UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30,
2015
¨ TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________
to _________
Commission file number: 000-52904
ATTITUDE DRINKS INCORPORATED
(Exact name of registrant as specified on
its charter)
Delaware |
|
65-0109088 |
(State or other jurisdiction of incorporation or
organization) |
|
(IRS Employer
Identification No.) |
11231 U.S. Highway 1, #201, North Palm
Beach, Florida 33408 USA
(Address of principal executive offices)
(561) 227-2727
(Registrant’s telephone number, including
area code)
712 U.S. Highway 1, Suite # 200, North
Palm Beach, Florida 33408
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the issuer (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes x
No ¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer |
¨ |
Accelerated filer |
¨ |
Non-accelerated filer |
¨ |
Smaller reporting company |
x |
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the registrant's
classes of common equity, as of the latest practicable date: 2,490,450,785 shares issued and outstanding as of November 2, 2015.
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARIES
INDEX
DOCUMENTS INCORPORATED BY REFERENCE: See Exhibits
PART I – FINANCIAL INFORMATION
ITEM 1. – CONDENSED FINANCIAL STATEMENTS
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
| |
June 30, 2015 | | |
March 31, 2015 | |
| |
(unaudited) | | |
| |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 226,770 | | |
$ | 233,591 | |
Accounts receivable | |
| 1,479 | | |
| 4,478 | |
Real estate loans receivable | |
| 950,000 | | |
| - | |
Inventories less reserve for abandoned property of $2,339 and allowance for obsolescence of $90,000 at June 30, 2015 and March 31, 2015 | |
| 104,444 | | |
| 112,797 | |
Prepaid expenses | |
| 41,353 | | |
| 1,150 | |
TOTAL CURRENT ASSETS | |
| 1,324,046 | | |
| 352,016 | |
| |
| | | |
| | |
FIXED ASSETS, NET | |
| 975,887 | | |
| 1,013,141 | |
| |
| | | |
| | |
OTHER ASSETS: | |
| | | |
| | |
Goodwill | |
| 4,038,945 | | |
| - | |
Capitalized pre-opening costs - World of Beer | |
| 198,823 | | |
| 204,059 | |
Deferred financing costs | |
| 67,889 | | |
| - | |
Trademarks, net | |
| 4,462 | | |
| 4,537 | |
Investment in Harrison, Vickers and Waterman Inc. common stock | |
| 65,000 | | |
| - | |
Deposits and other assets | |
| 3,740 | | |
| 8,145 | |
TOTAL OTHER ASSETS | |
| 4,378,859 | | |
| 216,741 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 6,678,792 | | |
$ | 1,581,898 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' (DEFICIT) | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Accounts payable | |
$ | 1,803,023 | | |
$ | 1,911,005 | |
Accrued liabilities | |
| 5,528,711 | | |
| 6,757,764 | |
Derivative liabilities | |
| 6,400,232 | | |
| 1,868,857 | |
Short-term bridge loans payable | |
| 115,000 | | |
| 115,000 | |
Real estate loan payable | |
| 950,000 | | |
| - | |
Convertible notes payable | |
| 5,999,845 | | |
| 6,999,295 | |
Non-convertible notes payable | |
| 694,020 | | |
| 625,016 | |
Loans payable -World of Beer Minority Owners | |
| 50,660 | | |
| 50,767 | |
Loans payable to related parties | |
| - | | |
| 21,463 | |
TOTAL CURRENT LIABILITIES | |
| 21,541,491 | | |
| 18,349,167 | |
| |
| | | |
| | |
LONG TERM LIABILITIES: | |
| | | |
| | |
Convertible notes payable | |
| 369,022 | | |
| 178,500 | |
Minority interest | |
| 1,552,276 | | |
| (3,391 | ) |
TOTAL LONG TERM LIABILITES | |
| 1,921,298 | | |
| 175,109 | |
| |
| | | |
| | |
STOCKHOLDERS' (DEFICIT): | |
| | | |
| | |
Series A and A-1 convertible preferred stock par value $0.00001 per share, 20,000,000 shares authorized, 9,000,051 shares issued and outstanding at June 30, 2015 and March 31, 2015, respectively | |
| 90 | | |
| 90 | |
Common stock, par value $0.00001, 20,000,000,000 shares authorized and 2,309,624,423 and 1,161,193,362 shares issued and outstanding at June 30, 2015 and March 31, 2015, respectively | |
| 23,097 | | |
| 11,612 | |
Additional paid-in capital | |
| 20,012,989 | | |
| 19,830,637 | |
Deficit accumulated | |
| (36,820,173 | ) | |
| (36,784,717 | ) |
TOTAL STOCKHOLDERS' (DEFICIT) | |
| (16,783,997 | ) | |
| (16,942,378 | ) |
| |
| | | |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) | |
$ | 6,678,792 | | |
$ | 1,581,898 | |
See accompanying notes to condensed consolidated financial
statements
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
| |
Three | | |
Three | |
| |
Months Ended | | |
Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2015 | | |
2014 | |
REVENUES: | |
| | | |
| | |
Net revenues - World of Beer | |
$ | 872,853 | | |
$ | - | |
Net revenues - Phase III | |
| (1,419 | ) | |
| 21,907 | |
Food and beverage costs - World of Beer | |
| (55,635 | ) | |
| - | |
Product and shipping costs | |
| (186,106 | ) | |
| (20,849 | ) |
GROSS PROFIT | |
| 629,693 | | |
| 1,058 | |
| |
| | | |
| | |
Real Estate Loans: | |
| | | |
| | |
Interest income earned | |
| 28,422 | | |
| - | |
Interest expense incurred | |
| (28,422 | ) | |
| - | |
GROSS PROFIT | |
| - | | |
| - | |
| |
| | | |
| | |
TOTAL GROSS PROFIT | |
| 629,693 | | |
| 1,058 | |
| |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | |
Administrative salaries, taxes and employee benefits | |
| 284,236 | | |
| 169,023 | |
Administrative consulting fees | |
| 75,000 | | |
| 75,000 | |
World of Beer other expenses | |
| 202,488 | | |
| - | |
World of Beer labor costs | |
| 259,387 | | |
| - | |
Other general and administrative expenses | |
| 76,331 | | |
| 46,588 | |
Administrative marketing and promotion expense | |
| 2,574 | | |
| 9,464 | |
Administrative professional and legal fees | |
| 87,821 | | |
| 31,875 | |
Product development costs | |
| - | | |
| 400 | |
Depreciation and amortization | |
| 47,056 | | |
| 1,823 | |
Total Operating Expenses | |
| 1,034,893 | | |
| 334,173 | |
| |
| | | |
| | |
LOSS FROM OPERATIONS | |
| (405,200 | ) | |
| (333,115 | ) |
| |
| | | |
| | |
OTHER INCOME (EXPENSE): | |
| | | |
| | |
Interest and other financing costs | |
| (684,518 | ) | |
| (194,878 | ) |
Deriviative expense | |
| (2,038,679 | ) | |
| - | |
Gain from debt restructuring | |
| 1,612,910 | | |
| - | |
Total Other Income (Expense) | |
| (1,110,287 | ) | |
| (194,878 | ) |
| |
| | | |
| | |
INCOME (LOSS) BEFORE PROVISION | |
| | | |
| | |
FOR INCOME TAXES | |
| (1,515,487 | ) | |
| (527,993 | ) |
Minority interest | |
| 1,465,605 | | |
| - | |
Provision for income taxes | |
| - | | |
| - | |
| |
| | | |
| | |
NET INCOME (LOSS) | |
$ | (49,882 | ) | |
$ | (527,993 | ) |
| |
| | | |
| | |
Basic income (loss) per common share | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Diluted income (loss) per common share | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Weighted average common shares outstanding-basic | |
| 2,011,266,510 | | |
| 338,533,990 | |
| |
| | | |
| | |
Weighted average common shares outstanding-dilted | |
| 2,011,266,510 | | |
| 338,533,990 | |
See accompanying notes to consolidated financial statements
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
| |
Three Months | | |
Three Months | |
| |
Ended | | |
Ended | |
| |
June 30, | | |
June 30, | |
| |
2015 | | |
2014 | |
| |
(Unaudited) | | |
(Unaudited) | |
| |
| | |
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net (loss)/income | |
$ | (49,882 | ) | |
$ | (527,993 | ) |
Adjustment to reconcile net (loss)/income to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 47,056 | | |
| 1,823 | |
Issuance of warrants | |
| (84 | ) | |
| - | |
Sale of companies to Harrison, Vickers and Waterman, Inc. | |
| 14,426 | | |
| - | |
Issuance of convertible notes for past due services | |
| 75,000 | | |
| 262,000 | |
Derivative expense | |
| 2,038,679 | | |
| - | |
Fair value adjustment of convertible notes | |
| 241,930 | | |
| (739,749 | ) |
Amortization of debt discount | |
| 247,007 | | |
| 668,344 | |
Minority interest | |
| (1,465,605 | ) | |
| - | |
Gain from debt restructuring | |
| (1,612,910 | ) | |
| - | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 2,999 | | |
| (6,415 | ) |
Prepaid expenses and other assets | |
| (35,798 | ) | |
| 386 | |
Inventories | |
| 8,353 | | |
| 18,979 | |
Accounts payable and accrued liabilities | |
| 444,980 | | |
| 190,166 | |
Net cash provided/(used) in operating activities | |
| (43,849 | ) | |
| (132,459 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Purchase of equipment | |
| (7,615 | ) | |
| - | |
Dividends to World of Beer minority owners | |
| (60,000 | ) | |
| - | |
Purchase of Harrison, Vickers and Waterman Inc. common stock | |
| (65,000 | ) | |
| - | |
Net cash (used) in investing activities | |
| (132,615 | ) | |
| - | |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Loans payable from World of Beer minority owners | |
| (107 | ) | |
| - | |
Proceeds from convertible notes payable | |
| 120,750 | | |
| 62,700 | |
Proceeds from short-term bridge loans payable | |
| - | | |
| 52,000 | |
Proceeds from promissory notes | |
| 84,000 | | |
| - | |
Other costs of financing | |
| (35,000 | ) | |
| (2,500 | ) |
Net cash provided by financing activities | |
| 169,643 | | |
| 112,200 | |
| |
| | | |
| | |
NET (DECREASE) IN CASH AND CASH EQUIVALENTS | |
| (6,821 | ) | |
| (20,259 | ) |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | |
| 233,591 | | |
| 20,615 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | |
$ | 226,770 | | |
$ | 356 | |
See accompanying notes to condensed consolidated financial
statements
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED JUNE 30, 2015
(Unaudited)
| Note 1. | Organization, Basis of Presentation and Significant
Accounting Policies |
Attitude Drinks Incorporated
(“the Company”) was formed in Delaware on May 10, 1988 under the name of L.H.M. Corp which later became Mason Hill
Holdings, Inc. The Company is engaged in two segments of the beverage industry: (i) the functional beverage segment through our
development and sale of non-alcoholic beverages to retail establishments and (ii) the craft brewing segment through our indirect
interest in a World of Beer franchise restaurant that sells, among other items, beer to consumers. Our plan of operation during
the next 12 months is to focus our management’s attention on the non-alcoholic single serving beverage business, developing
and marketing milk based products in two fast growing segments: sports recovery and functional dairy. Our indirect subsidiary,
Attitude Beer Holding Co. (“ABH”), which is now owned by our majority-owned subsidiary Harrison, Vickers and Waterman
Inc. (“HVWC”), is a 51% owner of a World of Beer franchise restaurant located in Connecticut and intends to establish
additional franchise restaurants in other locations in Connecticut and the greater Boston area.
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. On September 30, 2007, the Company changed its
name to Attitude Drinks Incorporated. Its wholly owned subsidiary, ADCI, was incorporated in Delaware on June 18, 2007. On
December 1, 2014, the Company formed Attitude Beer Holding Co. (“ABH”), its second subsidiary company, in the state
of Delaware which was sold to HVWC in April 2015. The Company’s principal executive offices are located at 11231 U. S. Highway
1, #201, North Palm Beach, Florida 33408. The telephone number is 561-227-2727. The Company’s common stock shares (PINK:ATTD)
began trading June 2008. The Company's fiscal year end is March 31.
On December 24, 2014, New England
WOB, LLC (“NEWOB”), Attitude Beer Holding Co.(”ABH”), Attitude Drinks Incorporated (“Attitude”),
Glenn E. Straub (“Straub”) and James D. Cecil (“Cecil”) entered into a joint venture agreement. NEWOB entered
into an Area Development Agreement with World of Beer Franchising, Inc which is in the business of entering into franchise agreements
with third parties to own and operate World of Beer themed bar/restaurants. NEWOB developed a World of Beer franchise in Stamford,
Connecticut as well as West Hartford, Connecticut. ABH was granted the right to participate in any World of Beer franchise that
NEWOB proposes to develop. ABH has the option to become a 51% of any new World of Beer franchise for the contribution of 100% of
the budgeted development costs of developing such new World of Beer franchise locations. NEWOB will manage the operations of each
World of Beer franchise location. The financial results of each World of Beer franchise location will be consolidated into the
overall results of HVWC which in turn will be consolidated into the overall results of Attitude while Attitude owns the majority
ownership of HVWC. All applicable minority interest related items will be recorded for proper consolidations and reported results
for Attitude’s consolidated financial statements.
On the same December 24, 2014
date, ABH purchased 51% of the West Hartford, Connecticut World of Beer franchise location and obtained an option for two years
to purchase 51% of the Stamford, Connecticut World of Beer franchise location that was opened earlier in 2014. That option has
not been exercised.
| Note 1. | Organization, Basis of Presentation and Significant
Accounting Policies (continued) |
Recent Developments and Change
in Business Model
On April 21, 2015, ABH and
ABH’s other owners, Alpha Capital Anstalt, a company organized under the laws of Liechtenstein (“Alpha”)
and Tarpon Bay Partners LLC, a Florida limited liability company (“Tarpon Bay”), (collectively all three
companies as shareholders of ABH), entered into a Purchase Agreement with HVWC pursuant to which the shareholders of ABH sold
to HVWC all of the outstanding shares of stock of ABH, and ABH thereupon became a wholly owned subsidiary of HVWC. In
consideration for the purchase of the shares of common stock of ABH, HVWC issued: (i) to us 51 shares of a newly created
HVWC Series B Preferred Stock (the “Series B Preferred Stock”) and a seven year warrant (the “B
Warrant”) to purchase 5,000,000 shares of HVWC’s common stock, par value $.0001 per share (the
“HVWC’s Common Stock”), at an exercise price of $0.075 per share (subject to customary anti-dilution
adjustments); (ii) to Alpha, a secured convertible note due April 20, 2017 (the “Secured Convertible Note”) in
the principal amount of $1,619,375, a seven year warrant (the “Alpha Warrant”), to purchase 1,295,500,000 shares
of HVWC’s Common Stock at an exercise price of $0.0025 per share (subject to customary anti-dilution adjustments), and
an additional investment right (“AIR”) to purchase up to $3,750,000 in additional notes (the
“AIR Note”) and corresponding warrants (“the “AIR Warrant”); and (iii) to Tarpon, a Secured
Convertible Note in the principal amount of $554,791.67, a seven year warrant (the “Tarpon Warrant”) to purchase
443,833,333 shares of HVWC’s Common Stock at an exercise price of $0.0025 per share (subject to customary anti-dilution
adjustments), and an AIR to purchase up to $1,250,000 in additional notes and corresponding AIR Warrants. In addition,
Alpha acquired 32,300 shares of the HVWC’s Series A Preferred Stock (convertible into 32,300,000 shares of HVWC’s
Common Stock) from HVW Holdings LLC (an entity of which Mr. James Giordano, HVWC’s prior Chief Executive Officer and
Chairman of the Board, is the managing member), subject to the terms of a Purchase Agreement (the “Series A Purchase
Agreement”). We purchased 87,990,000 shares of HVWC’s Common Stock from HVW Holdings LLC at a price of $65,000,
subject to the terms of a Purchase Agreement (the “Common Stock Purchase Agreement”) thereby making us the
majority owner of HVWC. We will consolidate 100% of HVWC’s financial results after April 21, with the recording of
applicable minority interest eliminations.
From the formation of ABH
on December 1, 2014 until April 21, 2015, we were the majority holder of the outstanding equity of ABH (we held 87.5% of the
outstanding common stock of ABH, and Alpha and Tarpon Bay held 9.9% and 2.6%, respectively, of the outstanding common stock
of ABH) and the active manager of ABH. Accordingly for the three months ended June 30, 2015, the financial results of ABH
were consolidated into our overall financial statements with the recording of any minority interest related activities
through April 21, 2015. Since the Company was the majority owner of HVWC at April 21, 2015 the consolidated financial results
of HVWC which includes ABH were consolidated into the overall results of the Company with the recording of any minority
interest related activities.
| (b) | Basis of Presentation/Going Concern: |
In the opinion of management,
the accompanying unaudited interim condensed consolidated financial statements of the Company contain all adjustments necessary
to present fairly the Company’s financial position as of June 30, 2015 and 2014 and the results of its operations and cash
flows for the three month periods ended June 30, 2015 and 2014. 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, 2015. The accompanying unaudited interim financial statements have been prepared in accordance with instructions
to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in
the United States of America ("U.S. GAAP").
The results of operations for
the three month period ended June 30, 2015 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. In addition, the Company consolidates 100% of the financial results of its other majority owned corporation, HVWC, which owns
100% of ABH. ABH is the majority owner of West Hartford WOB, LLC that owns the West Hartford, Connecticut World of Beer franchise
location. All material intercompany balances and transactions have been eliminated as well as all related minority interest transactions
have been recorded for proper consolidations and reporting.
| Note 1. | Organization, Basis of Presentation and Significant
Accounting Policies (continued) |
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 for the three months period ended
June 30, 2015 had a working capital deficit of ($20,217,445) as of June 30, 2015 and has incurred losses to date resulting in an
accumulated deficit of ($36,820,173), 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.
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America 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 significant estimate included in the Company’s financial statements is the following: Fair value of the Company’s
financial instruments that are required to be carried at fair value. The Company uses all available information and appropriate
techniques to develop its estimates, including the use of outside consultants. However, actual results could differ from the Company’s
estimates.
| (d) | Business Segment and Geographic Information: |
The Company currently operates
in one dominant industry segment that it has defined as the sports-recovery drink industry. However, its next two products
will enter into the functional milk category. Presently, there is no international business, although the Company may pursue the
sale of its products in international markets during the next fiscal year. In addition, the first World of Beer franchise location
in Connecticut opened in late January, 2015, and two other locations in the New England areas are expected to open in the spring
of 2006. Other franchises will be opened in 2016 based on available financing capital.
| (e) | Cash and Cash Equivalents: |
The Company considers all highly
liquid investments purchased with a remaining maturity of three months or less to be cash equivalents.
| (f) | Real Estate Loans Receivable and Related Promissory
Note Payable |
At April 21, 2015, the Company
recorded HVWC’s purchased real estate loans as well as certain assets in the form of real estate loans (the “Loans”).
The purchase price was paid by HVWC via the issuance of a secured promissory note in the principal amount of $1,800,000 (the
“Note”) due March 31, 2015.
Four loans, $1,800,000 in aggregate,
were purchased with one loan of $180,000 being collected during the interim period ending December 31, 2013. The remaining
three loans of $520,000, $550,000 and $550,000 were issued on April 2, 2013, May 15, 2013 and July 15, 2013, respectively. They
all bear interest at 12% per annum and are due one year from the date of issuance. The loans are secured by a first lien.
| Note 1. | Organization, Basis of Presentation and Significant
Accounting Policies (continued) |
The Note is secured by a Pledge
Agreement whereby the proceeds of the Loans are pledged as security for the repayment of the Note. During the interim period ended
December 31, 2013, the Company received payment on and paid down $330,000 of the Loans. The $550,000 loan was reduced to $400,000
during the year ended June 30, 2014 with a corresponding reduction in the promissory note payable. The balance of $400,000 is being
disputed by the property owner, but the Company is fully insured by Title Insurance for this amount.
On February 10, 2015, the note
for $520,000 was fully repaid.
The current balance outstanding
is $950,000. The Company plans to discontinue these operations and will eliminate these balances in September 2015.
Inventories, as estimated by
management, currently consist of finished goods for Phase III products as well as start-up inventory for the World of Beer franchise
location in West Hartford, Connecticut and are stated at the lower of cost on the first in, first-out method or market. The inventory
is comprised of the following:
| |
June 30, 2015 | | |
March 31, 2015 | |
| |
| (unaudited) | | |
| | |
| |
| | | |
| | |
World of Beer | |
$ | 81,048 | | |
$ | 88,235 | |
Finished goods-Phase III | |
| 115,735 | | |
| 116,901 | |
Less: Reserve for abandonment | |
| (2,339 | ) | |
| (2,339 | ) |
Less: Reserve for obsolescence | |
| (90,000 | ) | |
| (90,000 | ) |
Total inventories | |
$ | 104,444 | | |
$ | 112,797 | |
Fixed assets are stated at cost.
Depreciation is computed using the straight-line method over a period of ten years for furniture and certain bar equipment, three
years for corporate computer equipment and purchased software plus five years for World of Beer computer and point of sale systems.
Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Additions and betterments to property and
equipment are capitalized. When assets are disposed of, the related cost and accumulated depreciation thereon are removed
from the accounts, and any resulting gain or loss is included in the statement of operations. Leasehold improvements for the World
of Beer location are depreciated over the life of the lease or twenty years. Fixed assets include both the fixed assets of the
corporate office and the West Hartford, Connecticut World of Beer location which are as follows:
| Note 1. | Organization, Basis of Presentation and Significant
Accounting Policies (continued) |
| |
June 30, 2015 | | |
March 31, 2015 | |
| |
(unaudited) | | |
| |
Attitude Drink Company (a) | |
$ | 58,336 | | |
$ | 58,336 | |
World of Beer: | |
| | | |
| | |
Audio Visual | |
| 82,635 | | |
| 82,635 | |
Bar furniture and equipment | |
| 198,836 | | |
| 198,836 | |
Computer equipment | |
| 48,839 | | |
| 48,839 | |
Leasehold improvements | |
| 489,812 | | |
| 490,964 | |
Coolers | |
| 59,832 | | |
| 59,832 | |
Millwork | |
| 69,000 | | |
| 69,000 | |
Other | |
| 74,248 | | |
| 73,805 | |
| |
| | | |
| | |
Total gross fixed assets | |
| 1,081,538 | | |
| 1,082,247 | |
Less accumulated depreciation | |
| (105,651 | ) | |
| (69,106 | ) |
| |
| | | |
| | |
Net fixed assets | |
$ | 975,887 | | |
$ | 1,013,141 | |
(a) Net of reserve for abandoned furniture for $3,290
Depreciation expense for the
three months ended June 30, 2015 was $36,545.
Goodwill represents the increase
in the consideration paid over the fair value of HVWC’s consolidated assets being acquired by the Company on the acquisition
date as set forth in the Statement of Financial Accounting Standard ASC 350 Intangibles- Goodwill and Other and ASC 850
Subsequent Accounting and Disclosure for Goodwill. In order to fairly value the enterprise, the following assumptions were
made for a base case:
a. The
Company would open another three World of Beer franchises. One would open October 1, 2015, and the other two would open on April
1, 2016;
b. Operating
results would be predicated on 80% of the existing World of Beer location in West Hartford, Connecticut;
c. Discounted
cash flow model through 2022 was used ;
d. 15%
discount rate was used.
After the base case was quantified,
various scenarios using 20% required rate of returns and 75% of operating results were quantified. After equal weighting of all
these scenarios, it was determined that goodwill was worth $4,038,945 at June 30, 2015 as follows:
Value of enterprise | |
$ | 4,841,801 | |
Add: Negative net equity | |
| | |
Of company | |
| 20.764 | |
Intercompany eliminations | |
| 20,665 | |
Less: Incremental debt acquired | |
| (844,285 | ) |
| |
| | |
Goodwill | |
$ | 4,038,945 | |
| Note 1. | Organization, Basis of Presentation and Significant
Accounting Policies (continued) |
| (j) | Capitalized Pre-Opening Expenses – World of
Beer |
Certain pre-opening expenses
such as capitalized franchise fees, interest, legal costs, startup and organization costs are recorded as long term assets and
are amortized over fifteen years unless certain capitalized costs have a shorter life period to amortize. Any incurred costs that
are at best uncertain and fail to satisfy the suggested measurability test for accounting recognition as an asset are expensed.
| |
June 30, | | |
March 31, | |
Propery Description | |
2015 | | |
2015 | |
| |
(unaudited) | | |
| |
Pre-opening labor costs | |
$ | 66,734 | | |
$ | 66,734 | |
Franchise fees | |
| 45,000 | | |
| 45,000 | |
Training fees | |
| 28,857 | | |
| 28,857 | |
Legal fees | |
| 22,615 | | |
| 22,615 | |
Start-up costs | |
| 19,557 | | |
| 19,557 | |
Other | |
| 25,182 | | |
| 25,181 | |
Accumulated amortization | |
| (9,122 | ) | |
| (3,885 | ) |
| |
| | | |
| | |
Total | |
$ | 198,823 | | |
$ | 204,059 | |
Amortization expense amounted
to $5,236 for the three months ended June 30, 2015.
| (k) | Deferred Financing Costs |
Deferred financing costs represent fees associated
with the debt issuances for the merger with Attitude Beer as follows:
| |
June 30, | | |
March 31, | |
| |
2015 | | |
2015 | |
| |
(unaudited) | | |
| |
Legal fees associated with April 21, 2015 merger | |
$ | 35,000 | | |
$ | - | |
Value of Preferred Series A shares associated with financing | |
| 40,089 | | |
| - | |
Total costs | |
$ | 75,089 | | |
$ | - | |
Less amortization | |
| (7,200 | ) | |
| - | |
Net deferred assets | |
$ | 67,889 | | |
$ | - | |
All deferred financing costs are being amortized over
the length of the financing, being two years. Amortization expense recorded for the three months ended June 30, 2015 was $7,200.
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 year. The following table summarizes the components of the Company’s trademarks:
| Note 1. | Organization, Basis of Presentation and Significant
Accounting Policies (continued) |
| |
June 30, 2015 | | |
March 31, 2015 | |
| |
(unaudited) | | |
| |
Trademark costs | |
$ | 32,151 | | |
$ | 32,151 | |
Less accumulated amortization | |
| (27,689 | ) | |
| (27,614 | ) |
Total Trademarks - Net | |
$ | 4,462 | | |
$ | 4,537 | |
Amortization expense amounted
to $75 for the three months ended June 30, 2015.
During April 21, 2015, we purchased
87,990,000 shares of HVWC’s Common Stock from HVW Holdings LLC at a price of $65,000, thereby making us the majority owner
of HVWC. We will consolidate 100% of HVWC’s financial results with the recording of applicable consolidations and minority
interest eliminations.
| (n) | Impairment of Long-Lived Assets: |
Our long-lived assets consist
principally of goodwill, trademarks, furniture and equipment. We evaluate the carrying value and recoverability of our
long-lived assets when circumstances warrant such evaluation by applying the provisions of the FASB Accounting Standards Codification
which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the
use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized
for the amount by which the carrying value exceeds the fair value.
| (o) | 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, convertible debt and
redeemable preferred stock that we have concluded the notes payable and derivative financial instruments are more akin to debt
than equity.
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,
prior to February 21, 2013, derivative financial instruments were 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) |
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, redeemable preferred stock 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, prior to February 21, 2013, were not required to be carried as
derivative liabilities, at fair value, in our financial statements as we were allowed to elect fair value measurement of the hybrid
financial instruments, on a case-by-case basis, rather than bifurcate the derivative. We believed that fair value measurement of
the various hybrid convertible promissory notes financing arrangements prior to February 21, 2013 provided a more meaningful presentation
of that financial instrument.
Fair Value of Financial Instruments
- Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. We
believe that the carrying amounts of the financial instruments approximate their respective current fair values due to their relatively
short maturities.
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 convertible notes issued which are Level 3 and are further described
below in note 3.
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.
| (p) | (Loss)/Income Per Common Share: |
Our basic loss per common share
is computed by dividing loss applicable to common stockholders by the weighted average number of common shares outstanding during
the reporting period. Diluted loss per common share is computed similar to basic loss per common share except that diluted loss
per common share includes dilutive common stock equivalents, using the treasury stock method, and assumes that the convertible
debt instruments were converted into common stock upon issuance, if dilutive. For the three months ended June 30, 2015 and 2014,
respectively, potential common shares arising from the our stock warrants, stock options, convertible preferred stock and convertible
debt and accrued interest payable amount to 17,690,385,577 as we cannot exceed our authorized 20,000,000,000 shares and 5,767,005,538
shares for 2014 and were not included in the computation of diluted loss per share because their effect was anti-dilutive.
| Note 1. | Organization, Basis of Presentation and Significant
Accounting Policies (continued) |
| (q) | Recent Accounting Pronouncements Applicable to the
Company: |
In May 2014, the FASB issued
the FASB Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU
2014-09”). This guidance amends the existing FASB Accounting Standards Codification, creating a new Topic 606, Revenue
from Contracts with Customer. The core principle of the guidance is that an entity should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services.
To achieve that core principle,
an entity should apply the following steps:
| 1. | Identify the contract(s) with the customer |
| 2. | Identify the performance obligations in the contract |
| 3. | Determine the transaction price |
| 4. | Allocate the transaction price to the performance obligations
in the contract |
| 5. | Recognize revenue when (or as) the entity satisfies a performance
obligations |
The ASU also provides guidance
on disclosures that should be provided to enable financial statement users to understand the nature, amount, timing and uncertainty
of revenue recognition and cash flows arising from contracts with customers. Qualitative and quantitative information is required
about the following:
1. Contracts with customers
– including revenue and impairments recognized, disaggregation of revenue and information about contract balances and performance
obligations (including the transaction price allocated to the remaining performance obligations)
2. Significant judgments
and changes in judgments – determining the timing of satisfaction of performance obligations (over time or at a point
in time) and determining the transaction price and amounts allocated to performance obligations
3. Assets recognized from
the costs to obtain or fulfill a contract.
ASU 2014-09 is effective for
periods beginning after December 15, 2016, including interim reporting periods within that reporting period for all public entities.
Early application is not permitted.
Management does not believe
that any other recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.
In August, 2014,
the Financial Accounting Standards Board issued an ASU that contained guidance for the disclosure of uncertainties about an entity’s
ability to continue as a going concern. There is no impact on the Company through the adoption of this update as the Company has
always provided such required disclosures on doubt about the entity’s ability to continue as a going concern for one year
from the date of completion of the audit.
In November,
2014, the Financial Accounting Standards Board issued an ASU that contained guidance about derivatives and hedging and determining
whether the host contract in a hybrid financial instrument issued in the form of a share is more akin to debt or to equity. There
are predominantly two methods used in current practice by issuers and investors in evaluating whether the nature of the host contract
within a hybrid instrument issued in the form of a share is more akin to debt or to equity. This ASU is to eliminate the use of
different methods in practice. As the Company utilizes the services of an outside professional specialty firm for such valuations,
the Company believes there is no change needed for this update.
| Note 1. | Organization, Basis of Presentation and Significant
Accounting Policies (continued) |
In February,
2015, the Financial Accounting Standards Board issued an ASU that contained guidance about Consolidation (Topic 810) and amendments
to the consolidation analysis. These provisions provide amendments to limited partnerships and similar legal entities. As ABH owns
the 51% majority of the World of Beer location in West Hartford which is an LLC corporation, the Company believes there is no change
needed for this update.
| Note 2. | Accrued Liabilities: |
Accrued liabilities consist of
the following as of June 30, 2015 and March 31, 2015:
| |
2015 | | |
2014 | |
| |
(Unaudited) | | |
| |
| |
| | |
| |
Accrued payroll and related taxes | |
$ | 2,288,951 | | |
$ | 3,719,785 | |
Accrued interest payable | |
| 1,932,873 | | |
| 1,846,857 | |
Accrued marketing program costs | |
| 580,000 | | |
| 580,000 | |
Accrued professional fees | |
| 134,220 | | |
| 108,640 | |
Accrued board of directors' fees | |
| 251,792 | | |
| 242,792 | |
Accrued World of Beer expenses | |
| 120,650 | | |
| - | |
Accrued consulting expenses | |
| 124,372 | | |
| 124,372 | |
Other expenses | |
| 95,853 | | |
| 135,318 | |
| |
| | | |
| | |
Total
Accrued Liabilities | |
$ | 5,528,711 | | |
$ | 6,757,764 | |
| Note 3. | Derivative Liabilities: |
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.
Note 3. Derivative Liabilities (continued):
The following table provides
the liabilities carried at fair value measured on a recurring basis as of June 30, 2015:
| |
| | |
Fair Value Measurements at June 30, 2015 | |
| |
| | |
Quoted | | |
Significant | | |
| |
| |
Total | | |
Prices in | | |
Other | | |
Significant | |
| |
Carrying | | |
Active | | |
Observable | | |
Unobservable | |
| |
Value at | | |
Markets | | |
Inputs | | |
Inputs | |
| |
June 30, 2015 | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
Conversion feature liability | |
$ | 6,400,232 | | |
$ | - | | |
$ | - | | |
$ | 6,400,232 | |
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, who reports to the Principal 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.
