Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 2009
or
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from
to
Commission
file number: 0-33519
WHO’S
YOUR DADDY, INC.
(Exact
name of registrant as specified in its Charter)
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Nevada
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98-0360989
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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26381
Crown Valley Parkway, Suite 230, Mission Viejo, CA 92691
(Address
of principal executive offices)
Registrant’s
telephone number, including area code: (949) 582-5933
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.001 par value
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. o Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter periods that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained herein, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-k or any
amendment to this Form 10-k. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer
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o
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Accelerated
filer
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o
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Non-accelerated
filer
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o
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Smaller
reporting company
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x
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Indicate
by check mark whether the registrant is a shell company. o Yes x No
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant on April 13, 2009 was approximately
$1,232,492.35.
The
registrant had 59,194,938 shares of common stock and no shares of preferred
stock outstanding as of April 13, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
The
following documents are incorporated herein by reference in Part IV, Item
15: (i) Registration Statement on Form 10SB, filed on
January 18, 2002, (ii) Current Report on Form 8-K, filed on
April 7, 2005, (iii) Annual Report on Form 10-K, filed on
May 12, 2008, (iv) Current Report on Form 8-K, filed on
July 23, 2008, (v) Current Report on Form 8-K, filed on
October 16, 2008, (vi) Current Report on Form 8-K, filed on
January 29, 2009, (vii) Current Report on Form 8-K, filed on
August 26, 2009 , (viii) Current Report on Form 8-K, filed on
September 18, 2009, (ix) Current Report on Form 8-K, filed on
January 22, 2010, and (x) Current Report on Form 8-K, filed on
April 6, 2010.
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Business
Development
We were
incorporated in the State of Nevada on October 12, 2000 under the name
Cogen Systems, Inc. We changed our name to Snocone Systems, Inc.
on December 6, 2001. On April 1, 2005, Snocone
Systems, Inc. and its wholly-owned subsidiary, WYD Acquisition Corp., a
California corporation (the “Merger Sub”), completed and closed an Agreement and
Plan of Merger with Who’s Your Daddy, Inc. (“WYD”), an unrelated, privately
held California corporation, whereby the Merger Sub merged with and into
WYD. After the merger, the separate existence of the Merger Sub ceased
and, as such, WYD continued its corporate existence as a direct, wholly-owned
subsidiary of Snocone Systems, Inc. under the laws of the State of
California.
The
transaction was accounted for as a reverse-acquisition because control of
Snocone Systems, Inc. passed to WYD’s shareholders, and WYD was considered
as the accounting acquirer and therefore its accounting history was carried
forward as our history. On April 13, 2005, the shareholders of
Snocone Systems, Inc. voted to change our name to Who’s Your
Daddy, Inc.
After
developing an energy drink, we changed our primary business to the manufacture
(on an outsource basis), sale and distribution of ready-to-drink The King of
Energy® beverages centered on the trademark-protected brand, Who’s Your Daddy®
which we began selling in 2005. Although our primary focus was originally
to expand upon sales of our energy drinks, we began exploring opportunities for
the manufacture, sale and distribution of related products such as energy bars
and concentrated energy “shots” as well as for the licensing of our proprietary
name Who’s Your Daddy® for products that might take advantage of this
distinctive name.
Description
of Business
We had
originally marketed our energy drinks through retail outlets mainly to a
demographic of customers in their late teens through mid-thirties who were
seeking alternatives to bad tasting energy drinks, coffee and other stimulants
and were attracted to our products because of their energy boosting
capabilities, pleasant taste, and also because of our edgy and provocative
tradename. Given the crowded energy drink market and high cost of
acquiring shelf space, in late 2008, we developed and began marketing a new
product, our Sport Energy Shot, on a test basis in limited retail markets to
determine the best marketing strategy and demographic for this
product. Based on what we learned from marketing our Sport Energy
Shot, the Company determined during the second quarter of 2009 we should change
our marketing strategy and demographic in order to be competitive in the energy
product marketplace. During the last three quarters of 2009, the
Company temporarily suspended its sales activity to focus on a new marketing
strategy which will emphasize the sale of a new energy shot product over the
internet to people in their late twenties, thirties, forties and fifties who are
interested in fitness and health as well as gaining an energy
boost. The Company has developed the new energy shot product,
“F.I.T.T. Energy With Resveratrol”, which contains a number of ingredients which
certain scientific studies claim have various health and fitness benefits, and
the Company intends to develop additional products in the future for this market
niche.
Tradenames
Given the
change in our marketing strategy and demographic, during the third quarter of
2009, the Company completed an extensive review of its tradenames, Who’s Your
Daddy® and The King of Energy®. We had been concerned these
tradenames were not descriptive of our new products, were too offensive for a
large segment of the market we will be trying to attract, and would not be
effective names for our new marketing direction. As disclosed in our
Form 8-K filings of August 24, 2009 and September 15, 2009, the Company entered
into Marketing and Lead Generation Agreements with two parties which together
can supply us with lists of as many as 88 million high-quality email leads as
well as merchant accounts for customer use. Both parties had serious
reservations concerning the use of the existing tradenames and felt we would not
achieve optimum market penetration if continued their use. Prior to
2008, while under previous management, the Company was a party to a various
lawsuits involving the tradenames and their development, and a number of our
influential shareholders and advisors have counseled us that they believe these
existing tradenames were not viewed favorably by the business community and
could be subject to further legal action. They asked that the Company
consider adopting a new tradename for its new products.
After
careful review of numerous factors, including those described above, the Company
has decided to no longer use the Who’s Your Daddy® and The King of Energy®
tradenames. We intend to re-brand our products using the name “F.I.T.
T. Energy” which we consider to be non-offensive to our market demographic while
being more descriptive of our new products. During the first quarter
of 2010, the Company began the process of changing its corporate name to FITT
Energy, Inc., which name change will result in a new trading
symbol.
Former
Energy Shot Product
In late
2008, we began marketing our Sports Energy Shot, a concentrated two-ounce energy
drink, designed to provide a zero calorie, sugar free, rapid and lasting energy
boost which enhances muscle strength and endurance. One of the important
ingredients in the energy shot is L-Arginine. Arginine is an amino acid
and is essential for optimum growth and in the regulation of protein metabolism.
It is well established that Arginine facilitates the release of growth hormone
(HGH), stimulates the pancreas for insulin production, and is a component in the
hormone vasopressin produced by the pituitary gland. HGH-release by means of
Arginine may offer benefits in the treatment of injuries, as well as
strengthening the immune system, building lean muscle, and burning
fat. Arginine is also required by the body to carry out the synthesis
of nitric oxide, a compound that, working through cGMP, relaxes blood vessels
and allows more blood to flow through arteries. It has been hypothesized that
taking extra Arginine will increase nitric oxide levels and increase blood
flow. In the second quarter of 2009, we suspended sales of the Sports
Energy Shot to concentrate on the development of a new energy shot
product.
New
Energy Shot Product
Our new
energy shot “F.I.T.T. Energy with Resveratrol” contains some of the
most exiting supplements of this
generation. These ingredients have been
selected to enhance muscle strength and endurance, and promote cardiovascular
health. As in our Sports Energy Shot, the F.I.T.T. Energy Shot
features Arginine in the form of L-Arginine and AKG Arginine. Next
the shot contains Resveratrol. A substance found in grapes,
Resveratrol may cause the body to act as if it is already on a diet, and change
the distribution of fat tissue in the body. In fact, Resveratrol has the
scientific world fascinated by its potential to alter age-related
decline. Last, the F.I.T.T. Energy Shot will feature Green Tea
catechin (ECGC), 5 HTP, and Chromium. These ingredients have good safety
profiles and have solid support as weight-loss aides. Unlike other
energy shots that promise only a caffeine rush, the F.I.T.T. Energy Shot goes
above and beyond to carefully add natural energy boosters including Ginseng
& Guarana, as well as Vitamins B3, B4, B6, and B12. It should
also be noted that this new energy shot was specifically designed to allow us to
seek the approval of the National Football League and Major League Baseball for
use by their athletes upon receiving adequate funding.
Canned
Energy Drink Products
We
previously distributed our canned energy drinks in two flavors,
Cranberry-Pineapple and Green Tea, with a Regular and Sugar-Free version of
each. Shipments began in 2005 with the Cranberry-Pineapple
flavor. During the first quarter of 2009, we suspended sales of our
canned energy drink products to focus on our energy shots, but we may elect to
resume sales of these products in the future, under the F.I.T.T. brand, in those
situations where marketing, shipping, and product placement costs are
minimal.
BUSINESS
PLAN
On
January 26, 2009, we entered into a Marketing & Representation
Agreement with Leigh Steinberg Sports & Entertainment LLC, a Nevada
limited liability company (the “Steinberg Agreement”). Subsequently,
on August 24, 2009, we entered into a Marketing & Lead Generation Agreement
with LSSE, LLC, an Iowa corporation (“LSSE”) (the “LSSE Agreement”) and the
Steinberg Agreement was canceled. Under the LSSE Agreement, LSSE
agreed to provide a variety of services including marketing, public relations,
and merchandising services, including introductions, negotiations, and support
for our products, and the Company agreed to compensate LSSE by issuing them
10,000,000 shares of our common stock. On November 25, 2009, we were
informed by LSSE they would not be able to obtain final endorsement contracts,
which were called for under the LSSE Agreement, until our new energy shot
product was manufactured and our internet landing page was completed and
available for review; therefore, LSSE could not fulfill their obligations under
the LSSE Agreement. LSSE instructed us to inform our transfer agent
not to issue the 10,000,000 shares. Due to recent changes at LSSE, we
agreed that we would rework the LSSE Agreement, under the same terms and
conditions, with a company owned by NFL Hall of Fame quarterback, Warren Moon,
since Mr. Moon has the same athlete and media contacts to be able to perform the
consulting services outlined in the LSSE Agreement.
During
the first quarter of 2010, Mr. Moon was able to review our new F.I.T.T. Energy
With Resveratrol product and internet landing page, and has agreed to provide
his endorsement as can be seen at www.thefitthighway.com. Additionally,
Mr. Moon has agreed to reworking the LSSE Agreement whereby he will provide
similar consulting services to those agreed to by LSSE. The Company
is now in the process of reworking the LSSE Agreement and expects it to be
executed in the near future, at which time we will issue the previously
committed 10,000,000 shares.
LSSE
introduced the Company to Core Support Services, Inc. (“Core Support”), a
company with significant experience in the areas of marketing of internet
products and furthering business transactions and relationships through its
existing lead lists and M-Wallet leads. On October 17, 2009, we
entered into a Marketing & Lead Generation Agreement with Core Support under
which they agreed to provide up to 48 million email leads, develop an internet
landing page for the marketing of our products, and provide a merchant account
relationship to allow for credit card use by our customers. In
connection with this agreement, the Company agreed to issue 1,000,000 of its
shares of common stock to a principal of Core Support and pay for the design of
the internet landing page and for email broadcasts.
On
September 16, 2009, the Company entered into a Marketing & Lead Generation
Agreement with Gigamind Inc. (“Gigamind”), a Canadian corporation, under which
Gigamind agreed to provide services similar to Core Support with respect to
Gigamind’s 40 million email leads. The Company has agreed to pay
Gigamind a fee of $20.00 for each customer lead that results in the first
billable sale to that customer, an additional fee equal to approximately 17% of
the product sales price for each additional sale to that same
customer. In addition, the Company agreed to pay for Gigamind’s
internet landing page design and for their email broadcasts. On April
7, 2010, the Company terminated the agreement with Gigamind prior to
any services being performed, and entered into an agreement with Mochizmo LLC
(“Mochizmo”), a Nevada Limited Liability Company with similar obligations and
financial terms.
With the
substantial email lists and merchant account relationships of both Core Support
and Mochizmo, we now can begin our internet marketing program with up
to 88 million double opt-out email addresses, two merchant accounts, and two
landing pages which will be completed in April 2010.
Operating
and Marketing
Because
of the magnitude of our debt burden, the Company has experienced significant
difficulty raising capital from investors to pursue our operations and our new
marketing plan. The investors have required that we use the invested
dollars to 1) build the websites, 2) produce inventory, 3) provide for call and
fulfillment centers, 4) develop merchant account relationships for customer
credit card use, 5) develop internet leads, and 6) pay basic business expenses
including those necessary to keep the Company’s government filings
current. In addition, investors are requiring the Company develop a
structure that will protect their investments from prior creditor
claims. Finally, investors have asked us to pursue additional funding
to be used to mitigate existing debt at 10 to 15 cents per dollar of
debt.
Operating
Plan
The
Company is negotiating an Operating Agreement (the “Operating Agreement”) with
F.I.T.T. Energy Products, Inc. (“FITT”), a Nevada corporation owned by our
CEO. Terms of an Operating Agreement are still being evaluated, but
we expect to include requirements for FITT to raise capital or pay us a license
fee and perform certain operating services, including product production and
internet marketing, with respect to the Company’s F.I.T.T. Energy With
Resveratrol product. As consideration for the performance of their
obligations under the Operating Agreement, the Company and FITT have discussed
that FITT will provide the Company funds sufficient to pay 1) salaries and
benefits of the Company’s employees, 2) public company costs of the Company
including, but not limited to, legal and audit costs, SEC filing fees, transfer
agent fees, and investor relations fees, 3) other ongoing operating costs of the
Company including, but not limited to costs for office and equipment rent,
telephone and internet service, supplies, etc., and 4) a percentage of FITT’s
net after tax income resulting from its operations on behalf of the
Company. In its discussions with FITT, the Company has expressed a
willingness to issue shares of its common stock to investors as an inducement
for their investment and will reserve enough of its common shares to allow for
conversion of the notes into shares of the Company.
The
Company and FITT have also discussed that FITT will record in its books all
sales, cost of sales and operating expenses connected with its operations in
connection with the Operating Agreement, and all cash, inventory and other
assets resulting from either the investment dollars or from FITT’s operations
will be the property of FITT and under the Operating Agreement.
There can
be no assurance that we and FITT will successfully conclude our negotiations of
the Operating Agreement.
Marketing
Plan - Internet
The
internet marketing will begin with an internet email campaign using an
endorsement from Warren Moon and threemedical experts, Dr. Sam Maywood, Dr.
Robert Maywood and Dr. Vince Valdez, who are also investors in the
Company. The internet rollout will be directed to the 88 million
leads from Core Support and Mochizmo. It will begin with an initial
free trial offer consisting of a box of 12 free “F.I.T.T. Energy With
Resveratrol” energy shots for every customer who clicks through to our landing
page, www.thefitthighway.com, and provides their credit card for the billing of
shipping, handling and processing fees (“SHP”). The customer will then be
automatically enrolled in a continuity program and, after 17 days from their
agreement to receive the free trial offer, will be billed $72.00 plus SHP for 36
energy shots ($2 per energy shot). After the customer is billed for
his first 30 day supply of product, he will have the option to continue his
program at special discounts while customizing the quantity of product ordered
and frequency of delivery. Secondly, we will be creating an infomercial,
perhaps through FITT, using the high-profile athletes and two physicians (Dr.
Sam Maywood and Dr. Rand Scott) to explain and endorse the energy
shot. It is hoped that the infomercial will begin airing in the
second or third quarter of 2010. We anticipate being able to use
media contacts to put up the TV air time for the infomercial on a joint venture
based upon the initial test results for a negotiated profit split. Thirdly, we
will work in geographic areas where our athlete endorsers have strong
affiliations with local charities to provide an offer which benefits the
consumer and charity. Lastly, the Company through its strategic
alliances has excellent contacts with which to penetrate the retail market
place. In summary, we would be using the internet rollout and infomercial to
build brand recognition for our products. The brand recognition will
then create consumer awareness for the retail market.
We expect
that, because of our association with Warren Moon and his connections with
high-profile athletes, we will be able to bring nationally recognizable sport
figures to assist with the implementation of our marketing
plan. These well-known athletes will work with our medical expert,
Dr. Rand Scott, a Board Certified Anesthesiologist and Pain Management
Specialist. Dr. Scott is a former player and physician for Penn
State’s football team and a graduate of Penn State. He is on the board of
PriCara Pharmaceutical, a Johnson & Johnson Company and is currently a
consultant to Scisco Group, Inc. as well as an expert in herbal
products. Dr. Scott is also a member of the Speakers Board for Pfizer
Pharmaceutical and speaks across the United States on pain
management. We are confident these relationships will greatly enhance
the Company’s image and provide even greater brand awareness which we think will
lead to a substantial increase in sales. We believe this strategy
will be the most cost efficient way to build brand recognition with the least
amount of capital.
The
online marketing blueprint, which will begin with the new “F.I.T.T. Energy with
Resveratrol” energy shot, will use testing and scientific marketing
methodologies to determine the best offer and appeal for the
product. This will be accomplished by creating multiple offers and
multiple appeals by sending paid traffic to the various landing pages. The
traffic we send will result in conversions to sales and or some predetermined
free trial offer. Once we know the offer and appeal with the best
click-through-rate (CTR) and conversion, we will refine that offer and do
further testing to improve our metrics. Once we are satisfied with our offer and
appeal, we will insert our offer into a cost-per-action (CPA)
network. In essence, CPA networks broker leads for a fixed cost. The
CPA network will run a limited test to determine conversions within the network.
If we are satisfied with front end conversions and re-bill rates, we will do a
full release to the other affiliates in the CPA network.
Marketing
- Retail
On
November 21, 2008, we entered into a Master Distributor Agreement (the
“Distributor Agreement”) with Beryt Promotion, LLC, a Nevada limited liability
company ( “Beryt”). The Distributor Agreement has an initial term of
one year, renewable annually, and provides that, in exchange for Beryt acting as
the exclusive distributor of our energy drink products, with the right to
sub-distribute, we shall: (1) sell our products to Beryt at a discount to
the retail price; and (2) issue to Beryt an initial issuance of 100,000
shares of our common stock. Subsequently, we issued an additional
1,000,000 common shares to Ramon Desage, owner of Beryt, for marketing and
promotional expenses
in December 2008, another 1,000,000 shares stock in February 2009, and
another 1,000,000 shares in December 2009. Also, in July 2009, we
issued 500,000 shares of our common stock to several of Mr. Desage’s
employees. Our initial intent with this Distributor Agreement was to
test the marketability of our Sport Energy Shot in a large market, as a
precursor to marketing the product on a larger scale. We have learned
by evaluating our rollout of the energy shot in the Las Vegas market, that
entrenched high quality relationships, such as Ramon Desage’s contacts, are key
to obtaining high visibility in a new retail
marketplace.
Production
and Distribution
F.I.T.T.
Energy With Resveratrol is produced at Wellington Foods Incorporated, a contract
manufacturer of liquid and powder nutritional supplements since
1974. In addition to its manufacturing facilities, Wellington has the
in-house capabilities to develop products from concept for flavoring ingredient
content to production, or to take an existing formula and extend the product
line with new flavors or innovative ingredients. Dr. Rand Scott, one
of our medical experts and a shareholder, provided the ingredients for our new
energy shot formula and Wellington provided the final flavoring and
formulation. Wellington owns the formula for F.I.T.T. Energy With
Resveratrol, but there is no barrier to its recreation and there are numerous
manufacturers within the U.S. capable of manufacturing the product.
The
principal raw materials used to manufacture the energy shot are plastic bottles,
nutritional supplements, flavoring agents, and concentrates as well as other
ingredients from independent suppliers. These raw materials are
readily available from any number of sources in the United States.
