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EX-31.2 - 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 - Attitude Drinks Inc.f10q0612ex31ii_attitude.htm
EX-10.70 - FORM OF FIRST AMENDMENT TO LEASE AGREEMENT - Attitude Drinks Inc.f10q0612ex10lxx_attitude.htm
EX-10.71 - EQUITY FINANCING AND DEBT RETIREMETN AGREEMENT - Attitude Drinks Inc.f10q0612ex10lxxi_attitude.htm
EX-10.72 - FORM OF ASSIGNMENT AND ESCROW AGREEMENT - Attitude Drinks Inc.f10q0612ex10lxxii_attitude.htm
EX-10.73 - ALLONGE NO. 1 TO SECURED NOTE ISSUED FEBRUARY 22, 2012 - Attitude Drinks Inc.f10q0612ex10lxxiii_attitude.htm
EX-31.1 - 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 - Attitude Drinks Inc.f10q0612ex31i_attitude.htm
EX-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 - Attitude Drinks Inc.f10q0612ex32i_attitude.htm


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

FORM 10-Q

(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, 2012

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, #102, Palm Beach Gardens, Florida 33410 USA
(Address of principal executive offices)

(561) 227-2727
(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 has submitted electronically and posted on its corporate Web site, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 Yes 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: 1,223,739,196 shares issued and outstanding as of August 28, 2012.
 
 
 

 
 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

INDEX
 
 
PAGE #
 
PART I
FINANCIAL INFORMATION
   
Item 1 .
Condensed Consolidated Financial Statements:
 
 
  Condensed Consolidated Balance Sheets – June 30, 2012 (unaudited) and March 31, 2012
  3
 
  Condensed Consolidated Statements of Operations – Three  Months Ended June 30, 2012 and 2011 (unaudited)
  4
 
  Condensed Consolidated Statements of Cash Flows – Three Months Ended June 30, 2012 and 2011 (unaudited)
  5
 
Notes to Condensed Consolidated Financial Statements (unaudited)
  6
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
42
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
55

Item 4.
Controls and Procedures
56
 
PART II
OTHER INFORMATION
 
Item 1.
Legal Proceedings
57
 
Item 2.
Unregistered Sales of Equity and Use of Proceeds
58
 
Item 3.
Defaults upon Senior Securities
58
 
Item 4.
Removed and Reserved
 

Item 5.
Other Information
58
.
Item 6.
Exhibits
59

SIGNATURES
62

EXHIBITS
 
   
DOCUMENTS INCORPORATED BY REFERENCE: See Exhibits
 
 
 
 

 
 
PART I – FINANCIAL INFORMATION

ITEM 1. – CONDENSED FINANCIAL STATEMENTS

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
 
   
June 30, 2012
   
March 31, 2012
 
   
(Unaudited)
       
ASSETS
           
             
CURRENT ASSETS:
           
  Cash and cash equivalents
  $ 55,235     $ 132,120  
  Accounts receivable less allowance for doubtful acctounts of $817 and $817
               
     for June 30, 2012 and March 31, 2012, respectively
    53,950       43,895  
  Inventories
    165,952       258,496  
  Prepaid expenses
    39,843       53,385  
     TOTAL CURRENT ASSETS
    314,980       487,896  
                 
FIXED ASSETS, NET
    23,194       24,653  
                 
OTHER ASSETS:
               
  Trademarks, net
    24,806       25,280  
  Deposits and other
    20,996       20,996  
     TOTAL OTHER ASSETS
    45,802       46,276  
                 
TOTAL ASSETS
  $ 383,976     $ 558,825  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
CURRENT LIABILITIES:
               
  Accounts payable
  $ 1,689,801     $ 1,685,120  
  Accrued liabilities
    4,366,895       4,165,800  
  Derivative liabilities
    145,982       423,262  
  Short-term bridge loans payable
    115,000       115,000  
  Convertible notes payable
    1,798,231       2,726,657  
  Non-convertible notes payable
    296,012       86,012  
  Deferred revenue
    817       7,661  
  Loans payable to related parties
    21,463       21,463  
     TOTAL CURRENT LIABILITIES
    8,434,201       9,230,975  
                 
CONVERTIBLE NOTES PAYABLE - NET OF CURRENT PORTION
    4,864,516       5,346,744  
                 
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, 2012 and March 31, 2012, respectively
    9,000       9,000  
  Common stock, par value $0.001, 5,000,000,000 and 1,000,000,000 shares authorized and
               
     1,132,789,196 and 854,047,952 shares issued and outstanding at June
               
     30, 2012 and March 31, 2012, respectively
    1,132,789       854,048  
  Additional paid-in capital
    14,177,474       13,634,608  
  Deficit accumulated
    (28,234,004 )     (28,516,550 )
     TOTAL STOCKHOLDERS' (DEFICIT)
    (12,914,741 )     (14,018,894 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT)
  $ 383,976     $ 558,825  
                 
See accompanying notes to consolidated financial statements
               
 
 
3

 
 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

   
Three
   
Three
 
   
Months
   
Months
 
   
June 30,
   
June 30,
 
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
             
REVENUES:
           
  Net revenues
  $ 110,234     $ 56,957  
  Product and shipping costs
    (91,873 )     (53,805 )
GROSS PROFIT
    18,361       3,152  
                 
OPERATING EXPENSES:
               
  Salaries, taxes and employee benefits
    197,988       136,505  
  Marketing and promotion
    187,176       122,506  
  Consulting fees
    111       26,986  
  Professional and legal fees
    16,057       79,659  
  Travel and entertainment
    19,284       16,387  
  Stock compensation expense
    504       -  
  Other operating expenses
    109,909       153,866  
     Total Operating Expenses
    531,029       535,909  
                 
LOSS FROM OPERATIONS
    (512,668 )     (532,757 )
                 
OTHER INCOME (EXPENSE):
               
  Derivative income (expense)
    265,880       600,389  
  Interest and other financing costs
    529,334       535,888  
     Total Other Income (Expense)
    795,214       1,136,277  
                 
INCOME (LOSS) BEFORE PROVISION
               
  FOR INCOME TAXES
    282,546       603,520  
                 
  Provision for income taxes
    -       -  
                 
NET INCOME (LOSS)
  $ 282,546     $ 603,520  
                 
Basic income (loss) per common share
  $ -     $ 0.01  
                 
Diluted income (loss) per common share
  $ -     $ -  
 
               
Weighted average common shares
               
     outstanding - basic
    983,358,263       88,020,841  
                 
Weighted average common shares
               
     outstanding - diluted
    1,219,578,146       318,600,888  
                 
See accompanying notes to consolidated financial statements
         

 
 
4

 
 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Three Months
   
Three Months
 
   
Ended
   
Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
  Net income/(loss)
  $ 282,546     $ 603,520  
  Adjustment to reconcile net loss to net cash used in
               
operating activities:
               
Depreciation and amortization
    1,933       1,707  
Compensatory stock and warrants
    504       358,648  
Bad debt expense
    -       6,314  
Derivative expense/(income)
    (265,880 )     (600,389 )
Fair value adjustment of convertible note
    (675,447 )     (534,930 )
Amortization of debt discount
    100,696       81,143  
  Changes in operating assets and liabilities:
               
Accounts receivable
    (10,055 )     (12,411 )
Prepaid expenses and other assets
    13,542       48,963  
Inventories
    92,544       58,528  
Deferred revenue
    (6,844 )     (3,647 )
Accounts payable and accrued liabilities
    189,576       (343,688 )
  Net cash used in operating activities
    (276,885 )     (336,242 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of equipment
    -       (1,694 )
  Net cash used in investing activities
    -       (1,694 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from short-term bridge loans payable
    200,000       125,000  
  Net cash provided by financing activities
    200,000       125,000  
                 
NET INCREASE/(DECREASE) IN CASH  AND CASH EQUIVALENTS
    (76,885 )     (212,936 )
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    132,120       233,337  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 55,235     $ 20,401  
 
See accompanying notes to condensed consolidated financial statements
 
 
5

 
 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2012

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

(a)           Organization:

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

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. Our principal executive offices are located at 10415 Riverside Drive, Suite 102, Palm Beach Gardens, Florida 33410.  The telephone number is 561-227-2727.  Our company’s common stock shares (OTCBB:ATTD) began trading June 2008.

The Company's fiscal year end is March 31.  Its plan of operation during the next twelve months is to focus on the non-alcoholic single serving beverage business, developing and marketing products in two fast growing segments: sports recovery and functional dairy.

(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, 2012 and 2011 and the results of its operations and cash flows for the three month periods ended June 30, 2012 and 2011.  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 March 31, 2012, 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").

 
6

 

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

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

The results of operations for the three month period ended June 30, 2012 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, 2012, a working capital deficit of $8,119,221 as of June 30, 2012 and has incurred losses to date resulting in an accumulated deficit of $28,234,004, 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.

(c)           Inventories:

Inventories, as estimated by management, currently consist of 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, 2012
   
March 31, 2012
 
   
(unaudited)
       
             
Finished goods
  $ 165,387     $ 252,413  
Finished goods on consignment
    565       6,083  
                 
  Total inventories
  $ 165,952     $ 258,496  
 
(d)           Prepaid expenses:

Prepaid expenses of $39,843 consist mainly for retainers for legal fees, prepaid insurance and prepaid promotional coupon costs.

(e)           Trademarks:

Trademarks consist of costs associated with the acquisition and development of certain trademarks.  Trademarks, when acquired, will be amortized using the straight-line method over 15 years.  Amortization of trademarks for the three months ended June 30, 2012 was $474.

 
7

 


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

(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 various financing arrangements provide a more meaningful presentation of those financial instruments.

(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  (loss) per common share is computed similar to basic (loss) per common share, but diluted income 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, 2012, potential common shares arising from the Company’s stock warrants, stock options and convertible debt and preferred stock amounting to 581,728,812 shares were included in the computation of diluted income per share.

(h)          Recent Accounting Pronouncements Applicable to the Company:

In December 2011, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”) that provides amendments for disclosures about offsetting assets and liabilities.  The amendments require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements.  The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required by the amendments should be provided retrospectively for all comparative periods presented. For the Company, the amendment is effective for fiscal year 2014. The Company is currently evaluating the impact these amendments may have on its disclosures.

 
8

 

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

(h)          Recent Accounting Pronouncements Applicable to the Company (continued):

In June 2011, the Financial Accounting Standards Board issued an ASU that provides amendments on the presentation of comprehensive income. The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented. The amendments do not affect how earnings per share is calculated or presented. The amendments are effective for fiscal years and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. For the Company, the amendment is effective for fiscal 2013. The effect of adoption will have minimum impact on the Company as the Company’s current presentation of comprehensive income follows the two-statement approach.

Note 2. Accrued Liabilities:

Accrued liabilities consist of the following:
   
June 30, 2012
   
March 31, 2012
 
   
(unaudited)
       
Accrued payroll and related taxes
  $ 2,176,566     $ 2,111,853  
Accrued marketing program costs
    580,000       580,000  
Accrued professional fees
    55,250       70,000  
Accrued interest
    1,098,136       1,037,044  
Accrued board of directors' fees
    143,792       134,792  
Other expenses
    313,151       232,111  
 
               
    Total
  $ 4,366,895     $ 4,165,800  
 
 
9

 

Note 3. Short-term Bridge Loans:

Summary of short-term bridge loan balances is as follows:
 
   
June 30, 2012
   
March 31, 2012
 
   
(Unaudited)
       
             
April 14, 2008 (a)
    60,000       60,000  
August 5, 2008  (b)
    55,000       55,000  
 
               
Total
  $ 115,000     $ 115,000  
 
April 14, 2008 financing:

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

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 debt of $171,622 in accordance with the Financial Accounting Standards Codification. On December 15, 2008, we were in default on the notes for non-payment of the required principal payment.  The remedy for event of default was acceleration of principal and interest so they were recorded at face value.  As of March 31, 2012, 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 exercise dates for all warrants other than 6,000 warrants granted on January 27, 2009 have expired. The exercise price of the 6,000 warrants was reduced again to $1.00 when the Company issued additional convertible instruments with a lower conversion rate on January 27, 2009.  

August 5, 2008 financing:

(b) On August 5, 2008, the Company entered into a financing arrangement that provided for the issuance of a $55,000 face value short term bridge loan, due September 5, 2008, plus warrants to purchase (i) 5,000 shares of our common stock 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 as the exercise dates for these warrants have now expired.  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 principal payment. Remedies for an event of default are acceleration of principal and interest.  There were no incremental penalties for the event of default; however the notes were recorded at face value. Remedies for an event of default are acceleration of principal and interest.
 
 
10

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

August 5, 2008 financing (continued):

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 debt of $2,112 in accordance with the FASB Accounting Standards Codification. As of June 30, 2012, 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 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.  

