Attitude Drinks Inc. - FORM 10-Q/A

Attached files

file	filename
EX-32.1 - CERTIFICATION - Attitude Drinks Inc.	f10q0610a1ex32i_attdrinks.htm
EX-31.1 - CERTIFICATION - Attitude Drinks Inc.	f10q0610a1ex31i_attdrinks.htm
EX-31.2 - CERTIFICATION - Attitude Drinks Inc.	f10q0610a1ex31ii_attdrinks.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q /A

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2010

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _________ to _________

Commission file number: 000-52904

ATTITUDE DRINKS INCORPORATED

(Exact name of registrant as specified on its charter)

Delaware		65-0109088
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

10415 Riverside Drive, #101, Palm Beach Gardens, Florida 33410 USA

(Address of principal executive offices)

(561) 799-5053

(Registrant’s telephone number, including area code)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No 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.

Large accelerated filer o Accelerated filer o

Non-accelerated filer o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date: 14,081,591 shares issued and outstanding as of August 16, 2010.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

A Development Stage Company

INDEX

		PAGE

PART I	FINANCIAL INFORMATION

Item 1 .	Condensed Consolidated Financial Statements:

	Condensed Consolidated Balance Sheets – June 30, 2010 (unaudited) and March 31, 2010	3

	Condensed Consolidated Statements of Operations – Three Months Ended June 30, 2010 and 2009 and the Development Stage Period from Inception (June 18, 2007) to June 30, 2010 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows – Three Months Ended June 30, 2010 and 2009 and the Development Stage Period from Inception (June 18, 2007) to June 30, 2010 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

Item 2.

Unregistered Sales of Equity and Use of Proceeds

Item 3.

Defaults upon Senior Securities

Item 4.

Submission of Matters to a Vote of Security Holders

Item 5.

Other Information/Subsequent Events

Item 6.

Exhibits

SIGNATURES

EXHIBITS

DOCUMENTS INCORPORATED BY REFERENCE: See Exhibits

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2010		March 31, 2010
- ASSETS -	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	11,507	$	38,611
Accounts receivable		10,800		10,973
Inventories		4,458		12,713
Prepaid expenses		100,881		88,911
TOTAL CURRENT ASSETS		127,646		151,208

FIXED ASSETS, NET		32,711		34,636
OTHER ASSETS:
Trademarks, net		26,546		26,800
Deposits and other		24,389		24,389

TOTAL OTHER ASSETS		50,935		51,189

TOTAL ASSETS	$	211,292	$	237,033

- LIABILITIES AND STOCKHOLDERS' (DEFICIT) -
CURRENT LIABILITIES:
Accounts payable	$	1,314,887		$	1,287,824
Accrued liabilities		3,616,506			3,509,860
Derivative liabilities		106,466			4,858,123
Short-term bridge loans payable		388,000			388,000
Convertible notes payable		4,106,191			17,975,009
Non convertible note payable		50,500			34,000
Loans payable to related parties		21,463			21,463
TOTAL CURRENT LIABILITIES		9,604,013			28,074,279

STOCKHOLDERS' (DEFICIT):
Series A convertible preferred stock, par value $0.001 per share, 20,000,000 shares authorized, 9,000,000 shares issued and outstanding at June 30, 2010 and March 31, 2010		9,000			9,000
Common stock, par value $0.001, 1,000,000,000 shares authorized, 5,157,561 and 4,306,437 shares issued and outstanding at June 30, 2010 and March 31, 2010, respectively		5,158			4,306
Additional paid-in capital		6,286,161			5,959,687
Stock subscription receivable		-			(59,400	)
Deficit accumulated during the development stage		(15,693,040	)		(33,750,839	)

TOTAL STOCKHOLDERS' (DEFICIT)		(9,392,721	)		(27,837,246	)

TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT)	$	211,292		$	237,033

See accompanying notes to condensed consolidated financial statements.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended June 30, 2010			Three Months Ended June 30, 2009			Development Stage Period From Inception (June 18, 2007) to June 30, 2010
	(Unaudited)			(Unaudited)			(Unaudited)
REVENUES:
Net revenues	$	1,927		$	(4,959	)	$	33,151
Product and shipping costs		(1,055	)		(85	)		(176,712	)
GROSS PROFIT		872			(5,044	)		(143,561	)

OPERATING EXPENSES:
Salaries, taxes and employee benefits		135,991			335,260			3,555,374
Marketing and promotion		17,644			101,777			2,060,705
Consulting fees		—			—			464,409
Professional and legal fees		63,486			52,266			709,240
Travel and entertainment		4,697			10,603			218,179
Product development costs		—			7,500			117,500
Stock compensation expense		—			—			1,758,600
Other operating expenses		65,181			72,406			943,584
		286,999			579,812			9,827,591

LOSS FROM OPERATIONS		(286,127	)		(584,856	)		(9,971,152	)

OTHER INCOME (EXPENSE):
Derivative income (expense)		4,698,958			(250,887	)		1,020,927
Loss on extinguishment of debt		(1,034	)		—			(3,417,877	)
Loss of sale of assets		—			—			(8,338	)
Impairment loss		—			—			(507,500	)
Interest income (expense) and other		13,646,002			(524,286	)		(2,809,100	)
Income (expense)		18,343,926			(775,173	)		(5,721,888	)

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		18,057,799			(1,360,029	)		(15,693,040	)

Provision for income taxes		—			—			—

NET INCOME (LOSS)	$	18,057,799		$	(1,360,029	)	$	(15,693,040	)

Basic income/(loss) per common share	$	3.75		$	(1.72	)

Diluted income/(loss) per common share	$	1.02		$	(1.72	)

Weighted average common shares outstanding – basic		4,819,435			790,306

Weighted average common shares outstanding – diluted		17,659,864			790,306

See accompanying notes to condensed consolidated financial statements.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended June 30, 2010			Three Months Ended June 30, 2009			Development Stage Period From Inception (June 18, 2007) to June 30, 2010
	(Unaudited)			(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)	$	18,057,799		$	(1,360,029	)	$	(15,693,040	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,939			2,814			34,011
Amortization of deferred financing costs		—			93,352			886,060
Compensatory stock and warrants		—			—			3,696,449
Derivative expense/(income)		(4,698,958	)		250,887			(1,020,927	)
Fair value adjustment of convertible note		(13,667,558	)		354,298			532,231
Impairment loss		—			—			507,500
Stock subscription receivable		59,400			—			—
Loss on debt extinguishment		1,034			—			3,417,877
Amortization of debt discount		—			—			547,359
Loss on disposal of fixed assets		—			—			3,914
Loss on sale of marketable securities		—			—			8,338
Changes in operating assets and liabilities:
Accounts receivable		173			64			(10,800	)
Prepaid expenses and other assets		18,030			42,010			(171,270	)
Inventories		8,255			114			(4,458	)
Accounts payable and accrued liabilities		126,043			451,125			4,684,845
Net cash used in operating activities		(92,843	)		(165,365	)		(2,581,911	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment		(597	)		—			(29,897	)
Proceeds from sale of marketable securities		—			—			67,663
Trademarks		(164	)		(713	)		(67,286	)
Net cash used in investing activities		(761	)		(713	)		(29,520	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible notes payable		55,000			—			1,685,000
Proceeds from short-term bridge loans payable		25,000			—			1,580,000
Costs associated with financing		(5,000	)		—			(376,062	)
Default redemption		—			48,667			—
Repayment of notes		(8,500	)		—			(268,500	)
Capital contribution – common stock		—			—			2,500
Net cash provided by financing activities		66,500			48,667			2,622,938

NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS		(27,104	)		(117,411	)		11,507
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		38,611			119,637			—
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	11,507		$	2,226		$	11,507

See accompanying notes to condensed consolidated financial statements

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 1. Organization, Basis of Presentation and Significant Accounting Policies

(a) Organization:

Attitude Drinks Incorporated, a Delaware corporation, and subsidiary (“the Company”) is a development stage company that is engaged in the development and sale of functional beverages, primarily in the United States.

Attitude Drinks Incorporated (“Attitude”, “We” or the “Company”) was formed in Delaware on September 11, 1988 under the name of International Sportfest, Inc. In January 1994, the Company acquired 100% of the issued and outstanding common stock of Pride Management Services PLC ("PMS"). PMS was a holding company of six subsidiaries in the United Kingdom engaged in the leasing of motor vehicles throughout the United Kingdom. Simultaneously with the acquisition of PMS, we changed our name to Pride, Inc. On October 1, 1999, the Company acquired all of the issued and outstanding stock of Mason Hill & Co. and changed its name to Mason Hill Holdings, Inc. During the quarter ended June 30, 2001, the operating subsidiary, Mason Hill & Co., was liquidated by the Securities Investors Protection Corporation. As a result, the Company became a shell corporation whose principal business was to locate and consummate a merger with an ongoing business.

On September 19, 2007, the Company acquired Attitude Drink Company, Inc., a Delaware corporation (“ADCI”), under an Agreement and Plan of Merger (“Merger Agreement”) among Mason Hill Holdings, Inc. (“MHHI”) and ADCI. Pursuant to the Merger Agreement, each share of ADCI common stock was converted into 40 shares of Company common stock resulting in the issuance of 4,000,000 shares of Company common stock. The acquisition was accounted for as a reverse merger (recapitalization) with ADCI deemed to be the accounting acquirer, and the Company deemed to be the legal acquirer. Accordingly, the financial information presented in the financial statements is that of ADCI as adjusted to give effect to any difference in the par value of the issuer's and the accounting acquirer's stock with an offset to capital in excess of par value. The basis of the assets, liabilities and retained earnings of ADCI, the accounting acquirer, has been carried over in the recapitalization. On September 30, 2007, the Company changed its name to Attitude Drinks Incorporated. Its wholly owned subsidiary, ADCI, was incorporated in Delaware on June 18, 2007.

The Company is a development stage enterprise as defined by FASB Accounting Standards Codification. All losses accumulated since the inception of the Company will be considered as part of the Company's development stage activities. All activities of the Company to date relate to its organization, history, merger of its subsidiary, fundings and product development. The Company's fiscal year end is March 31. Its plan of operation during the next twelve months is to focus on the non-alcoholic single serving beverage business, developing and marketing products in three fast growing segments: sports recovery, functional dairy and milk/juice blends. Our company’s common stock shares (OTCBB:ATTD) began trading in June, 2008.

We implemented a 1-for-20 reverse stock split on July 7, 2010. Since this change had occurred before we released our June 30, 2010 financial statements, we restated all applicable financial data throughout this report for the three months ended June 30, 2010 and 2009 as well as any financial data for the year ended March 31, 2010.

(b) Basis of Presentation/Going Concern:

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements of the Company contain all adjustments necessary to present fairly the Company’s financial position as of June 30, 2010 and 2009 and the results of its operations and cash flows for the three month periods ended June 30, 2010 and 2009. The significant accounting policies followed by the Company are set forth in Note 3 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 1. Organization, Basis of Presentation and Significant Accounting Policies (Continued):

(b) Basis of Presentation/Going Concern (continued):

March 31, 2010, which is incorporated herein by reference. Specific reference is made to that report for a description of the Company’s securities and the notes to consolidated financial statements included therein. The accompanying unaudited interim financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America ("U.S. GAAP").

The results of operations for the three month period ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year.

The Company’s consolidated financial statements include the accounts of Attitude Drinks Incorporated and its wholly-owned subsidiary, Attitude Drink Company, Inc. All material intercompany balances and transactions have been eliminated.

The accompanying financial statements have been prepared on a going concern basis, which assumes the Company will realize its assets and discharge its liabilities in the normal course of business. As reflected in the accompanying financial statements, the Company had insignificant revenues for the three month period ended June 30, 2010, a working capital deficit of $9,476,367 as of June 30, 2010 and has incurred losses to date resulting in an accumulated deficit of $15,693,040, including derivative income and expense. These factors create substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and pay its liabilities when they come due. Management’s plan includes obtaining additional funds by debt and/or equity financings; however, there is no assurance of additional funding being available.

Inventories, as estimated by management, currently consist of raw materials and finished goods and are stated at the lower of cost on the first in, first-out method or market. The inventory is comprised of the following:

	June 30, 2010 (unaudited)		March 31, 2010
Finished goods	$	4,458	$	7,754
Raw materials		-		4,959
Total inventories	$	4,458	$	12,713

(d) Prepaid expenses:

Prepaid expenses of $100,881 consist mainly for retainers for legal fees that were paid with shares of the Company’s common stock. These retainers will be reduced through the incurrence of future legal expenses.

(e) Trademarks:

Trademarks consist of costs associated with the acquisition and development of certain trademarks. Trademarks,

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 1. Organization, Basis of Presentation and Significant Accounting Policies (Continued):

(e) Trademarks (continued)

when acquired, will be amortized using the straight-line method over 15 years. Amortization of trademarks for the three months ended June 30, 2010 was $418.

(f) Financial Instruments:

Financial instruments, as defined in the FASB Accounting Standards Codification, consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, notes payable, derivative financial instruments and convertible debt that we have concluded that some of these items are more akin to debt than equity. We carry cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities at historical costs; their respective estimated fair values approximate carrying values due to their current nature.

Derivative financial instruments, as defined in the FASB Accounting Standards Codification, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by the FASB Accounting Standards Codification, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements. However, we are allowed to elect fair value measurement of the hybrid financial instruments, on a case-by-case basis, rather than bifurcate the derivative. We believe that fair value measurement of the hybrid convertible promissory notes arising from our October 23, 2007, January 8, 2008, January 27, 2009 and March 30, 2009 financing arrangements provide a more meaningful presentation of that financial instrument.

(g) Income (Loss) Per Common Share:

The basic income (loss) per common share is computed by dividing the income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the reporting period. Diluted income/(loss) per common share is computed similar to basic income/(loss) per common share except that diluted income/(loss) per common share includes dilutive common stock equivalents, using the treasury stock method, and assumes that the convertible debt instruments were converted into common stock upon issuance, if dilutive. For the three months ended June 30, 2010, potential common shares arising from the Company’s stock warrants, stock options and convertible debt and preferred stock amounting to 12,840,429 shares were included in the computation of diluted income per share.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 1. Organization, Basis of Presentation and Significant Accounting Policies (Continued):

(h) Recent Accounting Pronouncements Applicable to the Company:

Recent accounting pronouncements - We have reviewed accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. We believe that the following impending standards may have an impact on our future filings. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.

In January 2010, FASB issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in ASC Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, the ASU 2010-06 amends Codification Subtopic 820-10 to now require: a reporting entity should disclose separately 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 in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. In addition, ASU 2010-06 clarifies the existing requirements that reporting entities use judgment in determining the appropriate classes of assets and liabilities for purposes of reporting fair value measurement for each class of assets and liabilities and provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The ASU is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of 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. Early application is permitted. The Company has not elected early application of this ASU but does not believe its adoption will have a significant impact on its financial statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on our present or future financial statements.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 2. Accrued Liabilities:

Accrued liabilities consist of the following:

	June 30, 2010 (unaudited)		March 31, 2010
Accrued payroll and related taxes	$	2,254,014	$	2,209,114
Accrued marketing program costs		580,000		580,000
Accrued professional fees		55,000		62,130
Accrued interest		489,994		435,773
Accrued consulting fees		151,506		140,852
Other payables		85,992		81,991
Total	$	3,616,506	$	3,509,860

Note 3. Short-term Bridge Loans:

Summary of short-term bridge loan balances are as follows:

		June 30, 2010 (unaudited)	March 31, 2010
April 2, 2008	$	120,000	120,000
April 9, 2008		120,000	120,000
April 14, 2008		60,000	60,000
May 19, 2008		33,000	33,000
August 5, 2008		55,000	55,000

Total		388,000	388,000

April 2, 2008 financing:

On April 2, 2008, the Company entered into a financing arrangement that provided for the issuance of $120,000 face value short term bridge loans, due June 30, 2008, plus warrants to purchase (i) 10,000 shares of our common stock and (ii) additional warrants to purchase 10,000 shares of our common stock, representing an aggregate 20,000 shares. We determined that the warrants issued in this financing arrangement met the conditions for equity classification. The Company accounts for debt issued with stock purchase warrants in accordance with the FASB Accounting Standards Codification. The proceeds of the debt were allocated between the debt and the detachable warrants based on the relative fair values of the debt security and the warrants. We allocated a value of $98,864 to the warrants, which was accreted through the original maturity date using the effective interest method.