The
F.I.T.T. Energy Shot will be shipped to customers from the Van Nuys, California
facility of Moulton Logistics Management, one of the nation’s leading
fulfillment resources. From its 200,000 square foot west coast
facility, Moulton serves clients in all areas of b-to-b and b-to-c marketing,
including DRTV, catalogs, online shopping, continuity programs, literature
fulfillment and CRM services. The customer service representatives at Moulton
Logistics Management are rigorously trained to understand every detail of our
product / service, and strive to provide the highest possible levels of service.
Their customer service includes inbound call processing, outbound sales
projects, email customer service, product / technical information, promotion
inquiry and order and shipping status inquiries. Because of our huge annual
shipping volume, they are in a position to negotiate highly favorable shipping
rates which are significantly lower than any single customer could negotiate.
They are also skilled managers in providing our customers with expeditious, yet
money saving ways of completing the final leg of distribution: shipping to the
individual consumer or in bulk to a retail store or retail distribution
point. Their complete background can be viewed at http://www.moultonlogistics.com.
The
Industry
Energy
drinks, including two-ounce shots and canned drinks, are beverages with legal
stimulants, vitamins, and minerals that give users a lift of
energy. Common ingredients are caffeine, taurine, ginseng, sugars,
and various amounts of vitamins and minerals. The products are
consumed by individuals who are explicitly looking for the extra boost in
energy. Energy shots, in particular, are meant for people who want a
jolt of caffeine without having to drink a big cup of coffee or one of the
16-ounce energy drinks that have become ubiquitous. They go down fast, more like
medicine than a beverage. That is part of the appeal to their most devoted
consumers: students cramming for exams or partying into the night, construction
workers looking for a lift, drivers trying to stay awake, fitness enthusiasts,
the “on-the-go” average person, and those seeking an alternative to coffee.
Tired, stressed-out college students and workers have embraced energy shots,
which promise a quick, convenient boost with fewer calories and less sugar than
full-size energy drinks.
Sales of
the 2-to-3 ounce shots soared to $544 million in 2008, double those of the
previous year, according to Information Resources Inc. (“IRI”), a Chicago-based
market research firm. In fact, energy shots are the fastest-growing segment of
the $4.6 billion energy drink market, according to the market research firm
Mintel International Group Ltd. Living Essentials pioneered energy
shots in 2004 with 5-Hour Energy, which still holds more than 75% of the market,
says IRI. . Living Essentials has spent heavily on advertising to build the
market and hold its position against newcomers. It has been reported that the
company expects to spend $60 million this year on television advertising for
5-Hour Energy. Industry heavyweights such as Red Bull, Monster Energy, and
Coca-Cola have since introduced their own energy shots. Sales of the energy
shots are rising even as sales of traditional energy drinks like Red Bull
have flattened out. Based on sales data collected by IRI it is estimated that
energy shot sales would be about $700 million in 2009, not counting sales of
non-reporting entities like Wal-Mart Stores.
Competition
The
energy drink industry is intensely competitive and significantly affected by new
product introductions and other market activities of industry
participants. The principal areas of competition are pricing, packaging,
development of new products and flavors, and marketing campaigns. The
F.I.T.T. Energy shot product competes with a number of other energy shots
produced by a relatively few number of manufacturers, most of which have
substantially greater financial, marketing and distribution resources than we
do. The principal competitors include 5 Hour Energy®, Red Bull®, and
Monster Energy® among many others. Management believes the F.I.T.T.
energy shot’s unique healthy formula and affiliation with qualified medical
expert as well as renowned athletes will give the company a vastly different
entry into an rapidly expanding market.
Intellectual
Property
We
previously manufactured, promoted and sold our The King of Energy® energy drinks
under our trademark-protected brand, Who’s Your Daddy®. As discussed
under “Tradenames” above, the Company decided during the third quarter of 2009
to no longer use the Who’s Your Daddy® and The King of Energy® tradenames, and
to investigate the development of new tradenames. Additionally, in
October 2009, we were served with an action by Fish & Richardson, P.C.
(“Fish”) to foreclose on their security interest in the our
tradenames. The security interest arose from a 2006 settlement
agreement between the Company and Fish in connection with fees purportedly owed
by us to Fish. Given the Company’s decision to no longer use its
Tradenames, the Company began working on an agreement with Fish to affect an
orderly transfer of the Tradenames to Fish and, effective January 19, 2010, we
entered into a settlement agreement with Fish under which we agreed to transfer
all right, title and interest in our tradenames to Fish, and Fish agreed to
acknowledge a full satisfaction of all indebtedness owed them by the
Company.
The
Company currently has no other intellectual property.
Employees
As of the
date of this Report, we employed two persons, both of whom are full-time.
We retain independent contractors as needed. None of our employees are
represented by labor unions and we believe that our employee relations are
satisfactory.
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities
Exchange Act of 1934 and are not required to provide the information under this
item.
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities
Exchange Act of 1934 and are not required to provide the information under this
item.
We do not
own any real property. Our principal executive offices are located at
26381 Crown Valley Parkway, Suite 230, Mission Viejo, CA 92691 where we are
leasing approximately 500 square feet under a month-to-month agreement that
commenced in June 2009. Monthly payments under the lease are currently
$900. As we have out-sourced manufacturing and product fulfillment,
including product storage, we consider our leased office space adequate for the
operation of our business.
On
July 19, 2006, we received a Demand for Arbitration filed with the American
Arbitration Association from Sacks Motor Sports Inc. (“Sacks”) seeking damages
arising out of a sponsorship contract. On February 13, 2007, the
Arbitrator awarded Sacks $1,790,000. This amount was recorded as an
expense in the quarter ending December 31, 2006 and is fully reserved on
the balance sheet. On August 6, 2007, we filed a petition in U.S.
District Court asking the judge to either: (1) order the arbitrator to
reopen the arbitration and allow for discovery regarding what we believe to be
significant new evidence to have the award vacated; or (2) to allow us to
conduct such discovery in the U.S. District Court proceeding regarding what we
believe to be significant new evidence to have the award vacated. On
May 27, 2008, the Court denied our petition and entered judgment in favor
of Sacks for the principal sum of $1,790,000 together with post-award interest
from February 13, 2007. On July 16, 2008, we entered into an
Assignment of Claims Agreement (“Assignment Agreement”) with Anga M’Hak
Publishing (“Anga M’Hak” ) and Edward Raabe, for the consideration of 150,000
shares of common stock and $100,000 in cash out of the proceeds of our proposed
private placement. We believe Anga M’Hak has a claim to offset the
approximately $1,500,000 of the Sacks judgment. As part of the Assignment
Agreement, Anga M’Hak and Raabe agreed to execute affidavits detailing their
entitlement to the above-referenced claims and monies. In addition, they
agreed to appear for depositions and as witnesses in court and to otherwise
fully cooperate in our pursuit of these claims. We believe their
affidavits will indicate that Sacks perpetrated fraud by not having the
authority to enter into the contract, which wrongfully created the judgment in
favor of Sacks.
Effective
March 30, 2010, we entered into a Settlement Agreement and Release (the “Sacks
Settlement”) with Sacks and with Greg Sacks (“Greg”). Under the Sacks
Settlement, the Company has agreed to pay Sacks $100,000 on or before April 15,
2010 and issue to Sacks 1,000,000 shares of its common stock in the form of 10
certificates of 100,000 shares each. The Sacks Settlement calls for
the shares of stock to be delivered to the Company’s law firm, Solomon Ward
Seidenwurm & Smith, LLP (“SWSS”) with an irrevocable instruction to mail to
Sacks one stock certificate of 100,000 shares per month for ten (10) consecutive
months commencing July 15, 2010. The Shares will be free-trading upon receipt of
a legal opinion from the Company’s counsel. Sacks has agreed that it
will not directly or indirectly sell, transfer or assign more than 100,000 (One
Hundred Thousand) Shares during any thirty (30) day period at any
time.
Once the
Company makes the $100,000 payment and delivers the 1,000,000 shares to SWSS,
Sacks has agreed that it will irrevocably waive, release and surrender all
rights relating to or arising from its judgment against us and will take all
actions reasonably requested by the Company to cause the Judgment to be
permanently rendered of no force or effect including without limitation by
stipulating to set aside and vacate the judgment and cause then entire
litigation to be dismissed with prejudice.
Fish &
Richardson
On or
about May 15, 2008, Fish & Richardson, P.C. (“Fish”) filed an
action against us in the Superior Court of California, County of San Diego,
asserting claims for breach of a settlement agreement purportedly entered into
in connection with fees allegedly owed by us to Fish for Fish’s providing of
legal services on the Company’s behalf in the approximate amount of
$255,000. The settlement agreement, dated September 27, 2006, also
granted Fish a security interest in all of the Tradenames owned by the Company
and all associated goodwill. In its response to the Fish action, the
Company asserted that the settlement agreement was void and that Fish failed to
act as reasonably careful attorneys in connection with their representation of
us. Fish brought a motion for summary judgment which was heard on
April 17, 2009, and the motion was granted. On May 21, 2009, a
judgment was entered against the Company for $273,835 plus interest of $74,817
through the date of the judgment. On September 10, 2009, Fish filed
an action to foreclose on their security interest in the Company’s tradenames,
which action was served on the Company’s registered agent on approximately
October 19, 2009. Given the Company’s decision to no longer use its
Tradenames, the Company began working on an agreement with Fish to affect an
orderly transfer of the Tradenames to Fish and, effective January 19, 2010, we
entered into a settlement agreement with Fish wherein the Company agreed to
transfer all right, title and interest in its tradenames to Fish and Fish has
agreed to acknowledge a full satisfaction
of its judgment and to dismiss the Federal Action with prejudice. The
Fish Settlement Agreement was executed on January 21,
2010.
Christopher
Wicks/Defiance
On
May 8, 2007, we were served with a summons and complaint in a lawsuit filed
in the San Diego Superior Court by Christopher Wicks and Defiance
U.S.A., Inc. seeking judgment against us, Edon Moyal and Dan Fleyshman
under a contract allegedly calling for the payment of $288,000 in cash plus
stock in our subsidiary, Who’s Your Daddy, Inc., a California corporation,
and a certain percentage of the revenues of that subsidiary. On
February 1, 2008, we entered into a Settlement Agreement and Mutual Release
with the plaintiffs pursuant to which we agreed to pay to the plaintiffs the sum
of $252,000 under a payment schedule detailed therein. As security for the
settlement payment, defendants Fleyshman and Moyal together pledged 317,210
shares of common stock in the Company owned and held by them. We are
currently in default of the Settlement Agreement.
Who’s Ya Daddy
On
April 1, 2005, the Company received a complaint filed by Who’s Ya
Daddy, Inc., a Florida corporation (“Daddy”), alleging that the Company was
infringing on Daddy’s trademark, Who’s Ya Daddy®, with respect to
clothing. On April 7, 2006, the Company entered into a
settlement agreement with Daddy pursuant to which the Company was granted an
exclusive license to use its marks on clothing in exchange for a royalty payment
of 6% of gross sales for clothing products in the United States, excluding
footwear. As part of the settlement, the Company also agreed to remit
to Daddy 12% of the licensing revenues received from third parties who the
Company granted sublicense to for use of the marks on clothing. The
Company has not made any of the required payments under the settlement
agreement. On March 26, 2008, the Company, Dan Fleyshman and
Edon Moyal each received a Notice of Levy from the United States District Court
for the Southern District of California in the amount of $143,561 allegedly
pursuant to the terms of the settlement agreement with Daddy. The
Company settled the debt on March 4, 2009 for $125,000 of which $25,000 was
paid through an advance by a shareholder. The remaining balance was
to be repaid with bi-monthly payments of $10,000 beginning April 30,
2009. The Company has not made any additional payments and is in
default of the most recent settlement agreement. As such, Daddy may
elect to declare the recent settlement agreement null and void and resume its
pursuit of the amount due under the original settlement agreement, but the
Company has not yet been notified that Daddy has chosen to do so.
H.G.
Fenton
On or
about July 22, 2009, H.G. Fenton Property Company (“Fenton”) filed a complaint
against the Company in the Superior Court of California, County of San Diego,
alleging Breach of Lease at our former office in Carlsbad, California (the
“Carlsbad Lease”.) The complaint claims damages in the
amount of $420,000. In its answer to the complaint, the Company
contends that Fenton has failed to mitigate damages, Fenton’s damages are
speculative, and Fenton made certain representations concerning a lease
restructure that the Company relied on to its detriment. On March 26,
2010, the Company attended a Case Management Conference during which a tentative
trial date was set for January 14, 2011. As of December 31, 2009, the
Company has recorded a liability of $209,950 for the estimated future net rental
expense for this lease.
Straub
Distributing
On
July 30, 2008, we entered into a Compromise and Settlement Agreement and
Mutual Release (the “Straub Settlement”) with Straub Distributing, L.L.C.
(“Straub”), a California Limited Liability Corporation. We paid $7,500 on
July 30, 2008 and were required to make two additional payments of $7,250
every sixty days for total payments to Straub of $22,000. As part of the
Straub Settlement, the parties executed a Stipulation for Entry of Judgment (the
“Stipulation”) which could be pursued by Straub in the event any of the payments
were late by more than fifteen days. The Stipulation was in the
amount of $40,000 against us plus attorney fees, costs and expenses to enforce
the judgment, and was to be reduced by the amount of payments previously
received. We made one payment of $7,250, but were unable to make
additional payments. On January 2, 2009, Straub filed an action requesting
entry of judgment against us in the principal sum of $25,250 as per the
Stipulation.
Reuven
Rubinson
On or
about September 24, 2009, Leslie T. Gladstone, Trustee for Debtor Reuven
Rubinson, filed a complaint against the Company in the United States Bankruptcy
Court, Southern District of California, asserting claims for breach of contract,
open book account, and turnover of property of the estate. The claims
stemmed from an employment
agreement between Mr. Rubinson and the Company during the time Mr. Rubinson was
a former CFO of the Company. Damages claimed in the complaint total
$130,000 plus interest from July 2, 2007. In its response to the
complaint, the Company asserted that all debts previously owed to Mr. Rubinson
have been paid in prior years either in cash or in shares of the Company’s
common stock and that the Company owes Mr. Rubinson nothing. On
February 8, 2010 we agreed to a Stipulation to Settle Adversary Proceeding with
the Trustee whereby we agreed to forward to the Trustee evidence of the 100,000
shares of the Company’s common stock which had previously been issued to Mr.
Rubinson in complete settlement of the claims.
Markstein
Beverage
On
December 22, 2009, a Default Judgment was entered against us by Markstein
Beverage Co. (“Markstein”) in the amount of $5,000. The matter, which
was heard in Superior Court of California, Small Claims Division, arose from
purported unpaid product distribution costs borne by Markstein.
Get
Logistics
On
March 19, 2008, a complaint was filed against us by Get Logistics, LLC
(formerly known as GE Transport) seeking damages of $30,278.72 for unpaid
shipping charges. We are attempting to settle this matter.
Worldwide
Express
On
March 3, 2009, a judgment was entered against us in favor of Worldwide
Express for unpaid delivery services. The amount of the judgment was
$8,794 inclusive of interest and costs.
During
the 2009 fiscal year, no matters were submitted to a vote of the Company’s
shareholders.
ITEM
5. MARKET FOR COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
Our common stock is
currently quoted under the symbol “WYDI” on the over-the-counter (“OTC”)
Bulletin Board quotation system. The following table reflects on a per
share basis the reported high and low bid prices of our Common Stock for each
quarter for the period indicated as reported by the OTC Bulletin Board.
Such prices are inter-dealer prices without retail mark-up, mark-down, or
commission and may not represent actual transactions.
YEAR
ENDED DECEMBER 31, 2009
|
QUARTER ENDED
|
HIGH
|
LOW
|
||||||
|
March
31, 2009
|
$ | 0.13 | $ | 0.05 | ||||
|
June 30,
2009
|
$ | 0.07 | $ | 0.02 | ||||
|
September
30, 2009
|
$ | 0.04 | $ | 0.02 | ||||
|
December
31, 2009
|
$ | 0.20 | $ | 0.03 |
YEAR
ENDED DECEMBER 31, 2008
|
QUARTER ENDED
|
HIGH
|
LOW
|
||||||
|
March
31, 2008
|
$ | 0.26 | $ | 0.13 | ||||
|
June 30,
2008
|
$ | 0.45 | $ | 0.16 | ||||
|
September
30, 2008
|
$ | 0.32 | $ | 0.04 | ||||
|
December
31, 2008
|
$ | 0.12 | $ | 0.02 | ||||
On
April 13, 2010, the closing price for our common stock was
$0.12.
Holders
of Common Stock
According
to the records of our transfer agent, Holladay Stock Transfer, as of
April 7, 2009, we had approximately 177 holders of record of our common
stock.
Dividends
We have
never paid dividends on our stock and have no plans to pay dividends in the near
future. We intend to reinvest earnings in the continued development and
operation of our business.
Equity
Compensation Plan Information
The
following table gives information about our common stock that may be issued upon
the exercise of options under all of our equity compensation plans as of
December 31, 2009.
|
Plan Category
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
|
|||||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||||
|
Equity
compensation plans approved by security holders
|
0 | 0 | 833,334 | |||||||||||
|
Equity
compensation plans not approved by security holders
|
1,018,248 | (1 | ) | $ | 7.13 | 0 | ||||||||
|
TOTAL
|
1,018,248 | (1 | ) | $ | 7.13 | 833,334 | ||||||||
|
(1)
|
Consists
of warrants to purchase 1,018,248 shares at a weighted average stock price
of $7.13, with strike prices ranging from $0.75 to $12.00, with an average
weighted life of 1.20 years.
|
Sales
of Unregistered Securities
On August
24, 2009, we issued 500,000 shares of common stock to one individual in exchange
for services. We relied on the exemption from registration relating to
offerings that do not involve any public offering pursuant to
Section 4(2) under the Act and/or Rule 506 of Regulation D
promulgated pursuant thereto. We believe that the investor is an
“accredited investor” under Rule 501 under Regulation D of the Act and had
adequate access to information about us.
On
November 24, 2009, we issued 250,000 shares of common stock to one individual in
exchange for services. We relied on the exemption from registration
relating to offerings that do not involve any public offering pursuant to
Section 4(2) under the Act and/or Rule 506 of Regulation D
promulgated pursuant thereto. We believe that the investor is an
“accredited investor” under Rule 501 under Regulation D of the Act and had
adequate access to information about us.
On
December 10, 2009, we issued 1,000,000 shares of common stock to one individual
in exchange for services. We relied on the exemption from registration
relating to offerings that do not involve any public offering pursuant to
Section 4(2) under the Act and/or Rule 506 of Regulation D
promulgated pursuant thereto. We believe that the investor is an
“accredited investor” under Rule 501 under Regulation D of the Act and had
adequate access to information about us.
On
December 10, 2009, we issued 100,000 shares of common stock to one individual in
exchange for services. We relied on the exemption from registration
relating to offerings that do not involve any public offering pursuant to
Section 4(2) under the Act and/or Rule 506 of Regulation D
promulgated pursuant thereto. We believe that the investor is an
“accredited investor” under Rule 501 under Regulation D of the Act and had
adequate access to information about us.
On
December 17, 2009, we issued 125,000 shares of common stock to one individual in
connection with our issuance of Convertible Promissory Notes. We relied on
the exemption from registration relating to offerings that do not involve any
public offering pursuant to Section 4(2) under the Act and/or
Rule 506 of Regulation D promulgated pursuant thereto. We believe
that the investor is an “accredited investor” under Rule 501 under
Regulation D of the Act and had adequate access to information about
us.