Information and significant assumptions as of June 30, 2012 and March 31, 2012 for warrants which are required to be recorded at fair value each reporting period:

   
January 27, 2009
 
   
Extension Warrants
 
   
June 
   
March
 
    30, 2012     31, 2012  
   
(unaudited)
         
Estimated fair value of underlying common share
  $ 0.0006     $ 0.0015  
Conversion or strike price
  $ 1.00     $ 1.00  
Volatility (based upon Peer Group)
    115.00 %     115.00 %
Equivalent term (years)
    1.58       1.83  
Risk-free rate
    0.29 %     0.33 %
Dividends
    --       --  

 
11

 

Note 4. Convertible Notes Payable:

Convertible debt carrying values consist of the following:
 
       
Fair Value Amounts
Original Issued
     
June
   
March
Face Value
     
 30, 2012
   
31, 2012
 $           312,000
Convertible Note Financing, due March 31, 2014 (a)
$
31,906
  $
          31,201
 $           500,000
Convertible Note Financing, due March 31, 2014 (b)
 
        346,709
   
          569,774
 $           243,333
Convertible Note Financing, due March 31, 2014 (c)
 
        292,000
   
          292,000
 $             60,833
Convertible Note Financing, due March 31, 2014 (d)
 
          60,833
   
            60,833
 $             20,000
Convertible Note Financing, due March 31, 2014 (c)
 
          20,000
   
            20,000
 $           120,000
Convertible Note Financing, due March 31, 2014 (e)
 
          78,849
   
            74,932
 $               5,000
Convertible Note Financing, due March 31, 2014 (e)
 
          14,964
   
            11,964
 $             60,000
Convertible Note Financing, due March 31, 2014 (e)
 
        128,387
   
            92,394
 $             70,835
Convertible Note Financing, due March 31, 2014 (e)
 
        152,180
   
          109,689
 $           507,500
Convertible Note Financing, due March 31, 2014 (f)
 
        523,707
   
          529,393
 $           200,000
Convertible Note Financing, due March 31, 2014 (e)
 
        145,618
   
            79,372
 $           161,111
Convertible Note Financing, due March 31, 2014 (e)
 
        126,101
   
            72,736
 $             27,778
Convertible Note Financing, due March 31, 2014 (e)
 
          42,296
   
            23,894
 $           111,112
Convertible Note Financing, due March 31, 2014 (g)
 
        167,539
   
          229,636
 $             50,000
Convertible Note Financing, due March 31, 2014 (e)
 
          41,934
   
            26,122
 $             55,000
Convertible Note Financing, due March 31, 2014 (e)
 
        328,526
   
          322,408
 $           137,500
Convertible Note Financing, due March 31, 2014 (e)
 
        412,449
   
          404,494
 $             55,000
Convertible Note Financing, due March 31, 2014 (e)
 
        328,526
   
          322,408
 $           100,000
Convertible Note Financing, due March 31, 2014 (h)
 
          38,875
   
            38,829
 $           900,000
Convertible Note Financing, due July 15, 2012 (i)
 
        199,392
   
          568,135
 $           400,000
Convertible Note Financing, due July 15, 2012 (j)
 
        327,533
   
          415,335
 $           600,000
Convertible Note Financing, due September 17, 2012 (k)
        575,155
   
          722,663
 $           221,937
Convertible Note Financing, due September 17, 2012 (l)
          52,269
   
          132,508
 $           500,000
Convertible Note Financing, due January 15, 2013 (m)
        634,532
   
          828,664
 $             59,359
Convertible Note Financing, due May 5, 2012 (n)
 
            9,359
   
            59,359
 $        1,000,000
Convertible Note Financing due March 31, 2014 (o)
 
     1,323,743
   
       1,733,696
 $           172,211
Convertible Note Fiancing due March 31, 2014 (p)
 
        259,365
   
          300,962
 
Total convertible notes payable
  $
6,662,747
  $
    8,073,401
 
(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

 
12

 

Note 4 – Convertible Notes Payable (continued):

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

 $260,000 of these loans.  To date, total conversions of $293,148 in principal face value have been converted into shares of common stock.

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,
 
Increase principal by $52,000
 
   
  2009 or closng of another funding
         
January 2009
 
Extend maturity date to July 1, 2009 and
 
140,000 shares of restricted stock
   
   add a conversion option to $0.05
         
January 2010
 
Extend maturity date to June 30, 2010
 
Convertible notes (See Note 4 (h))
July 2010
 
Extend maturity date to March 31, 2011
 
Change in conversion price to $.035
March 2011
 
Extend maturity date to March 31, 2012
 
Change in conversion price to $.02
March 2012
 
Extend maturity date to March 31, 2014
 
New convertible notes (See Note 4(p))
                 
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.  On March 17, 2011, we extended the due date to March 31, 2012 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $600,000. The conversion price of these notes shall be equal to eighty (80%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal market for the twenty trading days preceding a conversion date but in no event greater than $.02, subject to further reduction as described in the notes.  On March 31, 2012, we extended the due date to March 31, 2014 by issuing new convertible notes payable for 10% of the outstanding March 31, 2012 principal face value amount (see Note 4 (p)).

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:

 
13

 
 
Note 4 – Convertible Notes Payable (continued):

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

       
Shares
             
       
Indexed
   
Series A
   
Series B
 
Financing
 
Closing date
 
to Note
   
Warrants
   
Warrants
 
  $600,000 Face Value Convertible Note Financing
 
October 23, 2007
 
Converted
      958,805       140,910  
  $500,000 Face Value Convertible Note Financing
 
February 15, 2008
    215,951,528       757,304       75,758  
  $100,000 Face Value Convertible Note Financing
 
June 26, 2008
 
Converted
      151,502       15,152  
     Total
        215,951,528       1,867,611       231,820  
 
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. 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.  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 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 price for the convertible debt was changed to $.035.  In addition, $221,608 of the outstanding balance plus $27,460 in accrued interest payable was assigned to new debt holders. On March 17, 2011, we extended the due date to March 31, 2012 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $600,000.  The conversion price for the convertible debt was changed to $0.02 as well as the exercise price of all associated warrants to $.02. The conversion price of these notes shall be equal to eighty percent (80%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal market for the twenty trading days preceding a conversion date but in no event greater than $.02, subject to further reduction as described in the notes.  On March 31, 2012, we extended the due date to March 31, 2014 by issuing new convertible notes payable for 10% of the outstanding March 31, 2012 principal face value amount (see Note 4 (p)). To date, a total of $660,990 of the principal balance and $177,981 in accrued interest have been converted into shares of common stock, and a total of $301,608 of the principal balance was sold to other accredited investors, resulting in the outstanding principal amount of $237,402 at June 30, 2012.

 
14

 
 
Note 4 – Convertible Notes Payable (continued):

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

The original principal amounts of $600,000 from October, 2007 and $100,000 from June, 2008 out of the original total of $1,200,000 financing have been fully converted into shares of common stock and/or sold to other accredited investors.

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, 2012 and March 31, 2012 for this financing are illustrated in the following tables:

$500,000 Convertible Promissory Note Financing
           
  (Initial Closing)
 
Hybrid Note
   
Warrants
 
   
June
30, 2012
   
March
31, 2012
   
June
30, 2012
   
March
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0011     $ 0.003     $ 0.0016     $ 0.0048  
Conversion or strike price
  $ 0.0011     $ 0.003     $ 0.02     $ 0.02  
Volatility (based upon Peer Group)
    -       -       120.00 %     120.00 %
Equivalent term (years)
    -       -       3.04       3.29  
Risk-free rate
    -       -       0.55 %     0.62 %
Credit-risk adjusted yield
    7.04 %     7.19 %     -       -  
Dividends
    -       -       -       -  
 
(c)
$243,333 convertible notes payable
 
On September 29, 2008, for cash proceeds for $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 4 (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 the subscription agreement for a convertible debt financing in the principal gross amount of $900,000. On March 17, 2011, we extended the due date to March 31, 2012 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $600,000.  The conversion price for the convertible debt was changed to $0.02 as well as the exercise price of all associated warrants to $.02. The conversion price of these notes shall be equal to eighty (80%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal market for the twenty trading days preceding a conversion date but in no event greater than $.02, subject to further reduction as described in the notes.  On March 31, 2012, we extended the due date to March 31, 2014 by issuing new convertible notes payable for 10% of the outstanding March 31, 2012

 
15

 
 
Note 4 – Convertible Notes Payable (continued):

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

principal face value amount (see Note 4 (p)).The original face principal amount of $243,333 is still outstanding as no conversions have occurred.

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).

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.

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. The conversion price and exercise price were reduced again to $.035 as part of the July, 2010 financing of $900,000 and again to $.02 as part of the March, 2011 financing of $600,000.

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 principle 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 which the conversion price for the notes payable and exercise price of the warrants were reduced to $0.035.  Later on March 17, 2011, we extended the due date to March 31, 2012 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $600,000 which the conversion price for the notes payable and exercise price for the warrants was reduced to $0.02. The conversion price of these notes shall be equal to eighty (80%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal market for the twenty trading days preceding a conversion date but in no event greater than $.02, subject to further reduction as described in the notes.  On March 31, 2012, we extended the due date to March 31, 2014 by issuing new convertible notes payable for 10% of the outstanding March 31, 2012 principal face value amount (see Note 4 (p)). The original principal amount of $60,833 is still outstanding as there have been no conversions.

 
16

 

Note 4 – Convertible Notes Payable (continued):

(d)
$60,833 convertible notes payable (continued)

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.

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.

(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 for $55,000 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.  As part of this extension, the conversion price of the convertible notes payable and the exercise price of the applicable warrants were changed to $.035.   On March 17, 2011, we extended the due date to March 31, 2012 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $600,000.  As part of this extension, the conversion price of the convertible notes payable and the exercise price of the applicable warrants were changed to $.02. The conversion price of these notes shall be equal to eighty (80%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal market for the twenty trading days preceding a conversion date but in no event greater than $.02, subject to further reduction as described in the notes.  On March 31, 2012, we extended the due date to March 31, 2014 by issuing new convertible notes payable for 10% of the outstanding March 31, 2012 principal face value amount (see Note 4 (p)).  To date, $336,535 of the principal balance and $85,266 of accrued interest were converted into shares of common stock, resulting in the outstanding principal balance of $610,689.

 
17

 
 
Note 4 – Convertible Notes Payable (continued):

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

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

     
Outstanding
                   
 
Original
 
Face Balance at
         
indexed
   
indexed
 
  Face Value  
6/30/2012
 
Closing date
 
 Maturity Date
 
to note
   
to warrants
 
$
       130,000
  $ 65,000  
January 27, 2009
 
March 31, 2014
    59,090,910       120,000  
 
             70,835
    70,835  
January 27, 2009
 
March 31, 2014
    64,394,545       -  
 
             60,000
    60,000  
February 17, 2009
 
March 31, 2014
    54,545,455       60,000  
 
           200,000
    100,000  
March 30, 2009
 
March 31, 2014
    90,909,091       416,667  
 
           161,111
    80,556  
July 15, 2009
 
March 31, 2014
    73,232,727       335,649  
 
             27,778
    27,778  
October 1, 2009
 
March 31, 2014
    25,252,727       -  
 
             50,000
    25,000  
January 28, 2010
 
March 31, 2014
    22,727,273       104,167  
 
             55,000
    55,000  
February 19, 2010
 
March 31, 2014
    50,000,000       104,167  
 
           137,500
    71,520  
March 26, 2010
 
March 31, 2014
    65,018,018       286,459  
 
             55,000
    55,000  
May 13, 2010
 
March 31, 2014
    50,000,000       114,584  
                                 
$
        947,224
  $ 610,689             555,170,746       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.

We received the following proceeds from the financing transactions:

         
Debt
       
         
Discount &
   
Net
 
   
Gross Proceeds
   
Finance Costs
   
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  
 
 
18

 

Note 4 – Convertible Notes Payable (continued):

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

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.

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.

