NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The condensed consolidated financial statements include NEW LEAF BRANDS, INC. (“the Company”) and its wholly-owned subsidiaries Nutritional Specialties and Baywood New Leaf Acquisition, Inc. Nutritional Specialties was acquired by the Company effective March 30, 2007. Skae Beverage International LLC was acquired by Baywood New Leaf Acquisition, Inc. effective September 9, 2008. On July 24, 2009 the Company sold substantially all of its rights and assets of Nutritional Specialties to Nutra, Inc.
The Company develops markets and distributes healthy and functional ready-to-drink (“RTD”) beverages. The Company distributes its products through independent distributors both internationally and domestically.
The Company incorporated as Baywood Financial, Inc. in Nevada on June 13, 1986. In March 1992, the Company changed its name from Baywood Financial, Inc. to Baywood International, Inc. Between 1992 and 1998, the Company directed most of its sales efforts to nutraceutical international markets. In 1999, the Company expanded its nutraceutical business into domestic markets.
Baywood International, Inc. changed its name effective October 16, 2009 to New Leaf Brands, Inc. to reflect the change in strategic direction with the sale of Baywood International, Inc.’s nutraceutical businesses on October 9, 2009. The name change was effective in the market at the opening of business October 19, 2009, at which time the Company’s ticker symbol changed from BAYW.OB to NLEF.OB.
On April 9, 2012 the Company completed the sale of all of the assets and liabilities of its non-operating subsidiary Nutritional Specialties, Inc. (NSI) to Deep South Capital, LLC (DSCL). The terms of the divestiture included consideration of $1.00 plus the assumption of certain liabilities by DSCL. In connection with the disposition, the Company gave DSCL 6,000,000 shares of the Company’s stock, with a fair value of $180,000 to DSCL to relieve the Company’s responsibility for any future claims. The transaction reduced liabilities of the Company by approximately $928,000 and resulted in a gain on disposal of discontinued operations of approximately $758,000.
|
[2]
|
Basis of presentation
|
In the opinion of management, the accompanying unaudited, condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of New Leaf Brands, Inc. (“New Leaf” or the “Company”) and its results of operations and cash flows for the interim periods presented. Such financial statements have been condensed in accordance with the applicable regulations of the Securities and Exchange Commission and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with New Leaf's audited consolidated financial statements for the year ended December 31, 2011, included in New Leaf's Annual Report filed on Form 10-K for such fiscal year.
The results of operations for the nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year.
The condensed consolidated financial statements were prepared using accounting principles generally accepted in the United States (“GAAP”). These principles require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. Actual results could differ from those estimates.
In connection with the preparation of its September 30, 2012 financial statements, the Company has reclassed $349,243 (as of March 31, 2012) from notes payable to additional paid in capital to properly account for the convertible debt and warrants issued in December 2011. The Company determined that the amount was not material to the financial statements for the year ended December 31, 2011. There was no impact on the statement of operations for the year ended December 31, 2011 or the three and nine months ended September 30, 2012.
NOTE 2 - GOING CONCERN
The Company has a history of recurring losses from continuing operations, deficiencies in working capital and limited cash on hand as of September 30, 2012. To date, it has also been unable to generate sustainable cash flows from operating activities. In addition, the Company has $3,743,965 in current liabilities payable within the next twelve months including an obligation which is currently in default (see Item 3 - DEFAULTS UPON SENIOR SECURITIES). For the nine months ended September 30, 2012, the Company’s loss from continuing operations was $4,581,613. As of September 30, 2012, the Company’s cash and cash equivalents and working capital deficiency are $109,453 and $3,165,543 respectively. Collectively, these factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s existence is dependent upon its ability to obtain necessary financing. The Company believes that its existing cash resources, combined with projected cash flows from operations, will not be sufficient to execute its business plan and continue operations for the next twelve months without additional funding. The Company intends to continue to explore various strategic alternatives, including asset sales and private placements of debt and equity securities to raise additional capital. In the first nine months of 2012, the Company raised gross proceeds of $729,107 pursuant to Unsecured Note Issuances in February and September 2012 and the Warrant reset and Exchange Offer in March and May 2012 and advance under secured credit line in June and August 2012. In addition, the Company raised an additional $150,000 in January 2013. In addition to paying down and restructuring its debt, management is actively taking steps to reduce the Company’s future operating expenses and increase future sales. However, the Company cannot provide any assurance that operating results will generate sufficient cash flow to meet its working capital needs and service its existing debt or that it will be able to raise additional capital as needed. As such the Company’s corporate strategy has broadened from solely New Leaf lemonades and teas to an acquirer of mature beverage distributors and manufactures.
The condensed financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company has identified the policies below as critical to its business operations and the understanding of the results of its operations. The impact and any of its associated risks related to these policies on the Company’s business operations are discussed throughout this section.
|
[1]
|
Principles of consolidation
|
The condensed consolidated financial statements include the accounts of all subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Inventories consist primarily of raw material and finished product and are recorded at the lower of cost (on an average cost basis) or market. Inventories consisted of the following:
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Raw material
|
|
$
|
-
|
|
|
$
|
133,376
|
|
|
Finished goods
|
|
|
70,966
|
|
|
|
30,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,966
|
|
|
$
|
163,709
|
|
|
[3]
|
Property and Equipment
|
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of five years. Property and Equipment consisted of the following:
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
19,539
|
|
|
$
|
19,539
|
|
|
Computers
|
|
|
125,654
|
|
|
|
125,654
|
|
|
Equipment
|
|
|
21,199
|
|
|
|
21,199
|
|
|
Total
|
|
|
166,392
|
|
|
|
166,392
|
|
|
Less: Accumulated depreciation
|
|
|
132,854
|
|
|
|
108,392
|
|
|
Net property and equipment
|
|
$
|
33,538
|
|
|
$
|
58,000
|
|
Intangible assets consist of brand value resulting from the September 9, 2008 acquisition of certain net assets from Skae Beverage International, LLC. Intangible assets consisted of the following at September 30, 2012 (unaudited) and December 31, 2011:
|
|
|
Brand Value – New
Leaf Tea
|
|
|
Asset value at December 31, 2011
|
|
$
|
4,760,824
|
|
|
Accumulated amortization
|
|
|
(1,488,215
|
)
|
|
Impairment of intangibles
|
|
|
(2,155,000
|
)
|
|
Net asset value at December 31, 2011
|
|
$
|
1,117,609
|
|
|
|
|
|
|
|
|
Asset value at September 30, 2012
|
|
$
|
2,605,824
|
|
|
Accumulated amortization
|
|
|
(1,610,826
|
)
|
|
Impairment of intangibles
|
|
|
(845,000
|
)
|
|
Net asset value at September 30, 2012
|
|
$
|
149,998
|
|
The Company evaluates intangible assets for potential impairment on an annual basis or whenever events or circumstances indicate that impairment may have occurred using a two-step process. The first step of the impairment test, used to identify potential impairment, compares the estimated undiscounted cash flows attributable to the intangible with the related carrying amount. If the estimated undiscounted cash flows attributable to the intangibles exceed its carrying amount, the intangible is not considered to be impaired and the second step is unnecessary. If the carrying amount of the intangibles exceeds the estimated undiscounted cash flows, the Company performs the second step of the impairment test to determine the amount of the impairment loss. The second step of the impairment test involves comparing the implied fair value of the intangibles with its carrying amount to measure the amount of impairment loss, if any.
During the quarter ended September 30, 2012, the Company determined that a triggering event occurred and performed an interim impairment analysis. The interim impairment analysis resulted in an impairment of $845,000 for the third quarter of 2012. The Company’s interim test, used a discounted cash flow model derived from internal budgets to estimate fair values for the impairment testing. Factors that could change the result of our impairment test include, but are not limited to, different assumptions used to forecast future net sales, expenses, capital expenditures and resources, and liquidity and working capital requirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the estimated undiscounted cash flow is susceptible to future changes in market conditions, and when unfavorable, can adversely affect our original estimates of fair value. The Company’s key assumptions used in its interim impairment analysis included the following: a discount rate of 14% based on the estimated weighted average cost of capital from the market participant point of view; royalty rate of 4.5%; an average perpetual growth rate of 66% for six years and a tax rate of 38%. An increase in the discount rate of 1% or a 1% deterioration of the perpetual revenue growth rate would increase the impairment loss by approximately $2,000 or $1,000, respectively. The Company bases its fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. For the nine months ended September 30, 2012, the impairment of the Company’s brand value mainly resulted from the decline in its projected revenues and operating results and cash flows. However, the Company believes that the remaining amount recorded represents the current fair value of its intangible assets if they were to be sold to a market participant. In conjunction with preparing the revised forecasts, the Company reevaluated the remaining estimated useful lives of the long-lived intangibles and concluded there is no change in its estimated remaining useful lives.
The brand value (including Trademarks and Trade Names) of continuing operations are being amortized over the estimated life of ten years. Amortization expense for the nine months ended September 30, 2012 and 2011 was $122,612 and $361,872 respectively. The aggregate amortization for the years ended December 31, 2012 through December 31, 2016 and years thereafter is as follows:
|
Year
|
|
Amortization
|
|
|
2012
|
|
$
|
6,164
|
|
|
2013
|
|
|
24,657
|
|
|
2014
|
|
|
24,657
|
|
|
2015
|
|
|
24,657
|
|
|
2016
|
|
|
24,657
|
|
|
Thereafter
|
|
|
45,206
|
|
|
Total
|
|
$
|
149,998
|
|
|
[5]
|
Option -Warrants issued on debt and beneficial conversion
|
The Company estimates the fair value of each option and warrant grant on the date of grant using the Black-Scholes option-pricing model. The option and warrant estimates are based on the following assumptions for the nine months ended September 30, 2012 and 2011 (unaudited):
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
Volatility
|
|
281.20% to 397.47%
|
|
|
81.47% to 98.07%
|
|
|
Risk free interest rate
|
|
0.35% to 0.51%
|
|
|
0.03% to 1.76%
|
|
|
Expected term
|
|
2.50 years
|
|
|
0.19 to 4.35 years
|
|
The Company accounts for the beneficial conversion feature of debt and preferred stock using intrinsic value method measure at the date of issuance.
