NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)
Note 1. Organization, Basis of Presentation and Significant Accounting Policies
(a)
Organization
:
Attitude Drinks Incorporated 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 May 10, 1988 under the name of International Sportfest, Inc., which later became Mason Hill Holdings, Inc. 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.
We implemented a 1-for-500 reverse stock split on July 1, 2013, and we have restated all applicable financial data for this reverse stock split for both September 30, 2013 and September 30, 2012.
(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 September 30, 2013 and 2012 and the results of its operations and cash flows for the six month periods ended September 30, 2013 and 2012. 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, 2013, which is incorporated herein by reference. Specific reference is made to that report for a description of the Company’s securities and the notes to consolidated financial statements included therein. The accompanying unaudited interim financial statements have been prepared in accordance with instructions to Form
10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America ("U.S. GAAP").
The results of operations for the six month period ended September 30, 2013 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 six month period ended September 30, 2013, a working capital deficit of $8,854,818 as of September 30, 2013 and has incurred losses to date resulting in an accumulated deficit of $29,620,838, 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.
Note 1. Organization, Basis of Presentation and Significant Accounting Policies (Continued)
(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:
|
|
|
September 30,
2013
|
|
|
March 31,
2013
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
116,856
|
|
|
$
|
101,721
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
116,856
|
|
|
$
|
101,721
|
|
(d) Prepaid expenses:
Prepaid expenses of $10,596 consist mainly of prepaid insurance of $6,936 and other small prepaid expenses of $3,660.
(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 six months ended September 30, 2013 was $259.
(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. Fair value represents the price at which the property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
Note 1. Organization, Basis of Presentation and Significant Accounting Policies (Continued)
(f) Financial Instruments (Continued):
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. At February 21, 2013, the Company consolidated all previous outstanding notes into a new consolidated note per debt holder as well as exchanged all applicable warrants through the issuance of new convertible notes. The language of the new convertible notes payable was changed which, based on input from an outside new valuation firm, required a new accounting treatment in which the embedded derivatives are separated from the debt host and recorded as derivative liabilities at fair value. These derivative liabilities will need to be marked-to market each quarter with the change in fair value recorded in the profit/loss statement. We used a lattice model that values the convertible notes based on a probability weighted scenario model and future projections of the various potential outcomes. In sum, all embedded derivatives were bundled and valued as a single, compound embedded derivative, bifurcated from the debt host and treated as a liability.
Pursuant to the requirements of the Fair Value Measurements and Disclosures Topic of the FASB Codification, the Company’s financial assets and liabilities measured at fair value on a recurring basis are classified and disclosed in one of the following three categories:
Level 1: Financial instruments with unadjusted quoted prices listed on active market exchanges.
Level 2: Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over the counter traded financial instruments. The prices for the financial instruments are determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3: Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation techniques.
All cash and cash equivalents are considered Level 1 measurements for all periods presented. We do not have any financial instruments classified as Level 2. We have recorded a conversion feature liability in regards to a convertible note issued for the period ended June 30, 2013, which is Level 3 and further described below in note 4.
The Company carries cash and cash equivalents, inventory, and accounts payable and accrued expense at historical cost which approximates the fair value because of the short-term nature of these instruments.
(g) (Loss)/Income Per Common Share:
The
basic (loss)/income per common share is computed by dividing the (loss)/income 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 six months ended September 30, 2013, potential common shares based on market price and applicable discounts arising from
the Company’s stock warrants, stock options and convertible debt and preferred stock amounting to 3,179,274,722 weighted average common shares were included in the computation of diluted income per share.
Note 1. Organization, Basis of Presentation and Significant Accounting Policies (Continued)
(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, 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 October, 2012, the Financial Accounting Standards Board issued an ASU that contained amendments that affect a wide variety of topics in the Codification and represent changes to clarify the Codifications, correct unintended application of guidance or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. These amendments will be effective for fiscal periods beginning after December 15, 2012. The effect of adoption will have a minimum impact on the Company.
In January, 2013, the Financial Accounting Standards Board issued an ASU that contained amendments to apply to derivatives accounted for in accordance with Topic 815, Derivative and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and securities lending transactions that are either offset or subject to an enforceable
master netting arrangement or similar agreement. These amendments should be applied for fiscal years beginning on or after January 1, 2013 and interim periods within those annual periods. The Company is currently evaluating the impact these amendments may have on its disclosures.
In February, 2013, the Financial Accounting Standard Board issued an ASU that contained amendments that provide guidance for the recognition, measurement and disclosure of obligations resulting from joint
and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. Examples of obligations within the scope of this ASU include debt arrangements, other contractual obligations and settled litigation and judicial rulings. These amendments will be effective for fiscal periods and interim periods within those years beginning after December 15, 2013. The Company is currently evaluating the impact these amendments may have on its disclosures.
Note 2. Accrued Liabilities:
Accrued liabilities consist of the following:
|
|
|
September 30,
2013
|
|
|
March 31,
2013
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Accrued payroll and related taxes
|
|
$
|
3,068,757
|
|
|
$
|
2,770,580
|
|
|
Accrued marketing program costs
|
|
|
580,000
|
|
|
|
580,000
|
|
|
Accrued professional fees
|
|
|
78,733
|
|
|
|
74,950
|
|
|
Accrued interest
|
|
|
1,258,623
|
|
|
|
1,221,671
|
|
|
Accrued board of directors' fees
|
|
|
188,792
|
|
|
|
170,792
|
|
|
Other expenses
|
|
|
123,218
|
|
|
|
190,578
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,298,123
|
|
|
$
|
5,008,571
|
|
Note 3. Short-term Bridge Loans:
Summary of short-term bridge loan balances is as follows:
|
|
|
September 30,
2013
|
|
|
March 31,
2013
|
|
|
|
|
(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 (before any reverse stock splits) as the exercise date for these warrants has now expired.
We entered into the following Modification and Waiver Agreements related to the April 14, 2008 financing:
|
Date
|
|
Terms
|
|
Consideration
|
|
June 2008
|
|
Extend maturity to July 19, 2008
|
|
Warrants indexed to 5 shares of common stock (warrants have expired)
|
|
September 2008
|
|
Extend maturity to December 15, 2008
|
|
6,000/12 (before and after reverse stock split) shares of restricted stock
|
|
January 2009
|
|
Extend maturity date to April 30, 2009
|
|
1) Warrants indexed to 12 shares of common stock
2) 12 shares of restricted stock
|
Note 3. Short-term Bridge Loans (Continued):
April 14, 2008 financing (continued)
:
The modifications resulted in a loss on extinguishment of $171,622 in accordance with the Financial Accounting Standards
Codification. On December 15, 2008, we were in default on the notes for non-payment of the required principal payment. The remedy for event of default was acceleration of principal and interest so they were recorded at face value. As of March 31, 2013, this April 14, 2008 note was considered in default for non-payment. The Company is trying to find the debt holder to extend the due date of the note as the previous address is no longer valid. It was determined that the extension warrants required liability accounting and are being recorded at fair value with changes in fair value being recorded in derivative (income) expense. The exercise dates for all warrants other than 12 warrants granted on January 27, 2009 have expired. The exercise price of the 12 warrants was reduced again to $500.00 when the Company issued additional convertible instruments with a lower conversion rate on January 27, 2009. Associated warrants are recorded at fair value for each reporting period.