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 June 30, 2015, there were
no transfers in or out of level 3 from other levels in the fair value hierarchy. Starting with the 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 4. | Short-term Bridge Loans: |
Summary of short-term bridge
loan balances is as follows:
| |
June 30, 2015 | | |
March 31, 2015 | |
| |
(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.
There are no outstanding warrants associated with this financing as the expiration dates have expired.
April 14, 2008 financing (continued):
The Company 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 |
|
12 shares of restricted stock |
January 2009 |
|
Extend maturity date to April 30, 2009 |
|
1) Warrants indexed to 12 shares of common stock (warrants have
expired)
2) 12 shares of restricted stock |
The modifications resulted in
a loss on extinguishment of $171,622 in accordance with the Financial Accounting Standards Codification. On December 15, 2008,
the Company was 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.
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. There are no outstanding warrants associated with this financing as the expiration dates have 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, the Company was 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, the Company
extended the term on the note from December 15, 2008 to April 30, 2009. As of December 31, 2012, this note was considered in default
for non-payment. The debt holder is a board director and will exchange the note for Series C Convertible Preferred Stock in August,
2015.
| Note 5 | Convertible Notes Payable: |
All convertible notes payable
are recorded at fair value as prescribed by the FASB Accounting Standards Codification. Convertible debt carrying values consist
of the following:
| | |
| |
Fair Value Amounts | |
Outstanding | | |
| |
June 30, | | |
March 31, | |
Face Value | | |
| |
2015 | | |
2014 | |
| | |
| |
(unaudited) | | |
| |
$ | 5,452,892 | | |
Converitlbe Note Financing due February 21 2015 (a), (1) | |
$ | 5,419,270 | | |
$ | 5,413,574 | |
| 105,575 | | |
Convertible Note Financing due December 31, 2014 (b), (2) | |
| 105,575 | | |
| 605,520 | |
| 550,000 | | |
Convertible Note Financings due from January 30, 2015 through October 31, 2016 ($25,000 due each month) (2-i) | |
| 550,000 | | |
| | |
| 37,000 | | |
Convertible Note Financing due June 7, 2014 (c), (3) | |
| 37,000 | | |
| 37,000 | |
| 2,174,167 | | |
HVWC Convertible Note Financing due April 21, 2017 (d), (4) | |
| 237,843 | | |
| 1,204,500 | |
| 27,500 | | |
Convertible Note Financing due May 13, 2015 (e), (5) | |
| 19,800 | | |
| 35,200 | |
| 20,000 | | |
Convertible Note Financing due December 22, 2016 (f), (6) | |
| 20,000 | | |
| 20,000 | |
| 20,750 | | |
HVWC Convertible Note Financing due December 31, 2016 (g), (7) | |
| 20,750 | | |
| - | |
| 58,500 | | |
Convertible Note Financing due January 14, 2017 (h), (8) | |
| 58,500 | | |
| 58,500 | |
| 96,628 | | |
HVWC Convertible Note Financing due April 1, 2017 (i), (9) | |
| 96,628 | | |
| - | |
| | | |
Less discount on convertible notes | |
| (196,499 | ) | |
| (196,499 | ) |
$ | 8,543,012 | | |
Total convertible notes payable (10) | |
$ | 6,368,867 | | |
$ | 7,177,795 | |
(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 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. The principal amount of the above $5,452,892 balance equals the original $5,492,271 total financing plus new
allonges issued after that date less conversions.
(2) Monthly retainer fee to our
outside financial consulting firm of $25,000 face value from December, 2012 through December 31, 2015 less conversions. (2-i) Continued
$25,000 monthly retainer fees from January 30, 2015 through October 31, 2016 less conversions.
(3) Retainer fee to our previous
legal counsel of $37,000 face value issued June 7, 2013.
(4) HVWC issued two convertible
notes payable, one for $554,792 and another one for $1,619,375 on April 21, 2015 with a maturity date of April 21, 2017 at an interest
rate of 10%.
(5) Issued convertible note for
$35,200 on May 13, 2014 less conversion of $7,700.
(6) Issued convertible note for
$20,000 on December 12, 2014 for past due services.
(7) HVWC issued two convertible
notes on May 8, 2015, one for $13,250 and the other one for $7,500 at an interest rate of 10% with a maturity date of May 8, 2015.
(8) Issued three convertible
notes for $13,500, $13,500 and $31,500 to three different accredited investors on January 14, 2015.
Note 5 – Convertible Notes Payable (continued):
(9) HVWC issued nine small convertible
notes to the same accredited investor as all notes have a maturity date of April 1, 2017.
(10) 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 are 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 is treated as a liability. These derivative
liabilities are marked-to-market each quarter with the change in fair value recorded in the Statement of Operations.
Long-term Convertible Debt Maturities:
Annual maturities of long-term
outstanding convertible debt (face value) as of June 30, 2015 are as follows:
|
| |
Face Value | |
Years ending March 31, |
| |
$ Amount | |
2016 |
| |
$ | 6,011,467 | |
2017 |
| |
| 2,434,917 | |
2018 |
| |
| 96,628 | |
2019 |
| |
| - | |
2020 |
| |
| - | |
thereafter |
| |
| - | |
|
| |
| | |
|
| |
$ | 8,543,012 | |
Note 5 – Convertible Notes Payable (continued):
| (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 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 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%. They are in default. The Company is working with each debt holder to extend the
maturity date as well as implementing in 2015 a debt restructuring program to address such issues. During the month of August,
2015, the Company was successful in reducing a total of approximately $4.1 million of the total outstanding amount with the three
largest debt holders by exchange close to one half of the total to Series C Convertible Preferred Stock with the other one half
to be written off the books as a gain on the profit/loss statement. The conversion price per share is 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. 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 $806,879 in principal and $193,214
in accrued interest were converted into shares of common stock from February 21, 2013 through June 30, 2015. In addition, additional
allonge financings were added as follows:
TABLE FOR ADDED ALLONGES |
| |
| | |
| |
| |
ALLONGE | | |
$ | |
DATE | |
# | | |
AMOUNT | |
| |
| | |
| |
4/11/2013 | |
| 8 | | |
$ | 71,500 | |
6/5/2013 | |
| 9 | | |
| 88,000 | |
6/21/2013 | |
| 10 | | |
| 88,000 | |
7/23/2013 | |
| 11 | | |
| 82,500 | |
8/8/2013 | |
| 12 | | |
| 110,000 | |
9/18/2013 | |
| 13 | | |
| 110,000 | |
10/28/2013 | |
| 14 | | |
| 55,000 | |
11/15/2013 | |
| 15 | | |
| 55,000 | |
2/11/2014 | |
| 16 | | |
| 55,000 | |
5/2/2014 | |
| 17 | | |
| 27,500 | |
7/11/2014 | |
| 18 | | |
| 25,000 | |
| |
| | | |
| | |
| |
| TOTAL | | |
$ | 767,500 | |
Note 5 – Convertible Notes Payable (continued):
(b) Monthly $25,000 Retainer
Fee Convertible Notes
We issue each month a convertible
note for $25,000 to Southridge Partners II LP 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. From December, 2012 through June,
2015, we issued $25,000 monthly convertible notes for a total of $775,000. All of these notes have maturity dates from December
31, 2014 to October 31, 2016. The Company is working with the debt holder to extend the maturity dates of these convertible notes
and was successful in reducing the total convertible notes by approximately $641,000 of the total through the issuance of close
to one half of the total to Series C Convertible Preferred Stock and the write off of the other one half amount to a gain on the
profit/loss statement in August, 2015. The convertible notes can be converted into shares of Common Stock six months after issuance
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. Total conversions of $119,425 have been made for these convertible 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, and the note is in default. The Company
is working with the debt holder to extend the maturity date of this convertible note. 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.
(d) HVWC April 21, 2015 Convertible
Notes
As part of the April 21, 2015
purchase by HVWC of ABH, previous ABH convertible notes that were issued for the financing of the World of Beer location in West
Hartford, Connecticut were transferred into two newly issued convertible notes payable from HVWC, one for $1,619,375 and the other
one for $554,792, for a total of $2,174,167. The notes have a maturity date of April 21, 2017 and an interest rate of 10%. The
conversion price for the principal and interest shall be equal to the lesser of (i) $0.0025, or (ii) fifty percent (50%) of the
lowest Closing Price of HVWC’s Common Stock for the thirty (30) Trading Days preceding the Conversion Price. There have been
no conversions of these notes.
(e) May 13, 2014 Convertible
Note
We issued a convertible promissory
note to a new accredited investor for $35,200 with a maturity date of May 13, 2015 which is in default at an interest rate of 4%.
The conversion price per share is 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 $.02. Each conversion submitted by the holder must be at least the lesser of (i) $1,000 of principal
and interest or (ii) the balance due on the note. Conversion will be calculated to the hundredth of a penny (e.g. $0.0001). A conversion
of $7,700 was made during the three months ended June 30, 2015. We will work with this investor to extend the maturity date.
Note 5 – Convertible Notes Payable (continued):
(f) December 19, 2014 Convertible
Note
We issued a convertible promissory
note for past due services to an accredited investor for $20,000 with a maturity date of December 22, 2016 at an interest rate
of 10%. The conversion price per share is equal to seventy-five percent (75%) of the average of the three lowest closing bid prices
for the common stock as reported by Bloomberg L.P. for the principal market for the ten trading days preceding a conversion date
but in no event greater than $.02. Debt holder is limited to conversions up to 4.99% of the outstanding shares of the Common Stock.
No conversions have been made.
(g) HVWC April and May 2015
Notes
On April 27, 2015, HVWC issued
a convertible note for $13,250 and another convertible note for $7,500 on May 8, 2015. Both have a maturity date of December 31,
2016 and an interest rate of 10%. The conversion price for the principal and interest shall be equal to the lesser of (i) $0.0025,
or (ii) fifty percent (50%) of the lowest Closing Price of HVWC’s Common Stock for the thirty (30) Trading Days preceding
the Conversion Price. There have been no conversions of these notes.
(h) January 14, 2015 convertible
notes
On January 14, 2015, we issued
three (3) convertible notes for $13,500, $13,500 and $31,500 for a total of $58,500. All notes have the same maturity date of January
14, 2017 and the same interest rate of ten percent (10%). All three notes contain the same conversion language as follows: the
conversion price per share shall be equal to seventy-five (75%) of the average of the three lowest closing bid prices for the Common
Stock as reported by Bloomberg L.P. for the principal market for the ten trading days preceding a conversion date but in no event
greater than $.02. There have been no conversions of these convertible notes.
(i) April 21, 2015
HVWC convertible notes
As
part of the April 21, 2015 purchase of ABH by HVWC, certain HVWC’s convertible notes for a total of $96,628 were amended
for the conversion price which is equal to the lesser of (i) $0.0025, or (ii) fifty percent (50%) of the lowest Closing
Price of HVWC’s Common Stock for the thirty (30) Trading Days preceding the Conversion Price. The maturity date is April
1, 2017 with an interest rate of 10%. There have been no conversions of these notes.
| Note 6. | Non-convertible Notes payable: |
For the period ended March 31,
2011, we paid $23,750 as part of a promissory note in the total principal amount of $34,000 as a final settlement amount for a
previous license agreement. The remaining amount due of $10,250 was required to be settled through monthly payments of $4,250 through
December, 2010. Although we did not make all payments at June 30, 2013, we anticipate making those payments in 2013 when additional
capital is available.
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. Non-convertible Notes payable
(continued):
On June 14, 2012, we entered
into two promissory notes for $100,000 and $40,000, respectively, with two current accredited investors. These notes are subject
to an interest rate of ten percent (10%) and are due the sooner of (i) October 14, 2012 or (ii) from the proceeds of the next funding.
We received the $100,000 payment on June 27, 2012 and the $40,000 payment on July 9, 2012. The amounts are still outstanding, and
we accrue interest at the default interest rate of 18%. We expect to convert these notes into convertible notes payable later in
2015.
On June 26, 2012, we entered
into a promissory note of $110,000 with a current accredited investor. We agreed to pay a finder’s fee of $10,000, and we
received the net payment of $100,000 on June 28, 2012. The note is subject to an interest rate of ten percent (10%) and is due
the sooner of (i) October 14, 2012 or (ii) from the proceeds of the next funding. The amount is still outstanding, and we accrue
interest at the default interest rate of 18%. We expect to convert these notes into convertible notes payable later in 2015.
On December 23, 2013, we entered
into promissory notes with four current investors in the total principal amount of $45,505. These amounts are due December 31,
2014 and are not subject to any interest rates. These notes are exchangeable for equal aggregate amounts of notes of different
authorized denominations, as requested by the holder surrendering the same. No service charge will be made for such registration
or transfer or exchange.
On March 24, 2014, we entered
into promissory notes with three current investors in the total principal amount of $50,000. These amounts are due February 28,
2015 and are not subject to any interest rates. These notes are exchangeable for equal aggregate amounts of notes of different
authorized denominations, as requested by the holder surrendering the same. No service charge will be made for such registration
or transfer or exchange.
On April 30, 2014, we entered
into a promissory note with one current investor in the total principal amount of $12,000. This amount is due March 31, 2015 and
is not subject to any interest rates. This note is exchangeable for equal aggregate amounts of notes of different authorized denominations,
as requested by the holder surrendering the same. No service charge will be made for such registration or transfer or exchange.
On June 11, 2014, we entered
into promissory notes with four current investors in the total principal amount of $40,000. These amounts are due February 28,
2015 and are not subject to any interest rates. These notes are exchangeable for equal aggregate amounts of notes of different
authorized denominations, as requested by the holder surrendering the same. No service charge will be made for such registration
or transfer or exchange.
On July 31, 2014, we entered
into a promissory note with a current investor in the total principal amount of $15,000. This amount is due May 31, 2015 and is
not subject to any interest rates. This note is exchangeable for equal aggregate amounts of notes of different authorized denominations,
as requested by the holder surrendering the same. No service charge will be made for such registration or transfer or exchange.
On August 21, 2014, we entered
into a promissory note with a current investor in the total principal amount of $10,000. This amount is due August 21, 2015 and
is not subject to any interest rates. This note is exchangeable for equal aggregate amounts of notes of different authorized denominations,
as requested by the holder surrendering the same. No service charge will be made for such registration or transfer or exchange.
On August 29, 2014, we entered
into a promissory note with a current investor in the total principal amount of $10,000. This amount is due August 31, 2015 and
is not subject to any interest rates. This note is exchangeable for equal aggregate amounts of notes of different authorized denominations,
as requested by the holder surrendering the same. No service charge will be made for such registration or transfer or exchange.
Note 6. Non-convertible Notes
payable (continued):
On September 17 and 30, 2014,
we entered into promissory notes with two current investors in the total principal amount of $40,000. These amounts are due as
follows: $10,000 due September 30, 2015, $15,000 due August 31, 2015 and $15,000 due September 30, 2015 and are not subject to
any interest rates. These notes are exchangeable for equal aggregate amounts of notes of different authorized denominations, as
requested by the holder surrendering the same. No service charge will be made for such registration or transfer or exchange.
On November 19, 2014, we entered
into a promissory note with a current investor in the total principal amount of $10,000 with a maturity date of November 30, 2015
at no interest. This note is exchangeable for an equal aggregate amount of notes of different authorized denominations, as requested
by the holder surrendering the same. No service charge will be made for such registration or transfer or exchange
On November 19, 2014, we entered
into a promissory note with a current investor in the total principal amount of $31,500 with a maturity date of December 19, 2015
at no interest. This note is exchangeable for an equal aggregate amount of notes of different authorized denominations, as requested
by the holder surrendering the same. No service charge will be made for such registration or transfer or exchange
On March 5, 2015, we entered
into a promissory note with a current investor in the total principal amount of $7,500 with a maturity date of March 5, 2016 at
no interest. This note is exchangeable for an equal aggregate amount of notes of different authorized denominations, as requested
by the holder surrendering the same.
On March 13, 2015, we entered
into a promissory note with a current investor in the total principal amount of $7,500 with a maturity date of March 13, 2016 at
no interest. This note is exchangeable for an equal aggregate amount of notes of different authorized denominations, as requested
by the holder surrendering the same.
On March 19, 2015, we entered
into a promissory note with a current investor in the total principal amount of $7,500 with a maturity date of March 19, 2016 at
no interest. This note is exchangeable for an equal aggregate amount of notes of different authorized denominations, as requested
by the holder surrendering the same.
On March 27, 2015, we entered
into a promissory note with a current investor in the total principal amount of $7,500 with a maturity date of March 26, 2016 at
no interest. This note is exchangeable for an equal aggregate amount of notes of different authorized denominations, as requested
by the holder surrendering the same.
During the month of April, 2015,
we entered into promissory notes with a current investor for individual notes of $7,500, $7,500 and $7,500 at no interest with
maturity dates of April 3, 2016, April 17, 2016 and April 24, 2016. These notes are exchangeable for an equal aggregate amount
of notes of different authorized denominations, as requested by the holder surrendering the same.
During the month of May, 2015,
we entered into promissory notes with a current investor for individual notes of $7,500, $16,500, $7,500, $7,500 and $7,500 at
no interest with maturity dates of May 1, 2016, May 1, 2016, May 15, 2016, May 22, 2016 and May 29, 2016. These notes are exchangeable
for an equal aggregate amount of notes of different authorized denominations, as requested by the holder surrendering the same.
During the month of June, 2015,
we entered into promissory notes with a current investor for individual notes of $7,500 and $7,500 at no interest with maturity
dates of June 12, 2016 and June 26, 2016. These notes are exchangeable for an equal aggregate amount of notes of different authorized
denominations, as requested by the holder surrendering the same.
Note 7. Loans payable (West Hartford
WOB LLC):
A total of $50,660 is owed to
the 49% owners of the West Hartford, Connecticut World of Beer location. These loans are due on demand and have a 5% interest rate.
ABH will be making payments on these loans either via cash flows/profits or dividends as determined by our partners’ directions.
Note 8. Minority Interest
Attitude Drinks Incorporated
owns 70% of HVWC, resulting in the recording of 30% minority interest transactions for proper consolidations and reporting. Attitude
Beer Holding Co. which is owned by HVWC owns 51% of West Hartford WOB LLC which owns the World of Beer franchise store in West
Hartford, Connecticut. We record 49% minority interest transactions for that venture.
Note 9. Stockholders’ Deficit:
a) Series A Preferred Stock:
The Company’s
articles of incorporation authorize the issuance of 20,000,000 shares of preferred stock which the Company has designated as
Series A Preferred (“Series A” and “Series A-1”), $.00001 par value. Each share of Series
A and A-1 is convertible into six shares of the Company’s common stock for a period of five years from the date of
issue. The conversion basis is not adjusted for any stock split or combination of the common
stock. Inasmuch as the Series A Convertible Preferred Stock has been outstanding for in excess of five years, it
no longer has the right to convert into six shares of common stock for each one share of preferred stock. The Company must at
all times have sufficient common shares reserved to effect the conversion of all outstanding Series A and A-1 Preferred. The
holders of the Series A and A-1 Preferred are entitled to receive common stock dividends when, as, if and in the amount
declared by the directors of the Company to be in cash or in market value of the Company’s common stock. The
Company is restricted from paying dividends or making distributions on its common stock without the approval of a majority of
the Series A and A-1 holders. The Series A and A-1 are senior to the Common Stock and any other series or class of the
Company’s Preferred Stock. The Series A and A-1 has liquidation rights in the event of any liquidation, dissolution, or
winding up of the Company, whether voluntary or involuntary, the holders of the Series A and A-1 then outstanding shall be
entitled to be paid out of the assets of the Company available for distribution to its shareholders, before any payment or
declaration and setting apart for payment of any amount shall be made in respect of any outstanding capital stock of the
Company, an amount equal to $.00001 per share. The Company, at the option of its directors, may at any time or from time to
time redeem the whole or any part of the outstanding Series A. Upon redemption, the Company shall pay for each share
redeemed the amount of $2.00 per share, payable in cash, plus a premium to compensate the original purchaser(s) for the
investment risk and cost of capital equal to the greater of (a) $2.00 per share, or (b) an amount per share equal to fifty
percent (50%) of the market capitalization of the Company on the date of notice of such redemption divided by 2,000,000. We
have evaluated our Series A Preferred Stock and determined these shares required equity classification because the number of
shares convertible into common stock is fixed and reserved. Redemption of these preferred shares cannot be affected because
of the Company’s stockholders’ deficit.
During the quarter ended September
30, 2009, 9,000,000 shares of Series A Preferred were granted to Roy Warren. We recorded a non-cash expense for $1,620,000 which
is based on the then market price of $0.03 per common share times the convertible stock equivalents (9,000,000 preferred shares
x 6 = 54,000,000 common stock equivalents). These shares have specific voting power in that Roy Warren has voting rights for the
54,000,000 common stock equivalents. The Board of Directors on September 4, 2009 approved an amendment whereas Section 2(A) of
the Certificate of Designation is hereby declared in its entirety, and the following shall be substituted in lieu thereof-Rights,
Powers and Preferences: The Series A have the voting powers, preferences and relative, participating, optional and other special
rights, qualifications, limitations and restrictions as follows: Designation and Amount – Out of the Twenty Million (20,000,000)
shares of the $0.00001 par value authorized preferred stock, 14,999,049 shares have been designated as shares of “Series
A.
During the quarter ended March,
31, 2013, 51 shares of Series A-1 Preferred, convertible into 306 shares of common stock at the option of the holder, were granted
to Roy Warren for services rendered. We recorded a non-cash expense for $0.09 which is based on the then market price of $0.0003
per common share times the convertible stock equivalents (51 preferred shares x 6 = 306 common stock equivalents).
Note 9. Stockholders’ Deficit
(continued):
(b) Common Stock Warrants:
As of June 30, 2015, the Company
had 4,545,000 outstanding warrants at an exercise price of $0.0005. The warrants have an expiration date of December 24, 2019.
No warrants were issued or exercised during the three months ended June 30, 2015.
(c) Common Stock:
At June 30, 2015, the Company
had issued and outstanding 2,309,624,423 shares of common stock of which 30,244 shares are owned by our two officers. Holders
of shares of common stock are entitled to one vote for each share on all matters to be voted on by the shareholders. Holders
of common stock have no cumulative voting rights. In the event of liquidation, dissolution or winding down of the Company,
the holders of shares of common stock are entitled to share, pro rata, all assets remaining after payment in full of all liabilities. Holders
of common stock have no preemptive rights to purchase our common stock. There are no conversion rights or redemption
or sinking fund provisions with respect to the common stock. All of the outstanding shares of common stock are validly
issued, fully paid and non-assessable.
COMMON STOCK ISSUED FROM APRIL 1, 2015 THROUGH JUNE 30, 2015 |
| |
| | |
| | |
| | |
| |
| |
# OF | | |
$ DEBT | | |
$ INTEREST | | |
$ | |
DATE OF | |
SHARES | | |
AMOUNT | | |
AMOUNT | | |
CONVERSION | |
CONVERSION | |
ISSUED | | |
CONVERTED | | |
CONVERTED | | |
PRICE | |
| |
| | |
| | |
| | |
| |
4/9/2015 | |
| 65,625,000 | (a) | |
$ | 5,250 | | |
$ | - | | |
$ | 0.00008 | |
4/16/2015 | |
| 41,556,729 | (b) | |
| 8,311 | | |
| | | |
| 0.0002 | |
4/17/2015 | |
| 6,802,840 | (b) | |
| 1,361 | | |
| | | |
| 0.0002 | |
4/20/2015 | |
| 640,192,616 | (c) | |
| 128,039 | | |
| | | |
| 0.0002 | |
4/17/2015 | |
| 121,562,500 | (a) | |
| 9,725 | | |
| | | |
| 0.00008 | |
4/30/2015 | |
| 121,250,000 | (a) | |
| 9,700 | | |
| | | |
| 0.00008 | |
5/20/2015 | |
| 106,818,400 | (a) | |
| 7,700 | | |
| 311 | | |
| 0.000075 | |
6/8/2015 | |
| 44,622,976 | (c) | |
| 8,924 | | |
| | | |
| 0.0002 | |
(a) Conversion of convertible notes payable
(b) Payment for past due accounts payable as part of restructuring
program
(c) Payment for past due accrued salaries as part of restructuring
program
(d) Options Issued During the Three Months Ended
June 30, 2015:
None
Note 10. – Certain Relationships
and Related Transactions and Director Independence
During the quarter ended September
30, 2009, 9,000,000 shares of Series A Preferred, convertible into 54,000,000 shares of common stock at the option of the holder,
were granted to Roy Warren for services rendered. We recorded a non-cash expense for $1,620,000 which is based on the then market
price of $0.03 per common share times the convertible stock equivalents (9,000,000 preferred shares x 6 = 54,000,000 common stock
equivalents). Inasmuch as the Series A Convertible Preferred Stock has been outstanding for in excess of five years, it no longer
has the right to convert into six shares of common stock for each one share of preferred stock. These shares vote with the common
stock at a rate of 6 votes per share (54,000,000 total votes). During the quarter ended March, 31, 2013, 51 shares of Series A-1
Preferred, convertible into 306 shares of common stock at the option of the holder, were granted to Roy Warren for services rendered.
We recorded a non-cash expense for $0.09 which is based on the then market price of $0.0003 per common share times the convertible
stock equivalents (51 preferred shares x 6 = 306 common stock equivalents).
H. John Buckman is a board director
of the company and is a debt holder of the company of a note payable at the face value of $55,000. He also received
21 shares of restricted stock that related to this note payable, 3 shares of restricted stock for being a Director and 300 shares
of restricted stock for his services related to a November 2009
financing (total of 324 shares
of restricted stock). He also received 500,000 non-qualified stock options at an exercise price of $.004 with full vestment as
the life of the stock options is five (5) years.
Director Independence
H. John Buckman and Mike Edwards
are independent directors as defined by Rule 10A-3 of the Exchange Act
under NASDAQ rules. Roy G. Warren
is not independent as he is an officer of the Company.
Attitude Beer Holding Co.
On April 21, 2015, ABH was sold
to HVWC. As part of the sale, we received 87,990,000 shares of HVWC resulting in us being the majority owner of the common shares
of HVWC.
Note 11. Commitments and Contingencies:
We entered into an office lease
for 3,333 square feet at our new office in North Palm Beach, Florida on January 3, 2013 with a lease term of three years with two
years as renewable terms. Starting February 1, 2013, the minimum starting monthly base rent without sales tax was $1,602 plus monthly
operating expense for $2,670 for a monthly total of $4,272. The lease provides for annual 3% increases throughout its term. Future
minimum rental payments for the new office lease, based on the current adjusted minimum monthly amount of $4,370 and excluding
variable common area maintenance charges, as of June 30, 2015, are as follows:
Years ending March 31, | |
Amount | |
| |
| |
2016 | |
$ | 39,430 | |
2017 | |
| 53,146 | |
2018 | |
| 44,730 | |
We had a disagreement with the
landlord and were forced to vacate the offices including some inventory and fixed assets. Our new mailing address is 11231 U.S.
Highway 1, #201, North Palm Beach, Florida 33408. We are working on a solution with the landlord to resolve these problems. We
are working in our home offices and have accrued rent expense for the three months ended June 30, 2015 for a total of $13,740.
Note 11. Commitments and Contingencies (continued):
Lease of West Hartford,
Connecticut World of Beer
Through the December 24, 2014
purchase of 51% of the West Hartford, Connecticut World of Beer property, the lease is for 4,163 square feet and was signed on
May 16, 2014 for ten years with the option to extend the lease for two (2) additional periods of five (5) years each. The minimum
starting monthly base rent was $10,754 with 3% increases annually. Future minimum rental payments for this lease, based on the
current minimum monthly amount of $10,754, as of June 30, 2015, are as follows:
Years ending March 31, | |
Amount | |
| |
| |
2016 | |
| 97,754 | |
2017 | |
| 133,196 | |
2018 | |
| 137,197 | |
2019 | |
| 141,308 | |
2019 | |
| 145,552 | |
thereafter | |
| 795,932 | |
| |
$ | 1,450,939 | |
Rent expense recorded from April
21, 2015 through June 30, 2015 is $34,455
Production and Supply Agreements
On December 16, 2008, we signed
a manufacturing agreement with O-AT-KA Milk Products Cooperative, Inc. for the production of our current products. The
manufacturer will manufacture, package and ship such products. All products will be purchased freight on board (F.O.B)
with the Company paying for the shipping costs.
Note 12 - Segment Reporting
The Company operates in two segments
which are consistent with its internal organization. The major segments are beverage brand development and restaurant/tavern World
of Beer franchise locations.
Revenues, expenses and assets
not explicitly attributed to a segment are deemed to be unallocated.
See below for a summary:
Note 12 - Segment Reporting (continued)
ATTITUDE DRINKS INCORPORATED
SEGMENT REPORTING
JUNE 30, 2015
| |
Corporate | | |
| | |
| |
| |
Beverage | | |
| | |
| |
| |
Branding | | |
Restaurant/ | | |
| |
| |
Development | | |
Tavern | | |
Total | |
| |
| | |
| | |
| |
Net Revenues | |
$ | (1,419 | ) | |
$ | 872,853 | | |
$ | 871,434 | |
| |
| | | |
| | | |
| | |
Cost of Goods Sold | |
| 504 | | |
| 241,237 | | |
| 241,741 | |
| |
| | | |
| | | |
| | |
Gross Margin | |
| (1,923 | ) | |
| 631,616 | | |
| 629,693 | |
| |
| | | |
| | | |
| | |
Operating Expenses | |
| 413,432 | | |
| 621,461 | | |
| 1,034,893 | |
| |
| | | |
| | | |
| | |
Other Income/(Expense) | |
| 1,160,245 | | |
| (2,270,532 | ) | |
| (1,110,287 | ) |
| |
| | | |
| | | |
| | |
Net Income (Loss) Before Minority Interest | |
| 892,936 | | |
| (2,408,423 | ) | |
| (1,515,487 | ) |
| |
| | | |
| | | |
| | |
Minority Interest | |
| (5,336 | ) | |
| 1,470,941 | | |
| 1,465,605 | |
| |
| | | |
| | | |
| | |
Net income/(Loss) | |
| 887,600 | | |
| (937,482 | ) | |
| (49,882 | ) |
| |
| | | |
| | | |
| | |
Total Current Assets | |
| 26,459 | | |
| 1,297,587 | | |
| 1,324,046 | |
| |
| | | |
| | | |
| | |
Total Assets | |
| 109,338 | | |
| 6,569,454 | | |
| 6,678,792 | |
| |
| | | |
| | | |
| | |
Total Liabilities | |
| 15,824,429 | | |
| 7,638,360 | | |
| 23,462,789 | |
Note 12 - Segment Reporting (continued)
ATTITUDE DRINKS INCORPORATED
SEGMENT REPORTING
JUNE 30, 2014
| |
Corporate | | |
| | |
| | |
| |
| |
Beverage | | |
| | |
| | |
| |
| |
Branding | | |
Restaurant/ | | |
Minority | | |
| |
| |
Development | | |
Tavern | | |
Interest | | |
Total | |
| |
| | |
| | |
| | |
| |
Net Revenues | |
$ | 21,907 | | |
$ | - | | |
$ | - | | |
$ | 21,907 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of Goods Sold | |
| 20,849 | | |
| - | | |
| - | | |
| 20,849 | |
| |
| | | |
| | | |
| | | |
| | |
Gross Margin | |
| 1,058 | | |
| - | | |
| - | | |
| 1,058 | |
| |
| | | |
| | | |
| | | |
| | |
Operating Expenses | |
| 334,173 | | |
| - | | |
| - | | |
| 334,173 | |
| |
| | | |
| | | |
| | | |
| | |
Other Income/(Expense) | |
| (194,878 | ) | |
| - | | |
| - | | |
| (194,878 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net Income (Loss) Before Minority Interest | |
| (527,993 | ) | |
| - | | |
| - | | |
| (527,993 | ) |
| |
| | | |
| | | |
| | | |
| | |
Minority Interest | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Net income/(Loss) | |
| (527,993 | ) | |
| - | | |
| - | | |
| (527,993 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total Current Assets | |
| 21,791 | | |
| - | | |
| - | | |
| 21,791 | |
| |
| | | |
| | | |
| | | |
| | |
Total Assets | |
| 51,188 | | |
| - | | |
| - | | |
| 51,188 | |
| |
| | | |
| | | |
| | | |
| | |
Total Liabilities | |
| 12,667,935 | | |
| - | | |
| - | | |
| 12,667,935 | |
Note 13 – Subsequent
Events
On July 1, 2015, the Company
issued a convertible note to Southridge Partners II LP for $25,000 for their July, 2015 consulting services.
On July 29, 2015, HVWC, which
Attitude Drinks Incorporated is the majority owner, issued a convertible note in the amount of $80,000 with a maturity date of
July 29, 2017 at an interest rate of 10% as well as 64,000 warrants with a life of 7 years and an exercise price of $0.0025.