On
December 21, 2009, we issued 125,000 shares of common stock to one individual in
connection with our issuance of Convertible Promissory Notes. We relied on
the exemption from registration relating to offerings that do not involve any
public offering pursuant to Section 4(2) under the Act and/or
Rule 506 of Regulation D promulgated pursuant thereto. We believe
that the investor is an “accredited investor” under Rule 501 under
Regulation D of the Act and had adequate access to information about
us.
On
December 23, 2009, we issued 125,000 shares of common stock to one individual in
connection with our issuance of Convertible Promissory Notes. We relied on
the exemption from registration relating to offerings that do not involve any
public offering pursuant to Section 4(2) under the Act and/or
Rule 506 of Regulation D promulgated pursuant thereto. We believe
that the investor is an “accredited investor” under Rule 501 under
Regulation D of the Act and had adequate access to information about
us.
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities
Exchange Act of 1934 and are not required to provide the information under this
item.
Forward
Looking Statements
Our
Management’s Discussion and Analysis contains not only statements that are
historical facts, but also statements that are forward-looking (within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934). Forward-looking statements are,
by their very nature, uncertain and risky. These risks and uncertainties
include international, national and local general economic and market
conditions; demographic changes; our ability to sustain, manage, or forecast
growth; our ability to successfully make and integrate acquisitions; raw
material costs and availability; new product development and introduction;
existing government regulations and changes in, or the failure to comply with,
government regulations; adverse publicity; competition; the loss of significant
customers or suppliers; fluctuations and difficulty in forecasting operating
results; changes in business strategy or development plans; business
disruptions; the ability to attract and retain qualified personnel; the ability
to protect technology; and other risks that might be detailed from time to time
in our filings with the Securities and Exchange Commission.
Although
the forward-looking statements in this report reflect the good faith judgment of
our management, such statements can only be based on facts and factors currently
known by them. Consequently, and because forward-looking statements
are inherently subject to risks and uncertainties, the actual results and
outcomes may differ materially from the results and outcomes discussed in the
forward-looking statements. You are urged to carefully review and consider
the various disclosures made by us in this report and in our other reports as we
attempt to advise interested parties of the risks and factors that may affect
our business, financial condition, and results of operations and
prospects.
Summary
of Business
We
presently manufacture (on an outsource basis), market, sell, and distribute our
F.I.T.T. Energy With Resveratrol two-ounce energy shot. We expect to
develop other energy drink products in the future and are investigating
marketing and distributing other synergistic products as well.
Critical
Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States., which require us to make estimates and
assumptions in certain circumstances that affect amounts reported. In
preparing these financial statements, management has made its best estimates and
judgments of certain amounts, giving due consideration to materiality. We
believe that of our significant accounting policies (more fully described in
notes to the financial statements), the following are particularly important to
the portrayal of our results of operations and financial position and may
require the application of a higher level of judgment by our management, and as
a result are subject to an inherent degree of uncertainty.
Estimates
Our
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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. By their nature, these estimates and judgments are
subject to an inherent degree of uncertainty. We review our estimates on
an on-going basis, including those related to sales allowances, the allowance
for doubtful accounts, inventories and related reserves, long-lived assets,
income taxes, litigation and stock-based compensation. We base our
estimates on our historical experience, knowledge of current conditions and our
beliefs of what could occur in the future considering available
information. Actual results may differ from these estimates, and material
effects on our operating results and financial position may result. We
believe the following critical accounting policies involve our more significant
judgments and estimates used in the preparation of our financial
statements.
Stock-Based
Compensation
We
account for stock-based compensation in accordance with ASC 718 – Compensation
(“ASC 718”), formerly Statement of Financial Accounting Standards (“SFAS”)
No. 123R, “Share-Based Payment.” ASC 718 requires that we account for
all stock-based compensation transactions using a fair-value method and
recognize the fair value of each award as an expense, generally over the service
period. The fair value of stock options is based upon the market price of
our common stock at the grant date. We estimate the fair value of stock
option awards, as of the grant date, using the Black-Scholes option-pricing
model. The use of the Black-Scholes model requires that we make a number
of estimates, including the expected option term, the expected volatility in the
price of our common stock, the risk-free rate of interest and the dividend yield
on our common stock. If our expected option term and stock-price
volatility assumptions were different, the resulting determination of the fair
value of stock option awards could be materially different and our results of
operations could be materially impacted.
Accounting
for Non-Employee Stock-Based Compensation
We
measure compensation expense for non-employee stock-based compensation in
accordance ASC 505 – Equity, formerly EITF No. 96-18, “Accounting for
Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.” The fair value of the option
issued or expected to be issued is used to measure the transaction, as this is
more reliable than the fair value of the services received. The fair value
is measured at the value of our common stock on the date that the commitment for
performance by the counterparty has been reached or the counterparty’s
performance is complete. In the case of the issuance of stock options, we
determine the fair value using the Black-Scholes option pricing model. The
fair value of the equity instrument is charged directly to stock-based
compensation expense and credited to additional paid-in capital.
Modifications
to Convertible Debt
We
account for modifications of embedded conversion features (“ECF”) in accordance
with ASC 470 – Debt (“ASC 470”), formerly EITF 06-6 “Debtors Accounting for a
Modification (or exchange) of Convertible Debt Instruments.”
ASC 470 requires the modification of a convertible debt instrument that changes
the fair value of an ECF be recorded as a debt discount and amortized to
interest expense over the remaining life of the debt. If modification is
considered a substantial (i.e., greater than 10% of the carrying value of the
debt), an extinguishment of the debt is deemed to have occurred, resulting in
the recognition of an extinguishment gain or loss.
Derivative
Financial Instruments
Derivative
financial instruments, as defined in ASC 815 – Derivatives and Hedging (“ASC
815”), formerly SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” 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), that require no initial net investment and
permit net settlement. Derivative financial instruments may be
free-standing or embedded in other financial instruments. Further,
derivative financial instruments are initially, and subsequently, measured at
fair value and recorded as liabilities or, in rare instances,
assets.
We do not
use derivative financial instruments to hedge exposures to cash-flow, market or
foreign-currency risks. However, we have convertible debt 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 ASC 815, in certain
instances, these instruments are required to be carried as derivative
liabilities, at fair value, in its financial statements.
We
estimate the fair values of our derivative financial instruments using the
Black-Scholes option valuation model because it embodies all of the requisite
assumptions (including trading volatility, estimated terms and risk free rates)
necessary to fair value these instruments. 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. Since derivative financial instruments are
initially and subsequently carried at fair values, our operating results will
reflect the volatility in these estimate and assumption changes.
Equity
Instruments Issued with Registration Rights Agreement
We
account for these penalties as contingent liabilities, applying the accounting
guidance of ASC 450 – Contingencies, formerly SFAS No. 5, “Accounting for
Contingencies” as required by FASB Staff Positions ASC 815, formerly FSP EITF
00-19-2 “Accounting for Registration Payment Arrangements,” which was issued
December 21, 2006. Accordingly, we recognize the damages when it
becomes probable that they will be incurred and amounts are reasonably
estimable.
Recent
Accounting Pronouncements
In March
2008, the FASB, affirmed the consensus of FASB Staff Position in ASC 470,
formerly (FSP) APB No. 14-1 (APB 14-1), "Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)", which applies to all convertible debt instruments that have a
net settlement feature;
which means that such convertible debt instruments, by their terms, may be
settled either wholly or partially in cash upon conversion. ASC 470
requires issuers of convertible debt instruments that may be settled wholly or
partially in cash upon conversion to separately account for the liability and
equity components in a manner reflective of the issuer’s nonconvertible debt
borrowing rate. Previous guidance provided for accounting for this
type of convertible debt instrument entirely as debt. This
pronouncement was effective on January 1, 2009.
In June
2008, the FASB issued ASC Topic 815 – Derivatives and Hedging, formerly EITF
Issue No. 07-5, Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock. ASC 815 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early application is not
permitted. ASC 815 specifies that a contract that would otherwise
meet the definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial
instrument. ASC 815 also provides a new two-step model to be applied
in determining whether a financial instrument or an embedded feature is indexed
to an issuer’s own stock and thus able to qualify for above stated
exception. The adoption of ASC 815 had no material impact on our
financial statements.
In May
2009, the FASB issued ASC 855 (“ASC 855”) – Subsequent Events, formerly SFAS
No. 165, Subsequent
Events) ASC 855 , which is effective for interim and annual
periods ending after June 15, 2009, establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
Specifically, ASC 855 sets forth the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements,
and the disclosure that an entity should make about events or transactions that
occurred after the balance sheet date. The adoption of ASC 855 did not
have a material impact on its financial position, results of operations or
liquidity.
In
October 2009, FASB issued guidance for fair value measurements and improving
disclosures about fair value measurements. This new guidance requires some new
disclosures and clarifies some existing disclosure requirements about fair value
measurement. The objective of the guidance is to improve these disclosures and
improve transparency in financial reporting. The guidance now requires a
reporting entity to (1) separately disclose the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers and (2) present separately
information about purchases, sales, issuances and settlements in the
reconciliation of fair value measurements. In addition, a reporting entity needs
to use judgment in determining the appropriate classes of assets and liabilities
for purposes of reporting fair value measurement and the entity should provide
disclosures about the valuation techniques and inputs used to measure fair value
for both recurring and nonrecurring fair value measurements. This guidance is
effective for interim and annual reporting periods beginning after
December 15, 2009, except for disclosures about purchases, sales, issuances
and settlements in the roll-forward activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. We are
currently evaluating the impact of this standard on our financial
statements.
In
October 2009, the FASB issued guidance for multiple-deliverable revenue
arrangements. This guidance requires an entity to use an estimated selling price
when vendor-specific objective evidence or acceptable third party evidence does
not exist for any products or services included in a multiple-element
arrangement. The arrangement consideration should be allocated among the
products and services based upon their relative selling prices, thus eliminating
the use of the residual method of allocation. This guidance also requires
expanded qualitative and quantitative disclosures regarding significant
judgments made and changes in applying this guidance. This guidance is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption and
retrospective application are also permitted. We are currently evaluating the
impact of adopting this new provision.
Results
of Operations for the Fiscal Year Ended December 31, 2009 and
2008
Sales
Our sales
consist of energy drink products sold to distributors and retail
stores. Our sales are recorded at the selling price, less promotional
allowances, discounts and fees paid to obtain retail shelf space (referred to as
“shelving” or “slotting” fees).
Sales
decreased to $160,695 during 2009 from $745,050 in 2008. During the
last three quarters of 2009, we effectively had no sales compared to as we
concentrated on developing a new energy shot product and an internet marketing
program, both of which we expect to roll-out in the second quarter of
2010. Our 2008 sales were mainly canned energy drinks and we paid
$210,338 in promotion and merchandise allowances during this period which were
recorded as reductions of sales.
Gross
Profit (Loss)
Gross
profit (loss) represents revenues less the cost of goods sold. Our cost of goods
sold consists of the costs of raw materials utilized in the manufacturing of
products, packaging fees, repacking fees, in-bound freight charges, and internal
and external warehouse expenses. Raw materials account for the largest portion
of the cost of sales. Raw materials include costs for cans, bottles, ingredients
and packaging materials.
Gross profit was $66,759 during 2009 compared to a gross loss of $33,536
during 2008. Our gross margin in 2009 was 42% compared to a gross
margin (loss) in 2008 of (5)%. During the 2008 period, gross margin
was negatively impacted by lower net selling prices, which were attributable to
sales to a membership warehouse retailer and distributors, and $125,000 in
inventory reserves resulting from expiring product.
Selling
and Marketing Expenses
Selling
and marketing expenses include personnel costs for sales and marketing
functions, advertising, product marketing, promotion, events, promotional
materials, professional fees and non-cash, stock-based
compensation.
Selling
and marketing expenses increased to $935,432 during 2009 from $482,634 in
2008. The 2009 period includes stock-based marketing expenses totaling
$879,000 for common shares issued or committed to be issued for marketing,
representation and lead generation services in connection with agreements
between the Company and Ramon Desage (our Las Vegas distributor), Dr. Rand
Scott, Dr. Sam Maywood, Dr. Robert Maywood, Fadi Nona, Corporate Resource
Advisors Inc., Corporate Support Services LLC, H-Six, Ltd. and a designee of
LSSE, LLC. The 2008 period contained only $72,000 in such
expenses. During 2008, we were more aggressively pursuing sales and
we incurred higher expenses for advertising and promotional materials
($148,000), salaries and commissions ($136,000) and sales expense including
travel and entertainment ($80,000).
General
and Administrative Expenses
General
and administrative expenses include personnel costs for management, operations
and finance functions, along with legal and accounting costs, bad debt expense,
insurance and non-cash, stock-based compensation.
General
and administrative expenses decreased to $1,166,907 during the 2009 period from
$2,168,111 in same period in 2008. The 2009 period includes a charge of
$425,000 for stock compensation for shares issued in connection with employment
agreements with two key employees, while the charge for stock-based compensation
in the 2008 period of $750,382 included charges for employee compensation
($639,000) and services which were mainly legal and investor relations
($111,000). In addition, because of lower headcount and professional
fees, the 2009 period expenses were significantly lower than 2008 in the areas
of legal and accounting ($250,000), salaries ($283,000), insurance ($47,000) and
rent ($67,000).
Loss
on Relocation of Office
In the
second quarter of 2009, we moved our office from Carlsbad, California to a
smaller, less expensive office in Mission Viejo, California. The loss
recorded represents $208,884 of estimated future net rent expense for the
Carlsbad office lease and $27,896 for loss on disposal of property and equipment
related to the move.
Loss
on Impairment of Tradename
During
the third quarter of 2009, the Company recorded a tradename impairment charge of
$143,711, effectively reducing the value of this asset to zero.
Interest
Expense
Interest
expense decreased to $169,663 during the 2009 period from $313,325 for the
comparable fiscal 2008. The 2009 period includes $146,800 in non-cash
interest expense on our convertible promissory notes compared to a similar
charge of $63,652 in the 2008 period. The remainder of the 2008
period expense consists primarily of cash-based interest on loans and advances
either repaid or reclassified during later periods and $69,919 in registration
rights penalties.
Gain
on Extinguishment of Debt and Creditor Obligations
During
2008, we settled outstanding accounts payable, accrued liabilities, registration
rights penalties and accrued salaries to certain executive officers through the
issuance of shares of our common stock and/or cash. As a result of the
settlements, we recognized a net gain of $353,834 from these
settlements. No such settlements occurred during
2009.
Liquidity
and Capital Resources
The
report of our independent registered public accounting firm on the financial
statements for the year ended December 31, 2009 contains an explanatory
paragraph expressing substantial doubt about our ability to continue as a going
concern as a result of recurring losses, a working capital deficiency, and
negative cash flows. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that would be necessary if we are
unable to continue as a going concern.
At
December 31, 2009, our principal sources of liquidity consist of the issuance of
debt and equity securities and advances of funds from officers and
shareholders. In addition to funding operations, our principal
short-term and long-term liquidity needs have been, and are expected to be,
servicing debt, the funding of operating losses until we achieve profitability
and expenditures for general corporate purposes. Funds are expected
to be used for building our new website, producing inventory, providing for call
and fulfillment centers, developing a merchant account for customer credit card
use, developing internet leads, and paying basic business expenses including
those necessary to keep the Company’s government filings
current. While we have a high level of past-due debt and accounts
payable, our investors are requiring that we raise additional capital to
mitigate a substantial portion of this debt at 10 to 15 cents per dollar of
debt.
We have
been, and are, actively seeking to raise additional capital with debt and equity
financing through private contacts. Due to the highly competitive
nature of the beverage industry, our significant debt burden, our expected
operating losses in the foreseeable future, and the credit constraints in the
capital markets, we cannot assure you that such financing will be available to
us on favorable terms, or at all. If we cannot obtain such financing,
we will be forced to curtail our operations even further or may not be able to
continue as a going concern, and we may become unable to satisfy our obligations
to our creditors.
Convertible
Promissory Notes
During
the third quarter of 2008, we collectively issued $380,000 face value, 10%
convertible promissory notes (“2008 Promissory Note”), each of which became due
on January 15, 2010. Each 2008 Promissory Note consisted of a
convertible promissory note bearing interest at a rate of 10% per annum and two
shares of our restricted common stock per face value dollar of the
notes. Upon the closing of a debt or equity offering of $1,750,000
prior to the due date, we were required to repay any amounts due under the 2008
Promissory Notes.
The 2008
Promissory Notes and any accrued interest thereon were convertible at the option
of the holder into shares of our common stock at a conversion price equal to 80%
of the volume weighted average price (“VWAP”) for 30 trading days preceding the
earlier of (i) closing of at least $3 million in gross proceeds from a private
placement, or (ii) 12 months from the date of issuance. The
conversion price was subject to a floor of $0.50 per share and a ceiling of
$0.75 per share. If we were unable to complete the private placement
by January 15, 2010, we were required to make equal monthly payments of
principal and interest over a 60 month period. During January 2010,
we modified the conversion feature of the 2008 Promissory Notes to allow the
noteholders to convert the principal and accrued interest owed them at $0.16 per
share. All of the noteholders elected to convert, and as a result, we
issued them a total of 2,729,157 shares of our common stock during the first
quarter of 2010.
In May
2009, the Company issued a $20,000 face value, 10% convertible promissory note
(the “May 2009 Promissory Note”) together with 40,000 shares of its common
stock. In July 2009, the Company issued a $50,000 face value, 12%
convertible promissory note (the “July 2009 Promissory Note”) together with
100,000 shares of its common stock. These promissory notes and any
accrued interest are convertible at the option of the holder into shares of our
common stock at a conversion price equal to 80% of the VWAP for the last 30
trading days preceding conversion but in no event shall the conversion price be
less than $0.25 per share or greater than $1.00 per share.
On
September 30, 2009, the Company commenced a new $300,000 offering (the
“September 2009 Offering”) consisting of a convertible promissory note and five
shares of the Company’s common stock for every dollar invested. In
commencing the September 2009 Offering, the Company also amended its May 2009
Offering and its July 2009 Offering to provide five shares of the Company’s
common stock for every dollar invested in the note. Accordingly, on
September 30, 2009, the Company issued an additional 60,000 and 150,000 shares
of its common stock to the holders of the May 2009 Promissory Note and the July
2009 Promissory Note, respectively. In March 2010, we increased the
amount of the September 2009 Offering from $300,000 to
$400,000.
For
promissory notes issued under the September 2009 Offering, payments of principal
and interest are dependent on certain cash flow
parameters. Calculation of the amount to be paid will be based on ten
percent (10%) of cash received by the Company from the sale over the internet of
its F.I.T.T. Energy With Resveratrol energy shot for the entire amount of the
offering, apportioned to each Noteholder for their respective percentage of the
offering total (such cash receipts being paid to the Company from various
third-party merchant accounts established to receive customer credit card
payments). All payments will first be applied to
principal. Once the entire principal balance has been repaid, the
remaining payments will be applied to interest. In no circumstance
will the repayment of principal and interest extend beyond one year from the
date of the issuance of each note. On September 30, 2009, the Company
agreed to offer this same repayment structure to the holders of the May 2009 and
July 2009 Promissory Notes.