As part of certain note and warrant agreements, the Company has provided holders with the option to convert the note or exercise the warrant into the Company’s common stock at a specified strike price. In order to prevent dilution, if the new strike price may be lower than the original strike price on the day of conversion or exercise, the strike price would be lowered to the new conversion or exercise price. The Company has determined that these types of down round protection terms are considered derivatives.
During 2012, the Company began using a Monte Carlo model to value its warrant derivative liability. The change in this derivative value at each reporting period is included in the statement of operations as a change in fair value of derivative liabilities. The Company considers these derivative instruments as used for the purpose of securing financing.
The range of significant assumptions which the Company used to measure the fair value of derivatives liabilities at September 30, 2012 is as follows:
|
Stock price
|
|
$
|
0.03
|
|
|
Exercise price
|
|
$
|
0.01 – 0.15
|
|
|
Term
|
|
0.54 – 5.00 years
|
|
|
Risk-free interest rate
|
|
|
0.18 - 0.51
|
%
|
|
Volatility
|
|
|
281 - 397
|
%
|
|
Dividend yield
|
|
|
0.00
|
%
|
The following table summarizes the fair value of warrants classified as liability instruments, recorded on the balance sheet as of September 30, 2012 (all of which are calculated using level 3 fair value measurements):
|
Offering
|
|
Total Fair Value of Derivative as of September 30, 2012
|
|
|
2006 and 2008 Bridge Financing
|
|
$
|
793
|
|
|
Warrants issued to Series I and J Preferred Stock holders
|
|
|
409
|
|
|
October 2009 notes
|
|
|
5,812
|
|
|
February 2010 stock and warrant issuance
|
|
|
40,605
|
|
|
April 2010 stock and warrant issuance
|
|
|
22,941
|
|
|
September 2010 notes
|
|
|
42,806
|
|
|
|
|
$
|
113,366
|
|
The following table summarizes the changes in fair value of warrant liabilities (a level 3 fair value measurement) during the nine months ended September 30, 2012:
|
Balance at December 31, 2011
|
|
$
|
45,613
|
|
|
Reclassification of derivative liability on warrant exercised
|
|
|
(13,630)
|
|
|
Change in fair value of derivative instruments included in net loss for the nine months ended September 30, 2012
|
|
|
81,383
|
|
|
|
|
|
|
|
|
Balance at September 30, 2012
|
|
$
|
113,366
|
|
On March 7, 2012 the Company commenced a warrant reset and exercise offer to eligible holders of its outstanding warrants, pursuant to which all issued and outstanding warrants to purchase common stock of the Company issued, irrespective of current exercise price or expiration date, may, in each holder’s sole discretion, be exercised at $0.03 per share during the offer period. Approximately 15 investors elected to exercise their warrants for which the Company received $400,147 and issued 13,338,225 shares of common stock.
|
[7]
|
Revenue Recognition, Sales Returns and Allowances
|
Revenue is recognized when the product is shipped. Sales returns are recorded as a reduction to sales when a customer and the Company agree a return is warranted. All returns must be authorized in advance and must be accompanied by an invoice number within 180 days. If returned, the Company’s customers are responsible for returning merchandise in resalable condition. Full credit cannot be given for merchandise that has been defaced, marked, stamped, or priced in any way. The Company does not accept products kept longer than two years. Management communicates regularly with customers to compile data on the volume of product being sold to the end consumer. This information is used by management to evaluate the need for additional sales returns allowance. The Company’s experience has been such that sales returns can be estimated accurately based on feedback from the customer.
|
[8]
|
Net Income (Loss) per Share of Common Stock
|
Basic net income (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share may not been presented if the effect of the assumed exercise of options and warrants to purchase common shares would have an anti-dilutive effect.
The Company accounts for income taxes under the liability method under the Income Taxes Topic of the Codification (ASC Topic 740-10). Deferred taxes arise from temporary differences, due to differences between accounting methods for tax and financial statement purposes. The Company establishes a valuation allowance for the uncertainty related to its ability to generate sufficient future taxable income to utilize the net operating loss carry forwards and other deferred items.
The Company recognizes interest and penalties related to uncertain tax positions in interest and general and administrative expense. As of September 30, 2012, the Company has no unrecognized tax positions, including interest and penalties. The tax years 2008-2011 are open to examination by the major tax jurisdictions in which the Company operates.
|
[10]
|
Comprehensive Income (Loss)
|
The Company accounts for its Comprehensive Income (Loss) under the Topic of the Codification (ASC Topic 220-10), “Comprehensive Income (Loss),” establishes standards for the reporting and display of comprehensive income (loss) and its components within the financial statements. Other comprehensive income (loss) consists of charges or credits to stockholders’ equity, other than contributions from or distributions to stockholders, excluded from the determination of net income (loss). There were no other components of comprehensive income (loss) other than the net loss for the three and nine months ended September 30, 2012 and 2011, respectively and therefore a Statement of Comprehensive Income (Loss) has not been included with these financial statements.
|
[11]
|
Financial Instruments
|
Financial instruments consist primarily of cash and cash equivalents, accounts receivable and obligations under accounts payable, accrued expenses, derivatives and notes payables. The carrying amounts of cash, accounts receivable, accounts payable, short term debt obligations and accrued expenses approximate fair value because of the short term maturity of those instruments.
|
[12]
|
Fair Value Measurements
|
The accounting guidance under Accounting Standards Codification “Fair Value Measurements and Disclosures” (“ASC 820-10”) requires the Company to make disclosures about the fair value of certain of its assets and liabilities. ASC 820-10 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. ASC 820-10 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. A brief description of those three levels is as follows:
|
·
|
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
|
|
·
|
Level 2: Inputs other than quoted prices that is observable for the asset or liability, either directly or indirectly.
|
|
·
|
Level 3: Significant unobservable inputs
|
NOTE 4 - GEOGRAPHIC AREA INFORMATION
The Company generates its revenues from customers, primarily in the United States. The following table outlines the breakdown of sales to unaffiliated customers domestically and internationally for the nine months ended September 30 (unaudited):
|
|
|
2012
|
|
|
2011
|
|
|
United States
|
|
$
|
257,471
|
|
|
$
|
1,459,824
|
|
|
Other International
|
|
|
-
|
|
|
|
15,085
|
|
|
Totals
|
|
$
|
257,471
|
|
|
$
|
1,474,909
|
|
The Company holds all its assets in the United States.
NOTE 5 - CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and trade receivables. The Company maintains the majority of its cash and cash equivalents in the form of demand deposits with financial institutions that management believes are creditworthy. At September 30, 2012, the cash balances in these institutions were insured in full by the Federal Deposit Insurance Corporation.
As discussed in the section “
NEAR TERM BUSINESS STRATEGY”,
on February 14, 2012, the Board elected David Fuselier as New Leaf’s Chairman, President, and Chief Executive Officer and simultaneously, Eric Skae stepped down as our Chairman, President and Chief Executive Officer. Mr. Fuselier immediately implemented a turnaround plan to (a) refocus our sales and marketing efforts to our core product markets, (b) restructure corporate operations and product mix to significantly improve operating margins, (c) achieve significant debt restructurings and interim financings to both strengthen the balance sheet and support sustainable growth and (d) achieve additional tactical and strategic financing to support anticipated growth, research and development and release of new product lines and acquisitions.
While the Company made considerable progress towards the turnaround plan during the nine months ended September 30, 2012, a delay in additional financing limited the ability of management to achieve significant debt reduction that had been negotiated during the period
.
The aggregate accounts receivable from four customers amounted to 88% of the gross accounts receivable balance outstanding at September 30, 2012.
The aggregate accounts payable due to one vendor amounted to approximately 23% of the accounts payable balance outstanding September 30, 2012.
A slowdown or loss of these customers or vendors could materially adversely affect the results of operations and the Company’s ability to generate significant cash flow.