On August 1, 2015, the Company
issued a convertible note to Southridge Partners II LP for $25,000 for their August, 2015 consulting services
On August 12, 2015, the Company
filed a Form 8K to list filings with the state of Delaware for a (1) Corrected Restated Certificate of Incorporation (2) Certificate
of Amendment to the Certificate of Designations, Powers, Preferences and Rights of Series A Convertible Preferred Stock and (3)
Certificate of Designations, Preferences, and Rights of Series C Convertible Preferred Stock.
Note 14 – Subsequent
Events (continued)
On August 18, 2015 and August
28, 2015, the Company filed a Form 8K for the exchange of notes payable and past due accrued salaries for shares of Series C Convertible
Preferred Stock, warrants equating to the same number of common stock from conversions of Series C Convertible Preferred Stock
as well as Additional Investment Rights to purchase same number of Series C Convertible Preferred Stock and corresponding warrants.
A total of 4,265 shares of Series C Convertible Preferred Stock were issued for these debt exchanges. Total notes payable, accrued
interest payable and accrued salaries and accrued payroll taxes in the approximate amount of $8,227,452 were taken off the Company’s
records with approximately $3,933,051 that was moved to equity accounts for the Series C Convertible Preferred Stock transactions
and $4,179,795 recorded of a gain from the debt restructuring program for the forgiveness of approximately one half of the past
due liabilities.
Also on August 18, 2015, HVWC
which Attitude Drinks Incorporated is the majority owner filed a DEF 14C which the majority of the voting power was received to
change the name of Harrison, Vickers and Waterman Inc. to Attitude Beer, Inc. In addition, approval was received to increase the
authorized common stock from 2,000,000,000 to 7,500,000,000 as well as the 2015 Stock Incentive Plan. An application has been
filed with FINRA to approve these requests.
On September 1, 2015, the Company
issued a convertible note to Southridge Partners II LP for $25,000 for their September, 2015 consulting services.
On September 21, 2015, the Company
issued 200,000,000 shares of common stock for the conversion of $10,000 or 10 shares of Series C Convertible Preferred Stock at
a conversion price of $.00005.
On October 1, 2015, HVWC issued
6,664,820 shares of its common stock for the conversion of $9,670 principal debt and accrued interest of $6,992 at a conversion
price of $.0025.
On October 8, 2015, the Company
issued 160,000,000 shares of common stock for the conversion of $8,000 or 8 shares of Series C Convertible Preferred Stock at
a conversion price of $.00005.
On October 8, 2015, the Company
received $5,000 in which it will issue either a convertible note payable of Series C Convertible Preferred Stock.
On October 14, 2015, HVWC issued
a convertible note for $78,000 with a maturity date of October 14, 2017 at an interest rate of 10%. In addition, HVWC issued a
warrant for the right purchase up to a total of 62,400,000 shares of HVWC’s common stock.
On October 20, 2015, HVWC issued
a convertible note for $35,000 with a maturity date of October 20, 2017 at an interest rate of 10%.
On October 27, 2015, HVWC announced
the agreement to build another World of Beer franchise location in Cambridge, Massachusetts with operations planned to commence
in spring 2016.
| ITEM 2. – | MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
EXECUTIVE LEVEL OVERVIEW
Our Business Model
Phase III
Our plan of operation during
the next 12 months is to continue the implementation of market and sales promotion programs to gain awareness of our “Phase
III® Recovery drink in new markets as well as to build a national sales campaign throughout key markets in the west coast,
southwest, Midwest, southeast and northeast parts of the United States. We plan to build an aggressive and experienced sales team
to bring the brand to discerning consumers. In addition, we intend to increase our efforts to sell our products online and through
increased social media marketing. Our management will continue to focus on the non-alcoholic single serving beverage business,
developing and marketing 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 a third party contract packer.
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 are expected to 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. Singles should obtain higher margin than multi-packs.
World of Beer
As already stated, ABH and its
joint venture partners of New England WOB, LLC, anticipate developing new World of Beer franchise locations throughout its protected
territories in Connecticut and greater Boston, Massachusetts. It is anticipated that ABH will provide the financing for construction
of these stores, and New England WOB, LLC will provide the real estate location search and development as well as manage the operations
of each store.
World of Beer is an organization
of around 80 company owned and franchised craft taverns and growing in 20 states. Most World of Beer locations provide a selection
of over 500 unique craft and imported beers, modern tavern fare spirits and craft cocktails and a complete entertainment experience
including live music, sports viewing, seasonal and local celebrations and highly trained servers with in-depth beer knowledge.
ABH’s first World of Beer location is located in West Hartford, Connecticut which opened in late January, 2015. The West
Hartford location is a 4,000 square foot tavern and serves lunch and dinner daily and hosts live music performances on Friday and
Saturday nights. New England World of Beer, LLC opened its first store in Stamford, Connecticut in 2014 as ABH has an option with
a 2 years life to purchase 51% of this store as that option has not been exercised.
Celebrating the popularity of
craft beer and its culture, ABH and New England WOB, LLC plan to develop and build other World of Beer franchises in key market
areas in the state of Connecticut and in certain areas in Massachusetts with primary emphasis in the greater Boston areas. We have
signed leases to build new stores in Milford, Connecticut and Cambridge Massachusetts with expectations for opening in spring of
2016. Depending on available financing and market conditions, we will seek other territories to expand in the future as well. New
England World of Beer, LLC is an expert in commercial real estate development and restaurant/bar operations and management and
has broad business experience as entrepreneurs, operators and developers, having managed numerous businesses and commercial real
estate ventures. The planned stores will be built in areas where we believe these operations will command premium pricing and respectable
profit margins.
ABH’s future plan of operations
for the World of Beer franchises is to continue the search, development and operations of World of Beer franchises throughout the
state of Connecticut and the greater Boston areas over the next few years, especially in that we have these protected territories.
Its joint venture partners are commercial real estate developer specialists and based on the availability of financing, plan to
aggressively to build and open as many World of Beer locations as financing will allow. The West Hartford, Connecticut store which
opened in late January, 2015 has exceeded expectations and budgets and is profitable since the opening date. Future new taverns
are projected to be at least 4,000 square feet and have one of the world’s widest selections of craft beers, bottled and
on tap with more than 500 bottles and 50 rotating taps. The stores will serve lunch and dinner daily with dishes inspired by international
flavors such as Giant Bavarian Pretzels, Guinness Brat Sliders and the Chimay Burger. The taverns will host live music performances
on Friday and Saturday nights each weekend. The taverns will also provide signature craft spirit cocktails, ciders, wine along
with nonalcoholic beverages. ABH is expected to continue the World of Beer theme as being uncommon establishments where the experience
is as essential as the products.
Plan of Operations
We are continuing to seek other
sources of financing to develop our business plan, implement our sales and marketing plan and to meet other operational expense
requirements and to find and develop new World of Beer locations. Historically, we have had to rely on convertible debt financings
to cover operating costs. Based on the available cash, we have no assurance that we will be able to obtain additional funding to
sustain our limited operations. 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. We may also need to sell our interest in the World of Beer locations if we
do not continue to obtain the proper financing for our needs. However, certain of our Attitude Drinks Incorporated convertible
debt obligations totaling $6,251,467 and HVWC convertible debt obligations for $2,291,545 are secured by Attitude’s 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.
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 the holders agree to further extensions.
We will consider equity and/or
convertible debt financings, either or both of a private sale or a registered public offering of our common stock; however, at
this time and with the current economy, it seems unlikely that we can obtain an underwriter.
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. Our “Phase III® Recovery” drink product was introduced in early 2010 and based on historical spending,
we anticipate a need of funding in the range of $1,500,000 to $1,700,000 for the next twelve months to meet our business plan and
operating needs only. This figure does not include any new product research and development activities.
This discussion and analysis
of our consolidated financial condition and results of operations are based on our consolidated financial statements, which have
been prepared in accordance with accounting principles that are generally accepted in the United States of America.
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
In estimating 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 June 30, 2015, we use all available information and appropriate techniques including
outside consultants to develop our estimates. However, actual results could differ from our estimates.
Derivative
Financial Instruments
We generally do not use derivative
financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have and will frequently
enter into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with
features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts
or (iii) may be net-cash settled by the counterparty to a financing transaction. As required by the FASB Accounting
Standards Codification, these instruments are required to be carried as derivative liabilities, at fair value, in our financial
statements. However, in the past, we were allowed to elect fair value measurement of the hybrid financial instruments,
on a case-by-case basis, rather than bifurcate the derivative for all of our previous convertible notes up to February 21, 2013
when we issued new consolidated exchange convertible notes under different terms and language. We believed that fair
value measurement of the hybrid convertible promissory notes arising from our various financing arrangements provided a more meaningful
presentation of that financial instrument; however, as just previously mentioned 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 it 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 need to be marked-to-market each
reporting period with the change in fair value to be recorded in the profit/loss statement. Fair value 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.
Impairment of Long-Lived
Assets
Our long-lived assets consist
principally of intangible assets, and to a much lesser extent, furniture and equipment. We evaluate the carrying value
and recoverability of our long-lived assets when circumstances warrant such evaluation by applying the provisions of the FASB Accounting
Standards Codification which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to
result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss
will be recognized for the amount by which the carrying value exceeds the fair value. We did note record any impairment expense
for the three months ended June 30, 2015 and 2014.
Recent accounting pronouncements
In May 2014, the FASB issued
the FASB Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU
2014-09”). This guidance amends the existing FASB Accounting Standards Codification, creating a new Topic 606, Revenue
from Contracts with Customer. The core principle of the guidance is that an entity should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services.
To achieve that core principle,
an entity should apply the following steps:
| 1. | Identify the contract(s) with the customer |
| 2. | Identify the performance obligations in the contract |
| 3. | Determine the transaction price |
| 4. | Allocate the transaction price to the performance obligations
in the contract |
| 5. | Recognize revenue when (or as) the entity satisfies a performance
obligations |
The ASU also provides guidance
on disclosures that should be provided to enable financial statement users to understand the nature, amount, timing and uncertainty
of revenue recognition and cash flows arising from contracts with customers. Qualitative and quantitative information is required
about the following:
1. Contracts with customers
– including revenue and impairments recognized, disaggregation of revenue and information about contract balances and performance
obligations (including the transaction price allocated to the remaining performance obligations)
2. Significant judgments
and changes in judgments – determining the timing of satisfaction of performance obligations (over time or at a point
in time) and determining the transaction price and amounts allocated to performance obligations
3. Assets recognized from
the costs to obtain or fulfill a contract.
ASU 2014-09 is effective for
periods beginning after December 15, 2016, including interim reporting periods within that reporting period for all public entities.
Early application is not permitted.
Management does not believe that
any other recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying
financial statements.
In August, 2014,
the Financial Accounting Standards Board issued an ASU that contained guidance for the disclosure of uncertainties about an entity’s
ability to continue as a going concern. There is no impact on the Company through the adoption of this update as the Company has
always provided such required disclosures on doubt about the entity’s ability to continue as a going concern for one year
from the date of completion of the audit.
In November,
2014, the Financial Accounting Standards Board issued an ASU that contained guidance about derivatives and hedging and determining
whether the host contract in a hybrid financial instrument issued in the form of a share is more akin to debt or to equity. There
are predominantly two methods used in current practice by issuers and investors in evaluating whether the nature of the host contract
within a hybrid instrument issued in the form of a share is more akin to debt or to equity. This ASU is to eliminate the use of
different methods in practice. As the Company utilizes the services of an outside professional specialty firm for such valuations,
the Company believes there is no change needed for this update.
In February,
2015, the Financial Accounting Standards Board issued an ASU that contained guidance about Consolidation (Topic 810) and amendments
to the consolidation analysis. These provisions provide amendments to limited partnerships and similar legal entities. As ABH owns
the 51% majority of the World of Beer location in West Hartford which is an LLC corporation, the Company believes there is no change
needed for this update.
RESULTS OF OPERATIONS
Revenues and Gross Margin
Revenues | |
6/30/2015 | | |
6/30/2014 | | |
$ Change | | |
% Change | |
| |
| | | |
| | | |
| | | |
| | |
Phase III | |
| | | |
| | | |
| | | |
| | |
Revenues | |
$ | (1,419 | ) | |
$ | 23,831 | | |
$ | (25,250 | ) | |
| -106.0 | % |
Less returns and allowance | |
| - | | |
| (1,924 | ) | |
| 1,924 | | |
| -100.0 | % |
Net Revenues | |
| (1,419 | ) | |
| 21,907 | | |
| (23,326 | ) | |
| -106.5 | % |
Less cost of sales | |
| 504 | | |
| 20,849 | | |
| (20,345 | ) | |
| -97.6 | % |
Gross profit/(loss) | |
| (1,923 | ) | |
| 1,058 | | |
| (2,981 | ) | |
| -281.8 | % |
| |
| | | |
| | | |
| | | |
| | |
World of Beer | |
| | | |
| | | |
| | | |
| | |
Revenues | |
| 888,784 | | |
| - | | |
| 888,784 | | |
| N/M | |
Less comps | |
| (14,965 | ) | |
| - | | |
| (14,965 | ) | |
| N/M | |
Less promotions | |
| (966 | ) | |
| - | | |
| (966 | ) | |
| N/M | |
Net revenues | |
| 872,853 | | |
| - | | |
| 872,853 | | |
| N/M | |
Less costs of sales | |
| 241,237 | | |
| - | | |
| 241,237 | | |
| N/M | |
Gross profit/(loss) | |
$ | 631,616 | | |
$ | - | | |
$ | 631,616 | | |
| N/M | |
| |
| | | |
| | | |
| | | |
| | |
Total Net Revenues | |
$ | 871,434 | | |
$ | 21,907 | | |
| 849,527 | | |
| 3877.9 | % |
Total costs of sales | |
| 241,741 | | |
| 20,849 | | |
| 220,892 | | |
| 1059.5 | % |
Total gross profit/(loss) | |
$ | 629,693 | | |
$ | 1,058 | | |
$ | 628,635 | | |
| 59417.3 | % |
All revenues were generated in
the United States. The increase in our revenues for the three months ended June 30, 2015 as compared to the prior three months
ended June 30, 2014 is the result of opening the first World of Beer tavern in late January, 2015. Phase III revenues were lower
for the three months ended June 30, 2015 mainly due to the fact that we no longer sell our products in the Florida Walgreens’
stores and the lack of adequate capital for proper advertising and promotional costs.
As part of opening and operating
a new World of Beer location, we provided certain free complimentary drinks and services to customers in the amount of $14,965
for the three months ended June 30, 2015.
Based on available capital, we,
on our own or through our subsidiaries, plan to increase our revenues during the next twelve months by implementing marketing and
sales promotion programs to introduce our “Phase III® Recovery” drink to new markets in the 2015 and 2016 calendar
years, developing a sales force, securing additional national distributors, expanding our products offering, developing and opening
new World of Beer taverns, increasing our volume per outlet and implementing new grass roots marketing and sample programs.
The computation of the percentage
of expenses to revenues is not meaningful at this time and is not representative of expected future operations.
Product and shipping costs for
the Phase III products for the three months ended June 30, 2015 were less than the three months ended June 30, 2014 mainly due
to the lower sales of the Phase III® Recovery products.
Operating Expenses | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| |
| |
6/30/2015 | | |
6/30/2014 | | |
$ Change | | |
% Change | |
| |
| | |
| | |
| | |
| |
Attitude Drink Company Inc. and Attitude Drinks Incorporated | |
| | | |
| | | |
| | | |
| | |
Salaries, taxes and employee benefit costs | |
$ | 109,236 | | |
$ | 169,023 | | |
$ | (59,787 | ) | |
| -35.4 | % |
Consulting fees | |
| 75,000 | | |
| 75,000 | | |
| - | | |
| 0.0 | % |
Other administrative and general expenses | |
| 42,626 | | |
| 46,588 | | |
| (3,962 | ) | |
| -8.5 | % |
Marketing and promotion expenses | |
| 2,574 | | |
| 9,464 | | |
| (6,890 | ) | |
| -72.8 | % |
Professional and legal fees | |
| 46,365 | | |
| 31,875 | | |
| 14,490 | | |
| 45.5 | % |
Product development costs | |
| - | | |
| 400 | | |
| (400 | ) | |
| -100.0 | % |
Depreciation and amortization | |
| 15,121 | | |
| 1,823 | | |
| 13,298 | | |
| 729.5 | % |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
| 290,922 | | |
| 334,173 | | |
| (43,251 | ) | |
| -12.9 | % |
| |
| | | |
| | | |
| | | |
| | |
Harrison, Vickers and Waterman, Inc. and World of Beer | |
| | | |
| | | |
| | | |
| | |
Administrative salaries | |
| 175,000 | | |
| - | | |
| 175,000 | | |
| N/M | |
Restaurant/tavern salaries, taxes and employee benefit costs | |
| 259,387 | | |
| - | | |
| 259,387 | | |
| N/M | |
Restaurant/tavern other administrative and general expenses | |
| 202,488 | | |
| - | | |
| 202,488 | | |
| N/M | |
Other administrative and general expenses | |
| 33,705 | | |
| - | | |
| 33,705 | | |
| N/M | |
Professional and legal fees | |
| 41,456 | | |
| - | | |
| 41,456 | | |
| N/M | |
Depreciation and amortization | |
| 31,935 | | |
| - | | |
| 31,935 | | |
| N/M | |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
| 743,971 | | |
| - | | |
| 743,971 | | |
| N/M | |
| |
| | | |
| | | |
| | | |
| | |
Consolidated operating expenses | |
$ | 1,034,893 | | |
$ | 334,173 | | |
$ | 700,720 | | |
| 209.7 | % |
Attitude Drink Company
Inc. and Attitude Drinks Incorporated:
Administrative salaries,
taxes and employee benefit costs
For the three months ended June
30, 2015, total expenses of $109,236 were lower by $59,787 (35.4%) over last year’s comparable figures of $169,023 mainly
due to fewer employees caused by a lack of financing
Administrative consulting
fees
Consulting fees of $75,000 for
the three months ended June 30, 2015 were the same as last year’s figures. These fees relate to the use of an outside financial
services consulting firm.
Other administrative and
general expenses
For the three months ended June
30, 2015, total expenses of $42,626 were $3,962 (8.5%) less than last year’s comparable figures of $46,588 mainly due to
decreased activities from a lack of financing. These expenses mainly relate to accrued rent expense for $13,740, board of directors
accrued fees of $9,000, filing fees for $8,965 and telephone costs for $2,642.
Administrative marketing
and promotion expenses
For the three months ended June
30, 2015, we incurred total administrative marketing and promotion expenses of $2,574 as compared to $9,464 for the three months
ended June 30, 2014 for a decrease of $6,890 or (72.8%). This decrease was due primarily to the decision to spend fewer marketing
dollars for the three months ended June 30, 2015 due to limited resources and capital.
Administrative professional
and legal fees
These costs related to the use
of outside legal, accounting and auditing firms. Total costs for the three months ended June 30, 2015 of $46,365 were $14,490 45.5%
higher than the previous year’s comparable costs of $31,875 mainly due to the need for more legal services for the purchase
of HVCW.
HVWC (World of Beer):
Administrative salaries
This represents the accrual of
$175,000 for salaries of the former CEO and Sole Director, James Giordano. He believes he is owed these funds for his exit from
HVCW. We disagree but have recorded the amount. We will address this issue as soon as practical.
Restaurant/tavern salaries,
taxes and employee benefit costs
As this location was opened in
late January, 2015, there are no comparable costs for 2014. These costs relate to all of the payroll and tax expenses for operating
the West Hartford World of Beer location.
Restaurant/tavern other
administrative and general expenses
These costs relate to the new
World of Beer franchise location in West Hartford, Connecticut that opened in late January, 2015. The key expenses relate to: rent
expense for $46,788, royalties to corporate World of Beer for $43,503, utility costs for $10,909, credit card processing fees for
$13,220, disposal fees for $10,083, music and entertainment for $10,342, cleaning expense for $27,229 and the rest for other costs
to operate the World of Beer facility. There are no comparable costs for 2014.
Professional and legal
fees
These costs relate to the use
of outside legal counsel and auditors for the corporate functions of HVWC. There are no comparable costs for 2014.
Depreciation and amortization
For the three months ended June
30, 2015, we recorded depreciation and amortization expense for $31,935 as there are no comparable costs for 2014. Most of the
expense relates to the new World of Beer location that opened in late January, 2015 in West Hartford, Connecticut for the depreciable
fixed assets and amortized deferred pre-opening expenses.
Other Income (Expense)
Interest income/(expense)
The following table summarizes
the effects on our income (expense) associated with changes in the fair values of our financial instruments that are carried at
fair value from the three months ended June 30, 2015 and the three months ended June 30, 2014:
| |
Three Months | | |
Twelve Months | |
| |
ended | | |
ended | |
| |
June 30, 2015 | | |
June 30, 2014 | |
Our financing arrangements giving ris to derivative financial instruments and the income effects: | |
| | | |
| | |
| |
| | | |
| | |
Total interest income/(expense) arising from fair value adjustments | |
$ | (241,930 | ) | |
$ | 739,749 | |
Amortization of debt expense/accretion | |
| (247,007 | ) | |
| (668,344 | ) |
Other interest expense | |
| (195,581 | ) | |
| (266,283 | ) |
| |
$ | (684,518 | ) | |
$ | (194,878 | ) |
Our financial instruments that
are recorded at fair value will change in future periods based upon changes in our trading market price and changes in other assumptions
and market indicators used in the valuation techniques.
Interest and Other Financing
Costs:
We recorded interest expense
for the three months ended June 30, 2015 for $(684,518) and interest expense for $(194,878) for the three months ended June 30,
2014 in connection with our debt obligations at interest rates from 10% to 15%. The change of ($489,640) over the prior
fiscal year was attributed to the recording of debt instruments at fair value (debt discount expense) due to the changes in the
stock price. We recorded the amortization of debt discounts for $247,007 and $668,344 for the three months ended June 30, 2015
and 2014, respectively.
Gain from debt restructuring
For the three months ended June
30, 2015, we implemented a restructuring program to address certain past due accounts payable and accrued salaries. As a result,
we issued 733,175,168 shares of restricted common stock to certain vendors and previous employees as part of their agreement to
settle these past due amounts. As such, we were able to write off total payables in the amount of $1,759,545. As the original amounts
were settled at reduced amounts for the value of the stock, we recognized a gain for this debt restructuring in the amount of $1,612,910.
Minority Interest
For the three months ended June
30, 2015, we recorded minority interest in the amount of $1,465,605 which represents the elimination of 49% profit of the West
Hartford World of Beer location as well as 30% elimination for the loss of HVWC as these percentages represent minority ownership
interests in both companies.
Net Loss
We reported a net loss for the
three months ended June 30, 2015 of $(49,882) and a net loss of $(527,993) for the three months ended June 30, 2014. The
majority of the expenses for the three months ended June 30, 2015 related to salary related costs, consulting fees, general and
administrative fees, professional and legal fees and recognition of interest expense reflecting the changes in the fair value of
the convertible debts. Most of the costs incurred in the prior three months ended June 30, 2014 related to salary related costs,
consulting fees, professional and legal fee and recognition of interest income reflecting changes in the fair value of the convertible
debts.
Loss per Common Share Applicable
to Common Stockholders
The Company’s basic and
diluted loss per common share applicable to common stockholders for the three months ended June 30, 2015 was $(0.00), and the basic
and diluted loss per common share for the prior three months ended June 30, 2014 was $(0.00). Because the Company experienced a
net loss for the three months ended June 30, 2015, all potential common share conversions existing in our financial instruments
would have an anti-dilutive impact on earnings per share; therefore, diluted loss per common share equals basic loss per common
share for this period. The weighted average common shares outstanding for the three months ended June 30, 2015 and 2014
were 2,011,266,510 and 338,533,990, respectively for the basic and diluted loss calculation.
LIQUIDITY AND CAPITAL RESOURCES
We have yet to achieve any substantial
revenues or profitability, and our ability to continue as a going concern will be dependent upon us receiving additional third
party financings to fund our business at least throughout the next twelve months in our new fiscal year. Ultimately,
our ability to continue is dependent upon the achievement of profitable operations. We anticipate that, depending on market
conditions and our plan of operations, we may incur operating losses in the future based mainly based 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. These
conditions raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements
do not reflect any adjustments that may result from the outcome of this uncertainty.
Working Capital Needs and
Major Cash Expenditures
We currently have monthly working
capital needs of approximately $125,000 to $150,000. This amount is, however, expected to increase in the next fiscal
year, primarily due to the following factors:
¨ Increased
employees, sales consultant and related travel costs
¨
Required interest payments on our convertible promissory notes payable
¨ Increased
product development costs for new products, packaging and marketing materials
External Sources of Liquidity-External
Debt Financing and Use of Common Stock for the three months ended June 30, 2015:
External Debt Financing:
On April 3, 2015, we issued a
promissory note to Southridge Partners II LP in which we received $7,500.
On April 17, 2015, we issued
a promissory note to Southridge Partners II LP in which we received $7,500.
On April 24, 2015, we issued
a promissory note to Southridge Partners II LP in which we received $7,500.
On May 1, 2015, we issued a promissory
note to Southridge Partners II LP in which we received $7,500.
On May 1, 2015, we issued a promissory
note to Southridge Partners II LP in which we received $16,500.
On May 15, 2015, we issued a
promissory note to Southridge Partners II LP in which we received $7,500.
On May 22, 2015, we issued a
promissory note to Southridge Partners II LP in which we received $7,500
On May 29, 2015, we issued a
promissory note to Southridge Partners II LP in which we received $7,500
On June 12, 2015, we issued a
promissory note to Southridge Partners II LP in which we received $7,500
On June 26, 2015, we issued a
promissory note to Southridge Partners II LP in which we received $7,500
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(a)(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 restricted
legend.
Information about our cash
flows
| |
For the Three Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2015 | | |
2014 | |
Cash provided by (used in): | |
| | | |
| | |
| |
| | | |
| | |
Operating activities | |
$ | (43,849 | ) | |
$ | (132,459 | ) |
| |
| | | |
| | |
Investing activities | |
$ | (132,615 | ) | |
$ | - | |
| |
| | | |
| | |
Financing activities | |
$ | 169,643 | | |
$ | 112,200 | |
For the three months ended June
30, 2015, we reported a net loss of $(49,882) which was affected by recording the fair value adjustment of the convertible notes
for $241,930, amortization of debt discount for $247,007 and derivative expense of $2,038,679 offset by minority interest for $(1,465,605)
and gain from debt restructuring for $(1,612,910). Cash flows generated from our operating activities were inadequate to cover
our cash disbursement needs as we had to rely on new convertible debt financings and bridge loans to cover operating costs. Cash
used by investing activities were attributed mainly to the purchase of equipment and operating expenses related to the opening
of the World of Beer restaurant and tavern. Cash provided by financing activities increased due to the proceeds from the issuance
of additional convertible debt financings and short-term bridge loans payable for net proceeds of $169,643.
For the prior three months ended
June 30, 2014, we reported a net loss of $(527,993) which was affected by recording the fair value adjustment of the convertible
notes for $(739,749), offset by the amortization of debt discount for $668,344 as well as changes in accounts payable and accrued
expenses for $190,166. Cash flows generated from our operating activities were inadequate to cover our cash disbursement needs
as we had to rely on new convertible debt financings and bridge loans to cover operating costs. Cash used by investing activities
were attributed mainly to the purchase of a company vehicle. Cash provided by financing activities increased due to the proceeds
from the issuance of additional convertible debt financings and short-term bridge loans payable for net proceeds of $112,200.
Defaults for Short-Term Non-Convertible
Loans for the three months ended June 30, 2015:
At June 30, 2015, two short-term
bridge notes for a total of $115,000 were past due. One of these notes is held by one of our Board of Directors and he exchanged
his note for shares of Series C Convertible Preferred Stock in August, 2015. We are still trying to locate the other debt holder
to extend the maturity date.
Debt restructuring program
For the three months ended June
30, 2015, we implemented a debt restructuring program whereas we issued restricted shares of common stock to vendors and previous
employees for the reduction of our accounts and one note payable for $118,559 and accrued payroll liabilities by $1,640,986. Through
this restructuring program, we were able to record a gain to our statement of operations for the three months ended June 30, 2014
for $1,612,910. In addition for the six months ended September 30, 2015, the restructuring program resulted in a year to date gain
to the statement of operations for approximately $5,834,709 and a total reduction of notes and loans payables of approximately
$5,079,480, salaries payable of $3,546,669, accrued interest payable for $1,288,483 and accounts payable of $137,959.
The following table sets forth
various details of all convertible notes and short-term bridge loans including applicable interest and default rates for the three
months ended June 30, 2015:
RECAP ANALYSIS OF ALL CONVERTIBLE NOTES
PAYABLE
AND SHORT-TERM BRIDGE NON-CONVERTIBLE LOANS
FOR THE THREE MONTHS ENDED JUNE 30, 2015
Outstanding | | |
| |
| |
| |
(c) | | |
| | |
Default | | |
Accrued | |
Convertible | | |
Issue | |
| |
Default | |
$ Amount | | |
Interest | | |
Interest | | |
Default | |
Note Amounts | | |
Date | |
Due Date | |
Yes/No | |
Past Due | | |
Rate | | |
Rate | | |
Interest | |
| | |
| |
| |
| |
| | |
| | |
| | |
| |
$ | 5,452,892 | (a) | |
February, 2013 | |
2/21/2015 | |
Yes (b) | |
| 5,452,892 | | |
| 4 | % | |
| 20 | % | |
| - | |
$ | 5,575 | | |
April, 2013 | |
12/31/2014 | |
Yes (b) | |
| 5,575 | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
May, 2013 | |
12/31/2014 | |
Yes (b) | |
| 25,000 | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
June, 2013 | |
12/31/2014 | |
Yes (b) | |
| 25,000 | | |
| None | | |
| None | | |
| - | |
$ | 37,000 | | |
June, 2013 | |
6/7/2014 | |
Yes (b) | |
| 37,000 | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
July, 2013 | |
12/31/2014 | |
Yes (b) | |
| 25,000 | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
August, 2013 | |
12/31/2014 | |
Yes (b) | |
| 25,000 | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
September, 2013 | |
1/31/2015 | |
Yes (b) | |
| 25,000 | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
October, 2013 | |
2/28/2015 | |
Yes (b) | |
| 25,000 | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
November, 2013 | |
3/31/2015 | |
Yes (b) | |
| 25,000 | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
December, 2013 | |
4/30/2015 | |
Yes (b) | |
| 25,000 | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
January, 2014 | |
5/31/2015 | |
Yes (b) | |
| 25,000 | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
February, 2014 | |
6/30/2015 | |
Yes (b) | |
| 25,000 | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
March, 2014 | |
7/31/2015 | |
No | |
| - | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
April, 2014 | |
8/31/2015 | |
No | |
| - | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
May, 2014 | |
9/30/2015 | |
No | |
| - | | |
| None | | |
| None | | |
| - | |
$ | 27,500 | | |
May, 2014 | |
5/13/2015 | |
Yes (b) | |
| 27,500 | | |
| 4 | % | |
| 20 | % | |
| - | |
$ | 25,000 | | |
June, 2014 | |
10/31/2015 | |
No | |
| - | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
July, 2014 | |
11/30/2015 | |
No | |
| - | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
August, 2014 | |
12/31/2015 | |
No | |
| - | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
September, 2014 | |
1/31/2016 | |
No | |
| - | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
October, 2014 | |
2/28/2016 | |
No | |
| - | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
November, 2014 | |
3/31/2016 | |
No | |
| - | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
December, 2014 | |
4/30/2016 | |
No | |
| - | | |
| None | | |
| None | | |
| - | |
$ | 20,000 | | |
December, 2014 | |
12/22/2016 | |
No | |
| - | | |
| 10 | % | |
| 20 | % | |
| - | |
$ | 25,000 | | |
January, 2015 | |
5/31/2016 | |
No | |
| - | | |
| None | | |
| None | | |
| - | |
$ | 13,500 | | |
January, 2015 | |
1/14/2017 | |
No | |
| - | | |
| 10 | % | |
| 20 | % | |
| - | |
$ | 13,500 | | |
January, 2015 | |
1/14/2017 | |
No | |
| - | | |
| 10 | % | |
| 20 | % | |
| - | |
$ | 31,500 | | |
January, 2015 | |
1/14/2017 | |
No | |
| - | | |
| 10 | % | |
| 20 | % | |
| - | |
$ | 25,000 | | |
February, 2015 | |
6/30/2016 | |
No | |
| - | | |
| None | | |
| None | | |
| - | |
$ | 25,000 | | |
March, 2015 | |
7/31/2016 | |
No | |
| - | | |
| None | | |
| None | | |
| - | |
$ | 13,250 | | |
April, 2015 | |
12/31/2016 | |
No | |
| | | |
| 10 | % | |
| 10 | % | |
| - | |
$ | 25,000 | | |
April, 2015 | |
8/31/2016 | |
No | |
| | | |
| None | | |
| None | | |
| - | |
$ | 96,628 | | |
April, 2015 | |
4/1/2017 | |
No | |
| | | |
| 10 | % | |
| 10 | % | |
| - | |
$ | 2,174,167 | | |
April, 2015 | |
4/21/2017 | |
No | |
| | | |
| 10 | % | |
| 10 | % | |
| - | |
$ | 25,000 | | |
May, 2015 | |
9/30/2016 | |
No | |
| | | |
| None | | |
| None | | |
| - | |
$ | 7,500 | | |
May, 2015 | |
12/31/2016 | |
No | |
| | | |
| 10 | % | |
| 10 | % | |
| - | |
$ | 25,000 | | |
June, 2015 | |
10/31/2016 | |
No | |
| | | |
| None | | |
| None | | |
| - | |
| | | |
| |
| |
| |
| | | |
| | | |
| | | |
| | |
$ | 8,543,012 | | |
| |
| |
| |
$ | 5,772,967 | | |
| | | |
| | | |
| | |
(a) Total amount includes total consolidated notes plus additional
issued allonges.