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, 2012 and March 31, 2012 for this financing are illustrated in the following tables:

$130,000 Convertible Promissory Note Financing
                       
  (Initial Closing)
 
Hybrid Note
   
Warrants
 
   
June
30, 2012
   
March
31, 2012
   
June
30, 2012
   
March
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0012     $ 0.0012     $ 0.0011     $ 0.003  
Conversion or strike price
  $ 0.0011     $ 0.003     $ 0.02     $ 0.02  
Volatility (based upon Peer Group)
    -       -       120.00 %     120.00 %
Equivalent term (years)
    -       -       3.04       3.29  
Risk-free rate
    -       -       0.55 %     0.62 %
Credit-risk adjusted yield
    7.37 %     7.37 %     -       -  
Dividends
    -       -       -       -  
 
$60,000 Convertible Promissory Note Financing
                       
  (Initial Closing)
 
Hybrid Note
   
Warrants
 
   
June
30, 2012
   
March
31, 2012
   
June
30, 2012
   
March
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0012     $ 0.0012     $ 0.0011     $ 0.003  
Conversion or strike price
  $ 0.0011     $ 0.003     $ 0.02     $ 0.02  
Volatility (based upon Peer Group)
    -       -       120.00 %     120.00 %
Equivalent term (years)
    -       -       3.04       3.29  
Risk-free rate
    -       -       0.55 %     0.62 %
Credit-risk adjusted yield
    7.37 %     7.37 %     -       -  
Dividends
    -       -       -       -  

 
19

 
 
Note 4 – Convertible Notes Payable (continued):

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

$200,000 Convertible Promissory Note Financing
                       
  (Initial Closing)
 
Hybrid Note
   
Warrants
 
   
June
30, 2012
   
March
31, 2012
   
June
30, 2012
   
March
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0012     $ 0.0012     $ 0.0011     $ 0.003  
Conversion or strike price
  $ 0.0011     $ 0.003     $ 0.02     $ 0.02  
Volatility (based upon Peer Group)
    -       -       120.00 %     120.00 %
Equivalent term (years)
    -       -       3.04       3.29  
Risk-free rate
    -       -       0.55 %     0.62 %
Credit-risk adjusted yield
    7.37 %     7.37 %     -       -  
Dividends
    -       -       -       -  

$161,111 Convertible Promissory Note Financing
                       
  (Initial Closing)
 
Hybrid Note
   
Warrants
 
   
June
30, 2012
   
March
31, 2012
   
June
30, 2012
   
March
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0012     $ 0.0012     $ 0.0011     $ 0.003  
Conversion or strike price
  $ 0.0011     $ 0.003     $ 0.02     $ 0.02  
Volatility (based upon Peer Group)
    -       -       120.00 %     120.00 %
Equivalent term (years)
    -       -       3.04       3.29  
Risk-free rate
    -       -       0.55 %     0.62 %
Credit-risk adjusted yield
    7.37 %     7.37 %     -       -  
Dividends
    -       -       -       -  

$27,778 Convertible Promissory Note Financing
                       
  (Initial Closing)
 
Hybrid Note
   
Warrants
 
   
June
30, 2012
   
March
31, 2012
   
June
30, 2012
   
March
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0012     $ 0.0012     $ 0.001     $ 0.003  
Conversion or strike price
  $ 0.0011     $ 0.003     $ 0.02     $ 0.02  
Volatility (based upon Peer Group)
    -       -       120.00 %     120.00 %
Equivalent term (years)
    -       -       3.04       3.29  
Risk-free rate
    -       -       0.55 %     0.62 %
Credit-risk adjusted yield
    7.37 %     7.37 %     -       -  
Dividends
    -       -       -       -  

 
20

 
 
Note 4 – Convertible Notes Payable (continued):

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

$50,000, $55,000, $137,500 and $55,000 Convertible
             
Promissory Note Financings
 
Hybrid Note
   
Warrants
 
   
June
30, 2012
   
March
31, 2012
   
June
30, 2012
   
March
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0012     $ 0.0012     $ 0.0011     $ 0.00  
Conversion or strike price
  $ 0.0011     $ 0.003     $ 0.02     $ 0.02  
Volatility (based upon Peer Group)
    -       -       120.00 %     120.00 %
Equivalent term (years)
    -       -       3.04       3.29  
Risk-free rate
    -       -       0.55 %     0.62 %
Credit-risk adjusted yield
    7.37 %     7.37 %     -       -  
Dividends
    -       -       -       -  
 
(f)
$507,500 convertible note 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 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.  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 which the conversion price for the notes payable was changed to $.035. In addition, $203,882 of the outstanding balance plus $46,327 in accrued interest payable were assigned to new debt holders.  On March 17, 2011, we extended the due date to March 31, 2012 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $600,000 in which the conversion price for the notes payable was changed to $.02. The conversion price of these notes shall be equal to eighty (80%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal market for the twenty trading days preceding a conversion date but in no event greater than $.02, subject to further reduction as described in the notes.  On March 31, 2012, we extended the due date to March 31, 2014 by issuing new convertible notes payable for 10% of the outstanding March 31, 2012 principal face value amount (see Note 4 (p)).  After the sale of $253,750 to other accredited investors, the current outstanding balance at June 30, 2012 is $253,750.

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.

 
21

 
 
Note 4 – Convertible Notes Payable (continued):

(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 in which the conversion price of the notes payable and the exercise price of the applicable warrants were changed to $.035.  On March 17, 2011, we extended the due date to March 31, 2012 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $600,000.  As part of this extension, the conversion price of the convertible notes payable and the exercise price of the applicable warrants were changed to $.02. The conversion price of these notes shall be equal to eighty (80%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal market for the twenty trading days preceding a conversion date but in no event greater than $.02, subject to further reduction as described in the notes.  On March 31, 2012, we extended the due date to March 31, 2014 by issuing new convertible notes payable for 10% of the outstanding March 31, 2012 principal face value amount (see Note 4 (p)). The full original amount of $111,112 is still outstanding.

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. As part of the agreement from the July, 2010 financing for $900,000, the maturity date was extended to March 31, 2011, and the conversion price of the notes payable was changed to $.035.  As part of the agreement from the March, 2011 financing for $600,000, the maturity date was extended to March 31, 2012, and the conversion price of the notes payable was changed to $.02. The conversion price of these notes shall be equal to eighty (80%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal market for the twenty trading days preceding a conversion date but in no event greater than $.02, subject to further reduction as described in the notes.  On March 31, 2012, we extended the due date to March 31, 2014 by issuing new convertible notes payable for 10% of the outstanding March 31, 2012 principal face value amount (see Note 4 (p)).  To date, $50,000 of the principal balance and $13,450 of accrued interest were converted into shares of common stock, resulting in an outstanding balance at June 30, 2012 of $50,000.

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.

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, 2012 and March 31, 2012 for this financing is illustrated in the following table:

 
22

 
 
Note 4 – Convertible Notes Payable (continued):

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

$100,000 Convertible Promissory Note Financing
 
Hybrid Note
 
   
June
30, 2012
   
March
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0011     $ 0.003  
Conversion or strike price
  $ 0.0011     $ 0.003  
Volatility (based upon Peer Group)
    -       -  
Equivalent term (years)
    -       -  
Risk-free rate
    -       -  
Credit-risk adjusted yield
    7.04 %     7.19 %
Dividends
    -       -  

(i)         $900,000 convertible notes payable

On July 15, 2010, we entered into a Subscription Agreement with a group of accredited investors.  Under this agreement, we agreed to sell up to $900,000 of our securities consisting of 10% convertible notes with a maturity date of July 15, 2012 and 65,999,999 Class A stock purchase warrants at an exercise price of $.035 with an expiration date of July 14, 2015. The conversion price for the convertible notes payable per share shall be equal to seventy-five percent (75%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal Market for the ten trading days preceding a conversion date but in no event greater than $.08. On February 22, 2012, we entered into a Fifth Amendment and Consent Agreement as part of the February, 2012 financing in which the above $.08 conversion price was changed to $.02 as well as the exercise price of the warrants was changed from $.035 to $.02. These notes payable and warrants 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.  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-Sholes Merton 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. At inception, we allocated $156,000 as the valuation cost of the warrants (debt discount) against the gross proceeds of the $900,000 financing using the relative fair value method. We recorded a total debt discount of $171,600 (above $156,000 plus $15,600 for warrants issued to placement agent) in which we recorded $167,134 to capture the accretion of the debt discount from inception. To date, $125,000 was converted into shares of common stock, resulting in an outstanding balance of $775,000 at June 30, 2012 plus $57,000 was converted into shares of common stock.

Total financing costs paid from this financing amounted to $164,500 as well as a payment of $39,024 for other past due professional fees, resulting in a net amount of $696,476 to be paid to us at $150,000 per month until the total amount is paid in the following months.  In addition, we recorded $15,600 in non-cash deferred financing fees for the issuance of 6,000,000 warrants as a finder’s fee as part of the total issued 65,999,999 Class A warrants.  In addition, we paid other financing fees associated with this financing in the amount of $11,500, resulting in a total of $191,600.

As noted throughout Note 4, certain debts were assigned to new debt holders.  A total of $413,358 in convertible notes payable and $86,642 in accrued interest payable for a total of $500,000 was assigned to new debt holders as part of the July, 2010 financing.  Out of the total $500,000 balance, a total of $491,789 in these assigned notes payable were converted into common shares of stock from inception through June 30, 2012.These $500,000 assigned notes have the same conversion price terms as the $900,000 new notes payable.

 
23

 
 
Note 4 – Convertible Notes Payable (continued):

(i)         $900,000 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, 2012 and March 31, 2012 for this financing is illustrated in the following table:

$900,000 Convertible Promissory Note Financing
                       
  (Initial Closing)
 
Hybrid Note
   
Warrants
 
   
June
30, 2012
   
March
31, 2012
   
June
30, 2012
   
March 
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0011     $ 0.003     $ 0.0011     $ 0.003  
Conversion or strike price
  $ 0.0011     $ 0.00222     $ 0.02     $ 0.02  
Volatility (based upon Peer Group)
    -       -       120.00 %     120.00 %
Equivalent term (years)
    -       -       3.04       3.29  
Risk-free rate
    -       -       0.55 %     0.62 %
      7.04 %     7.37 %     -       -  
Dividends
    -       -       -       -  

(j)         $400,000 convertible notes payable

On January 21, 2011, we entered into a Subscription Agreement with a group of accredited investors.  Under this agreement, we agreed to sell up to $400,000 of our securities consisting of 10% convertible notes with a maturity date of July 15, 2012 and 20,460,357 Class A stock purchase warrants at an exercise price of $.035 with an expiration date of January 20, 2016. The conversion price for the convertible notes payable per share shall be equal to seventy-five percent (75%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal Market for the ten trading days preceding a conversion date but in no event greater than $.08.  On February 22, 2012, we entered into a Fifth Amendment and Consent Agreement as part of the February, 2012 financing in which the above $.08 conversion price was changed to $.02 as well as the exercise price of the warrants was changed from $.035 to $.02. These notes payable and warrants 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.  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-Sholes Merton 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. At inception, we allocated $136,123 as the valuation cost of the warrants (debt discount) against the gross proceeds of the $400,000 financing using the relative fair value method. We recorded $131,133 to capture the accretion of the debt discount since inception.  Total conversions of the principal amount to date amounted to $195,523 which were converted into shares of common stock, resulting in the current outstanding balance of $204,477 at June 30, 2012 as well as accrued interest in the total amount of $8,040 was converted into shares of common stock.

Total financing costs paid from this financing amounted to $70,000  as well as the payment of $102,500 of a previous promissory note resulted  in a net amount of $227,500 to be paid to us.  Out of this total $227,500, an amount of $128,500 was paid in the first January, 2011 closing with the remaining amount of $99,000 being paid in the second February, 2011 closing.  In addition, we recorded $31,921 in non-cash deferred financing fees for the issuance of 2,046,035 restricted shares of common stock as a finder’s fee.

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, 2012 and March 31, 2012 for this financing is illustrated in the following table:

 
24

 
 
Note 4 – Convertible Notes Payable (continued):

(j)         $400,000 convertible notes payable (continued)

   
Hybrid Note
   
Warrants
 
   
June
30, 2012
   
March
31, 2012
   
June
30, 2012
   
March 
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0011     $ 0.003     $ 0.0011     $ 0.003  
Conversion or strike price
  $ 0.0011     $ 0.00222     $ 0.02     $ 0.02  
Volatility (based upon Peer Group)
    -       -       120.00 %     120.00 %
Equivalent term (years)
    -       -       3.56       3.81  
Risk-free rate
    -       -       0.69 %     0.76 %
Credit-risk adjusted yield
    7.04 %     7.37 %     -       -  
Dividends
    -       -       -       -  
 
(k)        $600,000 convertible notes payable

On March 17, 2011, we entered into a Subscription Agreement with a group of accredited investors.  Under this agreement, we agreed to sell up to $600,000 of our securities consisting of 10% convertible notes with a maturity date of September 17, 2012 and 43,708,610 Class A stock purchase warrants (includes 3,973,510 warrants as a finder’s fee) at an exercise price of $.02 with an expiration date of March 16, 2016. The conversion price for the convertible notes payable per share shall be equal to seventy-five percent (75%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal Market for the ten trading days preceding a conversion date but in no event greater than $.02. These notes payable and warrants 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.  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-Sholes Merton 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. At inception, we allocated $223,802 as the valuation cost of the warrants (debt discount) against the gross proceeds of the $400,000 financing using the relative fair value method. We recorded $193,133 to capture the accretion of the debt discount from inception through June 30, 2012.  Total conversions of the principal amount to date amounted to $351,942 which were converted into shares of common stock, resulting in an outstanding principal balance of $248,058 at June 30, 2012.

Total financing costs paid from this financing amounted to $90,000 resulted in a net amount of $510,000 to be paid to us.   In addition, we recorded $75,371 in non-cash deferred financing fees for the issuance of 3,973,510 warrants to purchase common stock as a finder’s fee as well as issued a convertible note for $18,000 for a 3% non-accountable allowance placement agent fee as this note contained the same conversion rights as the above convertible notes.  This particular note has been fully converted into shares of common stock.

