013 (continued):
On October 11, 2012, we issued 75,000,000 shares of common stock pursuant to a conversion of February, 2008 debt of $30,000 at a conversion price of $.0004.
On October 11, 2012, we issued 15,000,000 shares of common stock pursuant to a conversion of March, 2011 debt of $6,375 at a conversion price of $.000425.
On October 11, 2012, we issued 9,941,176 shares of common stock pursuant to a conversion of July, 2011 debt that was purchased in August, 2012 by another accredited investor of $4,225 at a conversion price of $.000425.
On October 11, 2012, we issued 10,000,000 shares of common stock pursuant to a conversion of June, 2011 debt of $5,250 at a conversion price of $.000525.
On October 18, 2012, we issued 86,000,000 shares of common stock pursuant to a conversion of July, 2010 debt of $51,600 at a conversion price of $.0006.
On October 24, 2012, we issued 50,000,000 shares of common stock pursuant to a conversion of February, 2008 debt of $21,334 at a conversion price of $.00042667.
On October 24, 2012, we issued 44,444,444 shares of common stock pursuant to a conversion of an October, 2012 purchase of a non-convertible note of $20,000 at a conversion price of $.00045.
On November 8, 2012, we issued 130,000,000 shares of common stock pursuant to a conversion of February, 2008 debt of $38,376 and accrued interest of $24,024 at a conversion price of $.00048.
On November 7, 2012, we issued 15,000,000 shares of common stock pursuant to a conversion of June, 2011 debt of $6,750 at a conversion price of $.00045.
On November 8, 2012, we issued 155,520,833 shares of common stock pursuant to a conversion of November, 2009 debt that was purchased in October, 2012 by another accredited investor of $74,650 at a conversion price of $.00048.
On November 19, 2012, we issued 104,895,833 shares of common stock pursuant to a conversion of November, 2009 debt that was purchased in November, 2012 by another accredited investor of $50,350 at a conversion price of $.00048.
On November 20, 2012, we issued 25,900,000 shares of common stock pursuant to a conversion of July, 2010 debt of $11,137 at a conversion price of $.00043.
On November 20, 2012, we issued 100,000,000 shares of common stock pursuant to a conversion of February, 2008 accrued interest of $45,300 at a conversion price of $.000453.
On November 21, 2012, we issued 32,468,244 shares of common stock pursuant to a conversion of March, 2011 debt of $10,450 and $4,160 accrued interest at a conversion price of $.00045.
On November 26, 2012, we issued 32,997,040 shares of common stock pursuant to a conversion of March, 2011 debt of $8,969 and accrued interest of $3,405 at a conversion price of $.000375.
On December 3, 2012, we issued 25,000,000 shares of common stock pursuant to a conversion of June, 2011 debt of $7,500 at a conversion price of $.0003.
On December 5, 2012, we issued 150,000,000 shares of common stock pursuant to a conversion of November, 2009 debt that was purchased in November, 2012 by another accredited investor of $36,000 at a conversion price of $.00024.
On December 6, 2012, we issued 30,000,000 shares of common stock pursuant to a conversion of June, 2011 debt of $6,750 at a conversion price of $.000225.
On December 11, 2012, we issued 100,000,000 shares of common stock pursuant to a conversion of February, 2008 accrued interest of $24,000 at a conversion price of $.00024.
On December 17, 2012, we issued 95,000,000 shares of common stock pursuant to a conversion of July, 2010 debt of $21,375 at a conversion price of $.000225.
Note 11.	 Stockholders’ Deficit (continued):
(c) Common Stock Issued for the Year Ended March 31, 2013 (continued):
On December 17, 2012, we issued 100,000,000 shares of common stock pursuant to a conversion of February, 2008 accrued interest of $24,000 at a conversion price of $.00024.
On December 18, 2012, we issued 82,568,075 shares of common stock pursuant to a conversion of February, 2008 accrued interest of $17,587 at a conversion price of $.000213.
On December 20, 2012, we issued 205,000,000 shares of common stock pursuant to a conversion of November, 2009 debt that was purchased in November, 2012 by another accredited investor of $32,800 at a conversion price of $.00016.