(b) The Company is implementing a restruturing program and is
working with the debt holders to extend the maturity dates. No presentation of defaults to the Company from the debt holders has
occurred, thus no recording of default interest rates.
(c) Notes indicated in default are in default only because they
are past due.
SHORT-TERM BRIDGE LOANS (d) |
| |
| | | |
| | | |
| | |
$ | 60,000 | | |
April 14, 2008 | |
Past due | |
Yes | |
$ | 60,000 | | |
| 15 | % | |
$ | 55,101 | |
$ | 55,000 | | |
August 5, 2008 | |
Past due | |
Yes | |
$ | 55,000 | | |
| 15 | % | |
| 67,155 | |
$ | 115,000 | | |
Total amount past due | |
| |
| |
$ | 115,000 | | |
| | | |
$ | 122,256 | |
(d) Notes indicated in default are in default because they are
past due. One of the debt holders is a Board Director and has received shares of Series C Convertible Preferred Stock in August,
2015 as an exchange to eliminate the payable.
During August, 2015, approximately
$3.3 million of the above debt that was in default was exchanged for Series C Convertible Preferred Stock.
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 history of operating
losses. If we continue to incur operating losses, we eventually may have insufficient working capital to maintain or expand operations
according to our business plan.
As of June 30, 2015, we had a
total shareholders’ deficit of $16,783,997 and a working capital deficit of $20,217,445, compared to a total shareholders’
deficit of $16,942,378 and a working capital deficit of $17,997,151 at March 31, 2015. Cash and cash equivalents were $226,770
as of June 30, 2015 as compared to $233,591 at March 31, 2015. 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.
Our auditors have expressed
doubt as to 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
and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our auditor’s
report reflects substantial doubt about our ability 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.
At June 30, 2015, we were
in default on certain of our short-term bridge loans and convertible note payables.
At June 30, 2015, 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
has exchanged his notes payable during August, 2015 into shares of Series C Convertible Preferred Stock. We continue to locate
the other note holder which we have been doing for some time. The remedy for default under the notes is acceleration of principal
and interest due thereunder. In addition, we were in default on certain convertible note payables in the total amount of $5,772.967.
We implemented a restructuring program in August, 2015 and will work with our investors to extend these maturity dates. 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 from 15% up to 20%.
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. Our main assets relate to ABH’s assets in the World of Beer location in West Hartford,
Connecticut. If we lose those assets, we would have a very difficult time conducting our business.
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:
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sales of new products could adversely impact sales of existing products; |
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we may incur higher cost of goods sold and selling, general and administrative expenses in the periods when we introduce new products due to increased costs associated with the introduction and marketing of new products, most of which are expensed as incurred; and |
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when we introduce new platforms and bottle sizes, we may experience increased freight and logistics costs as our co-packers adjust their facilities for the new products. |
The beverage business is highly competitive.
The premium and functional beverage
drink industries are highly competitive. Many of our competitors have substantially greater financial, marketing, personnel and
other resources than we do. Competitors in these industries include bottlers and distributors of nationally advertised and marketed
products, as well as chain store and private label drinks. The principal methods of competition include brand recognition, price
and price promotion, retail space management, service to the retail trade, new product introductions, packaging changes, distribution
methods and advertising. We also compete for distributors, shelf space and customers primarily with other premium beverage companies.
As additional competitors enter the field, our market share may fail to increase or may decrease.
The growth of our revenues is dependent on acceptance
of our products by mainstream consumers.
We have limited resources to
introduce our products to the mainstream consumer. As such, we will need to increase our sales force and execute agreements with
distributors who, in turn, distribute to mainstream consumers at grocery stores, club stores and other retailers. If our products
are not accepted by the mainstream consumer, our business could suffer.
Our failure to accurately estimate demand for
our products could adversely affect our business and financial results.
We may not correctly estimate
demand for our products. Our ability to estimate demand for our products is imprecise, particularly with new products, and may
be less precise during periods of rapid growth, particularly in new markets. If we materially underestimate demand for our products
or are unable to secure sufficient ingredients or raw materials including, but not limited to, containers, labels, flavors or packing
arrangements, we might not be able to satisfy demand on a short-term basis. Moreover, industry-wide shortages of certain ingredients
have been and could, from time to time in the future, be experienced, which could interfere with and/or delay production of certain
of our products and could have a material adverse effect on our business and financial results. We do not use hedging agreements
or alternative instruments to manage this risk.
The loss of our third-party distributors could
impair our operations and substantially reduce our financial results.
We continually seek to expand
distribution of our products by entering into distribution arrangements with regional bottlers or other direct store delivery distributors
having established sales, marketing and distribution organizations. Many distributors are affiliated with and manufacture and/or
distribute other beverage products. In many cases, such products compete directly with our products.
The marketing efforts of our
distributors are important for our success. If our brands prove to be less attractive to our existing distributors and/or if we
fail to attract additional distributors and/or our distributors do not market and promote our products above the products of our
competitors, our business, financial condition and results of operations could be adversely affected.
Inability to secure co-packers
for our products could impair our operations and substantially reduce our financial results.
We rely on third parties, called
co-packers in our industry, to produce our products. We currently have only one co-packing agreement for our products and
at this time have only one milk-based product commercially available (Phase III® Recovery). Our co-packing agreement with our
principal co-packer was signed on December 16, 2008 and had an initial term of three (3) years which has now expired. This agreement
is automatically renewed for consecutive one (1) year periods (next renewal date of December 16, 2015) 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:
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if any of those co-packers were to terminate our co-packing arrangement or have difficulties in producing beverages for us, our ability to produce our beverages would be adversely affected until we were able to make alternative arrangements; and |
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our business reputation would be adversely affected if any of the co-packers were to produce inferior quality products. |
We compete in an industry
that is brand-conscious so brand name recognition and acceptance of our products are critical to our success.
Our business is substantially
dependent upon awareness and market acceptance of our products and brands by our targeted consumers. In addition, our business
depends on acceptance by our independent distributors of our brands as beverage brands that have the potential to provide incremental
sales growth rather than reduce distributors’ existing beverage sales. We believe that the success of our product name brands
will also be substantially dependent upon acceptance of our product name brands. Accordingly, any failure of our brands to maintain
or increase acceptance or market penetration would likely have a material adverse affect on our revenues and financial results.
We compete in an industry
characterized by rapid changes in consumer preferences and public perception so our ability to continue to market our existing
products and develop new products to satisfy our consumers’ changing preferences will determine our long-term success.
Consumers are seeking greater
variety in their beverages. Our future success will depend, in part, upon our continued ability to develop and introduce different
and innovative beverages. In order to retain and expand our market share, we must continue to develop and introduce different and
innovative beverages and be competitive in the areas of quality and health, although there can be no assurance of our ability to
do so. There is no assurance that consumers will continue to purchase our products in the future. Additionally, many of our products
are considered premium products and to maintain market share during recessionary periods, we may have to reduce profit margins,
which would adversely affect our results of operations. Product lifecycles for some beverage brands and/or products and/or packages
may be limited to a few years before consumers’ preferences change. The beverages we currently market are in their early
lifecycles, and there can be no assurance that such beverages will become or remain profitable for us. The beverage industry is
subject to changing consumer preferences, and shifts in consumer preferences may adversely affect us if we misjudge such preferences.
We may be unable to achieve volume growth through product and packaging initiatives. We also may be unable to penetrate new markets.
If our revenues decline, our business, financial condition and results of operations will be materially and adversely affected.
Our quarterly operating results may fluctuate
significantly because of the seasonality of our business.
As our products are relatively
new, there may be seasonality issues that could cause our financial performance to fluctuate. In addition, beverage sales can be
adversely affected by sustained periods of bad weather.
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.
We have identified material
weaknesses in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that
additional material weaknesses will not occur in the future.
If our internal control over
financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial
results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported
financial information and may lead to a decline in our stock price. Our most recent evaluation of our internal controls resulted
in our conclusion that our disclosure controls and procedures and that our internal controls over financial reporting were not
effective. Effective internal controls are necessary for us to provide reliable financial reports. All internal control systems,
no matter how well designed, have inherent limitations. Even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation. In our case, our failure to achieve and maintain an
effective internal control environment could cause us to be unable to produce reliable financial reports or prevent fraud. This
may cause investors to lose confidence in our reported financial information, which could in turn have a material adverse effect
on our stock price.
Our intellectual property rights are critical
to our success; the loss of such rights could materially, adversely affect our business.
We regard the protection of our
trademarks, trade dress and trade secrets as critical to our future success. We have registered our trademarks in the United States
that are very important to our business. We also own the copyright in and to portions of the content on the packaging of our products.
We regard our trademarks, copyrights and similar intellectual property as critical to our success and attempt to protect such property
with registered and common law trademarks and copyrights, restrictions on disclosure and other actions to prevent infringement.
Product packages, mechanical designs and artwork are important to our success, and we would take action to protect against imitation
of our packaging and trade dress and to protect our trademarks and copyrights, as necessary. We also rely on a combination of laws
and contractual restrictions, such as confidentiality agreements, to establish and protect our proprietary rights, trade dress
and trade secrets. However, laws and contractual restrictions may not be sufficient to protect the exclusivity of our intellectual
property rights, trade dress or trade secrets. Furthermore, enforcing our rights to our intellectual property could involve the
expenditure of significant management and financial resources. There can be no assurance that other third parties will not infringe
or misappropriate our trademarks and similar proprietary rights. If we lose some or all of our intellectual property rights, our
business may be materially and adversely affected.
If we are not able to retain
the full time services of our management team, including Roy G. Warren, it will be more difficult for us to manage our operations
and our operating performance could suffer.
Our business is dependent, to
a large extent, upon the services of our management team, including Roy G. Warren, our founder and Chief Executive Officer and
Chairman of the Board. We depend on our management team, but especially on Mr. Warren’s creativity and leadership in running
or supervising virtually all aspects of our day-to-day operations. We do not have a written employment agreement with any member
of our management team or Mr. Warren. In addition, we do not maintain key person life insurance on any of our management team or
Mr. Warren. Therefore, in the event of the loss or unavailability of any member of the management team to us, there can be no assurance
that we would be able to locate in a timely manner or employ qualified personnel to replace him. The loss of the services of any
member of our management team or our failure to attract and retain other key personnel over time would jeopardize our ability to
execute our business plan and could have a material adverse effect on our business, results of operations and financial condition.
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.
The beneficial ownership
of a significant percentage of our common stock gives Roy Warren and members of his family effective control of us and limits the
influence of other shareholders on important policy and management issues.
Roy Warren, our Chief Executive
Officer and Chairman of our Board, through his control of 51% of our voting stock, has control over our company and important matters
relating to us. As a result he can control the outcome of all matters submitted to our shareholders for approval, including the
election of our directors, our business strategy, our day-to-day operations and any proposed merger, consolidation or sale of all
or substantially all of our assets. This control of our company could discourage the acquisition of our common stock by potential
investors and could have an anti-takeover effect, preventing a change in control of our company that might be otherwise beneficial
to our shareholders, and possibly depressing the trading price of our common stock. There can be no assurance that conflicts of
interest will not arise with respect to Roy Warren’s ownership and control of our company or that any conflicts will be resolved
in a manner favorable to the other shareholders of our company.
Certain provisions of the General Corporation
Law of the State of Delaware, our Amended and Restated Certificate of Incorporation, as amended, and our bylaws may have anti-takeover
effects which may make an acquisition of our company by another company more difficult.
We are subject to the provisions
of Section 203 of the General Corporation Law of the State of Delaware, which prohibits a Delaware corporation from engaging
in any business combination, including mergers and asset sales, with an interested stockholder (generally, a 15% or greater stockholder)
for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The operation of Section 203 may have anti-takeover effects, which
could delay, defer or prevent a takeover attempt that a holder of our common stock might consider in its best interest.
Our Amended and Restated Certificate
of Incorporation and bylaws contain provisions that permit us to issue, without any further vote or action by the stockholders,
up to 20,000,000 shares of preferred stock in one or more series and, with respect to each such series, to fix the number of shares
constituting the series and the designation of the series, the voting powers, if any, of the shares of the series, and the preferences
and relative, participating, optional and other special rights, if any, and any qualifications, limitations or restrictions, of
the shares of such series.
These provisions on our Amended
and Restated Certificate of Incorporation may have anti-takeover effects, which could delay, defer or prevent a takeover attempt
that a holder of our common stock might consider in its best interest.
Certain of our officers
may have a conflict of interest and lack of availability.
Some of our officers, including
our Chief Executive Officer and our Chief Financial Officer, are currently working for the Company on a part-time basis and are
the Chief Executive Officer and Chief Financial Officer of Harrison Vickers and Waterman Inc. These officers have discretion to
decide what time they devote to our activities, which may result in a lack of availability when needed due to responsibilities
at other jobs.
We do not have an audit committee.
While not being legally obligated to have an audit
committee or independent audit committee financial expert, we currently do not have an audit committee or independent audit committee
financial expert which is an important entity-level control over the Company’s financial statements.
Risks Related to the World
of Beer operations
If ABH is unable to identify
and obtain suitable new franchises sites and successfully open new franchises, our revenue will suffer and profits may be reduced.
ABH requires that all proposed
franchise sites meet certain site selection criteria. ABH may make errors in selecting these criteria or applying these criteria
to a particular site, or there may be an insignificant number of new sites meeting these criteria that would enable us to achieve
our planned expansion in future periods. ABH faces significant competition from other restaurant companies and retailers for sites
that meet its criteria, and the supply of sites may be limited in some markets. Further, ABH may be precluded from acquiring an
otherwise suitable site due to an exclusivity restriction held by another tenant. As a result of these factors, costs to obtain
and lease sites may increase, or ABH may not be able to obtain certain sites due to unacceptable costs. ABH’s inability to
obtain suitable sites at reasonable costs may reduce our income growth.
To successfully expand its business,
ABH must open new World of Beer restaurants on schedule and in a profitable manner. In the past, World of Beer franchisees have
experienced delays in restaurant openings, and may experience similar delays in the future. Delays in opening new sites could hurt
ABH’s ability to meet its growth objectives, which may affect our results of operations and thus our stock price. We cannot
guarantee that ABH or any future franchisees will be able to achieve its expansion goals. Further, any sites that it opens may
not achieve operating results similar or better than the existing restaurant. If ABH is unable to generate positive cash flow from
a new site, it may be required to recognize an impairment loss with respect to the assets for that restaurant. ABH’s ability
to expand successfully will depend on a number of factors, many of which are beyond its control. These factors include:
| · | Negotiating acceptable lease or purchase terms for new sites; |
| · | Cost effective and timely planning, design and build-out of sites; |
| · | Creating Guest awareness of our restaurants and taverns in new markets; |
| · | Competition in new and existing markets; |
| · | General economic conditions. |
The restaurants and taverns may not achieve
market acceptance in the new regions ABH enters.
ABH’s expansion plans depend
on opening restaurants and taverns in markets starting with New England where it has little or no operating experience. ABH may
not be successful in operating in locations in new markets on a profitable basis. The success of these new locations will be affected
by the different competitive conditions, consumer tastes and discretionary spending patterns of the new markets as well as ABH’s
ability to generate market awareness of its brands. Sales at locations opening in new markets may take longer to reach profitable
levels, if at all.
New restaurants added to existing markets may
take sales from existing restaurants.
ABH intends to open new restaurants
and taverns in its existing market, which may reduce sales performance and guest visits for existing location. In addition, new
locations added in existing markets may not achieve sales and operating performance at the same level as established restaurants
in the market.
A security failure in ABH’s
information technology systems could expose us to potential liability and loss of revenues.
ABH accepts credit and debit
card payments at our restaurant. A number of retailers have recently experienced actual or potential security breaches in which
credit and debit card information may have been stolen, including a number of highly publicized incidents with well-known retailers.
The intentional, inadvertent or negligent release or disclosure of data by ABH or its service providers could result in theft,
loss, fraudulent or unlawful use of customer data which could harm its and our reputation and result in remedial and other
costs, fines or lawsuits.
Shortages or interruptions
in the availability and delivery of food and other supplies may increase costs or reduce revenues.
Possible shortages or interruptions
in the supply of food items and other supplies to a location(s) caused by inclement weather, terrorist attacks, natural disasters
such as floods, drought and hurricanes, pandemics, the inability of vendors to obtain credit in a tightened credit market, food
safety warnings or advisories or the prospect of such pronouncements, or other conditions beyond ABH’s control could adversely
affect the availability, quality and cost of items it buys and the operations of its restaurants. ABH’s inability to effectively
manage supply chain risk could increase costs and limit the availability of products critical to the restaurant operations.
There are general risks
associated with the restaurant and bar/tavern industry.
Restaurants are a very
cyclical business. Specific factors that impact economic recessions can negatively influence discretionary consumer spending
in restaurants and bars and result in lower customer counts as consumers become more price conscientious, tending to conserve
their cash amid unemployment and other economic uncertainty. The effects of higher gasoline prices can also negatively affect
discretionary consumer spending in restaurants and bars. Increasing costs for energy can affect profit margins in many other
ways. Petroleum based material is often used to package certain products for distribution. In addition, suppliers may add
fuel surcharges to their invoices. The cost to transport products from the distributors to restaurant operations will rise
with each increase in fuel prices. Higher costs for electricity and natural gas result in higher costs to a) heat and cool
restaurant facilities, b) refrigerate and cook food and c) manufacture and store food at ABH’s locations. Inflationary
pressure, particularly on food costs, labor costs (especially associated with increases in the minimum wage) and health care
benefits, can negatively affect the operation of the business. Shortages of qualified labor are sometimes experienced in
certain local economies. In addition, the loss of any key executives could pose a significant adverse effect on ABH and
us.
If consumer confidence in the business deteriorates,
our business, financial condition and results of operations could be adversely affected.
The restaurants are built on
consumers’ confidence in the World of Beer brand. As a consumer business, the strength of the brand and reputation are of
paramount importance to ABH and us. A number of factors could adversely affect consumer confidence in the brand, many of which
are beyond ABH’s control and could have an adverse impact on its and our results of operations. These factors include:
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any regulatory action or investigation against it or us; |
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any negative publicity about a restaurant in the World Of Beer franchise; and |
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any negative publicity about our restaurants. |
In addition, ABH is largely dependent
on the other World of Beer franchisees to maintain the reputation of its brand. Despite the measures that it puts in place to ensure
their compliance with its performance standards, ABH’s lack of control over its operations may result in the low quality
of service being attributed to the brand, negatively affecting its and our overall reputation. Any event that hurts its or our
brand and reputation among consumers as a reliable services provider could have a material adverse effect on its and our business,
financial condition and results of operations.
ABH faces substantial competition in our target
markets
The restaurant industry is highly
competitive, and many of the competitors are substantially larger and possess greater financial resources than ABH and us. Our
restaurant(s) have numerous competitors, including national chains, regional and local chains, as well as independent operators.
None of these competitors, in the opinion of our management, is dominant in the family-style sector of the restaurant industry.
In addition, competition continues to increase from non-traditional competitors such as supermarkets that not only offer home meal
replacement but also have in-store dining space trends that continue to grow in popularity. The principal methods of competition
in the restaurant industry are brand name recognition and advertising; menu selection and prices; food quality and customer perceptions
of value, speed and quality of service; cleanliness and fresh, attractive facilities in convenient locations. In addition to competition
for customers, sharp competition exists for qualified restaurant managers, hourly restaurant workers and quality sites on which
to build new locations.
The restaurant and bar industry
is very competitive, and ABH faces competition from large national chains as well as individually owned restaurants. Large chains
such as Buffalo Wild Wings have a similar open style that appeals to sports fan and family demographics. There are additional restaurants
that feature custom beers. Many of these competitors have substantially more resources than ABH and us which allow them to have
economies of scale allowing them price points which compare favorably to ABH’s price points. They also have the ability to
market their restaurants given their sheer size which ABH does not possess. All of these factors may make it difficult for ABH
and us to succeed.
Unfavorable publicity could harm ABH’s
and our business.
Multi-unit restaurant businesses
such as ABH’s business can be adversely affected by publicity resulting from complaints or litigation or general publicity
regarding poor food quality, food-borne illness, personal injury, food tampering, adverse health effects of consumption of various
food products or high-calorie foods (including obesity), or other concerns. Negative publicity from traditional media or on-line
social network postings may also result from actual or alleged incidents or events taking place in ABH’s restaurants. Regardless
of whether the allegations or complaints are valid, unfavorable publicity relating to a number of our restaurants, or only to a
single restaurant, could adversely affect public perception of the entire brand. Adverse publicity and its effect on overall consumer
perceptions of food safety, or ABH’s failure to respond effectively to adverse publicity, could have a material adverse effect
on its and our business.
Changes in employment laws or regulation could
harm ABH’s performance.
Various federal and state labor
laws govern ABH’s relationship with its employees and affect operating costs. These laws include minimum wage requirements,
overtime pay, healthcare reform and the implementation of the Patient Protection and Affordable Care Act, unemployment tax rates,
workers’ compensation rates, citizenship requirements, union membership and sales taxes. A number of factors could adversely
affect ABH’s operating results, including additional government-imposed increases in minimum wages, overtime pay, paid leaves
of absence and mandated health benefits, mandated training for employees, increased tax reporting and tax payment requirements
for employees who receive tips, a reduction in the number of states that allow tips to be credited toward minimum wage requirements,
changing regulations from the National Labor Relations Board and increased employee litigation including claims relating to the
Fair Labor Standards Act.
The Americans with Disabilities
Act is a federal law that prohibits discrimination on the basis of disability in public accommodations and employment. Although
ABH’s restaurants are designed to be accessible to the disabled, ABH could be required to make modifications to its restaurants
to provide service to, or make reasonable accommodations for disabled persons.
Economic conditions could
have a material adverse impact on ABH’s landlords or other tenants in retail centers in which it or its franchisees are located,
which in turn could negatively affect its financial results.
ABH’s landlords may be
unable to obtain financing or remain in good standing under their existing financing arrangements, resulting in failures to pay
required construction contributions or satisfy other lease covenants to ABH. In addition other tenants at retail centers in which
ABH or its franchisees are located or have executed leases may fail to open or may cease operations. If any landlords fail to satisfy
required co-tenancies, such failures may result in ABH or its franchisees terminating leases or delaying openings in these locations.
Also, decreases in total tenant occupancy in retail centers in which ABH are located may affect guest traffic at its restaurants.
All of these factors could have a material adverse impact on its and our operations.
ABH may experience higher-than-anticipated
costs associated with the opening of new locations or with the closing, relocating and remodeling of existing restaurants, which
may adversely affect its and our results of operations.
ABH’s and our revenues
and expenses can be impacted significantly by the location, number and timing of the opening of new restaurants and the closing,
relocating, and remodeling of existing restaurants. ABH incurs substantial pre-opening expenses each time it opens a new restaurant
and incurs other expenses when it closes, relocates or remodels existing restaurants. These expenses are generally higher when
it opens restaurants in new markets, but the costs of opening, closing, relocating or remodeling any of our restaurants may be
higher than anticipated. An increase in such expenses could have an adverse effect on ABH’s and our results of operations.
ABH’s and our success
depends substantially on the value of ABH’s brands and its reputation for offering guests an unparalleled Guest experience.
We believe that ABH has built
a strong reputation for the quality and breadth of its menu items as part of the total experience that guests enjoy in its restaurants.
We believe ABH must protect and grow the value of its brands to continue to be successful in the future. Any incident that erodes
consumer trust in or affinity for its brands could significantly reduce their value. If consumers perceive or experience a reduction
in food quality, service, or ambiance, or in any way believe ABH failed to deliver a consistently positive experience, its and
our brand value could suffer.
ABH’s inability to
successfully and sufficiently raise menu prices could result in a decline in profitability.
ABH utilizes menu price increases
to help offset cost increases, including increased cost for commodities, minimum wages, employee benefits, insurance arrangements,
construction, utilities and other key operating costs. If its selection and amount of menu price increases are not accepted
by consumers and reduce guest traffic, or are insufficient to counter increased costs, its and our financial results could be harmed.
Our quarterly operating
results may fluctuate due to the timing of special events and other factors, including the recognition of impairment losses.
Our quarterly operating results
depend, in part, on revenue that ABH derived from special events, such as the Super Bowl® and other sporting events viewed
by our guests in our World of Beer franchised locations such as the NFL, MLB, NBA, NHL and NCAA. Interruptions in the viewing of
these professional and collegiate sporting league events due to strikes, lockouts or labor disputes may impact our results. Additionally,
ABH’s and thus indirectly our results are subject to fluctuations based on the dates of sporting events and their availability
for viewing through broadcast, satellite and cable networks. Historically, sales in most of World of Beer restaurants have been
higher during fall and winter months based on the relative popularity and extent of national, regional and local sporting and other
events. Further, quarterly operating results may fluctuate significantly because of other factors, including:
| · | Fluctuations in food costs, particularly chicken wings; |
| · | The timing of new restaurant openings which may impact margins due to the related preopening costs
and initially higher restaurant level operating expense ratios; |
| · | Potential distraction or unusual expenses associated with
expansion into other geographical territories; |
| · | ABH’s ability to operate effectively in new markets
in which it has limited operating experience; |
| · | Labor availability and costs for hourly and management
personnel; |
| · | Changes in competitive factors; |
| · | General economic conditions, consumer confidence and fluctuations
in discretionary spending; |
| · | Claims experience for self-insurance programs; |
| · | Increases or decreases in labor or other variable expenses; |
| · | The impact of inclement weather, natural disasters and
other calamities; |
| · | Fluctuations in interest rates; |
| · | The timing and amount of asset impairment loss and restaurant
closing charges; and |
| · | Tax expenses and other non-operating costs. |
ABH may not be able to
attract and retain qualified team members and key executives to operate and manage our business.
ABH”s success and the success
of its individual restaurant(s) and business depends on its ability to attract, motivate, develop and retain a sufficient number
of qualified key executives and restaurant employees, including restaurant managers and hourly team members. The inability to recruit,
develop and retain these individuals may delay the planned openings of new restaurant and tavern locations or result in high employee
turnover in existing locations, thus increasing the cost to efficiently operate our restaurants. This could inhibit expansion plans
and business performance and, to the extent that a labor shortage may force ABH to pay higher wages, harm its profitability. The
loss of any of its key executive officers could jeopardize its ability to meet its financial targets.
The sale of alcoholic beverages
at ABH’s locations subjects it to additional regulations and potential liability.
Because ABH’s locations
sell alcoholic beverages, it is required to comply with the alcohol licensing requirements of the federal government, states and
municipalities where its restaurants are located. Alcoholic beverage control regulations require applications to state authorities
and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages on the premises
and to provide service for extended hours and on Sundays. Typically, the licenses are renewed annually and may be revoked or suspended
for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants
and bars, including minimum age of guests and employees, hours of operation, advertising, wholesale purchasing, inventory control
and handling, storage and dispensing of alcoholic beverages. If ABH fails to comply with federal, state or local regulations, its
licenses may be revoked, and it may be forced to terminate the sale of alcoholic beverages at one or more of its locations. Further,
growing movements to change laws relating to alcohol may result in a decline in alcohol consumption at its facilities or increase
the number of dram shop claims made against it, either of which may negatively impact operations or result in the loss of liquor
licenses.
In certain states ABH is subject
to “dram shop” statutes, which generally allow a person injured by an intoxicated person the right to recover damages
from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Some dram shop litigation against restaurant
companies has resulted in significant judgments, including punitive damages.
Changes in consumer preferences
or discretionary consumer spending could harm ABH’s and our performance.
The success of ABH’s World
of Beer franchises depends, in part, upon the continued popularity of the overall World of Beer system locations throughout the
United States as well as ABH’s unique food and beverage items and appeal of sports bars and casual dining restaurants. ABH
also depends on trends toward consumers eating away from home. Shifts in these consumer preferences could negatively affect its
future profitability. Such shifts could be based on health concerns related to the cholesterol, carbohydrate, fat, calorie or salt
content of certain food items, including items featured on its menu. Negative publicity over the health aspects of such food items
may adversely affect consumer demand for its menu items and could result in a decrease in guest traffic to its restaurants, which
could materially harm its business. In addition, ABH will be required to disclose calorie counts for all food items on its menus,
due to federal regulations, and this may have an effect on consumers’ eating habits. Other federal regulations could follow
this pattern. In addition, ABH’s success depends to a significant extent on numerous factors affecting discretionary consumer
spending, including economic conditions, disposable consumer income and consumer confidence. A decline in consumer spending or
in economic conditions could reduce guest traffic or impose practical limits
A regional or global health
pandemic could severely affect ABH’s business.
A health pandemic is a disease
outbreak that spreads rapidly and widely by infection and affects many individuals in an area or population at the same time. If
a regional or global health pandemic was to occur, depending upon its duration and severity, ABH’s and our business could
be severely affected. ABH has positioned its brand as a place where people can gather together.
Customers might avoid public
gathering places in the event of a health pandemic, and local, regional or national governments might limit or ban public gatherings
to halt or delay the spread of disease. A regional or global health pandemic might also adversely impact our business by disrupting
or delaying production and delivery of materials and products in its supply chain and by causing staffing shortages in ABH’s
restaurants. The impact of a health pandemic might be disproportionately greater than on other companies that depend less on the
gathering of people together for the sale or use of their products and services.
As a result of the factors discussed
above, ABH’s and our quarterly and annual operating results may fluctuate significantly. Accordingly, results for any one
quarter are not necessarily indicative of results to be expected for any other quarter or for any year. These fluctuations may
cause future operating results to fall below the expectations of securities analysts and shareholders. In that event, the price
of our common stock would likely decrease.
ABH may be subject to increased
labor and insurance costs.
ABH’s restaurant operations
are subject to federal and state laws governing such matters as minimum wages, working conditions, overtime, and tip credits. As
federal and state minimum wage rates increase, ABH may need to increase not only the wages of our minimum wage employees, but also
the wages paid to employees at wage rates that are above minimum wage. Labor shortages, increased employee turnover, and health
care mandates could also increase its labor costs. This, in turn, could lead it to increase prices which could impact its sales.
Conversely, if competitive pressures or other factors prevent ABH from offsetting increased labor costs by increases in prices,
its profitability may decline. In addition, the current premiums that ABH pays for its insurance (including workers' compensation,
general liability, property, health, and directors' and officers' liability) may increase at any time, thereby further increasing
our costs. The dollar amount of claims that ABH actually experiences under its workers' compensation and general liability insurance,
for which it carries high per-claim deductibles, may also increase at any time, thereby further increasing its costs. Also, the
decreased availability of property and liability insurance has the potential to negatively impact the cost of premiums and the
magnitude of uninsured losses.
ABH’s current insurance
may not provide adequate levels of coverage against claims.
ABH currently maintains insurance
customary for businesses of its size and type. However, there are types of losses it may incur that cannot be insured against or
that it believed are not economically reasonable to insure, such as losses due to natural disasters. Such damages could have a
material adverse effect on its and our business and results of operations.
ABH is dependent on information
technology and any material failure of that technology could impair its ability to efficiently operate its business.
ABH relies on information systems
across its operations, including, for example, point-of-sale processing in its locations, management of its supply chain, collection
of cash and credit and debit card payments, payment of obligations and various other processes and procedures. ABH’s ability
to efficiently manage its business depends significantly on the reliability and capacity of these systems. The failure of these
systems to operate effectively, problems with maintenance, upgrading or transitioning to replacement systems, or a breach in security
of these systems could cause delays in customer service, reduce efficiency in its operations, require significant investment to
remediate the issue or cause negative publicity that could damage its and our brand. Significant capital investments might be required
to remediate any problems.
If ABH is unable to maintain
its rights to use key technologies of third parties, its and our business may be harmed.
ABH relies on certain technology
licensed from third parties and may be required to license additional technology in the future for use in managing its internet
sites and providing related services to users and customers. These third-party technology licenses may not continue to be available
to it on acceptable commercial terms or at all. The inability to enter into and maintain any of these technology licenses could
significantly harm its and our business, financial condition and operating results.
ABH’s future growth
may require it to raise additional capital in the future, but that capital may not be available when it is needed or may be available
only at an excessive cost.