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, 2012 and March 31, 2012 for this financing is illustrated in the following table:

 
25

 
 
Note 4 – Convertible Notes Payable (continued):

(k)        $600,000 convertible notes payable (continued)

$600,000 Convertible Promissory Note Financing
                       
  (Initial Closing)
 
Hybrid Note
   
Warrants
 
   
June
30, 2012
   
March
31, 2012
   
June
30, 2012
   
March 
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0011     $ 0.003     $ 0.0011     $ 0.003  
Conversion or strike price
  $ 0.0011     $ 0.00222     $ 0.02     $ 0.02  
Volatility (based upon Peer Group)
    -       -       120.00 %     120.00 %
Equivalent term (years)
    -       -       3.71       3.96  
Risk-free rate
    -       -       0.74 %     0.80 %
Credit-risk adjusted yield
    7.04 %     7.19 %     -       -  
Dividends
    -       -       -       -  

(l)         $221,937 convertible notes payable

On May 23, 2011, the holder of the original April 2, 2008 short term bridge loan with principal balance of $120,000 and of the original May 19, 2008 short term bridge loan with principal balance of $33,000 entered into an agreement to transfer the original notes and personal guarantee of Roy Warren, CEO, to another debt holder (Jody Eisenman) who already is an existing debt holder and accredited investor. On June 30, 2011, the new debt holder entered into a Debt Exchange Agreement with the Company to transfer these two short term bridge loans dated April 2, 2008 with principal balance of $120,000 plus interest of $53,951 and the second short term bridge loan dated May 19, 2008 with principal balance of $33,000 plus interest of $14,986 for a grand total of $221,937 into a new long term convertible note with an interest rate of 10% and a maturity date of September 17, 2012.  This new note covers all previous commitments through June 30, 2011. As consideration for this exchange, the Company cancelled the personal guarantee of Roy Warren, CEO, and issued a warrant to purchase 20,000,000 shares of the Company’s common stock at an exercise price of $.02 with a life of five years.  This convertible note and warrants are subject to the same rights as all other convertible notes and associated warrants as the conversion price for the convertible notes payable per share shall be equal to seventy-five percent (75%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal Market for the ten trading days preceding a conversion date but in no event greater than $.02. 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.  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-Sholes Merton 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. Through this exchange, all original notes and guarantee and all obligations related thereunder were cancelled and terminated.   We recorded $2,295 to capture the accretion of the debt discount from inception through June 30, 2012. Total conversions of the principal amount to date amounted to $156,833 leaving a remaining outstanding principal face amount of $65,104 plus $806 in accrued interest was converted into shares of common stock.

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, 2012 and March 31, 2012 for this financing is illustrated in the following table:

 
26

 
 
Note 4 – Convertible Notes Payable (continued):

(l)         $221,937 convertible notes payable (continued)

$221,937 Convertible Promissory Note Financing
 
Hybrid Note
   
Warrants
 
   
June
30, 2012
   
March
31, 2012
   
June
30, 2012
   
March
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0011     $ 0.003     $ 0.0011     $ 0.003  
Conversion or strike price
  $ 0.0011     $ 0.003     $ 0.02     $ 0.02  
Volatility (based upon Peer Group)
    --       --       120.00 %     120.00 %
Equivalent term (years)
    --       --       4       4.25  
Risk-free rate
    --       --       0.82 %     0.88 %
Credit-risk adjusted yield
    7.04 %     7.19 %     --       --  
Dividends
    --       --       --       --  

(m)       $500,000 convertible notes payable
 
On July 15, 2011, we entered into a Subscription Agreement with a group of accredited investors.  Under this agreement, we agreed to sell up to $1,000,000 of our securities consisting of 10% convertible notes with a maturity date of January 15, 2013 in which we did sell $500,000.  In addition, we did issue a convertible note under the same terms as the $500,000 convertible notes for a 3% finder’s fee in the amount of $15,000.  We issued 27,500,000 Class A stock purchase warrants (includes 2,500,000 warrants as a finder’s fee) at an exercise price of $.02 with an expiration date of July 14, 2016.  The conversion price for the convertible notes payable per share shall be equal to seventy-five percent (75%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal Market for the ten trading days preceding a conversion date but in no event greater than $.02. These notes payable and warrants 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.  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-Sholes Merton 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. At inception, we allocated $70,454 as the valuation cost of the warrants (debt discount) against the gross proceeds of the $500,000 financing using the relative fair value method. We recorded $45,404 to capture the accretion of the debt discount from inception through June 30, 2012. There have been no conversions of this debt. Total financing costs paid from this financing amounted to $95,000 resulting in a net amount of $405,000 to be paid to us.

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, 2012 and March 31, 2012 for this financing is illustrated in the following table:

 
27

 
 
Note 4 – Convertible Notes Payable (continued):

(m)
$500,000 convertible notes payable (continued)

$500,000 Convertible Promissory Note Financing
 
Hybrid Note
   
Warrants
 
   
June
30, 2012
   
March
31, 2012
   
June
30, 2012
   
March
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0011     $ 0.003     $ 0.0011     $ 0.003  
Conversion or strike price
  $ 0.0011     $ 0.00222     $ 0.02     $ 0.02  
Volatility (based upon Peer Group)
    --       --       110.00 %     110.00 %
Equivalent term (years)
    --       --       4.04       4.29  
Risk-free rate
    --       --       0.83 %     0.89 %
Credit-risk adjusted yield
    7.04 %     7.19 %     --       --  
Dividends
    --       --       --       --  

(n)        $59,359 convertible notes payable

On November 3, 2011, we entered into a promissory note with conversion rights with outside legal counsel in the principal sum of $59,359, payable on or before May 5, 2012.  This note shall bear interest at the rate of five percent (5%) simple interest per annum until paid in full. At the option of the holder at the due date, all or any portion of the unpaid accrued interest and/or unpaid principal amount of this note shall be converted into newly issued shares of the Company’s common stock at the lesser of a conversion price per share equal to (1) the closing price reported on the primary trading market on the day prior to the conversion date or (2) the lowest conversion price for other convertible debt or securities issued by the Company with the ability to be converted or exercised on the Due Date. The conversion price in no event will be such an amount to trigger any conversion or exercise price reset or anti-dilution rights in existing convertible notes or other convertible securities on the Due Date. The holder may not convert any amount of the note into a number of shares of common stock which would result in beneficial ownership by the holder and its affiliates of more than 4.99% of the outstanding shares of common stock on such conversion date. The holder is not limited to aggregate conversions of 4.99%.  There have been no conversions of this debt. On May 29, 2012, a conversion for $50,000 was made for the issuance of shares of common stock, resulting in an outstanding balance of $9,359.

(o)        $1,000,000 convertible notes payable

On February 22, 2012, we entered into a Subscription Agreement with a group of accredited investors.  Under this agreement, we agreed to sell up to $1,000,000 of our securities consisting of 10% convertible notes with a maturity date of March 31, 2014 in which we did sell $1,000,000.  We issued 50,000,000 Class A stock purchase warrants at an exercise price of $.02 with an expiration date of February 21, 2017.  The conversion price for the convertible notes payable per share shall be equal to seventy-five percent (75%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal Market for the ten trading days preceding a conversion date but in no event greater than $.02. These notes payable and warrants 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.  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-Sholes Merton 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. At inception, we allocated $44,735 as the valuation cost of the warrants (debt discount) against the gross proceeds of the $1,000,000 financing using the relative fair value method. We recorded $10,604 to capture the accretion of the debt discount from inception through June 30, 2012. There have been no conversions of this debt.

Total financing costs paid from this financing amounted to $160,000. In addition, we applied three previous bridge loans for a total of $175,000 into this new financing, paid $103,451 for two other previous bridge loans including interest, resulting in a net amount of $561,549 to be paid to us.
 
 
28

 
 
Note 4 – Convertible Notes Payable (continued):

(o)
$1,000,000 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, 2012 and March 31, 2012 for this financing is illustrated in the following table:

$1,000,000 Convertible Promissory Note Financing
 
Hybrid Note
   
Warrants
 
   
June
30, 2012
   
March
31, 2012
   
June
30, 2012
   
March
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0011     $ 0.003     $ 0.0011     $ 0.003  
Conversion or strike price
  $ 0.0011     $ 0.00222     $ 0.02     $ 0.02  
Volatility (based upon Peer Group)
    --       --       90.00 %     110.00 %
Equivalent term (years)
    --       --       4.65       4.9  
Risk-free rate
    --       --       0.99 %     1.06 %
Credit-risk adjusted yield
    7.04 %     7.19 %     --       --  
Dividends
    --       --       --       --  

(p)        $172,211 convertible notes payable

On March 31, 2012, we entered into an Extension Agreement with note holders who have existing convertible notes in the total outstanding amount of $172,211 with a due date of March 31, 2012 to extend the maturity date of these notes to March 31, 2014.  As consideration of the extension of the maturity date of these notes, we issued to each note holder a new convertible note with an interest rate of twelve percent (12%) in the principal amount representing ten percent (10%) of the principal amount owed to each note holder.  The conversion price for the convertible notes payable per share shall be equal to seventy-five percent (75%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal Market for the ten trading days preceding a conversion date but in no event greater than $.02. These notes payable 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.  There have been no conversions of this debt.

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, 2012 and March 31, 2012 for this financing is illustrated in the following table:

$172,211 Convertible Promissory Note Financing
 
Hybrid Note
 
   
June
30, 2012
   
March
31, 2012
 
Estimated fair value of underlying common share
  $ 0.0011     $ 0.003  
Conversion or strike price
  $ 0.0011     $ 0.00222  
Volatility (based upon Peer Group)
    --       --  
Equivalent term (years)
    --       --  
Risk-free rate
    --       --  
Credit-risk adjusted yield
    7.04 %     7.19 %
Dividends
    --       --  
 
 
29

 
 
Note 5.  Non-convertible Notes payable:

For the period ended March 31, 2011, we paid $23,750 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 amount due of $10,250 was required to be settled through monthly payments of $4,250 through December, 2010.  Although we did not make all payments in the quarter ended June 30, 2012, we anticipate making those payments in late 2012.

On January 26, 2011, we entered into a promissory note with our landlord (Pishon Partners, LLC) in the principal amount of $75,762.  This amount is due June 30, 2011 together with interest of 10% computed on the basis of the actual number of days elapsed over a 360-day year on the unpaid balance.  The default rate shall be a per annum interest rate equal to the maximum amount permitted by applicable law.   Although we have not paid this note yet, we anticipate making a payment pending a future financing.

On June 14 2012, we entered into two promissory notes for $100,000 and $40,000, respectively, with two current accredited investors.  These notes are subject to an interest rate of ten percent (10%) and are due the sooner of (i) October 14, 2012 or (ii) from the proceeds of the next funding.  We received the $100,000 payment on June 27, 2012 and the $40,000 payment on July 9, 2012.

On June 26, 2012, we entered into a promissory note of $110,000 with a current accredited investor.  We agreed to pay a finder’s fee of $10,000 as we received the net payment of $100,000 on June 28, 2012.  The note is subject to an interest rate of ten percent (10%) and is due the sooner of (i) October 14, 2012 or (ii) from the proceeds of the next funding.

 
30

 
 
Note 6. Derivative Liabilities:

The following table summarizes the components of derivative liabilities as of June 30, 2012 and March 31, 2012:

Financing arrangement giving rise to
   
June
   
March
  derivated financial instruments
   
30, 2012
   
31, 2012
 $          600,000
Face Value Convertible Note Financing
$
1,225
  $
                      3,913
 $          500,000
Face Value Convertible Note Financing
 
928
   
                        2,964
 $          100,000
Face Value Convertible Note Financing
 
186
   
                           593
 $          120,000
Face Value Short Term Bridge Loan Financing
 
4
   
                             12
 $          120,000
Face Value Short Term Bridge Loan Financing
 
                               4
   
                             12
 $            60,000
Face Value Short Term Bridge Loan Financing
 
                               2
   
                               6
 $            33,000
Face Value Short Term Bridge Loan Financing
 
                               1
   
                               3
 $          120,000
Face Value Convertible Note Financing
 
                             87
   
                           241
 $            60,000
Face Value Convertible Note Financing
 
                             44
   
                           121
 $          200,000
Face Value Convertible Note Financing
 
                           303
   
                           837
 $          161,111
Face Value Convertible Note Financing
 
                           244
   
                           674
 $            50,000
Face Value Convertible Note Financing
 
                             76
   
                           209
 $            55,000
Face Value Convertible Note Financing
 
                             76
   
                           209
 $          137,500
Face Value Convertible Note Financing
 
                           208
   
                           575
 $            55,000
Face Value Convertible Note Financing
 
                             83
   
                           230
 $          900,000
Face Value Convertible Note Financing
 
                      41,235
   
                    113,810
 $          400,000
Face Value Convertible Note Financing
 
                      11,306
   
                      31,102
 $          600,000
Face Value Convertible Note Financing
 
                      31,833
   
                      89,678
 $          221,937
Face Value Convertible Note Financing
 
                      13,048
   
                      44,502
 $          500,000
Face Value Convertible Note Financing
 
                      20,981
   
                      57,528
 $       1,000,000
Face Value Convertible Note Financing
 
                      24,108
   
                      76,043
               
 
   Total derivative liabilities
  $
145,982
  $
                 423,262
 
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.