August 5, 2008 financing:
(b) On August 5, 2008, the Company entered into a financing arrangement that provided for the issuance of a $55,000 face value short term bridge loan, due September 5, 2008, plus warrants to purchase (i) 5,000 shares of our common stock and (ii) additional warrants to purchase 5,000 shares of our common stock, representing an aggregate of 10,000 shares (before any reverse stock splits) as the exercise dates for these warrants have now expired. The due date of the loan was extended to December 15, 2008 with 11 restricted shares of common stock issued as consideration. On December 15, 2008, we were in default on the notes for non-payment of the required principal payment. Remedies for an event of default are acceleration of principal and interest. There were no incremental penalties for the event of default; however the notes were recorded at face value. Remedies for an event of default are acceleration of principal and interest.
On January 15, 2009, we extended the term on the note from December 15, 2008 to April 30, 2009, and we issued investor warrants to purchase 11 shares of our common stock and 11 shares of restricted common stock as consideration for the extension. We recorded a loss on extinguishment of debt of $2,112 in accordance with the FASB Accounting Standards Codification. As of December 31, 2012, this note was considered in default for non-payment. The debt holder is a board director and will extend the note once we locate the debt holder of the above April 14, 2008 debt.
The exercise price of the warrants was adjusted to $1,650 when the Company issued additional convertible instruments with a lower conversion rate on December 18, 2008. The exercise price of the warrants was adjusted again to $500 when the Company issued additional convertible instruments with a lower conversion rate on January 27, 2009. Associated warrants are recorded at fair value for each reporting period.
Note 4. Convertible Notes Payable:
All convertible notes payable are recorded at fair value as prescribed by the FASB Accounting Standards Codification (see Note 8 for more details). Convertible debt carrying values consist of the following:
|
|
|
|
|
|
Fair Value Amounts
|
|
|
|
Plus
Allonges
|
|
|
|
September 30,
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,042,271
|
|
Convertible Note Financing due February 21, 2015 (a), (1)
|
|
$
|
5,453,632
|
|
|
$
|
5,310,290
|
|
|
|
250,000
|
|
Convertible Note Financing due December 31, 2014 (b), (2)
|
|
|
250,000
|
|
|
|
100,000
|
|
|
|
37,000
|
|
Convertible Note Financing due June 7, 2014 (c), (3)
|
|
|
37,000
|
|
|
|
-
|
|
|
|
|
|
Less discount on convertible notes (4)
|
|
|
(4,214,531
|
)
|
|
|
(4,679,689
|
)
|
|
$
|
6,329,271
|
|
Total convertible notes payable
|
|
$
|
1,526,101
|
|
|
$
|
730,601
|
|
(1) All previous convertible notes prior to February 21, 2013 were surrendered to the Company through a February 21, 2013 exchange agreement whereas the Company issued new face value consolidated notes per debt holder for a total amount of $5,020,944, $350,000 face value in new notes for the surrender of 425,003 (after reverse stock split) Class A warrants plus $121,327 in a new note for work rendered for this consolidated financing for a grand total of $5,492,271.
(2) Monthly retainer fee of $25,000 face value for December, 2012 through September, 2013 (total of $250, 000)
(3) Retainer fee of $37,000 face value issued June 7, 2013
(4) The consolidated notes required a new lattice valuation model that required the recording of a discount that will be amortized (accretion) over the life of the convertible notes payable.
Since these new consolidated notes contained new language as compared to the previous notes, we needed to use a different valuation model for applicable valuations, derivatives and fair market value. In order to determine the fair market value, we analyzed the various securities agreements and exchange agreements, compared the Company to comparable companies to determine industry factors for volatility, growth and future financing, developed a lattice model that valued the convertible notes on a probability weighted scenario model as well as future projections of the various potential outcomes and valued the convertible notes at issuance and at the end of the reporting period to account for the derivative liability. Based on our analysis in determining the proper accounting treatment and valuation as set forth in the Statement of Financial Accounting Standard ASC 820-10-
35-37 (Fair Value in Financial Instruments), Statement of Financial Accounting Standard ASC 815 (Accounting for Derivative Instruments and Hedging Activities), Emerging Issues Task (“EITF”) For Issue No. 00-10 and
EITF 07-05, the embedded derivatives will be bundled and valued as a single, compound embedded derivative, bifurcated from the debt host and treated as a liability. The single compound embedded derivative features valued include the variable conversion feature, and the value of these embedded derivatives for the convertible notes will be treated as a liability. These derivative liabilities will need to be marked-to-market each quarter with the change in fair value to be recorded in the profit/loss statement.
(a)
February 21, 2013 Consolidated Convertible Notes
On February 21, 2013, all previous convertible notes payable with outstanding balances totaling $5,020,944 were surrendered by the debt holders to the Company through exchange agreements whereas the Company issued one consolidated note to each debt holder for the total outstanding convertible note amounts. In addition and on the same date, all outstanding Class A warrants associated with these convertible note payables totaling 425,003 (after reverse stock split) Class A warrants were surrendered by the debt holders to the Company in which the Company issued additional convertible notes payable for the total amount of $350,000. All applicable 364 (after reverse stock split) Class B warrants were cancelled as well. Both the surrendered convertible notes payable for
$5,020,944 and warrants for $350,000 were combined into one new convertible note payable per debt holder for a
grand total of $5,370,944. All of these consolidated notes contain the same terms, maturity dates and conversion criteria and replace all terms, conditions and conversion criteria contained in the surrendered notes. These notes have a maturity date of February 21, 2015 and an interest rate of 4%. The conversion price per share shall be equal to seventy-five percent (75%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal market for the twenty trading days preceding a conversion date but in no event greater than $10.00 (after reverse stock split). Each conversion submitted by a holder must be at least the lesser of (i) $10,000 of principal and interest or (ii) the balance due on the note. In addition, another new convertible note was issued for $121,327 to one of the accredited debt holders for their efforts in assisting the Company with these consolidated notes, warrants and modifications. The amount was determined at 5% of the then outstanding balance of all the convertible notes payable held by the debt holder. This note is identical to the above notes for the terms, conversion criteria and maturity date. No accrued interest payable amounts were added to these new notes. A total of $588,156 in principal and $147,639 in accrued interest were converted into shares of common stock from February 21, 2013 through September 30, 2013. In addition, six allonges (allonge #8 for $71,500 dated April 11, 2013, allonge #9 for $88,000 dated June 5, 2013, allonge #10 for $88,000 dated June 21, 2013, allonge #11 for $82,500 dated July 23, 2013, allonge #12 for $110,000 dated August 8, 2013 and allonge #13 for $110,000 dated September 18, 2013) were added into these consolidated notes.