In order to build out ABH’s
business plan and to be ultimately successful, it will need ample capital to purchase/rent new properties, build new locations,
hire personnel and market its locations. ABH may not generate sufficient cash from its existing operations in order to do so. Therefore,
it or we may at some point choose to raise additional capital to support its continued growth. ABH’s and our ability to raise
additional capital will depend, in part, on conditions in the capital markets at that time which are outside of its control. Accordingly,
it or we may be unable to raise additional capital, if and when needed, on terms acceptable to it or us, or at all. If ABH or we
cannot raise additional capital when needed, its ability to further expand operations through internal growth and acquisitions
could be materially impacted. In the event of a material decrease in our stock price, future issuances of equity securities could
result in dilution of existing shareholder interests.
The occurrence of any failure,
breach or interruption in service involving ABH’s systems or those of its service providers could damage its reputation,
cause losses, increase its expenses, and result in a loss of customers, an increase in regulatory scrutiny or expose ABH to civil
litigation and possibly financial liability, any of which could adversely impact its and our financial condition, results of operations
and the market price of our stock.
Communications and information
systems are essential to the conduct of ABH’s business, as it uses such systems to manage its customer relationships, its
general ledger, its deposits and its loans. ABH’s operations rely on the secure processing, storage and transmission of confidential
and other information in its computer systems and networks. Although ABH takes protective measures and endeavor to modify them
as circumstances warrant, the security of its computer systems, software and networks may be vulnerable to breaches, unauthorized
access, misuse, computer viruses or other malicious code and cyber attacks that could have a security impact. In addition, breaches
of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to its confidential
or other information or the confidential or other information of our customers, clients or counterparties. If one or more of such
events was to occur, the confidential and other information processed and stored in and transmitted through its computer systems
and networks could potentially be jeopardized or could otherwise cause interruptions or malfunctions in its operations or the operations
of its customers, clients or counterparties. This could cause ABH significant reputational damage or result in its experiencing
significant losses.
Furthermore, ABH may be required
to expend significant additional resources to modify its protective measures or to investigate and remediate vulnerabilities or
other exposures arising from operational and security risks. ABH also may be subject to litigation and financial losses that are
either not insured against or not fully covered through any insurance it maintains. In addition, ABH routinely transmits and receives
personal, confidential and proprietary information by e-mail and other electronic means. It has discussed and worked with its customers,
clients and counterparties to develop secure transmission capabilities, but it does not have, and may be unable to put in place,
secure capabilities with all of these constituents, and it may not be able to ensure that these third parties have appropriate
controls in place to protect the confidentiality of such information.
While ABH has established policies
and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events
will not occur or that they will be adequately addressed if they do. In addition, ABH outsources certain aspects of its data processing
to certain third-party providers. If its third-party providers encounter difficulties, or if it has difficulty in communication
with them, its ability to adequately process and account for customer transactions could be affected, and its business operations
could be adversely impacted. Threats to information security also exist in the processing of customer information through various
other vendors and their personnel.
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 Pink. 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:
|
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price and volume fluctuations in the stock markets; |
|
● |
changes in our revenues and earnings or other variations in operating results; |
|
● |
any shortfall in revenue or increase in losses from levels expected by us or securities analysts; |
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changes in regulatory policies or law; |
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operating performance of companies comparable to us; and |
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general economic trends and other external factors. |
Even if an active market for our common stock is established,
stockholders may have to sell their shares at prices substantially lower than the price they paid for it or might otherwise receive
than if a broad public market existed.
Future financings could
adversely affect common stock ownership interest and rights in comparison with those of other security holders.
Our board of directors has the
power to issue additional shares of common or preferred stock without stockholder approval. If additional funds are raised through
the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced, and
these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. In addition,
as of September 22, 2015, we had issued and outstanding options and warrants that may be exercised into 14,599,204 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 $1,488,487 (excludes ABH’s
convertible notes of $2,371,545 which are not convertible into our common stock) and accrued interest payable of $417,338 (excludes
accrued interest for ABH convertible notes) which together may be converted into shares of common stock (subject to 4.99-9.99%
beneficial ownership limitations and a limit of a total of 20,000,000 authorized shares) at a maximum conversion cap rate of $.02
per share. Actual conversion prices are subject to certain discounts from market prices as the stock prices change daily and have
been significantly less than the $.02 price, resulting in a possible calculation to reach the maximum authorized amount of 20,000,000,000
common shares. 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 our 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 diluting each stockholder. In addition, such stock issuances might result in a reduction of the book
value of our common stock.
Because we do not have
an audit or compensation committee, shareholders will have to rely on our President, who is not independent, to perform these functions.
We do not have an audit or compensation
committee comprised of independent directors. Indeed, we do not have any audit or compensation committee. These functions are performed
by our Chief Executive Officer and Chief Financial Officer. An independent audit committee plays a crucial role in the corporate
governance process, assessing our processes relating to our risks and control environment, overseeing financial reporting, and
evaluating internal and independent audit processes. The lack of an independent audit committee may prevent the Board from being
independent from our management in their judgments and decisions and their ability to pursue the responsibilities of an audit
committee without undue influence. We may have difficulty attracting and retaining directors with the requisite qualifications.
If we are unable to attract and retain qualified, independent directors, the management of our business could be compromised. Our
lack of an independent compensation committee presents the risk that our executive officers on the Board may have influence over
his personal compensation and benefits levels that may not be commensurate with our financial performance.
Our common shares are subject
to the "Penny Stock" Rules of the SEC and the trading market in our securities is limited, which makes transactions in
our stock cumbersome and may reduce the value of an investment in our stock.
The Securities and Exchange Commission
has adopted Rule 15g-9, which establishes the definition of a “penny stock,” for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
| · | that a broker or dealer approve a person's account for transactions in penny stocks; and |
| · | the broker or dealer receives from the investor a written agreement to the transaction, setting
forth the identity and quantity of the penny stock to be purchased. |
| · | In order to approve a person's account for transactions in penny stocks, the broker or dealer must: |
| · | obtain financial information and investment experience objectives of the person; and |
| · | make a reasonable determination that the transactions in penny stocks are suitable for that person
and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions
in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed
by the Commission relating to the penny stock market, which, in highlight form: |
| · | sets forth the basis on which the broker or dealer made the suitability determination; and |
| · | that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Generally, brokers may be less
willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for
investors to dispose of our shares of common stock and cause a decline in the market value of our stock.
Disclosure also has to be made
about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies
available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing
recent price information for the penny stock held in the account and information on the limited market in penny stocks.
If an active market develops
for our shares, sales of our shares relying upon Rule 144 may depress prices in that market by a material amount.
The majority of the outstanding
shares of our common stock held by present stockholders are ”restricted securities” within the meaning of Rule 144
under the Securities Act of 1933, as amended. The SEC has recently adopted amendments to Rule 144, which became effective on February
15, 2008 and applies to securities acquired both before and after that date. Under these amendments, a person who has beneficially
owned restricted shares of our common stock or warrants for at least six months would be entitled to sell their securities provided
that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the three months preceding,
a sale and (ii) we have been current with the Exchange Act periodic reporting requirements for at least twelve months before the
sale.
Persons who have beneficially
owned restricted shares of our common stock or warrants for at least six months but who are our affiliates at the time of, or at
any time during the three months preceding, a sale, would be subject to additional restrictions, by which such person would be
entitled to sell within any three-month period only a number of securities that does not exceed 1% of the total number of shares
of our common stock then outstanding, which would equal 23,096,244 shares of our common stock immediately after this offering,
for a company trading on the pink sheets or Over-the-Counter Bulletin Board such as us.
The market for penny stocks
has experienced numerous frauds and abuses which could adversely impact investors in our stock.
We believe that the market for
penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
| · | Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; |
| · | Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; |
| · | “Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced
sales persons; |
| · | Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and |
| · | The wholesale dumping of the same securities by promoters and broker-dealers after prices have
been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses. |
We do not expect to pay
dividends to holders of our common stock in the foreseeable future. As a result, holders of our common stock must rely on stock
appreciation for any return on their investment.
There are no restrictions in
our Articles of Incorporation or Bylaws that prevent us from declaring dividends. The Nevada General Corporation Law, however,
does prohibit us from declaring dividends where, after giving effect to the distribution of the dividend, we would not be able
to pay our debts as they become due in the usual course of business, or if our total assets would be less than the sum of our total
liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to
those receiving the distribution. We have not declared any dividends since our inception, and we do not plan to declare any dividends
on our common stock in the foreseeable future. Accordingly, holders of our common stock will have to rely on capital appreciation,
if any, to earn a return on their investment in our common stock.
We may issue shares of
preferred stock in the future that may adversely impact the right of holders of our common stock.
As of the date of this Report,
our Articles of Incorporation authorizes us to issue up to 20,000,000 shares of preferred stock, of which 14,999,949 shares have
been designated as shares of Series A, 51 shares have been designated as Series A-1 and 100,000 shares have been designated as
Series C. Accordingly, our Board of directors will have the authority to fix and determine the relative rights and preferences
of preferred shares, as well as the authority to issue such shares, without further stockholder approval. As a result, our Board
of Directors could authorize the issuance of a series of preferred stock that would grant to holders preferred rights to our assets
upon liquidation, the right to receive dividends before dividends are declared to holders of our common stock and the right to
the redemption of such preferred shares, together with a premium, prior to the redemption of the common stock. To the extent that
we do issue such additional shares of preferred stock, the rights of holders of common stock could be impaired thereby, including,
without limitation, dilution of their ownership interests in us. In addition, shares of preferred stock could be issued with terms
calculated to delay or prevent a change in control or make removal of management more difficult, which may not be in the interest
of holders of common stock. To date, our investors in the Series A Preferred Convertible Preferred Stock have waived their dividends
which we were obligated to pay to them. There is no guarantee going forward that they will waive these dividends in the future.
If so, the number of shares issued may be materially dilute your investment.
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 2,309,624,423 shares of common stock outstanding as of June 30, 2015 of which 2,309,593,853 shares are
held by non-affiliates. Further, we have outstanding convertible notes in the face value of $8,543,101 (includes HVWC notes) which
may be converted into shares of common stock at a maximum conversion price of $.02. Generally, the holders of the securities convertible
or exercisable into our common stock may be able to sell the common stock issued upon conversion or exercise after a six month
holding period under Rule 144 adopted under the Securities Act of 1933 (as amended, the “Securities Act”). As such,
you should expect a significant number of such shares of common stock to be sold. Depending upon market liquidity at the time our
common stock is resold by the holders thereof, such re-sales could cause the trading price of our common stock to decline. In addition,
the sale of a substantial number of shares of our common stock, an anticipation of such sales, could make it more difficult for
us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.
EFFECTS OF INFLATION
We believe that inflation has
not had any material effect on our net sales and results of operations.
ITEM 3. – QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM
4. – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
and Procedures
Disclosure controls and procedures,
as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), are designed
to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms
and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation,
under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2015. Based upon such
evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s
disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Management’s Report
on Internal Control over Financial Reporting
Our management is responsible
for establishing and maintaining adequate internal controls over financial reporting. Under the supervision and with the participation
of our management, including our Chief Executive Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting using framework similar to criteria referenced in the initial steps of the Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation,
management concluded that our internal control over financial reporting was not effective as of the three months ended June 30,
2015.
A material weakness is a significant
deficiency (as defined in the Public Company Accounting Oversight Board’s Auditing Standard No. 2), or a combination
of significant deficiencies, that results in reasonable possibility that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of our internal controls
over financial reporting, management determined that there were control deficiencies as of the three months ended June 30, 2015
that constituted material weaknesses, as described below.
* We have
noted that there may be an insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing
internal controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented
or detected on a timely basis.
* We do
not have an audit committee or an independent audit committee financial expert. While not being legally obligated to have an audit
committee or independent audit committee financial expert, it is the management’s view that to have an audit committee, comprised
of independent board members and an independent audit committee financial expert, is an important entity-level control over the
Company's financial statements. Currently, the Board does not have sufficient independent directors to form such an audit committee.
Also, the Board of Directors does not have an independent director with sufficient financial expertise to serve as an independent
financial expert.
* Due to
the complex nature of recording derivatives and similar financial instruments, we noted a need for increased coordination and review
of techniques and assumptions used in recording derivatives to ensure accounting in conformity with generally accepted accounting
principles.
This annual report does not include
an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s
report is not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide
only management’s report in this annual report.
Remediation Efforts to Address
Deficiencies in Internal Control over Financial Reporting
As a result of the findings from
the evaluation conducted of the effectiveness of our internal control over financing reporting as set forth above, we intend to
take practical, cost-effective steps in implementing internal controls, including the following remedial measures, some of which
have already been taken:
* Interviewing
and potentially hiring outside consultants that are experts in designing internal controls over financial reporting based on criteria
established in Internal Control-Integrated Framework issued by COSO.
* we have
hired an outside consultant to assist with controls over the review and application of derivatives to ensure accounting in conformity
with generally accepted accounting principles.
* The Board
of Directors to consider nominating an audit committee and audit committee financial expert, which may or may not consist of independent
members as funds allow.
Due to inadequate financing,
we have not hired any outside experts to design additional internal controls over financial reporting or recommended a new board
director that is a financial expert.
A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls
must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because
of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control
over Financial Reporting
No change in our internal control
over financial reporting occurred during the quarter ended June 30, 2015, that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
On May 18, 2009, F&M Merchant
Group, LLC commenced a lawsuit in the District Court of Denton County, Texas to recover the balance owed by us under a Sales Agent
Agreement entered by the parties on November 1, 2008. This agreement requires us to pay $5,000 per month and a 5% commission
on all net sales. On September 3, 2009, a final judgment by default was approved by the district court in Denton County, Texas
for a total sum of $22,348. This claim has been recorded on the Company’s records. Due to the lack of adequate capital
financing, we have not been able to make any payments. We will address this matter as soon as practical and once we
have adequate financing.
On August 21, 2009, CH Fulfillment
Services, LLC commenced a lawsuit in the district court of Mobile, Alabama to recover past due amounts owed by us under a contract
to provide shipping and fulfillment services. The claim is for $2,106 plus interest and legal costs. This amount was already recorded
on our records as well as projected interest costs of $682 and estimated court costs of $307 for a total of $3,095. A process of
garnishment by the district court in Mobile County, Alabama was approved on September 25, 2009 for the total amount of $3,095.
On October 26, 2009, the same court authorized a garnishment process to pay $657 which was done as part payment of the total due
amount. Current outstanding balance due is $2,438. No other payments have been made.
On October 1, 2013, Beanpot Broadcasting
Corp. d/b/a WXRV-FM, commenced a lawsuit in the Commonwealth of Massachusetts District Court Department of the Trial Court Haverhill
Division to recover past due amounts owed by us for rendered independent sales contracting services. The claim was for $15,500
for past due services, $4,169 in service charges, $363 for prejudgment interest and $200 court costs for a total of $20,232. The
total $20,232 amount was already recorded on our records. On November 15, 2013, the Trial Court of Massachusetts entered a judgment
for the plaintiff (“Beanpot”) for the total $20,232. Due to the lack of adequate capital financing, we have not been
able to make any payments. We will address this matter as soon as practical and once we have adequate financing.
On November 27, 2013, we received
an order of the court from The Trial Court of Massachusetts District Court Department, Small Claims Session in Plymouth, Massachusetts
to attend a hearing on December 12 2013 about a small claims amount of $5,000 from Marshfield Broadcasting Company, Inc. to recover
past due amounts. A total of $5,500 was already recorded our records. On December 31, 2013, a judgment in the amount of $5,238
was entered in favor of Marshfield Broadcasting Inc. No payments have been made as we expect to resolve this matter as soon as
practical and once we have adequate financing.
On February 4, 2014, Philip Terrano
commenced a lawsuit in the circuit court of the 15th Judicial Circuit and for Palm Beach County, Florida to recover
past due amounts owed by us for past compensation in the amount of approximately $17,000. We disagree with this amount as our records
reflect a total amount owed of $6,974. On May 28, 2014, we entered into a settlement agreement with Terrano to pay him a total
of $11,000, to be remitted 60 days of the effective date of this agreement. Due to a lack of capital financing, we expect to address
this matter as soon as we can.
On June 9, 2014, North Palm Beach
Broadcasting Company d/b/a/ WSVU-AM Radio filed a lawsuit in the 15th Judicial Circuit in and for Palm Beach County,
Florida to recover past due services owed by us in the amount of $22,000 that is due with interest. We do not agree with that amount
as we did make various payments in 2013 that totaled $8,000. We are working with that party to arrive at a mutual agreeable outstanding
amount if any. We do not have any other outstanding balance that is recorded on our records. On August 6, 2014, we received a Default
Final Judgment from Palm Beach County Circuit Court in Florida for a total amount of $23, 411. We are still contesting that amount
and will resolve the matter as soon as possible.
On June 26, 2014, Innerworkings,
Inc. filed a lawsuit in the County Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida to recover past
due services owed by us in the amount of $5,039 that is due with interest. This same amount has already been recorded on our records.
We expect to address this issue as soon as practical and when we have adequate capital.
On November 11, 2014, C.A. Courtesy
Demos, Inc. commenced a lawsuit in the County Court, Palm Beach County, Florida civil action to recover past due amounts owed by
us for rendered services. The claim was for $5,803. We do not agree with this amount and have not recorded this amount on our records
as services were supposed to be rendered, but a hurricane in the northeastern section of the United States occurred at that given
time. We will address this matter as soon as practical and once we have adequate financing.
On November 20, 2014, Pavilion
Law Center, LLC filed a motion in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida to
enforce a settlement agreement for past due fees. We are contesting some of the amounts and will resolve this matter as soon as
practical.
On April 22, 2015, Edgar Agents
LLC filed a lawsuit in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida to recover past
due amounts owned by us for rendered services. The claim was for $23,323.50 plus interest and costs. We have recorded $19,069.50
in our records as we have not received the backup for the $4,254.00 difference. On August 13, 2015, the court entered into a final
judgment against us for a total amount of $24,215. We expect to resolve this matter as soon as practical and once we have adequate
financing.
On August 26, 2015, Harrison,
Vickers and Waterman Inc. (“HVWC”) which we own the majority of the outstanding shares received a lawsuit from James
Giordano, previous CEO of HVW that was filed in the State of Connecticut Superior Court in Stamford, Connecticut. The claim is
approximately $220,833 for past salaries. HVWC does not agree with this complaint and will address as soon as possible. HVW does
have a recorded amount of $175,000 on its books.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
During the three months ended
June 30, 2015, the Company issued a total of 1,148,431,061 shares of common stock for the conversions of $32,375 of principal of
convertible notes payable and $311 of related accrued interest to note holders of the Company pursuant to the terms of the note
instruments as well as for the exchange of old accounts payable and accrued payroll salaries for a total of $146,636.
On April 3, 2015, we issued a
promissory note to Southridge Partners II LP in which we received $7,500.
On April 17, 2015, we issued
a promissory note to Southridge Partners II LP in which we received $7,500.
On April 24, 2015, we issued
a promissory note to Southridge Partners II LP in which we received $7,500.
On May 1, 2015, we issued a promissory
note to Southridge Partners II LP in which we received $7,500.
On May 1, 2015, we issued a promissory
note to Southridge Partners II LP in which we received $16,500.
On May 15, 2015, we issued a
promissory note to Southridge Partners II LP in which we received $7,500.
On May 22, 2015, we issued a
promissory note to Southridge Partners II LP in which we received $7,500
On May 29, 2015, we issued a
promissory note to Southridge Partners II LP in which we received $7,500
On June 12, 2015, we issued a
promissory note to Southridge Partners II LP in which we received $7,500
On June 26, 2015, we issued a
promissory note to Southridge Partners II LP in which we received $7,500
The foregoing securities were
issued in reliance upon an exemption from registration under Section 4(a)(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.
Item 3. Defaults on Senior Securities
As of June 30, 2014, we were
in default in paying the April 14, 2008 short-term bridge loan with principal balance of $60,000 and the August 5, 2008 short-term
bridge loan with principal balance of $55,000 for a total of $115,000. The $55,000 debt was exchanged for shares of Series C Convertible
Preferred Stock in August, 2015. We are working on the extension of the due dates for these debts although there is no guarantee
that we will obtain such extensions.
In addition, we were in default
in a total of $5,772,965 of convertible note payables. We implemented a restructuring program in August, 2015 that addresses most
of the above amount in which we exchanged certain notes and accrued interest for Series C Convertible Preferred Stock. We are working
with the other debt holders to extend the maturity date or do similar preferred stock exchanges.
Item 4. Mine Safety Disclosures - None
Item 5. Other Information
See Note 13 – “Subsequent
Events” of Note to Condensed Consolidated Financial Statements for additional disclosure data on events occurring after the
date of the financial statements included herein.
Item 6, Exhibits and Financial Statement Schedules
The exhibits listed in the accompanying Exhibit Index are filed,
furnished or incorporated by reference as part of this Quarterly Report on Form 10-Q.
Exhibit |
|
|
|
Incorporated |
|
Filed |
No. |
|
Documents Description |
|
By Reference |
|
Herewith |
(10)(97) |
|
Promissory Note dated April 1, 2015 |
|
(25) |
|
|
(10)(98) |
|
Promissory Note dated April 3, 2015 |
|
(25) |
|
|
(10)(99) |
|
Promissory Note dated April 17, 2015 |
|
(25) |
|
|
(10)(100) |
|
Certificate of Designations of Series B Convertible Preferred Stock of Harrison |
|
(24) |
|
|
|
|
Vickers and Waterman Inc. as Exhibit 4.1 to the Company's Form 8-K filed on |
|
|
|
|
|
|
April 27, 2015 |
|
|
|
|
(10)(101) |
|
Warrant issued to Attitude Drinks Incorporated as Exhibit 4.2 to the |
|
(24) |
|
|
|
|
Company's Form 8-K filed on April 27,2015 |
|
|
|
|
(10)(102) |
|
Secured Convertible Note due 2017 issued to Alpha Capital Anstalt as Exhibit 4.3 |
|
(24) |
|
|
|
|
to the Company's Form 8-K filed on April 27,2015 |
|
|
|
|
(10)(103) |
|
Secured Convertible Note due 2017 issued to Tarpon Bay Partners LLC as Exhibit 4.4 |
|
(24) |
|
|
|
|
to the Company's Form 8-K filed on April 27, 2015 |
|
|
|
|
(10)(104) |
|
Additional Investment Right issued to Alpha Capital Anstalt as Exhibit 4.5 |
|
(24) |
|
|
|
|
to the Company's Form 8-K filed on April 27,2015 |
|
|
|
|
(10)(105) |
|
Additional Investment Right issued to Tarpon Bay Partners LLC as Exhibit 4.6 |
|
(24) |
|
|
|
|
to the Company's Form 8-K filed on April 27,2015 |
|
|
|
|
(10)(106) |
|
Asset Purchase Agreement dated as of April 21, 2015 by and between Harrison |
|
(24) |
|
|
|
|
Vickers and Waterman Inc., Attitude Drinks Incorporated, Alpha Capital Anstalt and |
|
|
|
|
|
|
Tarpon Bay Partners LLC as Exhibit 10.1 to the Company’s From 8-K filed on |
|
|
|
|
|
|
April 27, 2015. |
|
|
|
|
(10)(107) |
|
Pledge Agreement dated as of April 21, 2015 by and between Attitude Drinks Incorporated |
|
(24) |
|
|
|
|
and Tarpon Bay Partners LLC as collateral agent on behalf of Alpha Capital Anstalt |
|
|
|
|
|
|
and Tarpon Bay Partners LLC as exhibit 10.2 to the Company's Form 8-K filed on |
|
|
|
|
|
|
April 27, 2015. |
|
|
|
|
(10)(108) |
|
Security Agreement dated as of April 21, 2015 among Harrison Vickers and Waterman |
|
(24) |
|
|
|
|
Inc., each subsidiary of Harrison Vickers and Waterman Inc. and Tarpon Bay Partners |
|
|
|
|
|
|
LLC as collateral agent as Exhibit 10.3 to the Company's Form 8-K on April 27, 2015 |
|
|
|
|
(10)(109) |
|
Guaranty dated as of April 21, 2015 entered into by Attitude Beer Holding Co. for the |
|
(24) |
|
|
|
|
benefit of Alpha Capital Anstalt and Tarpon Bay Partners LLC as Exhibit 10.4 to the |
|
|
|
|
|
|
Company's Form 8-K filed on April 27,2015 |
|
|
|
|
(10)(110) |
|
Guaranty dated as of April 21, 2015 entered into by Attitude Drinks Incorporated for the |
|
(24) |
|
|
|
|
benefit of Alpha Capital Anstalt and Tarpon Bay Partners LLC as Exhibit 10.5 to the |
|
|
|
|
|
|
Company's Form 8-K filed on April 27,2015 |
|
|
|
|
(10)(111) |
|
Exchange Agreement dated as of April 21, 2015 by and among Attitude Beer Holding |
|
(24) |
|
|
|
|
Co., Attitude Drinks Incorporated, Alpha Capital Anstalt and Tarpon Bay Partners |
|
|
|
|
|
|
as exhibit 10.6 to the Company's Form 8-K filed on April 27, 2015 |
|
|
|
|
(10)(112) |
|
Purchase Agreement dated as of April 21, 2015 between HVW Holdings LLC and |
|
(24) |
|
|
|
|
Attitude Drinks Incorporated as exhibit 10.7 to the Company's Form 8-K on April |
|
|
|
|
|
|
27, 2015 |
|
|
|
|
(10)(113) |
|
A Warrant issued to Alpha Capital Anstalt as exhibit 99.1 to the Company's Form |
|
(24) |
|
|
|
|
8-K on April 27, 2015 |
|
|
|
|
(10)(114) |
|
Series A Warrant issued to Tarpon Bay Partners LLC as exhibit 99.2 to the Company's |
|
(24) |
|
|
|
|
Form 8-K on April 27, 2015 |
|
|
|
|
(10)(115) |
|
Purchase Agreement dated as of April 21, 2015 between HVW Holdings LLC and |
|
(24) |
|
|
|
|
Alpha Capital Anstalt as exhibit 99.3 to the Company's Form 8-K on April 27, 2015 |
|
|
|
|
(10)(116) |
|
Promissory Note dated April 24, 2015 |
|
(25) |
|
|
(10)(117) |
|
Promissory Note dated May 1, 2015 |
|
(25) |
|
|
(10)(118) |
|
Promissory Note dated May 1, 2015 |
|
(25) |
|
|
(10)(119) |
|
Promissory Note dated May 1, 2015 |
|
(25) |
|
|
(10)(120) |
|
Promissory Note dated May 15, 2015 |
|
(25) |
|
|
(10)(121) |
|
Promissory Note dated June 1, 2015 |
|
(26) |
|
|
(10)(122) |
|
Promissory Note dated May 22, 2015 |
|
(33) |
|
|
(10)(123) |
|
Promissory Note dated May 29, 2015 |
|
(33) |
|
|
(10)(124) |
|
Operating Agreement with Milford Craft, LLC May 29, 2015 |
|
(33) |
|
|
(10)(125) |
|
Promissory Note dated July 1, 2015 |
|
(33) |
|
|
(10)(126) |
|
Convertible Note for Harrison, Vickers and Waterman dated July 29, 2015 |
|
(33) |
|
|
(10)(127) |
|
Class A Common Stock Purchase Warrant for Harrison Vickers and Waterman July 29, 2015 |
|
(33) |
|
|
(10)(128) |
|
2015 Stock Incentive Plan August 12, 2015 Attitude Drinks Incorporated |
|
(29) |
|
|
(10)(129) |
|
Corrected Restated Certificate of Incorporation July 31, 2015 |
|
(30) |
|
|
(10)(130) |
|
Certificate of Amendment to the Certificate of Designations, Powers, Preferences and |
|
(30) |
|
|
|
|
Rights of Series A Convertible Preferred Stock August 7, 2015 |
|
|
|
|
(10)(131) |
|
Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock |
|
(30) |
|
|
|
|
August 7, 2015 |
|
|
|
|
(10)(132) |
|
Promissory Note dated August 1, 2015 |
|
(33) |
|
|
(10)(133) |
|
Form of Promissory Notes Warrant August 18, 2015 |
|
(31) |
|
|
(10)(134) |
|
Form of Promissory Notes Additional Investment Right August 18, 2015 |
|
(31) |
|
|
(10)(135) |
|
Form of Accrued Salary Warrant August 18, 2015 |
|
(31) |
|
|
(10)(136) |
|
Form of Accrued Salary Additional Investment Right August 18, 2015 |
|
(31) |
|
|
(10)(137) |
|
Form of Promissory Notes Exchange Agreement August 18, 2015 |
|
(31) |
|
|
(10)(138) |
|
Form of Accrued Salary Exchange Agreement August 18, 2015 |
|
(31) |
|
|
(10)(139) |
|
Promissory Note dated September 1, 2015 |
|
(33) |
|
|
(10)(140) |
|
Approval to file Amendment of Articles of Incorporation for Harrison, Vickers |
|
(32) |
|
|
|
|
and Waterman Inc. to increase authorized shares of common stock from |
|
|
|
|
|
|
2,000,000,000 to 7,500,000,000 |
|
|
|
|
(10)(141) |
|
Approval to file Amendment of Articles of Incorporation for Harrison, Vickers |
|
(32) |
|
|
|
|
and Waterman, Inc. to change the name to Attitude Beer, Inc. |
|
|
|
|
(10)(142) |
|
Approval to adopt the 2015 Stock Incentive Plan of Harrison, Vickers and Waterman Inc. |
|
(32) |
|
|
(10(143) |
|
Promissory Note dated October 1, 2015 |
|
|
|
X |
(10)(144) |
|
Convertible Note or Seriies C Convertible Preferred Stock issued for $5,000 |
|
|
|
X |
(10)(145) |
|
Convertible Note issued by HVWC for $78,000 including warrants on October 14, 2017 |
|
|
|
X |
(10)(146) |
|
Convertible Note issued by HVWC for $35,000 including warrants on October 20, 2017 |
|
|
|
X |
(14) |
|
Code of Ethics |
|
* |
|
|
(21) |
|
Subsidiaries of Registrant |
|
|
|
X |
(31)(i) |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14 (a), |
|
|
|
|
|
|
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
X |
(31)(ii) |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14 (a), |
|
|
|
|
|
|
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
X |
(32)(1) |
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant |
|
|
|
|
|
|
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 |
|
|
|
|
|
|
of the Sarbanes-Oxley Act of 2002 |
|
|
|
X |
101.INS |
|
XBRL Instance Document |
|
|
|
X |
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
X |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
X |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
X |
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase |
|
|
|
X |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase |
|
|
|
X |
* Previously filed with the Commission on August 14, 2009
as an exhibit to Form 10K (SEC Accession number 0001213900-09-002104)
(24) |
previously filed with the Commission on April 27, 2015 as a Form 8-K (SEC
Accession No. 0001144204-15-025275) |
(25) |
previously filed with the Commission on May 18, 2015 as an exhibit to
Form 10-Q (SEC Accession No. 0001144204-15-031872) |
(26) |
previously filed with the Commission on June 12, 2015 as an exhibit to
Form 10-Q (SEC Accession No. 0001144204-15-036831) |
(27) |
intentionally left blank |
(28) |
intentionally left blank |
(29) |
previously filed with the Commission on June 25, 2015 to Form DEF 14C (SEC
Accession No. 0001615774-15-001595) |
(30) |
previously filed with the Commission on August 12, 2015 as an exhibit to
Form 8-K (SEC Accession No. 0001615774-15-002174) |
(31) |
previously filed with the Commission on August 18, 2015 as an exhibit
to Form 8-K (SEC Accession No. 0001615774-15-002293) |
(32) |
previously
filed with the Commission on August 18, 2015 under Harrison, Vickers and Waterman Inc. to Form DEF 14C (SEC Accession No.
0001615774-15-002284) |
|
(33) |
previously filed with the Commission on September 28, 2015 as an exhibit
to Form 10-K (SEC Accession No. 0001615774-15-02766) |
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ATTITUDE DRINKS INCORPORATED
(Registrant)
Date: November 2, 2015
/S/Roy G. Warren |
|
Roy G. Warren |
|
President and Chief Executive Officer |
|
|
|
/S/Tommy E. Kee |
|
Tommy E. Kee |
|
Chief Financial Officer and Principal Accounting Officer |
|
EXHIBIT (10)(143)
NEITHER THIS SECURITY NOR THE
SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE OR UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES ARE RESTRICTED AND MAY NOT
BE OFFERED, RESOLD, PLEDGED OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR EXEMPTION OR SAFE HARBOR
THEREFROM.
ATTITUDE
DRINKS INCORPORATED
PROMISSORY NOTE DUE FEBRUARY 1, 2017
THIS Note is a duly authorized issuance
of up to $25,000.00 of ATTITUDE DRINKS INCORPORATED, a Delaware corporation and located at 712 U.S. Highway 1, Suite #200, North
Palm Beach, Florida 33408 (the "Company") designated as its Note, pursuant to the Consulting Agreement entered into by
the Company and the Holder as of July 19, 2012.