NOTE 6 - NOTES PAYABLE TO RELATED PARTIES
Related party notes payable at September 30, 2012 (unaudited) and December 31, 2011 consisted of the following:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Description
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable to a former director with a face amounts of $50,000 bearing interest at 10% per annum and payable on October 31, 2012 (E)(F)(G)(I)
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
Unsecured note payable to a former director with a face amounts of $5,500 bearing interest at 10% per annum and payable on demand (C)
|
|
|
5,500
|
|
|
|
5,500
|
|
|
Unsecured note payable to a principal shareholder with a face amounts of $55,000 bearing interest at 10% per annum and payable on September 18, 2012 and October 14, 2012 (E)(F)(G)(L)
|
|
|
55,000
|
|
|
|
55,000
|
|
|
Unsecured note payable to an officer with a face amount of $20,000 bearing interest at 6% per annum and payable on demand (C)
|
|
|
20,000
|
|
|
|
20,000
|
|
|
Unsecured note payable to a director with a face amount of $75,000 bearing interest at 12% per annum and payable on demand (C)
|
|
|
75,000
|
|
|
|
75,000
|
|
|
Unsecured note payable to a director with a face amount of $10,000 bearing interest at 10% per annum and payable on demand (D)
|
|
|
10,000
|
|
|
|
10,000
|
|
|
10% Secured Convertible Subordinated Notes to a principal shareholder with a face amount of $125,000 bearing interest at 10% payable July 23, 2012 (H)(L)
|
|
|
125,000
|
|
|
|
125,000
|
|
|
Secured factoring loan agreement to a principal shareholder with a face amount of $298,227 bearing interest at 10% payable July 23, 2012 (E)(F)(G)(L)
|
|
|
298,227
|
|
|
|
298,227
|
|
|
10% Secured Convertible Subordinated Notes to a director with a face amount of $120,517 bearing interest at 10% payable July 23, 2012 (E)(F)(G)(L)
|
|
|
120,517
|
|
|
|
120,517
|
|
|
Secured note payable to an officer with a face amount of $30,100 bearing interest at 10% payable August 13, 2012 (H)(L)
|
|
|
30,100
|
|
|
|
30,100
|
|
|
Unsecured note payable to a former director with a face amount of $50,000 bearing interest, which is payable at maturity on July 15, 2013, at 8% per annum. (A)
|
|
|
68,921
|
|
|
|
-
|
|
|
Unsecured note payable to a principal shareholder with a face amount of $50,000 which is payable at maturity on July 15, 2013, at 8% annum. (A)
|
|
|
68,921
|
|
|
|
-
|
|
|
Unsecured note payable to a principal shareholder with a face amount of $37,500 bearing interest, which is payable at maturity on September 3, 2013, at 8% per annum. (A)
|
|
|
48,339
|
|
|
|
-
|
|
|
Unsecured note payable to a former officer with a face amount of $200,000 bearing interest, which is payable at maturity on August 14, 2013, at 8% per annum. (B)
|
|
|
200,000
|
|
|
|
-
|
|
|
Unsecured note payable to a former officer with a face amount of $100,000 bearing interest, which is payable on demand, at 8% per annum. (B)
|
|
|
100,000
|
|
|
|
-
|
|
|
Unsecured note payable to a principal shareholder with a face amount of $100,000 bearing interest, which is payable at maturity on March 24, 2014, at 8% per annum (M)
|
|
|
100,000
|
|
|
|
-
|
|
|
Note payable to a related party with a face amount of $20,000 bearing interest, payable at maturity on November 16, 2013, at 18% per annum (J)
|
|
|
20,000
|
|
|
|
-
|
|
|
Secured credit line payable to a related party, payable at maturity on April 26, 2013 (face value $50,000) and June 18, 2013 (face value $100,913), bearing interest at 1.50% per month (K)
|
|
|
150,913
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to related parties
|
|
$
|
1,546,438
|
|
|
$
|
789,344
|
|
|
Discount on Debt
|
|
|
(206,905
|
)
|
|
|
(36,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable to related parties
|
|
$
|
1,339,533
|
|
|
$
|
752,787
|
|
|
Less current maturities
|
|
|
(1,250,761)
|
|
|
|
(752,787)
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term notes payable to related parties
|
|
$
|
88,772
|
|
|
$
|
-
|
|
|
A)
|
Between February 15, 2012 and March 2, 2012, the Company received proceeds of $250,000 from four investors in exchange for 8% 18 month Unsecured Convertible Notes (“Unsecured Note”) and warrants. One of the investors invested $87,500 and the other, a former director, invested $50,000 in the Unsecured Notes. Each Unsecured Note is convertible thirteen months after their respective issuance dates into common stock at a conversion price equal to the greater of (i) the Variable Conversion Price of 50% of the Market Price and (ii) the Fixed Conversion Price of $0.01. The investors also received 25,000,000 5 year warrants at a strike price of $0.03 per share. In addition the investors received the right to invest in new notes on the same basis as provided. The Company has accounted for these share based provisions at fair value due to the variable conversion price will require the Company to issue additional shares and accordingly has recorded an additional liability to the notes of approximately $88,000 of which approximately $47,000 has been recorded as change in fair value for the nine months ended September 30, 2012. The Company will fair value these provisions at each reporting period until either settled or forfeited.
|
|
B)
|
On February 14, 2012, the Company entered into a Mutual Termination and Release agreement between New Leaf Brands, Inc. and Eric Skae. On February 15, 2012, the Company issued Mr. Skae an 8% 18 month Unsecured Note in the amount of $200,000 which is convertible if asked by Mr. Skae, 13 months after the date of issuance at $0.01 (subject to a beneficial ownership blocker of 4.99%) and an 8% Demand Note in the amount of $100,000.
|
|
C)
|
These notes were issued during the year ended December 31, 2011 to provide short-term financing.
|
|
D)
|
On June 30, 2011, the Company issued a $10,000 Demand 10% Promissory Note to a director of the Company. The note required a $5,000 repayment on July 7, 2011 which the holder converted to due on demand on the same day at no additional cost to the Company.
|
|
E)
|
On June 15, 2011, the Company entered into a Secured Factoring Loan with a principal amount of $426,680 with four lenders, the total amount received on the Secured Factoring Loan was $400,000 of which $125,000 was purchased by a director of the Company and $200,000 was purchased by a principal shareholder. These loans matured on August 20, 2011 and are secured by all of the Company assets, subject to subordinations of certain assets to present and future factoring facilities. On August 24, 2011 these notes were converted into the recasted notes described in (G) below. The Company determined that the conversion of the secured notes into the secured recast notes was more than the carrying value of the obligation on the date of the conversion and recorded a loss on extinguishment of debt.
|
|
F)
|
On July 14, 2011, July 28, 2011 and July 29, 2011 the Company issued Original Issue Discount Notes to three lenders receiving amounts of $75,000 from a principal shareholder, $50,000 and $25,000 respectively from other investors. These notes were to mature on January 14, 2012 at $170,458 and were secured by all of the Company assets, subject to subordinations of certain assets to present and future factoring facilities, of which $85,227 was due to a principal shareholder. On August 24, 2011 these notes were converted into the recast notes described in (G) below. The Company determined that the conversion of the secured notes into the secured recast notes was more than the carrying value of the obligation on the date of the conversion and recorded a loss on extinguishment of debt.
|
|
G)
|
On August 24, 2011, the Company recast $606,381 (principal plus accrued interest) in existing secured loans with six parties (entered into between June and July 2011), one of whom is a director of the Company for $120,517, and another who is a principal shareholder for $298,227, in exchange for 10% Secured Convertible Subordinated Notes (“Secured Notes”) which Notes and shares of common stock. Each Secured Note is collateralized by all of the Company assets and is convertible into common stock at a conversion price of $0.05 per share. Additionally, such lenders were granted an additional 5 shares of our common stock for each $1.00 of interest and principal due them totaling 2,881,405 common shares. The Company determined that the conversion of the secured notes into the secured recast notes was more than the carrying value of the obligation on the date of the conversion and recorded a loss on extinguishment of debt of $144,392 for the year ended December 31, 2011.
|
|
H)
|
Between September 13 and 16, 2011, the Company borrowed $250,000 from two investors, one of whom is a principal shareholder of the Company ($125,000) and refinanced an existing unsecured loan with one officer in the amount of $30,100. The Company issued these investors and officers the same 10% Secured Convertible Subordinated Notes as issued to the lenders reported in (G) above. Additionally, such investors received an additional 5 shares of common stock for each $1.00 invested totaling 1,400,500 common shares (625,000 included in shares issuable). The fair value of the common shares on the date of issuance of $31,250 was recorded as a debt discount which will be amortized over the term of the notes.
|
|
I)
|
On October 18, 2011, November 11, 2011 and November 14, 2011, the Company borrowed $25,000, $50,000, and $30,000 from two investors, both of whom are principal shareholders of the Company. The Company issued these investors the same 10% Secured Convertible Subordinated Notes as issued to the lenders reported in (G) above. Additionally, such investors received an additional 5 shares of common stock for each $1.00 invested, totaling 525,000 common shares. The common shares were fair valued at $18,313 as debt discount and will be amortized over the term of the notes.
|
|
J)
|
On May 16, 2012, the Company borrowed $20,000 from CS Healthcare, a related party (controlled by the Company’s CEO), in exchange for an 8% 18 month Unsecured Promissory Notes (“Unsecured Note”).
|
|
|
|
|
K)
|
On June 26, 2012, the Company reached an agreement with related party Fuselier Bridge Capital, LLC (owned by the Company’s CEO) to provide a secured working capital loan facility up to $300,000. The loan facility is secured by all Company assets including general intangibles (including trademarks, formulations, customer lists) and accounts receivables, fixed assets, inventory (all raw, work in progress and finished goods including labels) present and hereafter acquired. Each advance under the loan facility bears an interest rate of 1.5% per month and is due in full ten months after the issuance date. On June 26 and August 18, 2012, the Company borrowed $50,000 and $100,913, respectively under this loan facility and issued 1,666,666 and 3,363,767 warrants, respectively.
|
|
L)
|
These notes matured during the period and remain unpaid as of September 30, 2012. Therefore they are and classified as current portion of notes payable to related parties.
|
|
M)
|
Between September 24 and 25, 2012, the Company borrowed an aggregate of $250,000 from two investors in exchange for 8% 18 month Unsecured Promissory Notes (“Unsecured Note”), which is payable at maturity on March 24 and 25, 2014. A substantial portion of these proceeds were loaned to a potential acquisition candidate of the Company.