We entered into the following Modification and Waiver Agreements related to this financing:

Date	Terms	Consideration
June 2008	Extend maturity to July 30, 2008	1) Warrants indexed to 5,000 shares of common stock 2) Warrants indexed to 5,000 shares of common stock
September 2008	Extend maturity to December 15,2008	12,000 shares of restricted stock
January 2009	Extend maturity date to April 30, 2009	1) Warrants indexed to 12,000 shares of common stock 2) 12,000 shares of restricted stock

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 3. Short-term Bridge Loans (continued):

April 2, 2008 financing (continued)

The modifications resulted in a loss on extinguishment of $296,975 in accordance with the Financial Accounting Standards Codification. The notes were considered in default on December 15, 2008 due to non-payment. Remedy for default was acceleration of principal so the notes were recorded at face value as of December 15, 2008. As of June 30, 2010, this note was considered in default for non-payment. The company is negotiating with the debt holder to extend the due date of this debt.

The warrants contain full-ratchet protection so the exercise price of the warrants was reduced to $3.30 when the Company issued additional convertible instruments with a lower conversion rate on December 18, 2008. The exercise price of the warrants was reduced again to $1.00 when the Company issued additional convertible instruments with a lower conversion rate on January 27, 2009. The exercise price of the warrants was reduced again to $.494 when the Company issued additional convertible instruments with a lower conversion rate in November 2009. The exercise price of the warrants was reduced again to $.16 when the Company issued additional convertible instruments with a lower conversion rate in January 2010.

April 9, 2008 and April 14, 2008 financing:

On April 9, 2008, the Company entered into a financing arrangement that provided for the issuance of $120,000 face value short term bridge loans, due July 10, 2008, plus warrants to purchase (i) 10,000 shares of our common stock and (ii) additional warrants to purchase 10,000 shares of our common stock, representing an aggregate 20,000 shares. On April 14, 2008, the Company entered into a financing arrangement that provided for the issuance of $60,000 face value short term bridge loan notes payable, due July 15, 2008, plus warrants to purchase (i) 5,000 shares of our common stock and (ii) additional warrants to purchase 5,000 shares of our common stock, representing an aggregate 10,000 shares. We determined that the warrants issued in these financing arrangements meet the conditions for equity classification so we allocated the proceeds of the debt between the debt and the detachable warrants based on the relative fair values of the debt security and the warrants in accordance with the FASB Accounting Standards Codification.

We entered into the following Modification and Waiver Agreements related to the April 9, 2008 financing:

Date	Terms	Consideration
June 2008	Extend maturity to August 10, 2008	Warrants indexed to 10,000 shares of common stock
September 2008	Extend maturity to December 15, 2008	12,000 shares of restricted stock
January 2009	Extend maturity date to April 30, 2009	1) Warrants indexed to 12,000 shares of common stock 2) 12,000 shares of restricted stock
February 2010	Extend maturity date to June 30, 2010	1) Warrants indexed to 12,000 shares of common stock 2) 12,000 shares of restricted stock
June 2010	Extend maturity date to December 31 , 2010	1) Warrants indexed to 24,000 shares of common stock 2) 12,000 shares of restricted stock

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 3. Short-term Bridge Loans (continued):

April 9, 2008 and April 14, 2008 financing (continued):

The modifications resulted in a loss on extinguishment of $13,442 in accordance with the Financial Accounting Standards Codification.

We entered into the following Modification and Waiver Agreements related to the April 14, 2008 financing:

Date	Terms	Consideration
June 2008	Extend maturity to July 19, 2008	Warrants indexed to 2,500 shares of common stock
September 2008	Extend maturity to December 15, 2008	6,000 shares of restricted stock
January 2009	Extend maturity date to April 30, 2009	1) Warrants indexed to 6,000 shares of common stock 2) 6,000 shares of restricted stock

The modifications resulted in a loss on extinguishment of $171,622 in accordance with the Financial Accounting Standards Codification.

On December 15, 2008, we were in default on the notes for non-payment of the required principal payment. The remedy for event of default was acceleration of principal and interest so they were recorded at face value.

As of June 30, 2010, this April 14, 2008 note was considered in default for non-payment. The company is negotiating with the debt holder to extend the due date of the note. It was determined that the extension warrants required liability accounting and are being recorded at fair value with changes in fair value being recorded in derivative (income) expense. The warrants contain full-ratchet protection so the exercise price of the warrants was reduced to $3.30 when the Company issued additional convertible instruments with a lower conversion rate on December 18, 2008. The exercise price of the warrants was reduced again to $1.00 when the Company issued additional convertible instruments with a lower conversion rate on January 27, 2009. The exercise price of the warrants was reduced again to $.494 when the Company issued additional convertible instruments with a lower conversion rate in November 2009. The exercise price of the warrants was reduced again to $.16 when the Company issued additional convertible instruments with a lower conversion rate in January 2010.

May 19, 2008 financing:

On May 19, 2008, the Company entered into a financing arrangement that provided for the issuance of $33,000 face value short term bridge loan notes payable, due June 19, 2008, plus warrants to purchase (i) 5,000 shares of our common stock and (ii) additional warrants to purchase 5,000 shares of our common stock, representing an aggregate 10,000 shares.

We determined that the warrants issued in these financing arrangements met the conditions for equity classification so we allocated the proceeds of the debt between the debt and the detachable warrants based on the relative fair values of the debt security and the warrants in accordance with the FASB Accounting Standards Codification. The fair value of the warrants using the Black-Scholes pricing model was $280,560, and we allocated a value of $29,569 to the warrants in accordance with the FASB Accounting Standards Codification.

We entered into the following Modification and Waiver Agreements related to the May 19, 2008 financing:

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 3. Short-term Bridge Loans (continued):

May 19, 2008 financing (continued):

Date	Terms	Consideration
June 2008	Extend maturity to July 30, 2008	1)Warrants indexed to 2,500 shares of common stock 2) Additional warrants to purchase 2,500 shares of common stock
September 2008	Extend maturity to December 15, 2008	3,300 shares of restricted stock
January 2009	Extend maturity date to April 30, 2009	1) Warrants indexed to 3,300 shares of common stock 2) 3,300 shares of restricted stock

We recorded a loss on extinguishment of $140,550 in accordance with the FASB Accounting Standards Codification related to these modifications.

On December 15, 2008, we were in default on the notes for non-payment of the required principle payment. The remedy for this event of default was acceleration of principal and interest so they were recorded at face value.

As of June 30, 2010, this note was considered in default for non-payment. The company is negotiating with the debt holder to extend the due date of the note. The warrants contain full-ratchet protection so the exercise price of the warrants was reduced to $3.30 when the Company issued additional convertible instruments with a lower conversion rate on December 18, 2008. The exercise price of the warrants was reduced again to $1.00 when the Company issued additional convertible instruments with a lower conversion rate on January 27, 2009. The exercise price of the warrants was reduced again to $.494 when the Company issued additional convertible instruments with a lower conversion rate in November 2009. The exercise price of the warrants was reduced again to $.16 when the Company issued additional convertible instruments with a lower conversion rate on January 28, 2010.

Information and significant assumptions as of June 30, 2010 and March 31, 2010 for the extension warrants related to the April and May financings which are required to be recorded at fair value each reporting period:

	June 23, 2008 Extension Warrants						January 27, 2009 Extension warrants
	June 30, 2010			March 31, 2010			June 30, 2010			March 31, 2010
Estimate fair value of the underlying common share	$	0.052		$	1.00		$	0.052		$	0.052
Conversion or strike price	$	1.00		$	1.00		$	1.00		$	1.00
Volatility (based upon Peer Group)		128.57	%		150.60	%		139.73	%		110.93	%
Equivalent term (years)		.98			1.23			1.04			3.83
Risk-free rate		0.32	%		0.41	%		0.32	%		2.55	%
Dividends		--			--			--			--

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 3. Short-term Bridge Loans (continued):

May 19, 2008 financing (continued):

	June 30, 2010 Extension Warrants

Estimate fair value of the underlying common share		$	0.052
Conversion or strike price		$	0.16
Volatility (based upon Peer Group)			118.24	%
Equivalent term (years)			3.00
Risk-free rate			1.00	%
Dividends			--

August 5, 2008 financing:

On August 5, 2008, the Company entered into a financing arrangement that provided for the issuance of $55,000 face value short term bridge loans, due September 5, 2008, plus warrants to purchase (i) 5,000 shares of our common stock at an exercise price of $10.00 and (ii) additional warrants to purchase 5,000 shares of our common stock at an exercise price of $15.00, representing an aggregate 10,000 shares. The due date of the loan was extended to December 15, 2008 with 5,500 restricted shares of common stock issued as consideration. On December 15, 2008, we were in default on the notes for non-payment of the required principle payment. Remedies for an event of default are acceleration of principle and interest. There were no incremental penalties for the event of default; however, the notes were recorded at face value.

We also evaluated the warrants to determine if they required liability or equity accounting. The warrants issued in conjunction with the financing are redeemable for cash upon the occurrence of acquisition, merger or sale of substantially all assets of the Company in an all cash transaction; therefore, the FASB Accounting Standards Codification requires that they be recorded as derivative liabilities on our balance sheet and marked to fair value each reporting period. We allocated the proceeds of the debt to the warrants, and the remaining portion was allocated to the debt instrument. The fair value of the warrants using the Black-Scholes pricing model was $62,700 and since the fair value of the warrants exceeded the proceeds from the financing, we recorded a day-one derivative loss of $12,700.

On January 15, 2009, we extended the term on the note from December 15, 2008 to April 30, 2009, and we issued investor warrants to purchase 5,500 shares of our common stock and 5,500 shares of restricted common stock as consideration for the extension. We recorded a loss on extinguishment of $2,112 in accordance with the FASB Accounting Standards Codification.

As of June 30, 2010, this note was considered in default for non-payment. The company is negotiating with the debt holder to extend the due date of the note.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 3. Short-term Bridge Loans (continued):

August 5, 2008 financing (continued):

Information and significant assumptions as of June 30, 2010 for warrants which are required to be recorded at fair value each reporting period:

	June 23, 2009 Extension warrants						January 27, 2009 Extension warrants
	June 30, 2010			March 31, 2010			June 30, 2010			March 31, 2010
Estimate fair value of the Underlying common share	$	0.052		$	1.00		$	0.052		$	1.00
Conversion or strike price	$	1.00		$	1.00		$	1.00		$	1.00
Volatility (based upon Peer group)		144.18	%		150.84	%		111.21	%		110.93	%
Equivalent term (years)		1.10			1.35			3.58			3.83
Risk-free rate		0.32	%		0.41	%		1.00	%		2.55	%
Dividends		--			--			--			--

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 4. Convertible Notes Payable:

Convertible debt carrying values consist of the following:

	June 30,		March 31,
	2010		2010
$ 312,000 Convertible Note Financing, due June 30, 2010 (a)	$	247,951	$	1,257,963
$ 600,000 Convertible Note Financing, due June 30, 2010 (b)		569,715		2,444,412
$ 500,000 Convertible Note Financing, due June 30, 2010 (b)		684,975		3,225,265
$ 100,000 Convertible Note Financing, due June 30, 2010 (b)		74,097		328,015
$ 243,333 Convertible Note Financing, due June 30, 2010 (c)		292,000		292,000
$ 60,833 Convertible Note Financing, due June 30, 2010 (d)		60,833		60,833
$ 20,000 Convertible Note Financing, due June 30, 2010 (c)		20,000		20,000
$ 120,000 Convertible Note Financing, due June 30, 2010 (e)		182,767		803,999
$ 5,000 Convertible Note Financing, due June 30, 2010 (e)		7,733		33,316
$ 5,000 Convertible Note Financing, due June 30, 2010 (e)		7,615		33,499
$ 60,000 Convertible Note Financing, due June 30, 2010 (e)		90,865		401,481
$ 70,835 Convertible Note Financing, due June 30, 2010 (e)		107,885		474,586
$ 507,500 Convertible Note Financing, due June 15, 2010 (f)		553,191		3,111,581
$ 200,000 Convertible Note Financing, due June 30, 2010 (e)		295,177		1,331,904
$ 161,111 Convertible Note Financing, due June 30, 2010 (e)		231,620		1,064,011
$ 27,778 Convertible Note Financing, due June 30, 2010 (e)		38,747		182,738
$ 111,112 Convertible Note Financing, due June 30 2010 (g)		134,312		707,736
$ 50,000 Convertible Note Financing, due June 30, 2010 (e)		66,682		323,968
$ 55,000 Convertible Note Financing, due June 30, 2010 (e)		72,952		356,364
$ 137,500 Convertible Note Financing, due June 30, 2010 (e)		180,798		890,912
$ 55,000 Convertible Note Financing, due June 30, 2010 (e)		72,319		-
$ 100,000 Convertible Note Financing, due June 30, 2010 (h)		113,957		630,426
Total convertible notes payable:	$	4,106,191	$	17,975,009

(a)	$312,000 convertible notes payable

On January 8, 2008, we executed secured convertible notes in the aggregate of $520,000 with three lenders, all unrelated entities. We received a net amount of $430,000 with the $90,000 discount being treated as interest. The loans became payable on May 7, 2008, or we had the option of compelling the holder to convert all, or a portion of the outstanding principal and accrued interest into Company common stock based on defined criteria. On February 13, 2008, we repaid $260,000 of these loans. During the quarter ended June 30, 2010, $16,800 of the principal balance of the notes was converted into common shares at the default conversion price of $.16 calculated pursuant to the notes default provisions. A total of $121,992 of the principal balance has been converted into common shares prior to the start of the current fiscal year.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 4. Convertible Notes Payable (continued)

(a)	$312,000 convertible notes payable (continued)

We have entered into the following Modification and Waiver Agreements related to this financing:

Date	Terms	Consideration
June 2008	Extend maturity to July 15, 2008	9,750 shares of common stock
September 2008	Extend maturity to sooner of January 1, 2009 or closing of another funding	Increase principal by $52,000
January 2009	Extend maturity date to July 1, 2009 and add a conversion option of $0.05	140,000 shares of restricted stock
January 2010	Extend maturity date to June 30, 2010	Convertible notes (See Note 4(h)

The addition of a conversion option and the issuance of restricted stock in January 2009 resulted in an extinguishment loss of $56,000 under the FASB Accounting Standards Codification.

The January 2010 modification resulted in an extinguishment loss of $72,441. On July 14, 2010, we extended the due date to March 31, 2011 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $900,000.

We chose to value the entire hybrid instrument at fair value. We estimate the fair value of the hybrid contract as a common stock equivalent, enhanced by the forward elements (coupon, puts, and calls), because that technique embodies all of the assumptions (including credit risk, interest risk, stock price volatility and conversion behavior estimates) that are necessary to fair value complex, hybrid contracts.