Note 4. Convertible Notes Payable (Continued):
(a)
February 21, 2013 Consolidated Convertible Notes (Continued)
Southridge Partners II LP purchased from another debt- holder $100,000 on April 9, 2013 and another $100,000 on June 5, 2013 from these February 21, 2013 notes. These new replacement notes contain the same terms as in the February 21, 2013 consolidated convertible notes. No conversions have been made on these notes.
(b) Monthly $25,000 Retainer Fee Convertible Notes
We issue each month a convertible note for $25,000 to SC Advisors as part of their consulting fees. Previously issued convertible notes from August, 2012 through November, 2012 were consolidated in the above February 21, 2013 convertible note (Note 4 (a)). From December, 2012 through September, 2013, we issued $25,000 monthly convertible notes for a total of $250,000 as all of these notes have a maturity date of December 31, 2014. The notes can be converted into shares of Common Stock after six months of holding at a conversion price to equal the current market price multiplied by eighty percent (80%). Current market price means the average of the closing bid prices for the common stock for the five (5) trading days ending on the trading day immediately before the relevant conversion date. No conversions have been made on these notes.
(c) June 7, 2013 Convertible Note
We issued a $37,000 convertible note on June 7, 2013 for past due services. The maturity date of this note is June 7, 2014. The note maybe converted into shares of common stock after a six month holding period at a conversion price to equal the current market price multiplied by eighty percent (80%). Current market price means the average of the closing bid prices for the common stock for the five (5) trading days ending on the trading day immediately before the relevant conversion date. No conversions have been made on these notes.
Note 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.
Note 5. Non-convertible Notes payable (Continued):
On January 26, 2011, we entered into a promissory note with our previous landlord in the principal amount of $75,762. This amount was due June 30, 2011 together with interest of 10% computed on the basis of the actual
number of days elapsed over a 360-day year on the unpaid balance. The default rate shall be a per annum interest rate equal to the maximum amount permitted by applicable law as we currently use 15%. Although we have not paid this note yet, we anticipate making a payment pending a future financing. On October 12, 2012, the previous landlord sold $20,000 of the promissory note to another accredited investor resulting in an outstanding amount of $55,762. The sold $20,000 note has since been fully converted into shares of common stock.
Note 6. Derivative Liabilities:
Fair Value Measurement
Valuation Hierarchy
ASC 820, “Fair Value Measurements and Disclosures,” establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the liabilities carried at fair value measured on a recurring basis as of September 30, 2013:
|
|
|
|
Fair Value Measurement at September 30, 2013
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
Total
|
|
|
Quoted
|
|
|
Other
|
|
|
Significant
|
|
Carrying
|
|
|
Prices in
|
|
|
Observable
|
|
|
Unobservable
|
|
Value at
|
|
|
Active Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
September 30, 2013
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,623,816
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,623,816
|
The carrying amounts of cash, accounts receivable, prepaid expenses, accounts payable, and accrued liabilities approximate their fair value due to their short maturities. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting department, which reports to the Chief Financial Officer, determines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting department and are approved by the Principal Financial Officer.
Note 6. Derivative Liabilities (Continued):
Level 3 Valuation Techniques
Level 3 financial liabilities consist of the conversion feature liability for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate. A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement.
As of September 30, 2013, there were no transfers in or out of level 3 from other levels in the fair value hierarchy.
Starting with the new consolidated convertible notes payable as of February 21, 2013, we used a new lattice valuation model which required the embedded derivatives to be bundled and valued as a single compound embedded derivative, bifurcated from the debt host and treated as a liability at fair value.
Note 7. Stockholders’ Deficit:
(a)
Common Stock Warrants
As of September 30, 2013, the Company had the following
outstanding warrants:
|
|
|
|
|
|
|
|
|
|
|
Reverse Stock Split
|
|
|
|
|
|
|
Expiration
|
|
Warrants
|
|
Exericse
|
|
Restated
|
|
Restated
|
|
|
Issued Class A Warrants
|
|
Grant Date
|
|
Date
|
|
Granted
|
|
Price
|
|
Warrants
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January, 2009 Debt Extensions
|
|
1/27/2009
|
|
1/26/2014
|
|
|
26,800
|
|
|
$
|
1.00
|
|
|
|
54
|
|
|
$
|
500
|
|
|
January, 2011 Debt Extension
|
|
1/11/2011
|
|
1/10/2014
|
|
|
12,000
|
|
|
$
|
0.05
|
|
|
|
24
|
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total issued Class A warrants
|
|
|
|
|
|
|
38,800
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
(b) Common Stock Issued During the Six Months Ended September 30, 2013:
At September 30, 2013, we had issued and outstanding 107,849,650 (after reverse stock split) shares of common stock of which 30,570 (after reverse stock split) 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.
All issued shares and conversion rates are reflected at the values after the reverse stock split.
Note 7. Stockholders’ Deficit (Continued):
(b) Common Stock Issued During the Six Months Ended September 30, 2013 (Continued):
On April 3, 2013, we issued 300,000 shares of common stock pursuant to a conversion for $11,250 of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 4, 2013, we issued 438,400 shares of common stock pursuant to a conversion for $16,440 of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 4, 2013, we issued 1,166,667 shares of common stock pursuant to a conversion for $43,750 of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 9, 2013, we issued 400,000 shares of common stock pursuant to a conversion for $15,000 accrued interest of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 9, 2013, we issued 179,093 shares of common stock pursuant to a conversion for $6,716 accrued interest of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 10, 2013, we issued 439,067 shares of common stock pursuant to a conversion for $16,465 of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 11, 2013, we issued 320,000 shares of common stock pursuant to a conversion for $12,000 of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 15, 2013, we issued 400,000 shares of common stock pursuant to a conversion for $15,000 accrued interest of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 16, 2013, we issued 1,273,333 shares of common stock pursuant to a conversion for $47,750 of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 22, 2013, we issued 124,867 shares of common stock pursuant to a conversion for $4,675 accrued interest of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 22, 2013, we issued 400,000 shares of common stock pursuant to a conversion for $15,000 accrued interest of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 29, 2013, we issued 500,000 shares of common stock pursuant to a conversion for $18,750 accrued interest of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On April 30, 2013, we issued 320,000 shares of common stock pursuant to a conversion for $12,000 of February, 2013 consolidated convertible notes at a conversion price of $.0375.