On January 2, 2013, we issued 331,875,000 shares of common stock pursuant to a conversion of November, 2009 debt that was purchased in November, 2012 by another accredited investor of $53,100 at a conversion price of $.00016.
On January 4, 2013, we issued 125,000,000 shares of common stock pursuant to a conversion of September, 2008 debt of $20,000 at a conversion price of $.00016.
On January 10, 2013, we issued 175,000,000 shares of common stock pursuant to a conversion of January, 2009 debt of $28,000 at a conversion price of $.00016.
January 11, 2013, we issued 42,812,500 shares of common stock pursuant to a conversion of November, 2009 debt that was purchased in November, 2012 by another accredited investor of $6,850 at a conversion price of $.00016.
January 11, 2013, we issued 223,125,000 shares of common stock pursuant to a conversion of December, 2009 debt that was purchased in December, 2012 by another accredited investor of $35,700 at a conversion price of $.00016.
On January 15, 2013, we issued 50,000,000 shares of common stock pursuant to a conversion of September, 2008 debt of $7,500 at a conversion price of $.00015.
On January 16, 2013, we issued 200,000,000 shares of common stock pursuant to a conversion of September, 2008 debt of $32,000 at a conversion price of $.00016.
On January 16, 2013, we issued 87,420,000 shares of common stock pursuant to a conversion of July, 2010 accrued interest of $13,113 at a conversion price of $.00015.
On January 17, 2013, we issued 190,000,000 shares of common stock pursuant to two conversions of July, 2010 debt totaling $28,500 at a conversion price of $.00015.
January 17, 2013, we issued 155,000,000 shares of common stock pursuant to a conversion of September, 2008 debt that was purchased in December, 2012 by another accredited investor of $24,800 at a conversion price of $.00016.
January 23, 2013, we issued 255,312,500 shares of common stock pursuant to a conversion of September, 2008 debt that was purchased in December, 2012 by another accredited investor of $40,850 at a conversion price of $.00016.
On January 29, 2013, we issued 37,160,000 shares of common stock pursuant to a conversion of February, 2012 debt of $5,574 at a conversion price of $.00015.
January 28, 2013, we issued 165,468,750 shares of common stock pursuant to a conversion of September, 2008 debt that was purchased in December, 2012 by another accredited investor of $26,475 at a conversion price of $.00016.
On February 5, 2013, we issued 200,000,000 shares of common stock pursuant to a conversion of January, 2009 debt of $32,000 at a conversion price of $.00016.
On February 6, 2013, we issued 138,593,750 shares of common stock pursuant to a conversion of September, 2008 debt that was purchased in December, 2012 by another accredited investor of $22,175 at a conversion price of $.00016.
On February 7, 2013, we issued 200,000,000 shares of common stock pursuant to a conversion of January, 2009 debt of $32,000 at a conversion price of $.00016.
On February 11, 2013, we issued 70,000,000 shares of common stock pursuant to a conversion of March, 2011 debt of $10,500 at a conversion price of $.00015.
Note 11.	 Stockholders’ Deficit (continued):
(c) Common Stock Issued for the Year Ended March 31, 2013 (continued):
On February 13 2013, we issued 87,146,666 shares of common stock pursuant to a conversion of July, 2010 debt for $4,837 and accrued interest for $8,233 at a conversion price of $.00015.
On February 21, 2013, we issued 100,000,000 shares of common stock pursuant to a conversion of June, 2011 debt of $7,500 at a conversion price of $.000075.
On February 21 2013, we issued 593,533,333 shares of common stock pursuant to a conversion of September, 2008 debt that was purchased in January, 2013 by another accredited investor of $44,515 at a conversion price of $.000075.
On February 22, 2013, we issued 190,000,000 shares of common stock pursuant to two conversions of July, 2010 debt totaling $14,250 at a conversion price of $.000075.
On February 6, 2013, we issued 138,593,750 shares of common stock pursuant to a conversion of September, 2008 debt that was purchased in December, 2012 by another accredited investor of $22,175 at a conversion price of $.00016.