(b)	$1,200,000 convertible notes payable

On October 23, 2007, we entered into a Subscription agreement with a group of accredited investors. Under this agreement, we agreed to sell up to $1,200,000 of our securities consisting of 10% convertible notes, shares of common stock and Class A and Class B common stock purchase warrants. The original subscription agreement required that we have an effective registration statement in order for the second closing date to occur. On February 15, 2008, we obtained a Waiver of Certain Conditions that allowed us to waive the requirement for the Registration Statement to become effective prior to the occurrence of the Second closing.

The indexed shares and closing dates for the three tranches of the $1,200,000 financing are as follows:

Financing	Closing date	Shares indexed to note		Series A warrants		Series B warrants
$ 600,000 Face Value Convertible Note Financing	October 23, 2007		7,708,333		958,805		140,910
$ 500,000 Face Value Convertible Note Financing	February 15, 2008		9,458,333		757,304		75,758
$ 100,000 Face Value Convertible Note Financing	June 26, 2008		1,031,250		151,502		15,152
Total			18,197,916		1,867,611		231,820

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 4. Convertible Notes Payable (continued)

(b)	$1,200,000 convertible notes payable (continued)

The convertible promissory notes were initially convertible into common shares based on a fixed conversion price of $6.60, and are subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than those prices. The conversion features were not afforded the exemption as conventional convertible, and the notes require liability classification under the FASB Accounting Standards Codification. We chose to value the entire hybrid instruments at fair value. We estimate the fair value of the hybrid contract as a common stock equivalent, enhanced by the forward elements (coupon, puts, and calls), because that technique embodies all of the assumptions (including credit risk, interest risk, stock price volatility and conversion behavior estimates) that are necessary to fair value complex, hybrid contracts.

The warrants issued in this financing arrangement did not meet the conditions for equity classification and are also required to be carried as a derivative liability, at fair value. We estimate the fair value of the warrants on the inception dates, and subsequently, using the Black-Scholes valuation technique, adjusted for dilution, because that technique embodies all of the assumptions (including, volatility, expected terms, dilution and risk free rates) that are necessary to fair value freestanding warrants. See also Note 6 – Derivative Liabilities.

The warrants and the convertible notes contain full-ratchet protection so the exercise price of the warrants and the conversion price of the notes were reduced to $3.30 when the Company issued additional convertible instruments with this conversion rate on December 18, 2008. On January 27, 2009, we entered into a modification of the agreement which reduced the maturity date from October 23, 2009 to July 1, 2009 and changed from a periodic debt payment schedule to full payment of principal and interest on July 1, 2009. In exchange for this modification, we issued 62,500 shares of restricted stock, and we agreed to reduce the conversion price of the notes and related warrants to $1.00. This modification resulted in a loss on extinguishment of $379,183. During the quarter ended June 30, 2009, $85,000 of principal balance on the notes and $8,723 of interest was converted into common shares of stock at a price of $1.00. During the quarter ended December 31, 2009, $105,000 of principal balance of the notes and $4,500 of interest were converted into common shares at the default conversion price of $.16 calculated pursuant to the notes default provisions. The conversion price was reduced again to $.494 when the Company issued additional convertible instruments with a lower conversion rate in November 2009. On January 10, 2010, we entered into a modification of the agreement with certain note holders, which extended the maturity date to June 30, 2010. In exchange for this modification, we issued convertible promissory notes in the amount of $100,000 See Note 4(h). Additionally, we agreed to (i) issue additional warrants to purchase 1,635,792 shares of common stock and (ii) reduce the price of certain warrants to $0.20. This modification resulted in an extinguishment loss of $395,249. During the quarter ended March 31, 2010, $100,500 of the principal balance of the notes was converted into common shares at the default conversion price of $.16 calculated pursuant to the notes default provisions. On January 28, 2010, certain warrants were re-priced to $0.16, and the expiration dates were extended to July 15, 2015. On February 11, 2010, the warrants which were re-priced to $0.20 on January 10, 2010 were re-priced to $0.16, and the expiration dates were extended to July 15, 2015. During the quarter ended June 30, 2010, $36,000 of the principal balance of the notes was converted into common shares at the default conversion price of $0.16 calculated pursuant to the notes default provisions. On July 14, 2010, we extended the due date to March 31, 2011 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $900,000.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 4. Convertible Notes Payable (continued)

(b)	$1,200,000 convertible notes payable (continued)

Information and significant assumptions embodied in our valuations (including ranges for certain assumptions during the subject periods that instruments were outstanding) as of June 30, 2010 and March 31, 2010 for this financing are illustrated in the following tables:

$600,000 Convertible Promissory Note Financing (Initial Closing):	Hybrid Note						Warrants
	June 30, 2010			March 31, 2010			June 30, 2010			March 31, 2010
Estimate fair value of the underlying common share	$	0.052		$	1.00		$	0.052		$	1.00
Conversion/exercise price	$	0.16		$	0.16		$	0.16		$	0.16
Volatility (based upon Peer Group)		--			--			101.58	%		101.35	%
Term (years)		--			--			5.04			5.29
Risk-free rate		--			--			1.79	%		2.55	%
Credit-risk adjusted yield		8.07	%		7.91	%		--			--
Dividends		--			--			--			--

$500,000 Convertible Promissory Note Financing (Second Closing):	Hybrid Note						Warrants
	June 30, 2010			March 31, 2010			June 30, 2010			March 31, 2010
Estimate fair value of the underlying common share	$	0.052		$	1.00		$	0.052		$	1.00
Conversion/exercise price	$	0.16		$	0.16		$	0.16		$	0.16
Volatility (based upon Peer Group)		--			--			101.58	%		101.35	%
Term (years)		--			--			5.04			5.29
Risk-free rate		--			--			1.79	%		2.55	%
Credit-risk adjusted yield		8.07	%		7.91	%		--			--
Dividends		--			--			--			--

$100,000 Convertible Promissory Note Financing (Third Closing):	Hybrid Note						Warrants
	June 30, 2010			March 31, 2010			June 30, 2010			March 31, 2010
Estimate fair value of the underlying common share	$	0.052		$	1.00		$	1.00		$	1.00
Conversion/exercise price	$	0.16		$	.16		$	0.16		$	.16
Volatility (based upon Peer Group)		--			--			101.35	%		101.35	%
Term (years)		--			--			5.29			5.29
Risk-free rate		--			--			2.55	%		2.55	%
Credit-risk adjusted yield		8.07	%		7.91	%		--			--
Dividends

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 4. Convertible Notes Payable (continued)

(c)	$243,333 convertible notes payable

On September 29, 2008, for cash proceeds of $192,500, net of issuance costs of $7,500, we issued $243,333 face value convertible notes, due March 29, 2009, plus warrants to purchase (i) 28,384 shares of our common stock at an exercise price of $10.00 and (ii) additional warrants to purchase 28,384 shares of our common stock at an exercise price of $15.00, representing an aggregate 56,768 shares. The notes are convertible, only at the Company’s option, into Common Stock at $3.30 and are subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than that price. The notice of conversion must be given to the Holder on the first day following the twenty consecutive trading days during which the stock price is greater than $100.00 per share each trading day and the daily trading volume is greater than 100,000 shares. The Holder of the note does not have an option to convert the instrument. The note is secured by a security interest in all the tangible and intangible assets of the Company. According to the original terms of the note, fifty percent of the interest was due on December 28, 2008 and fifty percent due and payable on March 29, 2009; however, the Company modified the agreement on January 27, 2009 to require full payment of principal and interest on July 1, 2009 in exchange for a reduction of the conversion price of the note and exercise price of the warrants to $1.00. On January 27, 2009, the warrants were redeemed in exchange for a convertible note in the amount of $70,834. The exchange resulted in an extinguishment loss of $82,484. See Note 4(e). On January 10, 2010, we entered into a modification of the agreement with certain note holders, which extended the maturity date to June 30, 2010. In exchange for this modification, we issued convertible promissory notes in the amount of $100,000 (See Note (h)). This modification resulted in an extinguishment loss of $113,768. On July 14, 2010, we extended the due date to March 31, 2011 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $900,000.

In originally evaluating the financing transaction, we concluded that the conversion feature was not clearly and closely related to the debt instrument since the risks are those of an equity security; however, we determined that the conversion feature met the paragraph 11(a) exemption and did not require liability classification under the FASB Accounting Standards Codification. Since the embedded conversion feature did not require liability classification, we were required to consider if the contract embodied a beneficial conversion feature (“BCF”). The conversion option is contingent on a future stock price so under the guidance of The FASB Accounting Standards Codification, the beneficial conversion feature was calculated at inception but will not be recognized until the contingency is resolved. The aggregate BCF at its intrinsic value amounted to $192,739. This amount gives effect to (i) the trading market price on the contract date and (ii) the effective conversion price after allocation of proceeds to the warrants. Notwithstanding, BCF was limited to the value ascribed to the note (using the relative fair value approach).

The warrants and the convertible note contain full-ratchet protection so the exercise price of the warrants, and the conversion price of the notes were reduced to $3.30 when the Company issued additional convertible instruments with a lower conversion rate on December 18, 2008. The conversion price was reduced again to $.494 when the Company issued additional convertible instruments with a lower conversion rate in November 2009.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 4. Convertible Notes Payable (continued)

(c)	$243,333 convertible notes payable (continued0

In connection with the note, we issued a note payable in the amount of $20,000 under the same terms as the $243,333 note as consideration for finders’ fees. The finders’ fee note did not include warrants.

(d)	$60,833 convertible notes payable

On December 18, 2008, we entered into a financing arrangement that provided for the issuance of $60,833 face value convertible note for a purchase price of $50,000, due March 29, 2009, plus warrants to purchase (i) 7,084 shares of our common stock at an exercise price of $10.00 and (ii) additional warrants to purchase 7,084 shares of our common stock at an exercise price of $15.00, representing an aggregate 14,168 shares. The note was initially convertible into common shares, only at the Company’s option, a conversion price of $3.30 and is subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than that price. The notice of conversion must be given to the Holder on the first day following the twenty consecutive trading days during which the stock price is greater than $100.00 per share each trading day and the daily trading volume is greater than 100,000 shares. The Holder of the note does not have an option to convert the instrument. The note is secured by a security interest in all the tangible and intangible assets of the Company. According to the original terms of the note, fifty percent of the note was due on December 28, 2008 and fifty percent due and payable on March 29, 2009 and if the note was not paid by its maturity date; a default rate of 15% applied. The note was considered in default as of December 28, 2008 due to non-payment of the required principal payment, therefore, it is recorded at face value and default interest of 15% is being accrued. We modified the note agreement on January 27, 2009 to require full payment of principal and interest on July 1, 2009 in exchange for a reduction of the conversion price of the note and exercise price of the warrants to $1.00. On January 27, 2009, the warrants were redeemed in exchange for a convertible note in the amount of $70,834. The exchange resulted in an extinguishment loss of $82,484. See Note 4(e). The conversion price was reduced again to $.494 when the Company issued additional convertible instruments with a lower conversion rate in November 2009. On January 10, 2010, we entered into a modification of the agreement with certain note holders, which extended the maturity date to June 30, 2010. In exchange for this modification, we issued convertible promissory notes in the amount of $100,000 (See Note 4(h)). This modification resulted in an extinguishment loss of $26,282. On July 14, 2010, we extended the due date to March 31, 2011 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $900,000.

In originally evaluating the financing transaction, we concluded that the conversion feature was not clearly and closely related to the debt instrument; however, it did meet the paragraph 11(a) exemption and did not require liability classification. We considered if the contract embodied a beneficial conversion feature (“BCF”) however there was no beneficial conversion feature present, since the effective conversion price was greater than the market value of the stock.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 4. Convertible Notes Payable (continued)

(e)	$947,224 convertible notes payable

On January 27, 2009 , March 30, 2009, and July 15, 2009, we entered into Subscription agreements with a group of accredited investors that provided for the sale of an aggregate $892,224 face value secured convertible notes and warrants to purchase an aggregate 1,183,473 shares of our common stock. The notes and warrants are based on a fixed conversion price of $1.00 and are subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than those prices. The conversion price was reduced to $.494 when the Company issued additional convertible instruments with a lower conversion rate in November 2009. On January 10, 2010, we entered into a modification of the agreement with certain note holders, which extended the maturity date to June 30, 2010. In exchange for this modification, we issued convertible promissory notes in the amount of $50,000. Additionally, we agreed to reduce the price of certain warrants to $0.20. This modification resulted in an extinguishment loss of $309,740. On January 28, 2010, certain warrants were re-priced to $0.16, and the expiration dates were extended to July 15, 2015. On February 11, 2010, the warrants which were re-priced to $0.20 on January 10, 2010 were re-priced to $0.16, and the expiration dates were extended to July 15, 2015. On May 13, 2010, we executed an allonge to the March, 2009 secured convertible notes payable as well as issued 114,583 warrants at an exercise price of $0.16. On July 14, 2010, we extended the due date to March 31, 2011 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $900,000.

The following table provides the details of each of the financings:

Face Value				Closing date	Maturity date	Shares indexed to note		Shares indexed to warrants
$	30,000	(1	)	January 27, 2009	June 30, 2010		2,708,333		120,000
	70,835	(2	)	January 27, 2009	June 30, 2010		1,475,708		--
	60,000			February 17, 2009	June 30, 2010		1,250,000		60,000
	200,000			March 30, 2009	June 30, 2010		4,166,667		416,667
	161,111			July 15, 2009	June 30, 2010		3,356,500		335,649
	27,778			October 1, 2009	June 30, 2010		578,708		--
	50,000			January 28, 2010	June 30, 2010		1,041,667		104,167
	55,000			February 19, 2010	June 30, 2010		1,145,833		104,167
	137,500			March 26, 2010	June 30, 2010		2,864,583		286,459
	55,000			May 13, 2010	June 30, 2010		1,145,833		114,584
$	947,224						19,733,832		1,541,693

(1)	The $130,000 convertible notes payable includes two $5,000 face value convertible notes issued as payment for finder’s fees.