On July 2, 2013, we issued 1,918,462 shares of common stock pursuant to a conversion for $62,350 of February, 2013 consolidated convertible notes at a conversion price of $.0325.
On July 2, 2013, we issued 524,154 shares of common stock pursuant to a conversion for $17,035 of February, 2013 consolidated convertible notes at a conversion price of $.0325.
On July 15, 2013, we issued 609,756 shares of common stock pursuant to a conversion for $10,000 of February, 2013 consolidated convertible notes at a conversion price of $.0164.
Note 7. Stockholders’ Deficit (Continued):
(b) Common Stock Issued During the Six Months Ended September 30, 2013 (Continued):
On July 23, 2013, we issued 1,353,000 shares of common stock pursuant to a conversion for $5,412 of accrued interest at a conversion price of $.004.
On July 29, 2013, we issued 2,686,667 shares of common stock pursuant to a conversion for $10,075 of February, 2013 consolidated convertible notes at a conversion price of $.00375.
On August 5, 2013, we issued 2,352,941 shares of common stock pursuant to a conversion for $10,000 of February, 2013 consolidated convertible notes at a conversion price of $.00425.
On August 16, 2013, we issued 1,183,908 shares of common stock pursuant to a conversion for $2,575 of February, 2013 consolidated convertible notes at a conversion price of $.002175.
On August 16, 2013, we issued 1,498.851 shares of common stock pursuant to a conversion for $3,260 of February, 2013 consolidated convertible notes at a conversion price of $.002175.
On August 19, 2013, we issued 2,000,000 shares of common stock pursuant to a conversion for $4,350 of February, 2013 consolidated convertible notes at a conversion price of $.002175.
On August 19, 2013, we issued 1,500,000 shares of common stock pursuant to a conversion for $3,300 of February, 2013 consolidated convertible notes at a conversion price of $.0022.
On August 21, 2013, we issued 1,702,529 shares of common stock pursuant to a conversion for $3,703 of accrued interest at a conversion price of $.002175.
On August 22, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $6,525 of February, 2013 consolidated convertible notes at a conversion price of $.002175.
On August 22, 2013, we issued 1,818,182 shares of common stock pursuant to a conversion for $4,000 of February, 2013 consolidated convertible notes at a conversion price of $.0022.
On August 28, 2013, we issued 1,818,182 shares of common stock pursuant to a conversion for $4,000 of February, 2013 consolidated convertible notes at a conversion price of $.0022.
On September 6, 2013, we issued 4,256,098 shares of common stock pursuant to a conversion for $8,725 of February, 2013 consolidated convertible notes at a conversion price of $.00205.
On September 11, 2013, we issued 2,500,000 shares of common stock pursuant to a conversion for $5,250 of February, 2013 consolidated convertible notes at a conversion price of $.0021.
On September 12, 2013, we issued 2,500,000 shares of common stock pursuant to a conversion for $5,000 of February, 2013 consolidated convertible notes at a conversion price of $.002.
On September 12, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $5,850 of February, 2013 consolidated convertible notes at a conversion price of $.002.
On September 12, 2013, we issued 2,500,000 shares of common stock pursuant to a conversion for $5,000 of February, 2013 consolidated convertible notes at a conversion price of $.002.
Note 7. Stockholders’ Deficit (Continued):
(b) Common Stock Issued During the Six Months Ended September 30, 2013 (Continued):
On September 12, 2013, we issued 2,500,000 shares of common stock pursuant to a conversion for $5,000 of February, 2013 consolidated convertible notes at a conversion price of $.002.
On September 12, 2013, we issued 2,500,000 shares of common stock pursuant to a conversion for $5,000 of February, 2013 consolidated convertible notes at a conversion price of $.002.
On September 13, 2013, we issued 4,256,410 shares of common stock pursuant to a conversion for $8,300 of February, 2013 consolidated convertible notes at a conversion price of $.00195.
On September 13, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $6,300 of February, 2013 consolidated convertible notes at a conversion price of $.0021.
On September 14, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $6,000 of February, 2013 consolidated convertible notes at a conversion price of $.002.
On September 17, 2013, we issued 2,500,000 shares of common stock pursuant to a conversion for $5,000 of February, 2013 consolidated convertible notes at a conversion price of $.002.
On September 18, 2013, we issued 2,500,000 shares of common stock pursuant to a conversion for $4,750 of February, 2013 consolidated convertible notes at a conversion price of $.0019.
On September 20, 2013, we issued 3,286,842 shares of common stock pursuant to a conversion for $6,245 of accrued interest at a conversion price of $.0019.
On September 23, 2013, we issued 2,600,000 shares of common stock pursuant to a conversion for $4,940 of February, 2013 consolidated convertible notes at a conversion price of $.0019.
On September 24, 2013, we issued 2,481,579 shares of common stock pursuant to a conversion for $4,715 of February, 2013 consolidated convertible notes at a conversion price of $.0019.
On September 24, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $5,700 of February, 2013 consolidated convertible notes at a conversion price of $.0019.
On September 24, 2013, we issued 4,326,316 shares of common stock pursuant to a conversion for $8,220 of February, 2013 consolidated convertible notes at a conversion price of $.0019.
On September 30, 2013, we issued 8,500,000 shares of common stock pursuant to a conversion for $15,300 of February, 2013 consolidated convertible notes at a conversion price of $.0018.
(c) Options Issued During the Six Months Ended September 30,
2013:
On September 16, 2013, we issued a total of 10,000,000 non-qualified stock options with an expiration date of September 16, 2018. All options are fully vested with an exercise price of $.004. We recorded an expense of $26,997 for the fully vested value using a Black Scholes value of $.002762815 per option.
Note 8. Subsequent Events:
On October 1, 2013, we issued a convertible note to SC Advisors, Inc. for $25,000 for their October, 2013 consulting services.
On October 3, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $4,800 of
February, 2013 consolidated convertible notes at a conversion price of $.0016.
On October 9, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $3,600 of February, 2013 consolidated convertible notes at a conversion price of $.0012.
On October 10, 2013, we issued 3,000,000 shares of common stock pursuant to a conversion for $3,600 of February, 2013 consolidated convertible notes at a conversion price of $.0012.
On October 14, 2013, we issued 9,150,000 shares of common stock pursuant to a conversion for $9,150 of February, 2013 consolidated convertible notes at a conversion price of $.001.
On October 17, 2013, we issued 5,000,000 shares of common stock pursuant to a conversion for $4,500 of February, 2013 consolidated convertible notes at a conversion price of $.0009.
On October 28, 2013, we entered into an allonge number 14 to a secured note issued February 22, 2013 in the amount of $55,000 less a finder’s fee of $5,000 for net proceeds in the amount of $50,000.