During
the fourth quarter of 2009, we collectively issued $75,000 face value, 12%
convertible promissory notes in connection with the September 2009 Offering
together with 375,000 shares of our common stock. These promissory
notes and any accrued interest are convertible at the option of the holder into
shares of our common stock at a conversion price equal to 80% of the VWAP for
the last 30 trading days preceding conversion but in no event shall the
conversion price be less than $0.20 per share or greater than $1.00 per
share.
Sales
of Equity Securities
During
2009 we sold a total of 1,800,000 shares of our common stock to two investors
for proceeds of $45,000.
At
December 31, 2009, our cash and cash equivalents were $0, and we had negative
working capital of approximately $5.5 million. During 2009, because
of a lack of capital, we have issued 30,400,000 shares of common stock in
payment for employee compensation, investor relations, Director’s fees, lead
generation, and for marketing, promoting and merchandising our
product. Also in 2009, we committed to issue 10,000,000 shares to
LSSE in payment for lead generation and representation services. Due
to changes at LSSE which caused them to be unable to perform their obligations
under our agreement with them, we agreed to rework that agreement, under the
same terms and conditions, with a company owned by NFL Hall of Fame quarterback
Warren Moon. We are currently in the process of reworking the
agreement and expect it to be executed in the near future, at which time we will
issue the previously committed 10,000,000 shares.The value of the services and
shares (issued and committed) was $1,334,200.
Due to
our lack of capital, we are in default of certain note agreements, are past due
with many vendors, and have a levy on any bank accounts we might
obtain. At December 31, 2009, we had $1,186,000 in notes payable
obligations, of which $707,000 is in default for non-payment. If we
do not raise additional capital, we may not be able to meet our financial
obligations when they become due which can have a material adverse impact on our
business.
Cash
Flows
The
following table sets forth our cash flows for the year ended
December 31:
|
2009
|
2008
|
Change
|
||||||||||
|
Operating
activities
|
$ | (189,456 | ) | $ | (364,961 | ) | $ | 175,505 | ||||
|
Investing
activities
|
(544 | ) | (10,684 | ) | 10,140 | |||||||
|
Financing
activities
|
190,000 | 375,500 | (185,500 | ) | ||||||||
|
Change
|
$ | -0- | $ | (145 | ) | $ | 145 | |||||
Operating
Activities
Operating
cash flows for the 2009 period reflects our net loss of $2,587,334 offset by
changes in working capital of $500,317 and non-cash items (primarily consisting
of stock-based payments for compensation and services, accretion of debt
discounts, loss on relocation of our offices, and loss on impairment of
tradename) of $1,897,561. The change in working capital is primarily
related to increases in accrued compensation, amounts owed to officers (or
former officers), and accounts payable; decreases in accounts receivable and
prepaid expenses and other assets; all
offset by decreases in customer deposits and accrued expenses. The
increase in accrued compensation and accounts payable was due to the lack of
operating capital to pay a significant portion of employees’ wages and to pay
vendors. Amounts owed to officers increased on additional advances
due to lack of operating capital, while customer deposits decreased as customer
prepayments in 2008 were applied to product shipments in
2009. Because of a lack of operating capital, we issued shares of our
common stock (or committed for such issuance) for services, and we relocated our
office to a smaller, more affordable space.
Operating
cash flows for the 2008 period reflects our net loss of $2,644,172, offset by
changes in working capital of $1,256,803 and non-cash items (primarily
consisting of stock-based compensation, accretion of debt discounts and creditor
settlements) of $1,022,408. The change in working capital is primarily
related to decreases in inventory, offset by increases in accounts payable,
accrued expenses and customer deposits. The increase in accounts payable
and accrued expenses are due to the lack of operating capital to pay vendors and
the deferral of payment of a significant percentage of wages to our executive
officers. Non-cash expenses resulted from the issuance of shares of our
common stock for services due to our lack of capital.
Investing
Activities
Cash
expended for the 2009 period consisted of a $544 equipment
purchase. During the same period in 2008, we spent $10,684 for
trademarks.
Financing
Activities
During
the 2009 period, we issued Convertible Promissory Notes for net proceeds of
$145,000 and sold shares of our common stock for net proceeds of
$45,000.
During
the 2008 period, net proceeds of $95,000 were received from the collection of an
outstanding stock subscription agreement entered into in 2007. We
also issued Promissory Notes for net proceeds of $323,000 and made
payments on notes totaling $42,500.
Off
Balance Sheet Arrangements
We have
no off balance sheet arrangements.
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities
Exchange Act of 1934 and are not required to provide the information under this
item.
|
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Page No.
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Audited
Financial Statements for Who’s Your Daddy, Inc.
|
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The Board
of Directors and Stockholders
Who’s
Your Daddy, Inc.
We have
audited the accompanying balance sheet of Who’s Your Daddy, Inc. (the
“Company”) as of December 31, 2009, and the related statements of
operations, shareholders’ deficit, and cash flows for the year then ended.
These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform an audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company was
not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting as of December 31, 2009. Our audit
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 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 financial statements referred to above present fairly, in all
material respects, the financial position of Who’s Your Daddy, Inc. as
of December 31, 2009, and the results of operations and 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 the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company suffered losses from operations and has a
working capital deficiency, which raises substantial doubt about its ability to
continue as a going concern. Management’s plans regarding those matters
also are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
|
/s/
dbbmckennon
|
|
|
Newport
Beach, California
|
|
|
April 14,
2010
|
The Board
of Directors and Stockholders
Who’s
Your Daddy, Inc.
We have
audited the accompanying balance sheets of Who’s Your Daddy, Inc. (the
“Company”) as of December 31, 2008, and the related statements of
operations, shareholders’ deficit, and cash flows for the year then ended.
These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform an audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company was
not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting as of December 31, 2008. Our audit
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 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 financial statements referred to above present fairly, in all
material respects, the financial position of Who’s Your Daddy, Inc. as
of December 31, 2008, and the results of operations and 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 the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company suffered losses from operations and has a
working capital deficiency, which raises substantial doubt about its ability to
continue as a going concern. Management’s plans regarding those matters
also are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
|
/s/
McKennon, Wilson & Morgan, LLP
|
|
|
Irvine,
California
|
|
|
April 15,
2009
|
WHO’S
YOUR DADDY, INC.
BALANCE
SHEETS
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | — | $ | — | ||||
|
Accounts
receivable, net of allowance of $0 and $60,468 at December 31, 2009
and 2008, respectively.
|
— | 33,496 | ||||||
|
Prepaid
and other
|
6,945 | 37,691 | ||||||
|
Total
current assets
|
6,945 | 71,187 | ||||||
|
Property
and equipment, net
|
3,642 | 45,708 | ||||||
|
Tradename,
net
|
— | 143,711 | ||||||
|
Deposits
|
— | 36,335 | ||||||
|
Total
assets
|
$ | 10,587 | $ | 296,941 | ||||
|
Liabilities
and Shareholders’ Deficit
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 868,626 | $ | 833,364 | ||||
|
Accrued
expenses
|
442,543 | 366,306 | ||||||
|
Accrued
compensation
|
1,168,704 | 803,281 | ||||||
|
Customer
deposits
|
227 | 115,576 | ||||||
|
Accrued
litigation
|
1,790,000 | 1,790,000 | ||||||
|
Notes
payable
|
812,567 | 607,000 | ||||||
|
Advances
from officers
|
390,025 | 221,618 | ||||||
|
Total
current liabilities
|
5,472,692 | 4,737,145 | ||||||
|
Notes
payable, net of current portion
|
373,065 | 232,146 | ||||||
|
Total
liabilities
|
5,845,757 | 4,969,291 | ||||||
|
Shareholders’
deficit:
|
||||||||
|
Preferred
stock, $0.001 par value: 20,000,000 shares authorized, 0 and 333,333
shares issued and outstanding at December 31, 2009 and 2008,
respectively.
|
— | 333 | ||||||
|
Common
stock, $0.001 par value: 100,000,000 shares authorized, 52,795,781 and
19,870,781 shares issued and outstanding at December 31, 2009 and
2008, respectively.
|
52,796 | 19,871 | ||||||
|
Stock
subscription receivable
|
— | — | ||||||
|
Additional
paid-in capital
|
25,828,049 | 24,436,127 | ||||||
|
Accumulated
deficit
|
(31,716,015 | ) | (29,128,681 | ) | ||||
|
Total
shareholders’ deficit
|
(5,835,170 | ) | (4,672,350 | ) | ||||
|
Total
liabilities and shareholders’ deficit
|
$ | 10,587 | $ | 296,941 | ||||
See
accompanying Notes to Financial Statements.
WHO’S
YOUR DADDY, INC.
|
Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Sales
|
$ | 160,695 | $ | 745,050 | ||||
|
Cost
of sales
|
93,936 | 778,586 | ||||||
|
Gross
profit (loss)
|
66,759 | (33,536 | ) | |||||
|
Operating
expenses:
|
||||||||
|
Selling
and marketing
|
935,432 | 482,634 | ||||||
|
General
and administrative
|
1,166,907 | 2,168,111 | ||||||
|
Loss
on relocation of office
|
236,780 | |||||||
|
Loss
on impairment of tradename
|
143,711 | |||||||
|
Total
operating expenses
|
2,482,830 | 2,650,745 | ||||||
|
Operating
loss
|
(2,416,071 | ) | (2,684,281 | ) | ||||
|
Interest
expense
|
169,663 | 313,325 | ||||||
|
Gain
on Extinguishment of debt and creditor obligations
|
— | (353,834 | ) | |||||
|
Other
expense (income), net
|
800 | (400 | ) | |||||
|
Loss
before income taxes
|
(2,586,534 | ) | (2,643,372 | ) | ||||
|
Income
taxes
|
(800 | ) | (800 | ) | ||||
|
Net
loss
|
$ | (2,587,334 | ) | $ | (2,644,172 | ) | ||
|
Basic
and diluted net loss per share
|
$ | (0.08 | ) | $ | (0.18 | ) | ||
|
Weighted
average number of common shares used in basic and diluted per share
calculations
|
31,000,671 | 14,500,331 | ||||||
See
accompanying Notes to Financial Statements.
WHO’S
YOUR DADDY, INC.
|
Preferred Stock
|
Common Stock
|
Stock
Subscription
|
Additional
Paid-in
|
Accumulated
|
||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Receivable
|
Capital
|
Deficit
|
Total
|
|||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
333,333 | $ | 333 | 7,991,986 | $ | 7,992 | $ | (95,000 | ) | $ | 22,606,307 | $ | (26,484,509 | ) | $ | (3,964,877 | ) | |||||||||||||||
|
Stock
compensation expense - employees
|
— | — | 2,745,091 | 2,745 | — | 620,904 | — | 623,649 | ||||||||||||||||||||||||
|
Stock
issued to settle accrued employee and officer compensation
|
— | — | 2,479,699 | 2,480 | — | 419,070 | — | 421,550 | ||||||||||||||||||||||||
|
Stock
issued for services and operating expenses – non-employees
|
— | — | 1,569,194 | 1,569 | — | 241,136 | — | 242,705 | ||||||||||||||||||||||||
|
Stock
issued for settlement of accrued registration rights
penalties
|
— | — | 1,602,989 | 1,603 | — | 238,845 | — | 240,448 | ||||||||||||||||||||||||
|
Stock
issued for creditor settlements
|
— | — | 750,155 | 750 | — | 88,445 | — | 89,195 | ||||||||||||||||||||||||
|
Stock
subscription receivable
|
— | — | — | — | 95,000 | — | — | 95,000 | ||||||||||||||||||||||||
|
Stock
issued under an investment banking agreement
|
— | — | 380,000 | 380 | — | 48,534 | — | 48,914 | ||||||||||||||||||||||||
|
Stock
issued for anti-dilution provision
|
— | — | 416,667 | 417 | — | (417 | ) | — | — | |||||||||||||||||||||||
|
Stock
issued for shares previously cancelled
|
— | — | 75,000 | 75 | — | (75 | ) | — | — | |||||||||||||||||||||||
|
Stock
and warrants issued to distributors
|
— | — | 1,100,000 | 1,100 | — | 68,547 | — | 69,647 | ||||||||||||||||||||||||
|
Stock
issued in connection with the issuance of convertible promissory
notes
|
— | — | 760,000 | 760 | — | 104,831 | — | 105,591 | ||||||||||||||||||||||||
|
Net
loss
|
— | — | — | — | — | — | (2,644,172 | ) | (2,644,172 | ) | ||||||||||||||||||||||
|
Balance
at December 31, 2008
|
333,333 | 333 | 19,870,781 | 19,871 | — | 24,436,127 | (29,128,681 | ) | (4,672,350 | ) | ||||||||||||||||||||||
|
Issuance
of common stock for cash
|
— | — | 1,800,000 | 1,800 | — | 43,200 | — | 45,000 | ||||||||||||||||||||||||
|
Stock
compensation expense - employees
|
— | — | 17,000,000 | 17,000 | — | 408,000 | — | 425,000 | ||||||||||||||||||||||||
|
Stock
issued or committed to be issued for services and operating expenses –
non-employees
|
— | — | 13,400,000 | 13,400 | — | 895,800 | — | 909,200 | ||||||||||||||||||||||||
|
Stock
issued in connection with the issuance of convertible promissory
notes
|
— | — | 725,000 | 725 | — | 44,589 | — | 45,314 | ||||||||||||||||||||||||
|
Cancellation
of preferred shares outstanding
|
(333,333 | ) | (333 | ) | — | — | — | 333 | — | — | ||||||||||||||||||||||
|
Net
loss
|
— | — | — | — | — | — | (2,587,334 | ) | (2,587,334 | ) | ||||||||||||||||||||||
|
Balance
at December 31, 2009
|
— | $ | — | 52,795,781 | $ | 52,796 | $ | — | $ | 25,828,049 | $ | (31,716,015 | ) | $ | (5,835,170 | ) | ||||||||||||||||
See
accompanying Notes to Financial Statements.
WHO’S
YOUR DADDY, INC.
STATEMENTS
OF CASH FLOWS
|
|
Year Ended December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (2,587,334 | ) | $ | (2,644,172 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Stock
compensation expense
|
425,000 | 623,649 | ||||||
|
Common
stock issued or committed to be issued for services
rendered
|
909,200 | 312,352 | ||||||
|
Depreciation
|
13,627 | 22,755 | ||||||
|
Bad
debt expense
|
22,443 | — | ||||||
|
Loss
on relocation of office
|
236,780 | — | ||||||
|
Amortization
of debt discount
|
146,800 | 63,652 | ||||||
|
Loss
on impairment of tradename
|
143,711 | — | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
11,053 | (3,863 | ) | |||||
|
Inventories
|
— | 454,792 | ||||||
|
Prepaid
expenses and other assets
|
30,746 | (7,521 | ) | |||||
|
Accounts
payable
|
35,262 | 265,995 | ||||||
|
Accrued
expenses
|
28,688 | 21,181 | ||||||
|
Accrued
compensation
|
365,423 | |||||||
|
Customer
deposits
|
(115,349 | ) | 115,576 | |||||
|
Accrued
litigation
|
— | (22,000 | ) | |||||
|
Due
to officers
|
144,494 | 432,643 | ||||||
|
Net
cash used in operating activities
|
(189,456 | ) | (364,961 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Capital
expenditures
|
(544 | ) | — | |||||
|
Tradename
|
— | (10,684 | ) | |||||
|
Net
cash used in investing activities
|
(544 | ) | (10,684 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from issuance of notes payable, net of fees
|
145,000 | 323,000 | ||||||
|
Payments
on notes payable
|
— | (42,500 | ) | |||||
|
Proceeds
from the sale of common stock
|
45,000 | 95,000 | ||||||
|
Net
cash provided by financing activities
|
190,000 | 375,500 | ||||||
|
Net
decrease in cash and cash equivalents
|
— | (145 | ) | |||||
|
Cash
and cash equivalents at beginning of year
|
— | 145 | ||||||
|
Cash
and cash equivalents at end of year
|
$ | — | $ | — | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid for interest
|
$ | 12,864 | $ | 164,151 | ||||
|
Cash
paid for income taxes
|
$ | — | $ | — | ||||
|
Supplemental
disclosure of non-cash investing and financing activities:
|
||||||||
|
Issuance
of common stock to settle creditor obligations
|
$ | — | $ | 329,643 | ||||
|
Issuance
of common stock for accrued salaries
|
$ | — | $ | 421,550 | ||||
See
accompanying Notes to Financial Statements.
Who’s
Your Daddy, Inc.
1.
Business and Management’s Plan of Operation
Business
Who’s
Your Daddy, Inc. (the “Company”) manufactured (on an outsource
basis), marketed, and distributed its The King of Energy® energy drinks,
including two-ounce energy shots and canned energy drinks, centered on its
trademark-protected brand, Who’s Your Daddy®. We marketed our energy
drinks mainly to a demographic of customers in their late teens through
mid-thirties who were attracted to our products because of energy boosting
capabilities, pleasant taste, and also because of our edgy and provocative
tradename. In late 2008, we began marketing a sports energy shot on a
test basis in limited markets to determine where best this product would
fit. During the second and third quarter of 2009, the Company
temporarily suspended its sales activity to focus on a new marketing strategy
which will principally emphasize the sale of its energy shot products over the
internet to people in their late twenties, thirties, forties and fifties who are
interested in fitness and health as well as gaining an energy
boost. The Company has developed a new energy shot product containing
a number of ingredients which various scientific studies describe as having
certain possible health and fitness benefits, and the Company intends to develop
additional products in the future for this market niche.
During
the third quarter of 2009, the Company completed a review of its Who’s Your
Daddy® and The King of Energy® tradenames given the change in our marketing
strategy and demographic. We have been concerned that these
tradenames were not descriptive of our product, were too offensive for a large
segment of the market we will be trying to attract, and would not be effective
names for our current marketing direction. Also in the third quarter
of 2009, the Company entered into Marketing and Lead Generation Agreements with
two parties which together can supply us with lists of as many as 88 million
high-quality email leads as well as merchant accounts for customer
use. Both parties had serious reservations concerning the use of the
existing tradenames and felt we would not achieve optimum market penetration if
we continued their use. Prior to 2008, while under previous
management, the Company was a party to various lawsuits involving the tradenames
and their development, and a number of our influential shareholders and advisors
have counseled us that they believe these existing tradenames were not viewed
favorably by the business community and could be subject to further legal
action. They asked that the Company consider adopting a new tradename
for its new products.
After careful review of numerous
factors, including those described above, the Company has decided to no longer
use the Who’s Your Daddy® and The King of Energy® tradenames, and accordingly
has recorded an impairment charge (see Note 5). We intend to brand
our new products using the name “F.I.T.T. Energy” which we consider to be
non-offensive to our market demographic while being more descriptive of our new
products. In April 2010, the Board of Directors approved a resolution
to change the Company’s corporate name to FITT Energy, Inc., and we are in the
process of securing shareholder approval for the name change. The
corporate name change will result in a new trading symbol.
Management’s
Plan of Operations
For the
years ended December 31, 2009 and 2008, revenues declined to $160,695 from
$745,050, respectively, primarily due to the lack of operating capital and our
decision to temporarily suspend our sales activity to focus on our new marketing
strategy and product development. The Company has also incurred net losses
of $2,587,334 and $2,644,172 for the years ended December 31, 2009 and
2008, respectively. The net losses can be broken down as
follows:
|
2009
|
2008
|
|||||||
|
Stock
based expenses for compensation and services
|
$ | 1,334,200 | $ | 936,001 | ||||
|
Loss
from tradename impairment and office relocation
|
380,491 | — | ||||||
|
Debt
discount amortization and depreciation
|
160,427 | 86,407 | ||||||
|
All
other operations
|
712,216 | 1,621,764 | ||||||
|
Total net
loss
|
$ | 2,587,334 | $ | 2,644,172 | ||||
As of
December 31, 2009, the Company had negative working capital in excess of
$5.8 million, which includes $1.8 million of an accrued arbitration award for a
lawsuit against the Company.