(2)	The $70,835 convertible notes payable was issued in exchange for the redemption of 56,767 warrants shares issued in connection with the September 29, 2008 convertible note financing and 14,167 warrant shares issued in connection with the December 18, 2008 convertible note financing.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 4. Convertible Notes Payable (continued)

(e)	$947,224 convertible notes payable (continued)

We received the following proceeds from the financing transactions:

	Gross proceeds		Debt discount & finance costs		Net proceeds
$ 130,000 Face Value Convertible Note Financing	$	120,000	$	23,750	$	96,250
$ 60,000 Face Value Convertible Note Financing		60,000		10,000		50,000
$ 200,000 Face Value Convertible Note Financing		200,000		41,900		158,100
$161,111 Face Value Convertible Note Financing		161,111		16,111		145,000
$ 27,778 Face Value Convertible Note Financing		27,778		--		27,778
$ 50,000 Face Value Convertible Note Financing		50,000		10,000		40,000
$ 55,000 Face Value Convertible Note Financing		55,000		--		55,000
$137,500 Face Value Convertible Note Financing		137,500		13,100		124,400
$ 55,000 Face Value Convertible Note Financing		55,000		5,000		50,000
Total	$	866,389	$	119,861	$	746,528

The holder has the option to redeem the convertible notes for cash in the event of defaults and certain other contingent events, including events related to the common stock into which the instrument was convertible, registration and listing (and maintenance thereof) of our common stock and filing of reports with the Securities and Exchange Commission (the “Default Put”). The conversion feature was not afforded the exemption as conventional convertible and the notes require liability classification under the FASB Accounting Standards Codification. We chose to value the entire hybrid instrument at fair value. We estimate the fair value of the hybrid contract as a common stock equivalent, enhanced by the forward elements (coupon, puts, and calls), because that technique embodies all of the assumptions (including credit risk, interest risk, stock price volatility and conversion behavior estimates) that are necessary to fair value complex, hybrid contracts.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 4. Convertible Notes Payable (continued)

(e)	$947,224 convertible notes payable (continued)

$130,000 Convertible Promissory Note Financing:	Hybrid Note						Warrants
	June 30, 2010			March 31, 2010			June 30, 2010			March 31, 2010
Estimate fair value of the underlying common share	$	0.052		$	1.00		$	0.052		$	1.00
Conversion/exercise price	$	0.16		$	0.16		$	0.16		$	0.16
Volatility (based upon Peer Group)		--			--			101.58	%		101.35	%
Term (years)		--			--			5.04			5.29
Risk-free rate		--			--			1.79	%		2.55	%
Credit-risk adjusted yield		8.07	%		7.91	%		--			--
Dividends		--			--			--			--

$60,000 Convertible Promissory Note Financing:	Hybrid Note						Warrants
	June 30, 2010			March 31, 2010			June 30, 2010			March 31, 2010
Estimate fair value of the underlying common share	$	0.052		$	1.00		$	0.052		$	1.00
Conversion/exercise price	$	0.16		$	0.16		$	0.16		$	0.16
Volatility (based upon Peer Group)		--			--			101.58	%		101.35	%
Term (years)		--			--			5.04			5.29
Risk-free rate		--			--			1.79	%		2.55	%
Credit-risk adjusted yield		8.07	%		7.91	%		--			--
Dividends		--			--			--			--

$200,000 Convertible Promissory Note Financing:	Hybrid Note						Warrants
	June 30, 2010			March 31, 2010			June 30, 2010			March 31, 2010
Estimate fair value of the underlying common share	$	0.052		$	1.00		$	0.052		$	1.00
Conversion/exercise price	$	0.16		$	0.16		$	0.16		$	0.16
Volatility (based upon Peer Group)		--			--			101.58	%		101.35	%
Term (years)		--			--			5.04			5.29
Risk-free rate		--			--			1.79	%		2.55	%
Credit-risk adjusted yield		8.07	%		7.91	%		--			--
Dividends		--			--			--			--

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 4. Convertible Notes Payable (continued)

(e)	$947,224 convertible notes payable (continued)

$161,111 Convertible Promissory Note Financing:	Hybrid Note						Warrants
	June 30, 2010			March 31, 2010			June 30, 2010			March 31, 2010
Estimate fair value of the underlying common share	$	0.052		$	1.00		$	0.052		$	1.00
Conversion/exercise price	$	0.16		$	0.16		$	0.16		$	0.16
Volatility (based upon Peer Group)		--			--			101.58	%		101.35	%
Term (years)		--			--			5.04			5.29
Risk-free rate		--			--			1.79	%		2.55	%
Credit-risk adjusted yield		8.07	%		7.91	%		--			--
Dividends		--			--			--			--

$27,778 Convertible Promissory Note Financing:	Hybrid Note					Warrants
	June 30, 2010			March 31, 2010		June 30, 2010			March 31, 2010
Estimate fair value of the underlying common share	$	0.052			--	$	.052		$	1.00
Conversion/exercise price	$	0.16			--	$	0.16		$	0.16
Volatility (based upon Peer Group)		--			--		101.58	%		101.35	%
Term (years)		--			--		5.04			5.29
Risk-free rate		--			--		1.79	%		2.55	%
Credit-risk adjusted yield		8.07	%		--		--			--
Dividends		--			--		--			--

$50,000, $55,000, $137,500 and $55,000 Convertible Promissory Note Financing:	Hybrid Note					Warrants
	June 30, 2010			March 31, 2010		June 30, 2010			March 31, 2010
Estimate fair value of the underlying common share	$	0.052			--	$	.052		$	1.00
Conversion/exercise price	$	0.16			--	$	0.16		$	0.16
Volatility (based upon Peer Group)		--			--		101.58	%		101.35	%
Term (years)		--			--		5.04			5.29
Risk-free rate		--			--		1.79	%		2.55	%
Credit-risk adjusted yield		8.07	%		--		--			--
Dividends		--			--		--			--

(f)	$507,500 convertible notes payable

On August 8, 2008, the Company executed a secured convertible promissory note in the aggregate amount of $507,500 with one lender, an unrelated entity. The note was payable on August 7, 2009 with interest on the outstanding principal to accrue at 10%. This note was entered into pursuant to the terms of a Secured Promissory Note and Security Agreement, Asset Purchase Agreement and Registration Rights Agreement to purchase certain trademarks, notably “Slammers” and “Blenders”, from a company that previously acquired such trademarks through a foreclosure sale of certain assets of Bravo! Brands, Inc. The holder of this note payable had the right to convert all or any portion of the then aggregate outstanding principal amount together with interest at the fixed conversion price of $20.00. In November 2009, the note was settled with the issuance of new notes of equal face value, which are convertible into shares of common stock at a conversion price equal to the lesser of $1.00 or

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 4. Convertible Notes Payable (continued)

(f)	$507,500 convertible notes payable (continued)

80% of the average of the three lowest closing bid prices for the Company’s common stock for the twenty trading days preceding the date of conversion. The notes are subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than those prices. On January 10, 2009, we entered into a modification of the agreement with certain note holders, which extended the maturity date to June 30, 2010. In exchange for this modification, we issued convertible promissory notes in the amount of $50,000. Additionally, we agreed to reduce the price of certain warrants to $0.20. This modification resulted in an extinguishment loss of $206,356. During the year ended March 31, 2010, $15,000 of the principal balance of the notes was converted into common shares at the default conversion price of $.16 calculated pursuant to the notes default provisions. For the quarter ended June 30, 2010, $34,868 of the principal balance was converted into common shares at the conversion price of $.16. On July 14, 2010, we extended the due date to March 31, 2011 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $900,000.

The conversion feature was not afforded the exemption as conventional convertible and the notes require liability classification under the FASB Accounting Standards Codification. We chose to value the entire hybrid instruments at fair value. We estimate the fair value of the hybrid contract as a common stock equivalent, enhanced by the forward elements (coupon, puts, and calls), because that technique embodies all of the assumptions (including credit risk, interest risk, stock price volatility and conversion behavior estimates) that are necessary to fair value complex, hybrid contracts.

(g)	$111,112 convertible note payable

In November 2009, the Company issued a convertible note with a face value of $111,112 and 150,000 shares of common stock in exchange for marketable securities with a fair market value on the date of the transaction of $76,000. The note is convertible into common stock at a fixed conversion price of $1.00 per share subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than those prices. On January 10, 2009, we entered into a modification of the agreement with certain note holders, which extended the maturity date to June 30, 2010. In exchange for this modification, we issued convertible promissory notes in the amount of $50,000. Additionally, we agreed to reduce the price of certain warrants to $0.20. This modification resulted in an extinguishment loss of $47,520. On July 14, 2010, we extended the due date to March 31, 2011 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $900,000.

We chose to value the entire hybrid instrument at fair value. We estimate the fair value of the hybrid contract as a common /stock equivalent, enhanced by the forward elements (coupon, puts, and calls), because that technique embodies all of the assumptions (including credit risk, interest risk, stock price volatility and conversion behavior estimates) that are necessary to fair value complex, hybrid contracts.

(h)	$100,000 convertible notes payable

As consideration for the modification agreement we entered into with certain investors on January 10, 2010, we agreed to issue two convertible promissory notes in the aggregate amount of $100,000. The notes are based on a fixed conversion price of $1.00 and are subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than those prices.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 4. Convertible Notes Payable (continued)

(h)	$100,000 convertible notes payable (continued)

$100,000 Convertible Promissory Note Financing:	Hybrid Note
	June 30, 2010		March 31, 2010
Estimate fair value of the underlying common share	$	0.052	$	1.00
Conversion/exercise price	$	0.16	$	0.16
Volatility (based upon Peer Group)		--		--
Term (years)		--		--
Risk-free rate		--		--
Credit-risk adjusted yield		N/A		7.91
Dividends		--		--

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 5. Non-convertible Notes payable:

For the three months ended June 30, 2010, we paid $8,500 as part of a promissory note in the total principal amount of $34,000 as a final settlement amount for a previous license agreement. The remaining due amount of $25,500 is required to be settled through monthly payments of $4,250 through December, 2010.

On June 17, 2010, we entered into a promissory note in the amount of $25,000. This note is subject to an interest rate of 18% and is due the sooner of July 1, 2010 or upon the next financing. This note has not been paid as the company is addressing payment of this note.

Note 6. Derivative Liabilities:

The following table summarizes the components of derivative liabilities as of June 30, 2010 and March 31, 2010:


Financing arrangements giving rise to	June 30,		March 31,
derivative financial instruments:	2010		2010
$ 600,000 Face Value Convertible Note Financing	$	36,840	$	1,832,123
$ 500,000 Face Value Convertible Note Financing		27,908		1,387,879
$ 100,000 Face Value Convertible Note Financing		5,583		277,644
$ 120,000 Face Value Short Term Bridge Loan Note Financing		264		24,820
$ 120,000 Face Value Short Term Bridge Loan Note Financing		1,452		53,600
$ 60,000 Face Value Short Term Bridge Loan Note Financing		145		12,460
$ 33,000 Face Value Short Term Bridge Loan Note Financing		82		10,115
$ 55,000 Face Value Short Term Bridge Loan Note Financing		119		17,897
$ 120,000 Face Value Convertible Note Financing		2,652		104,400
$ 60,000 Face Value Convertible Note Financing		1,326		52,200
$ 200,000 Face Value Convertible Note Financing		9,208		362,500
$ 161,111 Face Value Convertible Note Financing		7,418		292,014
$ 50,000 Face Value Convertible Note Financing		2,302		90,625
$ 55,000 Face Value Convertible Note Financing		2,302		90,625
$137,500 Face Value Convertible Note Financing		6,331		249,221
$ 55,000 Face Value Convertible Note Financing		2,534		-

Total derivative liabilities	$	106,466	$	4,858,123

We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes-Merton option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. For complex hybrid instruments, such as convertible promissory notes that include embedded conversion options, puts and redemption features embedded in, we generally use techniques that embody all of the requisite assumptions (including credit risk, interest-rate risk, dilution and exercise/conversion behaviors) that are necessary to fair value these more complex instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, we project and discount future cash flows applying probability-weightage to multiple possible outcomes. 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 income will reflect the volatility in these estimate and assumption changes

The following table summarizes the effects on our income (expense) associated with changes in the fair values of our financial instruments that are carried at fair value from inception through June 30, 2010:


Total day-one derivative losses	(a )		$	(6,541,644	)
Total income arising from fair value adjustments	(b )			7,562,571
Derivative income (expense) inception (June 18, 2007) through June 30, 2010		(a)+ (b )	$	1,020,927

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 6. Derivative Liabilities (continued):

The following tables summarize the effects on our income (expense) associated with changes in the fair values of our financial instruments that are carried at fair value from the three months ended June 30, 2010 and 2009.

Our financing arrangements giving rise to	Three Months Ended			Three Months Ended
derivative financial instruments and the income effects:	June 30, 2010			June 30, 2009
Derivative income (expense):
$ 600,000 Original Face Value Convertible Note Financing	$	1,795,283		$	(69,891)
$ 500,000 Original Face Value Convertible Note Financing		1,359,971			(37,273)
$ 100,000 Original Face Value Convertible Note Financing		272,061			(7,818)
$ 120,000 Original Face Value Short Term Bridge Loan Financing		24,556			(3,144)
$ 120,000 Original Face Value Short Term Bridge Loan Financing		52,558			(3,184)
$ 60,000 Original Face Value Short Term Bridge Loan Financing		12,315			(1,592)
$ 33,000 Original Face Value Short Term Bridge Loan Financing		10,033			(1,162)
$ 55,000 Original Face Value Short Term Bridge Loan Financing		17,778			(2,716)
$ 243,333 Original Face Value Convertible Note Financing		-			-
$ 60,833 Original Face Value Convertible Note Financing		-			-
$ 120,000 Original Face Value Convertible Note Financing		101,748			(24,960)
$ 60,000 Original Face Value Convertible Note Financing		50,874			(12,480)
$ 200,000 Original Face Value Convertible Note Financing		353,292			(86,667)
$ 161,111 Original Face Value Convertible Note Financing		284,596			-
$ 50,000 Original Face Value Convertible Note Financing		88,323			-
$ 55,000 Original Face Value Convertible Note Financing		88,323			-
$ 137,500 Original Face Value Convertible Note Financing		242,888			-
$ 55,000 Original Face Value Convertible Note Financing (day one loss)		(55,641	)		-
Total derivative income (expense) arising from fair value adjustments	$	4,698,958		$	(250,887)

Interest income (expense) from instruments recorded at
Fair value:
$ 600,000 Original Face Value Convertible Note Financing	$	1,860,860	$	(168,152	)
$ 500,000 Original Face Value Convertible Note Financing		2,413,777		(139,404	)
$ 100,000 Original Face Value Convertible Note Financing		252,067		(25,511	)
$ 312,000 Original Face Value Convertible Note Financing		960,457		(128	)
$ 120,000 Original Face Value Convertible Note Financing		621,232		(3,547	)
$ 5,000 Original Face Value Convertible Note Financing		25,583		(130	)
$ 5,000 Original Face Value Convertible Note Financing		25,884		(130	)
$ 60,000 Original Face Value Convertible Note Financing		310,616		(1,749	)
$ 70,834 Original Face Value Convertible Note Financing		366,701		(949	)
$ 27,778 Original Face Value Convertible Note Financing		143,991		-
$ 200,000 Original Face Value Convertible Note Financing		1,036,727		(14,598	)
$ 111,112 Original Face Value Convertible Note Financing		573,424		-
$ 161,111 Original Face Value Convertible Note Financing		832,391		-
$ 507,500 Original Face Value Convertible Note Financing		2,445,777		-
$ 50,000 Original Face Value Convertible Note Financing		257,286		-

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 6. Derivative Liabilities (continued):

$ 55,000 Original Face Value Convertible Note Financing		283,412			-
$ 137,500 Original Face Value Convertible Note Financing		710,114			-
$ 100,000 Original Face Value Convertible Note Financing		516,470			-
$ 55,000 Original Face Value Convertible Note Financing		35,790			-
Total interest income (expense) arising from fair value adjustments		13,672,559			(354,298	)
Other interest expense		(26,557	)		(169,988	)
Interest income (expense) and other financing costs	$	13,646,002		$	524,286

Our derivative liabilities as of June 30, 2010, and our derivative income and expense during the quarter ended June 30, 2010 and from inception through June 30, 2010 are significant to our consolidated financial statements. The magnitude of derivative income (expense) reflects the following:

In connection with our accounting for the $600,000, $500,000, $100,000 face value convertible promissory notes and warrant financings for the October 23, 2007 financing arrangement, the $55,000 face value short term bridge loan and warrant financing dated August 5, 2008, the $120,000 face value convertible note and warrant financing dated January 27, 2009, the $60,000 face value convertible note and warrant financing dated February 17, 2009, the $200,000 face value convertible note and warrant financing dated March 30, 2009, the $161,111 face value convertible note and warrant financing dated July 15, 2009, the $27,778 face value convertible note and warrant financing dated October 1, 2009, the $111,112 face value convertible note issuance dated November 13, 2009, the $50,000 face value convertible note issuance dated January 28, 2010, the $50,000 face value convertible note and warrant financing dated January 28, 2010, the $55,000 face value convertible note and warrant financing dated February 19, 2010, the $137,500 face value convertible note and warrant financing dated March 26, 2010 and the $55,000 face value convertible note and warrant financing dated May 13, 2010, we had a day-one derivative loss related to the recognition of (i) the hybrid notes and (ii) the derivative instruments arising from the arrangement at fair values. That means that the fair value of the hybrid notes and warrants exceeded the proceeds that we received from the arrangement, and we were required to record a loss on the derivative financial instruments at fair value. We did not enter into any other financing arrangements during the periods reported that reflected day-one loss.