|
The following is a schedule of principal maturities for the next five years and the total amount thereafter on these related party notes as of September 30, 2012:
|
Year Ending December 31,
|
|
Principal
Maturities
|
|
|
2012
|
|
$
|
889,345
|
|
|
2013
|
|
|
657,093
|
|
|
Total
|
|
$
|
1,546,438
|
|
NOTE 7 - SHORT-TERM DEBT
Short-term debt at September 30, 2012 (unaudited) and December 31, 2011 consisted of the following:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Description
|
|
2012
|
|
|
2011
|
|
|
Secured loan agreement with a face amount of $155,000 bearing interest at 10% payable on November 21, 2012 ( A) (B) (D)
|
|
|
|
|
|
$
|
155,000
|
|
|
Secured loan agreement with a face amount of $175,000 bearing interest at 10% payable on November 1, 2012 (A) (B) (D)
|
|
|
|
|
|
|
175,000
|
|
|
Secured loan agreement with a face amount of $30,000 bearing interest at 10% payable on October 14, 2012 ( A) (B) (C) (E)
|
|
$
|
30,000
|
|
|
|
30,000
|
|
|
Secured loan agreement with a face amount of $25,000 bearing interest at 10% payable on October 18, 2012 ( A) (B) (C) (E)
|
|
|
25,000
|
|
|
|
25,000
|
|
|
Secured factoring loan agreement with a face amount of $282,537 bearing interest at 10% payable on July 23, 2012 and August 13, 2012 ( A) (B)
|
|
|
282,537
|
|
|
|
282,537
|
|
|
Unsecured note payable to a shareholder with a face amount of $25,000 bearing interest at 8% per annum and payable July 15, 2013 (F)
|
|
|
34,460
|
|
|
|
-
|
|
|
Unsecured note payable to a shareholder with a face amount of $50,000 bearing interest at 8% per annum and payable July 15, 2013(F)
|
|
|
68,921
|
|
|
|
-
|
|
|
Unsecured note payable to a shareholder with a face amount of $37,500 bearing interest at 8% per annum and payable September 3, 2013(F)
|
|
|
48,339
|
|
|
|
-
|
|
|
Secured promissory note with a face amount of $60,000 bearing interest at 11% per annum and payable September 2013 (G)
|
|
|
58,194
|
|
|
|
-
|
|
|
Equipment loan bearing interest at 11% per annum, mature in November 2013 (H)
|
|
|
35,457
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt before discount on debt
|
|
|
582,908
|
|
|
|
667,537
|
|
|
Discount on Debt (D)
|
|
|
(59,196
|
)
|
|
|
(547,047)
|
|
|
Total short-term debt
|
|
$
|
523,712
|
|
|
$
|
120,490
|
|
|
A)
|
On June 15, 2011, the Company entered into a Secured Factoring Loan with a principal amount of $426,680 with four lenders, total amount received on the Secured Factoring Loans was $400,000 of which $125,000 was purchased by a director of the Company and $200,000 was purchased by a principal shareholder (See Related Party Note 6). These notes matured on August 20, 2011 and are secured by all of the Company assets, subject to subordinations of certain assets to present and future factoring facilities. On August 24, 2011 these notes were converted into recast notes described in (D) below.
|
|
B)
|
On July 14, 2011, July 28, 2011 and July 29, 2011 the Company issued Original Issue Discount Notes to three lenders receiving amounts of $75,000 from a principal shareholder, and $50,000 and $25,000 respectively from other investors. These notes were to mature on January 14, 2012 at $170,458 and were secured by all of the Company assets, subject to subordinations of certain assets to present and future factoring facilities, of which $85,227 was due to a principal shareholder of the Company. On August 24, 2011 these notes were converted into the recast notes described below.
|
|
C)
|
Between September 13 and 16, 2011, the Company borrowed $250,000 from two investors, one of whom is a principal shareholder of the Company for $125,000 and refinanced an existing unsecured loan with one officer in the amount of $30,100. The Company issued to these investors and officers the same 10% Secured Convertible Subordinated Notes as issued to the lenders reported in Note 6 (G) above. Additionally, such investors received an additional 5 shares of common stock for each $1.00 invested totaling 1,400,500 common shares (625,000 included in shares issuable). The fair value of the common shares on the date of issuance of $62,500 was recorded as a debt discount which will be amortized over the term of the notes.
|
|
D)
|
Between December 1 and December 21, 2011 the Company borrowed $330,000 from an investor. We issued 10% Secured Convertible Subordinated Notes as issued to the lenders reported in Note 6 (G) above. Additionally, such investor received an additional 5 shares of common stock for each $1.00 invested totaling 1,650,000 common shares that were valued at $565,890 and recorded as a debt discount which will be amortized over the term of notes. In addition, the Company agreed in a side letter to a revenue participation based on 2% of the first $2,000,000 of revenue and 3% of revenue above $2,000,000 in 2012. This agreement may be terminated by the Company with a penalty of 3 times the annual revenue participation. On July 11, 2012 both notes were converted into common stock. During first quarter of 2012, the Company reclassified approximately $349,000 of debt discount to additional paid in capital due to previously over allocated embedded beneficial conversion in excess of carrying value of the related notes.
|
|
E)
|
On October 18, 2011 and November 14, 2011 the Company borrowed $25,000 and $30,000 from one investor. The Company issued to this investor the same 10% Secured Convertible Subordinated Notes as issued to the lenders reported in Note 6 (G) above. Additionally, such investor received an additional 5 shares of common stock for each $1.00 invested, totaling 275,000 common shares (275,000 included in shares issuable). The fair value of the common shares on the date of issuance of $12,313 was recorded as a debt discount which will be amortized over the term of the notes.
|
|
F)
|
Between February 15, 2012 and March 2, 2012, the Company received proceeds of $250,000 from four investors in exchange for 8% 18 month Unsecured Convertible Notes (“Unsecured Note”) and warrants. One of the investors invested $87,500 and the other, a former director, invested $50,000 in the Unsecured Notes. Each Unsecured Note is convertible thirteen months after their respective issuance dates into common stock at a conversion price equal to the greater of (i) the Variable Conversion Price of 50% of the Market Price and (ii) the Fixed Conversion Price of $0.01. The investors also received 25,000,000 5 year warrants at a strike price of $0.03 per share. In addition the investors received the right to invest in new notes on the same basis as provided. The Company has accounted for these share based provisions at fair value due to the variable conversion price will require the Company to issue additional shares and accordingly has recorded an additional liability to the notes of approximately $88,000 of which approximately $47,000 has been recorded as change in fair value for the nine months ended September 30, 2012. The Company will fair value these provisions at each reporting period until either settled or forfeited.
|
|
G)
|
On September 20, 2012 the Company borrowed $ 60,000 from an outside lender in exchange for an 11% 1 year Secured Promissory Note. The Company’s Chief Executive Officer personally guaranteed the Note.
|
|
H)
|
On December 3, 2008, the Company completed the purchase of a new ERP system and financed that purchase through a third-party equipment financing arrangement having an interest rate of 11% and requiring payments of monthly interest and principal of $1,719 which matures by December 2013.
|
NOTE 8 - LONG-TERM DEBT
Long-term debt at September 30, 2012 (unaudited) and December 31, 2011 consisted of the following:
|
Description
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
|
Loan payable bearing interest at 8% per annum, maturing in March 2014 (B)
|
|
$
|
150,000
|
|
|
|
|
|
|
Equipment loan bearing interest at 11% per annum, mature in November 2013 (A)
|
|
|
-
|
|
|
$
|
35,457
|
|
|
Total long-term debt
|
|
|
150,000
|
|
|
|
35,457
|
|
|
Less current maturities
|
|
|
-
|
|
|
|
(21,119
|
)
|
|
Discount on Debt
|
|
|
(33,026
|
)
|
|
|
-
|
|
|
Long-term debt
|
|
$
|
116,974
|
|
|
$
|
14,338
|
|
Interest expense for the nine months ended September 30, 2012 and 2011 amounted to $65,670 and $13,743, respectively. The weighted average interest rate for all long-term borrowings was 17.34% for 2012 and 6% for 2011.
|
A)
|
On December 3, 2008, the Company completed the purchase of a new ERP system and financed that purchase through a third-party equipment financing arrangement having an interest rate of 11% and requiring payments of monthly interest and principal of $1,719 which matures by November 2013.B)Between September 24 and 25, 2012, the Company borrowed an aggregate of $250,000 from two investors in exchange for 8% 18 month Unsecured Promissory Notes (“Unsecured Note”), which is payable at maturity on March 24 and 25, 2014. A substantial portion of these proceeds were loaned to a potential acquisition candidate of the Company.
|
The following is a schedule of principal maturities for the next five years and the total amount thereafter on these notes as of September 2012:
|
Year Ending December 31,
|
|
Principal
Maturities
|
|
|
2014
|
|
$
|
150,000
|
|
NOTE 9 - STOCKHOLDERS’ DEFICIT
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, $0.001 par value per share. The Company designated 1,000 shares of the authorized shares as Series K 10% Convertible Preferred Stock (18.9 and 30 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively) and 1,750 shares of the authorized shares as Series M Convertible Preferred Stock (no shares were outstanding at September 30, 2012 and December 31, 2011).
Common Stock
The Company is authorized to issue 500,000,000 shares of common stock, $0.001 par value per share. At September 30, 2012 and December 31, 2011, 328,533,316 and 150,811,031 shares were issued and outstanding, respectively.