Management
believes the Company’s operating losses have resulted from a combination of
insufficient revenues generated to support its sales and marketing efforts, new
product development and administrative time and expense of being a small
publicly-traded company. The Company is finalizing a new
internet-based marketing plan for its energy shot products which it plans to
roll-out in the second quarter of 2010. We believe this marketing
approach will allow us to reach a far greater number of customers than currently
possible using traditional distribution networks at significantly reduced costs
for marketing, shipping, and product placement than we have historically
experienced. The Company has also decided to limit any future sales
of its canned energy drink products to those situations where marketing,
shipping and product placement costs are minimal.
Cash
required to implement the internet marketing plan will be significant and we
have been in discussions with a number of interested investors. The
investors are requiring that investment dollars be used to 1) build the internet
landing page, 2) produce inventory, 3) provide for call and fulfillment centers,
4) obtain the services of merchant accounts for customer credit card use, 5)
develop internet leads, and 6) pay basic ongoing business expenses including
current employee wages and benefits and all other costs necessary to keep the
Company’s government filings current. In addition, investors are
requiring the Company develop a structure that will protect their investments
from prior creditor claims. Finally, investors have asked us to
pursue additional funding to be used to mitigate existing debt at 10 to 15 cents
per dollar of debt.
Because
of the magnitude of our debt burden, the Company has experienced significant
difficulty raising capital from investors to pursue our operations and our new
marketing plan. As a result, the Company is negotiating an Operating
Agreement (the “Operating Agreement”) with F.I.T.T. Energy Products, Inc.
(“FITT”), a Nevada corporation owned by our CEO, which recently commenced
operations. Terms of an Operating Agreement are still
being discussed, but we expect that they will include requirements for FITT to
raise capital and perform certain operating services for the Company, including
product production and internet marketing, with respect to the Company’s
F.I.T.T. Energy With Resveratrol product. As consideration for the
performance of their obligations under the Operating Agreement, the Company and
FITT have discussed that FITT will provide the Company funds sufficient to pay a
license fee which will provide for 1) salaries and benefits of the Company’s
employees, 2) public company costs of the Company including, but not limited to,
legal and audit costs, SEC filing fees, transfer agent fees, and investor
relations fees, 3) other ongoing operating costs of the Company including, but
not limited to costs for
office and equipment rent, telephone and internet service, supplies, etc., and
4) a percentage of FITT’s net after tax income resulting from its operations on
behalf of the Company. In its discussions with FITT, the Company has
expressed a willingness to issue shares of its common stock to investors as an
inducement for their investment and will reserve enough of its common shares to
allow for conversion of the notes into shares of the Company. The
Company and FITT have also discussed that FITT will record in its books all
sales, cost of sales and operating expenses connected with its operations in
connection with the Operating Agreement, and all cash, inventory and other
assets resulting from either the investment dollars or from FITT’s operations
will be the property of FITT and under the Operating Agreement. There
can be no assurance that the Company and FITT will successfully conclude their
negotiations of the Operating Agreement.
Management
continues to actively seek capital through various sources. Due to
the current economic environment and the Company’s current financial condition,
management cannot be assured there will be adequate capital available when
needed and on acceptable terms. The factors described above raise
substantial doubt about the Company’s ability to continue as a going
concern. The financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets and liabilities that might
result from the outcome of this uncertainty.
2.
Basis of Presentation and Significant Accounting
Policies
Basis
of Presentation
The
accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”).
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Our significant
estimates relate to the assessment of inventory reserves, long-lived assets,
contingencies related to pending or threatened litigation, and the valuation of
stock options and warrants to purchase common stock.
Concentrations
of Credit Risks
The
Company invests its cash balances through high-credit quality financial
institutions. From time to time, the Company may maintain bank account
levels in excess of FDIC insurance limits. If the financial institution in
which the Company has its accounts has financial difficulties, any cash balances
in excess of the FDIC limits could be at risk.
Accounts
receivable from individual customers representing 10% or more of the net
accounts receivable balance consists of the following as of
December 31:
|
2009
|
2008
|
|||
|
Percent
of accounts receivable
|
0%
|
100%
|
||
|
Number
of customers
|
0
|
1
|
Sales
from individual customers representing 10% or more of sales consist of the
following customers for the years ended December 31:
|
2009
|
2008
|
|||
|
Percent
of sales
|
97%
|
57%
|
||
|
Number
of customers
|
1
|
2
|
The above
sales represent sales of the Company’s canned energy drinks and Sports Energy
Shot. In the second quarter of 2009, the Company suspended sales of
these products in order to concentrate on developing a new F.I.T.T. Energy With
Resveratrol energy shot. While the above information illustrates a
significant concentration of sales, future sales of our new product will be made
through an internet marketing campaign and will not create such a
concentration.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with insignificant interest rate
risk and original maturities of three months or less from the date of purchase
to be cash equivalents. The carrying amounts of cash and cash equivalents
approximate their fair values.
Accounts
Receivable
The
Company utilizes the allowance method to provide a reserve for uncollectible
accounts. The Company determines any required allowance by considering a
number of factors including length of time trade accounts receivable are past
due and the Company’s previous loss history. The Company records a reserve
account for accounts receivable when they become uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts.
The
Company performs ongoing credit evaluations and continually monitors its
collection of amounts due from its customers. The Company adjusts credit
limits and payment terms granted to its customers based upon payment history and
the customer’s current creditworthiness. The Company does not require
collateral from its customers to secure amounts due. Reserves for
uncollectible amounts are provided based on past experience and a specific
analysis of its individual customers’ accounts.
Inventories
Inventories
are stated at the lower of cost, determined on an average cost basis, or market
and include shipping and handling costs.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of five years. Significant renewals and betterments are
capitalized while maintenance and repairs are charged to expense as
incurred. Leasehold improvements are amortized on the straight-line basis
over the lesser of their estimated useful lives or the term of the related
lease.
Long-Lived
Assets
The
Company reviews its fixed assets and identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to the
future undiscounted operating cash flow expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds the fair value of the asset or discounted cash flows. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
value, minus costs to sell.
Fair
Value of Financial Instruments
On
January 1, 2009, the Company adopted ASC 820 (“ASC 820”) Fair Value Measurements
and Disclosures. The Company did not record an adjustment to retained
earnings as a result of the adoption of the guidance for fair value
measurements, and the adoption did not have a material effect on the Company’s
results of operations.
Fair
value is defined as the exit price, or the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants as of the measurement date. The guidance also establishes
a hierarchy for inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that
the most observable inputs be used when available. Observable inputs are inputs
market participants would use in valuing the asset or liability and are
developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company’s assumptions about the
factors market participants would use in valuing the asset or liability. The
guidance establishes three levels of inputs that may be used to measure fair
value:
Level 1.
Observable inputs such as quoted prices in active markets;
Level 2.
Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly; and
Level 3.
Unobservable inputs in which there is little or no market data, which require
the reporting entity to develop its own assumptions.
Debt
Issued with Common Stock
Debt
issued with common stock is accounted for under the guidelines established by
ASC Subtopic 470-20 – Accounting for Debt With Conversion or Other
Options, formerly Accounting Principles Board ("APB") Opinion No. 14 “Accounting
for Convertible Debt and Debt issued with Stock Purchase Warrants” under the
direction of EITF 98-5, “Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios”, EITF 00-27
“Application of Issue No 98-5 to Certain Convertible Instruments”, and EITF 05-8
Income Tax Consequences of Issuing Convertible Debt with Beneficial Conversion
Features. The Company records the relative fair value of common stock related to
the issuance of convertible debt as a debt discount or premium. The
discount or premium is subsequently amortized over the expected term of the
convertible debt to interest expense.
Modifications
to Convertible Debt
The
Company accounts for modifications of embedded conversion features (“ECFs”) in
accordance with ASC 470-50 – Debt Modifications and Extinguishments, formerly
EITF 06-6 “Debtors Accounting for a Modification (or exchange) of Convertible
Debt Instruments”. ASC 470-50 requires the modification of a convertible
debt instrument that changes the fair value of an ECF be recorded as a debt
discount and amortized to interest expense over the remaining life of the debt.
If modification is considered substantial (i.e., greater than 10% of the
carrying value of the debt), an extinguishment of the debt is deemed to have
occurred, resulting in the recognition of an extinguishment gain or
loss.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Due to historical net losses, a valuation
allowance has been established to offset the deferred tax assets.
In
July 2006, the FASB issued ASC 740-10 – Accounting for Uncertainty in
Income Taxes, formerly FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes— an interpretation of FASB Statement No. 109
(“FIN 48”).” The pronouncement clarified the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements and describes a
recognition threshold and measurement attribute for the recognition and
measurement of tax positions taken or expected to be taken in a tax return and
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. ASC 740-10 was
effective for fiscal years beginning after December 15, 2006. The
cumulative effect of adopting ASC 740-10 was required to be reported as an
adjustment to the opening balance of retained earnings (or other appropriate
components of equity) for that fiscal year, presented separately. The
adoption of ASC 740-10 did not have a material impact to the Company’s financial
statements.
Revenue
Recognition
Revenue
is recognized when there is pervasive evidence that an arrangement exists,
products are delivered to the customer which occurs when goods are shipped and
title and risk of loss transfer to the customer, in accordance with the terms
specified in the arrangement with the customer. Revenue recognition is
deferred in all instances where the earnings process is incomplete based on the
criteria listed above. Management provides for sales returns and
allowances in the same period as the related revenues are recognized.
Management bases their estimates on historical experience or the specific
identification of an event necessitating a reserve.
In
accordance with ASC Subtopic 605-50 – Revenue Recognition – Customer Payments
and Incentives, formerly EITF 01-9, “Accounting for Consideration Given by a
Vendor to a Customer”, slotting fees, buy-downs, cooperative advertising and
other reductions and incentives given by the Company to its customers are
included as a reduction of revenue, rather than as a cost of goods
sold.
Freight
Costs
For the
years ended December 31, 2009 and 2008, freight-out costs totaled $8,589
and $155,677, respectively, and have been included in cost of goods sold in the
accompanying statements of operations. Shipping terms are generally FOB
destination and the Company does not pass freight costs to the
customer.
Advertising
Expenses
The
Company accounts for advertising costs by expensing such amounts the first time
the related advertising takes place. Advertising expenses amounted to $428
and $111,543 for the years ended December 31, 2009 and 2008,
respectively.
Net
Loss per Share
Basic and
diluted net loss attributable to common stockholders per share is calculated by
dividing the net loss applicable to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted net loss per
common share is the same as basic net loss per common share for all periods
presented. The effects of potentially dilutive securities are antidilutive in
the loss periods. At December 31, 2009 and 2008, there were no
options and warrants outstanding that would have had a dilutive effect should we
have had net income during the years. For the year ended December 31,
2009, the Company had 1,018,248 warrants outstanding, for which all of the
exercise prices were in excess of the average closing price of the Company’s
common stock during the corresponding year and thus no shares are considered as
dilutive under the treasury-stock method of accounting. For the year
ended December 31, 2008, the Company had 1,161,167 options and 1,023,010
warrants outstanding, for which all of the exercise prices were in excess of the
average closing price of the Company’s common stock during the corresponding
year and thus no shares are considered as dilutive under the treasury-stock
method of accounting.
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance with ASC
Subtopic 718 – Stock Compensation Awards Classified as Equity, formerly SFAS
No. 123R (revised 2004), “Share-Based Payment.” The Company
accounts for all stock-based compensation using a fair-value method on the grant
date and recognizes the fair value of each award as an expense over the
requisite vesting period.
Accounting
for Equity Instruments Issued to Non-Employees
The
Company accounts for its equity-based payments to non-employees under ASC
Subtopic 505 – Equity-Based Payments to Non-Employees, formerly Emerging Issues
Task Force (“EITF”) No. 96-18 “Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.” The fair value of the equity instrument issued or committed to be
issued is used to measure the transaction, as this is more reliable than the
fair value of the services received. The fair value is measured at the value of
the Company’s common stock on the date the commitment for performance by the
counterparty has been reached or the counterparty’s performance is complete. The
fair value of the equity instrument is charged directly to the statement of
operations and credited to common stock and/or additional paid-in capital as
appropriate.
Recent Accounting
Pronouncements
In March
2008, the FASB, affirmed the consensus of FASB Staff Position in ASC Topic 470,
formerly (FSP) APB No. 14-1 (APB 14-1), "Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)", which applies to all convertible debt instruments that have a
net settlement
feature; which means that
such convertible debt instruments, by their terms, may be settled either wholly
or partially in cash upon conversion. ASC 470 requires issuers of
convertible debt instruments that may be settled wholly or partially in cash
upon conversion to separately account for the liability and equity components in
a manner reflective of the issuer’s nonconvertible debt borrowing
rate. Previous guidance provided for accounting for this type of
convertible debt instrument entirely as debt. This pronouncement was
effective on January 1, 2009. The adoption of ASC 470 did not have a
material impact on our financial statements.
In June
2008, the FASB issued ASC Topic 815 – Derivatives and Hedging, formerly EITF
Issue No. 07-5, Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock. ASC 815 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early application is not
permitted. ASC 815 specifies that a contract that would otherwise
meet the definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial
instrument. ASC 815 also provides a new two-step model to be applied
in determining whether a financial instrument or an embedded feature is indexed
to an issuer’s own stock and thus able to qualify for above stated
exception. The adoption of ASC 815 did not have a material impact on
our financial statements.
In May
2009, the FASB issued ASC 855 Topic – Subsequent Events, formerly SFAS
No. 165, Subsequent
Events. ASC 855 , which is effective for interim and annual
periods ending after June 15, 2009, establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
Specifically, ASC 855 sets forth the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements,
and the disclosure that an entity should make about events or transactions that
occurred after the balance sheet date. The adoption of ASC 855 did not
have a material impact on its financial position, results of operations or
liquidity.
In
October 2009, FASB issued guidance for fair value measurements and improving
disclosures about fair value measurements. This new guidance requires some new
disclosures and clarifies some existing disclosure requirements about fair value
measurement. The objective of the guidance is to improve these disclosures and
improve transparency in financial reporting. The guidance now requires a
reporting entity to (1) separately disclose the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers and (2) present separately
information about purchases, sales, issuances and settlements in the
reconciliation of fair value measurements. In addition, a reporting entity needs
to use judgment in determining the appropriate classes of assets and liabilities
for purposes of reporting fair value measurement and the entity should provide
disclosures about the valuation techniques and inputs used to measure fair value
for both recurring and nonrecurring fair value measurements. This guidance is
effective for interim and annual reporting periods beginning after
December 15, 2009, except for disclosures about purchases, sales, issuances
and settlements in the roll-forward activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. We are
currently evaluating the impact of this standard on our financial
statements.
In
October 2009, the FASB issued guidance for multiple-deliverable revenue
arrangements. This guidance requires an entity to use an estimated selling price
when vendor-specific objective evidence or acceptable third party evidence does
not exist for any products or services included in a multiple-element
arrangement. The arrangement consideration should be allocated among the
products and services based upon their relative selling prices, thus eliminating
the use of the residual method of allocation. This guidance also requires
expanded qualitative and quantitative disclosures regarding significant
judgments made and changes in applying this guidance. This guidance is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption and
retrospective application are also permitted. We are currently evaluating the
impact of adopting this new provision.
3.
Inventories
The
Company had no inventory on December 31, 2009. At December 31, 2008,
our inventory, consisting of energy products, was fully reserved as the product
was expired or near the expiration date or deemed not
saleable.
4.
Property and Equipment
Property
and equipment consist of the following at December 31:
|
2009
|
2008
|
|||||||
|
Furniture and
fixtures
|
$ | 6,536 | $ | 36,308 | ||||
|
Computers
|
6,716 | 48,359 | ||||||
|
Software
|
2,584 | 5,235 | ||||||
|
Leasehold
improvements
|
— | 18,455 | ||||||
| 15,836 | 108,357 | |||||||
|
Less
accumulated depreciation
|
(12,194 | ) | (62,649 | ) | ||||
| $ | 3,642 | $ | 45,708 | |||||
As
discussed in Note 10, we relocated our office from Carlsbad, California to
Mission Viejo, California in May 2009. In connection with this
relocation, we recorded a loss on disposal of property and equipment of
$27,896. Depreciation expense for the years ended December 31, 2009
and 2008 was $13,627 and $22,755, respectively.
5.
Tradename, net
At
December 31, 2008, the tradename asset represented tradenames with lives assumed
to be perpetual, but reviewed annually for impairment or a lessening of the
estimated useful lives. During the three months ended September 30, 2009,
as described in Note 1, the Company completed an extensive review of its
tradenames given the change in our marketing strategy and
demographic. Additionally, as disclosed in Note 12, a creditor,
Fish & Richardson, P.C. (“Fish”), filed an action on September 10, 2009
to foreclose on their security interest in the Company’s
tradenames. After careful review of numerous factors, the
Company decided to no longer use the Who’s Your Daddy® and The King of Energy®
tradenames and is in the process of developing new tradenames. As a
result, the Company recorded an impairment charge during the three-month period
ended September 30, 2009 of $143,711, effectively reducing the value of the
asset to zero. Additionally, effective January 19, 2010, we entered
into a settlement agreement with Fish wherein we agreed to transfer all right,
title and interest in our tradenames to Fish and Fish has agreed to acknowledge
a full satisfaction of its judgment and to dismiss the Federal Action with
prejudice. The Fish Settlement Agreement was executed on January 21,
2010. See Note 12.
6.
Accrued Expenses
Accrued
expenses consist of the following at December 31:
|
2009
|
2008
|
|||||||
|
Estimated
future cost of office lease abandoned
|
$ | 209,950 | $ | — | ||||
|
Professional
fees
|
— | 72,914 | ||||||
|
Interest
|
125,746 | 115,746 | ||||||
|
Other
|
106,847 | 177,646 | ||||||
| $ | 442,543 | $ | 366,306 | |||||
7.
Accrued Compensation
Accrued
compensation consists of the following at December 31:
|
2009
|
2008
|
|||||||
|
Accrued
officers (and former officers) compensation
|
$ | 769,776 | $ | 540,050 | ||||
|
Other
accrued compensation
|
59,995 | 5,475 | ||||||
|
Accrued
payroll taxes
|
334,547 | 253,370 | ||||||
|
Other
|
4,386 | 4,386 | ||||||
| $ | 1,168,704 | $ | 803,281 | |||||
Accrued
payroll taxes includes amounts recorded for delinquent payments of $258,489 and
$253,370 in 2009 and 2008, respectively. Due to our lack of capital,
we have been unable to pay compensation to certain of our employees and also
have unpaid payroll taxes. In January 2010, we entered into
settlement agreements with three former officers under which these former
officers agreed to forgo the repayment of $379,141 in accrued
compensation. See Note 16.
8.