In addition, our financial instruments that are recorded at fair value will change in future periods based upon changes in our trading market price and changes in other assumptions and market indicators used in the valuation techniques.

Generally, the FASB Accounting Standards Codification provides for the exclusion of registration payment arrangements, such as the liquidated damage provisions that are included in the financing contracts underlying the convertible debt financing arrangements, from the consideration of classification of financial instruments. Rather, such registration payments will require recognition when they are both probable and reasonably estimable. As of June 30, 2010, our management concluded that registration payments are not probable.

Note 7. Loans Payable – Related Parties:

In connection with the reverse merger (see Note 1), the Company assumed $47,963 in advances payable to the officers of MHHI in which we paid $1,500 in January, 2009 and issued 25,000 shares of common stock at $1.00 per share or $25,000, resulting in an outstanding balance of $21,463 that is due. These advances are non-interest bearing and payable upon demand.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 8. Stockholders’ Deficit:

(a) Series A Preferred Stock:

The Company’s articles of incorporation authorize the issuance of 20,000,000 shares of preferred stock which the Company has designated as Series A Preferred (“Series A”), $.001 par value. Each share of Series A is convertible into six shares of the Company’s common stock for a period of five years from the date of issue. The conversion basis is not adjusted for any stock split or combination of the common stock. The Company must at all times have sufficient common shares reserved to effect the conversion of all outstanding Series A Preferred. The holders of the Series A Preferred shall be entitled to receive common stock dividends when, as, if and in the amount declared by the directors of the Company to be in cash or in market value of the Company’s common stock. The Company is restricted from paying dividends or making distributions on its common stock without the approval of a majority of the Series A holders. The Series A shall be senior to the Common Stock and any other series or class of the Company’s Preferred Stock. The Series A has liquidation rights in the event of any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, the holders of the Series A then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its shareholders, before any payment or declaration and setting apart for payment of any amount shall be made in respect of any outstanding capital stock of the Company, an amount equal to $.001 per share, The Company, at the option of its directors, may at any time or from time to time redeem the whole or any part of the outstanding Series A. Upon redemption, the Company shall pay for each share redeemed the amount of $2.00 per share, payable in cash, plus a premium to compensate the original purchaser(s) for the investment risk and cost of capital equal to the greater of (a) $2.00 per shares, or (b) an amount per share equal to fifty percent (50%) of the market capitalization of the Company on the date of notice of such redemption divided by 2,000,000. We have evaluated our Series A Preferred Stock and determined these shares required equity classification because the number of shares convertible into common stock is fixed and reserved. Redemption of these preferred shares cannot be effected because of the Company’s stockholders’ deficit.

During the quarter ended September 30, 2009, 9,000,000 shares of Series A Preferred were granted to Roy Warren the Company's President and CEO. We recorded a non-cash expense for $1,620,000 which is based on the then market price of $0.03 per common share times the convertible stock equivalents (9,000,000 preferred shares x 6 = 54,000,000 common stock equivalents). These shares have specific voting power in that Roy Warren has voting rights for the 54,000,000 common stock equivalents. The Board of Directors on September 4, 2009 approved an amendment whereas Section 2(A) of the Certificate of Designation is hereby declared in its entirety, and the following shall be substituted in lieu thereof-Rights, Powers and Preferences: The Series A shall have the voting powers, preferences and relative, participating, optional and other special rights, qualifications, limitations and restrictions as follows: Designation and Amount – Out of the Twenty Million (20,000,000) shares of the $0.001 par value authorized preferred stock, all Twenty Million (20,000,000) shares shall be designated as shares of “Series A.”

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 8. Stockholders’ Deficit (continued):

(b) Common Stock Warrants

As of June 30, 2010, the Company had the following outstanding warrants:

Issued Class A Warrants	Grant date	Expiration date	Warrants/ Options Granted	Exercise Price

October, 2007 Convertible Notes Financing	10/23/2007	7/15/2015	908,806	$	0.16
October, 2007 Due Diligence	10/23/2007	10/22/2012	50,000		0.16
January, 2008 Investment Banker Agreement	1/1/2008	12/31/2012	6,250		10.00
February, 2008 Convertible Note Financing	2/15/2008	7/15/2015	757,304		0.16
April, 2008 Supply Agreement	4/16/2008	4/15/2013	5,000		15.00
April, 2008 Financing	4/2-9-14/08	4/1-8-13/2011	25,000		1.00-10.00
April, 2008 Finder’s Fees	4/14//2008	4/13/2008	3,125		10.00
May, 2008 Financing	5/19/2008	5/18/2011	5,000		10.00
May, 2008 Finder’s Fees	5/19/2008	5/18/2013	1,875		10.00
June, 2008 Debt Extension	6/23/2008	6/22/2011	7,500		10.00
June,2008 Convertible Note Financing	6/26/2008	6/25/2013	151,502		0.16
July, 2008 Debt Extensions	7/14/2008	7/13/2011	7,500		1.00-10.00
August, 2008 Financing	8/5/2008	8/4/2011	5,000		10.00
January, 2009 Convertible Note Financing	1/27/2009	1/26/2014	120,000		0.16
January, 2009 Debt Extensions	1/27/2009	1/26/2014	38,800		10.00
February, 2009 Convertible Note Financing	1/27/2009	1/26/2014	60,000		0.16
March, 2009 Convertible Note Financing	3/30/2009	3/29/2014	416,666		0.16
July, 2009 Convertible Note Financing	7/15/2009	7/15/2015	335,648		0.16
January, 2010 Convertible Note Financing	1/28/2010	7/15/2015	104,166		0.16
February, 2010 Convertible Note Financing	2/19/2010	7/15/2015	104,167		0.16
March, 2010 Convertible Note Financing	3/26/2010	7/15/2015	286,458		0.16
May, 2010 Convertible Note Financing	5/13/2010	7/15/2015	114,583		0.16
June, 2010 Debt Extension	6/30/2010	6/29/2013	24,000		0.16
Total issued Class A warrants			3,538,350

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 8. Stockholders’ Deficit (continued):

(b) Common Stock Warrants (continued)

Unissued Class B warrants (b):
October, 2007 Convertible Notes Financing	140,910	15.00
January, 2008 Investment Banker Agreement	6,250	15.00
February, 2008 Convertible Notes Financing	75,756	15.00
April, 2008 Financing	25,000	15.00
April, 2008 Finder’s Fees	3,125	15.00
May, 2008 Financing	5,000	15.00
May, 2008 Finder’s Fees	1,875	15.00
June, 2008 Debt Extension	7,500	15.00
June, 2008 Convertible Note Financing	15,152	15.00
July, 2008 Debt Extensions	7,500	15.00
August, 2008 Financing	5,000	15.00

Total unissued Class B warrants	293,068

Total Warrants	3,831,418

No warrants were exercised for the three months ended June 30, 2010.

At June 30, 2010, we had issued and outstanding 5,157,561 shares of common stock of which 191,479 shares are owned by one of our officers. Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the shareholders. Holders of common stock have no cumulative voting rights. In the event of liquidation, dissolution or winding down of the Company, the holders of shares of common stock are entitled to share, pro rata, all assets remaining after payment in full of all liabilities. Holders of common stock have no preemptive rights to purchase our common stock. There are no conversion rights or redemption or sinking fund provisions with respect to the common stock. All of the outstanding shares of common stock are validly issued, fully paid and non-assessable.

On April 5, 2010, we issued 64,813 shares of common stock pursuant to a conversion of August, 2008 convertible notes of $10,000 and accrued interest payable of $370 at a conversion price of $0.16.

On April 6, 2010, we issued 125,000 shares of common stock pursuant to a conversion of October, 2007 convertible notes of $20,000 at a conversion price of $0.16.

On April 12, 2010, we issued 155,423 shares of common stock pursuant to a conversion of $24,868 in convertible notes payable at a conversion price of $0.16.

On April 29, 2010, we issued 5,000 shares of common stock pursuant to a conversion of January, 2008 convertible notes of $800 at a conversion price of $0.16.

On May 4, 2010, we issued 100,000 shares of common stock pursuant to a conversion of January, 2008 convertible notes of $16,000 at a conversion price of $0.16.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 8. Stockholders’ Deficit (continued):

On May 14, 2010, we issued 100,000 shares of common stock pursuant to a conversion of October, 2007 convertible notes of $16,000 at a conversion price of $.16.

On June 2, 2010, the Board of Directors approved the issuance of 138,889 (valued at $25,000) and 150,000 (valued at $30,000) for a total of 288,889 shares for payment of past due services. These shares were issued from the Company’s 2010 Stock Compensation Plan which was registered on a Form S-8 registration statement filed and declared effective on May 25, 2010.

On June 30, 2010, we issued 12,000 shares of common stock for the extension of the due date for certain April, 2008 short term notes payable to December 31, 2010.

(d) Warrants Issued During the Three Months Ended June 30, 2010:

On May 13, 2010, we issued 114,583 warrants with an exercise price of $0.16 to be exercisable up to July 15, 2015. These shares were issued for the May, 2010 financing for an allonge to the March, 2009 Secured Notes. In addition, we issued 12,000 warrants at an exercise price of $0.16 to be exercisable up to June 29, 2013 to extend the due date on the April 9, 2008 short term bridge loan to December 31, 2010.

(e) Options Issued During the Three Months Ended June 30, 2010:

None

Note 9 Fair Value Measurements:

The FASB Accounting Standards Codification clarifies the definition of fair value, prescribes methods for measuring fair value and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 9 Fair Value Measurements (Continued):

			Fair Value Measurements at Reporting Date Using
Description	June 30, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets	$	-	$	-	$	-	$	-

Total Assets	$	-	$	-	$	-	$	-

Liabilities:
Derivative Instrument (See Note 6)	$	106,466	$	-	$	-	$	106,466

Total Liabilities	$	106,466	$	-	$	-	$	106,466

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Beginning Balance, March 31, 2010	$	4,858,123
Total gains or (losses) (realized/unrealized):
Included in earnings		(4,698,958	)
Included in other comprehensive income		-
Purchases, issuances and settlements, net		(52,699	)
Transfer in and/or out of Level 3		-
Ending Balance, June 30, 2010	$	106,466

Note 10. Commitments and Contingencies:

Lease of office

In December 2007, the Company entered into a five year agreement for office space in Palm Beach Gardens, Florida with a commencement date of June 1, 2008. The minimum starting monthly base rent was $7,415 and currently is $7,711 per month. The lease provides for annual 4% increases throughout its term.

Future minimum rental payments for the new office lease, based on the current adjusted minimum monthly amount of $7,711 and excluding variable common area maintenance charges, as of June 30, 2010, are as follows:

Years ending March 31,	Amount
2011	$	95,620
2012		99,444
2013		103,422
2014		17,348

	$	315,834

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 10. Commitments and Contingencies (continued):

Lease of office (continued)

Rental expense, which also includes maintenance and parking fees, for the three months ended June 30, 2010 was $32,712.

Production and Supply Agreements

On December 16, 2008, we signed a manufacturing agreement with O-AT-KA Milk Products Cooperative, Inc. for the production of future new products that are in the development stage. The manufacturer shall manufacture, package and ship such products. All products shall be purchased F.O.B., the facility by the Company. Costs of such production and expected time lines are still in the planning stages and also are related to the final sign-offs of the final formulas for such products.

Note 11. Subsequent Events:

After June 30, 2010, the Company is in default with most of the convertible notes and some of short-term bridge loans; however, on July 15, 2010, we entered into a subscription agreement for a convertible debt financing in the principal amount of $900,000 in which the due date of the Company’s existing convertible debt was extended until March 31, 2011. We are negotiating with the applicable debt holders of the short term bridge loans to extend the due dates of these debts. One due date of the short term bridge loans is extended until December 31, 2010.

On July 7, 2010, we announced a one-for-twenty reverse stock split. Effective as of open of trading on July 7, 2010, the Company amended its Certificate of Incorporation to effect a one-for-twenty reverse stock split of its issued and outstanding shares of common stock, par value $.001. As reported on the Company’s Definitive Schedule 14C filed with the Securities and Exchange Commission on March 8, 2010 in which the Certificate of Amendment to the Certificate of Incorporation was approved by the state of Delaware to be filed and effective on April 5, 2010, stockholders of the Company holding a majority of its voting power approved a proposal authorizing the Board of Directors, in their sole discretion, to effect a reverse split. Further, any outstanding options, warrants and rights as of the effective date that are subject to adjustment will be adjusted accordingly. These adjustments may include adjustments to the number of shares of common stock that may be obtained upon exercise or conversion of the securities and the applicable exercise or purchase price as well as other adjustments. Pursuant to the terms and conditions of the Company’s outstanding Series A Convertible Preferred Stock, the conversion rate and the voting rights of the Series A will not adjust as a result of the reverse stock split. Further the authorized but unissued Series A will not adjust as a result of the reverse stock split. In addition, there will be no change to the authorized shares of common stock of the Company as a result of the reverse stock split and any fractional shares will be rounded up, so that no shareholder shall have less than 1 share after the effectiveness of the reverse split. As such, the authorized shares for both the Series A Preferred and common stock were not changed as they remain 20,000,000 and 1,000,000,000 shares, respectively.

On July 15, 2010, the Company entered into a subscription agreement for a convertible debt financing in the principal gross amount of $900,000 with an interest rate of 10%. The due date is July 15, 2012. The conversion price of the convertible notes shall be equal to seventy-five (75%) of the average of the three lowest closing bid prices for the Common Stock for the ten trading days preceding a Conversion Date, but in no event greater than $0.08. One Class A Warrant will be issued for every share which would be issued on the closing date assuming the complete conversion of the notes on the closing date at the conversion price. As such, a total of 59,999,999 warrants shall be exercisable until five years after the issue date at an exercise price of

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED JUNE 30, 2010

Note 11. Subsequent Events (continued):

$0.035. In addition, another 6,000,000 warrants with the same exercise price and term were issued to the placement agent for a total of 65,999,999 warrants. Legal fees to be paid from the gross proceeds are approximately $35,000.

On July 21, 2010, the Company issued 8,333,333 shares of common stock to Roy Warren, CEO, for the conversion of $125,000 of his past due unpaid wages at an exercise price of $0.015.

On July 23, 2010, the Company appointed Maximum Marketing as a sales brokerage company to cover the Midwest, Northeast and Southeast United States territories with their initial focus to be on Phase III 'Recovery'®

On July 28, 2010, the Company issued 40,000 shares of common stock pursuant to a conversion of previously issued convertible notes in the amount of $880 at a conversion price of $0.022.

On July 30, 2010, Roy Warren, CEO, purchased 25,000 shares on the open market at a purchase price of $.07.

On August 5, 2010, the Company issued 500,000 shares of common stock pursuant to a conversion of previously issued convertible notes in the amount of $20,000 at a conversion price of $.04.

On August 10, 2010, the Company issued 25,550 shares of common stock pursuant to a conversion of previously issued convertible notes in the amount of $956 at a conversion price of $.0375.

ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Statements that are not historical facts, including statements about our prospects and strategies and our expectations about growth contained in this report, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our present expectations or beliefs concerning future events. We caution that such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the uncertainty as to our future profitability; the uncertainty as to whether our new business model can be implemented successfully; the accuracy of our performance projections; and our ability to obtain financing on acceptable terms to finance our operations until we become profitable.

OVERVIEW

Our efforts and resources were focused in our first full year operations primarily to develop our first energy drink which is called VisViva™ in which sales began in late March 2008. We have since tabled that product with the intent to possibly reintroduce this product in a new format and as a “focus” drink in late 2010. We are a development stage company with negligible product sales to date. Our major sources of working capital have been from the October 23, 2007 financing and other short-term bridge loans.

Our plan of operation during the next 12 months is to focus on the non-alcoholic single serving beverage business developing and marketing of milk based products in three fast growing segments; sports recovery, functional dairy and milk juice blends. We do not directly manufacture our products but instead outsource the manufacturing process to third party bottlers and contract packers. We are a development stage company with negligible product sales to date. Our major sources of working capital have been from various convertible note financings, primarily the October 23, 2007 financing, and other short-term bridge loans.

We have no assurance that we will be able to obtain additional funding to sustain our limited operations beyond twelve months based on available cash. If we do not obtain additional funding, we may need to cease operations until we do so and, in that event, may consider a sale of the rights to our product line(s) and intangible assets such as our trademarks or a joint venture partner that will provide funding to the enterprise. Our future operations are totally dependent upon obtaining additional funding. Past fundings have been subject to defaults by the company’s inability to meet due dates for certain notes payable, thereby triggering anti-dilution rights which created the need to issue additional shares of common stock and/or additional warrants to purchase additional shares of common stock in order to extend the applicable due dates for certain notes payable. There can be no assurance that these defaults will not happen again in the future, thereby creating the potential need for additional issuances of shares of common stock and/or warrants assuming that the note holders agree to such extensions.

The Product

Milk, while the second highest beverage consumed in America in terms of overall volume, is still under-represented in the American single serve ready-to-drink beverage industry. While known for generations by nutritionists and more recently identified by sports, hydration, metabolism and protein professionals and scientists as “mother nature’s most perfect food”, milk has yet to be successfully branded and commercialized.

We have completed research and development work in developing our latest dairy based product which is called “Phase III™ Recovery” and is designed for the third phase of exercise, the “after phase” of before, during and after. This product is the first milk based protein drink ever to be produced in America and is shelf-stable with a twelve (12) month long shelf life. We started to sell this new product in February 2010. Our co-pack partner, O-AT-KA Milk Products, is the largest retort milk processor in America, located in Batavia, New York and has the most advanced retort processor and know-how to produce this product with state-of-the-art milk filtration systems as well as the packaging of this product in new Ball Container aluminum eco-friendly re-sealable bottles. The primary target for Phase III Recovery ™ is active sports minded males and females from ages 15 to 35, but we will target active sports and exercise consumers at all levels. Gyms, sports teams, body builders and even high-endurance athletes are all beginning to focus on sports recovery drinks which we consider the “next generation” sports drink. We anticipate the development of other dairy based drink products in the fourth calendar quarter of 2010.

ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

OVERVIEW (continued)

We recently organized a Scientific Advisory Board of four well known experts that have extensive experience in sports nutrition. This board will be helpful in communicating the scientific benefits of our sports recovery drink as well as new functional milk drinks. Their contacts in the world of sports will be very important in our sales efforts, especially in the early days.

We plan to initially focus on the largest markets for beverages in the eastern United States. We intend to develop key working partnerships with regional direct store delivery (DSD) beverage distributors in these markets and will support them with field representatives to assure sufficient shelf compliance. Regional distributors have lost four major beverage lines in the last year including Monster Energy (moved to Anheuser Bush), Fuze (purchased by Coca-Cola), Vitamin Water (purchased by Coca-Cola), and the V-8 brands (now distributed by Coca-Cola). We will develop regionally exclusive DSD agreements that are desperately needed by the distributors to replace these losses as well as shipping direct to our customers via our own warehouse system.

We intend to focus on the fifteen largest markets for beverages in the United States and will pre-sell in four sales channels: grocery, convenience, drug and sports and gym specialty. We intend to develop key working partnerships with regional direct store delivery (DSD) beverage distributors in these fifteen prime markets . Certain accounts like chained convenience stores, grocery and drug stores will require warehouse distribution. The shelf-stable and long shelf life attributes of our products will accommodate any and all distribution and warehouse systems. To accommodate this business, we will employ beverage brokers and work with the “tobacco & candy” and food service warehouse distributors like McLane Company and Sysco Foods for this business.

The pricing and gross profit margin for the products will vary. Each product delivers different functionality and utilizes different types of packaging and package sizes. Without exception, these products will command premium pricing due to the functionality and value-added formulation and will therefore be priced according to the nearest competitive brands in their respective spaces. The functional milk drinks are also expected to command approximately the same percentage margin due to the premium pricing commanded by the experiential functionality. Clearly singles will command higher margin than multi-packs.

We intend to focus on the fifteen largest markets for beverages in the United States and will pre-sell in four sales channels: grocery, convenience, drug and sports and gym specialty. We intend to develop key working partnerships with regional direct store delivery (DSD) beverage distributors in these fifteen prime markets. Certain national accounts like chained convenience stores, grocery and drug stores will require warehouse distribution. To accommodate this business, we will employ national beverage brokers and work with the “tobacco and candy” and food service warehouse distributors for this business.

The pricing and gross profit margin for the products will vary. Each product delivers different functionality and utilizes different types of packaging and package sizes. Without exception, these products will obtain premium pricing due to the functionality and value-added formulation and will therefore be priced according to the nearest competitive brands in their respective spaces. The functional milk drinks are also expected to have approximately the same percentage margin due to the premium pricing commanded by the experiential functionality. Singles will have higher margins than multi-packs . We expect that the average gross margin for our products will be 55%-60% depending upon the consumer response and sales channel mix.

Increase In Authorized Shares and Reverse Stock Split

The state of Delaware approved on April 4, 2010 the increase in our authorized shares of common stock from one hundred million (100,000,000) to one billion (1,000,000,000). As such, we are reflecting that increase in our financial statements for the year ended June 30, 2010.

We implemented a 1-for-20 reverse stock split on July 7, 2010. Since this change has occurred before the release of our June 30, 2010 financial statements, we have restated all applicable financial information for both the three months ended June 30, 2010 and 2009. In addition, we have provided key financial data before and after the stock split for the three months ended June 30, 2009 in the following table:

ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Increase In Authorized Shares and Reverse Stock Split (continued)

TABLE REFLECTING THE EFFECTS OF THE 1-FOR-20 REVERSE STOCK SPLIT

THAT WAS EFFECTIVE AS OF JULY 7, 2010 FOR THE THREE MONTHS

ENDED JUNE 30, 2010 AND JUNE 30, 2009


	Before Stock Split		Post Stock Split

For the three months ended June 30, 2010

Shares issued and outstanding		103,151,219		5,157,561

Basic income per common share	$	0.19	$	3.75

Diluted income per common share	$	0.05	$	1.02

Weighted average common shares outstanding - basic		96,388,700		4,819,435

Weighted average common shares outstanding - diluted		96,388,700		17,659,864

For the three months ended June 30 2009

Shares issued and outstanding		18,088,710			904,436

Basic loss per common share	$	(0.09	)	$	(1.72	)

Diluted loss per common share	$	(0.09	)	$	(1.72	)

Weighted average common shares outstanding - basic		15,806,124			790,306

Weighted average common shares outstanding - diluted		15,806,124			790,306

ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most critical estimates included in our financial statements are the following:

Financial Instrument Valuation

Estimating the fair value of our hybrid financial instruments that are required to be carried as liabilities at fair value pursuant to the FASB Accounting Standards Codification for the period ended June 30, 2010

We use all available information and appropriate techniques including outside consultants to develop our estimates. However, actual results could differ from our estimates.

Derivative Financial Instruments

We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have and will frequently enter into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts or (iii) may be net-cash settled by the counterparty to a financing transaction. As required by the FASB Accounting Standards Codification, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements. However, we are allowed to elect fair value measurement of the hybrid financial instruments, on a case-by-case basis, rather than bifurcate the derivative. We believe that fair value measurement of the hybrid convertible promissory notes arising from our various financing arrangements provides a more meaningful presentation of that financial instrument.

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 income will reflect the volatility in these estimate and assumption changes.

ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

GOING CONCERN

Our operating losses since inception and negative working capital raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts or classification of liabilities that might be necessary should we be unable to continue as a going concern. For the foreseeable future, we will have to fund all our operations and capital expenditures from the net proceeds of equity or debt offerings. Although we plan to pursue additional financing, there can be no assurance that we will be able to secure financing when needed or to obtain such financing on terms satisfactory to us, if at all. If we are unable to secure additional financing in the future on acceptable terms, or at all, we may be unable to complete the development of our new products. In addition, we could be forced to reduce or discontinue product development, reduce or forego sales and marketing efforts and forego attractive business opportunities in order to improve our liquidity to enable us to continue operations.

RESULTS OF OPERATIONS

Since we are a development company, negligible revenues have been reported for the period ended June 30, 2010 and 2009. As such, there is no meaningful comparison with prior periods. The Company also made the decision to withdraw our first energy drink (VisViva™) from the market and reintroduce this product in a new format and as a “focus” drink in the future possibly as early as late 2011.

Our plan during the next few months is to implement market and sales promotion programs to introduce our new “Phase III™ Recovery” drink to new markets and customers as this will be our only revenue producing product at this time.

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009:

For the three months ended June 30, 2010, our primary expenses related to salaries and professional fees. Total operating expenses for the three months ended June 30, 2010 were $286,999 which is lower than last year’s similar expenses for $579,812, mainly due to fewer employees in 2010 as compared to 2009. The marketing and promotion costs of $17,644 for the three months ended June 30, 2010 were lower than the previous year’s quarterly expenses of $101,777 mainly due to the decision to stop producing and selling the VisViva™ product line in 2010. Derivative income was $4,698,958, and interest income was $13,646,002 which both items were caused by the recording of the changes in the fair value measurements of our convertible notes payable. These figures are significantly different with the results for last year’s quarterly results due to the changes and volatility in the price of the Company’s stock price. As a result, we reported a net profit for the three months ended June 30, 2010 of $18,057,799 leading to basic earnings per share of $3.75 and diluted earnings per share of $1.02 as compared to a net loss for the three months ended June 30. 2009 of $1,360,029 which includes the recognition of derivative expense of $250,887 and $524,286 net interest expense. The weighted average number of common shares outstanding for the basic earnings per share calculation for the three months ended June 30, 2010 was 4,819,435 whereas the weighted average number of common shares outstanding for the diluted earnings per share calculation was 17,659,864. The basic and diluted loss per common share for the three months ended June 30, 2009 was $1.72 based on a weighted average number of common shares outstanding of 790,306.

LIQUIDITY AND CAPITAL RESOURCES

We have not yet begun to generate significant revenues, and our ability to continue as a going concern will be dependent upon receiving additional third party financings to fund our business for at least the next twelve months. As a development stage company with only about two and one half years of operations, we do not have any meaningful comparable financial information with prior periods. We anticipate that, depending on market conditions and our plan of operations, we may incur operating losses in the future based mainly on the fact that we may not be able to generate enough gross profits from our sales to cover our operating expenses and to increase our sales and marketing efforts. There is no assurance that further funding will be available at acceptable terms, if at all, or that we will be able to achieve profitability or receive adequate funding for new product research and development activities.

For the three months ended June 30, 2010:

Net cash used in operating activities was $92,843 which was mainly the effect of changes in our operating assets. Our profit of $18,057,799 is offset by non-cash items of $4,698,958 in derivative income and $13,667,558 for the changes in the fair values of our convertible notes payable.

Net cash flows generated by operating activities were inadequate to cover our working capital needs for the three months ended June 30, 2010, and we had to rely on a new convertible debt financing as well as a short term promissory note to cover operating expenses.

Net cash used in our investing activities was $761, mainly for the purchase of equipment in our office.

Net cash provided by our financing activities was $66,500 which was attributed to a new convertible note payable in the amount of $55,000.

For the three months ended June 30, 2009:

For the three months ended June 30, 2009, we reported a net loss of $1,360,029 which includes such non-cash items as derivative expense of $250,887 and fair value adjustment loss of convertible notes for $354,298. Net cash flows generated by our operating activities were inadequate to cover our working capital needs for the period ended June 30, 2009, and we had to rely on new convertible debt financings to cover operating expenses.

Cash used in the period ended June 30, 2009 for investing activities was $713 for trademark costs.

Net cash provided by our financing activities for the period ended June 30, 2009 was $48,667. This is primarily attributed to recognizing a default redemption amount of 20% for certain convertible debts.

Comparison of the three months ended June 30, 2010 to the three months ended June 30, 2009:

The major variances in the Condensed Consolidated Statements of Cash Flows for the three months of June 30, 2010 as compared to the three months of June 30, 2009 related to items that are affected by the changes in the prices of the Company’s common stock such as changes in fair value of our convertible notes payable which impact the following line items: “net income/(loss), derivative expense/(income) and fair value adjustment of convertible notes”. Changes in our accounts payable and accrued liabilities in the Cash Flows from Operating Activities for the three months ended June 30, 2010 for $126,043 as compared to the three months ended June 30, 2009 for $451,125 were the result of paying more accounts payable related items in 2010 with the additional financings. Proceeds from convertible notes payable and short-term bridge loans as shown in the Cash Flows From Financing Activities section for the three months ended June 30, 2010 were the result of additional financings in 2010 ($80,000) compared to no new financings for the three months ended June 30, 2009.

External Sources of Liquidity:

For the three months ended June 30, 2010:

On April 9, 2010, the Company received $59,400 for one of the March, 2010 allonges that had been recorded as a stock subscription receivable in March, 2010.

On May 13, 2010, the Company executed an allonge to the March, 2009 Secured Notes in the amount of $55,000, increasing the aggregate face values of these notes from $359,833 to $414,833. Associated finance fees of $5,000 were deducted from the gross proceeds for a net received amount of $50,000. In addition, we issued 114,583 warrants with an exercise price of $0.16 as these warrants are exercisable up to July 15, 2015.

On June 17, 2010, the Company entered into a promissory note in the amount of $25,000. This note is subject to an interest rate of 18% and is due the sooner of July 1, 2010 or upon the next financing. Currently the note has not been paid but is being addressed to be paid from the recent July, 2010 financing.

ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

RECENT ACCOUNTNG PRONOUNCEMENTS:

See Note 1 "Recent Accounting Pronouncements Applicable to the Company” in the Notes to Condensed Consolidated Financial Statements in Item 1 for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein.

CURRENT AND FUTURE FINANCING NEEDS

We will require additional capital to finance our future operations. We can provide no assurance that we will obtain additional financing sufficient to meet our future needs on commercially reasonable terms or otherwise. Currently we are in default in paying certain short-term bridge loans in the amount of $268,000 although we are working on extending the due dates. We are recording interest expense at the default interest rate of 15%. If we are unable to obtain the necessary financing, our business, operating results and financial condition will be materially and adversely affected. We still anticipate a need of funding in the range of $1,750,000 to $2,000,000 for the next twelve months to meet our business plan and operating needs only. This figure does not include any new product research and development activities. See also Note 11 regarding subsequent events.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.