On March 6, 2013, we issued 100,000,000 shares of common stock pursuant to a conversion of February, 2012 debt of $7,500 at a conversion price of $.000075.
On March 12, 2013, we issued 250,000,000 shares of common stock pursuant to a conversion of July, 2010 accrued interest of $18,750 at a conversion price of $.000075.
On March 14 2013, we issued 100,000,000 shares of common stock pursuant to a conversion of June, 2011 debt of $7,500 at a conversion price of $.000075.
On March 18, 2013, we issued 593,666,667 shares of common stock pursuant to a conversion of September, 2008 debt that was purchased in January, 2013 by another accredited investor of $44,525 at a conversion price of $.000075.
On March 20 2013, we issued 200,000,000 shares of common stock pursuant to a conversion of January, 2009 debt of $6,834 and accrued interest of $8,166 at a conversion price of $.000075.
On March 28, 2013, we issued 593,600,000 shares of common stock pursuant to a conversion of September, 2008 debt that was purchased in January, 2013 by another accredited investor of $44,520 at a conversion price of $.000075.
On March 28 2013, we issued 402,960,000 shares of common stock pursuant to a conversion of July, 2010 accrued interest of $30,222 at a conversion price of $.000075.
(d) Compensation and Incentive Plan:
On March 10, 2010, our Board of Directors approved the issuance of 100 stock options to our Scientific Advisory Board at an exercise price of $300.00 that will expire in five (5) years on March 11, 2015. We recorded the full compensation cost of $41,100 for these options in March, 2010. None of these stock options have been exercised. In addition and on the same date, we issued 150 stock options as a retainer for future services from our outside legal counsel at an exercise price of $500.00 in which the options will expire in five (5) years on March 11, 2015. We recorded the full compensation cost of $57,450 for these options in March, 2010. None of these options have been exercised.
On May 25, 2010, a registration that covers the offering of an aggregated 7,500 shares of the Company’s common stock was approved by the Company’s Board of Directors. As such, the 2010 Stock Compensation and Incentive Plan was created for employees, directors, consultants and other persons associated with the Company in which awards of common stock and/or non-qualified stock options may be granted. During the fiscal year ended March 31, 2011, we issued 6,578 shares of common stock for a total of $161,000 for past due professional services and payroll in which 3,000 shares were returned back to the plan, leaving an available 3,922 shares to be issued in the future
On December 21, 2011, the Company’s Board of Directors approved the issuance of 54,204 non-qualified stock options to certain employees for the return of previously issued shares of common stock that were issued for payment of past due expenses to be effective at December 31, 2011. The stock options have an exercise price of $10.00, full vesting rights and a life of five years. The Board of Directors intends to approve a registration to cover an offering to include these stock options as well as certain other stock options (see below) in 2014/2015. We recognized the full compensation expense of $12,656 at December 31, 2011 by using the Black-Scholes valuation model (27,102,009 -before stock split of 1 for 500 - x $.000467). No options have been exercised.
Note 11.	 Stockholders’ Deficit (continued):
(d) Compensation and Incentive Plan (continued):
On January 10, 2013, the stockholders holding a majority voting rights of our Common Stock approved the 2013 Equity Incentive Plan by written consent without a meeting in accordance with Delaware Law. This plan provides for the grant of stock awards to employees, directors and consultants of the Company and its affiliates covering an aggregate of 1,000,000 shares of its common stock. The number of shares of common stock available for issuance under this plan shall automatically increase on February 1st of each year for a period of 9 years commencing January 1, 2014 in an amount equal to the lesser of 5% of the total number of shares of common stock outstanding on December 31st of the preceding calendar year or 30,000 shares. Revised number is now 1,030,000 as of March 31, 2014. No stock awards have been granted as of March 31, 2014.