On October 29, 2013, we issued 8,000,000 shares of common stock pursuant to a conversion for $7,200 of February, 2013 consolidated convertible notes at a conversion price of $.0009.
On November 1, 2013, we issued a convertible note to SC Advisors, Inc. for $25,000 for their October, 2013 consulting services.
On November 1, 2013, we issued 5,000,000 shares of common stock pursuant to a conversion for $4,500 of February, 2013 consolidated convertible notes at a conversion price of $.0009.
On November 6, 2013, we issued 5,000,000 shares of common stock pursuant to a conversion for $4,500 of February, 2013 consolidated convertible notes at a conversion price of $.0009.
On November 6, 2013, we issued 11,777,778 shares of common stock pursuant to a conversion for $10,600 of February, 2013 consolidated convertible notes at a conversion price of $.0009.
On November 6, 2013, we issued 6,935,556 shares of common stock pursuant to a conversion for $6,242 of accrued interest from February, 2013 consolidated convertible notes at a conversion price of $.0009.
On November 6, 2013, we issued 8,000,000 shares of common stock pursuant to a conversion for $7,200 of February, 2013 consolidated convertible notes at a conversion price of $.0009.
On November 13, 2013, we issued 6,000,000 shares of common stock pursuant to a conversion for $4,800 of February, 2013 consolidated convertible notes at a conversion price of $.0008.
On November 15, 2013, we entered into an allonge number 15 to a secured note issued February 22, 2013 in the amount of $55,000 less a finder’s fee of $5,000 for net proceeds in the amount of $50,000.
Note 8. Subsequent Events (Continued):
On December 1, 2013, we issued a convertible note to SC Advisors, Inc. for $25,000 for their October, 2013 consulting services.
Between December 23 and December 24, 2013, we received a total of $45,505 from four debt holder groups as promissory notes with a maturity date of December 31, 2014 with no stated interest rates.
On January 1, 2014, we issued a convertible note to SC Advisors, Inc. for $25,000 for their October, 2013 consulting services.
On February 1, 2014, we issued a convertible note to SC Advisors, Inc. for $25,000 for their October, 2013 consulting services.
On February 11, 2014, we entered into an allonge number 16 to a secured note issued February 22, 2013 in the amount of $55,000 less a finder’s fee of $5,000 for net proceeds in the amount of $50,000.
On March 1, 2014, we issued a convertible note to SC Advisors, Inc. for $25,000 for their October, 2013 consulting services.
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 2013 or early 2014.
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
OVERVIEW (CONTINUED)
We organized a Scientific Advisory Board of four well known experts that have extensive experience in sports nutrition. This board will be helpful in communicating the scientific benefits of our sports recovery drink as well as new functional milk drinks. Their contacts in the world of sports will be very important in our sales efforts, especially in the early days.
We 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.
Reverse Stock Split
We implemented a 1-for-500 reverse stock split on July 1, 2013. We have restated all applicable financial data throughout this report for the six months ended September 30, 2013 and 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 derivative financial instruments that are required to be carried as liabilities at fair value pursuant to the FASB Accounting Standards Codification for the period ended September 30, 2013. We use
all available information and appropriate techniques including outside consultants to develop our estimates. However, actual results could differ from our estimates.
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. On February 21, 2013, we consolidated all the past outstanding convertible notes into new consolidated exchange notes that contained different language and eliminated many of the toxic elements listed in the old convertible notes.
We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring of fair values. In selecting the appropriate technique(s), we consider, among other factors, the nature of the instrument, the market risks that such instruments embody and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes-Merton option valuation technique, since it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. For complex hybrid instruments, such as convertible promissory notes that include embedded
conversion options, puts and redemption features embedded in them, we generally use techniques that embody all of the requisite assumptions (including credit risk, interest-rate risk, dilution and exercise/conversion behaviors) that are necessary to fair value these more complex instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, we project and discount future cash flows applying probability-weightage to multiple possible outcomes. After consulting with a new outside valuation firm, we found that many companies are using other valuation models, primarily the lattice model to bifurcate the derivative and record the derivatives at fair value. We elected to use this new valuation model for the new consolidated notes because that model would value all convertible notes based on a probability weighted scenario model and future projections of the various potential outcomes on all assumptions, observable inputs and inherent valuation of risk, The embedded derivatives that were analyzed and incorporated into our model included the conversion feature with the variable market based conversion and the default provisions. This lattice model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur and the specific terms that would be in effect at the time (i.e. interest rates, stock price, conversion price, etc.). Projections were then made on these underlying factors which led to a set of potential scenarios. Probabilities were assigned to each of these scenarios based on management projections. This led to a cash flow projection and a probability associated with that cash flow. A discounted weighted average cash flow over the various scenarios was completed and was compared to the discounted cash flow of the 2 year 4% instrument without the embedded derivatives, thus determining a value for the compound embedded derivatives at the point of issue. These derivative liabilities are marked-to-market each reporting period with the change in fair value to be recorded in the Statement of Operations as interest and other financing costs and is defined as the amount for which an asset (or liability) could be exchanged in a current transaction between knowledgeable, unrelated willing parties when neither party is acting under compulsion
Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal
and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
GOING CONCERN
Our operating losses since inception and negative working capital raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts or classification of liabilities that might be necessary should we be unable to continue as a going concern. For the foreseeable future, we will have
to fund all our operations and capital expenditures from the net proceeds of equity or debt offerings. Although we plan to pursue additional financing, there can be no assurance that we will be able to secure financing when needed or to obtain such financing on terms satisfactory to us, if at all. If we are unable to secure additional financing in the future on acceptable terms, or at all, we may be unable to complete the development of our new products. In addition, we could be forced to reduce or discontinue product development, reduce or forego sales
and marketing efforts and forego attractive business opportunities in order to improve our liquidity to enable us to continue operations.
RESULTS OF OPERATIONS
Our plan during the next few months is to continue the implementation of market and sales promotion programs to gain awareness of our “Phase III® Recovery” drink in new markets and to increase customers as this is our only revenue producing product at this time.
Six Months Ended September 30, 2013 Compared to Six Months Ended September 30, 2012:
For the six months ended September 30, 2013, our primary expenses related to salaries and consulting fees. Total operating expenses for the six months ended September 30, 2013 were $965,407 which was $535,044 less than last year’s similar expenses for $1,500,451
, mainly due to fewer employees and a decreased spending in 2013 marketing and sales programs caused by the lack of adequate capital.