CERTAIN BUSINESS RISKS:

Investing in our securities involves a high degree of risk. You should carefully consider the risk factors discussed below, together with all the other information contained or incorporated by reference in this report and in our filings under the Securities Exchange Act of 1934, as amended, or the Exchange Act, before deciding whether to purchase any of our securities. Each of the risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our securities, and the occurrence of any of these risks might cause you to lose all or part of your investment.

Risks Relating to Our Business

We have a limited history of operating losses. If we continue to incur operating losses, we eventually may have insufficient working capital to maintain or expand operations according to our business plan.

As of June 30, 2010, we had an accumulated shareholders’ deficit of $15,693,040 and a working capital deficit of $9,476,367, compared to an accumulated shareholders’ deficit of $33,750,839 and a working capital deficit of $27,923,071 at March 31, 2010. Cash and cash equivalents were $11,507 as of June 30, 2010 as compared to $38,611 at March 31, 2010. This decrease in our working capital deficit was primarily attributable to the decrease in the fair value calculations for our convertible notes payable as well a decrease in the derivative liabilities.

Ability to continue as a going concern.

Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

For the foreseeable future, we will have to fund all of our operations and capital expenditures from the net proceeds of equity or debt offerings we may have and cash on hand. Although we plan to pursue additional

ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

CERTAIN BUSINESS RISKS (continued)

financing, there can be no assurance that we will be able to secure financing when needed or obtain such financing on terms satisfactory to us, if at all, or that any additional funding we do obtain will be sufficient to meet our needs in the long term. Obtaining additional financing may be more difficult because of the uncertainty regarding our ability to continue as a going concern. If we are unable to secure additional financing in the future on acceptable terms, or at all, we may be unable to complete planned development of certain products.

To date, we have generated no material product revenues. Our operating losses have negatively impacted our liquidity, and we are continuing our efforts to develop new products, while focusing on increasing net sales. However, changes may occur that would consume our existing capital at a faster rate than projected, including, among others, the progress of our research and development efforts and hiring of additional key employees. If we continue to suffer losses from operations, our working capital may be insufficient to support our ability to expand our business operations as rapidly as we would deem necessary at any time, unless we are able to obtain additional financing. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to pursue our business objectives and would be required to reduce our level of operations, including reducing infrastructure, promotions, personnel and other operating expenses. These events could adversely affect our business, results of operations and financial condition. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage of opportunities, develop products or services or otherwise respond to competitive pressures, could be significantly limited. Any additional sources of financing will likely involve the sale of our equity securities, which will have a dilutive effect on our stockholders. If we are unable to achieve profitability, the market value of our common stock will decline, and there would be a material adverse effect on our financial condition.

At June 30, 2010, we were in default on certain of our short-term bridge notes and convertible notes payable and have other substantial outstanding debt obligations

At June 30, 2010, we were in default on some short term bridge notes totaling $268,000 in principal and $523,966 for certain convertible notes payable. The remedy for default under the notes is acceleration of principal and interest due thereunder. Although we have previously been able to obtain extension on the maturity dates of such obligations, we may be unable to continue to do so. We extended the convertible notes payable due date to March 31, 2011 as the result of the July, 2010 $900,000 subscription agreement for a convertible debt financing. We also are addressing the extension of the due dates for the other applicable debt payables. Further, we have secured convertible notes outstanding totaling $2,986,842 in principal face value at June 30, 2010. Penalties for default under our convertible notes include but are not limited to acceleration of principal and interest, redemption provisions which allow the holders the option to redeem the notes for 120% of the principal balances plus interest and default interest rates up to 15%. Defaults on these obligations could materially adversely affect our business operating results and financial condition to such extent that we may be forced to restructure, file for bankruptcy, sell assets or cease operation. Further certain of these obligations are secured by our assets. Failure to fulfill our obligations under these notes and related agreements could lead to the loss of these assets, which would be detrimental to our operations. If we are unable to do so, the expiration of these due dates could jeopardize the ownership of the assets and intellectual property of the Company.

We may not be able to develop successful new beverage products which are important to our growth.

An important part of our strategy is to increase our sales through the development of new beverage products. We cannot assure you that we will be able to continue to develop, market and distribute future beverage products that will have market acceptance. The failure to continue to develop new beverage products that gain market

ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

CERTAIN BUSINESS RISKS (continued)

acceptance could have an adverse impact on our growth and materially adversely affect our financial condition. Further, we may have higher obsolescent product expense if new products fail to perform as expected due to the need to write off excess inventory of the new products. Our results of operations may be impacted in various ways by the introduction of new products, even if they are successful, including the following:

	●	sales of new products could adversely impact sales of existing products;
	●	we may incur higher cost of goods sold and selling, general and administrative expenses in the periods when we introduce new products due to increased costs associated with the introduction and marketing of new products, most of which are expensed as incurred; and
	●	when we introduce new platforms and bottle sizes, we may experience increased freight and logistics costs as our co-packers adjust their facilities for the new products.

The beverage business is highly competitive.

The premium and functional beverage drink industries are highly competitive. Many of our competitors have substantially greater financial, marketing, personnel and other resources than we do. Competitors in these industries include bottlers and distributors of nationally advertised and marketed products, as well as chain store and private label drinks. The principal methods of competition include brand recognition, price and price promotion, retail space management, service to the retail trade, new product introductions, packaging changes, distribution methods, and advertising. We also compete for distributors, shelf space and customers primarily with other premium beverage companies. As additional competitors enter the field, our market share may fail to increase or may decrease.

The growth of our revenues is dependent on acceptance of our products by mainstream consumers.

We have limited resources to introduce our products to the mainstream consumer. As such, we will need to increase our sales force and execute agreements with distributors who, in turn, distribute to mainstream consumers at grocery stores, club stores and other retailers. If our products are not accepted by the mainstream consumer, our business could suffer.

Our failure to accurately estimate demand for our products could adversely affect our business and financial results.

We may not correctly estimate demand for our products. Our ability to estimate demand for our products is imprecise, particularly with new products, and may be less precise during periods of rapid growth, particularly in new markets. If we materially underestimate demand for our products or are unable to secure sufficient ingredients or raw materials including, but not limited to, containers, labels, flavors or packing arrangements, we might not be able to satisfy demand on a short-term basis. Moreover, industry-wide shortages of certain ingredients have been and could, from time to time in the future, be experienced, which could interfere with and/or delay production of certain of our products and could have a material adverse effect on our business and financial results. We do not use hedging agreements or alternative instruments to manage this risk.

The loss of our third-party distributors could impair our operations and substantially reduce our financial results.

We continually seek to expand distribution of our products by entering into distribution arrangements with regional bottlers or other direct store delivery distributors having established sales, marketing and distribution

ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

CERTAIN BUSINESS RISKS (continued)

organizations. Many distributors are affiliated with and manufacture and/or distribute other beverage products. In many cases, such products compete directly with our products. The marketing efforts of our distributors are important for our success. If our brands prove to be less attractive to our existing distributors and/or if we fail to attract additional distributors, and/or our distributors do not market and promote our products above the products of our competitors, our business, financial condition and results of operations could be adversely affected.

Inability to secure co-packers for our products could impair our operations and substantially reduce our financial results.

We rely on third parties, called co-packers in our industry, to produce our products. We currently have only one co-packing agreement for our products and at this time have only one milk-based product commercially available (Phase III). Our co-packing agreement with our principal co-packer was signed on December 16, 2008 and will expire in less than two years (December 15, 2011). After the initial term, this agreement shall automatically renew for consecutive one (1) year periods unless either party provides notice of cancellation at least one hundred twenty (120) calendar days prior to the end of the initial term or subsequent extension period. Our dependence on one co-packer puts us at substantial risk in our operations. If we lose this relationship and/or require new co-packing relationships for other products, we may be unable to establish such relationships on favorable terms, if at all. Further, co-packing arrangements with potential new companies may be on a short term basis and such co-packers may discontinue their relationship with us on short notice. Our dependence on co-packing arrangements

exposes us to various risks, including:

	●	if any of those co-packers were to terminate our co-packing arrangement or have difficulties in producing beverages for us, our ability to produce our beverages would be adversely affected until we were able to make alternative arrangements; and
	●	our business reputation would be adversely affected if any of the co-packers were to produce inferior quality products.

We compete in an industry that is brand-conscious, so brand name recognition and acceptance of our products are critical to our success.

Our business is substantially dependent upon awareness and market acceptance of our products and brands by our targeted consumers. In addition, our business depends on acceptance by our independent distributors of our brands as beverage brands that have the potential to provide incremental sales growth rather than reduce distributors’ existing beverage sales. We believe that the success of our product name brands will also be substantially dependent upon acceptance of our product name brands. Accordingly, any failure of our brands to maintain or increase acceptance or market penetration would likely have a material adverse affect on our revenues and financial results.

We compete in an industry characterized by rapid changes in consumer preferences and public perception, so our ability to continue to market our existing products and develop new products to satisfy our consumers’ changing preferences will determine our long-term success.

Consumers are seeking greater variety in their beverages. Our future success will depend, in part, upon our continued ability to develop and introduce different and innovative beverages. In order to retain and expand our market share, we must continue to develop and introduce different and innovative beverages and be competitive in the areas of quality and health, although there can be no assurance of our ability to do so. There is no assurance that consumers will continue to purchase our products in the future. Additionally, many of our products are considered premium products and to maintain market share during recessionary periods, we may have to reduce

ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

CERTAIN BUSINESS RISKS (continued):

profit margins, which would adversely affect our results of operations. Product lifecycles for some beverage brands and/or products and/or packages may be limited to a few years before consumers’ preferences change. The beverages we currently market are in their early lifecycles, and there can be no assurance that such beverages will become or remain profitable for us. The beverage industry is subject to changing consumer preferences, and shifts in consumer preferences may adversely affect us if we misjudge such preferences. We may be unable to achieve volume growth through product and packaging initiatives. We also may be unable to penetrate new markets. If our revenues decline, our business, financial condition and results of operations will be materially and adversely affected.

Our quarterly operating results may fluctuate significantly because of the seasonality of our business.

As our products are relatively new, there may be seasonality issues that could cause our financial performance to fluctuate. In addition, beverage sales can be adversely affected by sustained periods of bad weather.

Our business is subject to many regulations, and noncompliance is costly.

The production, marketing and sale of our unique beverages, including contents, labels, caps and containers, are subject to the rules and regulations of various federal, provincial, state and local health agencies. If a regulatory authority finds that a current or future product or production run is not in compliance with any of these regulations, we may be fined, or production may be stopped, thus adversely affecting our financial conditions and operations. Similarly, any adverse publicity associated with any noncompliance may damage our reputation and our ability to successfully market our products. Furthermore, the rules and regulations are subject to change from time to time and while we closely monitor developments in this area, we have no way of anticipating whether changes in these rules and regulations will impact our business adversely. Additional or revised regulatory requirements, whether labeling, environmental, tax or otherwise, could have a material adverse effect on our financial condition and results of operations.

We face risks associated with product liability claims and product recalls.

Other companies in the beverage industry have experienced product liability litigation and product recalls arising primarily from defectively manufactured products or packaging. Our co-packer maintains product liability insurance insuring our operations from any claims associated with product liability. This insurance may or may not be sufficient to protect us. We do not maintain product recall insurance. In the event we were to experience additional product liability or product recall claim, our business operations and financial condition could be materially and adversely affected.

Our intellectual property rights are critical to our success, the loss of such rights could materially, adversely affect our business.

We regard the protection of our trademarks, trade dress and trade secrets as critical to our future success. We have registered our trademarks in the United States that are very important to our business. We also own the copyright in and to portions of the content on the packaging of our products. We regard our trademarks, copyrights and similar intellectual property as critical to our success and attempt to protect such property with registered and common law trademarks and copyrights, restrictions on disclosure and other actions to prevent infringement. Product packages, mechanical designs and artwork are important to our success, and we would take action to protect against imitation of our packaging and trade dress and to protect our trademarks and copyrights, as necessary. We also rely on a combination of laws and contractual restrictions, such as confidentiality agreements, to establish and protect our proprietary rights, trade dress and trade secrets. However, laws and contractual

ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

CERTAIN BUSINESS RISKS (continued):

restrictions may not be sufficient to protect the exclusivity of our intellectual property rights, trade dress or trade secrets. Furthermore, enforcing our rights to our intellectual property could involve the expenditure of significant management and financial resources. There can be no assurance that other third parties will not infringe or misappropriate our trademarks and similar proprietary rights. If we lose some or all of our intellectual property rights, our business may be materially and adversely affected.

If we are not able to retain the full time services of our management team, including Roy G. Warren, it will be more difficult for us to manage our operations and our operating performance could suffer.

Our business is dependent, to a large extent, upon the services of our management team, including Roy G. Warren, our founder and Chief Executive Officer and Chairman of the Board. We depend on our management team, but especially on Mr. Warren’s creativity and leadership in running or supervising virtually all aspects of our day-to-day operations. We do not have a written employment agreement with any member of our management team or Mr. Warren. In addition, we do not maintain key person life insurance on any of our management team or Mr. Warren. Therefore, in the event of the loss or unavailability of any member of the management team to us, there can be no assurance that we would be able to locate in a timely manner or employ qualified personnel to replace him. The loss of the services of any member of our management team or our failure to attract and retain other key personnel over time would jeopardize our ability to execute our business plan and could have a material adverse effect on our business, results of operations and financial condition.

We need to manage our growth and implement and maintain procedures and controls during a time of rapid expansion in our business.

If we are to expand our operations, such expansion would place a significant strain on our management, operational and financial resources. Such expansion would also require improvements in our operational, accounting and information systems, procedures and controls. If we fail to manage this anticipated expansion properly, it could divert our limited management, cash, personnel, and other resources from other responsibilities and could adversely affect our financial performance.

Our business may be negatively impacted by a slowing economy or by unfavorable economic conditions or developments in the United States and/or in other countries in which we may operate.

A general slowdown in the economy in the United States or unfavorable economic conditions or other developments may result in decreased consumer demand, business disruption, supply constraints, foreign currency devaluation, inflation or deflation. A slowdown in the economy or unstable economic conditions in the United States or in the countries in which we operate could have an adverse impact on our business results or financial condition. Currently we do not have any international operations.

Risks Relating to Our Securities

There has been a very limited public trading market for our securities, and the market for our securities may continue to be limited and be sporadic and highly volatile.

There is currently a limited public market for our common stock. Our common stock has been listed for trading on the OTC Bulletin Board (the “OTCBB”). We cannot assure you that an active market for our shares will be established or maintained in the future. Holders of our common stock may, therefore, have difficulty selling their shares, should they decide to do so. In addition, there can be no assurances that such markets will continue or that any shares, which may be purchased, may be sold without incurring a loss. Any such market price of our shares

ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

CERTAIN BUSINESS RISKS (continued):

may not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value and may not be indicative of the market price for the shares in the future. In addition, the market price of our common stock may be volatile, which could cause the value of our common stock to decline. Securities markets experience significant price and volume fluctuations. This market volatility, as well as general economic conditions, could cause the market price of our common stock to fluctuate substantially. Many factors that are beyond our control may significantly affect the market price of our shares. These factors include:

	●	price and volume fluctuations in the stock markets;
	●	changes in our revenues and earnings or other variations in operating results;
	●	any shortfall in revenue or increase in losses from levels expected by us or securities analysts;
	●	changes in regulatory policies or law;
	●	operating performance of companies comparable to us; and
	●	general economic trends and other external factors.

Even if an active market for our common stock is established, stockholders may have to sell their shares at prices substantially lower than the price they paid for it or might otherwise receive than if a broad public market existed.

Future financings could adversely affect common stock ownership interest and rights in comparison with those of other security holders.