On September 16 2013, the Company’s Board of Directors approved the issuance of 10,000,000 non-qualified stock options to certain employees and the two independent Board Directors. The stock options have an exercise price of $.004, full vesting rights and a life of five years. The Board of Directors intends to approve a registration to cover an offering to include these stock options in 2014/2015. We recognized the full compensation expense of $26,997 by using the Black-Scholes valuation model (10,000,000 x $.0026997). No options have been exercised.
As required by the FASB Accounting Standards Codification, we would normally estimate forfeitures of employee stock option and recognize the compensation cost over the requisite service period for the entire award in accordance with the provisions. As all stock options were fully vested, no estimate of forfeitures was required, and compensation cost is fully recognized at the time of grant and full vesting. We estimated the fair value of these stock options on the date of grant using a Black-Scholes-Merton (BSM) option-pricing formula, applying the following assumptions (before and after reverse stock split):
A summary of option activity under these stock option plans for the year ended March 31, 2014 is presented below:
Note 11 - Stockholders’ Deficit (continued)
(d) Compensation and Incentive Plan (continued):
Note that all of the stock options are outstanding, fully vested and exercisable for the year ended March 31, 2014. As such, all compensation expense for the above options has been recognized, and there is no unrecognized compensation expense to be recorded in the future.
Note 12 - Income Taxes:
The Company has recorded no income tax benefit for its taxable losses during the period ending March 31, 2014 because there is no certainty that the Company will realize those benefits. The components of the Company's deferred tax assets and liabilities as of March 31, 2014 and 2013 are as follows:
As of March 31, 2014 the Company has a net tax operating loss of $20,614,000 that will be available to offset future taxable income, if any. The use of net operating loss carryforwards to reduce future income tax liabilities is subject to limitations, and these amounts will begin to expire in 2028.
The following table illustrates the reconciliation of the tax benefit at the federal statutory rate to the Company's effective rate for the period ending March 31, 2014 and 2013:
The Company is required to file income tax returns for U.S. Federal and State of Florida purposes. The Company is not currently under any tax examination, but the statute of limitations has not yet expired because no federal or state tax returns have been filed since 2007. Therefore, the Company generally remains subject to examination of its U.S. Federal income tax returns for 2008 and subsequent years by the Internal Revenue Service. In addition, the Company also remains subject to examinations of its State of Florida tax returns for 2008 and subsequent years.
Note 13 - Commitments and Contingencies:
Lease of office
We entered into a new office lease for 3,333 square feet at our new office in North Palm Beach, Florida on January 3, 2013 with a lease term of three years with two years as renewable terms. Starting February 1, 2013, the minimum starting monthly base rent without sales tax was $1,602 plus monthly operating expense for $2,670 for a monthly total of $4,272. The lease provides for annual 3% increases throughout its term.
Future minimum rental payments for the new office lease, based on the current adjusted minimum monthly amount of $4,320 and excluding variable common area maintenance charges, as of March 31, 2014, are as follows:
Rental expense, which also includes maintenance and parking fees, for the period ended March 31, 2014 was $55,599.
Production and Supply Agreements
On December 16, 2008, we signed a manufacturing agreement with O-AT-KA Milk Products Cooperative, Inc. for the production of future new products that are in the development stage. The manufacturer shall manufacture, package and ship such products. All products shall be purchased F.O.B., the facility by the company.
Litigation
On May 18, 2009, F&M Merchant Group, LLC commenced a lawsuit in the state of Texas to recover the balance owed by us under a Sales Agent Agreement entered by the parties on November 1, 2008. This agreement requires us to pay $5,000 per month and a 5% commission on all net sales. On September 3, 2009, a final judgment by default was approved by the district court in Denton County, Texas for a total sum of $22,348. This claim has been recorded on the Company’s records. Due to the lack of adequate capital financing, we have not been able to make any payments. We expect to resolve this matter as soon as practical.
On June 5, 2009, Tuttle Motor Sports, Inc. commenced a lawsuit in the state of Florida to recover the balance owed by us under a Letter of Agreement to sponsor a Top Fuel Dragster for the 2008 NHRA racing season in the amount of $803,750. Out of this total amount, only $300,000 is required to be paid in cash with the remainder to be paid in shares of common stock. This amount had already been recorded in our records. During May, 2010, Tuttle Motor Sports, Inc. dismissed the lawsuit without prejudice. Prior to that time, the parties went through mediation but were unable to settle. The likelihood of an unfavorable outcome cannot be evaluated as another lawsuit possibly could be filed against the Company.