 
31

 
 
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, 2012 and 2011:

     
Three Months
   
Three Months
 
Our financing arrangements giving rise to
 
Ended
   
Ended
 
  derivated financial instrumentsand the income effects:
 
June 30, 2012
   
June 30, 2011
 
Derivative income (expense):
           
 $    600,000
Face Value Convertible Note Financing
  $ 2,688     $ 15,483  
 $    500,000
Face Value Convertible Note Financing
    2,036       11,729  
 $    100,000
Face Value Convertible Note Financing
    407       2,346  
 $    120,000
Face Value Short Term Bridge Loan Financing
    8       70  
 $    120,000
Face Value Short Term Bridge Loan Financing
    8       70  
 $      60,000
Face Value Short Term Bridge Loan Financing
    4       35  
 $      33,000
Face Value Short Term Bridge Loan Financing
    2       1  
 $      55,000
Face Value Short Term Bridge Loan Financing
    -       4  
 $    120,000
Face Value Convertible Note Financing
    154       946  
 $      60,000
Face Value Convertible Note Financing
    77       474  
 $    200,000
Face Value Convertible Note Financing
    534       3,288  
 $    161,111
Face Value Convertible Note Financing
    430       2,648  
 $      50,000
Face Value Convertible Note Financing
    133       822  
 $      55,000
Face Value Convertible Note Financing
    133       822  
 $    137,500
Face Value Convertible Note Financing
    367       2,260  
 $      55,000
Face Value Convertible Note Financing
    147       904  
 $    900,000
Face Value Convertible Note Financing
    72,575       447,044  
 $    400,000
Face Value Convertible Note Financing
    19,796       104,307  
 $    600,000
Face Value Convertible Note Financing
    46,445       302,281  
 $    221,937
Face Value Convertible Note Financing
    31,454       (295,145 )
 $    500,000
Face Value Convertible Note Financing
    36,547       -  
 $ 1,000,000
Face Value Convertible Note Financing
    51,935       -  
                   
Total derivative income (expense) arising from fair value adjustments
  $ 265,880     $ 600,389  
 
 
32

 
 
Note 6. Derivative Liabilities (continued)

Interest income (expense) from instruments recorded at fair value:
           
 $      600,000
Face Value Convertible Note Financing
  $ -     $ (24,880 )
 $      500,000
Face Value Convertible Note Financing
    (36,209 )     264,153  
 $      312,000
Face Value Convertible Note Financing
    (705 )     (6,091 )
 $      120,000
Face Value Convertible Note Financing
    (3,917 )     (66 )
 $          5,000
Face Value Convertible Note Financing
    (3,000 )     (2 )
 $          5,000
Face Value Convertible Note Financing
    -       (2 )
 $        60,000
Face Value Convertible Note Financing
    (35,993 )     (34 )
 $        70,834
Face Value Convertible Note Financing
    (42,491 )     (39 )
 $        27,778
Face Value Convertible Note Financing
    (18,402 )     (2,032 )
 $      200,000
Face Value Convertible Note Financing
    (66,246 )     28,236  
 $      111,112
Face Value Convertible Note Financing
    62,097       74,736  
 $      161,111
Face Value Convertible Note Financing
    (53,365 )     213,509  
 $      507,500
Face Value Convertible Note Financing
    (21,579 )     (49,073 )
 $        50,000
Face Value Convertible Note Financing
    (15,812 )     45,868  
 $        55,000
Face Value Convertible Note Financing
    (6,118 )     31,146  
 $      137,500
Face Value Convertible Note Financing
    (7,955 )     136,857  
 $      100,000
Face Value Convertible Note Financing
    (46 )     (10,038 )
 $        55,000
Face Value Convertible Note Financing
    (6,118 )     31,147  
 $      900,000
Face Value Convertible Note Financing
    242,606       (21,156 )
 $      400,000
Face Value Convertible Note Financing
    70,330       (68,093 )
 $      600,000
Face Value Convertible Note Financing
    140,242       (109,216 )
 $      221,937
Face Value Convertible Note Financing
    (137,378 )     -  
 $      500,000
Face Value Convertible Note Financing
    192,660       -  
 $   1,000,000
Face Value Convertible Note Financing
    382,066       -  
 $      172,211
Face Value Convertible Note Financing
    40,780       -  
 Total interest income (expense) arising from fair value adjustments
    675,447       534,930  
     Other interest expense
    (146,113 )     958  
       Interest income (expense) and other financing costs
  $ 529,334     $ 535,888  

Our derivative liabilities as of June 30, 2012, and our derivative income and expense during the quarter ended June 30, 2012 are significant to our consolidated financial statements. The magnitude of derivative income (expense) reflects the following:

 
33

 
 
Note 6. Derivative Liabilities (continued)

In connection with our accounting for the various face value convertible promissory notes and warrant financings, we encountered the unusual circumstance of 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 to record the derivative financial instruments at fair value.  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, 2012, our management concluded that registration payments are not probable.
 
Note 7. Transactions with Related Parties:

In connection with the reverse merger (see Note 1), we assumed $47,963 in advances payable to the officers of MHHI in which we paid $1,500 in January, 2009 and issued 25,000 shares of common 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.

In addition, the Company previously issued aggregate notes of $100,000 to Roy Warren, the Company’s CEO, an accredited investor with whom the Company entered into subscription agreements for 10% convertible notes (see Note 4b).  However Roy Warren assigned the $100,000 notes to another party. During the quarter ended September 30, 2009, 9,000,000 shares of Series A Preferred, convertible into 54,000,000 shares of common stock at the option of the holder, were granted to Roy Warren (see Note 8).

H. John Buckman is a board director of the company and is a debt holder of the company whereas the company issued him a note payable at the face value of $55,000.  He also has a total of 10,500 Class A warrants at an exercise price of $1.00 with a life of three to five years, and he will be entitled to an additional 5,000 warrants with at an exercise price of $15.00 if he exercises the same number of specific Class A warrants.  He also received 11,000 shares of restricted stock that related to this note payable, 1,200 shares of restricted stock for being a Director and 150,000 shares of restricted stock for his services related to a November, 2009 financing (total of 162,200 shares of restricted stock).

RPBGI LLC, our landlord, received 644,677 restricted shares of common stock back in March, 2009 for past due services. This company still owns all of these shares.

Weed & Co. LLP serves as our main outside legal counsel and holds a convertible note payable in the amount of $59,359.  On May 29, 2012, they converted $50,000 of the above note payable into 46,728,972 shares of common stock resulting in an outstanding balance of $9,359.

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

 
34

 
 
Note 8. Stockholders’ Deficit (continued):

(a) Series A Preferred Stock (continued):

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.  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.”

(b) Common Stock Warrants
 
As of June 30, 2012, the Company had the following outstanding warrants:

 
35

 

Note 8. Stockholders’ Deficit (continued):

(b) Common Stock Warrants (continued)

                         
         
Expiration
   
Warrants
   
Exericse
 
Issued Class A Warrants
 
Grant Date
   
Date
   
Granted
   
Price
 
                             
October, 2007 Convertible Notes Financing
 
10/23/2007
   
7/15/2015
      908,806     $ 0.02  
October, 2007 Due Diligence
 
10/23/2007
   
10/22/2012
      50,000     $ 0.02  
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     $ 0.02  
April, 2008 Supply Agreement
 
4/16/2008
   
4/15/2013
      5,000     $ 15.00  
Aprl, 2008 Finder's Fees
 
4/14/2008
   
4/13/2013
      3,125     $ 10.00  
May, 2008 Finder's Fees
 
5/19/2008
   
5/18/2013
      1,875     $ 10.00  
June, 2008 Convertible Note Financing
 
6/26/2008
   
6/25/2013
      151,502     $ 0.02  
January, 2009 Convertible Note Financing
 
1/27/2009
   
7/15/2015
      120,000     $ 0.02  
January, 2009 Debt Extensions
 
1/27/2009
   
1/26/2014
      26,800     $ 1.00  
February, 2009 Convertible Note Financing
 
1/27/2009
   
1/26/2014
      60,000     $ 0.02  
March, 2009 Convertible Note Financing
 
3/30/2009
   
7/15/2015
      416,666     $ 0.02  
July, 2009 Convertible Note Financing
 
7/15/2009
   
7/15/2015
      335,648     $ 0.02  
January, 2010 Convertible Note Financing
 
1/28/2010
   
7/15/2015
      104,166     $ 0.02  
February, 2010 Convertible Note Financing
 
2/19/2010
   
7/15/2015
      104,167     $ 0.02  
March, 2010 Convertible Note Financing
 
3/26/2010
   
7/15/2015
      286,458     $ 0.02  
May, 2010 Convertible Note Financing
 
5/13/2010
   
7/15/2015
      114,583     $ 0.02  
July, 2010 Convertible Notes Financinbg
 
7/15/2010
   
7/14/2015
      56,666,666     $ 0.02  
September, 2010 Debt Extension
 
9/9/2010
   
9/9/2013
      51,000     $ 0.05  
January, 2011 Debt Extension
 
1/11/2011
   
1/10/2014
      12,000     $ 0.05  
January, 2011 Financing
 
1/21/2011
   
1/20/2016
      14,578,005     $ 0.02  
March, 2011 Financing
 
3/17/2011
   
3/16/2016
      36,423,842     $ 0.02  
March, 2011 Financing Finder's Fees
 
3/17/2011
   
3/16/2016
      3,973,510     $ 0.02  
June, 2011 Debt Exchange Agreement
 
6/30/2011
   
6/29/2016
      20,000,000     $ 0.02  
July, 2011 Financing
 
7/15/2011
   
7/14/2016
      25,000,000     $ 0.02  
July, 2011 Financing Finder's Fees
 
7/15/2011
   
7/14/2016
      2,500,000     $ 0.02  
February, 2012 Financing
 
2/22/2012
   
2/21/2017
      50,000,000     $ 0.02  
                                 
Total issued Class A warrants
                    212,657,373          
 
Note that 1,000,000 warrants were exercised during the three months ended June 30, 2012 via cashless exercise in which 363,056 shares of common stock were issued. 
 
 
36

 

Note 8. Stockholders’ Deficit (continued):

(b) Common Stock Warrants (continued)
 
Unissued Class B warrants (b):
       
         
October, 2007 Convertible Notes Financing
    140,910  
January, 2008 Investment Banker Agreement
    6,250  
February, 2008 Convertible Notes Financing
    75,756  
April, 2008 Finder's Fees
    3,125  
May, 2008 Finder's Fees
    1,875  
June, 2008 Convert8ible Note Financing
    15,152  
         
  Total unissued Class B Warrants
    243,068  
         
  Total Warrants
    212,900,441  
 
(a) When certain Class A warrants are exercised, holders of these warrants will receive an equal number of Class B warrants with an exercise price of $15.00.

(c) Common Stock Issued During the Three Months Ended June 30, 2012:

At June 30, 2012, we had issued and outstanding 1,132,789,196 shares of common stock of which 5,288,962 shares are owned by our officers and independent board directors.  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 3, 2012, we issued 6,000,000 shares of common stock pursuant to two conversions of January, 2011 convertible notes for $10,443 and accrued interest for $2,877 at a conversion price of $.00222.

On April 4, 2012, we issued 663,800 shares of common stock pursuant to a conversion of July, 2010 convertible notes for $1,444 at a conversion price of $.002175.

On April 5, 2012, we issued 62,332 shares of common stock pursuant to a conversion of March, 2011 convertible notes for $132 at a conversion price of $.002123.

On April 5, 2012, we issued 2,843,146 shares of common stock pursuant to a conversion of January, 2011 convertible notes for $873 and $5,163 accrued interest at a conversion price of $.002123.

 
37

 

Note 8. Stockholders’ Deficit (continued):

(c) Common Stock Issued During the Three Months Ended June 30, 2012 (continued):

On April 10, 2012, we issued 23,809,524 shares of common stock pursuant to a conversion of July, 2010 convertible notes for $50,000 at a conversion price of $.0021.

On April 10, 2012, we issued 3,225,000 shares of common stock pursuant to a conversion of January, 2011 convertible notes for $6,702 at a conversion price of $.002078.

On April 10, 2012, we issued 3,225,000 shares of common stock pursuant to a conversion of March, 2011 convertible notes for $6,702 at a conversion price of $.002078.

On April 11, 2012, we issued 3,250,000 shares of common stock pursuant to a conversion of March, 2011 convertible notes for $6,347 at a conversion price of $.002603.

On April 16, 2012, we issued 1,900,000 shares of common stock pursuant to a conversion of June, 2011 convertible notes for $3,178 at a conversion price of $.0016725.