Following is a summary of changes in stockholder’s equity from December 31, 2011 to September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Shares
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Dollars
|
|
|
Shares
|
|
|
Dollars
|
|
|
issuable
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – December 31, 2011
|
|
|
30.0
|
|
|
$
|
-
|
|
|
|
150,811,033
|
|
|
$
|
150,811
|
|
|
$
|
5,550
|
|
|
$
|
44,025,118
|
|
|
$
|
(48,114,561
|
)
|
|
$
|
(3,933,082
|
)
|
|
Issuance of shares issuable at year end
|
|
|
-
|
|
|
|
-
|
|
|
|
5,550,000
|
|
|
|
5,550
|
|
|
|
(5,550
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Settlement of accounts payable for common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
25,879,452
|
|
|
|
25,879
|
|
|
|
-
|
|
|
|
1,386,525
|
|
|
|
-
|
|
|
|
1,412,404
|
|
|
Shares issued upon conversion of notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
33,000,000
|
|
|
|
33,000
|
|
|
|
-
|
|
|
|
297,000
|
|
|
|
-
|
|
|
|
330,000
|
|
|
Shares issued upon conversion of preferred stock
|
|
|
(11.0
|
)
|
|
|
-
|
|
|
|
8,305,811
|
|
|
|
8,306
|
|
|
|
-
|
|
|
|
(8,306
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Shares issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
54,200,000
|
|
|
|
54,200
|
|
|
|
-
|
|
|
|
1,262,400
|
|
|
|
-
|
|
|
|
1,316,600
|
|
|
Shares issued upon warrants exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
18,587,020
|
|
|
|
18,587
|
|
|
|
-
|
|
|
|
499,031
|
|
|
|
-
|
|
|
|
517,618
|
|
|
Shares issued to terminate revenue participation agreement
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000,000
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
350,000
|
|
|
|
-
|
|
|
|
375,000
|
|
|
Derivative liability of warrants issued in connection with notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
353,614
|
|
|
|
-
|
|
|
|
353,614
|
|
|
Beneficial conversion feature and debt discount on notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,825
|
|
|
|
-
|
|
|
|
3,825
|
|
|
Shares issued for release of UCC
lien
|
|
|
-
|
|
|
|
-
|
|
|
|
1,200,000
|
|
|
|
1,200
|
|
|
|
-
|
|
|
|
34,800
|
|
|
|
-
|
|
|
|
36,000
|
|
|
Shares issued in connection with disposal of subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
6,000,000
|
|
|
|
6,000
|
|
|
|
-
|
|
|
|
174,000
|
|
|
|
-
|
|
|
|
180,000
|
|
|
Fair value of conversion rights on notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(41,334
|
)
|
|
|
-
|
|
|
|
(41,334
|
)
|
|
Conversion of derivative warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,630
|
|
|
|
-
|
|
|
|
13,630
|
|
|
Dividends on series K 10% convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(42,271
|
)
|
|
|
(42,271
|
)
|
|
Net (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,823,123
|
)
|
|
|
(3,823,123
|
)
|
|
Balance- September 30, 2012
|
|
|
19.0
|
|
|
$
|
-
|
|
|
|
328,533,316
|
|
|
$
|
328,533
|
|
|
$
|
-
|
|
|
$
|
48,350,303
|
|
|
$
|
(51,979,955
|
)
|
|
$
|
(3,301,119
|
)
|
During the three and nine months ended September 30, 2012, the Company issued 1,272,600 and 13,673,600 common shares in settlement of accounts payable for $57,206 and $717,652, respectively.
On March 21, 2012 the Company granted 25,000,000 restricted shares of common stock to an investor who loaned the Company $330,000 on December 1, 2011 and December 22, 2011 in connection with the termination of the revenue participation agreement. The Company has recorded a share based compensation charge of $375,000 in general and administrative expense.
On March 7, 2012 the Company commenced a warrant reset and exercise offer to eligible holders of its outstanding warrants, pursuant to which all issued and outstanding warrants to purchase common stock of the Corporation issued, irrespective of current exercise price or expiration date, may, in each holder’s sole discretion, be exercised at $0.03 per share during the offer period. Approximately 15 investors elected to exercise their warrants for which the Company received proceeds of $400,147 and issued 13,338,225 shares of common stock.
On February 24, 2012 and June 5, 2012 three investors in our Series Preferred K converted 1.45 and 5.80 preferred shares into 1,210,000 and 4,829,216 shares of common stock, respectively.
On February 24, 2012 one investor in our Series Preferred K converted 1.45 preferred shares into 1,210,000 shares of common stock.
On February 3, 2012 one investor in our Series Preferred K converted 4 preferred shares into 2,266,667 shares of common stock and exercised a warrant to purchase 1,333,333 shares of common stock.
On February 3, 2012 one investor in our Series Preferred K converted 4 preferred shares and Series X, Y and Z warrants to purchase 1,333,333 shares of common stock into 3,600,000 shares of common stock.
In February 2011, the Company issued 1,000,000 common shares for marketing services at stated market value on the date of the agreement of $0.14 per share. In June 2011, The Company issued an additional 80,000 shares for marketing services at stated market value on the date of the agreement of $0.0625 per share.
On February 24, 2011, the Company received proceeds from the sale of unsecured convertible notes of $60,000 and $30,000 to investors and a director, respectively. On April 29, 2011, these unsecured notes were converted into 800,000 and 400,000 common shares respectively.
On January 12, 2011, the Company’s OID note holders agreed to extend the maturity of their notes to January 17, 2011. In granting the extensions to January 17, 2011, the OID note holders received 402,045 Common Shares in the Company. As this exchange was to extend the term of the debt the Company accounted for the extension as a material modification and recognized a loss on extinguishment of debt of $66,338 in January 2011.
On January 21, 2011, the Company completed a unit offering of an aggregate of $1,215,000 of its Series K 10% Convertible Preferred Stock (“Series K Preferred Stock”) and three series (Series X, Y and Z) of common stock purchase warrants (“Warrants”) to eleven accredited investors. Each unit sold consisted of one share of $25,000 stated value (and liquidation preference) of Series K Preferred Stock and Warrants to purchase up to an aggregate of 333,333 shares of common stock at $0.15 per share, subject to adjustment. A total of 48.6 units were sold. The Series X Warrants are five-year warrants, exercisable immediately to purchase an aggregate of 4,049,999 shares of common stock. The Series Y Warrants are exercisable until 45 days after the effectiveness of a certain registration statement and are exercisable to purchase an aggregate of 4,049,999 shares of common stock. The Series Z Warrants are ‘five-year’ warrants whose effectiveness are conditional upon the exercise of the holder’s Y warrants and are exercisable to purchase an aggregate of 8,100,001 shares of common stock. Pursuant to a Registration Rights Agreement described below, Investors also received the right to demand that the Company file one or more registration statements covering the securities into which the Series K Preferred Stock is convertible and as to which the Warrants are exercisable. As a condition to consummation of the offering, certain individuals converted outstanding debt in the original principal amount of $2,050,000 into 82 shares of the Company’s Series K Preferred Stock and 6,833,334 Series Y warrants. Additionally, all subscribers to the Company’s 12% Original Issue Discount Notes sold in September and October 2010, whose then current balances on such Notes aggregated $2,079,171, were automatically converted into 83.16 units of the Company’s Series K Preferred Stock and were issued X, Y and Z warrants
pari- passu
to the current unit investors (an aggregate of 6,930,571 Series X warrants, 6,930,571 Series Y warrants and 13,861,139 Series Z warrants).
In connection with the transaction, the Company entered into a Securities Purchase Agreement, dated January 20, 2011, with eleven investors (“SPA”). In addition to providing for the purchase of the Series K Preferred Stock and warrants by such investors as above, the SPA also provided for the Company to amend its earn-out arrangement with Eric Skae, its Chief Executive Officer, as set forth in a certain Amendment to Asset Purchase Agreement; placed certain restrictions on the Company in connection with additional equity offerings by it for a period of 12 months; caused each executive officer and director to enter into a “lock-up” agreement valid until 90 days after the effectiveness of one or more registration statements to be filed pursuant to the Registration Rights Agreement described below; and caused the conversion to equity of certain outstanding debt of the Company as set forth in the last two sentences of the preceding paragraph.
The Company also entered into a Registration Rights Agreement, dated January 20, 2011 with each unit subscriber pursuant to which the Company agreed, at its expense, to file and gain effectiveness for one or more registration statements covering the Company common stock issuable pursuant to exercise of the Warrants and conversion of the Series K Preferred Stock. The Company further agreed to file such registration statement within 60 days of the closing of the offering and to obtain its effectiveness within 90 days of such closing (or 120 days if such registration statement is subject to full Securities and Exchange Commission review), failing which monetary penalties are imposed. The registration statement(s) is (are) to be maintained effective until all securities registered for sale there under have been sold. On April 29, 2011 holders of the rights agreed to amend the Registration Rights Agreement, dated as of January 21, 2011, between the Corporation and each of the several purchasers signatory thereto and eliminated Section 2(b) thereof in its entirety in order to remove the liquidated damages provisions from the agreement.
The Company also filed a Certificate of Designation of its Certificate of Incorporation which created a class of 1,000 shares of Series K 10% Convertible Preferred Stock, par value $.001 per share. The Series K Preferred Stock ranks senior to the common stock, carries a 10% cumulative rate of interest, has a liquidation preference and is convertible into shares of the Company’s common stock at $.15 per share, subject to adjustment and anti-dilution protection. The Series K Stock is callable and redeemable by the Company under certain circumstances. The Series K Stock may be converted by the Company into shares of its common stock if the market price of the common stock is at least 300% of the conversion price for a period of 30 days and at least 200,000 shares have traded each day during such 30 day period. The Series K Preferred Stock has voting rights, voting with the Company’s common stock on an assumed-converted basis. The Certificate of Designation contains additional restrictions on the Company’s operations, including a restriction prohibiting the payment of any dividends on the Company’s common stock without the affirmative consent of the holders of the Stock.