On August 21, 2009, CH Fulfillment Services, LLC commenced a lawsuit in the state of Alabama to recover past due amounts owed by us under a contract to provide shipping and fulfillment services. The claim is for $2,106 plus interest and legal costs. This amount was already recorded on our records as well as projected interest costs of $682 and estimated court costs of $307 for a total of $3,095. A process of garnishment by the district court in Mobile County, Alabama was approved on September 25, 2009 for the total amount of $3,095. On October 26, 2009, the same court authorized a garnishment process to pay $657 which was done as part payment of the total due amount. Current outstanding balance due is $2,438. No other payments have been made.
On September 20, 2013, James N. Fuller, Jr. commenced a lawsuit in the state of Florida to recover past due amounts owed by us for rendered independent sales contracting services. The claim was for $18,300 plus filing fee of $460. The $18,300 was already recorded on our records. Due to the lack of adequate capital financing, we have not been able to make any payments. We expect to resolve this matter as soon as practical.
Note 13 - Commitments and Contingencies (continued):
Litigation (continued)
On October 1, 2013, Beanpot Broadcastng Corp., d/b/a WXRV-FM. commenced a lawsuit in the state of Massachusetts to recover past due amounts owed by us for rendered independent sales contracting services. The claim was for $15,500 for past due services, $4,169 in service charges, $363 for prejudgment interest and $200 court costs for a total of $20,232. The total $20,232 amount was already recorded on our records. On November 15, 2013, the Trial Court of Massachusetts entered a judgment for the plaintiff (“Beanpot”) for the total $20,232. Due to the lack of adequate capital financing, we have not been able to make any payments. We expect to resolve this matter as soon as practical.
On November 27, 2013, we received an order of the court from The Trial Court of Massachusetts, Small Claims Session, to attend a hearing to be scheduled on December 12, 2013 about a small claims amount of $5,000 from Marshfield Broadcasting Company, Inc. to recover past due amounts. A total of $5,500 was already recorded on our records. On December 31, 2013, judgment in the total amount of $5,238 was entered in favor of Marshfield Broadcasting Inc. We expect to resolve this matter as soon as practical.
On February 4, 2014, Philip Terrano commenced a lawsuit in the state of Florida to recover past due amounts owed by us for past compensation in the amount of approximately $17,000. We disagree with this amount as our records reflect a total amount owed of $6,974. On May 28, 2014, we entered into a settlement agreement with Terrano to pay him a total of $11,000, to be remitted 60 days of the effective date of this agreement. Due to a lack of capital financing, we expect to resolve this matter as soon as we can.
On June 9, 2014, North Palm Beach Broadcasting Company d/b/a/ WSVU-AM Radio filed a lawsuit in the state of Florida to recover past due services owed by us in the amount of $22,000 that is due with interest. We do not agree with that amount as we did make various payments in 2013 that totaled $8000. We are working with that party to arrive at a mutual agreeable outstanding amount if any. We do not have any other outstanding balance that is recorded on our records. On August 6, 2014, we received a Default Final Judgment from Palm Beach County Circuit Court in Florida for a total amount of $23, 411. We are still contesting that amount and will resolve the matter as soon as possible.
On June 26, 2014, Innerworkings, Inc. filed a lawsuit in the state of Florida to recover past due services owed by us in the amount of $5,039 that is due with interest. This same amount has already been recorded on our records. We expect to address this issue as soon as practical.
On November 11, 2014, C.A. Courtesy Demos, Inc. commenced a lawsuit in the state of Florida to recover past due amounts owed by us for rendered services. The claim was for $5,803. We do not agree with this amount and have not recorded this amount on our records as services were supposed to be rendered, but a hurricane in the northeastern section of the United States occurred at that given time. We expect to resolve this matter as soon as practical.