Net interest income for the six months ended September 30, 2013 was $2,860,011 as compared to a $2,477,488 interest expense in the prior year. Changes and volatility in the price of the Company’s stock price which are used to measure fair value of convertible notes and derivatives created these variations, especially with the differences in the stock prices from year to year. As a result, we reported a net profit for the six months ended September 30, 2013 of $1,920,991 leading to a basic income per share of $.05 and a diluted income per share of $.00 as compared to a net loss for the six months ended September 30, 2012 of $3,706,167 which includes the recognition of derivative income of $247,119 and $2,477,488 net interest expense. The weighted average number of common shares outstanding for the basic income per share and the diluted income per share calculation for the six months ended September 30, 2013 were 35,491,621 and 3,214,766,343, respectively. The basic and diluted loss per common share was $1.63 for the six months ended September 30, 2012 based on a weighted average number of common shares outstanding of 2,268,962 for the basic and diluted loss per share.
Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012:
For the three months ended September 30, 2013, our primary expenses related to salaries and consulting fees. Total operating expenses for the three months ended September 30, 2013 were $519,426 which was $449,996 less than last year’s similar expenses for $969,422, mainly due to fewer employees and consultants.
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Net interest income f
or the three months ended September 30, 2013
was $2,730,895 a
s compared to a $3,006,822 interest expense in the prior year. Changes and volatility, which are used to measure fair value of convertible notes and derivatives created these variations, especially with the differences in the stock prices from year to year.
As a result, we reported a net profit for the three months ended September 30, 2013 of $2,226,087 leading to a basic and a diluted income per share of $.05 and $0.00, respectively as compared to a net loss for the three months ended September 30, 2012 of $3,988,713 which includes the recognition of derivative expense of $18,761 and $3,006,822 net interest expense The weighted average number of common shares outstanding for the basic and diluted income per share calculation for the three months ended September 30, 2013 was 47,018,140 and 3,226,292,862, respectively. The basic and diluted loss per common share was $1.55 for the three months ended September 30, 2012 based on a weighted average number of common shares outstanding of 2,567,923 (after reverse stock split) for the basic and diluted loss per share.
LIQUIDITY AND CAPITAL RESOURCES
We have not yet begun to generate significant revenu.es, 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 six months ended September 30, 2013 compared to six months ended September 30, 2012:
Net cash used in operating activities for the six months ended September 30, 2013 was $498,153 which was mainly the effect of changes in our operating assets. Our profit of $1,920,991 is offset by non-cash items of $(3,674,948) for the changes in the fair values of our convertible notes payable, $637,967 for the amortization of debt discount and $412,760 for changes in accounts payable and accrued expenses. Net cash used in operating activities for the six months ended September 30, 2012 was $444,002 which was mainly the effect of changes in our operating assets. Our loss of $3,706,167 was offset by non-cash items of $2,016,756 for the changes in fair values of our convertible notes payable as well as $848,994 for changes in our accounts payable and accrued liabilities.
Net cash flows generated by operating activities for the six months ended September 30, 2013 as well as for the six months ended September 30, 2012 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.
Net cash used in investing activities for the six months ended September 30, 2013 was $3,910 which was used to purchase vending machines. There were no similar expenditures for the six months ended September 30, 2012.
Net cash provided by our financing activities was $500,000 for the six months ended September 30, 2013 as compared to $315,000 for the six months ended September 30, 2012. The net increase of $185,000 was attributed to receiving additional allonges in 2013.
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
External Sources of Liquidity
:
For the six months ended September 30, 2013:
On April 11, 2013, we executed a $71,500 allonge #8 with Alpha Capital Anstalt to an original secured convertible note for $175,000 dated February 22, 2012 in which we received $65,000 as $6,500 was paid as a finder’s fee.
On June 5, 2013, we executed an $88,000 allonge #9 with Alpha Capital Anstalt to an original secured convertible note for $175,000 dated February 22, 2012 in which we received $80,000 as $8,000 was paid as a finder’s fee.
On June 21, 2013, we executed an $88,000 allonge #10 with Alpha Capital Anstalt to an original secured convertible note for $175,000 dated February 22, 2012 in which we received $80,000 as $8,000 was paid as a finder’s fee.
On July 23, 2013, we executed an $82,500 allonge #11 with Alpha Capital Anstalt to an original secured convertible note for $175,000 dated February 22, 2012 in which we received $75,000 as $7,500 was paid as a finder’s fee.
On August 8, 2013, we executed an $110,000 allonge #12 with Alpha Capital Anstalt to an original secured convertible note for $175,000 dated February 22, 2012 in which we received $100,000 as $10,000 was paid as a finder’s fee.
On September 18, 2013, we executed an $110,000 allonge #13 with Alpha Capital Anstalt to an original secured convertible note for $175,000 dated February 22, 2012 in which we received $100,000 as $10,000 was paid as a finder’s fee.
All of the net proceeds from the above financings were used for operations and working capital purposes.
The foregoing securities were issued in reliance upon an exemption from registration under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended. All of the investors were accredited investors and/or had
preexisting relationships with the Company, there was no general solicitation or advertising in connection with the offer or sale of securities and the securities were issued with a restrictive legend.
RECENT ACCOUNTING PRONOUNCEMENTS
:
In December 2011, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”) that provides amendments for disclosures about offsetting assets and liabilities. The amendments require an
entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, securities borrowing and securities lending arrangements. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required by the amendments should be provided retrospectively for all comparative periods
presented. For the Company, the amendment is effective for fiscal year 2014. The Company is currently evaluating the impact these amendments may have on its disclosures.
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
:
In October, 2012, the Financial Accounting Standards Board issued an ASU that contained amendments that affect a wide variety of topics in the Codification and represent changes to clarify the Codifications, correct unintended application of guidance or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. These amendments will be effective for fiscal periods beginning after December 15, 2012. The effect of adoption will have a minimum impact on the Company.
In January, 2013, the Financial Accounting Standards Board issued an ASU that contained amendments to apply to derivatives accounted for in accordance with Topic 815, Derivative and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. These amendments should be applied for fiscal years beginning on or after January 1, 2013 and interim periods within those annual periods. The Company is currently evaluating the impact these amendments may have on its disclosures.
In February, 2013, the Financial Accounting Standard Board issued an ASU that contained amendments that provide guidance for the recognition, measurement and disclosure of obligations resulting from joint and several
liability arrangements for which the total amount of the obligation is fixed at the reporting date. Examples of obligations within the scope of this ASU include debt arrangements, other contractual obligations and settled
litigation and judicial rulings. These amendments will be effective for fiscal periods and interim periods within those years beginning after December 15, 2013. The Company is currently evaluating the impact these amendments may have on its disclosures.
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 $5,740,632 outstanding at September 30, 2013. 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 $1,500,000 to $1,750,000 for the next twelve months to meet our business plan and operating needs. 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.