The Warrants are represented by warrant certificates and are exercisable at $.15 per share. They are exercisable in whole or in part and the Series X and Z (but not Y) warrants may be exercised on a cashless basis.
The placement agent for the offering received $72,435 in cash fees and 361,000 warrants valued at $18,804 using the Black-Scholes model described above, to purchase common stock which have terms similar to the Series X warrants.
NOTE 10 - STOCK OPTIONS AND WARRANTS
Set forth below is a description of the Company’s warrants as of September 30, 2012 (unaudited):
|
Designation / Reason Granted
|
|
Original issue date
|
|
Shares of Common Stock Upon Exercise
|
|
Exercise Price / Share
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing Program Development
|
|
October-07
|
|
250,000
|
|
$
|
1.00
|
|
October-12
|
|
|
April 2008 Bridge Notes Warrants (1)
|
|
April-08
|
|
15,625
|
|
$
|
0.80
|
|
April-13
|
|
|
September 2008 Bridge Note Warrants (1)
|
|
September-08
|
|
25,884
|
|
$
|
0.85
|
|
September-13
|
|
|
Series J Warrants (1)
|
|
December-08
|
|
14,368
|
|
$
|
0.87
|
|
December-13
|
|
|
October 2009 Note Warrants (1)
|
|
October-09
|
|
200,000
|
|
$
|
0.25
|
|
October-14
|
|
|
Investor Warrants 2009 Private Placement (1)
|
|
December-09
|
|
531,817
|
|
$
|
0.55
|
|
December-14
|
|
|
Investor Warrants 2009 Private Placement (1)
|
|
February-10
|
|
289,545
|
|
$
|
0.55
|
|
February-15
|
|
|
Marketing Program Development
|
|
March-10
|
|
150,000
|
|
$
|
0.49
|
|
March-15
|
|
|
Investor warrants 2009 Private Placement (1)(2)
|
|
May-10
|
|
1,164,346
|
|
$
|
0.25
|
|
May-15
|
|
|
Investor Warrants 2010 Private Placement (1)
|
|
June-10
|
|
1,821,414
|
|
$
|
0.45
|
|
June-15
|
|
|
Investor Warrants 2010 Original Issue Discount Private Placement (1)
|
|
September/October 2010
|
|
3,338,703
|
|
$
|
0.25
|
|
September, October 2015
|
|
|
Placement agent Warrants (1)
|
|
October-10
|
|
444,609
|
|
$
|
0.25
|
|
October-15
|
|
|
Investor X Warrants 2011 Series K Preferred stock (3)
|
|
January 2011
|
|
6,476,472
|
|
$
|
0.15
|
|
January-16
|
|
|
Investor Y Warrants 2011 Series K Preferred stock (3)
|
|
January 2011
|
|
7,260,786
|
|
$
|
0.15
|
|
45 days after registration statement
|
|
|
Investor Z Warrants 2011 Series K Preferred stock (3)
|
|
January 2011
|
|
14,800,780
|
|
$
|
0.15
|
|
January-16
|
|
|
Placement agent X Warrants (3)
|
|
January 2011
|
|
361,000
|
|
$
|
0.15
|
|
January-16
|
|
|
Debt conversion Y Warrants (3)
|
|
January 2011
|
|
1,833,333
|
|
$
|
0.15
|
|
45 days after registration statement
|
|
|
Marketing Program Development (3)
|
|
2/1/2011
|
|
100,000
|
|
$
|
0.15
|
|
February-16
|
|
|
Investor Relations (3)
|
|
November-11
|
|
5,000,000
|
|
$
|
0.25
|
|
11/20/2016
|
|
|
2012 Unsecured Note Warrants (4)
|
|
February / March 2012
|
|
16,566,667
|
|
$
|
0.03
|
|
February, March 2017
|
|
|
Warrants issued for services (4)
|
|
March 2012
|
|
3,750,000
|
|
$
|
0.03
|
|
March 2017
|
|
|
Warrants issued for bridge capital (5)
|
|
June 2012
|
|
1,666,666
|
|
$
|
0.03
|
|
June 2017
|
|
|
Warrants issued for bridge capital (5)
|
|
August 2012
|
|
3,363,767
|
|
$
|
0.03
|
|
August 2017
|
|
|
September 2012 Notes Warrants (6)
|
|
September 2012
|
|
1,250,000
|
|
$
|
0.03
|
|
September 2017
|
|
Fair values for the warrants (excluding those with down round provisions) were determined using the Black-Scholes-Merton option valuation model with the following assumptions:
|
Stock price
|
|
$
|
0.015 to 0.06
|
|
|
Exercise price
|
|
$
|
0.03
|
|
|
Term
|
|
5 years
|
|
|
Volatility
|
|
263.01 to 397.47%
|
|
|
Risk-free interest rate
|
|
0.81 to 1.01 %
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
(1)
|
The exercise price of the warrants and the number of warrant shares subject thereto shall be subject to adjustment in the event of stock splits, stock dividends, reverse stock splits, and similar events. Further, in the event that the Company should issue shares of its Common Stock at an effective price per share less than the then effective exercise price of the warrants, the exercise price and the number of warrant shares subject to such warrants shall be adjusted on a weighted average basis to reflect the dilution represented by the issuance of such shares of Common Stock and such lower effective price on a non-fully-diluted basis, subject to similar exceptions to those described for such adjustments above with respect to the Convertible Preferred Stock. The impact of this provision would be to reduce the exercise price. Therefore, these warrants were classified as derivative liability instruments upon issuance. The warrants also contain standard reorganization provisions.
|
|
(2)
|
In February 2010, the Company issued a side letter to investors in the private placements which closed in December 2009 and February 2010 which effectively amended the terms of the private placements to contain a price protection clause through April 30, 2010. The price protection clause required the Company to issue additional warrants to these investors, based upon a formula contained in the side letter, in the event that common stock was issued during the price protection period at an effective price less than the purchase price paid by such investors, subject to certain exceptions. This side letter resulted in the warrants being classified as derivative liability instruments.
|
|
(3)
|
During the year ended December 31, 2011, the Company issued 100,000 warrants for marketing services at an exercise price of $0.15 per share with a fair value of $10,388, 43,922,280 warrants were issued in conjunction with the issuance of Series K Preferred shares, 361,000 warrants were issued to the placement agent of the Series K Preferred shares, 6,833,333 warrants were issued for the conversion of certain notes payable into Series K Preferred shares, and 1,000,000 warrants were issued in conjunction with the conversion of vendor payables. In April 2011, the Company made an offer to the series X, Y and Z warrant holders to exercise their warrants at an exercise price of $0.075 per warrant share; certain warrant holders accepted the Company’s offer and exercised 6,666,665 warrants for $500,000. In addition a series K Preferred shareholder forfeited 666,667 series X warrants and 1,333,313 series Y warrants and a warrant holder who, as previously described, received warrants as part of the conversion certain notes payable agreed to forfeit 4,066,667 series X warrants.
|
|
(4)
|
Between February 15, 2012 and March 2, 2012, the Company received proceeds of $250,000 from four investors in exchange for 8% 18 month Unsecured Convertible Notes (“Unsecured Note”), which Notes were coupled with warrants. One of the investors is a principal shareholder who invested $87,500 and the other was a former director who invested $50,000 in the Unsecured Notes. Each Unsecured Note is convertible thirteen months after their respective issuance dates into common stock at a conversion price equal to the greater of (i) the Variable Conversion Price of 50% of the Market Price and (ii) the Fixed Conversion Price of $0.01. The investors also received 25,000,000 5 year warrants at a strike price of $0.03 per share. In addition the investors received the right to invest in new notes on the same basis as provided. The Company has accounted for these share based provisions at fair value due to the variable conversion price will require the Company to issue additional shares and accordingly has recorded an additional liability to the notes of approximately $88,000 of which approximately $47,000 has been recorded as change in fair value for the nine months ended September 30, 2012. The Company will fair value these provisions at each reporting period until either settled or forfeited.
On March 7, 2012 the Company commenced a warrant reset and exercise offer to eligible holders of its outstanding warrants, pursuant to which all issued and outstanding warrants to purchase common stock of the Corporation issued, irrespective of current exercise price or expiration date, may, in each holder’s sole discretion, be exercised at $0.03 per share during the offer period. Approximately 15 investors elected to exercise their warrants for which the Company received $400,147 in proceeds and issued 13,338,225 shares of common stock.
|
|
(5)
|
On June 26, 2012 and August 18, 2012, the Company issued 1,666,667 and 3,363,767 warrants with a 5 year term exercisable at $.03 per share in connection with a bridge note from an entity controlled by our Chief Executive Officer.
|
|
(6)
|
On September 24, 2012, the Company issued 1,250,000 warrants with a 5 year term exercisable at $0.03 per share in connection with the issuance of $250,000 in notes to two investors.