Notes Payable
Notes
payable consist of the following at December 31:
|
2009
|
2008
|
|||||||
|
2008
Convertible Promissory Notes
|
$ | 380,000 | $ | 380,000 | ||||
|
Less:
unamortized debt discount
|
(6,935 | ) | (147,854 | ) | ||||
|
2009
Convertible Promissory Notes
|
145,000 | — | ||||||
|
Less:
unamortized debt discount
|
(39,433 | ) | — | |||||
|
Note
payable – vendor settlement
|
255,000 | 255,000 | ||||||
|
Note
payable – distributor settlement
|
202,000 | 202,000 | ||||||
|
Note
payable – trademark settlement
|
100,000 | — | ||||||
|
Notes
payable - other
|
150,000 | 150,000 | ||||||
|
Subtotal
|
1,185,632 | 839,146 | ||||||
|
Less
current portion
|
(812,567 | ) | (607,000 | ) | ||||
|
Long-term
portion
|
$ | 373,065 | $ | 232,146 | ||||
2008
Convertible Promissory Notes
During
2008, the Company issued $380,000 face value, 10% convertible promissory notes
(“2008 Promissory Notes”) together with 760,000 shares of common stock.
These notes together with accrued interest are due upon the completion of an
offering of common stock or convertible securities of at least $1,750,000
(“Qualified Offering”) within 18 months from the date of issuance of the
respective 2008 Promissory Notes (July and August 2008). In the
event the Company does not complete the Qualified Offering by January 15,
2010, the outstanding principal and accrued interest will be repaid over a 60
month period.
The
outstanding principal and interest are convertible into shares of unregistered
common stock at a conversion price equal to 80% of the volume weighted average
price for the last 30 trading days preceding the earlier of (i) closing of
at least $3,000,000 in gross proceeds, or (ii) twelve months from the
initial closing date of the offering. The conversion price may not be less
than $0.50 per share or greater than $0.75 per share. The market price of
the common stock on the date of issuance of the 2008 Promissory Notes was less
than the conversion price.
The
Company paid a placement agent fee of $57,000 and issued 380,000 shares of
common stock. The Company allocated the proceeds between the 2008
Promissory Notes, the common stock issued to the holders and the offering costs
based on their relative fair values which resulted in a debt discount on the
date of issuance of $211,758. The Company is amortizing the discount over
the contractual term of the 2008 Promissory Notes. During the years
ended December 31, 2009 and 2008, the Company amortized $140,920 and $63,652 of
the discount to interest expense, respectively.
During
January 2010, we modified the conversion feature of the 2008 Promissory Notes to
allow the noteholders to convert the principal and accrued interest owed them at
$0.16 per share. All of the noteholders elected to convert, and as a
result, we issued them a total of 2,729,157 shares of our common stock in full
settlement of notes payable and accrued interest of $436,664. In
connection with the settlement, the Company will record a loss on extinguishment
of debt of $3,691 during the first quarter of 2010. See Note
16.
2009
Convertible Promissory Notes
In the
May 2009, the Company issued a $20,000 face value, 10% convertible promissory
note (the “May 2009 Promissory Note”) together with 40,000 shares of its common
stock. The May 2009 Promissory Note was issued in connection with a
$300,000 offering (the “May 2009 Offering”) which consisted of a convertible
promissory note and two shares of the Company’s common stock for every dollar
invested. In July 2009, the Company issued a $50,000 face value, 12%
convertible promissory note (the “July 2009 Promissory Note”) together with
100,000 shares of its common stock. The July 2009 Promissory Note was
issued in connection with a $500,000 offering (the “July 2009 Offering”) which
consisted of a convertible promissory note and two shares of the Company’s
common stock for every dollar invested. Both notes together with
accrued interest are due 12 months from the date of issuance. The
outstanding principal and interest for both notes are convertible into shares of
unregistered common stock at a conversion price equal to 80% of the volume
weighted average price for the last 30 trading days preceding conversion but in
no event shall the conversion price be less than $0.25 per share or greater than
$1.00 per share. The market price of the common stock on the date of
issuance of the Promissory Notes was less than the conversion
price. The Company allocated the proceeds between the promissory
notes and the 140,000 shares of common stock issued to the holders based on
their relative fair values which resulted in a debt discount on the date of
issuance of $1,818 for the May 2009 Promissory Note and $2,830 for the July 2009
Promissory Note.
On
September 30, 2009, the Company commenced a new $300,000 offering (the
“September 2009 Offering”) consisting of a convertible promissory note bearing
12% interest and five shares of the Company’s common stock for every dollar
invested. In commencing the September 2009 Offering, the Company also
amended its May 2009 Offering and its July 2009 Offering to provide five shares
of the Company’s common stock for every dollar invested in the
note. Accordingly, on September 30, 2009, the Company issued 60,000
and 150,000 shares of its common stock to the holders of the May 2009 Promissory
Note and the July 2009 Promissory Note, respectively. In connection
with the issuance of the additional shares, the Company recorded additional debt
discount on September 30, 2009 for both notes totaling $5,067. This
was considered a modification of debt rather than an extinguishment based on
FASB guidance. In March 2010, we increased the amount of the
September 2009 Offering from $300,000 to $400,000.
For
promissory notes issued under the September 2009 Offering, payments of principal
and interest will be made monthly beginning with the month of March
2010. Calculation of the amount to be paid will be based on ten
percent (10%) of cash received by the Company from the sale over the internet of
its F.I.T.T. Energy With Resveratrol energy shot for the entire amount of the
$300,000 offering, apportioned to each Noteholder for their respective
percentage of the offering total (such cash receipts being paid to the Company
from various third-party merchant accounts established to receive customer
credit card payments). All payments will first be applied to
principal. Once the entire principal balance has been repaid, the
remaining payments will be applied to interest. In no circumstance
will the repayment of principal and interest extend beyond one year from the
date of the issuance of each note. On September 30, 2009, the Company
agreed to offer the same repayment structure as in the promissory notes issued
in the September 2009 Offering to the holders of the May 2009 and July 2009
Promissory Notes.
During
December 2009 the Company issued notes with face value totaling $75,000 together
with 375,000 shares of common stock under the September Offering. The
Company recorded an initial discount on the notes of $35,599.
Note
Payable – Vendor Settlement
This note
payable arose from a September 27, 2006 settlement agreement with Fish to
convert $395,405 of outstanding accounts payable into a promissory note.
The agreement required the Company to pay $100,000 on or before
September 30, 2007, of which $45,000 has been paid. In addition,
$200,000 was to have been paid at the closing of any financing of at least
$3,500,000, which the Company has not been able to accomplish. Interest at
the rate of 10% per annum is to be accrued for all payments not timely
made. As of December 31, 2009 and 2008, the Company was in
default for non-payment and the outstanding balance was classified as a current
liability in the accompanying balance sheet. Effective January 19,
2010, we entered into a settlement agreement with Fish wherein Fish agreed to
acknowledge a full satisfaction of all amounts due them in connection with the
settlement agreement. See Note 12.
Note
Payable – Distributor Settlement
This note
payable arose from a February 1, 2008 settlement agreement with Christopher
Wicks (“Wicks”) and Defiance U.S.A., Inc., under which the Company agreed to pay
Wicks the sum of $252,000 under a payment schedule detailed therein, with the
final payment due February 2010. Interest was to accrue at 5% per
annum beginning in August 2008. The Company has made payments
totaling $50,000 and is currently in default for non-payment. As of
December 31, 2009 and 2008, the outstanding balance was classified as a
current liability in the accompanying balance sheet. See Note
12.
Note
Payable – Trademark Settlement
This note
payable arose from a March 4, 2009 settlement agreement with Who’s Ya Daddy,
Inc. (“Daddy”) concerning an alleged infringement on a trademark of
Daddy. The settlement amount totaled $125,000 and called for
$25,000 to be paid immediately with additional payments of $10,000 to be made
every 60 days, beginning April 30, 2009, until the obligation was fully
paid. The payment of $25,000 was paid through a loan by a former
officer. The note payable contains no provision for
interest. As of December 31, 2009, the Company was in default
for non-payment and the outstanding balance was classified as a current
liability in the accompanying balance sheet. See Note
12.
Notes
Payable – Other
This
category represents notes payable to two individuals. As of
December 31, 2009 and 2008, the Company was in default for non-payment and
the outstanding balance was classified as a current liability in the
accompanying balance sheet.
9.
Related Parties
As
described in Note 1, the Company has limited capital resources and
liquidity. As a result, during 2009 and 2008, an officer of the
Company and one of its former officers each has advanced funds to the Company in
order for it to pay certain obligations. In addition, prior to the
2008 calendar year, two other former officers advanced funds to the Company,
which amounts have not been fully repaid. At December 31, 2009 the
Company owes a total of $390,025 to these individuals for these
advances. The amounts outstanding are due upon demand and do not
incur interest.
In
January 2010, we entered into settlement agreements with three of the former
officers under which these former officers agreed to forgo the repayment of
$375,324 in amounts owed for these advances. See Note
16.
During
2008, the Company borrowed $30,000 from a relative of a former officer and used
the funds to pay certain operating expenses. This amount together with
interest of $5,000 was repaid during 2008.
10.
Loss on Relocation of Office
In May
2009, the Company moved its office from Carlsbad, California to a smaller, less
expensive office in Mission Viejo, California. Because our Carlsbad
lease runs through March 2012 and is still in force, we calculated our future
minimum rent expenditures, adjusted for an estimate of the landlord’s future
cash receipts from sublease based on current market lease rates, and accordingly
recorded a loss relating to this lease of $208,884 for the year ended December
31, 2009. Additionally in the same period, we recorded a loss on
disposal of property and equipment related to the move of $27,896, bringing the
total loss resulting from the relocation of our office to
$236,780. See Note 12 for discussion of a lawsuit filed by the former
landlord.
11.
Commitments and Contingencies
As
discussed in Note 10, the Company vacated its office in Carlsbad, California and
recorded an expense for our estimated net future rental expense under the
non-cancellable operating lease with the Carlsbad landlord. The
Company leases its current office space in Mission Viejo, California on a
month-to-month basis and has no other non-cancellable
operating leases. Rent expense under operating leases amounted to $55,340
and $114,664, respectively, for the years ended December 31, 2009 and 2008,
respectively.
12.
Litigation
Sacks
Motor Sports Inc.
On
July 19, 2006, we received a Demand for Arbitration filed with the American
Arbitration Association from Sacks Motor Sports Inc. (“Sacks”) seeking damages
arising out of a sponsorship contract. On February 13, 2007, the
Arbitrator awarded Sacks $1,790,000. This amount was recorded as an
expense in the quarter ending December 31, 2006 and is fully reserved on
the balance sheet. On August 6, 2007, we filed a petition in U.S.
District Court asking the judge to either: (1) order the arbitrator to
reopen the arbitration and allow for discovery regarding what we believe to be
significant new evidence to have the award vacated; or (2) to allow us to
conduct such discovery in the U.S. District Court proceeding regarding what we
believe to be significant new evidence to have the award vacated. On
May 27, 2008, the Court denied our petition and entered judgment in favor
of Sacks for the principal sum of $1,790,000 together with post-award interest
from February 13, 2007. On July 16, 2008, we entered into an
Assignment of Claims Agreement (“Assignment Agreement”) with Anga M’Hak
Publishing (“Anga M’Hak” ) and Edward Raabe, for the consideration of 150,000
shares of common stock and $100,000 in cash out of the proceeds of our proposed
private placement. We believe Anga M’Hak has a claim to offset the
approximately $1,500,000 of the Sacks judgment. As part of the Assignment
Agreement, Anga M’Hak and Raabe agreed to execute affidavits detailing their
entitlement to the above-referenced claims and monies. In addition, they
agreed to appear for depositions and as witnesses in court and to otherwise
fully cooperate in our pursuit of these claims. We believe their
affidavits will indicate that Sacks perpetrated fraud by not having the
authority to enter into the contract, which wrongfully created the judgment in
favor of Sacks.
Effective
March 30, 2010 we entered into a Settlement Agreement and Release (the “Sacks
Settlement”) with Sacks and with Greg Sacks (“Greg”). Under the Sacks
Settlement, the Company has agreed to pay Sacks $100,000 on or before April 15,
2010 and issue to Sacks 1,000,000 shares of its common stock in the form of 10
certificates of 100,000 shares each. The Sacks Settlement calls for
the shares of stock to be delivered to the Company’s law firm, Solomon Ward
Seidenwurm & Smith, LLP (“SWSS”) with an irrevocable instruction to mail to
Sacks one stock certificate of 100,000 shares per month for ten (10) consecutive
months commencing July 15, 2010. The Shares will be free-trading upon receipt of
a legal opinion from the Company’s counsel. Sacks has agreed that it
will not directly or indirectly sell, transfer or assign more than 100,000 (One
Hundred Thousand) Shares during any thirty (30) day period at any
time.
Once the
Company makes the $100,000 payment and delivers the 1,000,000 shares to SWSS,
Sacks has agreed that it will irrevocably waive, release and surrender all
rights relating to or arising from its judgment against us and will take all
actions reasonable requested by us to cause the Judgment to be permanently
rendered of no force or effect including without limitation by stipulating to
set aside and vacate the judgment and cause then entire litigation to be
dismissed with prejudice.
Fish &
Richardson
On or
about May 15, 2008, Fish & Richardson, P.C. (“Fish”) filed an
action against us in the Superior Court of California, County of San Diego,
asserting claims for breach of a settlement agreement purportedly entered into
in connection with fees allegedly owed by us to Fish for Fish’s providing of
legal services on the Company’s behalf in the approximate amount of
$255,000. The settlement agreement, dated September 27, 2006, also
granted Fish a security interest in all of the tradenames owned by the Company
and all associated goodwill. In its response to the Fish action, the
Company asserted that the settlement agreement was void and that Fish failed to
act as reasonably careful attorneys in connection with their representation of
us. Fish brought a motion for summary judgment which was heard on
April 17, 2009, and the motion was granted. On May 21, 2009, a
judgment was entered against the Company for $273,835 plus interest of $74,817
through the date of the judgment. On September 10, 2009, Fish filed
an action to foreclose on their security interest in the Company’s tradenames,
which action was served on the Company’s registered agent on approximately
October 19, 2009. Given the Company’s decision to no longer use its
Tradenames, the Company began working on an agreement with Fish to affect an
orderly transfer of the Tradenames to Fish and, effective January 19, 2010, we
entered into a settlement agreement with Fish wherein the Company agreed to
transfer all right, title and interest in its tradenames to Fish and Fish has
agreed to acknowledge a full satisfaction
of its judgment and to dismiss the Federal Action with prejudice. The
Fish Settlement Agreement was executed on January 21, 2010.
Christopher
Wicks/Defiance
On
May 8, 2007, we were served with a summons and complaint in a lawsuit filed
in the San Diego Superior Court by Christopher Wicks and Defiance
U.S.A., Inc. seeking judgment against us, Edon Moyal and Dan Fleyshman
under a contract allegedly calling for the payment of $288,000 in cash plus
stock in our subsidiary, Who’s Your Daddy, Inc., a California corporation,
and a certain percentage of the revenues of that subsidiary. On
February 1, 2008, we entered into a Settlement Agreement and Mutual Release
with the plaintiffs pursuant to which we agreed to pay to the plaintiffs the sum
of $252,000 under a payment schedule detailed therein. As security for the
settlement payment, defendants Fleyshman and Moyal together pledged 317,210
shares of common stock in the Company owned and held by them. We are
currently in default of the Settlement Agreement.
Who’s Ya Daddy
On
April 1, 2005, the Company received a complaint filed by Who’s Ya
Daddy, Inc., a Florida corporation (“Daddy”), alleging that the Company was
infringing on Daddy’s trademark, Who’s Ya Daddy®, with respect to
clothing. On April 7, 2006, the Company entered into a
settlement agreement with Daddy pursuant to which the Company was granted an
exclusive license to use its marks on clothing in exchange for a royalty payment
of 6% of gross sales for clothing products in the United States, excluding
footwear. As part of the settlement, the Company also agreed to remit
to Daddy 12% of the licensing revenues received from third parties who the
Company granted sublicense to for use of the marks on clothing. The
Company has not made any of the required payments under the settlement
agreement. On March 26, 2008, the Company, Dan Fleyshman and
Edon Moyal each received a Notice of Levy from the United States District Court
for the Southern District of California in the amount of $143,561 allegedly
pursuant to the terms of the settlement agreement with Daddy. The
Company settled the debt on March 4, 2009 for $125,000 of which $25,000 was
paid through an advance by a shareholder. The remaining balance was
to be repaid with bi-monthly payments of $10,000 beginning April 30,
2009. The Company has not made any additional payments and is in
default of the most recent settlement agreement. As such, Daddy may
elect to declare the recent settlement agreement null and void and resume its
pursuit of the amount due under the original settlement agreement, but the
Company has not yet been notified that Daddy has chosen to do so. The
amount due is included in Notes Payable. See Note 8.
H.G.
Fenton
On or
about July 22, 2009, H.G. Fenton Property Company (“Fenton”) filed a complaint
against the Company in the Superior Court of California, County of San Diego,
alleging Breach of Lease at our former office in Carlsbad, California (the
“Carlsbad Lease”.) The complaint claims damages in the
amount of $420,000. In its answer to the complaint, the Company
contends that Fenton has failed to mitigate damages, Fenton’s damages are
speculative, and Fenton made certain representations concerning a lease
restructure that the Company relied on to its detriment. On March 26,
2010, the Company attended a Case Management Conference during which a tentative
trial date was set for January 14, 2011. As illustrated in Note 6,
the Company has recorded a liability of $209,950 for the estimated future net
rent expense for this lease.
Straub
Distributing
On
July 30, 2008, we entered into a Compromise and Settlement Agreement and
Mutual Release (the “Straub Settlement”) with Straub Distributing, L.L.C.
(“Straub”), a California Limited Liability Corporation. We paid $7,500 on
July 30, 2008 and were required to make two additional payments of $7,250
every sixty days for total payments to Straub of $22,000. As part of the
Straub Settlement, the parties executed a Stipulation for Entry of Judgment (the
“Stipulation”) which could be pursued by Straub in the event any of the payments
were late by more than fifteen days. The Stipulation was in the
amount of $40,000 against us plus attorney fees, costs and expenses to enforce
the judgment, and was to be reduced by the amount of payments previously
received. We made one payment of $7,250, but were unable to make
additional payments. On January 2, 2009, Straub filed an action requesting
entry of judgment against us in the principal sum of $25,250 as per the
Stipulation. The amount due is recorded in Accounts Payable in the
accompanying financial statements.
Reuven
Rubinson
On or
about September 24, 2009, Leslie T. Gladstone, Trustee for Debtor Reuven
Rubinson, filed a complaint against the Company in the United States Bankruptcy
Court, Southern District of California, asserting claims for breach of contract,
open book account, and turnover of property of the estate. The claims
stemmed from an employment agreement between Mr. Rubinson and the Company during
the time Mr. Rubinson was a former CFO of the Company. Damages
claimed in the complaint total $130,000 plus interest from July 2,
2007. In its response to the complaint, the Company asserted that all
debts previously owed to Mr. Rubinson have been paid in prior years either in
cash or in shares of the Company’s common stock and that the Company owes Mr.
Rubinson nothing. On February 8, 2010, we agreed to a Stipulation to
Settle Adversary Proceeding with the Trustee whereby we agreed to forward to the
Trustee 100,000 shares of the Company’s common stock which had previously been
issued to Mr. Rubinson in complete settlement of the
claims.