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 SIX MONTHS ENDED SEPTEMBER 30, 2013
|
|
|
|
|
Total Original Consolidated Notes
|
|
|
Total Exchanged Outstanding Convertible Notes
|
|
$
|
5,020,944
|
|
|
New note issued to shareholder for services
|
|
|
121,327
|
|
|
Warrants Purchase Notes
|
|
|
350,000
|
|
|
|
|
$
|
5,492,271
|
|
|
|
Original
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Note
|
|
|
|
|
|
|
|
|
|
|
|
Default
|
|
|
Accrued
|
|
|
|
Amounts
|
|
Issue
|
|
Default
|
|
$ Amount
|
|
|
Interest
|
|
|
Interest
|
|
|
Default
|
|
|
|
Plus
Allonges
|
|
Date
|
|
Due Date
|
|
Yes/No
|
|
Past Due
|
|
|
Rate
|
|
|
Rate
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,000
|
|
December, 2013
|
|
12/31/2014
|
|
No
|
|
|
-
|
|
|
None
|
|
|
None
|
|
|
|
-
|
|
|
|
25,000
|
|
January, 2013
|
|
12/31/2014
|
|
No
|
|
|
-
|
|
|
None
|
|
|
None
|
|
|
|
-
|
|
|
|
6,042,271
|
|
February, 2013
|
|
2/21/2015
|
|
No
|
|
|
-
|
|
|
4
|
%
|
|
|
20
|
%
|
|
|
-
|
|
|
|
25,000
|
|
February, 2013
|
|
12/31/2014
|
|
No
|
|
|
-
|
|
|
None
|
|
|
None
|
|
|
|
-
|
|
|
|
25,000
|
|
March, 2013
|
|
12/31/2014
|
|
No
|
|
|
-
|
|
|
None
|
|
|
None
|
|
|
|
-
|
|
|
|
25,000
|
|
April, 2013
|
|
12/31/2014
|
|
No
|
|
|
-
|
|
|
None
|
|
|
None
|
|
|
|
-
|
|
|
|
25,000
|
|
May, 2013
|
|
12/31/2014
|
|
No
|
|
|
-
|
|
|
None
|
|
|
None
|
|
|
|
-
|
|
|
|
25,000
|
|
June, 2013
|
|
12/31/2014
|
|
No
|
|
|
-
|
|
|
None
|
|
|
None
|
|
|
|
-
|
|
|
|
37,000
|
|
June, 2013
|
|
6/7/2014
|
|
No
|
|
|
-
|
|
|
None
|
|
|
None
|
|
|
|
-
|
|
|
|
25,000
|
|
July, 2013
|
|
12/31/2014
|
|
No
|
|
|
-
|
|
|
None
|
|
|
None
|
|
|
|
-
|
|
|
|
25,000
|
|
August, 2013
|
|
12/31/2014
|
|
No
|
|
|
-
|
|
|
None
|
|
|
None
|
|
|
|
-
|
|
|
|
25,000
|
|
September, 2013
|
|
12/31/2014
|
|
No
|
|
|
-
|
|
|
None
|
|
|
None
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,329,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHORT-TERM BRIDGE LOANS (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,000
|
|
April 14, 2008
|
|
Past due
|
|
Yes
|
|
$
|
60,000
|
|
|
|
|
|
|
15
|
%
|
|
$
|
39,394
|
|
|
$
|
55,000
|
|
August 5, 2008
|
|
Past due
|
|
Yes
|
|
$
|
55,000
|
|
|
|
|
|
|
15
|
%
|
|
$
|
52,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Notes indicated in default are in default because they are past due. One of the debt holders is a Board Director and will extend the maturity date as soon as we can locate the other debt holder.
|
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 September 30, 2013, we had total shareholders’ deficit of $10,304,436 and a working capital deficit of $8,854,818, compared to a total shareholders’ deficit of $12,855,297 and a working capital deficit of $12,264,236 at March 31, 2013. Cash and cash equivalents were $5,352 as of September 30, 2013 as compared to $7,415 at March 31, 2013. The main contributing factor to the working capital deficit was primarily attributable to the changes in the fair value calculations for the valuation of our convertible notes payable as well as changes in the derivative liabilities.
Ability to continue as a going concern.
Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
For the foreseeable future, we will have to fund all of our operations and capital expenditures from the net proceeds of equity or debt offerings we may have and cash on hand. Although we plan to pursue additional financing, there can be no assurance that we will be able to secure financing when needed or obtain such financing on terms satisfactory to us, if at all, or that any additional funding we do obtain will be sufficient to meet our needs in the long term. Obtaining additional financing may be more difficult because of the uncertainty regarding our ability to continue as a going concern. If we are unable to secure additional financing in the future on acceptable terms, or at all, we may be unable to complete planned development of certain products.
To date, we have generated no material product revenues. Our operating losses have negatively impacted our liquidity, and we are continuing our efforts to develop new products, while focusing on increasing net sales. However, changes may occur that would consume our existing capital at a faster rate than projected, including, among others, the progress of our research and development efforts and hiring of additional key employees. If we continue to suffer losses from operations, our working capital may be insufficient to support our ability to expand our business operations as rapidly as we would deem necessary at any time, unless we are able to obtain additional financing. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to pursue our business objectives and would be required to reduce our level of operations, including reducing infrastructure, promotions, personnel and other operating expenses. These events could adversely affect our business, results of operations and financial condition. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage of opportunities, develop products or services or otherwise respond to competitive pressures, could be curtailed or significantly limited. Any additional sources of financing will likely involve the sale of our equity securities, which will have a dilutive
effect on our stockholders. If we are unable to achieve profitability, the market value of our common stock will decline, and there would be a material adverse effect on our financial condition.
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
At September 30, 2013, we were in default on certain of our short-term bridge notes and have other substantial outstanding debt obligations.
At September 30, 2013, we were in default on short term bridge notes totaling $115,000 in principal. One of the two note holders is on our Board of Directors and will extend the due date once we locate the other note holder. The remedy for default under the notes is acceleration of principal and interest due thereunder. Further, we have secured convertible notes outstanding totaling $5,740,632 in principal face value at September 30, 2013. Although we have been able to extend the maturity dates of most of these convertible notes to February 21, 2015, there is no assurance that we will be able to continue to extend these obligations. Penalties for default under our convertible notes include but are not limited to acceleration of principal and interest and default interest rates up to 20%. As of September 30, 2013, we are not in default in our convertible notes payable as maturity dates range from June 7, 2014 through February 21, 2015.
Defaults on these obligations could materially adversely affect our business operating results and financial condition to such extent that we may be forced to restructure, file for bankruptcy, sell assets or cease operation. Further, certain of these obligations are secured by our assets. Failure to fulfill our obligations under these notes and related agreements could lead to the loss of these assets, which would be detrimental to our operations.
We may not be able to develop successful new beverage products which are important to our growth.