|
The following table reflects a summary of common stock warrants outstanding and warrant activity during 2012 (unaudited):
|
|
|
2012
|
|
|
|
|
# Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average Term
(Years)
|
|
|
Warrants outstanding at January 1, 2012
|
|
|
52,893,843
|
|
|
|
0.20
|
|
|
|
3.46
|
|
|
Granted during the period
|
|
|
36,816,544
|
|
|
|
0.03
|
|
|
|
4.91
|
|
|
Exercised during the period
|
|
|
(18,880,856
|
)
|
|
|
0.03
|
|
|
|
4.57
|
|
|
Expired during the period
|
|
|
(153,749
|
)
|
|
|
0.15
|
|
|
|
4.57
|
|
|
Warrants outstanding at September 30, 2012
|
|
|
70,675,782
|
|
|
$
|
0.1658
|
|
|
|
3.85
|
|
The Common Stock warrants expire in years ended December 31 as follows:
|
2012
|
|
|
250,000
|
|
|
2013
|
|
|
55,877
|
|
|
2014
|
|
|
731,817
|
|
|
2015
|
|
|
7,208,617
|
|
|
2016 and thereafter
|
|
|
52,542,036
|
|
|
45 days after registration statement
|
|
|
9,887,435
|
|
|
Total
|
|
|
70,675,782
|
|
Under the Company’s Employee Incentive Stock Option Plan (the “1996 Plan”) approved by the stockholders in 1996, the total number of shares of Common Stock that may be granted is 500,000, amended to 325,000 in 1999. The 1996 Plan provides that shares granted come from the Company’s authorized but unissued Common Stock. The price of the options granted pursuant to these plans will not be less than 100% of the fair market value of the shares on the date of grant. The options expire ten years from date of grant. At the Company’s Annual Meeting held on December 10, 2004, the Company’s stockholders approved the 2004 Stock Option Plan (the "2004 Plan"). At the Company’s Board of Directors meeting held on July 28, 2007, the Board approved an increase in the number of shares of Common Stock that may be granted to 2,000,000 under all plans. At the Company’s Board of Directors meeting on June 27, 2008, the Board approved a new Stock Option Plan (the “2008 Plan”) for a total of 2,000,000 additional shares. At the Company’s Board of Directors meeting held on February 2, 2010, the Board approved a new Stock Option Plan (the “2010 Plan”) for a total of 3,000,000 additional shares. The price of the options granted pursuant to these plans will not be less than 100% of the fair market value of the shares on the date of grant. The option vesting period is determined by the Board of Directors at the time of grant and ranges from immediately to five years. The Company did not grant any stock options to directors and employees during the nine months ended September 30, 2012. Compensation cost recognized during the three, six and nine months ended September 30, 2012 and 2011 related to stock-based awards was $12,561 and $(16,411), respectively. Options are usually issued at an exercise price equal to or above the fair value at the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option-pricing model
The summary of activity during 2012 (unaudited) for the Company's stock options is presented below:
|
|
|
2012
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at January 1, 2012
|
|
|
2,241,250
|
|
|
$
|
0.67
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminated/Expired
|
|
|
(986,802)
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2012
|
|
|
1,254,448
|
|
|
$
|
0. 67
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2012
|
|
|
1,173,945
|
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available for grant at September 30, 2012
|
|
|
4,752,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per share of options outstanding
|
|
$
|
$0.65 to 1.02
|
|
|
$
|
0.65 to 1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual lives of all options
|
|
5.91 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average fair value of options granted during the year
|
|
$
|
0
|
|
|
$
|
0
|
|
The Common Stock options expire as follows:
The aggregate intrinsic value of the options outstanding at September 30, 2012 was $0 with a weighted average remaining contract term of 5.91 years.
Unrecognized compensation costs related to non-vested share-based compensation for the above options amounted to $12,048 as of September 30, 2012 which will be amortized over the next eighteen months.
NOTE 11 - RELATED PARTIES TRANSACTIONS
From time to time, certain officers and directors loan the Company money as well as defer payment of salaries in order to assist the Company in its cash flow needs.
The table below sets forth the amounts of notes payable and accrued salaries of the Company’s officers and directors as of September 30, 2012, the title reflects the position held by the individual as of September 30, 2013:
|
Officer/Director
|
|
Notes Payable
|
|
|
Accrued Salaries &
|
|
|
|
|
Amount
|
|
|
Accrued Interest
|
|
|
Bonus Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric Skae, Former C.E.O. & President
|
|
$
|
330,100
|
|
|
$
|
2,970
|
|
|
|
-
|
|
|
David N. Fuselier, C.E.O.
|
|
$
|
150,913
|
|
|
|
-
|
|
|
$
|
93,750
|
|
|
O. Lee Tawes, III Former Director
|
|
$
|
311,017
|
|
|
$
|
78,690
|
|
|
|
-
|
|
On January 12, 2011, O. Lee Tawes, a then director of the Company, lent the Company an aggregate of $75,000 for which he received a demand promissory note bearing interest at the rate of 12% per annum. Mr. Tawes lent the Company an additional $30,000 on February 24, 2011 for which he received a promissory note bearing interest at the rate of 0% per annum. This note was converted into 400,000 shares of common stock on April 29, 2011 at $0.075 per share. On June 30, 2011, O. Lee Tawes lent the Company an additional $10,000 for which he received a promissory note bearing interest at the rate of 10% per annum.
On January 12, 2011, Eric Skae, the Company's then CEO and a director, lent the Company an aggregate of $20,000 for which he received a demand promissory note bearing interest at the rate of 0% per annum. On January 28, 2011, the Company repaid $7,500 of this loan. During September 2011, the Company refinanced an existing unsecured loan with one officer in the amount of $30,100. The Company issued the officer the same 10% Secured Convertible Subordinated Notes they had issued to the lenders with the recast notes. Additionally, the officer received an additional 5 shares of its common stock for each $1.00 of interest and principal due them. The Company determined that the conversion of the secured notes into the secured recast notes was more than the carrying value of the obligation on the date of the conversion and recorded a loss on extinguishment of debt of $7,525.
Between August 24, 2011 and December 22, 2011 we borrowed an aggregate of $ 1,346,381 from eight investors, in exchange for 10% Secured Convertible Subordinated Notes (“Secured Notes”) which Notes were coupled with common stock. Each Secured Note is collateralized by all of the Company’s assets and an assignment of the Company’s trademark with the US Patent and Trademark Office and is convertible into common stock at a conversion price of $0.05 per share. Additionally, such lender was granted an additional 5 shares of our common stock for each $1.00 of interest and principal due them.
In February 2012, the Company and Eric Skae, former CEO and director entered into a Mutual Termination and Release agreement to settle aggregate $508,193 indebtedness comprised of $260,000 earn-out payable and $166,667 accrued bonus whereby Mr. Skae agreed to convert $300,000 debt into a $200,000 8% 18 month unsecured convertible note (convertible at holder’s option 13 months after the date of issuance at $0.01, subject to a beneficial ownership blocker), a $100,000 8% demand note and also forfeited the remaining $178,093 of debt. During 2012, the Company recorded a gain on the settlement of the long term debt of $178,093.
On May 4, 2012 the Company commenced a warrant reset and exercise offer to eligible holders of its outstanding warrants, pursuant to which all issued and outstanding warrants to purchase common stock of the Corporation issued, irrespective of current exercise price or expiration date, may, in each holder’s sole discretion, be exercised at $0.03 per share during the offer period. Approximately 7 investors elected to exercise their warrants for which the Company received $117,471 and issued 3,915,295 shares of common stock.
Between May 10 and May 17, 2012 six of the eight lenders agreed to waive and release its first priority and perfected security interest in and lien on the Company’s assets, and consents to the filing of a form UCC3 for the above UCC1 financing statements. In consideration for this waiver, we issued each lender 200,000 shares of common stock in New Leaf Brands, Inc. The Company issued 1,200,000 shares of common stock to these six parties in connection with the UCC release.
On May 16, 2012, the Company borrowed $20,000 from CS Healthcare, a related party, in exchange for an 8% 18 month Unsecured Promissory Notes (“Unsecured Note”).
On June 26, 2012, the Company reached an agreement with related party Fuselier Bridge Capital, LLC to provide a secured working capital loan facility up to $300,000. The loan facility is secured by all Company assets including general intangibles (including trademarks, formulations, customer lists) and accounts receivables, fixed assets, inventory (all raw, work in progress and finished goods including labels) present and hereafter acquired. Each advance under the loan facility bears an interest rate of 1.5% per month and is due in full ten months after the issuance date. The investors also received up to 10,000,000 5 year warrants at a strike price of $0.03 per share and up to 10,000,000 shares of common stock at a price of $0.03 per share. On June 26, 2012, the Company borrowed $50,000 under this loan facility. On August 18, 2012, the Company borrowed an additional $100,913 under this loan facility.
On August 2, 2012 David Fuselier was elected as a director and chairman and appointed the position of Chief Executive Officer of Integrated Freight Corp (Ticker: IFCR.OTCBB)
, a related party
.
NOTE 12 - CONTINGENCIES
In connection with the acquisition of Skae Beverage International LLC (“Skae”) in 2008, the Company agreed to provide the former member of Skae, who was also the Company’s Chief Executive Officer through February 14, 2012, with a three year earn-out arrangement. Under the terms of the earn-out arrangement, the Company can be required to pay an additional $4,776,100 to the owner of Skae if the acquired operations meet certain performance targets related to sales and gross profit. As of September 30, 2011 and December 31, 2010, the Company has accrued $260,000 and $535,000 respectively related to the achievement of the performance targets. Currently, the Company is unable to determine the likelihood that future performance targets will be met or estimate the future liability that will be incurred. In January 2011, the Company amended the earn-out agreement with the CEO; where by Mr. Skae forgave his 2010 earn-out of $325,000 which also reduced the intangible by the same amount.
On January 29, 2009, the Company was notified that it was named as a defendant, along with 54 other defendants, in a class action lawsuit under California Proposition 65 for allegedly failing to disclose the amount of lead in one of its products. The Company has responded to discovery requests from the Attorney General of California. To date, no trial date has been set. The Company is currently investigating the merits of the allegation and is unable to determine the likelihood of an unfavorable outcome or a range of possible loss. This matter remains pending.