FOR VALUE RECEIVED,
the Company promises to pay to SOUTHRIDGE PARTNERS II, LP, the registered holder hereof (the "Holder"), the principal
sum of twenty five thousand and 00/100 Dollars (US $25,000.00) on February 1, 2017 (the "Maturity Date"). The principal
of this Note is payable at the option of the Holder at any time after the Maturity Date, in shares of the Company's common stock,
$.00001 par value per share ("Common Stock") as set forth below, or in United States dollars, at the address last appearing
on the Note Register of the Company as designated in writing by the Holder. The Company will pay the outstanding principal amount
of this Note in cash on the Maturity Date to the registered holder of this Note. The forwarding of such wire transfer shall constitute
a payment hereunder and shall satisfy and discharge the liability for principal on this Note to the extent of the sum represented
by such check or wire transfer plus any amounts so deducted.
This Note is subject to the following additional provisions:
1. The
Note is issuable in denominations of Ten Thousand Dollars (US$10,000) and integral multiples thereof, provided that the
number of shares to be issued upon conversion is a minimum of 3,000 (unless if at the time of election to convert the number
of shares of Common Stock issuable upon conversion is less than 3,000). The Note is exchangeable for an equal aggregate
principal amount of Note of different authorized denominations, as requested by the Holder surrendering the same. No service
charge will be made for such registration or transfer or exchange.
2. The
Holder of this Note is entitled any time after the Maturity Date, subject to the following provisions, to convert all
or a portion of the principal amount of this Note into shares of Common Stock at a conversion price for each share of Common
Stock equal to the Current Market Price multiplied by eighty percent (80%) (the "Conversion Price"). "Current
Market Price" means the average of the closing bid prices for the Common Stock as reported by Bloomberg, LP or, if not
so reported, as reported on the over-the-counter market, for the five (5) trading days ending on the trading day immediately
before the relevant Conversion Date (as defined below). The amount of shares issuable pursuant to a conversion shall equal
the principal amount (or portion thereof) of the Note to be converted, divided by the Conversion Price.
Conversion shall be
effectuated by surrendering the Note to the Company, accompanied by or preceded by facsimile or other delivery to the Company of
the form of conversion notice attached hereto as Exhibit A, executed by the Holder evidencing such Holder's intention to convert
a specified portion hereof No fractional shares of Common Stock or scrip representing fractions of shares will be issued on conversion,
but the number of shares issuable shall be rounded to the nearest whole share. The date on which notice of conversion is given
(the "Conversion Date") shall be deemed to be the date on which the Holder faxes or otherwise delivers the conversion
notice ("Notice of Conversion"), substantially in the form annexed hereto as Exhibit A, duly executed, to the Company.
Facsimile delivery of the Notice of Conversion shall be accepted by the Company at facsimile number )
ATTN: Chief Financial Officer. Certificates representing Common Stock upon conversion will be delivered within three (3)
business days from the Conversion Date. ("Delivery Date")
The Company understands
that a delay in the issuance of the Shares of Common Stock beyond the Delivery Date (as defined in this Section) could result in
economic loss to the Holder. As compensation to the Holder for such loss, the Company agrees to pay late payments to the Holder
for late issuance of Shares upon Conversion, unless the delay is due to causes beyond the reasonable control of the Company or
the Transfer Agent, in accordance with the following schedule (where "No. Business Days Late" refers to the number of
business days which is beyond three (3)) business days after the Delivery Date):'
| |
Late Payment For Each $10,000 | |
| |
of Note Principal or Interest | |
No. Business Days Late | |
Amount Being Converted | |
| |
| |
1 | |
$ | 100 | |
2 | |
$ | 200 | |
3 | |
$ | 300 | |
4 | |
$ | 400 | |
5 | |
$ | 500 | |
6 | |
$ | 600 | |
7 | |
$ | 700 | |
8 | |
$ | 800 | |
9 | |
$ | 900 | |
10 | |
$ | 1,000 | |
>10 | |
| $1,000+$200 for each Business Day Late beyond 10 days | |
The Company shall pay
any payments incurred under this Section in immediately available funds upon demand as the Holder's remedy for such delay. Furthermore,
in addition to any other remedies which may be available to the Holder, in the event that the Company fails for any reason to effect
delivery of such shares of Common Stock by close of business on the Delivery Date, unless such failure is due to causes beyond
the Company's reasonable control or that of its Transfer Agent, the Holder will be entitled to revoke the relevant Notice of Conversion
by delivering a notice to such effect to the Company, whereupon the Company and the Holder shall each be restored to their respective
positions immediately prior to delivery of such Notice of Conversion; provided, however, that an amount equal to any payments contemplated
by this Section which have accrued through the date of such revocation notice shall remain due and owing to the Converting Holder
notwithstanding such revocation.
If, by the relevant
Delivery Date, the Company fails, unless such failure is due to causes beyond the Company's reasonable control or that of its Transfer
Agent, for any reason to deliver the Shares to be issued upon conversion of the Note and after such Delivery Date, the Holder of
the Note being converted (a "Converting Holder") purchases, in an arm's-length open market transaction or otherwise,
shares of Common Stock (the "Covering Shares") in order to make delivery in satisfaction of a sale of Common Stock by
the Converting Holder (the "Sold Shares"), which delivery such Converting Holder anticipated to make using the Shares
to be issued upon such conversion (a "Buy-In"), the Converting Holder shall have the right, to require the Company to
pay to the Converting Holder, in addition to and not in lieu of the amounts due hereunder (but in addition to all other amounts
contemplated in other provisions of the Transaction Agreements, and not in lieu of any such other amounts), the Buy-In Adjustment
Amount (as defined below). The "Buy-hi Adjustment Amount" is the amount equal to the excess, if any, of (x) the Converting
Holder's total purchase price (including brokerage commissions, if any) for the Covering Shares over (y) the net proceeds (after
brokerage commissions, if any) received by the Converting Holder from the sale of the Sold Shares. The Company shall pay the Buy-In
Adjustment Amount to the Company in immediately available funds immediately upon demand by the Converting Holder. By way of illustration
and not in limitation of the foregoing, if the Converting Holder purchases shares of Common Stock having a total purchase price
(including brokerage commissions) of $11,000 to cover a Buy-1n with respect to shares of Common Stock it sold for net proceeds
of $10,000, the Buy-In Adjustment Amount which Company will be required to pay to the Converting Holder will be $1,000.
In
lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Company's Transfer
Agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, upon request
of the Holder and its compliance with the provisions contained in this paragraph, so long as the certificates therefore do not
bear a legend and the Holder thereof is not obligated to return such certificate for the placement of a legend thereon, the Company
shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to
the Holder by crediting the account of Holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission system.
The
Holder of the Note shall be entitled to exercise its conversion privilege with respect to the Note notwithstanding the commencement
of any case under 11 U.S.C. §101 et seq. (the "Bankruptcy Code"). In
the event the Company is a debtor under the Bankruptcy Code, the Company hereby waives, to the fullest extent permitted, any rights
to relief it may have under 11 U. S .C. §362 in respect of such holder's conversion privilege. The Company hereby waives,
to the fullest extent permitted, any rights to relief it may have under 11 U.S.C. §362 in respect of the conversion of the
Note.
3. This
Note has been issued subject to investment representations of the original purchaser hereof and may be transferred or exchanged
only in compliance with the Securities Act of 1933, as amended (the "Act"), and other applicable state and foreign securities
laws. In the event of any proposed transfer of this Note, the Company may require, prior to issuance of a new Note in the name
of such other person, that it receive reasonable transfer documentation including legal opinions that the issuance of the Note
in such other name does not and will not cause a violation of the Act or any applicable state or foreign securities laws. Prior
to due presentment for transfer of this Note, the Company and any agent of the Company may treat the person in whose name this
Note is duly registered on the Company's Note Register as the owner hereof for the purpose of receiving payment as herein provided
and for all other purposes, whether or not this Note be overdue, and neither the Company nor any such agent shall be affected by
notice to the contrary.
4. No
provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal
of this Note at the time, place, and rate, and in the coin or currency, herein prescribed. This Note is a direct obligation of
the Company.
5. The
Holder of the Note, by acceptance hereof, agrees that this Note is being acquired for investment and that such Holder will not
offer, sell or otherwise dispose of this Note or the shares of Common Stock issuable upon conversion thereof except under circumstances
which will not result in a violation of the Act or any applicable state Blue Sky or foreign laws or similar laws relating to the
sale of securities.
6. This
Note shall be governed by and construed in accordance with the laws of the State of Connecticut. Each of the parties consents to
the jurisdiction of the federal or state courts whose districts encompass any part of the State of Connecticut in connection with
any dispute arising under this Note and hereby waives, to the maximum extent permitted by law, any objection, including any objection
based on forum non coveniens, to the bringing of any such proceeding in such jurisdictions.
Each of the parties hereby
waives the right to a trial by jury in connection with any dispute arising under this Note.
| 7. | The following shall constitute an "Event of Default": |
| a. | The Company shall default in the payment of principal and
interest on this Note and same shall continue for a period of five (5) days; or |
| b. | Any of the representations or warranties made by the Company
herein, in any certificate or financial or other written statements heretofore or hereafter furnished by the Company in connection
with the execution and delivery of this Note shall be false or misleading in any material respect at the time made; or |
| c. | The Company shall fail to perform or observe, in any material
respect, any other covenant, term, provision, condition, agreement or obligation of any Note and such failure shall continue uncured
for a period of thirty (30) days after written notice from the Holder of such failure; or |
| d. | The Company fails to authorize or to cause its Transfer
Agent to issue shares of Common Stock upon exercise by the Holder of the conversion rights of the Holder in accordance with the
terms of this Note, fails to transfer or to cause its Transfer Agent to transfer any certificate for shares of Common Stock issued
to the Holder upon conversion of this Note and when required by this Note, and such transfer is otherwise lawful, or fails to
remove any restrictive legend on any certificate or fails to cause its Transfer Agent to remove such restricted legend, in each
case where such removal is lawful, as and when required by this Note, the Agreement, and any such failure shall continue uncured
for ten (10) business days; or |
| e. | The Company shall (1) admit in writing its inability to
pay its debts generally as they mature; (2) make an assignment for the benefit of creditors or commence proceedings for its dissolution;
or (3) apply for or consent to the appointment of a trustee, liquidator or receiver for its or for a substantial part of its property
or business; or |
| f. | A trustee, liquidator or receiver shall be appointed for
the Company or for a substantial part of its property or business without its consent and shall not be discharged within sixty
(60) days after such appointment; or |
| g. | Any governmental
agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the
whole or any substantial portion of the properties or assets of the Company and shall not be dismissed
within sixty (60) days thereafter; or |
| h. | Any money judgment, writ or warrant of attachment, or similar
process in excess of Two Hundred Thousand ($200,000) Dollars in the aggregate shall be entered or filed against the Company or
any of its properties or other assets and shall remain unpaid, unvacated, unbonded or unstayed for a period of sixty (60) days
or in any event later than five (5) days prior to the date of any proposed sale thereunder; or |
Bankruptcy, reorganization, insolvency
or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall
be instituted by or against the Company and, if instituted against the Company, shall not be dismissed within sixty (60) days after
such institution or the Company shall by any action or answer approve of; consent to, or acquiesce in any such proceedings or admit
the material allegations of, or default in answering a petition filed in any such proceeding; or
The Company shall have its Common
Stock suspended or delisted from an exchange or over-the-counter market from trading for in excess of five trading days.
Then, or at any time
thereafter, and in each and every such case, unless such Event of Default shall have been waived in writing by the Holder (which
waiver shall not be deemed to be a waiver of any subsequent default) at the option of the Holder and in the Holders sole discretion,
the Holder may consider all obligations under this Note immediately due and payable within five (5) days of notice, without presentment,
demand, protest or notice of any kinds, all of which are hereby expressly waived, anything herein or in any note or other instruments
contained to the contrary notwithstanding, and the Holder may immediately enforce any and all of the Holders rights and remedies
provided herein or any other rights or remedies afforded by law.
8. The
Holder may not convert this Note to the extent such conversion would result in the Holder, together with any affiliate thereof,
beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in
excess of 9.999% of the then issued and outstanding shares of Common Stock held by such Holder after application of this Section.
Since the Holder will not be obligated to report to the Company the number of shares of Common Stock it may hold at the time of
a conversion hereunder, unless the conversion at issue would result in the issuance of shares of Common Stock in excess of 9.999%
of the then outstanding shares of Common Stock without regard to any other shares which may be beneficially owned by the Holder
or an affiliate thereof; the Holder shall have the authority and obligation to determine whether the restriction contained in this
Section will limit any particular conversion hereunder and to the extent that the Holder determines that the limitation contained
in this Section applies, the determination of which portion of the principal amount of Note are convertible shall be the responsibility
and obligation of the Holder. If the Holder has delivered a Conversion Notice for a principal amount of Note that would result
in the issuance of in excess of the permitted amount hereunder, without regard to any other shares that the Holder or its affiliates
may beneficially own, the Company shall notify the Holder of this fact and shall honor the conversion for the maximum principal
amount permitted to be converted on such Conversion Date and, at the option of the Holder, either retain any principal amount tendered
for conversion in excess of the permitted amount hereunder for future conversions or return such excess principal amount to the
Holder. The provisions of this Section may be waived by a Holder (but only as to itself and not to any other Holder) upon not less
than 65 days prior notice to the Company. Other Holders shall be unaffected by any such waiver.
9. Nothing
contained in this Note shall be construed as conferring upon the Holder the right to vote or to receive dividends or to consent
or receive notice as a shareholder in respect of any meeting of shareholders or any rights whatsoever as a shareholder of the
Company, unless and to the extent converted in accordance with the terms hereof.
IN WITNES
S WHEREOF, the Company has caused this instrument to be duly executed by an officer thereunto duly authorized.
Dated: October 1, 2015
|
ATTITUDE DRINKS INCORPORATED |
|
|
|
/s/ Roy G. Warren |
|
By: Roy G. Warren |
|
Title President and CEO |
ATTESTOR |
|
|
|
|
By: |
/s/ Tommy E. Kee |
|
Name: |
Tommy E. Kee |
|
EXHIBIT (10)(144)
Issuance of Series C Convertible Preferred Stock for $5,000
on October 8, 2015
The document is being prepared and will be resubmitted upon
the next filing.
EXHIBIT (10)(145)
NEITHER THIS SECURITY NOR THE SECURITIES
INTO WHICH THIS SECURITY IS CONVERTIBLE HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION
OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH
EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO BORROWER. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION
OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH
A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
THIS NOTE HAS BEEN ISSUED PURSUANT TO
THE EXERCISE OF AN ADDITIONAL INVESTMENT RIGHT ISSUED PURSUANT TO AN ASSET PURCHASE AGREEMENT AMONG HARRISON VICKERS AND WATERMAN
INC., THE INITIAL HOLDER ON APRIL 21, 2015 (THE “PURCHASE AGREEMENT”) IN CONNECTION WITH TRANSACTIONS DESCRIBED
THEREIN.
Original Issue Date: October
14, 2015
Principal Amount: $78,000.00
SECURED
CONVERTIBLE NOTE
DUE
Ocotber 14, 2017
THIS CONVERTIBLE NOTE
is one of a series of duly authorized and validly issued Notes of HARRISON VICKERS AND WATERMAN INC., a Nevada corporation, (the
“Borrower”), having its principal place of business at 4224 White Plains Road, 3rd Floor, Bronx,
New York 10466, due October 14, 2017 (this note, the “Note” and, collectively with the other notes of
such series, the “Notes”).
FOR VALUE RECEIVED,
Borrower promises to pay to ALPHA CAPITAL ANSTALT, Lettstrasse 32, 9490 Vaduz, Principality of Liechtenstein Fax: + 423
232 31 96 or its registered assigns (the “Holder”), or shall have paid pursuant to the terms hereunder, the
principal sum of Seventy Eight Thousand Dollars ($78,000.00) on October 14, 2017 (the “Maturity Date”)
or such earlier date as this Note is required or permitted to be repaid as provided hereunder, and to pay interest, if any, to
the Holder on the aggregate unconverted and then outstanding principal amount of this Note in accordance with the provisions hereof.
The Holder of this
Note has been granted a security interest in assets of the Borrower.
This Note is subject
to the following additional provisions:
Section 1. Definitions.
For the purposes hereof, in addition to the terms defined elsewhere in this Note, (a) capitalized terms not otherwise defined
herein shall have the meanings set forth in the Purchase Agreement and (b) the following terms shall have the following meanings:
“Alternate
Consideration” shall have the meaning set forth in Section 5(e).
“Bankruptcy
Event” means any of the following events: (a) Borrower or any Subsidiary thereof commences a case or other proceeding
under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation
or similar law of any jurisdiction relating to Borrower or any Subsidiary thereof, (b) there is commenced against Borrower or any
Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement, (c) Borrower or any Subsidiary
thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered,
(d) Borrower or any Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its
property that is not discharged or stayed within 60 calendar days after such appointment, (e) Borrower or any Subsidiary thereof
makes a general assignment for the benefit of creditors, (f) Borrower or any Subsidiary thereof calls a meeting of its creditors
with a view to arranging a composition, adjustment or restructuring of its debts or (g) Borrower or any Subsidiary thereof, by
any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any
corporate or other action for the purpose of effecting any of the foregoing.
“Beneficial
Ownership Limitation” shall have the meaning set forth in Section 4(d).
“Business
Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or
any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to
close.
“Buy-In”
shall have the meaning set forth in Section 4(c)(v).
“Change
of Control Transaction” means, other than by means of conversion or exercise of the Notes and the Securities issued together
with the Notes, the occurrence after the date hereof of any of (a) an acquisition after the date hereof by an individual or legal
entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of Borrower, by contract or otherwise) of in excess of 50% of the voting
securities of Borrower, (b) Borrower merges into or consolidates with any other Person, or any Person merges into or consolidates
with Borrower and, after giving effect to such transaction, the stockholders of Borrower immediately prior to such transaction
own less than 50% of the aggregate voting power of Borrower or the successor entity of such transaction, or (c) Borrower sells
or transfers all or substantially all of its assets to another Person and the stockholders of Borrower immediately prior to such
transaction own less than 50% of the aggregate voting power of the acquiring entity immediately after the transaction, (d) the
execution by Borrower of an agreement to which Borrower is a party or by which it is bound, providing for any of the events set
forth in clauses (a) through (d) above.
“Closing
Price” means on any particular date (a) the last reported closing bid price per share of Common Stock on such date
on the Trading Market (as reported by Bloomberg L.P. at 4:15 p.m. (New York City time)), or (b) if there is no such price on such
date, then the closing bid price on the Trading Market on the date nearest preceding such date (as reported by Bloomberg L.P. at
4:15 p.m. (New York City time)), or (c) if the Common Stock is not then listed or quoted on a Trading Market and if prices
for the Common Stock are then reported in the “pink sheets” published by Pink OTC Markets, Inc. (or a similar organization
or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported,
or (d) if the shares of Common Stock are not then publicly traded the fair market value of a share of Common Stock as determined
by an independent appraiser selected in good faith by the Holder and reasonably acceptable to Borrower, the fees and expenses of
which shall be paid by Borrower.
“Common
Stock” means the common stock of the Company, $0.0001 par value, and any other class of securities into which such securities
may hereafter be reclassified or changed.
“Common
Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to
acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument
that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.
“Conversion”
shall have the meaning ascribed to such term in Section 4.
“Conversion
Date” shall have the meaning set forth in Section 4(a).
“Conversion
Price” shall have the meaning set forth in Section 4(b).
“Conversion
Shares” means, collectively, the shares of Common Stock issuable upon conversion of this Note in accordance with the
terms hereof.
“Distribution”
shall have the meaning set forth in Section 5(d).
“Event
of Default” shall have the meaning set forth in Section 8(a).
“Fundamental
Transaction” shall have the meaning set forth in Section 5(e).
“Interest
Payment Date” shall have the meaning set forth in Section 2(a).
“Loan
Documents” shall have the meaning set forth in Section 9.
“Mandatory
Conversion” shall have the meaning set forth in Section 6.
“Mandatory
Conversion Date” shall have the meaning set forth in Section 6.
“Mandatory
Default Amount” means the sum of (a) the greater of (i) the outstanding principal amount of this Note divided by the
Conversion Price on the date the Mandatory Default Amount is either (A) demanded (if demand or notice is required to create an
Event of Default) or otherwise due or (B) paid in full, whichever has a lower Conversion Price, multiplied by the VWAP on the date
the Mandatory Default Amount is either (x) demanded or otherwise due or (y) paid in full, whichever has a higher VWAP, or (ii)
115% of the outstanding principal amount of this Note and (b) all other amounts, costs, expenses and liquidated damages due in
respect of this Note.
“New
York Courts” shall have the meaning set forth in Section 9(d).
“Note
Register” shall have the meaning set forth in Section 2(c).
“Notice
of Mandatory Conversion” shall have the meaning set forth in Section 6.
“Original
Issue Date” means the date of the first issuance of the Notes, regardless of any transfers of any Note and regardless
of the number of instruments which may be issued to evidence such Notes.
“Other
Holders” means the holders of Other Notes.
“Other
Notes” means Notes nearly identical to this Note issued to other Holders pursuant to the Purchase Agreement.
“Permitted
Indebtedness” means (x) any liabilities for borrowed money or amounts owed not in excess of $200,000 in the aggregate
(other than trade accounts payable incurred in the ordinary course of business), (y) all guaranties, endorsements and other contingent
obligations in respect of indebtedness of others, whether or not the same are or should be reflected in the Borrower’s consolidated
balance sheet (or the notes thereto) not affecting more than $200,000 in the aggregate, except guaranties by endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary course of business; and (z) the present value of
any lease payments not in excess of $200,000 due under leases required to be capitalized in accordance with GAAP. Neither the Borrower
nor any Subsidiary is in default with respect to any Indebtedness.
“Permitted
Lien” means the individual and collective reference to the following: (a) Liens for taxes, assessments and other governmental
charges or levies not yet due or Liens for taxes, assessments and other governmental charges or levies being contested in good
faith and by appropriate proceedings for which adequate reserves (in the good faith judgment of the management of Borrower) have
been established in accordance with GAAP, (b) Liens imposed by law which were incurred in the ordinary course of Borrower’s
business, such as carriers’, warehousemen’s and mechanics’ Liens, statutory landlords’ Liens, and other
similar Liens arising in the ordinary course of Borrower’s business, and which (x) do not individually or in the aggregate
materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business
of Borrower and its consolidated Subsidiaries or (y) are being contested in good faith by appropriate proceedings, which proceedings
have the effect of preventing for the foreseeable future the forfeiture or sale of the property or asset subject to such Lien,
and (c) Liens incurred prior to the Closing Date in connection with Permitted Indebtedness under clauses (a), (b) thereunder, and
Liens incurred in connection with Permitted Indebtedness under clause (c) thereunder, provided that such Liens are not secured
by assets of Borrower or its Subsidiaries other than the assets so acquired or leased.
“Purchase
Agreement” has the meaning set forth on the first page of this Note.
“Purchase
Rights” shall have the meaning set forth in Section 5(b).
“Reservation
Date” shall have the meaning set forth in Section 4(e)(vi).
“Securities
Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Share
Delivery Date” shall have the meaning set forth in Section 4(c)(ii).
“Successor
Entity” shall have the meaning set forth in Section 5(e).
“Threshold
Period” shall have the meaning set forth in Section 6(b).
“Trading
Day” means a day on which the principal Trading Market is open for trading.
“Trading
Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on
the date in question: the NYSE MKT, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New
York Stock Exchange, the OTC Bulletin Board, the OTCQB, or the OTCQX (or any successors to any of the foregoing).
“Transaction
Documents” shall have the meaning set forth in the Purchase Agreement of even date herewith among the Borrower and other
parties thereto.
“VWAP”
means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed
or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding
date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading
Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if the OTC Bulletin Board is not a Trading
Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin
Board, (c) if the Common Stock is not then listed or quoted for trading on the OTC Bulletin Board and if prices for the Common
Stock are then reported on the OTCQX, OTCQB or OTC Pink Marketplace maintained by the OTC Markets Group, Inc. (or a similar organization
or agency succeeding to its functions of reporting prices), the volume weighted average price of the Common Stock on the first
such facility (or a similar organization or agency succeeding to its functions of reporting prices), or (d) in all other cases,
the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Purchasers
of a majority in interest of the Securities then outstanding and reasonably acceptable to Borrower, the fees and expenses of which
shall be paid by Borrower.
Section 2. Interest.
a) Interest
in Cash or in Kind. Holders shall be entitled to receive, and Borrower shall pay, cumulative interest on the outstanding principal
amount of this Note compounded annually at the annual rate of 10% (subject to increase as set forth in this Note) payable
on each anniversary of the Original Issue Date and on the Maturity Date (each such date, an “Interest Payment Date”)
(if the Interest Payment Date is not a Trading Day, the applicable payment shall be due on the next succeeding Trading Day).
b) Payment
Grace Period. The Borrower shall not have any grace period to pay any monetary amounts due under this Note.
c) Conversion
Privileges. The Conversion Rights set forth in Section 4 shall remain in full force and effect immediately from the date hereof
and until the Note is paid in full regardless of the occurrence of an Event of Default. This Note shall be payable in full on the
Maturity Date, unless previously converted into Common Stock in accordance with Section 4 hereof.
d) Application
of Payments. Interest on this Note shall be calculated on the basis of a 360-day year and the actual number of days elapsed.
Payments made in connection with this Note shall be applied first to amounts due hereunder other than principal and interest, thereafter
to interest and finally to principal.
e) Pari
Passu. Except as otherwise set forth herein, all payments made on this Note and the Other Notes and all actions taken by the
Borrower with respect to this Note and the Other Notes, shall be made and taken pari passu with respect to this Note and
the Other Notes. Notwithstanding anything to the contrary contained herein or in the Transaction Documents, it shall not be considered
non-pari passu for a Holder or Other Holder to elect to receive interest paid in shares of Common Stock or for the Borrower to
actually pay interest in shares of Common Stock to such electing Holder or Other Holder.
f) Manner
and Place of Payment. Principal and interest on this Note and other payments in connection with this Note shall be payable
at the Holder’s offices as designated above in lawful money of the United States of America in immediately available funds
without set-off, deduction or counterclaim. Upon assignment of the interest of Holder in this Note, Borrower shall instead make
its payment pursuant to the assignee’s instructions upon receipt of written notice thereof. This Note may not be prepaid
or mandatorily converted without the consent of the Holder.
Section 3. Registration
of Transfers and Exchanges.
a) Different
Denominations. This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations,
as requested by the Holder surrendering the same. No service charge will be payable for such registration of transfer or exchange.
b) Investment
Representations. This Note has been issued subject to certain investment representations of the original Holder set forth in
the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal
and state securities laws and regulations.
c) Reliance
on Note Register. Prior to due presentment for transfer to Borrower of this Note, Borrower and any agent of Borrower may treat
the Person in whose name this Note is duly registered on the Note Register as the owner hereof for the purpose of receiving payment
as herein provided and for all other purposes, whether or not this Note is overdue, and neither Borrower nor any such agent shall
be affected by notice to the contrary.
Section 4. Conversion.
a) Voluntary
Conversion. At any time after the Original Issue Date until this Note is no longer outstanding, Note principal and/or at the
election of the Holder accrued interest shall be convertible, in whole or in part, into shares of Common Stock at the option of
the Holder, at any time and from time to time (subject to the conversion limitations set forth in Section 4(d) hereof). The
Holder shall effect conversions by delivering to Borrower a Notice of Conversion, the form of which is attached hereto as Annex
A (each, a “Notice of Conversion”), specifying therein the principal and/or interest amount of this Note
to be converted and the date on which such conversion shall be effected (such date, the “Conversion Date”).
If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion
is deemed delivered hereunder. To effect conversions hereunder, the Holder shall not be required to physically surrender this Note
to Borrower unless the entire principal amount of this Note has been so converted. Conversions hereunder shall have the effect
of lowering the outstanding principal amount of this Note or accrued interest, at the option of the Holder, in an amount equal
to the applicable conversion. The Holder and Borrower shall maintain records showing the principal and interest amount(s) converted
and the date of such conversion(s). Borrower may deliver an objection to any Notice of Conversion only within one (1) Business
Day of delivery of such Notice of Conversion. In the event of any dispute or discrepancy, the records of the Holder shall be controlling
and determinative in the absence of manifest error. The Holder, and any assignee by acceptance of this Note, acknowledge and
agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted
principal amount of this Note may be less than the amount stated on the face hereof.
b) Conversion
Price. The conversion price for the principal and interest in connection with voluntary conversions by the Holder shall be
equal to the lesser of (i) $0.0025, or (ii) fifty percent (50%) of the lowest Closing Price of the Common Stock for the thirty
(30) Trading Days preceding the Conversion Date, subject to adjustment herein (the “Conversion Price”).
c) Mechanics
of Conversion.
i. Conversion
Shares Issuable Upon Conversion of Principal Amount. The number of Conversion Shares issuable upon a conversion hereunder shall
be determined by the quotient obtained by dividing (x) the outstanding principal amount of this Note to be converted plus interest
elected by the Holder to be converted by (y) the Conversion Price.
ii. Delivery
of Certificate Upon Conversion. Not later than three (3) Trading Days after each Conversion Date (the “Share Delivery
Date”), Borrower shall deliver, or cause to be delivered, to the Holder a certificate or certificates representing the
Conversion Shares which, on or after the earlier of (i) the six month anniversary of the Original Issue Date or (ii) after the
effective date or a current registration statement, shall be free of restrictive legends and trading restrictions (other than those
which may then be required by the Purchase Agreement) representing the number of Conversion Shares being acquired upon the conversion
of this Note. On or after the earlier of (i) the six month anniversary of the Original Issue Date or (ii) the effective date, Borrower
shall use its best efforts to deliver any certificate or certificates required to be delivered by Borrower under this Section 4(c)
electronically through the Depository Trust Company or another established clearing corporation performing similar functions.
iii. Failure
to Deliver Certificates. If, in the case of any Notice of Conversion, such certificate or certificates are not delivered to
or as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to
Borrower at any time on or before its receipt of such certificate or certificates, to rescind such Conversion, in which event Borrower
shall promptly return to the Holder any original Note delivered to Borrower and the Holder shall promptly return to Borrower the
Common Stock certificates issued to such Holder pursuant to the rescinded Conversion Notice.
iv. Obligation
Absolute; Partial Liquidated Damages. Borrower’s obligations to issue and deliver the Conversion Shares upon conversion
of this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the
Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any
Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or
alleged breach by the Holder or any other Person of any obligation to Borrower or any violation or alleged violation of law by
the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of Borrower
to the Holder in connection with the issuance of such Conversion Shares; provided, however, that such delivery shall
not operate as a waiver by Borrower of any such action Borrower may have against the Holder. In the event the Holder of this Note
shall elect to convert any or all of the outstanding principal amount hereof, Borrower may not refuse conversion based on any claim
that the Holder or anyone associated or affiliated with the Holder has been engaged in any violation of law, agreement or for any
other reason, unless an injunction from a court, on notice to Holder, restraining and or enjoining conversion of all or part of
this Note shall have been sought and obtained, and Borrower posts a surety bond for the benefit of the Holder in the amount of
150% of the outstanding principal amount of this Note, which is subject to the injunction, which bond shall remain in effect until
the completion of arbitration/litigation of the underlying dispute and the proceeds of which shall be payable to the Holder to
the extent it obtains judgment. In the absence of such injunction, Borrower shall issue Conversion Shares or, if applicable, cash,
upon a properly noticed conversion. If Borrower fails for any reason to deliver to the Holder such certificate or certificates
pursuant to Section 4(c)(ii) by the Share Delivery Date, Borrower shall pay to the Holder, in cash, as liquidated damages and not
as a penalty, for each $1,000 of principal amount being converted, $10 per Trading Day (increasing to $20 per Trading Day on the
fifth (5th) Trading Day after such liquidated damages being to accrue) for each Trading Day after such Share Delivery
Date until such certificates are delivered or Holder rescinds such conversion. Nothing herein shall limit a Holder’s right
to pursue actual damages or declare an Event of Default pursuant to Section 8 hereof for Borrower’s failure to deliver Conversion
Shares within the period specified herein and the Holder shall have the right to pursue all remedies available to it hereunder,
at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any
such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable
law.
v. Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon Conversion. In addition to any other rights available to the Holder,
if Borrower fails for any reason to deliver to the Holder such certificate or certificates by the Share Delivery Date pursuant
to Section 4(c)(ii), and if after such Share Delivery Date the Holder is required by its brokerage firm to purchase (in an open
market transaction or otherwise), or the Holder or Holder’s brokerage firm otherwise purchases, shares of Common Stock to
deliver in satisfaction of a sale by the Holder of the Conversion Shares which the Holder was entitled to receive upon the conversion
relating to such Share Delivery Date (a “Buy-In”), then Borrower shall (A) pay in cash to the Holder (in addition
to any other remedies available to or elected by the Holder) the amount, if any, by which (x) the Holder’s total purchase
price (including any brokerage commissions) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number
of shares of Common Stock that the Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale
price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B)
at the option of the Holder, either reissue (if surrendered) this Note in a principal amount equal to the principal amount of the
attempted conversion (in which case such conversion shall be deemed rescinded) or deliver to the Holder the number of shares of
Common Stock that would have been issued if Borrower had timely complied with its delivery requirements under Section 4(c)(ii).