An important part of our strategy is to increase our sales through the development of new beverage products. We cannot assure you that we will be able to continue to develop, market and distribute future beverage products that will have market acceptance. The failure to continue to develop new beverage products that gain market acceptance could have an adverse impact on our growth and materially adversely affect our financial condition. Further, we may have higher obsolescent product expense if new products fail to perform as expected due to the need to write off excess inventory of the new products.
Our results of operations may be impacted in various ways by the introduction of new products, even if they are successful, including the following:
|
-
|
sales of new products could adversely impact sales of existing products:
|
|
|
|
|
-
|
we may incur higher cost of goods sold and selling, general and administrative expenses in the periods when we introduce new products due to increase costs associated with the introduction and marketing of new products, most of which are expensed as incurred;
|
|
|
|
|
-
|
and when we introduce new platforms and bottle sizes, we may experience increased freight and logistics costs as our co-packers adjust their facilities for the new products.
|
The beverage business is highly competitive.
The premium and functional beverage drink industries are highly competitive. Many of our competitors have substantially greater financial, marketing, personnel and other resources than we do. Competitors in these industries include bottlers and distributors of nationally advertised and marketed products, as well as chain store
and private label drinks. The principal methods of competition include brand recognition, price and price promotion, retail space management, service to the retail trade, new product introductions, packaging changes, distribution methods and advertising. We also compete for distributors, shelf space and customers primarily with other premium beverage companies. As additional competitors enter the field, our market share may fail to increase or may decrease.
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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.
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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, 2013) unless either party provides notice of cancellation at least one hundred twenty (120) calendar days prior to the end of the initial term or subsequent
extension period. Our dependence on one co-packer puts us at substantial risk in our operations. If we lose this relationship and/or require new co-packing relationships for other products, we may be unable to establish such relationships on favorable terms, if at all. Further, co-packing arrangements with potential new companies may be on a short term basis, and such co-packers may discontinue their relationship with us on short notice. Our dependence on co-packing arrangements exposes us to various risks, including:
|
-
|
if any of those co-packers were to terminate our co-packing arrangements 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 in 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.
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.
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
If we are not able to retain the full time services of our management team, including Roy G. Warren, it will be more difficult for us to manage our operations and our operating performance could suffer.
Our business is dependent, to a large extent, upon the services of our management team, including Roy G. Warren, our founder and Chief Executive Officer and Chairman of the Board. We depend on our management team, but especially on Mr. Warren’s creativity and leadership in running or supervising virtually all aspects of our day-to-day operations. We do not have a written employment agreement with any member of our management team or Mr. Warren. In addition, we do not maintain key person life insurance on any of our management team or Mr. Warren. Therefore, in the event of the loss or unavailability of any member of the management team to us, there can be no assurance that we would be able to locate in a timely manner or employ qualified personnel to replace him. The loss of the services of any member of our management team or our failure to attract and retain other key personnel over time would jeopardize our ability to execute our business plan and could have a material adverse effect on our business, results of operations and financial condition.
We need to manage our growth and implement and maintain procedures and controls during a time of rapid expansion in our business.
If we are to expand our operations, such expansion would place a significant strain on our management, operational and financial resources. Such expansion would also require improvements in our operational, accounting and information systems, procedures and controls. If we fail to manage this anticipated expansion properly, it could divert our limited management, cash, personnel, and other resources from other responsibilities and could adversely affect our financial performance.
Our business may be negatively impacted by a slowing economy or by unfavorable economic conditions or developments in the United States and/or in other countries in which we may operate.
A general slowdown in the economy in the United States or unfavorable economic conditions or other developments may result in decreased consumer demand, business disruption, supply constraints, foreign currency devaluation, inflation or deflation. A slowdown in the economy or unstable economic conditions in the United States or in the countries in which we operate could have an adverse impact on our business results or financial condition. Currently we do not have any international operations.
Risks Relating to Our Securities
There has been a very limited public trading market for our securities, and the market for our securities may continue to be limited and be sporadic and highly volatile.
There is currently a limited public market for our common stock. Our common stock has been listed for trading on the OTC Bulletin Board (the “OTCBB”). We cannot assure you that an active market for our shares will be established or maintained in the future. Holders of our common stock may, therefore, have difficulty selling their shares, should they decide to do so. In addition, there can be no assurances that such markets will continue or that any shares, which may be purchased, may be sold without incurring a loss. Any such market price of our shares 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:
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
CERTAIN BUSINESS RISKS (Continued)
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price and volume fluctuations in the stock markets;
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changes in our revenues and earnings or other variations in operating results;
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any shortfall in revenue or increase in losses from levels expected by us or securities analysts;
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changes in regulatory policies or law;
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operating performance of companies comparable to us;
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and general economic trends and other external factors.
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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 September 30, 2013, we had issued and outstanding options and warrants that may be exercised into 10,056,301 shares of common stock, 9,000,000 shares of Series A Convertible Preferred Stock and 51 shares of Series A-1 Convertible Preferred Stock that may be converted into 54,000,306 shares of common stock, outstanding principal convertible notes totaling $5,740,632 and accrued interest payable of $1,091,708 which together may be converted into 3,785,779,109 and using the applicable discounts and market value at September 30, 2013) shares of common stock (subject to 4.99-9.99% beneficial ownership limitations) at a maximum conversion cap rate of $10.00 per share. The Series A and A-1 Preferred Stock vote with the common stock on an as converted basis. Pursuant to the terms and conditions of the Company’s outstanding Series A and Series A-1 Preferred Stock, the conversion rate and the voting rights of the Series A and A-1 will not adjust as a result of any reverse stock split. Further, the authorized but unissued Series A will not adjust as a result of any reverse split. As a result, in the event of a reverse split of our common stock, the voting power would be concentrated with the Series A holder.
Further, if we issue any additional common stock or securities convertible into common stock, such issuance will reduce the proportionate ownership and voting power of each other stockholder. In addition, such stock issuances might result in a reduction of the book value of our common stock.
A substantial number of our shares are available for sale in the public market, and sales of those shares could adversely affect our stock price and our ability to obtain financing.
Sales of a substantial number of shares of common stock into the public market, or the perception that such sales could occur, could substantially reduce our stock price in the public market for our common stock and could impair our ability to obtain capital through a subsequent financing of our securities. We have 107,849,650 shares of common stock outstanding as of September 30, 2013 of which 107,819,080 shares are held by non-affiliates. Further, the Company has outstanding convertible notes in the face value of $5,740,632 which may be converted into 3,179,274,722 shares, using the applicable discounts and market value at September 30, 2013) of common stock. Generally, the holders of the securities convertible or exercisable into our common stock may be able to sell the common stock issued upon conversion or exercise after a six month holding period under Rule 144 adopted under the Securities Act of 1933