On December 7, 2009, the Company received a demand notice for payment for $822,920 from the estate of a former owner of Nutritional Specialties, Inc. Without acknowledging liability, the Company offered to settle any claims against us in this matter for cash and restricted common stock. The Company's offer lapsed before it was accepted. The Company intends to continue to attempt to negotiate a settlement for this debt. The Company has accrued for this payment of $822,920 as of December 31, 2010 as a current portion of note payable. On July 7, 2010, the Company was served with a Complaint demanding payment of the remaining balance of a $1,200,000 note payable with a current balance of $822,920 from the estate of a former owner of Nutritional Specialties, Inc. The parties have attended mediation and the Company is hopeful that this may be amicably resolved. This matter remains pending. As discussed in Note 14 “Subsequent Events” on April 9, 2012 the Company completed the sale its non-operating subsidiary Nutritional Specialties, Inc. (NSI) to Deep South Capital, LLC (DSCL). As part of the security purchase agreement, DSCL assumed this obligation and indemnified the Company for the note payable with a current balance of $822,920 from the estate of a former owner of Nutritional Specialties, Inc
On March 12, 2010, the Company was notified that it was named as a defendant in lawsuit in the United States District Court, Eastern District of Texas, brought by Vitro Packaging de Mexico, SA de CV, the assignee of a former supplier. Vitro Packaging alleges the Company owed unpaid accounts payable and is seeking payment of approximately $345,000. The Company has entered into a Side Compromise Settlement Agreement, Indemnity and Release with Vitro Packaging De Mexico, S.A. DE C.V. with Vitro agreeing not to execute on an Agreed Final Judgment for $245,275 until after May 16, 2011, which the Company has not paid and is recorded as a current liability. On August 17, 2011, the judgment was recorded in the State of New Jersey. During September 2012, the Company re-initiated negotiations to settle this matter. In October 2012, Management negotiated an agreement with Vitro whereby the Company would pay $125,000 in three installments to settle all claims relating to the litigation. To date, no payments have been made under the agreement, however, Vitro and Company continue to discuss a beginning date for the installment payments
On January 21, 2011, the Company filed a Certificate of Designation to its Certificate of Incorporation which created a class of 1,000 shares of Series K 10% Convertible Preferred Stock with a par value of $.001 per share. As of June 30, 2012, Series K 10% Preferred stock dividends of $ 191,275 are accrued.
On July 11, 2011, the Company was served with a complaint from Bett-A-Way Traffic Systems, Inc. demanding payment of $90,928 in an accounts payable collection matter. The parties settled this matter on April 15, 2012 for a combination of stock and cash. The stock component has been paid and the cash component remains open. At September 30, 2012, the parties continue to discuss payment of the cash component. The remaining balance is included in accounts payable at September 30, 2012.
On January 12, 2012, Key Equipment filed a complaint demanding payment of $81,943 and on August 29, 2012 a Final Judgment was attained. In November 2012, the parties agreed to a Stipulation of Settlement for $65,000 requiring an initial payment of $5,000 and subsequent monthly payments of $1,666 until fully retired. To date, the Company has not begun the payments as required under the Stipulation. The equipment loan is included in short term debt and the balance is included in accrued expenses at September 30, 2012.
On February 4, 2012, we were served with a complaint by Hartford Meir, Inc demanding payment of $160,009 in a collection matter regarding a trade receivable conveyed to them by Mode Transportation (with whom the Company originally incurred the debt). We have accrued for this payment of $136,920 as of December 31, 2011 as part of accounts payable. The Company reached a settlement agreement with this creditor which was consummated on July 18, 2012 and the amounts owed remain unpaid. The case has been dismissed.
On July 17, 2012, former CEO Eric Skae served a notice of default on the Settlement and Mutual Release Agreement and the Consulting Agreement signed on February 15, 2012. Amounts owed under the Settlement and Mutual Release Agreement are included in the Notes Payable to related parties totaling $300,000.
On January 9, 2013, we received a complaint from Stephen Gould Corporation alleging that we were in breach of contract and sought $47,587 for such breach and are included in accrued expenses. The Company’s counsel is reviewing the complaint.
Purchase Order Financing
On September 20, 2011 the Company entered into secured Purchase Order Financing agreements with certain suppliers for additional trade credit to produce and ship approximately $750,000 in orders to Company customers. The agreements are secured by certain future sales and inventory provided by the suppliers. The agreement provided for the repayment of $307,563 of outstanding accounts payable at September 30, 2011 and $443,000 in additional trade credit by the Company.
The Company further agreed to segregate all cash proceeds from specific sales to certain customers (the “Customers”) to enable the Company to pay the suppliers. The Company entered into an Escrow Agreement with the Suppliers and an escrow agent for the purpose of establishing a segregated account controlled by the Escrow Agent to disburse the cash proceeds from such Customer accounts directly to each Supplier based upon a predetermined percentage.
In connection with this facility, the Company also received consent from Secured Note holders to consent to (a) the Company entering into the Escrow Agreement with the Escrow Agent and the Suppliers for the benefit of each Supplier, and (b) consent to the Company’s segregation of proceeds from Customer accounts receivable to the Escrow Account and waive each such Secured Note holder’s security interest in and lien on all cash proceeds in the Escrow Account so long as the Escrow Agreement and the Escrow Account remains in place.
As of September 30, 2012 the Company’s accounts payable to those Suppliers was $82,893 of which $0 represented Purchase Order Financing.
NOTE 13 - NET LOSS PER SHARE
Convertible preferred stock and outstanding options and warrants were not considered in the calculation for diluted net loss per share for the periods ended September 30, 2012 and 2011 because the effect of their inclusion would be anti-dilutive.
As of September 30, 2012, there were warrants and options to purchase 70,675,782 and 1,254,448, respectively shares of common stock outstanding and Series K Preferred shares were convertible into 15,750,784 shares of common stock.
NOTE 14 - DISCONTINUED OPERATIONS
On April 9, 2012 the Company completed the sale its non-operating subsidiary Nutritional Specialties, Inc. (NSI) to Deep South Capital, LLC (DSCL). The terms of the divestiture was for a consideration of $1.00 plus the assumption of certain liabilities by DSCL. In addition, the Company issued 6,000,000 shares of the Company’s stock valued at approximately $180,000 to DSCL as a reserve against possible offsets. The Company estimated a charge of approximately $180,000 in connection with this transaction.
The accompanying condensed financial statements have been reclassified for all prior periods to report the assets and liabilities of this subsidiary.
The major classes of assets and liabilities of the discontinued operations on the balance sheet are as follows:
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September 30, 2012 (unaudited)
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December 31, 2011
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ASSETS
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$
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—
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$
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—
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LIABILITIES
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Note payable and accrued interest to trust
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0
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915,390
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Accounts payable and accrued expenses
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0
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12,692
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Current liabilities of discontinued operations
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$
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0
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$
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928,082
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NOTE 15 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2011, the FASB issued ASU No. 2011-05,
Comprehensive Income (Topic 220), Presentation of Comprehensive Income
. This update is intended to increase the prominence of other comprehensive income in the financial statements by requiring public companies to present comprehensive income either as a single statement detailing the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income or using a two statement approach including both a statement of income and a statement of comprehensive income. The option to present other comprehensive income in the statement of changes in equity has been eliminated. The amendments in this update, which should be applied retrospectively, are effective for public companies for fiscal years, and interim periods beginning after December 15, 2011. The Company adopted this pronouncement in the first quarter of 2012. During all of the periods presented the Company did not have any amounts of other comprehensive income, therefore a separate Statement of Comprehensive Income has not been included in these financial statements.
In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Testing Goodwill for Impairment” (ASU 2011-08).
Under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If an entity believes, as a result of its qualitative assessment that the fair value of a reporting unit is greater than its carrying amount, performing the current two-step impairment test is not required. The guidance also includes a number of events and circumstances that an entity to consider in conducting the qualitative assessment. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, if an entity has not yet issued financial statements for the most recent annual or interim period, provided the entity has not yet performed its annual impairment test. The adoption of this guidance did not have a material impact on these financial statements.
NOTE 16 - SUBSEQUENT EVENTS
On December 7, 2012, the Company’s Chief Executive Officer executed a promissory note for $105,000 with a creditor of the Company. The Company’s Chief Executive Officer and Fuselier and Co, Inc., personally and corporately, guaranteed the Note.
On December 14, 2012 the Company borrowed $ 50,000 from an investor in exchange for a 12% 14 month Unsecured Promissory Notes (“Unsecured Note”). The Company’s Chief Executive Officer and Fuselier and Co, Inc., personally and corporately, guaranteed the Note.
Between January 8, 11 and 30, 2013, the Company borrowed an aggregate of $150,000 from three investors in exchange for an 8% 18 month Unsecured Promissory Notes (“Unsecured Note”) and an additional $50,000 was borrowed in February 2013.
On May 17, 2013, the Company designated 1,750 of the 10,000,000 shares of preferred stock the Company is authorized to issue as Series M Preferred Stock with a par value of $0.001 per share and a stated value of $1,000 per share with privileges and conversion rights as stated.
On April 19, 2013 the Company through its wholly owned subsidiary, New Leaf Distribution, Inc. entered into a Stock Purchase Agreement to acquire 100% of the shares of Master Distributors Inc. (“Master”), which operates as Beverage Network of Maryland, Inc. The total purchase price of $2.9 million is comprised of $1.15 million of cash, of which $125,000 was paid on or prior to closing, and $1.75 million through the issuance of 1,750 shares of the Company’s Series M Convertible Preferred Stock with a liquidation preference of $1,000 per share. The balance of the cash portion of the purchase price is due in installments ranging from $100,000 to $16,666 over the 30 months following the closing. Beverage Network of Maryland distributes a variety of beverage products based in Maryland.