For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an
attempted conversion of this Note with respect to which the actual sale price of the Conversion Shares (including any brokerage
commissions) giving rise to such purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence,
Borrower shall be required to pay the Holder $1,000. The Holder shall provide Borrower written notice indicating the amounts payable
to the Holder in respect of the Buy-In and, upon request of Borrower, evidence of the amount of such loss. Nothing herein shall
limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation,
a decree of specific performance and/or injunctive relief with respect to Borrower’s failure to timely deliver certificates
representing shares of Common Stock upon conversion of this Note as required pursuant to the terms hereof.
vi. Reservation
of Shares Issuable Upon Conversion. Borrower covenants that it will from and after the Original Issue Date, and at all times
thereafter reserve and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance
upon conversion of this Note as herein provided, free from preemptive rights or any other actual contingent purchase rights of
Persons other than the Holder (and the other holders of the Notes), not less than such aggregate number of shares of the Common
Stock as shall be issuable upon the conversion of the then outstanding principal amount of this Note and interest which has accrued
and would accrue on such principal amount, assuming such principal amount was not converted through the Maturity Date. Borrower
covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully
paid and non-assessable.
vii. Fractional
Shares. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of this Note. As to
any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, Borrower shall at its election,
either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion
Price or round up to the next whole share.
viii. Transfer
Taxes and Expenses. The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without
charge to the Holder hereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery
of such certificates, provided that, Borrower shall not be required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of this Note
so converted and Borrower shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting
the issuance thereof shall have paid to Borrower the amount of such tax or shall have established to the satisfaction of Borrower
that such tax has been paid. Borrower shall pay all Transfer Agent fees required for same-day processing of any Notice of Conversion.
d) Holder’s
Conversion Limitations. Borrower shall not effect any conversion of this Note, and a Holder shall not have the right to convert
any portion of this Note, to the extent that after giving effect to the conversion set forth on the applicable Notice of Conversion,
the Holder (together with the Holder’s Affiliates, and any Persons acting as a group together with the Holder or any of the
Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For
purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall
include the number of shares of Common Stock issuable upon conversion of this Note with respect to which such determination is
being made, but shall exclude the number of shares of Common Stock which are issuable upon (i) conversion of the remaining, unconverted
principal amount of this Note beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of Borrower subject to a limitation on conversion or exercise analogous
to the limitation contained herein (including, without limitation, any other Notes or the Warrants) beneficially owned by the Holder
or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(d), beneficial ownership
shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder.
To the extent that the limitation contained in this Section 4(d) applies, the determination of whether this Note is convertible
(in relation to other securities owned by the Holder together with any Affiliates) and of which principal amount of this Note is
convertible shall be in the sole discretion of the Holder, and the submission of a Notice of Conversion shall be deemed to be the
Holder’s determination of whether this Note may be converted (in relation to other securities owned by the Holder together
with any Affiliates) and which principal amount of this Note is convertible, in each case subject to the Beneficial Ownership Limitation.
To ensure compliance with this restriction, the Holder will be deemed to represent to Borrower each time it delivers a Notice of
Conversion that such Notice of Conversion has not violated the restrictions set forth in this paragraph and Borrower shall have
no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated
above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder.
For purposes of this Section 4(d), in determining the number of outstanding shares of Common Stock, the Holder may rely on the
number of outstanding shares of Common Stock as stated in the most recent of the following: (i) Borrower’s most recent periodic
or annual report filed with the Commission, as the case may be, (ii) a more recent public announcement by Borrower, or (iii) a
more recent written notice by Borrower or Borrower’s transfer agent setting forth the number of shares of Common Stock outstanding.
Upon the written or oral request of a Holder, Borrower shall within two Trading Days confirm orally and in writing to the Holder
the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall
be determined after giving effect to the conversion or exercise of securities of Borrower, including this Note, by the Holder or
its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial
Ownership Limitation” shall be 9.99% of the number of shares of the Common Stock outstanding immediately after giving
effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder. The Holder may decrease
the Beneficial Ownership Limitation at any time and the Holder, upon not less than 61 days’ prior notice to Borrower, may
increase the Beneficial Ownership Limitation provisions of this Section 4(d), provided that the Beneficial Ownership Limitation
in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance
of shares of Common Stock upon conversion of this Note held by the Holder and the Beneficial Ownership Limitation provisions of
this Section 4(d) shall continue to apply. Any such increase will not be effective until the 61st day after such notice
is delivered to Borrower. The Beneficial Ownership Limitation provisions of this paragraph shall be construed and implemented in
a manner otherwise than in strict conformity with the terms of this Section 4(d) to correct this paragraph (or any portion hereof)
which may be defective or inconsistent with the intended Beneficial Ownership Limitation contained herein or to make changes or
supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall
apply to a successor holder of this Note.
Section 5. Certain
Adjustments.
a) Stock
Dividends and Stock Splits. If Borrower, at any time while this Note is outstanding: (i) pays a stock dividend or otherwise
makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any Common Stock Equivalents
(which, for avoidance of doubt, shall not include any shares of Common Stock issued by Borrower upon conversion of the Notes),
(ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of a reverse
stock split) outstanding shares of Common Stock into a smaller number of shares or (iv) issues, in the event of a reclassification
of shares of the Common Stock, any shares of capital stock of Borrower, then the Conversion Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of Borrower) outstanding immediately
before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such
event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination
of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date
in the case of a subdivision, combination or re-classification.
b) Subsequent
Rights Offerings. In addition to any adjustments pursuant to Section 5(a) above, if at any time Borrower grants, issues or
sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders
of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder
had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations
on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record
holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however,
to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the
Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or
beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right
to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the
Holder exceeding the Beneficial Ownership Limitation).
d) Pro
Rata Distributions. During such time as this Note is outstanding, if Borrower shall declare or make any dividend or other distribution
of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise
(including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend,
spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”),
at any time after the issuance of this Note, then, in each such case, the Holder shall be entitled to participate in such Distribution
to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock
acquirable upon complete exercise of this Note (without regard to any limitations on exercise hereof, including without limitation,
the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such
record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in
such Distribution (provided, however, to the extent that the Holder's right to participate in any such Distribution
would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate
in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution
to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if
ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
e) Fundamental
Transaction. If, at any time while this Note is outstanding, (i) Borrower, directly or indirectly, in one or more related transactions
effects any merger or consolidation of Borrower with or into another Person, (ii) Borrower, directly or indirectly, effects any
sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or
a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by Borrower
or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares
for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv)
Borrower, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization
of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged
for other securities, cash or property, (v) Borrower, directly or indirectly, in one or more related transactions consummates a
stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares
of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated
or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination)
(each a “Fundamental Transaction”), then, upon any subsequent conversion of this Note, the Holder shall have
the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence
of such Fundamental Transaction (without regard to any limitation in Section 4(d) and Section 4(e) on the conversion of this Note),
the number of shares of Common Stock of the successor or acquiring corporation or of Borrower, if it is the surviving corporation,
and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental
Transaction by a holder of the number of shares of Common Stock for which this Note is convertible immediately prior to such Fundamental
Transaction (without regard to any limitation in Section 4(d) and Section 4(e) on the conversion of this Note). For purposes of
any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration
based on the amount of Alternate Consideration issuable in respect of one (1) share of Common Stock in such Fundamental Transaction,
and Borrower shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative
value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities,
cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any conversion of this Note following such Fundamental Transaction. Borrower shall cause any successor
entity in a Fundamental Transaction in which Borrower is not the survivor (the “Successor Entity”) to assume
in writing all of the obligations of Borrower under this Note and the other Transaction Documents (as defined in the Purchase Agreement)
in accordance with the provisions of this Section 5(e) pursuant to written agreements in form and substance reasonably satisfactory
to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option
of the holder of this Note, deliver to the Holder in exchange for this Note a security of the Successor Entity evidenced by a written
instrument substantially similar in form and substance to this Note which is convertible for a corresponding number of shares of
capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable
upon conversion of this Note (without regard to any limitations on the conversion of this Note) prior to such Fundamental Transaction,
and with a conversion price which applies the conversion price hereunder to such shares of capital stock (but taking into account
the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital
stock, such number of shares of capital stock and such conversion price being for the purpose of protecting the economic value
of this Note immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form
and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and
be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Note and the other
Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every
right and power of Borrower and shall assume all of the obligations of Borrower under this Note and the other Transaction Documents
with the same effect as if such Successor Entity had been named as Borrower herein.
f) Subsequent
Equity Sales. If, at any time while this Note is outstanding, Borrower or any Subsidiary, as applicable, sells or grants any
option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any sale, grant or
any option to purchase or other disposition), any Common Stock or Common Stock Equivalents entitling any Person to acquire shares
of Common Stock at an effective price per share that is lower than the then Conversion Price (such lower price, the “Base
Conversion Price” and such issuances, collectively, a “Dilutive Issuance”) (if the holder of the Common Stock
or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued
in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is lower than
the Conversion Price, such issuance shall be deemed to have occurred for less than the Conversion Price on such date of the Dilutive
Issuance), then the Conversion Price shall be reduced to equal the Base Conversion Price. Such adjustment shall be made whenever
such Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no adjustment will be made under this
Section 6(b) in respect of an Exempt Issuance. If Borrower enters into a Variable Rate Transaction, despite the prohibition set
forth in the Purchase Agreement, Borrower shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest
possible conversion price at which such securities may be converted or exercised. Borrower shall notify the Holder in writing,
no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 6(b),
indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing
terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not Borrower provides
a Dilutive Issuance Notice pursuant to this Section 6(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled
to receive a number of Conversion Shares based upon the Base Conversion Price on or after the date of such Dilutive Issuance, regardless
of whether the Holder accurately refers to the Base Conversion Price in the Notice of Conversion.
g) Calculations.
All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.
For purposes of this Section 5, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall
be the sum of the number of shares of Common Stock (excluding any treasury shares of Borrower) issued and outstanding.
h) Notice
to the Holder.
i. Adjustment to Conversion Price. Whenever the Conversion Price is adjusted pursuant to any provision of this Section 5, Borrower
shall promptly deliver to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
ii. Notice
to Allow Conversion by Holder. If (A) Borrower shall declare a dividend (or any other distribution in whatever form) on the
Common Stock, (B) Borrower shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) Borrower
shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights, (D) the approval of any stockholders of Borrower shall be required in connection with
any reclassification of the Common Stock, any consolidation or merger to which Borrower is a party, any sale or transfer of all
or substantially all of the assets of Borrower, or any compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property or (E) Borrower shall authorize the voluntary or involuntary dissolution, liquidation or winding up
of the affairs of Borrower, then, in each case, Borrower shall cause to be filed at each office or agency maintained for the purpose
of conversion of this Note, and shall cause to be delivered to the Holder at its last address as it shall appear upon the Note
Register, at least twenty (20) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or
if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that
holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure
to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required
to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public
information regarding Borrower or any of the Subsidiaries, Borrower shall simultaneously file such notice with the Commission pursuant
to a Current Report on Form 8-K. The Holder shall remain entitled to convert this Note during the 20-day period commencing on the
date of such notice through the effective date of the event triggering such notice except as may otherwise be expressly set forth
herein.
Section 6. Redemption
and Mandatory Conversion. Borrower shall have no right to require the Holder to surrender the Note for redemption, nor convert
any part or all of this Note without the consent of the Holder.
Section 7. Negative
Covenants. As long as any portion of this Note remains outstanding, unless the holders of at least 51% in principal amount
of the then outstanding Notes which must include the Lead Investor shall have otherwise given prior written consent, Borrower
shall not, and shall not permit any of the Subsidiaries to, directly or indirectly:
a) other
than Permitted Indebtedness, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for borrowed money
of any kind, including, but not limited to, a guarantee, on or with respect to any of its property or assets now owned or hereafter
acquired or any interest therein or any income or profits therefrom;
b) other
than Permitted Liens, enter into, create, incur, assume or suffer to exist any Liens of any kind, on or with respect to any of
its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;
c) amend
its charter documents, including, without limitation, its certificate of incorporation and bylaws, in any manner that materially
and adversely affects any rights of the Holder;
d) repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of its Common
Stock or Common Stock Equivalents other than as to the Conversion Shares as permitted or required under the Transaction Documents;
e) redeem,
defease, repurchase, repay or make any payments in respect of, by the payment of cash or cash equivalents (in whole or in part,
whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Indebtedness
(other than the Notes if on a pro-rata basis), whether by way of payment in respect of principal of (or premium, if any) or interest
on, such Indebtedness;
f) pay
cash dividends or distributions on any equity securities of Borrower;
g) enter
into any transaction with any Affiliate of Borrower which would be required to be disclosed in any public filing with the Commission,
unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors
of Borrower (even if less than a quorum otherwise required for board approval);
h) any
material damage to, or loss, theft or destruction of, any Collateral, whether or not insured, or any strike, lockout, labor dispute,
embargo, condemnation, or other casualty which causes, for more than fifteen (15) consecutive days, the cessation or substantial
curtailment of revenue producing activities at any facility of Borrower or any Subsidiary, if any such event or circumstance could
have a Material Adverse Effect; or
i) enter
into any agreement with respect to any of the foregoing.
Section 8. Events
of Default.
a)
“Event of Default” means, wherever used herein, any of the following events (whatever the reason for such event
and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or
order of any court, or any order, rule or regulation of any administrative or governmental body):
i. any
default in the payment of (A) the principal amount of any Note or (B) liquidated damages and other amounts owing to a Holder on
any Note, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration
or otherwise) which default, solely in the case of a default under clause (B) above, is not cured within 7 Trading Days after Borrower
has become or should have become aware of such default;
ii. Borrower
shall fail to observe or perform any other covenant or agreement contained in the Notes (other than a breach by Borrower of its
obligations to deliver shares of Common Stock to the Holder upon conversion, which breach is addressed in clause (x) below) which
failure is not cured, if possible to cure, within the earlier to occur of (A) 7 Trading Days after notice of such failure sent
by the Holder or by any Other Holder to Borrower and (B) 15 Trading Days after Borrower has become or should have become aware
of such failure;
iii. a
default or event of default (subject to any grace or cure period provided in the applicable agreement, document or instrument)
shall occur under (A) any of the Transaction Documents, or (B) any other material agreement, lease, document or instrument to which
Borrower or any Subsidiary is obligated (and not covered by clause (vi) below);
iv. any
representation or warranty made in this Note, any other Transaction Documents, any written statement pursuant hereto or thereto
or any other report, financial statement or certificate made or delivered to the Holder or any Other Holder shall be untrue or
incorrect in any material respect as of the date when made or deemed made;
v. Borrower
or any Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) shall be subject to a Bankruptcy Event;
vi. Borrower
or any Subsidiary shall default on any of its obligations under any mortgage, credit agreement or other facility, indenture agreement,
factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness
for borrowed money or money due under any long term leasing or factoring arrangement that (a) involves an obligation greater than
$200,000, whether such indebtedness now exists or shall hereafter be created, and (b) results in such indebtedness becoming or
being declared due and payable prior to the date on which it would otherwise become due and payable;
vii. Borrower
shall be a party to any Change of Control Transaction or Fundamental Transaction or shall agree to sell or dispose of all or in
excess of 30% of its assets in one transaction or a series of related transactions (whether or not such sale would constitute a
Change of Control Transaction);
viii. Borrower
does not meet the current public information requirements under Rule 144;
ix. Borrower
shall fail for any reason to deliver certificates to a Holder prior to the seventh Trading Day after a Conversion Date pursuant
to Section 4(c) or Borrower shall provide at any time notice to the Holder, including by way of public announcement, of Borrower’s
intention to not honor requests for conversions of any Notes in accordance with the terms hereof;
x. any
Person shall breach any agreement delivered to the initial Holders pursuant to Section 2.2 of the Purchase Agreement;
xi. any
monetary judgment, writ or similar final process shall be entered or filed against Borrower, any subsidiary or any of their respective
property or other assets for more than $50,000, and such judgment, writ or similar final process shall remain unvacated, unbonded
or unstayed for a period of 90 calendar days;
xii. any
dissolution, liquidation or winding up by Borrower or a material Subsidiary of a substantial portion of their business;
xiii. cessation
of operations by Borrower or a material Subsidiary;
xiv. The
failure by Borrower or any material Subsidiary to maintain any material intellectual property rights, personal, real property,
equipment, leases or other assets which are necessary to conduct its business (whether now or in the future) and such breach is
not cured with twenty (20) days after written notice to the Borrower from the Holder;
xv. An
event resulting in the Common Stock no longer being listed or quoted on a Trading Market, or notification from a Trading Market
that the Borrower is not in compliance with the conditions for such continued quotation and such non-compliance continues for twenty
(20) days following such notification;
xvi. a
Commission or judicial stop trade order or suspension from its Principal Trading Market;
xvii. except
as disclosed in the SEC Reports, the restatement after the date hereof of any financial statements filed by the Borrower with the
Commission for any date or period from two years prior to the Original Issue Date and until this Note is no longer outstanding,
if the result of such restatement would, by comparison to the unrestated financial statements, have constituted a Material Adverse
Effect. For the avoidance of doubt, any restatement related to new accounting pronouncements shall not constitute a default under
this Section;
xviii. the
Borrower effectuates a reverse split of its Common Stock without ten (10) days prior written notice to the Holder;
xix. the
Borrower fails to have authorized and reserved 150% of the Conversion Shares issuable upon conversion of the Notes including Conversion
Shares issuable upon conversion of interest through the Maturity Date;
xx. a
failure by Borrower to notify Holder of any material event of which Borrower is obligated to notify Holder pursuant to the terms
of this Note or any other Transaction Document;
xxi. a
default by the Borrower of a material term, covenant, warranty or undertaking of any other agreement to which the Borrower and
Holder are parties, or the occurrence of an event of default under any such other agreement to which Borrower and Holder are parties
which is not cured after any required notice and/or cure period;
xxii. the
occurrence of an Event of Default under any Other Note; or
xxiii. any
provision of any Transaction Document shall at any time for any reason (other than pursuant to the express terms thereof) cease
to be valid and binding on or enforceable against the parties thereto, or the validity or enforceability thereof shall be contested
by any party thereto, or a proceeding shall be commenced by Borrower or any Subsidiary or any governmental authority having jurisdiction
seeking to establish the invalidity or unenforceability thereof, or Borrower or any Subsidiary shall deny in writing that it has
any liability or obligation purported to be created under any Transaction Document.
b) Remedies
Upon Event of Default, Fundamental Transaction and Change of Control Transaction. If any Event of Default or a Fundamental
Transaction or a Change of Control Transaction occurs, the outstanding principal amount of this Note, liquidated damages and other
amounts owing in respect thereof through the date of acceleration, shall become, at the Holder’s election, immediately due
and payable in cash at the Mandatory Default Amount. Commencing on the Maturity Date and also five (5) days after the occurrence
of any Event of Default interest on this Note shall accrue at an interest rate equal to the lesser of 15% per annum or the maximum
rate permitted under applicable law. Upon the payment in full of the Mandatory Default Amount, the Holder shall promptly surrender
this Note to or as directed by Borrower. In connection with such acceleration described herein, the Holder need not provide, and
Borrower hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it
under applicable law. Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the
Holder shall have all rights as a holder of the Note until such time, if any, as the Holder receives full payment pursuant to this
Section 8(b). No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.
Section 9. Security
Interest/Waiver of Automatic Stay. This Note is secured by a security interest granted to the Holder pursuant to a Security
Agreement, as delivered by Borrower to Holder. The Borrower acknowledges and agrees that should a proceeding under any bankruptcy
or insolvency law be commenced by or against the Borrower or a Subsidiary, or if any of the Collateral (as defined in the Security
Agreement) should become the subject of any bankruptcy or insolvency proceeding, then the Holder should be entitled to, among
other relief to which the Holder may be entitled under the Transaction Documents and any other agreement to which the Borrower
or a Subsidiary and Holder are parties (collectively, “Loan Documents”) and/or applicable law, an order from
the court granting immediate relief from the automatic stay pursuant to 11 U.S.C. Section 362 to permit the Holder to exercise
all of its rights and remedies pursuant to the Loan Documents and/or applicable law. THE BORROWER EXPRESSLY WAIVES THE BENEFIT
OF THE AUTOMATIC STAY IMPOSED BY 11 U.S.C. SECTION 362. FURTHERMORE, THE BORROWER EXPRESSLY ACKNOWLEDGES AND AGREES THAT NEITHER
11 U.S.C. SECTION 362 NOR ANY OTHER SECTION OF THE BANKRUPTCY CODE OR OTHER STATUTE OR RULE (INCLUDING, WITHOUT LIMITATION, 11
U.S.C. SECTION 105) SHALL STAY, INTERDICT, CONDITION, REDUCE OR INHIBIT IN ANY WAY THE ABILITY OF THE HOLDER TO ENFORCE ANY OF
ITS RIGHTS AND REMEDIES UNDER THE LOAN DOCUMENTS AND/OR APPLICABLE LAW. The Borrower hereby consents to any motion for relief
from stay that may be filed by the Holder in any bankruptcy or insolvency proceeding initiated by or against the Borrower and,
further, agrees not to file any opposition to any motion for relief from stay filed by the Holder. The Borrower represents, acknowledges
and agrees that this provision is a specific and material aspect of the Loan Documents, and that the Holder would not agree to
the terms of the Loan Documents if this waiver were not a part of this Note. The Borrower further represents, acknowledges and
agrees that this waiver is knowingly, intelligently and voluntarily made, that neither the Holder nor any person acting on behalf
of the Holder has made any representations to induce this waiver, that the Borrower has been represented (or has had the opportunity
to he represented) in the signing of this Note and the Loan Documents and in the making of this waiver by independent legal counsel
selected by the Borrower and that the Borrower has discussed this waiver with counsel.
Section 10. Miscellaneous.
a) Notices.
All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return
receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted
by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine,
at the address or number designated below (if delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service,
fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be: (i) if to Borrower, to: Harrison Vickers and Waterman Inc., 4224 White Plains Road, 3rd
Floor, Bronx, New York 10466, Attn: Roy Warren, and (ii) if to the Holder, to: the address and fax number indicated on the front
page of this Note, with an additional copy by fax only to (which shall not constitute notice): Grushko & Mittman, P.C., 515
Rockaway Avenue, Valley Stream, New York 11581, facsimile: (212) 697-3575.
b) Absolute
Obligation. Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of Borrower,
which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest, as applicable, on this Note
at the time, place, and rate, and in the coin or currency, herein prescribed. This Note is a direct debt obligation of Borrower.
This Note ranks pari passu with all other Notes now or hereafter issued under the terms set forth herein.
c) Lost
or Mutilated Note. If this Note shall be mutilated, lost, stolen or destroyed, Borrower shall execute and deliver, in exchange
and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed
Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed, but only upon receipt of evidence
of such loss, theft or destruction of such Note, and of the ownership hereof, reasonably satisfactory to Borrower.
d) Governing
Law. All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by
and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict
of laws thereof. Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions
contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective Affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York,
Borough of Manhattan (the “New York Courts”). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby
irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such proceeding. Each
party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding
by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other
manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable
law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note or the transactions contemplated
hereby. If any party shall commence an action or proceeding to enforce any provisions of this Note, then the prevailing party in
such action or proceeding shall be reimbursed by the other party for its attorneys fees and other costs and expenses incurred in
the investigation, preparation and prosecution of such action or proceeding. This Note shall be deemed an unconditional obligation
of Borrower for the payment of money and, without limitation to any other remedies of Holder, may be enforced against Borrower
by summary proceeding pursuant to New York Civil Procedure Law and Rules Section 3213 or any similar rule or statute in the jurisdiction
where enforcement is sought. For purposes of such rule or statute, any other document or agreement to which Holder and Borrower
are parties or which Borrower delivered to Holder, which may be convenient or necessary to determine Holder’s rights hereunder
or Borrower’s obligations to Holder are deemed a part of this Note, whether or not such other document or agreement was delivered
together herewith or was executed apart from this Note.
e) Waiver.
Any waiver by Borrower or the Holder of a breach of any provision of this Note shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of this Note. The failure of Borrower or the Holder
to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that
party of the right thereafter to insist upon strict adherence to that term or any other term of this Note on any other occasion.
Any waiver by Borrower or the Holder must be in writing.
f) Severability.
If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any
provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances.
g) Usury.
If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury,
the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under
applicable law. Borrower covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead,
or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would
prohibit or forgive Borrower from paying all or any portion of the principal of or interest on this Note as contemplated herein,
wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Note, and
Borrower (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants
that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holder, but
will suffer and permit the execution of every such as though no such law has been enacted.
h) Next
Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day.
i) Headings.
The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit
or affect any of the provisions hereof.
j) Amendment.
Unless otherwise provided for hereunder, this Note may not be modified or amended or the provisions hereof waived without the written
consent of Borrower and the Holder.
k) Facsimile
Signature. In the event that the Borrower’s signature is delivered by facsimile transmission, PDF, electronic signature
or other similar electronic means, such signature shall create a valid and binding obligation of the Borrower with the same force
and effect as if such signature page were an original thereof.
*********************
(Signature Pages Follow)
IN WITNESS WHEREOF, Borrower has
caused this Note to be signed in its name by an authorized officer as of the date written above.
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HARRISON VICKERS AND WATERMAN, INC. |
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By: |
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Name: |
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Title: |
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby
elects to convert principal under the Convertible Note due October 14, 2017 of Harrison Vickers and Waterman, Inc., a Nevada corporation
(the “Borrower”), into shares of common stock (the “Common Stock”), of Borrower according
to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such
certificates and opinions as reasonably requested by Borrower in accordance therewith. No fee will be charged to the holder for
any conversion, except for such transfer taxes, if any.
By the delivery of
this Notice of Conversion the undersigned represents and warrants to Borrower that its ownership of the Common Stock does not exceed
the amounts specified under Section 4 of this Note, as determined in accordance with Section 13(d) of the Exchange Act.
The undersigned agrees
to comply with the prospectus delivery requirements under the applicable securities laws in connection with any transfer of the
aforesaid shares of Common Stock.
Conversion calculations:
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Date to Effect Conversion: ____________________________ |
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Principal Amount of Note to be Converted: $__________________ |
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Number of shares of Common Stock to be issued: ______________ |
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* Interest Amount to be Converted: $_______________ |
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Signature: _________________________________________ |
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Name: ____________________________________________ |
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Address for Delivery of Common Stock Certificates: __________ |
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Or |
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DWAC Instructions: _________________________________ |
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Broker No:_____________ |
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Account No: _______________ |
* Interest on Principal Amount of $____________ for period of
______________ through ________________.
NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY
IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF
WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY
BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
COMMON STOCK PURCHASE CLASS A WARRANT
HARRISON
VICKERS AND WATERMAN INC.
Warrant Shares: 62,400,000 |
Initial Exercise Date: October 14, 2015 |
Warrant No: A_
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”)
certifies that, for value received, ALPHA CAPITAL ANSTALT, Lettstrasse 32, 9490 Vaduz, Principality of Liechtenstein Fax:
+ 423 232 31 96 or its assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on
exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Initial Exercise Date”)
and on or prior to the close of business on the seven (7) year anniversary of the Initial Exercise Date (the “Termination
Date”) but not thereafter, to subscribe for and purchase from HARRISON VICKERS AND WATERMAN INC., a Nevada corporation
(the “Company”), up to 62,400,000 shares (as subject to adjustment hereunder, the “Warrant Shares”)
of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined
in Section 2(b).
Section 1. Definitions.
Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Asset Purchase Agreement
(the “Purchase Agreement”), dated April 21, 2015, among the Company and the purchasers signatory thereto.
Section 2. Exercise.
a)
Exercise of the purchase rights represented by this Warrant
may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date
by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered
Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy of the Notice of Exercise
Form annexed hereto. Within two (2) Trading Days following the date of exercise as aforesaid, the Holder shall deliver the aggregate
Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on
a United States bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice
of Exercise. Notwithstanding anything herein to the contrary (although the Holder may surrender the Warrant to, and receive a replacement
Warrant from, the Company), the Holder shall not be required to physically surrender this Warrant to the Company until the Holder
has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder
shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date the final Notice of Exercise
is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant
Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in
an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing
the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of
Exercise Form within one (1) Trading Day of delivery of such notice. The Holder and any assignee, by acceptance of this Warrant,
acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares
hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on
the face hereof.
b)
Exercise Price. The initial exercise price per share
of the Common Stock under this Warrant shall be $0.0025, subject to adjustment hereunder (the “Exercise Price”).
c)
Cashless Exercise. If at any time after the Initial Exercise
Date, there is no effective registration statement registering, or no current prospectus available for the resale of the Warrant
Shares by the Holder, then this Warrant may also be exercised at the Holder’s election, in whole or in part, at such time
by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal
to the quotient obtained by dividing [(A-B) (X)] by (A), where:
(A) = the VWAP on the Trading Day
immediately preceding the date on which Holder elects to exercise this Warrant by means of a “cashless exercise,” as
set forth in the applicable Notice of Exercise;
(B) = the Exercise Price of this
Warrant, as adjusted hereunder; and
(X) = the number of Warrant
Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were
by means of a cash exercise rather than a cashless exercise.
Notwithstanding anything herein
to the contrary, on the Termination Date, unless the Holder notifies the Company otherwise, if there is no effective Registration
Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder, then this Warrant
shall be automatically exercised via cashless exercise pursuant to this Section 2(c).
d)
Mechanics of Exercise.
| i. | Delivery of Certificates Upon Exercise. Certificates
for shares purchased hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s
prime broker with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”)
if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the
issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) this Warrant is being exercised via cashless
exercise and Rule 144 is available, and otherwise by physical delivery to the address specified by the Holder in the Notice of
Exercise by the date that is three (3) Trading Days after the latest of (A) the delivery to the Company of the Notice of Exercise,
(B) surrender of this Warrant (if required) and (C) payment of the aggregate Exercise Price as set forth above (including by cashless
exercise, if permitted) (such date, the “Warrant Share Delivery Date”). The Warrant Shares shall be deemed
to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder
of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise
Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 2(d)(vi)
prior to the issuance of such shares, having been paid. The Company understands that a delay in the delivery of the Warrant Shares
after the Warrant Share Delivery Date could result in economic loss to the Holder. As compensation to the Holder for such loss,
the Company agrees to pay (as liquidated damages and not as a penalty) to the Holder for late issuance of Warrant Shares upon
exercise of this Warrant the proportionate amount of $10 per Trading Day (increasing to $20 per Trading Day after the fifth (5th)
Trading Day) after the Warrant Share Delivery Date for each $1,000 of Exercise Price of Warrant Shares for which this Warrant
is exercised which are not timely delivered. The Company shall pay any payments incurred under this Section in immediately available
funds upon demand. Furthermore, in addition to any other remedies which may be available to the Holder, in the event that the
Company fails for any reason to effect delivery of the Warrant Shares by the Warrant Share Delivery Date, the Holder may revoke
all or part of the relevant Warrant exercise by delivery of a notice to such effect to the Company, whereupon the Company and
the Holder shall each be restored to their respective positions immediately prior to the exercise of the relevant portion of this
Warrant, except that the liquidated damages described above shall be payable through the date notice of revocation or rescission
is given to the Company. |
ii. Delivery
of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder
and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant
Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called
for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii. Rescission
Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing
the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right, at any
time prior to issuance of such Warrant Shares, to rescind such exercise.
iv. Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon Exercise. In addition to any other rights available to the Holder,
if the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant
Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its
broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares
of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving
upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by
which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased
exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the
Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation
was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant
Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder
the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery
obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In
with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation
of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon
request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other
remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock
upon exercise of the Warrant as required pursuant to the terms hereof.
v. No
Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise
of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the
Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction
multiplied by the Exercise Price or round up to the next whole share.
vi. Charges,
Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or
transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall
be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed
by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other
than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto
duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any
Notice of Exercise.
vii. Closing
of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this
Warrant, pursuant to the terms hereof.
e)
Holder’s Exercise Limitations. The Company shall
not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant
to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable
Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with
the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as
defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder
and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which
such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise
of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise
or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation,
any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein
beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of
this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder
that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules
required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination
of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of
which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise
shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities
owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to
the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination.
In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d)
of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the
number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected
in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent
public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number
of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading
Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the
number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities
of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares
of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 9.99% of the number of shares of
the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of
this Warrant. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial
Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99%
of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock
upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any such increase
or decrease will not be effective until the 61st day after such notice is delivered to the Company. The provisions of
this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section
2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership
Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation.
The limitations contained in this paragraph shall apply to a successor holder of this Warrant.