On April 26, 2012, we issued 5,800,000 shares of common stock pursuant to a conversion of June, 2011 convertible notes for $7,076 at a conversion price of $.00122

On May 17, 2012, we issued 2,000,000 shares of common stock pursuant to a conversion of June, 2011 convertible notes for $2,536 at a conversion price of $.001268.

On May 17, 2012, we issued 6,500,000 shares of common stock pursuant to a conversion of July, 2010 convertible notes accrued interest for $8,242 at a conversion price of $.001268.

On May 17, 2012, we issued 60,000,000 shares of common stock pursuant to a conversion of February, 2008 convertible notes for $76,140 at a conversion price of $.001269.

On May 17, 2012, we issued 44,970,414 shares of common stock pursuant to a conversion of June, 2011 convertible notes accrued interest for $57,000 at a conversion price of $.0012675.

On May 25, 2012, we issued 3,000,000 shares of common stock pursuant to a conversion of March, 2011 convertible notes for $3,285 at a conversion price of $.001095.

On May 29, 2012, we issued 46,728,972 shares of common stock pursuant to a conversion of November, 2011 convertible notes for $50,000 at a conversion price of $.00107.

On May 31, 2012, we issued 2,500,000 shares of common stock pursuant to a conversion of March, 2011 convertible notes for $2,588 at a conversion price of $.001035.

On June 1, 2012, we issued 363,056 shares of common stock pursuant to a cashless exercise of 1,000,000 warrants from the March, 2011 financing.

On June 5, 2012, we issued 5,100,000 shares of common stock pursuant to a conversion of June, 2011 convertible notes for $4,549 and accrued interest for $806 at a conversion price of $.00105.

On June 11, 2012, we issued 4,900,000 shares of common stock pursuant to a conversion of July, 2010 convertible notes for $5,145 at a conversion price of $.00105
 
 
38

 
 
Note 8. Stockholders’ Deficit (continued):

(c) Common Stock Issued During the Three Months Ended June 30, 2012 (continued):

On June 19, 2012, we issued 40,000,000 shares of common stock pursuant to a conversion of February, 2008 convertible notes for $40,000 at a conversion price of $.001.

On June 22, 2012, we issued 6,900,000 shares of common stock pursuant to conversion of July, 2010 accrued interest for $8,211 at a conversion price of $.00119.

On June 25, 2012, we issued 5,000,000 shares of common stock pursuant to a conversion of March, 2011 convertible notes for $4,000 at a conversion price of $.0008.

 (d) Warrants Issued During the Three Months Ended June 30, 2012:

None

(e) Options Issued During the Three Months Ended June 30, 2012:

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.
 
         
Fair Value Measurements at Reporting Date Using
 
Description
 
June 30, 2012
   
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)
  $ 145,982     $ -     $ -     $ 145,982  
Total Liabilities
  $ 145,982     $ -     $ -     $ 145,982  
 
 
39

 
 
Note 9.  Fair Value Measurements: (continued)
 
   
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
 
Beginning Balance, March 31, 2012
  $ 423,262  
Total gains or (losses) (realized/unrealized):
       
Included in earnings
    (265,880 )
Included in other comprehensive income
    -  
Purchases, issuances and settlements, net
    (11,400 )
Transfer in and/or out of Level 3
    -  
Ending Balance, June 30, 2012
  $ 145,982  

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 $8,020 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 $8,674 and excluding variable common area maintenance charges, as of June 30, 2012, are as follows:
 
Years ending March 31,
 
Amount
 
2013
  $ 78,067  
2014
    17,348  
         
    $ 95,415  

Rental expense, which also includes maintenance and parking fees, for the three months ended June 30, 2012, was 44,224.  We will enter into a first amendment of the lease on August 1, 2012 to reduce the size of the premises by 2,750 square feet from 5,561 square feet to 2,811 square feet.

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 freight on board (F.O.B) with the Company paying for the shipping costs.  

Note 11.   Subsequent Events:

On June 14, 2012, we issued a promissory note for $40,000 as these funds were not received until July 9, 2012.  See Note 5 to the financial statements.

We issued on July 25, 2012, 30,000,000 shares of common stock pursuant to a conversion of July, 2010 notes for $24,000 at a conversion price of $.0008.

We issued on July 25, 2012, 6,000,000 shares of common stock pursuant to a conversion of $4,800 of accrued interest associated with July, 2010  notes at a conversion price of $.0008.
 
 
40

 
 
Note 11.   Subsequent Events (continued):

We issued on July 27, 2012 50,000,000 shares of common stock pursuant to a conversion of February, 2008 notes for $29,300 at a conversion price of $.000586.

Effective August 1, 2012, we entered into a first amendment to our office lease agreement.  We decreased the size of the existing premises and extended the lease term through August 31, 2015.  We reduced the office premises by 2,750 square feet by deleting unit 1.  The leased premises shall now consist of 2,811 square feet being all of unit 2. The base rent per square foot shall be reflected in the lease.

We have a total of $987,688 in outstanding face value debt with a maturity date of July 15, 2012.  We are working on extending these various debt instruments to a later date.

On August 8, 2012, we issued 4,950,000 restricted shares of common stock pursuant to certain athlete Cause Marketing Endorsement Partnership and Commission Agreements.

On August 15, 2012, a debt dated July 15, 2011 for $75,000 was assigned to a new debt holder which has the same conversion price terms.

On August 22, 2012, we executed a $75,000 allonge to a secured convertible note for $100,000 dated February 22, 2012 in which we received the full $75,000 amount on the same date.
 
 
41

 
 
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 accuracy of our performance projections and our ability to obtain financing on acceptable terms to finance our operations until profitability

OVERVIEW

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 two fast growing segments; sports recovery and functional dairy. We do not directly manufacture our products but instead outsource the manufacturing process to third party bottlers and contract packers.

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, if at all possible. 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.

Our current product is a 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 late 2012 or early 2013.
 
 
42

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

We organized a Scientific Advisory Board of three 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 intend to focus on the largest markets in the eastern United States with further expansion in the fifteen largest markets of the country.  We 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 markets.

Regional distributors have lost four major beverage lines in the last few years including Monster Energy (moved to Anheuser Busch), 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.

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 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

A meeting was held on April 27, 2012 in which a majority of the stockholders voted in favor of the amendment to increase the authorized shares.  As such, the state of Delaware approved on May 1, 2012 the increase in our authorized shares of common stock from one billion (1,000,000,000) to five billion (5,000,000,000).  We are reflecting that increase in our financial statements for the period ended June 30, 2012.

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

We estimate 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, 2012. We use all available information and appropriate techniques including outside consultants to develop our estimates. However, actual results could differ from our estimates.
 
 
43

 
 
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 
CRITICAL ACCOUNTING POLICIES (continued)

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.

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

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.

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.
 
 
44

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

RESULTS OF OPERATIONS

Our plan during the next few months is to continue the implementation of market and sales promotion programs to gain awareness of our new “Phase III® Recovery” drink in new markets and to increase customers as this is our only revenue producing product at this time.

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011:

For the three months ended June 30, 2012, our primary expenses related to salaries and marketing and promotion expenses.  Total operating expenses for the three months ended June 30, 2012 were $531,029 which were  $4,880 less than last year’s similar expenses for $535,909.

Derivative income was $265,880, and interest income was $529,334 which both items were caused by the recording of the changes in the fair value measurements of our convertible notes payable and warrants.  These figures are 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, 2012 of $282,546 leading to basic earnings per share of $.00 and diluted earnings per share of $.00 as compared to a net profit for the three months ended June 30, 2011 of $603,520 which includes the recognition of derivative income of $600,389 and $535,888 net interest income.  The weighted average number of common shares outstanding for the basic earnings per share calculation for the three months ended June 30, 2012 was 983,358,263 whereas the weighted average number of common shares outstanding for the diluted earnings per share calculation was 1,219,578,146. The basic earnings per common share was $.01, and the diluted earnings per share was $.00 for the three months ended June 30, 2011 based on a weighted average number of common shares outstanding of 88,020,841 for the basic earnings per shares and 318,600,888 for the diluted earnings per share.

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.  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, 2012 compared to three months ended June 30, 2011:
Net cash used in operating activities for the three months ended June 30, 2012 was $276,885 which was mainly the effect of changes in our operating assets. Our profit of $282,546 is offset by non-cash items of $265,880 in derivative income and $675,447 for the changes in the fair values of our convertible notes payable. Net cash used in operating activities for the three months ended June 30, 2011 was $336,242 which was mainly the effect of changes in our operating assets.  Our profit of $603,520 was offset by non-cash items of $600,389 in derivative income and $534,930 for the changes in fair values of our convertible notes payable.
 
 
45

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

LIQUIDITY AND CAPITAL RESOURCES (continued)

Net cash flows generated by operating activities for the three months ended June 30, 2012 as well as for the three months ended June 30, 2011 were inadequate to cover our working capital needs. We had to rely on a new convertible debt financing as well as a short term promissory notes to cover operating expenses.

There was no net cash used in our investing activities for the three months ended June 30, 2012 as compared to $1,694 for the three months ended June 30, 2011.  These funds for the prior year were used mainly for the purchase of equipment in our office.

Net cash provided by our financing activities was $200,000 for the three months ended June 30, 2012 as compared to $125,000 for the three months ended June 30, 2011. The increase of $75,000 was attributed to two short-term bridge loans in 2012.

Comparison of the three months ended June 30, 2012 to the three months ended June 30, 2011:

The major variances in the Condensed Consolidated Statements of Cash Flows for the three months of June 30, 2012 as compared to the three months of June 30, 2011 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, 2012 for $189,576 as compared to the three months ended June 30, 2011 for $(343,688) were the result of paying fewer accounts payable related items in 2012. 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, 2012 were the result of two short-term note financings in 2012 for a total of $200,000 compared to lower new financings of $125,000 for the three months ended June 30, 2011.

External Sources of Liquidity:

For the three months ended June 30, 2012:

On June 14, 2012, we entered into two promissory notes, one for $100,000 with Alpha Capital Anstalt with receipt of payment on June 27, 2012 and the other one for $40,000 with Whalehaven Capital Fund, Ltd with receipt of payment on July 9, 2012.  These notes are subject to an interest rate of ten percent (10%) and are due the sooner of (i) October 14, 2012 or (ii) from the proceeds of the next funding.

On June 26, 2012, we entered into a promissory note of $110,000 with Centaurian Fund LP with receipt of payment on June 28, 2012.  We agreed to pay a finder’s fee of $10,000 as we received the net payment of $100,000 on June 28, 2012.  The note is subject to an interest rate of ten percent (10%) and is due the sooner of (i) October 14, 2012 or (ii) from the proceeds of the next funding.

 
46

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

RECENT ACCOUNTING PRONOUNCEMENTS:

In December 2011, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”) that provides amendments for disclosures about offsetting assets and liabilities.  The amendments require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements.  The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required by the amendments should be provided retrospectively for all comparative periods presented. For the Company, the amendment is effective for fiscal year 2014. The Company is currently evaluating the impact these amendments may have on its disclosures.

In June 2011, the Financial Accounting Standards Board issued an ASU that provides amendments on the presentation of comprehensive income. The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented. The amendments do not affect how earnings per share is calculated or presented. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. For the Company, the amendment is effective for fiscal 2013. The effect of adoption will have minimum impact on the Company as the Company’s current presentation of comprehensive income follows the two-statement approach.

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 $115,000 although we are working on extending the due dates.  Please see a summary of all convertible notes and short-term bridge loans in the table below.  We have convertible notes in the principal face amount of $4,724,398 outstanding at June 30, 2012. There is no guarantee that we will be able to pay these notes when due or secure further extensions.  We are recording interest expense at the default interest rate of 15% for the short-term bridge loans.  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. There is no guarantee that we will be able to obtain these funds and continue operations.
 