On November 20, 2014, Pavilion Law Center, LLC filed a motion in the circuit court of Palm Beach County, Florida to enforce a settlement agreement for past due fees. We are contesting some of the amounts and will resolve this matter as soon as practical.
Note 14 - Subsequent Events
On April 1, 2014, we issued a convertible note to Southridge Partners II LP for $25,000 for their April, 2014 consulting services.
On April 9, 2014, we issued 15,912,500 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $6,365 at a conversion price of $.004.
On April 9, 2014, we issued 8,000,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $3,200 at a conversion price of $.004.
On April 9, 2014, we issued 12,000,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $4,800 at a conversion price of $.004.
On April 9, 2014, we issued 9,067,500 shares of common stock pursuant to a conversion of accrued interest payable for $3,627 at a conversion price of $.004.
On April 30, 2014, we issued a promissory note for $12,000 with no interest with a maturity date of March 31, 2015.
On May 1, 2014, we issued a convertible note to Southridge Partners II LP for $25,000 for their May, 2014 consulting services.
Note 14 - Subsequent Events (continued)
On May 2, 2014, we entered into an allonge number 17 to a secured note issued February 21, 2013 in the amount of $27,500 less a finder’s fee of $2,500 for net proceeds received in the amount of $25,000.
On May 5, 2014, we issued 10,000,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $5,000 at a conversion price of $.0005.
On May 5, 2014, we issued another 10,000,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $5,000 at a conversion price of $.0005.
On May 6, 2014, we issued 22,441,780 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $6,925 at a conversion price of $.0005.
On May 12, 2014, we issued 11,312,000 shares of common stock pursuant to a conversion of accrued interest payable for $5,656 at a conversion price of $.0005.
On May 13, 2014, we issued to a new accredited investor a convertible note payable in the amount of $35,200 with an interest rate of 4% with a maturity date of May 13, 2015.
On May 15, 2014, we issued 9,600,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $4,800 at a conversion price of $.0005.
On May 16, 2014, we issued 26,628,740 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $13,250 at a conversion price of $.0005.
On May 20, 2014, we issued 12,000,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $6,000 at a conversion price of $.0005.
On May 20, 2014, we issued 12,000,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $6,000 at a conversion price of $.0005.
On May 22, 2014, we issued 12,000,000 shares of common stock pursuant to a conversion of accrued interest payable for $4,800 at a conversion price of $.0004.
On May 29, 2014, we issued 14,000,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $5,600 at a conversion price of $.0004.
On May 29, 2014, we issued another 14,000,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $5,600 at a conversion price of $.0004.
On May 29, 2014, we issued another 14,000,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $5,600 at a conversion price of $.0004.
On May 30, 2014, we issued 26,644,475 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $11,200 at a conversion price of $.0004.
On June 1, 2014, we issued a convertible note to Southridge Partners II LP for $25,000 for their June, 2014 consulting services.
On June 3, 2014, we issued 15,000,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $6,000 at a conversion price of $.0004.
On June 3 2014, we issued 14,000,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $5,600 at a conversion price of $.0004.
On June 4, 2014, we issued 15,800,000 shares of common stock pursuant to a conversion of accrued interest payable for $6,320 at a conversion price of $.0004.
On June 9, 2014, we issued 14,000,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $5,600 at a conversion price of $.0004.
On June 11, 2014, we issued promissory notes with no interest rate with a maturity date of February 28, 2015 to 4 accredited investors for a total of $40,000 ($10,000 to each investor).
Note 14 - Subsequent Events (continued)
On June 23, 2014, we issued 18,136,000 shares of common stock pursuant to a conversion of accrued interest payable for $9,068 at a conversion price of $.0005.
On June 24, 2014, we issued 20,000,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $10,000 at a conversion price of $.0005.
On June 24, 2014, we issued 26,642,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $13,300 and $21 accrued interest payable at a conversion price of $.0005.
On July 1, 2014, we issued a convertible note to Southridge Partners II LP for $25,000 for their July, 2014 consulting services.