Markstein
Beverage
On
December 22, 2009, a Default Judgment was entered against us by Markstein
Beverage Co. (“Markstein”) in the amount of $5,000. The matter, which
was heard in Superior Court of California, Small Claims Division, arose from
purported unpaid product distribution costs borne by Markstein. The
amount due is recorded in Accounts Payable in the accompanying financial
statements.
Get
Logistics
On
March 19, 2008, a complaint was filed against us by Get Logistics, LLC
(formerly known as GE Transport) seeking damages of $30,278.72 for unpaid
shipping charges. We are attempting to settle this matter. The
amount due is recorded in Accounts Payable in the accompanying financial
statements.
Worldwide
Express
On
March 3, 2009, a judgment was entered against us in favor of Worldwide
Express for unpaid delivery services. The amount of the judgment was
$8,794 inclusive of interest and costs. The amount due is recorded in
Accounts Payable in the accompanying financial statements.
13.
Income Taxes
Reconciliations
of the U.S. federal statutory rate to the actual tax rate are as follows for the
years ended December 31:
|
2009
|
2008
|
|||||||
|
Pretax
loss
|
||||||||
|
Federal
tax at statutory rate
|
34.0 | % | 34.0 | % | ||||
|
Permanent
differences:
|
||||||||
|
State
income taxes, net of federal benefit
|
5.8 | % | 5.8 | % | ||||
|
Impairment
of tradenames
|
-1.9 | % | — | |||||
|
Amortization
of debt discount
|
-1.9 | % | -1.0 | % | ||||
|
Non-deductible
entertainment
|
-0.3 | % | -0.1 | % | ||||
|
Temporary
differences:
|
||||||||
|
Change
in valuation allowance
|
-35.7 | % | -38.7 | % | ||||
|
Total
provision
|
0.0 | % | 0.0 | % | ||||
The major
components of the deferred taxes are as follows at
December 31:
|
Asset (Liability)
|
||||||||
|
2009
|
2008
|
|||||||
|
Current:
|
||||||||
|
Reserves
and accruals
|
$ | 1,160,463 | $ | 1,057,296 | ||||
|
Noncurrent:
|
||||||||
|
Net
operating losses
|
7,830,391 | 7,020,355 | ||||||
|
Stock
compensation
|
498,662 | 498,662 | ||||||
|
Valuation
allowance
|
(9,489,516 | ) | (8,576,313 | ) | ||||
|
Net
deferred tax asset
|
$ | — | $ | — | ||||
Based on
federal tax returns filed through December 31, 2009, the Company had
available approximately $22,284,000 in U.S. tax net operating loss
carryforwards, pursuant to the Tax Reform Act of 1986, which assesses the
utilization of a Company’s net operating loss carryforwards resulting
from retaining continuity of its business operations and changes within its
ownership structure. Net operating loss carryforwards expire in 20 years
for federal income tax reporting purposes. For Federal income tax
purposes, the net operating losses begin to expire in 2027. The Company
has relied on the issuance of common stock to fund certain operating
expenses. The Company may have experienced a change in ownership as
defined in Section 382 of the Internal Revenue Code. In the event the
Company experienced a change in ownership, net operating loss carryforwards for
federal income tax reporting will be limited based on the fair value of the
Company on the date of change in ownership. Such change is expected to
provide benefit to the Company only upon the attainment of
profitability.
During
the years ended December 31, 2009 and 2008, the Company’s valuation
allowance increased by approximately $913,203 and $1,016,311,
respectively.
14.
Preferred Stock
The
Company has authorized 20,000,000 shares of preferred stock of which 0 and
333,333 shares are issued and outstanding at December 31, 2009 and 2008,
respectively. The outstanding shares were owned by two former officers of
the Company, both of whom agreed to cancel their shares in December 2009 for no
consideration. The preferred shares are not convertible into common stock
and have no preference rights, however, each share is entitled to four votes on
a common stock basis. The Certificate of Designation related to these
shares has not been filed with the State of Nevada and these preferred shares
will not have voting power until this filing is accomplished.
15.
Common Stock
Sales
of Common Stock
During
2009, the Company sold 1,800,000 shares of its common stock for cash proceeds of
$45,000.
Issuance
of Common Stock to Officers and Employees
During
2009, the Company issued a total of 17,000,000 shares of common stock to an
officer and an employee in connection with Employment Agreements dated August
24, 2009, and recorded stock-based compensation amounting to $425,000 in General
and Administrative expense in connection with the issuance. A minimum
of 15,400,000 of the shares were restricted and subject to lock-up provisions
that prohibit the officer and employee from selling, transferring or otherwise
encumbering the shares for a period of six (6) months. The fair value
of the shares was determined based on the closing stock price on the date of
issuance and the shares were earned on their respective dates of
issuance.
During
2008, the Company issued stock awards totaling 2,745,091 shares of common stock
to four employees and recorded stock-based compensation of $623,649 in
connection with the issuance. Of this amount, $8,981 was recorded in
Selling and Marketing expense and the remainder in General and Administrative
expense. Also in 2008, the Company issued 2,479,699 shares of common
stock to certain executive officers and employees for settlement of salaries
accrued during 2007 through May 2008 totaling $348,719. The fair
market value of the common stock issued was $421,549, based on the closing stock
price on the date of settlement which resulted in additional stock-based
compensation of $72,830 recorded in General and Administrative
expense. All shares issued contained a Rule 144
restriction.
Issuance
of Common Stock to Consultants and Advisors
During
2009 the Company issued 13,400,000 shares of common stock to consultants with an
aggregate fair value totaling $609,200. Of this amount, $579,000 was
recorded in Selling and Marketing expense and $30,200 in General and
Administrative expense. The shares were issued for marketing,
representation, lead generation, and investor relations services as well as for
director’s fees. In addition during 2009, the Company committed to
the issuance to a consultant of 10,000,000 shares with a fair value of $300,000
for marketing, representation and lead generation services, which amount has
been recorded in Selling and Marketing expense. The fair value of the
shares was determined based on the closing stock price on the date of issuance
and the shares were earned on their respective vesting dates. As of
the date of this report, the 10,000,000 committed shares have not been issued,
but we expect to issue them during the second quarter of 2010.
During
2008, the Company issued 1,569,194 shares of common stock to consultants with an
aggregate fair value totaling $242,705. Of this amount, $30,750 was
recorded in Selling and Marketing expense and the remainder in General and
Administrative expense The shares were issued for marketing, representation,
investor relations services as well as for director’s fees, legal fees and legal
settlements. The fair value of the shares was determined based on the
closing stock price on the date of issuance and the shares were earned on their
respective vesting dates.
Issuance
of Common Stock for Settlement of Registration Rights Penalties
In
February 2008, the Company received notice from an investor in a
November 2005 financing that it was exercising the registration rights
penalties contained in the documentation related to that financing and that it
was owed $480,897. The Company and the investor entered into a settlement
agreement that required the Company to issue 1,602,989 shares of unregistered
common stock to this investor to settle the registration rights claim in full
which resulted in a gain on the settlement of $240,448. There are no
liabilities for registration rights as of December 31, 2009.
Issuance
of Common Stock for Settlement of Obligations
During
2008, the Company issued 750,155 shares of common stock to settle creditor
obligations including accounts payable, accrued expense and registration rights
obligations. For the year ended December 31, 2008, the aggregate fair
value of the common stock for the settlement of accounts payable, accrued
expense and registration rights obligations was $329,643. The fair value
of the shares for each period was based on the closing stock price on the date
of issuance.
Issuance
of Common Stock Warrants to Consultants
Since the
Company’s inception, it has issued warrants to purchase common stock to certain
consultants, service providers and distributors. The following is a
summary of the stock warrant activity.
|
Warrants
Outstanding
|
Weighted-Average
Exercise Price
|
|||||||
|
Warrants
outstanding, December 31, 2007
|
1,023,010 | $ | 7.16 | |||||
|
Granted
|
— | — | ||||||
|
Exercised
|
— | — | ||||||
|
Cancelled
|
— | — | ||||||
|
Warrants
outstanding, December 31, 2008
|
1,023,010 | $ | 7.16 | |||||
|
Granted
|
— | — | ||||||
|
Exercised
|
— | — | ||||||
|
Cancelled
|
(4,762 | ) | 15.00 | |||||
|
Warrants
outstanding, December 31, 2009
|
1,018,248 | $ | 7.13 | |||||
|
Warrants Outstanding
|
Warrants Exercisable
|
||||||||||||
|
Range of
Exercise
Prices
|
Number
Outstanding
|
Average
remaining life
(in years)
|
Weighted
average
exercise price
|
Number of
shares
|
Weighted
average
exercise price
|
||||||||
| $0.75 - $6.00 |
250,000
|
2.94
|
$
|
0.75
|
250,000
|
$
|
0.75
|
||||||
| $6.00 - $12.00 |
768,248
|
0.63
|
9.20
|
768,248
|
9.20
|
||||||||
|
1,018,248
|
1,018,248
|
||||||||||||
For the years ended December 31, 2009 and 2008, the Company
recorded $0 and $87,011, respectively in stock-based compensation for these
stock warrants. As of December 31, 2008, there was no future
stock-based compensation expense to be recorded for these outstanding warrants
to purchase common stock.
Issuance
of Common Stock Options to Employees
Since the
Company’s inception, it has issued options to purchase common stock to certain
employees and officers. The following is a summary of the stock option
activity.
|
Options
Outstanding
|
Weighted-Average
Exercise Price
|
|||||||
|
Options
outstanding, December 31, 2007
|
1,411,167 | $ | 9.09 | |||||
|
Granted
|
— | — | ||||||
|
Exercised
|
— | — | ||||||
|
Cancelled
|
(250,000 | ) | 9.60 | |||||
|
Options
outstanding, December 31, 2008
|
1,161,167 | $ | 9.10 | |||||
|
Granted
|
— | — | ||||||
|
Exercised
|
— | — | ||||||
|
Cancelled
|
(1,161,167 | ) | 9.10 | |||||
|
Options
outstanding, December 31, 2009
|
— | $ | — | |||||
For the
years ended December 31, 2009 and 2008, the Company recorded $0 and
$221,507, respectively in stock-based compensation for these stock
options. As of December 31, 2009, there was no future stock-based
compensation expense to be recorded for these outstanding stock
options.
On
June 29, 2007, the Company’s board of directors adopted the 2007 Equity
Incentive Plan (the “2007 Plan”). The 2007 Plan provides for the grant of
equity awards to directors, officers, other employees, consultants, independent
contractors and agents of the Company and its subsidiaries, including stock
options to purchase shares of the Company’s common stock, stock appreciation
rights (“SARs”), restricted stock, restricted stock units, bonus stock and
performance shares. Up to 833,333 shares of the Company’s common stock,
subject to adjustment in the event of stock splits and other similar events, may
be issued pursuant to awards granted under the 2007 Plan. The 2007 Plan is
administered by the Board of Directors, and expires ten years after adoption,
unless terminated earlier by the Board. As of December 31, 2009, no
stock option grants have been made under the 2007 Plan.
16.
Subsequent Events
Debt
Compromise – Fleyshman and Moyal
The
Company entered into letter agreements (the “Letter Agreements”) dated January
13, 2010 with two former officers and directors, Dan Fleyshman (“Fleyshman”) and
Edon Moyal (“Moyal”), whereby Fleyshman and Moyal agreed that the Company would
not be required to repay indebtedness owed them totaling $630,691 ($200,458 in
accrued salaries, $370,026 in unpaid loans and advances, and $60,207 in unpaid
services provided.) Additionally, the Letter Agreements require
Fleyshman and Moyal to assign a total of 2,044,428 shares of the Company’s
common stock (the “Assigned Shares”) held in their name for the purpose of
liquidation and repayment of certain other specified debt (the “Specified
Debt”). In the Letter Agreements, the Company gave no assurance that
it would be able to liquidate the Assigned Shares or, if liquidated, the
proceeds, net of costs of settlement of the Specified Debt (including legal
fees) and liquidation of the Assigned Shares, would be sufficient to repay the
Specified Debt. Therefore the Letter Agreements do not provide a
release by the Company to Fleyshman and Moyal of any liability they may have for
the Specified Debt. On January 20, 2010, Fleyshman and Moyal
completed their obligations under the Letter Agreements by providing the
Assigned Shares to the Company. In connection with the Letter
Agreements, the Company expects to record an adjustment during the three-month
period ending March 31, 2010. In addition, the Company may record an
additional adjustment in future periods if it can successfully liquidate some or
all of the Assigned Shares and repay some or all of the Specified
Debt.
Debt
Compromise – former officer
The
Company entered into a Settlement Agreement and General Release (the “Officer
Settlement Agreement”) dated January 15, 2010 with a former officer (the
“Officer”) whereby the Officer agreed to accept 75,000 shares of the Company’s
common stock (the “Shares”) as full repayment of indebtedness owed by the
Company totaling $183,981 ($178,683 in accrued salaries and $5,298 in unpaid
loans and advances.) The Officer Settlement Agreement provides that
the Company will endeavor to obtain an opinion from counsel confirming that the
Shares need not contain a restrictive legend under Rule 144. The
Officer signed the Officer Settlement Agreement on January 19,
2010. In connection with the Officer Settlement Agreement, the
Company expects to record a gain on extinguishment of debt of $170,481 during
the three-month period ending March 31, 2010.
Sale
of Stock
On
January 13, 2010, the Company sold 75,000 shares of its common stock for net
proceeds of $10,000.
Settlement
with Fish & Richardson
Effective
January 19, 2010, we entered into a settlement agreement with Fish wherein the
Company agreed to transfer all right, title and interest in its tradenames to
Fish and Fish has agreed to acknowledge a full satisfaction of its judgment and
to dismiss the Federal Action with prejudice. The Fish Settlement
Agreement was executed on January 21, 2010. See Note 12.
Conversion
of Convertible Promissory Notes
On
January 22, 2010, notified the holders of our 2008 Promissory Notes that we were
modifying the conversion feature of the notes to allow the noteholders to
convert the principal and accrued interest owed them at $0.16 per
share. All of the noteholders elected to convert, and as a result, we
issued them a total of 2,729,157 shares of our common stock during the first
quarter of 2010. The Company expects to record a loss on
extinguishment of debt of $3,691 during the three-month period ending March 31,
2010 in connection with the conversions.
Issuance
of Convertible Promissory Notes
On March
1, 2010, the Company issued $50,000 face value, 12% convertible promissory notes
under the September 2009 Offering together with 250,000 shares of its common
stock.
Amendment
to Sam Maywood Agreement
On March
3, 2010, the Company entered into Amendment No.2 to the Sam Maywood Agreement
which included the issuance of 1,000,000 more shares. The shares were
fully vested on March 3, 2010 and the Company expects to record a selling and
marketing expense of $120,000 in connection with their issuance based on the
closing price of the stock on the date of the amendment.
Cancelation
of Shares
On March
3, 2010, the Company and Dr. Robert Maywood reached an agreement whereby the
Company canceled 300,000 shares of common stock previously issued to Dr. Maywood
in October 2009.
Financial
Public Relations Agreement - APPL
On March
23, 2010, the Company entered into a Financial Public Relations Agreement with
APPL International Inc. (“APPL”) (the “APPL Agreement”) under which APPL agreed
to provide a variety of public relations services including press release and
other correspondence with the public, investors, portfolio managers, brokers and
analysts on behalf of the Company. The APPL Agreement has a term of 6
months and can be terminated by either party with immediate
notice. In connection with the APPL Agreement, the Company agreed to
issue 1,000,000 shares of its common stock to an employee of
APPL. The shares were fully vested on March 23, 2010, the date of
issuance, and will be released to APPL’s employee on a schedule set forth in the
APPL Agreement.
Financial
Public Relations Agreement - ICA
On April
9, 2010, the Company entered into a Consulting Agreement with Issuers Capital
Advisors, LLC(“ICA”) (the “ICA Agreement”) under which ICA agreed to provide a
variety of public relations services including press release and other
correspondence with the public, investors, portfolio managers, brokers and
analysts on behalf of the Company. The ICA Agreement has a term of 6
months and can be terminated by either party after sixty days for any
reason. In connection with the ICA Agreement, the Company agreed to
issue 570,000 shares of its common stock to ICA. The shares were
fully vested on April 9, 2010, the date of issuance, and will be released to ICA
on a schedule set forth in the ICA Agreement.
Amendment
to Articles of Incorporation
In April
2010, the Board of Directors approved a resolution to amend the Company’s
Articles of Incorporation to change the corporate name to FITT Energy, Inc. and
to increase the authorized number of common shares from 100,000,000 to
150,000,000. The amendment is subject to shareholder approval and the
Company is in the process of obtaining such approval.
On
February 25, 2008, we accepted the resignation of Baum & Company,
PA (“Baum”) as our independent auditors.
On
February 25, 2008, we appointed and engaged the services of McKennon,
Wilson & Morgan LLP (“MWM”) as our independent auditors. MWM is a
registered public accounting firm with the Public Company Accounting Oversight
Board and members of the American Institute of Certified Public
Accountants. During the two most recent fiscal years and the interim
period preceding the engagement of MWM, we had not consulted with MWM regarding
either: (i) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our financial statements; or (ii) any matter that was
either the subject of a disagreement or event identified in paragraph
(a)(1)(iv) of Item 304 of Regulation S-K. The decision to accept
the appointment of MWM as replacement auditors for Baum was approved by the
Board on February 25, 2008.
In
connection with the reorganization of MWM in which certain of its audit partners
resigned from the Former Auditors and have joined dbbmckennon
(“DBBM”). The Former Auditors resigned as the independent
auditors of Who’s Your Daddy, Inc. (the “Company”), effective May 4,
2009. MWM had been the Company’s auditor since February 25, 2008.
The Company’s Board of Directors (the “Board”) approved the resignation of
McKennon, Wilson & Morgan LLP on May 4, 2009.
Effective
May 4, 2009, the Board appointed dbbmckennon (the “New
Auditors”) as the Company’s independent auditors.
During
the Company’s two most recent fiscal years and subsequent interim period on or
prior to May 4, 2009, the Company has not consulted with the New Auditors
regarding either i) the application of accounting principles to a specific
completed or contemplated transaction, or the type of audit opinion that might
be rendered on the Company’s financial statements or (ii) any matter that was
either the subject of a disagreement or event identified in response to
(a)(1)(iv) of Item 304 of Regulation S-K.
The
report of MWM with respect to our financial statements for the year ended
December 31, 2008 contained no adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope, or accounting
principles except for an explanatory paragraph relative to substantial doubt
about our ability to continue as a going concern. Since appointment as our
independent auditors through the date of this report, there were no
disagreements between us and MWM on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of MWM would have caused MWM
to make reference to the subject matter of the disagreements in connection with
its report on our financial statements for such years through the date of this
letter.
Evaluation
of Disclosure Controls and Procedures
Our
President and Chief Financial Officer (the “Certifying Officer”) has evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of
period covered by this report. Based upon such evaluation, the
Certifying Officer concluded that our disclosure controls and procedures were
effective as of December 31, 2009.
Management’s
Report on Internal Control over Financial Reporting
Our
management, including the Certifying Officer, is responsible for establishing
and maintaining adequate internal control over financial reporting, as defined
in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934. Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of our financial statements for external
purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures
that: (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our assets,
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and
that our receipt and expenditures are being made only in accordance with
authorizations of management and our Board of Directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the financial statements.
All
internal control systems, no matter how well designed, have inherent
limitations. A system of internal control may become inadequate over
time because of changes in conditions or deterioration in the degree of
compliance with the policies or procedures. Therefore, even those
systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.