Our board of directors has the power to issue additional shares of common or preferred stock without stockholder approval. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. In addition, as of June 30, 2010, we had issued and outstanding options and warrants that may be exercised into 4,858,486 (restated for recent reverse stock split) shares of common stock and 9,000,000 shares of Series A Convertible Preferred Stock that may be converted into 54,000,000 shares of common stock. The Series A votes with the common stock on an as converted basis. Pursuant to the terms and conditions of the Company’s outstanding Series A, the conversion rate and the voting rights of the Series A will not adjust as a result of any reverse stock split. Further, the authorized but unissued Series A will not adjust as a result of any reverse split. As a result, in the event of a reverse split of our common stock, the voting power would be concentrated with the Series A holder. Subsequent to the three months ended June 30, 2010, effective July 7, 2010, the Company effected a one-for-twenty reverse split of its common stock (see Note 11-“Subsequent Events” of the notes to the condensed consolidated financial statements). Further, if we issue any additional common stock or securities convertible into common stock, such issuance will reduce the proportionate ownership and voting power of each other stockholder. In addition, such stock issuances might result in a reduction of the book value of our common stock.

A substantial number of our shares are available for sale in the public market, and sales of those shares could adversely affect our stock price.

Sales of a substantial number of shares of common stock into the public market, or the perception that such sales could occur, could substantially reduce our stock price in the public market for our common stock, and could impair our ability to obtain capital through a subsequent financing of our securities. We have 5,157,561 (restated for recent reverse stock split) shares of common stock outstanding as of June 30, 2010.

ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

ITEM 4. – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2010. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.

The Company has disclosed management’s determination in its annual report that deficiencies existed in the Company’s internal controls over financial reporting as of March 31, 2010. Management concluded that control deficiencies existed as of March 31, 2010 that constituted material weaknesses, as described below.

* We have noted that there may be an insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing internal controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis.

* We do not have an audit committee or an independent audit committee financial expert. While not being legally obligated to have an audit committee or independent audit committee financial expert, it is the management’s view that to have an audit committee, comprised of independent board members and an independent audit committee financial expert, is an important entity-level control over the Company's financial statements. Currently, the Board does not have sufficient independent directors to form such an audit committee. Also, the Board of Directors does not have an independent director with sufficient financial expertise to serve as an independent financial expert.

* Due to the complex nature of recording derivatives and similar financial instruments, we noted a need for increased coordination and review of techniques and assumptions used in recording derivatives to ensure accounting in conformity with generally accepted accounting principles.

Remediation Efforts to Address Deficiencies in Internal Control Over Financial Reporting

As a result of the findings from the investigation and a company-led accounting review, management intends to take practical, cost-effective steps in implementing internal controls, including the following remedial measures:

* Interviewing and potentially hiring outside consultants that are experts in designing internal controls over financial reporting based on criteria established in Internal Control-Integrated Framework issued by COSO.

* The Company has hired an outside consultant to assist with controls over the review and application of derivatives to ensure accounting in conformity with generally accepted accounting principles.

ITEM 4. – CONTROLS AND PROCEDURES (CONTINUED)

* Board to review and make recommendations to shareholders concerning the composition of the Board of Directors, with particular focus on issues of independence. The Board of Directors to consider nominating an audit committee and audit committee financial expert, which may or may not consist of independent members as funds allow.

Due to the lack of adequate financing, the Company has not hired any outside experts to design additional internal controls over financing reporting or recommend a new board director that is a financial expert.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Accordingly, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were not effective, as of June 30, 2010, for the purposes of recording, processing, summarizing, and timely reporting material information required to be disclosed in reports filed by the Company under the Securities Exchange Act of 1934.

Changes in Internal Control Over Financial Reporting

No change in the Company’s internal control over financial reporting occurred during the quarter ended June 30, 2010, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

On May 18, 2009, F&M Merchant Group, LLC commenced a lawsuit in the state of Texas to recover the balance owed by us under a Sales Agent Agreement entered by the parties on November 1, 2008. This agreement requires us to pay $5,000 per month and a 5% commission on all net sales. On September 3, 2009, a final judgment by default was approved by the district court in Denton County, Texas for a total sum of $22,348. This claim has been recorded on the Company’s records. Due to the lack of adequate capital financing, we have not been able to make any payments. We expect to resolve this matter as soon as practical.

On June 5, 2009, Tuttle Motor Sports, Inc. commenced a lawsuit in the state of Florida to recover the balance owed by us under a Letter of Agreement to sponsor a Top Fuel Dragster for the 2008 NHRA racing season in the amount of $803,750. Out of this total amount, only $300,000 is required to be paid in cash with the remainder to be paid in shares of common stock. This amount had already been recorded in our records. During May, 2010, Tuttle Motor Sports, Inc. dismissed the lawsuit without prejudice. Prior to that time, the parties went through mediation but were unable to settle. The likelihood of an unfavorable outcome cannot be evaluated as another lawsuit possibly could be filed against the Company.

On August 21, 2009, CH Fulfillment Services, LLC commenced a lawsuit in the state of Alabama to recover past due amounts owed by us under a contract to provide shipping and fulfillment services. The claim is for $2,106 plus interest and legal costs. This amount was already recorded on our records as well as projected interest costs of $682 and estimated court costs of $307 for a total of $3,095. This amount was recorded on our records. A process of garnishment by the district court in Mobile County, Alabama was approved on September 25, 2009 for the total amount of $3,095. On October 26, 2009, the same court authorized a garnishment process to pay $657 which was done as part payment of the total due amount. No other payments have been paid.

On November 9, 2009, Nationwide Distribution Services, Inc. filed a lawsuit in the state of Florida to recover past due amounts owed by us under a contract to provide storage and warehouse fees. The Court approved a final judgment on January 11, 2010 in the sum of $3,650, court costs of $350 and interest fees of $959 for a total sum of $4,959. We have already recorded a similar amount in our records. As of April 2, 2010, we received a letter of notification from Nationwide Distribution Services, Inc. that at 12:00 noon on April 19, 2010, the products owned by us and stored at their facilities were sold at public auction. This sale constituted satisfaction of the final judgment brought against us.

PART II – OTHER INFORMATION (CONTINUED)

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On May 13, 2010, the Company executed an allonge to an institutional investor, Alpha Capital Anstaldt , to the March, 2009 Secured Notes in the amount of $55,000, increasing the aggregate face values of these notes from $359,834 to $414.834. Associated finance fees of $5,000 were deducted from the gross proceeds for a net received amount of $50,000. In addition, we issued 114,583 warrants to Alpha Capital Anstaldt with an exercise price of $0.16 as these warrants are exercisable up to July 15, 2015.

On June 2, 2010, the Company issued a total of 288,889 shares of common stock for payment of $55,000 for past due services: outside valuation consultant (138,889 shares for $25,000) and outside legal counsel (150,000 shares for $30,000).

On June 30, 2010, the Company issued warrants to purchase 12,000 shares of common stock as well as 12,000 restricted shares of Common Stock to extend the due date of one short-term bridge loan to December 31, 2010.

During the three months ended June 30, 2010, the Company issued a total of 550,236 shares of common stock for the conversions of $87,668 of convertible notes payable and $370 of accrued interest payable to note holders of the Company pursuant to the terms of their note instruments. No additional consideration was given for these conversions. The shares of common stock issued upon conversion of these notes were issued pursuant to an exemption from the registration requirements of the Securities Act provided by Section 3(a)(9) thereof.

Item 3. Defaults on Senior Securities

As of June 30, 2010, the Company was in default in paying the following convertible debt obligations: January, 2008; June, 2008; and August, 2008. However, as part of the July, 2010 subscription agreement for a convertible debt financing in the principal gross amount of $900,000, the due date for these debts were extended to March 31, 2011.

As of June 30, 2010, the Company was in default in paying certain April-2008, May-2008 and August-2008 debt obligations in which the debt holders agreed in January, 2009 to extend the due dates to April 30, 2009. The company is working on the extension of the due dates for these debts. One of the April-2008 debts had the due date to be extended to December 31, 2010.

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

No matters were submitted to a vote of the security holders during the period covered by this report.

Item 5. Other Information/Subsequent Events

On April 9, 2010, David D. Brooks resigned as Chief Financial Officer on March 31, 2010. Mr. Brooks had been appointed CFO on February 10. 2010. The resignation was not the result of any disagreements with the management or its outside professions regarding accounting or financial reporting matters, rather it was a result of the rapid evolution of his firm. As a result, Tommy E. Kee rejoined the company as CFO to be effective April 12, 2010. He previously was the Company’s CFO.

On May 21, 2010, effective May 17, 2010, we dismissed our previous independent registered accounting firm, KBL, LLP. There were no disagreements between KBL and us on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. Effective on the same date, we engaged Meeks International, LLC as our independent registered accounting firm to audit our financial statements for the year ended March 31, 2010.

On May 25, 2010, a registration that covers the offering of an aggregated 3,750,000 shares of the Company’s common stock was approved by the Company’s Board of Directors. As such, the 2010 Stock Compensation and Incentive Plan was created for employees, directors, consultants and other persons associated with the Company in which awards of common stock and/or non-qualified stock options may be granted.

See Note 11-“Subsequent Events” of Notes to Condensed Consolidated Financial Statements for additional disclosure data on events occurring after the date of the financial statements included herein.

Item 6. Exhibits


Exhibit No.	Document Description	Reference	Herewith

(2)(1)	Agreement and Plan of Merger dated September 14, 2007	(1)
(3)(1)(i)	Restated Certificate of Incorporation	(1)
(3)(1)(ii)	Certificate of Amendment to Certificate of Incorporation	(8)
(3)(2)	Amended and Restated Bylaws	(1)
(4)(1)	Certificate of Designation of the Series A Convertible Preferred	(1)
(4)(2)	Form of Common Stock Certificate	(1)
(4)(3)	Form of Class A and B Common Stock Purchase Warrant with Schedule	(1)
	of other documents omitted
(4)(4)	Form of 10% Convertible Note with Schedule of other documents omitted	(1)
(4)(5)	Form of Secured Convertible Note with Schedule of other documents omitted	(1)
(4)(6)	Certificate of Amendment to the certificate of Designation of the Series A
	Convertible Preferred Stock	(5)
(4)(7)	Form of Note dated January 8, 2008	(9)
(10)(1)	Subscription Agreement for Securities dated October 23, 2007	(9)
(10)(2)	2007 Stock Compensation and Incentive Plan	(1)
(10)(3)	Escrow Agreement dated October 23, 2007	(1)
(10)(4)	Security Agreement dated October 23, 2007	(1)
(10)(5)	Subsidiary Guaranty dated October 23, 2007	(1)
(10)(6)	Collateral Agent Agreement dated October 23, 2007	(1)
(10)(7)	Office Lease Agreement dated December 15, 2007	(2)
(10)(8)	Subscription Agreement for Securities dated January 8, 2008	(9)
(10)(9)	Funds Escrow Agreement dated January 8, 2008	(1)
(10)(10)	Waiver and Consent dated January 8, 2008	(1)
(10)(11)	Notice of Waiver of Certain Conditions effective February 15, 2008	(1)
(10)(12)	Notice of Waiver effective February 15, 2008	(1)
(10)(13)	Notice of Waiver of Conditions effective April 8, 2008	(1)
(10)(14)	Modification and Waiver Agreement, dated June 30, 2008	(9)
(10)(15)	Asset Purchase Agreement, and Secured Convertible
	Promissory Note, August 2008	(9)
(10)(16)	Sublicense Agreeement, Termination Agreement, Promissory Note
	With Nutraceutical Discoveries, Inc. – August, 2008 and February 2010	(9)
(10)(17)	Form of Modification, Waiver and Consent Agreement, September 2008	(3)
(10)(18	Subscription Agreement Securities September 2008	(9)
(10)(19)	Funds Escrow Agreement September 2008	(9)
(10)(20)	Form of Note, September 2008	(3)
(10)(21)	Form of Class A and Class B Warrant, September 2008	(3)
(10)(22)	Manufacturing Agreement dated December 16, 2008 with O-AT-KA
	Milk Products Cooperative, Inc.	(4)
(10)(23)	Form of Note and Warrant and Modification, Waiver and Consent
	Agreement, December 2008	(9)
(10)(24)	Subscription Agreement, Form of Note and Warrant, Funds Escrow
	Agreement, Form of Legal Opinion, and Second Modification, Waiver
	And Consent Agreement, January 2009	(9)
(10)(25)	Amendment, Waiver and Consent Agreement, Form of Allonge No.1 to January
	09 Notes, Form of Warrant, February 2009	(9)
(10)(26)	Subscription Agreement, Funds Escrow Agreement, Form of Note and
	Warrant and Legal Opinion, March 2009	(9)
(10)(27)	Third Modification, Waiver and Consent Agreement, Form of Allonge No. 1 to
	March 09 Notes, Form of Warrant, July 2009	(9)
(10)(28)	Form of Note, November 2009	(9)
(10)(29)	Modification and Amendment Letters, Form of Warrant, January 2010	(9)
(10)(30)	2010 Stock Compensation and Incentive Plan	(7)
(10)(31)	Warrant and Allonge to March 2009 Note, dated May 13, 2010		X
(10)(32)	Promissory Note, dated June 17, 2010		X
(10)(33)	Warrants to extend short-term bridge loan June 30, 2010		X
(14)	Code of Ethics	(6)
(21)	Subsidiaries of Registrant	(1)
(31)(i)	Certification of Chief Executive Officer pursuant to Rule 13a-14 (a)/ 15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		X
(31)(ii)	Certification of Chief Financial Officer pursuant to Rule 13a-14 (a)/ 15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		X
(32)(1)	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		X

(1) previously filed with the Commission on April 11, 2008 as an exhibit to Form S-1/A SEC Accession Number 0001144204-08-021783

(2) previously filed with the Commission on February 14, 2008 as Exhibit 10.3 to Form 10-Q SEC Accession Number 0001144204-08-008934

(3) previously filed with the Commission on November 19, 2008 as an exhibit to Form 10-Q SEC Accession Number 0001144204-08-0063995

(4) previously filed with the Commission on March 5, 2009 as Exhibit 10.18 to Form 10-Q SEC Accession Number 0001213900-09-0005

(5) previously filed with the Commission on November 23, 2009 as Exhibit 4.6 to Form 10-Q SEC Accession No. 0001213900-09-003372

(6) previously filed with the Commission on August 14, 2009 as Exhibit 14.1 to Form 10-K SEC Accession No. 0001213900-09-002104

(7) previously filed with the Commission on May 25, 2010 as Exhibit 10.1 to Form S-8 SEC Accession No. 0001213900-10-002206

(8) previously filed with the Commission on July 14, 2010 as Exhibit 3(1)(ii) to Form 10-K SEC Accession No. 0001213900-10-2857

(9) previously filed with the Commission on April 21, 2011 as an exhibit to Form 10-K/A SEC Accession No. 0001213900-11-002129

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, Attitude Drinks Incorporated has caused this report to be signed on its behalf by the undersigned, thereunder duly authorized.

ATTITUDE DRINKS INCORPORATED

(Registrant)

Date: May 26, 2011


/S/Roy G. Warren
Roy G. Warren
President and Chief Executive Officer

In accordance with the Securities Exchange Act of 1934, Attitude Drinks Incorporated has caused this report to be signed on its behalf by the undersigned in the capacities and on the dates stated.


Signature	Title	Date

/S/Roy G. Warren
Roy G. Warren	President and Chief Executive Officer	5/26/11

S/Tommy E. Kee
Tommy E. Kee	Chief Financial Officer and Principal Accounting Officer	5/26/11

Attached files

Stock widget

Investing forum

Attitude Drinks Inc. Reports