On July 11, 2014, we entered into an allonge number 18 to a secured note issued February 21, 2013 in the amount of $25,000.
On July 31, 2014, we issued a promissory note payable to an accredited investor in the amount of $15,000 with no interest rate and with a maturity date of May 31, 2015.
On August 1, 2014, we issued a convertible note to Southridge Partners II LP for $25,000 for their August, 2014 consulting services.
On August 6, 2014, we issued 26,655,000 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $5,310 and $21 accrued interest payable at a conversion price of $.0002.
On August 21, 2014, we issued a promissory note payable to an accredited investor in the amount of $10,000 with no interest rate and with a maturity date of May 31, 2015.
On August 26, 2014, we issued 56,546,850 shares of common stock pursuant to a conversion of the February, 2013 consolidated convertible notes payable for $11,275 and $34 accrued interest payable at a conversion price of $.0002.
On August 29, 2014, we issued a promissory note payable to an accredited investor in the amount of $10,000 with no interest rate and with a maturity date of August 31, 2015.
On September 1, 2014, we issued a convertible note to Southridge Partners II LP for $25,000 for their September, 2014 consulting services.
On September 17, 2014, we issued a promissory note payable to an accredited investor in the amount of $10.000 with no interest rate.
On September 30, 2014, we issued a promissory note payable to an accredited investor in the amount of $15,000 with no interest rate with a maturity date of August 31, 2015.
On September 30, 2014 we issued a second promissory note payable to an accredited investor in the amount of $15,000 with no interest rate with a maturity date of August 31, 2015.
On October 1, 2014, we issued a convertible note to Southridge Partners II LP for $25,000 for their October, 2014 consulting services.
On November 1, 2014, we issued a convertible note to Southridge Partners II LP for $25,000 for their November, 2014 consulting services.
On November 19. 2014, we issued a promissory note payable to an accredited investor in the amount of $25,000 with no interest rate.
On December 1, 2014, we issued a convertible note to Southridge Partners II LP for $25,000 for their December, 2014 consulting services.
On December 19, 2014, we issued a convertible note to one of our debt holders for $20,000 with a 10% interest rate and maturity date of December 22,2015 for past due services.
On December 19, 2014, we issued a promissory note to one of our debt holders for $31,500 with no interest rate and a maturity date of December 19, 2015.
Note 14 - Subsequent Events (continued)
On December 24, 2014, we formed a new subsidiary which is called Attitude Beer Holding Co. On the same date, Attitude Drinks Incorporated and Attitude Beer Holding Co. entered into a joint venture with New England WOB, LLC to develop franchises for World of Beer Franchising in all of Connecticut and the greater Boston area. We paid $300,000 as part of the total $1,200,000 for a new franchise in West Hartford, Connecticut with $300,000 to paid each month starting in January, 2015 until the remaining $900,000 amount is paid., We paid the first $300,000 through newly issued convertible notes to our key accredited investors under Attitude Beer Holding Co.
On January 1, 2015, we issued a convertible note to Southridge Partners II LP for $25,000 for their January, 2015 consulting services.
On January 2, 2015, we issued 62,500,000 shares of common stock pursuant to a conversion of the December 1, 2012 convertible note payable for $25,000 at a conversion price of $.0004.
On January 14 2015, we issued three convertible notes for a total of $58,500 to 3 accredited debt holders with an interest rate of 10% and a maturity date of January 15, 2017.
On January 23, 2015, our subsidiary, Attitude Beer Holding Co., issued two convertible notes to two accredited investors for a total of $300,000 which the received funds were used to pay the second installment payments for the investment in the World of Beer franchise in West Hartford, Connecticut. In addition, these two accredited investors received Class A Common Stock Purchase Warrants with an expiration date of seven years for a number of shares equal to the number of shares the debt holder could acquire upon the complete conversion of the Notes issued to them. The purchase price shall be equal to the conversion price of the convertible note.
On February 1, 2015, we issued a convertible note to Southridge Partners II LP for $25,000 for their February, 2015 consulting services.