 
47

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

CURRENT AND FUTURE FINANCING NEEDS (continued)
 
RECAP ANALYSIS OF ALL CONVERTIBLE NOTES PAYABLE
AND SHORT-TERM BRIDGE NON-CONVERTIBLE LOANS
FOR THE PERIOD ENDED JUNE 30, 2012
 
             
 
             
Default
   
Accrued
 
Original Note  
Issue
     
Default
 
$ Amount
   
Interest
   
Interest
   
Default
 
Amount  
Date
 
Due Date
 
Yes/No
 
Past Due
   
Rate
   
Rate
   
Interest
 
                                       
CONVERTIBLE NOTES                                
                                       
600,000
 
October, 2007
 
3/31/2014
 
No
    -       10 %     15 %     -  
312,000
 
January, 2008
 
3/31/2014
 
No
    -    
None-discount note
    15 %     -  
    500,000
 
February, 2008
 
3/31/2014
 
No
    -       10 %     15 %     -  
   100,000
 
June, 2008
 
3/31/2014
 
No
    -       10 %     15 %     -  
263,333
 
September, 2008
 
3/31/2014
 
No
    -    
None-discount note
    15 %     -  
60,833
 
December, 2008
 
3/31/2014
 
No
    -    
None-discount note
    15 %     -  
200,834
 
January, 2009
 
3/31/2014
 
No
    -       15 %     15 %     -  
60,000
 
February, 2009
 
3/31/2014
 
No
    -       15 %     15 %     -  
361,112
 
March, 2009
 
3/31/2014
 
No
    -       12 %     20 %     -  
27,778
 
October, 2009
 
3/31/2014
 
No
    -       12 %     20 %     -  
618,612
 
November, 2009
 
3/31/2014
 
No
    -       12 %     20 %     -  
$
150,000
 
January, 2010
 
3/31/2014
 
No
    -       12 %     20 %     -  
$
192,500
 
March, 2010
 
3/31/2014
 
No
    -       12 %     20 %     -  
$
55,000
 
May, 2010
 
3/31/2014
 
No
    -       10 %     20 %     -  
$
900,000
 
July, 2011
 
7/15/2012
 
No
    -       10 %     20 %     -  
$
400,000
 
January, 2011
 
7/15/2012
 
No
    -       10 %     20 %     -  
$
600,000
 
March, 2011
 
9/17/2012
 
No
    -       10 %     20 %     -  
221,937
 
June, 2011
 
9/17/2012
 
No
    -       10 %     20 %     -  
500,000
 
July, 2011
 
1/15/2013
 
No
    -       10 %     20 %     -  
59,359
 
November, 2011
 
5/5/2012
 
Yes (a)
  $ 9,359       5 %  
NONE
      -  
1,000,000
 
February, 2012
 
8/22/2013
 
No
    -       10 %     20 %     -  
172,211
 
March, 2012
 
3/31/2014
 
No
    -       12 %     20 %     -  
                                               
7,355,509
                                           
                                               
SHORT-TERM BRIDGE LOANS                                        
                                               
60,000
 
April 14, 2008
 
Past due
 
Yes (a)
  $ 60,000               15 %   $ 28,127  
55,000
 
August 5, 2008
 
Past due
 
Yes (a)
  $ 55,000               15 %   $ 42,406  
                                               
115,000
 
Total amount past due
      $ 115,000                     $ 70,533  
 
(a) Notes indicated in default are in default because they are past due.
 
 
48

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

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, 2012, we had total shareholders’ deficit of $12,914,741 and a working capital deficit of $8,119,221, compared to a total shareholders’ deficit of $14,018,894 and a working capital deficit of $8,743,079 at March 31, 2012. Cash and cash equivalents were $55,235 as of June 30, 2012 as compared to $132,120 at March 31, 2012. The main contributing factor to the working capital deficit was primarily attributable to the changes in the fair value calculations for the valuation of our convertible notes payable as well as changes in the derivative liabilities.

Ability to continue as a going concern.

Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
 
For the foreseeable future, we will have to fund all of our operations and capital expenditures from the net proceeds of equity or debt offerings we may have and cash on hand.  Although we plan to pursue additional financing, there can be no assurance that we will be able to secure financing when needed or obtain such financing on terms satisfactory to us, if at all, or that any additional funding we do obtain will be sufficient to meet our needs in the long term. Obtaining additional financing may be more difficult because of the uncertainty regarding our ability to continue as a going concern.  If we are unable to secure additional financing in the future on acceptable terms, or at all, we may be unable to complete planned development of certain products.

To date, we have generated no material product revenues. Our operating losses have negatively impacted our liquidity, and we are continuing our efforts to develop new products, while focusing on increasing net sales.  However, changes may occur that would consume our existing capital at a faster rate than projected, including, among others, the progress of our research and development efforts and hiring of additional key employees.  If we continue to suffer losses from operations, our working capital may be insufficient to support our ability to expand our business operations as rapidly as we would deem necessary at any time, unless we are able to obtain additional financing. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to pursue our business objectives and would be required to reduce our level of operations, including reducing infrastructure, promotions, personnel and other operating expenses. These events could adversely affect our business, results of operations and financial condition. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage of opportunities, develop products or services or otherwise respond to competitive pressures, could be curtailed or significantly limited.   Any additional sources of financing will likely involve the sale of our equity securities, which will have a dilutive effect on our stockholders.  If we are unable to achieve profitability, the market value of our common stock will decline, and there would be a material adverse effect on our financial condition.
 
 
49

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

At June 30, 2012, we were in default on certain of our short-term bridge notes and have other substantial outstanding debt obligations.

At June 30, 2012, we were in default on short term bridge notes totaling $115,000 in principal.  The remedy for default under the notes is acceleration of principal and interest due thereunder.  Further, we have secured convertible notes outstanding totaling $4,724,398 in principal face value at June 30, 2012. Although we were able to extend the maturity dates of the notes issued prior to the July, 2010 financing until March 31, 2014, there is no assurance that we will be able to continue to extend these obligations. Further, an event of default under our convertible notes includes failure to pay certain debts over $50,000-$100,000.  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 20%.  As of June 30, 2012, we have a total of $987,588 in outstanding notes payable that have a maturity date of July 15, 2012.  Although we are working on extending the maturity date for these notes, there is no guarantee that we will be able to obtain an extension, leading to an event of default.

Defaults on these obligations could materially adversely affect our business operating results and financial condition to such extent that we may be forced to restructure, file for bankruptcy, sell assets or cease operation.  Further, certain of these obligations are secured by our assets.  Failure to fulfill our obligations under these notes and related agreements could lead to the loss of these assets, which would be detrimental to our operations.

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

An important part of our strategy is to increase our sales through the development of new beverage products. We cannot assure you that we will be able to continue to develop, market and distribute future beverage products that will have market acceptance. The failure to continue to develop new beverage products that gain market acceptance could have an adverse impact on our growth and materially adversely affect our financial condition. Further, we may have higher obsolescent product expense if new products fail to perform as expected due to the need to write off excess inventory of the new products. Our results of operations may be impacted in various ways by the introduction of new products, even if they are successful, including the following:

sales of new products could adversely impact sales of existing products;
we may incur higher cost of goods sold and selling, general and administrative expenses in the periods when we introduce new products due to increased costs associated with the introduction and marketing of new products, most of which are expensed as incurred; and
when we introduce new platforms and bottle sizes, we may experience increased freight and logistics costs as our co-packers adjust their facilities for the new products.
 
 
50

 
 
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 
The beverage business is highly competitive.

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

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

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

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

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

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

We continually seek to expand distribution of our products by entering into distribution arrangements with regional bottlers or other direct store delivery distributors having established sales, marketing and distribution organizations. Many distributors are affiliated with and manufacture and/or distribute other beverage products. In many cases, such products compete directly with our products.

The marketing efforts of our distributors are important for our success. If our brands prove to be less attractive to our existing distributors and/or if we fail to attract additional distributors and/or our distributors do not market and promote our products above the products of our competitors, our business, financial condition and results of operations could be adversely affected.

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

We rely on third parties, called co-packers in our industry, to produce our products.  We currently have only one co-packing agreement for our products and at this time have only one milk-based product commercially available (Phase III® Recovery). Our co-packing agreement with our principal co-packer was signed on December 16, 2008 and had an initial term of three (3) years which has now expired. This agreement shall automatically renew for consecutive one (1) year periods (next renewal date of December 16, 2012) 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:
 
 
51

 
 
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 
if any of those co-packers were to terminate our co-packing arrangement or have difficulties in producing beverages for us, our ability to produce our beverages would be adversely affected until we were able to make alternative arrangements; and
our business reputation would be adversely affected if any of the co-packers were to produce inferior quality products.

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

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

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

Consumers are seeking greater variety in their beverages. Our future success will depend, in part, upon our continued ability to develop and introduce different and innovative beverages. In order to retain and expand our market share, we must continue to develop and introduce different and innovative beverages and be competitive in the areas of quality and health, although there can be no assurance of our ability to do so. There is no assurance that consumers will continue to purchase our products in the future. Additionally, many of our products are considered premium products and to maintain market share during recessionary periods, we may have to reduce profit margins, which would adversely affect our results of operations. Product lifecycles for some beverage brands and/or products and/or packages may be limited to a few years before consumers’ preferences change. The beverages we currently market are in their early lifecycles, and there can be no assurance that such beverages will become or remain profitable for us. The beverage industry is subject to changing consumer preferences, and shifts in consumer preferences may adversely affect us if we misjudge such preferences. We may be unable to achieve volume growth through product and packaging initiatives. We also may be unable to penetrate new markets. If our revenues decline, our business, financial condition and results of operations will be materially and adversely affected.

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

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

 
52

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

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

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

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

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

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

We regard the protection of our trademarks, trade dress and trade secrets as critical to our future success. We have registered our trademarks in the United States that are very important to our business. We also own the copyright in and to portions of the content on the packaging of our products. We regard our trademarks, copyrights and similar intellectual property as critical to our success and attempt to protect such property with registered and common law trademarks and copyrights, restrictions on disclosure and other actions to prevent infringement. Product packages, mechanical designs and artwork are important to our success, and we would take action to protect against imitation of our packaging and trade dress and to protect our trademarks and copyrights, as necessary. We also rely on a combination of laws and contractual restrictions, such as confidentiality agreements, to establish and protect our proprietary rights, trade dress and trade secrets. However, laws and contractual restrictions may not be sufficient to protect the exclusivity of our intellectual property rights, trade dress or trade secrets. Furthermore, enforcing our rights to our intellectual property could involve the expenditure of significant management and financial resources. There can be no assurance that other third parties will not infringe or misappropriate our trademarks and similar proprietary rights. If we lose some or all of our intellectual property rights, our business may be materially and adversely affected.

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

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

 
53

 
 
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 
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 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.
 
 
54

 
 
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 
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, 2012, we had issued and outstanding options and warrants that may be exercised into 241,029,518 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, outstanding principal convertible notes totaling  $4,724,398 and accrued interest payable of $1,009,587 which together may be converted into 286,699,294 shares of common stock (subject to 4.99-9.99% beneficial ownership limitations) at a maximum conversion cap rate of $.02 per share.  The Series A 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.

Further, if we issue any additional common stock or securities convertible into common stock, such issuance will reduce the proportionate ownership and voting power of each other stockholder. In addition, such stock issuances might result in a reduction of the book value of our common stock.

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

Sales of a substantial number of shares of common stock into the public market, or the perception that such sales could occur, could substantially reduce our stock price in the public market for our common stock and could impair our ability to obtain capital through a subsequent financing of our securities. We have 1,132,789,196 shares of common stock outstanding as of June 30, 2012 of which 1,127,500,234 shares are held by non-affiliates.  Further, the Company has outstanding convertible notes in the face value of $4,724,398 which may be converted into 236,219,883 shares of common stock and warrants that may be exercised into 212,900,441 shares of common stock (subject to 4.99-9.99% beneficial ownership limitations).  Generally, the holders of the securities convertible or exercisable into our common stock may be able to sell the common stock issued upon conversion or exercise after a six month holding period under Rule 144 adopted under the Securities Act of 1933 (as amended, the “Securities Act”).  As such, you should expect a significant number of such shares of common stock to be sold.  Depending upon market liquidity at the time our common stock is resold by the holders thereof, such re-sales could cause the trading price of our common stock to decline.  In addition, the sale of a substantial number of shares of our common stock, an anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.  In addition, shareholders on April 27, 2012 approved the increase of our authorized shares from one billion to five billion shares which makes more shares available for issuance. 
 
ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable
 
 
55

 
 
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, 2012. 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 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, 2012. Management concluded that control deficiencies existed as of March 31, 2012 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 evaluation conducted of the effectiveness of our internal control over financial reporting as set forth above, management intends to take practical, cost-effective steps in implementing internal controls, including the following remedial measures:
 
* Interviewing and potentially hiring outside consultants that are experts in designing internal controls over financial reporting based on criteria established in Internal Control-Integrated Framework issued by COSO.
 
* The Company has hired an outside consultant to assist with controls over the review and application of derivatives to ensure accounting in conformity with generally accepted accounting principles.
 
* Board to review and make recommendations to shareholders concerning the composition of the Board of Directors, with particular focus on issues of independence. The Board of Directors to consider nominating an audit committee and audit committee financial expert, which may or may not consist of independent members as funds allow.
 
Due to the lack of adequate financing, the Company has not hired any outside experts to design additional internal controls over financing reporting or reviewed or made recommendations to shareholders concerning the composition of the Board of Directors or recommended a new board director that is a financial expert.
 
 
56

 
 
ITEM 4. – CONTROLS AND PROCEDURES (continued)
 
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, 2012, 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, 2012, 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.
 