Our
management assessed the effectiveness of our internal control over financial
reporting as December 31, 2008 using the criteria set forth by the
Commission of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on this assessment, our management concluded
that our internal control over financial reporting disclosure controls and
procedures were effective as of December 31, 2009.
This Item
is not applicable to us.
On
April 13, 2009, Edon Moyal resigned from all positions as an officer and
director with us, and as of December 31, 2009 is no longer employed by the
Company. Michael R. Dunn, our Chief Executive Officer and Chief Financial
Officer, filled the vacancy of Corporate Secretary created by the resignation of
Mr. Moyal.
|
Name
|
Age
|
Position(s) and Office(s)
|
||
|
Michael
R. Dunn
|
58
|
Chief
Executive Officer, Chief Financial Officer, Secretary,
Director
|
||
|
Derek
Jones
|
72
|
Director
|
Michael R. Dunn, our Chief
Executive Officer, Chief Financial Officer, and member of our Board of
Directors, joined us on May 28, 2008. From December 1995 and
continuing through the present, Mr. Dunn is the Chief Executive Officer of
Bankers Integration Group, Inc., an e-commerce company serving the
automotive finance and insurance industry. Bankers Integration
Group, Inc. filed for Chapter 11 bankruptcy protection in 2008 and the
assets of this company were sold as part of that proceeding. Mr. Dunn
spends two to three hours a week working for Bankers Integration
Group, Inc. in connection with winding down of that business.
Mr. Dunn also served as Chairman and Chief Executive Officer of Mountaineer
Gaming, a Russell 2000 gaming and entertainment company, as well as being the
owner, manager, or director of various businesses, both large and small.
Mr. Dunn attended La Crosse State University, Wisconsin, in business and
has extensive training in business management and leadership.
Derek Jones was appointed to
our Board of Directors on April 26, 2005. Mr. Jones is a
consultant and telecommunications analyst. Since 2003, he has served as a
Director of Native American Studies and Fund Raising Division of the Rio Grande
Foundation, a New Mexico free market research and educational organization
dedicated to the study of public policy. Along with his background in
Business Administration, Mr. Jones brings to us his knowledge and 35 years
experience in the area of corporate development and finance as well as his
background in the areas of International Finance and business
affairs.
Compliance
with Section 16(a)of the Exchange Act
Section 16(a) of
the Securities Exchange Act of 1934 requires our directors, officers and persons
who own more than 10% of a registered class of our equity securities to file
with the SEC initial reports of ownership and reports of changes in ownership of
common stock and other equity securities. Officers, directors and greater
than 10% shareholders are required by SEC regulations to furnish us with copies
of all Section 16(a) forms they file.
To the
best of our knowledge, since December 31, 2008, the following delinquencies
occurred:
|
Name and Affiliation
|
No. of Late
Reports
|
No. of Transactions
Not Filed on Timely
Basis
|
Known Failures to
File
|
|||
|
Derek
Jones, Director
|
0
|
2
|
Form 4,
Form 5
|
|||
|
Ramon
Desage, 10% Shareholder
|
0
|
1
|
-0-
|
Code
of Ethics
We have
adopted a Code of Ethics that applies to our principal executive officer,
principal financial officer, and principal accounting officer. Our Code of
Ethics was an exhibit to our Annual Report on Form 10-k for the fiscal year
ended December 31, 2006 and filed with the SEC on April 16,
2007.
Summary
Compensation Table
Set forth
below is a summary of compensation for our principal executive officer and our
two most highly compensated officers other than our principal executive officer
(collectively, the “named executive officers”) for our last two fiscal
years. There have been no annuity, pension or retirement benefits ever
paid to our officers, directors or employees.
With the
exception of reimbursement of expenses incurred by our named executive officers
during the scope of their employment and unless expressly stated otherwise in a
footnote below, none of the named executive officers received other
compensation, perquisites and/or personal benefits in excess of
$10,000.
|
Name and
Principal
Position
|
Year
|
Salary ($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-equity
Incentive Plan
Compensation
($)
|
All Other
Compensation
($)
|
Total ($)
|
||||||||||||||||||||||
|
Michael
R. Dunn,
|
2009
|
$ | 183,150 | $ | -0- | $ | 350,000 | $ | -0- | $ | -0- | $ | -0- | $ | 533,150 | |||||||||||||||
|
CEO,
CFO (1)
|
2008
|
$ | 105,000 | $ | -0- | $ | 340,000 | $ | -0- | $ | -0- | $ | -0- | $ | 445,000 | |||||||||||||||
|
Edon
Moyal,
|
2009
|
$ | 37,500 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | 37,500 | |||||||||||||||
|
Secretary,
Exec. V.P. (2)
|
2008
|
$ | 177,500 | $ | -0- | $ | 100,305 | $ | -0- | $ | -0- | $ | -0- | $ | 277,805 | |||||||||||||||
|
Dan
Fleyshman,
|
2008
|
$ | 90,000 | $ | -0- | $ | 17,379 | $ | -0- | $ | -0- | $ | -0- | $ | 107,379 | |||||||||||||||
|
President
(3)
|
||||||||||||||||||||||||||||||
|
John
F. Moynahan,
|
2008
|
$ | 66,226 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | 66,226 | |||||||||||||||
|
CFO
(4)
|
||||||||||||||||||||||||||||||
|
(1)
|
Joined
us May 28, 2008. Stock award was valued based on the share
price on the day of issuance.
|
|
(2)
|
Resigned
as an officer and director on April 13, 2009, and is no longer an
employee as of December 31, 2009.
|
|
(3)
|
Resigned
May 28, 2008.
|
|
(4)
|
Resigned
November 21, 2008.
|
|
(5)
|
Stock award shares, issued in
connection with employment agreements, are restricted under Rule
144.
|
|
(6)
|
Options
previously issued to Edon Moyal and Dan Fleyshman to purchase 521,667 and
521,667 common shares, respectively, were forfeited in 2009 as neither
person was employed by the Company at the end of the
period.
|
Employment
Agreements
Michael
R. Dunn
As
required by the LSSE Agreement, on August 24, 2009, the Company entered into an
Employment Agreement with Michael R. Dunn (the “Dunn Agreement”) to serve as the
Company’s Chief Executive Officer (“CEO”) and Chairman of the Board of Directors
(“Chairman”). Mr. Dunn has been serving as the Company’s CEO and
Chairman since May 28, 2008. The Dunn Agreement supersedes and
replaces any prior employment agreement or arrangement between the Company and
Mr. Dunn. The Dunn Agreement has a term of two years (the “Initial
Term”). Unless sooner terminated pursuant to the terms thereof, Mr.
Dunn’s employment will automatically renew for additional one-year terms (each a
“Renewal Term”). Mr. Dunn will receive an annual salary of $189,000
per year, which will be increased by 5 percent on January 1st of each year. He
will also receive a monthly home office expense allowance of $2,000 and a
monthly car allowance of $750. If the Company fails to make any
regularly scheduled payment of salary amounts owed to Mr. Dunn under the Dunn
Agreement within fifteen (15) days of their due date, at the option of Mr. Dunn,
the Company shall issue, in lieu of such payment and subject to applicable
securities laws, shares of the Company’s common stock with a value of 150% of
the payment owing to Mr. Dunn, such shares valued at the price per share in the
last reported trade of the Company’s common stock on the date such payment
should have been made. Mr. Dunn will also be eligible to receive a
bonus of $110,000, which is contingent upon his continued employment and the
Company’s success in raising capital as follows: $60,000 of the bonus
shall be due and payable upon the Company’s completion of a capital raise of at
least $900,000 for the period May 28, 2008 to November 1, 2009, and the
remaining $50,000 shall be due and payable upon the Company’s completion of at
least an additional $750,000, over and above the $900,000, in capital financing
by January 1, 2010. Mr. Dunn was also granted 14 million (14,000,000)
shares of the Company’s common stock, vesting immediately, with a minimum of 13
million (13,000,000) shares restricted and subject to a lock-up provision that
prohibits Mr. Dunn from selling, transferring or otherwise encumbering the
shares for a period of six (6) months. In addition, the shares are
subject to forfeiture under certain circumstances in the first 6 months of the
Dunn Agreement. Mr. Dunn also is entitled to additional benefits
commensurate with the position of Chief Executive Officer, including paid
vacation, reimbursement of reasonable and necessary business expenses incurred
in the performance of his duties, and eligibility to participate in the
Company’s employee benefit plans.
If the
Company terminates Mr. Dunn’s employment for any reason other than just cause,
Mr. Dunn will be entitled to payment of his annual salary, as in effect on the
date of his termination, for either twelve (12) months or through the Initial
Term or any applicable Renewal Term, whichever period of time is
longer. In addition the Company will continue to pay for coverage for
Mr. Dunn and his dependents under its group insurance plans for a period of
twelve (12) months from the effective date of termination. The Dunn
Agreement also contains customary non-disclosure/non-solicitation and
non-competition provisions.
The 14
million shares were fully vested on August 24, 2009, the date of
issuance. Accordingly, the Company recorded stock-based compensation
expense of $350,000, based on the market price on the date of issuance, during
the three months ended September 30, 2009.
Robert
E. Crowson, Jr.
As
required by the LSSE Agreement, on August 24, 2009, the Company entered into an
Employment Agreement with Robert E. Crowson, Jr. (the “Crowson Agreement”) to
serve as the Company’s Controller, a non-officer position. The
Crowson Agreement has a term of two years (the “Initial
Term”). Unless sooner terminated pursuant to the terms thereof, Mr.
Crowson’s employment will automatically renew for additional one-year terms
(each a “Renewal Term”). Mr. Crowson will receive an annual salary of
$120,000 per year, which will be increased by 5 percent on January 1st of each year. If
the Company fails to make any regularly scheduled salary payment of amounts owed
to Mr. Crowson under the Crowson Agreement within fifteen (15) days of their due
date, at the option of Mr. Crowson, the Company shall issue, in lieu of such
payment and subject to applicable securities laws, shares of the Company’s
common stock with a value of 150% of the payment owing to Mr. Crowson, such
shares valued at the price per share in the last reported trade of the Company’s
common stock on the date such payment should have been made. Mr.
Crowson was also granted 3 million (3,000,000) shares of the Company’s common
stock, vesting immediately, with a minimum of 2.4 million (2,400,000) shares
restricted and subject to a lock-up provision that prohibits Mr. Crowson from
selling, transferring or otherwise encumbering the shares for a period of six
(6) months. In addition, the shares are subject to forfeiture under
certain circumstances in the first 6 months of the Crowson
Agreement. Mr. Crowson also is entitled to additional benefits
commensurate with the position of Controller including paid vacation,
reimbursement of reasonable and necessary business expenses incurred in the
performance of his duties, and eligibility to participate in the Company’s
employee benefit plans.
If the
Company terminates Mr. Crowson’s employment for any reason other than just
cause, Mr. Crowson will be entitled to payment of his annual salary, as in
effect on the date of his termination, for either twelve (12) months or through
the Initial Term or any applicable Renewal Term, whichever period of time is
longer. In addition the Company will continue to pay for coverage for
Mr. Crowson and his dependents under its group insurance plans for a period of
twelve (12) months from the effective date of termination.
The 3
million shares were fully vested on August 24, 2009, the date of issuance, but
are subject to forfeiture during the first 6 months of the Crowson
Agreement. Accordingly, the Company recorded stock-based compensation
expense of $75,000, based on the market price on the date of issuance, during
the three months ended September 30, 2009.
Director
Compensation
On
October 15, 2009 the Board of Directors approved a program to compensate our
outside directors at the rate of $3,000 per calendar quarter in cash or in
equivalent value of shares of our common stock. Prior to that, our
directors were not compensated for their services. All directors are
entitled to reimbursement of expenses incurred in the performance of their
duties as directors, including their attendance at Board of Directors
meetings.
During
2009, the Company accrued directors fees for Derek Jones in the amount of
$3,000. During 2009 and 2008, Derek Jones was issued 100,000 and
37,500 shares of common stock, respectively. The fair value of these shares was
$2,700 in 2009 and $4,501 in 2008.
Grants
of Plan Based Awards
There
were no grants of plan-based awards during our last fiscal year.
ITEM
12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The
following table sets forth certain information concerning the common stock
ownership as of the date of this Report, with respect to: (i) each person
who is known to the Company to beneficially own more than 5% of the Company’s
common stock; (ii) each officer and director; and (iii) all directors
and officers as a group; based upon 59,194,938 shares of common stock
outstanding. Note that there are no outstanding preferred
shares.
|
Common Stock
|
Preferred Stock
|
|||||||
|
Name and Address of
Beneficial Owners(1)
|
Amount and
Nature of
Beneficial
Ownership
|
Percent
Ownership
of Class(2)
|
Amount and
Nature of
Beneficial
Ownership
|
Percent
Ownership
of Class
|
||||
|
Michael
R. Dunn, CEO, CFO, Secretary, and Director
|
16,000,000
|
27.0%
|
-0-
|
0.0%
|
||||
|
Derek
Jones, Director
|
100,000
|
*
|
-0-
|
0.0%
|
||||
|
All
executive officers and directors as a group (two persons)
|
16,100,000
|
27.2%
|
-0-
|
0.0%
|
||||
|
Rand
Scott, MD
|
5,100,000
|
8.6%
|
-0-
|
0.0%
|
||||
|
Sam
Maywood, MD
|
3,150,000
|
5.3%
|
-0-
|
0.0%
|
||||
|
Ramon
Desage
|
3,000,000
|
5.2%
|
-0-
|
0.0%
|
||||
(1)
c/o our address, P.O. Box 4709, Mission Viejo, CA 92690, unless otherwise
noted.
(2)
Except as otherwise indicated, we believe that the beneficial owners of common
stock listed above, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable. 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 or warrants currently exercisable, or
exercisable within 60 days, are deemed outstanding for purposes of computing the
percentage of the person holding such options or warrants, but are not deemed
outstanding for purposes of computing the percentage of any other
person.
None.
dbbmckennon and McKennon,
Wilson & Morgan LLP (the “Independent Auditors”) were our independent
auditors and examined our financial statements for the years ended
December 31, 2009 and 2008, respectively. The Independent Auditors
performed the services listed below and were as paid the aggregate fees listed
below for the years ended December 31, 2009 and 2008.
Audit
Fees
The
Independent Auditors were paid aggregate fees of approximately $45,000 for the
fiscal year ended December 31, 2009 and approximately $81,141 for the
fiscal year ended December 31, 2008 for professional services rendered for
the audit of our annual financial statements and for the reviews of the
financial statements included in our quarterly reports on Form 10-Q during
these periods.
Audit
Related Fees
The
Independent Auditors were not paid additional fees for either the year ended
December 31, 2009 or the fiscal year ended December 31, 2008 for
assurance and related services reasonably related to the performance of the
audit or review of our financial statements.
Tax
Fees
The
Independent Auditors were not paid fees for the year ended December 31,
2009 or the fiscal year ended December 31, 2008 for professional services
rendered for tax compliance, tax advice and tax planning during this fiscal year
period.
All
Other Fees
The
Independent Auditors were not paid any other fees for professional services
during the year ended December 31, 2009 or the fiscal year ended
December 31, 2008.
Board
of Directors Pre-Approval Policies and Procedures
The
Company’s Board of Directors has policies and procedures that require the
pre-approval by the Board of all fees paid to, and all services performed by,
the Company’s independent accounting firms. The fees and services
provided as noted above were authorized and approved by the Board in compliance
with the pre-approval policies and procedures described herein.
|
2.1
|
Agreement
and Plan of Merger by and among Snocone Systems Inc., WYD Acquisition
Corp. and Who’s Your Daddy, Inc., dated April 1,
2005(1)
|
|
3.1
|
Amended
and Restated Articles of Incorporation, dated December 4,
2001(2)
|
|
3.2
|
Amended
and Restated Bylaws, dated December 4, 2001(2)
|
|
10.1
|
Assignment
of Rights Agreement with Anga M’Hak Publishing and Edward Raabe, dated
July 16, 2008(3)
|
|
10.2
|
Consulting
Agreement with BSW & Associates, dated September 16,
2008(4)
|
|
10.3
|
Consulting
Agreement with Net Vertex New York Inc., dated October 23, 2008
(5)
|
|
10.4
|
Separation
Agreement and General Release with John F. Moynahan, dated
November 21, 2008 (5)
|
|
10.5
|
Master
Distributor Agreement with Beryt Promotion, LLC, dated November 21,
2008 (5)
|
|
10.6
|
Marketing &
Representation Agreement with Leigh Steinberg Sports &
Entertainment LLC, dated January 26, 2009 (6)
|
|
10.7
|
Marketing
& Lead Generation Agreement with Leigh Steinberg Sports &
Entertainment LLC, dated August 21, 2009 (7)
|
|
10.8
|
Marketing
& Representation Agreement with Rand Scott M.D. dated August 24, 2009
(7)
|
|
10.9
|
Employment
Agreement with Michael R. Dunn dated August 24, 2009
(7)
|
|
10.10
|
Employment
Agreement with Robert E. Crowson, Jr. dated August 24, 2009
(7)
|
|
10.11
|
Marketing
& Lead Generation Agreement with Gigamind Inc. dated September 16,
2009 (8)
|
|
10.12
|
Letter
Agreement with Dan Fleyshman dated January 13, 2010 (9)
|
|
10.13
|
Letter
Agreement with Edon Moyal dated January 13, 2010 (9)
|
|
10.14
|
Settlement
Agreement and General Release with Joseph Conte dated January 15, 2010
(9)
|
|
10.15
|
Settlement
Agreement and Release of All Claims with Fish & Richardson P.C. dated
January 19, 2010 (9)
|
|
10.16
|
Settlement
Agreement and Release with Sacks Motor Sports, Inc. and Greg Sacks dated
effective March 30, 2010 (10)
|
|
(1)
|
Incorporated
by reference from our Current Report on Form 8-K filed with the
Commission on April 7, 2005.
|
|
(2)
|
Incorporated
by reference from our Registration Statement on Form 10SB filed with
the Commission on January 18, 2002.
|
|
(3)
|
Incorporated
by reference from our Current Report on Form 8-K filed with the
Commission on July 23, 2008.
|
|
(4)
|
Incorporated
by reference from our Current Report on Form 8-K filed with the
Commission on October 16, 2008.
|
|
(5)
|
Incorporated
by reference from our Annual Report on Form 10-K filed with the
Commission on May 12, 2008.
|
|
(6)
|
Incorporated
by reference from our Current Report on Form 8-K filed with the
Commission on January 29, 2009.
|
|
(7)
|
Incorporated
by reference from our Current Report on Form 8-K filed with the
Commission on August 26, 2009.
|
|
(8)
|
Incorporated
by reference from our Annual Report on Form 8-K filed with the
Commission on September 18, 2009.
|
|
(9)
|
Incorporated
by reference from our Current Report on Form 8-K filed with the
Commission on January 22, 2010.
|
|
(10)
|
Incorporated
by reference from our Current Report on Form 8-K filed with the
Commission on April 6, 2010.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
WHO’S
YOUR DADDY, INC.
|
|
|
DATED:
April 14, 2010
|
/s/
Michael R. Dunn
|
|
By:
Michael R. Dunn
|
|
|
Its:
Chief Executive Officer and Chief Financial Officer
|
|
|
(Principal
Executive Officer, Principal Financial Officer and Principal Accounting
Officer)
|
51