 
57

 
 
PART II – OTHER INFORMATION (CONTINUED)

Item 1. Legal Proceedings (continued)

On April 20, 2012, Arena Advertising and Sports Marketing Inc commenced a lawsuit in the state of Florida to recover past due amounts owed by us in the amount of $15,390 since January 16, 2012.  The $15,000 was already recorded in our records.  A Notice of Filing Settlement Agreement was filed on August 14, 2012 in the county court of Broward County, Florida whereas a settlement plan was agreed by both parties in which we will pay the total sum of $15,390 with $3,390 on September 1, 2012 and $3,000 on the first day of each following month for four months until the total is paid in full.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
During the three months ended June 30, 2012, the Company issued a total of 278,378,188 shares of common stock for the conversions of $281,141 of principal of convertible notes payable and $82,299 of related accrued interest to note holders of the Company pursuant to the terms of the note instruments.  No additional consideration was given for these conversions by the note holders.  Also the Company issued 363,056 shares of common stock for the cashless exercise of 1,000,000 warrants. The shares of common stock issued upon conversion of these notes and the cashless exercise of warrants were issued pursuant to an exemption from the registration requirements of the Securities Act provided by Section 3(a)(9) thereof as the conversions were an exchange of securities with existing holders exclusively, and no commission or other remuneration was paid or given in connection with the exchange.

Item 3. Defaults on Senior Securities

As of June 30, 2012, the Company was in default in paying the April 14, 2008 short-term bridge loan with principal balance of $60,000 and the August 5, 2008 short-term bridge loan with principal balance of $55,000 for a total of $115,000.  These 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 although there is no guarantee that we will obtain such extensions. In addition, we were in default in paying the remaining outstanding balance of $9,359 for a November 3, 2011 convertible note as we are working extending that note or will make a payment pending the next financing.

Item 5. Other Information

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

 
58

 
 
ITEM 6 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
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)(1)(iii)
 
Certificate of Amendment to Certificate of Incorporation
 
(9)
   
(3)(1)(iv)
 
Certificate of Amendment to the Certificate of Incorporation
 
(23)
   
(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 of other documents omitted- Exhibit B in Exhibit (10)(1)-(a)
 
(1)
   
(4)(4)
 
Form of 10% Convertible Note with Schedule of other documents omitted Exhibit A in Exhibit (10)(1) – (a)
 
(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 –Exhibit A in Exhibit (10)(8) – (b)
 
(11)
   
(10)(1)
 
Subscription Agreement for Securities dated October 23, 2007
 
(11)
   
(10)(2)
 
2007 Stock Compensation and Incentive Plan
 
(1)
   
(10)(3)
 
Escrow Agreement dated October 23, 2007 – Exhibit C in Exhibit (10)(1) –(a)
 
(1)
   
(10)(4)
 
Security Agreement dated October 23, 2007 – Exhibit D in Exhibit (10)(1) –(a)
 
(1)
   
(10)(5)
 
Subsidiary Guaranty dated October 23, 2007 – Exhibit E in Exhibit (10)(1) – (a)
 
(1)
   
(10)(6)
 
Collateral Agent Agreement dated October 23, 2007-Exhibit F in Exhibit (10)(1) – (a)
 
(1)
   
(10)(7)
 
Office Lease Agreement dated December 15, 2007
 
(2)
   
(10)(8)
 
Subscription Agreement for Securities dated January 8, 2008
 
(11)
   
(10)(9)
 
Funds Escrow Agreement dated January 8, 2008 – Exhibit B in Exhibit (10)(8) –(b)
 
(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
 
(11)
   
(10)(15)
 
Asset Purchase Agreement, and Secured Convertible Promissory Note, August 2008
 
(11)
   
(10)(16)
 
Sublicense Agreement, Termination Agreement, Promissory Note With Nutraceutical Discoveries, Inc. – August, 2008 and February 2010
 
(11)
   
(10)(17)
 
Form of Modification, Waiver and Consent Agreement, September 2008
 
(3)
   
(10)(18)
 
Subscription Agreement Securities September 2008
 
(11)
   
(10)(19)
 
Funds Escrow Agreement September 2008 –Exhibit C in Exhibit (10)(19) –(c)
 
(11)
   
(10)(20)
 
Form of Note, September 2008- Exhibit A in Exhibit (10)(19) –(c)
 
(3)
   
(10)(21)
 
Form of Class A and Class B Warrant, September 2008 – Exhibit B in Exhibit (10)(19) – (c)
 
(3)
   
(10)(22)
 
Manufacturing Agreement dated December 16, 2008 with O-AT-KA Milk Products Cooperative, Inc.
 
(4)
   
(10)(23)
 
Form of Note and Warrant and Modification, Waiver and Consent Agreement, December 2008
 
(11)
   
(10)(24)
 
Subscription Agreement, Form of Note and Warrant, Funds Escrow Agreement, Form of Legal Opinion, and Second Modification, Waiver And Consent Agreement, January 2009 (d)
 
 
(11)
 
 
(10)(25)
 
Amendment, Waiver and Consent Agreement, Form of Allonge No.1 to January09 Notes, Form of Warrant, February 2009
 
(11)
   
(10)(26)
 
Subscription Agreement, Funds Escrow Agreement, Form of Note and Warrant and Legal Opinion, March 2009
 
(11)
   
 
 
59

 
 
(10)(27)
 
Third Modification, Waiver and Consent Agreement, Form of Allonge No. 1 to March 09 Notes, Form of Warrant, July 2009
 
(11)
   
(10)(28)
 
Form of Note, November 2009
 
(11)
   
(10)(29)
 
Modification and Amendment Letters, Form of Warrant, January 2010
 
(11)
   
(10)(30)
 
2010 Stock Compensation and Incentive Plan
 
(7)
   
(10)(31)
 
Warrant and Allonge to March 2009 Note, dated May 13, 2010
 
(15)
   
(10)(32)
 
Promissory Note, dated June 17, 2010
 
(15)
   
(10)(33)
 
Warrants to extend short-term bridge loan June 30, 2010
 
(15)
   
(10)(34)
 
Subscription Agreement dated July 15, 2010 (Exhibits A-B (Form of Note and Warrant) filed with Form 8-K dated July 21, 2010, Exhibit C (Escrow Agreement) filed as Exhibit 10.38 to Form 10-Q as amended for quarter ended September 30, 2010 filed June 1 2011))
 
(14)
   
(10)(35)
 
Form of Convertible Promissory Note dated July 15, 2010
 
(10)
   
(10)(36)
 
Form of Class A Warrant dated July 15, 2010
 
(10)
   
(10)(37)
 
First Amendment and Consent Agreement dated July 15, 2010
 
(10)
   
(10)(38)
 
Escrow Agreement dated July 15, 2010
 
(14)
   
(10)(39)
 
Placement Agent Agreement for July 2010 financing
 
(14)
   
(10)(40)
 
Promissory Note dated December 21, 2010
 
(15)
   
(10)(41)
 
Placement Agent Agreement dated December 21, 2010 for January 2011 Financing
 
(15)
   
(10)(42)
 
Form of Bridge Loan Extension Letter and Form of Warrant dated  January 11, 2011
 
(12)
   
(10)(43)
 
Subscription Agreement dated January 21, 2011 to include cap table, all exhibits (forms of note and warrant, escrow agreement, forms of legal opinion and lockup agreements) and other schedules
 
(16)
   
(10)(44)
 
Second Amendment and Consent Agreement dated January 21, 2011
 
(16)
   
(10)(45)
 
Form of Note with Landlord dated January 26, 2011
 
(12)
   
(10)(46)
 
Subscription Agreement dated February 1, 2011 to include cap table, all exhibits (forms of note and warrant, escrow agreement, forms of legal opinion and lockup agreements) and other schedules
 
(16)
   
(10)(47)
 
Placement Agent Agreement dated March 8, 2011
 
(13)
   
(10)(48)
 
Subscription Agreement dated March 17, 2011to include cap table, all exhibits (forms of note and warrant, escrow agreement, forms of legal opinion and lockup agreements) and other schedules
 
(16)
   
(10)(49)
 
Third Amendment and Consent Agreement dated March 17, 2011
 
(16)
   
(10)(50)
 
Form of Promissory Note dated June 3, 2011
 
(18)
   
(10)(51)
 
Form of Promissory Note dated June 30, 2011
 
(18)
   
(10)(52)
 
Placement Agent Agreement dated June 22, 2011
 
(17)
   
(10)(53)
 
Form of Debt Exchange Agreement dated June 30, 2011
 
(18)
   
(10)(54)
 
Subscription Agreement dated July 15, 2011 to include cap table, all Exhibits (forms of note and warrant, escrow agreement, form of legal opinion) and other schedules
 
(17)
   
(10)(55)
 
Form of Promissory Note dated October 7, 2011 (Alpha)
 
(19)
   
(10)(56)
 
Form of Promissory Note dated October 7, 2011 (Centaurian)
 
(19)
   
(10((57)
 
Form of Promissory Note with conversion rights November 3, 2011
 
(19)
   
(10)(58)
 
Form of Promissory Note dated December 1, 2011 (Centaurian)
 
(20)
   
(10)(59)
 
Form of Promissory Note dated December 1, 2011 (Alpha)
 
(20)
   
(10)(60)
 
Form of Note dated December 28, 2011 (Alpha)
 
(20)
   
(10)(61)
 
Cause Marketing Endorsement Partnership Agreement dated October 13, 2011
 
(20)
   
(10)(62)
 
Commission Agreement dated June 29, 2011
 
(20)
   
(10)(63)
 
Form of Approval of Grant of Stock Options at December 21, 2011
 
(20)
   
(10)(64)
 
Subscription Agreement dated February 22, 2012 to include cap table, all Exhibits (forms of note and warrant, escrow agreement, form of legal Option) and other schedules
 
(21)
   
(10)(65)
 
Fifth Amendment and Consent Agreement dated February 22, 2012
 
(21)
   
(10)(66)
 
Placement Agent Agreement dated February 6, 2012
 
(21)
   
 
 
60

 
 
(10)(67)
 
Extension Agreement and Form of Note dated March 31, 2012
 
(22)
   
(10)(68)
 
Personal Services Agreement
 
(23)
   
(10)(69)
 
Promissory Notes
 
(23)
   
(10)(70)
 
First Amendment to Lease Agreement
 
X
   
(10)(71)
 
Equity Financing and Debt Retirement Agreement date July 19, 2012
 
X
   
(10)(72)
 
Form of Assignment and Escrow Agreement dated August 15, 2012
 
X
   
(10)(73)
 
Allonge No. 1 to Secured Note Issued February 22, 2012
 
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 July 7, 2010 as Exhibit 3.1 to Form 8-K (SEC Accession No. 0001213900-10-002769)
(10) previously filed with the Commission on July 21, 2010 as an exhibit to the Company’s Form 8-K (SEC Accession No. 0001213900-10-002955)
(11) previously filed with the Commission on April 21, 2011 as an exhibit to Form 10-K/A (SEC Accession No. 0001213900-11-002129)
(12) previously filed with the Commission on May 9, 2011 as an exhibit to Form 8-K/A (SEC Accession No. 0001213900-11-002409)
(13) previously filed with the Commission on May 10, 2011 as an exhibit to Form 8-K/A (SEC Accession No. 0001213900-11-002431)
(14) previously filed with the Commission on June 1, 2011 as an exhibit to Form 10-Q/A (SEC Accession No.  0001213900-11-003038)
(15) previously filed with the Commission on July 6, 2011 as an exhibit to Form 10-Q/A (SEC Accession No. 0001213900-11-003542)
(16) previously filed with the Commission on July 14, 2011 as an exhibit to Form 10-K (SEC Accession No. 0001213900-11-003662)
(17) previously filed with the Commission on July 20, 2011 as an exhibit to Form 8-K (SEC Accession No. 0001313900-11-003757)
(18) previously filed with the Commission on August 22, 2011 as an exhibit to Form 10-Q (SEC Accession No. 0001213900-11-004667)
(19) previously filed with the Commission on November 21, 2011 as an exhibit to Form 10-Q (SEC Accession No. 0001213900-11-006291)
(20) previously filed with the Commission on February 21, 2012 as an exhibit to Form 10-Q (SEC Accession No. 0001213900-12-000838)
(21) previously filed with the Commission on February 24, 2012 as an exhibit to Form 8-K (SEC Accession No. 0001213900-12-000890)
(22) previously filed with the Commission on April 5, 2012 as an exhibit to Form 8-K (SEC Accession No. 0001213900-12-001638)
(23) previously filed with the Commission on July 13, 2012 as an exhibit to Form 10-K (SEC Accession No. 0001213900-12-003795)

(a)  This exhibit is referenced in the October 23, 2007 Subscription Agreement
(b)  This exhibit is referenced in the January 8, 2008 Subscription Agreement
(c)  This exhibit is referenced in the September 29, 2008 Subscription Agreement
(d)  Schedule 9(s) for Lockup Agreement Providers, referenced in the exhibit index to the Subscription Agreement, was not included in this Subscription Agreement because this schedule was not assembled or produced although Exhibit E, Form of Lock Up Agreement, was included in the Subscription Agreement

 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
ATTITUDE DRINKS INCORPORATED   
(Registrant)  
Date: August 28, 2012  
   
/S/ Roy G. Warren
 
Roy G. Warren
 
President and Chief Executive Officer
 
   
/S/ Tommy E. Kee  
Tommy E. Kee  
Chief Financial Officer and Principal Accounting Officer
 
 
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