Section 3. Certain
Adjustments.
a)
Stock Dividends and Splits. If the Company, at any time
while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its
Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt,
shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant or pursuant to any of the other
Transaction Documents), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including
by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification
of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied
by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding
immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately
after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the
aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become
effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
b)
Subsequent Rights Offerings. In addition to any adjustments
pursuant to Section 3(a) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase
stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase
Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon
complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial
Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in
any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be
entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result
of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such
time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
c)
Pro Rata Distributions. If the Company, at any time while
this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to the Holder) evidences of its indebtedness
or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common
Stock (which shall be subject to Section 3(b)), then in each such case the Exercise Price shall be adjusted by multiplying the
Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of
which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the
portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined
by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holder
of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common
Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record
date mentioned above.
d)
Fundamental Transaction. If, at any time while this Warrant
is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation
of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment,
transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions,
(iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed
pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or
property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly,
in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash
or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase
agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme
of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding
shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to,
or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business
combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder
shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the
occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the
exercise of this Warrant) the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if
it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable
as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant).
For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting
the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice
as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice
as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. Notwithstanding
anything to the contrary, in the event of a Fundamental Transaction that is (1) an all cash transaction, (2) a “Rule 13e-3
transaction” as defined in Rule 13e-3 under the Exchange Act, or (3) a Fundamental Transaction involving a person or entity
not traded on a national securities exchange or trading market (with such exchange or market including, without limitation, the
Nasdaq Global Select Market, the Nasdaq Global Market, or the Nasdaq Capital Market, The New York Stock Exchange, Inc., the NYSE
or Amex), the Company or any Successor Entity (as defined below) shall, at the Holder’s option, exercisable concurrently
with the consummation of the Fundamental Transaction, purchase this Warrant from the Holder by paying to the Holder the higher
of (i) an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of this Warrant on the date of the
consummation of such Fundamental Transaction, or (ii) the positive difference between the cash per share paid in such Fundamental
Transaction minus the then in effect Exercise Price. “Black Scholes Value” means the value of the unexercised
portion of this Warrant based on the Black and Scholes Option Pricing Model obtained from the “OV” function on Bloomberg,
L.P. (“Bloomberg”) determined as of the day of consummation of the applicable Fundamental Transaction for pricing
purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between
the date of the public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility
equal to the greater of 100% and the 100 day volatility obtained from the “HVT” function on Bloomberg as of the Trading
Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share
used in such calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash
consideration, if any, being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between
the date of the public announcement of the applicable Fundamental Transaction and the Termination Date. The Company shall cause
any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”)
to assume in writing all of the obligations of the Company under this Warrant and the other Transaction Documents in accordance
with the provisions of this Section 3(d) pursuant to written agreements in form and substance reasonably satisfactory to the Holder
and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder,
deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially
similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such
Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this
Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an
exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative
value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such
number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant
immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance
to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted
for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant and the other Transaction
Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and
power of the Company and shall assume all of the obligations of the Company under this Warrant and the other Transaction Documents
with the same effect as if such Successor Entity had been named as the Company herein.
e)
Subsequent Equity Sales. If the Company or any Subsidiary thereof,
as applicable, at any time while this Warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any
right to reprice, or otherwise issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common
Stock or Common Stock Equivalents, at an effective price per share less than the Exercise Price then in effect, excluding Exempt
Issuances as defined in the Purchase Agreement (such lower price, the “Base Share Price” and such issuances collectively,
a “Dilutive Issuance”) (it being understood and agreed that if the holder of the Common Stock or Common Stock Equivalents
so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise
or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance,
be entitled to receive shares of Common Stock at an effective price per share that is less than the Exercise Price, such issuance
shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance at such effective price),
then simultaneously with the consummation of each Dilutive Issuance the Exercise Price shall be reduced and only reduced to equal
the Base Share Price and the number of Warrant Shares issuable hereunder shall be increased such that the aggregate Exercise Price
payable hereunder, after taking into account the decrease in the Exercise Price, shall be equal to the aggregate Exercise Price
prior to such adjustment. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. Notwithstanding
the foregoing, no adjustments shall be made, paid or issued under this Section 3(e) in respect of an Exempt Issuance. The Company
shall notify the Holder, in writing, no later than the Trading Day following the issuance or deemed issuance of any Common Stock
or Common Stock Equivalents subject to this Section 3(e), indicating therein the applicable issuance price, or applicable reset
price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For
purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 3(e), upon the
occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price
regardless of whether the Holder accurately refers to the Base Share Price in the Notice of Exercise. If the Company enters into
a Variable Rate Transaction, despite the prohibition thereon in the Purchase Agreement, the Company shall be deemed to have issued
Common Stock or Common Stock Equivalents at the lowest possible conversion or exercise price at which such securities may be converted
or exercised. Notwithstanding the foregoing, the issuance of any Common Stock or Common Stock Equivalents pursuant to the Purchase
Agreement shall not be deemed a Dilutive Issuance.
f) Calculations.
All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.
For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall
be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
g)
Notice to Holder.
i. Adjustment
to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly
mail to the Holder a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of
Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice
to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the
Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the
Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares
of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection
with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer
of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted
into other securities, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of
the affairs of the Company, then, in each case, to the extent that such information constitutes material non-public information
(as determined in good faith by the Company) the Company shall follow the procedure described in Section 13 of the Subscription
Agreement and shall deliver to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least
fifteen (15) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date
on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record
is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the
Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice
or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified
in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding
the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current
Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such
notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
Section 4. Transfer
of Warrant.
a)
Transferability. Subject to compliance with any applicable
securities laws and the provisions of the Purchase Agreement, this Warrant and all rights hereunder (including, without limitation,
any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company
or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed
by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer.
Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name
of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment,
and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly
be cancelled. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant
Shares without having a new Warrant issued.
b)
New Warrants. This Warrant may be divided or combined
with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying
the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance
with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver
a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All
Warrants issued on transfers or exchanges shall be dated the initial issuance date of this Warrant and shall be identical with
this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
c)
Warrant Register. The Company shall register this Warrant,
upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record
Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof
for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the
contrary.
Section 5. Miscellaneous.
a)
No Rights as Stockholder Until Exercise. This Warrant
does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise
hereof as set forth in Section 2(a).
b)
Loss, Theft, Destruction or Mutilation of Warrant. The
Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction,
of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any
bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver
a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
c)
Saturdays, Sundays, Holidays, etc. If the last or appointed
day for the taking of any action or the expiration of any right required or granted herein shall not be a Trading Day, then, such
action may be taken or such right may be exercised on the next succeeding Trading Day.
d)
Authorized Shares.
The Company covenants that, during the period the Warrant
is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the
issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that
its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates
to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant.
The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided
herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common
Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights
represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant
Shares in accordance herewith, be duly authorized, validly issued, fully paid and non-assessable and free from all taxes, liens
and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously
with such issue).
Except and to the extent as waived
or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of
incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will
at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary
or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality
of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon
such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant
and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory
body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.
Before taking any action which would
result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company
shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.
e)
Jurisdiction. All questions concerning the construction,
validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Purchase
Agreement.
f) Restrictions.
The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, or unless exercised
in a cashless exercise when Rule 144 is available, and the Holder does not utilize cashless exercise, will have restrictions upon
resale imposed by state and federal securities laws.
g)
Non-waiver and Expenses. No course of dealing or any
delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice
the Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant or the Purchase Agreement,
if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages
to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including,
but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting
any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
h)
Notices. Any notice, request or other document required
or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions
of the Purchase Agreement.
i) Limitation
of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase
Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder
for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company
or by creditors of the Company.
j) Remedies.
The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled
to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation
for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert
the defense in any action for specific performance that a remedy at law would be adequate.
k)
Successors and Assigns. Subject to applicable securities
laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors
and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended
to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant
Shares.
l) Amendment.
This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holders
of not less than a majority of the outstanding Warrants issued pursuant to the Purchase Agreement.
m)
Severability. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant
shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
n)
Headings. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
********************
(Signature Page Follows)
IN WITNESS WHEREOF, the Company has caused
this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
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HARRISON VICKERS AND WATERMAN INC. |
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By: |
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Name: |
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Title: |
NOTICE OF EXERCISE
To:
HARRISON VICKERS AND
WATERMAN INC.
(1) The
undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only
if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes,
if any.
(2) Payment
shall take the form of (check applicable box):
o
in lawful money of the United States; or
o
[if permitted] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in
subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the
cashless exercise procedure set forth in subsection 2(c).
(3) Please
issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is
specified below:
(4) After
giving effect to this Notice of Exercise, the undersigned will not have exceeded the Beneficial Ownership Limitation.
The Warrant Shares shall be delivered to the following DWAC
Account Number or by physical delivery of a certificate to:
[SIGNATURE OF HOLDER]
Name of Investing Entity:
________________________________________________________________________
Signature of Authorized Signatory of Investing Entity:
_________________________________________________
Name of Authorized Signatory:
___________________________________________________________________
Title of Authorized Signatory:
____________________________________________________________________
Date:
______________________________________________________________________________
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
HARRISON
VICKERS AND WATERMAN INC.
FOR VALUE RECEIVED, [____] all
of or [_______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to
_______________________________________________ whose address
is
_______________________________________________________________.
_______________________________________________________________
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Dated: ______________, _______ |
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Holder’s Signature: |
_____________________________ |
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Holder’s Address: |
_____________________________ |
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_____________________________ |
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond
with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be
guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
NOTICE OF EXERCISE
| TO: | HARRISON VICKERS AND WATERMAN INC.
4224 White Plains Road, 3rd Floor
Bronx, New York 10466 |
(1) The undersigned
hereby elects to purchase $78,000 principal amount of secured convertible promissory notes of HARRISON VICKERS AND WATERMAN
(the “Company”) pursuant to the terms of the attached AIR and tenders herewith payment of the amount equal to such
Stated Value.
(2) Payment shall take the form of (check
applicable box) in lawful money of the United States,
¨
Cash;
x
Wire Transfer; or
¨
Check
(3) Please issue a
certificate or certificates representing said AIR Notes and AIR Warrants representing the right to purchase 62,400,000 shares
of the Company’s Common Stock in the name of the undersigned or in such other name as is specified below:
The AIR Notes and AIR Warrants shall be delivered to the following:
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c/o LH Financial Services Corp. |
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510 Madison Avenue, 14th Floor |
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New York, NY 10022 |
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(4) ACCREDITED INVESTOR. The undersigned
is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.
[SIGNATURE OF HOLDER]
Name of Investing Entity: |
Alpha Capital Anstalt |
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY:
_________________________
Name of Authorized Signatory: Konrad Ackermann_____________________________________
Title of Authorized Signatory: Director_______________________________________________
Date: October 14 ,2015___________________________________________________________
EXHIBIT (10)(146)
NEITHER THIS SECURITY NOR THE SECURITIES
INTO WHICH THIS SECURITY IS CONVERTIBLE HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION
OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH
EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO BORROWER. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION
OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH
A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
THIS NOTE HAS BEEN ISSUED PURSUANT TO
THE EXERCISE OF AN ADDITIONAL INVESTMENT RIGHT ISSUED PURSUANT TO AN ASSET PURCHASE AGREEMENT AMONG HARRISON VICKERS AND WATERMAN
INC., THE INITIAL HOLDER ON APRIL 21, 2015 (THE “PURCHASE AGREEMENT”) IN CONNECTION WITH TRANSACTIONS DESCRIBED
THEREIN.
Original Issue Date: October
20, 2015
Principal Amount: $35,000.00
SECURED
CONVERTIBLE NOTE
DUE
Ocotber 20, 2017
THIS CONVERTIBLE NOTE
is one of a series of duly authorized and validly issued Notes of HARRISON VICKERS AND WATERMAN INC., a Nevada corporation, (the
“Borrower”), having its principal place of business at 4224 White Plains Road, 3rd Floor, Bronx,
New York 10466, due October 20, 2017 (this note, the “Note” and, collectively with the other notes of
such series, the “Notes”).
FOR VALUE RECEIVED,
Borrower promises to pay to TARPON BAY PARTNERS LLC, 90 Grove Street, Suite 206, Ridgefield, Connecticut 06877 or its registered
assigns (the “Holder”), or shall have paid pursuant to the terms hereunder, the principal sum of Thirty Five
Thousand Dollars ($35,000.00) on October 20, 2017 (the “Maturity Date”) or such earlier date as this
Note is required or permitted to be repaid as provided hereunder, and to pay interest, if any, to the Holder on the aggregate unconverted
and then outstanding principal amount of this Note in accordance with the provisions hereof.
The Holder of this
Note has been granted a security interest in assets of the Borrower.
This Note is subject
to the following additional provisions:
Section 1. Definitions.
For the purposes hereof, in addition to the terms defined elsewhere in this Note, (a) capitalized terms not otherwise defined herein
shall have the meanings set forth in the Purchase Agreement and (b) the following terms shall have the following meanings:
“Alternate
Consideration” shall have the meaning set forth in Section 5(e).
“Bankruptcy
Event” means any of the following events: (a) Borrower or any Subsidiary thereof commences a case or other proceeding
under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation
or similar law of any jurisdiction relating to Borrower or any Subsidiary thereof, (b) there is commenced against Borrower or any
Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement, (c) Borrower or any Subsidiary
thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered,
(d) Borrower or any Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its
property that is not discharged or stayed within 60 calendar days after such appointment, (e) Borrower or any Subsidiary thereof
makes a general assignment for the benefit of creditors, (f) Borrower or any Subsidiary thereof calls a meeting of its creditors
with a view to arranging a composition, adjustment or restructuring of its debts or (g) Borrower or any Subsidiary thereof, by
any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any
corporate or other action for the purpose of effecting any of the foregoing.
“Beneficial
Ownership Limitation” shall have the meaning set forth in Section 4(d).
“Business
Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or
any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to
close.
“Buy-In”
shall have the meaning set forth in Section 4(c)(v).
“Change
of Control Transaction” means, other than by means of conversion or exercise of the Notes and the Securities issued together
with the Notes, the occurrence after the date hereof of any of (a) an acquisition after the date hereof by an individual or legal
entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of Borrower, by contract or otherwise) of in excess of 50% of the voting
securities of Borrower, (b) Borrower merges into or consolidates with any other Person, or any Person merges into or consolidates
with Borrower and, after giving effect to such transaction, the stockholders of Borrower immediately prior to such transaction
own less than 50% of the aggregate voting power of Borrower or the successor entity of such transaction, or (c) Borrower sells
or transfers all or substantially all of its assets to another Person and the stockholders of Borrower immediately prior to such
transaction own less than 50% of the aggregate voting power of the acquiring entity immediately after the transaction, (d) the
execution by Borrower of an agreement to which Borrower is a party or by which it is bound, providing for any of the events set
forth in clauses (a) through (d) above.
“Closing
Price” means on any particular date (a) the last reported closing bid price per share of Common Stock on such date
on the Trading Market (as reported by Bloomberg L.P. at 4:15 p.m. (New York City time)), or (b) if there is no such price on such
date, then the closing bid price on the Trading Market on the date nearest preceding such date (as reported by Bloomberg L.P. at
4:15 p.m. (New York City time)), or (c) if the Common Stock is not then listed or quoted on a Trading Market and if prices
for the Common Stock are then reported in the “pink sheets” published by Pink OTC Markets, Inc. (or a similar organization
or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported,
or (d) if the shares of Common Stock are not then publicly traded the fair market value of a share of Common Stock as determined
by an independent appraiser selected in good faith by the Holder and reasonably acceptable to Borrower, the fees and expenses of
which shall be paid by Borrower.
“Common
Stock” means the common stock of the Company, $0.0001 par value, and any other class of securities into which such securities
may hereafter be reclassified or changed.
“Common
Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to
acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument
that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.
“Conversion”
shall have the meaning ascribed to such term in Section 4.
“Conversion
Date” shall have the meaning set forth in Section 4(a).
“Conversion
Price” shall have the meaning set forth in Section 4(b).
“Conversion
Shares” means, collectively, the shares of Common Stock issuable upon conversion of this Note in accordance with the
terms hereof.
“Distribution”
shall have the meaning set forth in Section 5(d).
“Event
of Default” shall have the meaning set forth in Section 8(a).
“Fundamental
Transaction” shall have the meaning set forth in Section 5(e).
“Interest
Payment Date” shall have the meaning set forth in Section 2(a).
“Loan
Documents” shall have the meaning set forth in Section 9.
“Mandatory
Conversion” shall have the meaning set forth in Section 6.
“Mandatory
Conversion Date” shall have the meaning set forth in Section 6.
“Mandatory
Default Amount” means the sum of (a) the greater of (i) the outstanding principal amount of this Note divided by the
Conversion Price on the date the Mandatory Default Amount is either (A) demanded (if demand or notice is required to create an
Event of Default) or otherwise due or (B) paid in full, whichever has a lower Conversion Price, multiplied by the VWAP on the date
the Mandatory Default Amount is either (x) demanded or otherwise due or (y) paid in full, whichever has a higher VWAP, or (ii)
115% of the outstanding principal amount of this Note and (b) all other amounts, costs, expenses and liquidated damages due in
respect of this Note.
“New
York Courts” shall have the meaning set forth in Section 9(d).
“Note
Register” shall have the meaning set forth in Section 2(c).
“Notice
of Mandatory Conversion” shall have the meaning set forth in Section 6.
“Original
Issue Date” means the date of the first issuance of the Notes, regardless of any transfers of any Note and regardless
of the number of instruments which may be issued to evidence such Notes.
“Other
Holders” means the holders of Other Notes.
“Other
Notes” means Notes nearly identical to this Note issued to other Holders pursuant to the Purchase Agreement.
“Permitted
Indebtedness” means (x) any liabilities for borrowed money or amounts owed not in excess of $200,000 in the aggregate
(other than trade accounts payable incurred in the ordinary course of business), (y) all guaranties, endorsements and other contingent
obligations in respect of indebtedness of others, whether or not the same are or should be reflected in the Borrower’s consolidated
balance sheet (or the notes thereto) not affecting more than $200,000 in the aggregate, except guaranties by endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary course of business; and (z) the present value of
any lease payments not in excess of $200,000 due under leases required to be capitalized in accordance with GAAP. Neither the Borrower
nor any Subsidiary is in default with respect to any Indebtedness.
“Permitted
Lien” means the individual and collective reference to the following: (a) Liens for taxes, assessments and other governmental
charges or levies not yet due or Liens for taxes, assessments and other governmental charges or levies being contested in good
faith and by appropriate proceedings for which adequate reserves (in the good faith judgment of the management of Borrower) have
been established in accordance with GAAP, (b) Liens imposed by law which were incurred in the ordinary course of Borrower’s
business, such as carriers’, warehousemen’s and mechanics’ Liens, statutory landlords’ Liens, and other
similar Liens arising in the ordinary course of Borrower’s business, and which (x) do not individually or in the aggregate
materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business
of Borrower and its consolidated Subsidiaries or (y) are being contested in good faith by appropriate proceedings, which proceedings
have the effect of preventing for the foreseeable future the forfeiture or sale of the property or asset subject to such Lien,
and (c) Liens incurred prior to the Closing Date in connection with Permitted Indebtedness under clauses (a), (b) thereunder, and
Liens incurred in connection with Permitted Indebtedness under clause (c) thereunder, provided that such Liens are not secured
by assets of Borrower or its Subsidiaries other than the assets so acquired or leased.
“Purchase
Agreement” has the meaning set forth on the first page of this Note.
“Purchase
Rights” shall have the meaning set forth in Section 5(b).
“Reservation
Date” shall have the meaning set forth in Section 4(e)(vi).
“Securities
Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Share
Delivery Date” shall have the meaning set forth in Section 4(c)(ii).
“Successor
Entity” shall have the meaning set forth in Section 5(e).
“Threshold
Period” shall have the meaning set forth in Section 6(b).
“Trading
Day” means a day on which the principal Trading Market is open for trading.
“Trading
Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on
the date in question: the NYSE MKT, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New
York Stock Exchange, the OTC Bulletin Board, the OTCQB, or the OTCQX (or any successors to any of the foregoing).
“Transaction
Documents” shall have the meaning set forth in the Purchase Agreement of even date herewith among the Borrower and other
parties thereto.
“VWAP”
means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed
or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding
date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading
Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if the OTC Bulletin Board is not a Trading
Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin
Board, (c) if the Common Stock is not then listed or quoted for trading on the OTC Bulletin Board and if prices for the Common
Stock are then reported on the OTCQX, OTCQB or OTC Pink Marketplace maintained by the OTC Markets Group, Inc. (or a similar organization
or agency succeeding to its functions of reporting prices), the volume weighted average price of the Common Stock on the first
such facility (or a similar organization or agency succeeding to its functions of reporting prices), or (d) in all other cases,
the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Purchasers
of a majority in interest of the Securities then outstanding and reasonably acceptable to Borrower, the fees and expenses of which
shall be paid by Borrower.
Section 2. Interest.
a) Interest
in Cash or in Kind. Holders shall be entitled to receive, and Borrower shall pay, cumulative interest on the outstanding principal
amount of this Note compounded annually at the annual rate of 10% (subject to increase as set forth in this Note) payable
on each anniversary of the Original Issue Date and on the Maturity Date (each such date, an “Interest Payment Date”)
(if the Interest Payment Date is not a Trading Day, the applicable payment shall be due on the next succeeding Trading Day).
b) Payment
Grace Period. The Borrower shall not have any grace period to pay any monetary amounts due under this Note.
c) Conversion
Privileges. The Conversion Rights set forth in Section 4 shall remain in full force and effect immediately from the date hereof
and until the Note is paid in full regardless of the occurrence of an Event of Default. This Note shall be payable in full on the
Maturity Date, unless previously converted into Common Stock in accordance with Section 4 hereof.
d) Application
of Payments. Interest on this Note shall be calculated on the basis of a 360-day year and the actual number of days elapsed.
Payments made in connection with this Note shall be applied first to amounts due hereunder other than principal and interest, thereafter
to interest and finally to principal.
e) Pari
Passu. Except as otherwise set forth herein, all payments made on this Note and the Other Notes and all actions taken by the
Borrower with respect to this Note and the Other Notes, shall be made and taken pari passu with respect to this Note and
the Other Notes. Notwithstanding anything to the contrary contained herein or in the Transaction Documents, it shall not be considered
non-pari passu for a Holder or Other Holder to elect to receive interest paid in shares of Common Stock or for the Borrower to
actually pay interest in shares of Common Stock to such electing Holder or Other Holder.
f) Manner
and Place of Payment. Principal and interest on this Note and other payments in connection with this Note shall be payable
at the Holder’s offices as designated above in lawful money of the United States of America in immediately available funds
without set-off, deduction or counterclaim. Upon assignment of the interest of Holder in this Note, Borrower shall instead make
its payment pursuant to the assignee’s instructions upon receipt of written notice thereof. This Note may not be prepaid
or mandatorily converted without the consent of the Holder.
Section 3. Registration
of Transfers and Exchanges.
a) Different
Denominations. This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations,
as requested by the Holder surrendering the same. No service charge will be payable for such registration of transfer or exchange.
b) Investment
Representations. This Note has been issued subject to certain investment representations of the original Holder set forth in
the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal
and state securities laws and regulations.
c) Reliance
on Note Register. Prior to due presentment for transfer to Borrower of this Note, Borrower and any agent of Borrower may treat
the Person in whose name this Note is duly registered on the Note Register as the owner hereof for the purpose of receiving payment
as herein provided and for all other purposes, whether or not this Note is overdue, and neither Borrower nor any such agent shall
be affected by notice to the contrary.
Section 4. Conversion.
a) Voluntary
Conversion. At any time after the Original Issue Date until this Note is no longer outstanding, Note principal and/or at the
election of the Holder accrued interest shall be convertible, in whole or in part, into shares of Common Stock at the option of
the Holder, at any time and from time to time (subject to the conversion limitations set forth in Section 4(d) hereof). The
Holder shall effect conversions by delivering to Borrower a Notice of Conversion, the form of which is attached hereto as Annex
A (each, a “Notice of Conversion”), specifying therein the principal and/or interest amount of this Note
to be converted and the date on which such conversion shall be effected (such date, the “Conversion Date”).
If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion
is deemed delivered hereunder. To effect conversions hereunder, the Holder shall not be required to physically surrender this Note
to Borrower unless the entire principal amount of this Note has been so converted. Conversions hereunder shall have the effect
of lowering the outstanding principal amount of this Note or accrued interest, at the option of the Holder, in an amount equal
to the applicable conversion. The Holder and Borrower shall maintain records showing the principal and interest amount(s) converted
and the date of such conversion(s). Borrower may deliver an objection to any Notice of Conversion only within one (1) Business
Day of delivery of such Notice of Conversion. In the event of any dispute or discrepancy, the records of the Holder shall be controlling
and determinative in the absence of manifest error. The Holder, and any assignee by acceptance of this Note, acknowledge and
agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted
principal amount of this Note may be less than the amount stated on the face hereof.
b) Conversion
Price. The conversion price for the principal and interest in connection with voluntary conversions by the Holder shall be
equal to the lesser of (i) $0.0025, or (ii) fifty percent (50%) of the lowest Closing Price of the Common Stock for the thirty
(30) Trading Days preceding the Conversion Date, subject to adjustment herein (the “Conversion Price”).
c) Mechanics
of Conversion.
i. Conversion
Shares Issuable Upon Conversion of Principal Amount. The number of Conversion Shares issuable upon a conversion hereunder shall
be determined by the quotient obtained by dividing (x) the outstanding principal amount of this Note to be converted plus interest
elected by the Holder to be converted by (y) the Conversion Price.
ii. Delivery
of Certificate Upon Conversion. Not later than three (3) Trading Days after each Conversion Date (the “Share Delivery
Date”), Borrower shall deliver, or cause to be delivered, to the Holder a certificate or certificates representing the
Conversion Shares which, on or after the earlier of (i) the six month anniversary of the Original Issue Date or (ii) after the
effective date or a current registration statement, shall be free of restrictive legends and trading restrictions (other than those
which may then be required by the Purchase Agreement) representing the number of Conversion Shares being acquired upon the conversion
of this Note. On or after the earlier of (i) the six month anniversary of the Original Issue Date or (ii) the effective date, Borrower
shall use its best efforts to deliver any certificate or certificates required to be delivered by Borrower under this Section 4(c)
electronically through the Depository Trust Company or another established clearing corporation performing similar functions.
iii. Failure
to Deliver Certificates. If, in the case of any Notice of Conversion, such certificate or certificates are not delivered to
or as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to
Borrower at any time on or before its receipt of such certificate or certificates, to rescind such Conversion, in which event Borrower
shall promptly return to the Holder any original Note delivered to Borrower and the Holder shall promptly return to Borrower the
Common Stock certificates issued to such Holder pursuant to the rescinded Conversion Notice.
iv. Obligation
Absolute; Partial Liquidated Damages. Borrower’s obligations to issue and deliver the Conversion Shares upon conversion
of this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the
Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any
Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or
alleged breach by the Holder or any other Person of any obligation to Borrower or any violation or alleged violation of law by
the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of Borrower
to the Holder in connection with the issuance of such Conversion Shares; provided, however, that such delivery shall
not operate as a waiver by Borrower of any such action Borrower may have against the Holder. In the event the Holder of this Note
shall elect to convert any or all of the outstanding principal amount hereof, Borrower may not refuse conversion based on any claim
that the Holder or anyone associated or affiliated with the Holder has been engaged in any violation of law, agreement or for any
other reason, unless an injunction from a court, on notice to Holder, restraining and or enjoining conversion of all or part of
this Note shall have been sought and obtained, and Borrower posts a surety bond for the benefit of the Holder in the amount of
150% of the outstanding principal amount of this Note, which is subject to the injunction, which bond shall remain in effect until
the completion of arbitration/litigation of the underlying dispute and the proceeds of which shall be payable to the Holder to
the extent it obtains judgment. In the absence of such injunction, Borrower shall issue Conversion Shares or, if applicable, cash,
upon a properly noticed conversion. If Borrower fails for any reason to deliver to the Holder such certificate or certificates
pursuant to Section 4(c)(ii) by the Share Delivery Date, Borrower shall pay to the Holder, in cash, as liquidated damages and not
as a penalty, for each $1,000 of principal amount being converted, $10 per Trading Day (increasing to $20 per Trading Day on the
fifth (5th) Trading Day after such liquidated damages being to accrue) for each Trading Day after such Share Delivery
Date until such certificates are delivered or Holder rescinds such conversion. Nothing herein shall limit a Holder’s right
to pursue actual damages or declare an Event of Default pursuant to Section 8 hereof for Borrower’s failure to deliver Conversion
Shares within the period specified herein and the Holder shall have the right to pursue all remedies available to it hereunder,
at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any
such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable
law.
v. Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon Conversion. In addition to any other rights available to the Holder,
if Borrower fails for any reason to deliver to the Holder such certificate or certificates by the Share Delivery Date pursuant
to Section 4(c)(ii), and if after such Share Delivery Date the Holder is required by its brokerage firm to purchase (in an open
market transaction or otherwise), or the Holder or Holder’s brokerage firm otherwise purchases, shares of Common Stock to
deliver in satisfaction of a sale by the Holder of the Conversion Shares which the Holder was entitled to receive upon the conversion
relating to such Share Delivery Date (a “Buy-In”), then Borrower shall (A) pay in cash to the Holder (in addition
to any other remedies available to or elected by the Holder) the amount, if any, by which (x) the Holder’s total purchase
price (including any brokerage commissions) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number
of shares of Common Stock that the Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale
price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B)
at the option of the Holder, either reissue (if surrendered) this Note in a principal amount equal to the principal amount of the
attempted conversion (in which case such conversion shall be deemed rescinded) or deliver to the Holder the number of shares of
Common Stock that would have been issued if Borrower had timely complied with its delivery requirements under Section 4(c)(ii).
For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an
attempted conversion of this Note with respect to which the actual sale price of the Conversion Shares (including any brokerage
commissions) giving rise to such purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence,
Borrower shall be required to pay the Holder $1,000. The Holder shall provide Borrower written notice indicating the amounts payable
to the Holder in respect of the Buy-In and, upon request of Borrower, evidence of the amount of such loss. Nothing herein shall
limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation,
a decree of specific performance and/or injunctive relief with respect to Borrower’s failure to timely deliver certificates
representing shares of Common Stock upon conversion of this Note as required pursuant to the terms hereof.
vi. Reservation
of Shares Issuable Upon Conversion. Borrower covenants that it will from and after the Original Issue Date, and at all times
thereafter reserve and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance
upon conversion of this Note as herein provided, free from preemptive rights or any other actual contingent purchase rights of
Persons other than the Holder (and the other holders of the Notes), not less than such aggregate number of shares of the Common
Stock as shall be issuable upon the conversion of the then outstanding principal amount of this Note and interest which has accrued
and would accrue on such principal amount, assuming such principal amount was not converted through the Maturity Date. Borrower
covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully
paid and non-assessable.
vii. Fractional
Shares. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of this Note. As to
any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, Borrower shall at its election,
either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion
Price or round up to the next whole share.
viii. Transfer
Taxes and Expenses. The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without
charge to the Holder hereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery
of such certificates, provided that, Borrower shall not be required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of this Note
so converted and Borrower shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting
the issuance thereof shall have paid to Borrower the amount of such tax or shall have established to the satisfaction of Borrower
that such tax has been paid. Borrower shall pay all Transfer Agent fees required for same-day processing of any Notice of Conversion.
d) Holder’s
Conversion Limitations. Borrower shall not effect any conversion of this Note, and a Holder shall not have the right to convert
any portion of this Note, to the extent that after giving effect to the conversion set forth on the applicable Notice of Conversion,
the Holder (together with the Holder’s Affiliates, and any Persons acting as a group together with the Holder or any of the
Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For
purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall
include the number of shares of Common Stock issuable upon conversion of this Note with respect to which such determination is
being made, but shall exclude the number of shares of Common Stock which are issuable upon (i) conversion of the remaining, unconverted
principal amount of this Note beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of Borrower subject to a limitation on conversion or exercise analogous
to the limitation contained herein (including, without limitation, any other Notes or the Warrants) beneficially owned by the Holder
or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(d), beneficial ownership
shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder.
To the extent that the limitation contained in this Section 4(d) applies, the determination of whether this Note is convertible
(in relation to other securities owned by the Holder together with any Affiliates) and of which principal amount of this Note is
convertible shall be in the sole discretion of the Holder, and the submission of a Notice of Conversion shall be deemed to be the
Holder’s determination of whether this Note may be converted (in relation to other securities owned by the Holder together
with any Affiliates) and which principal amount of this Note is convertible, in each case subject to the Beneficial Ownership Limitation.
To ensure compliance with this restriction, the Holder will be deemed to represent to Borrower each time it delivers a Notice of
Conversion that such Notice of Conversion has not violated the restrictions set forth in this paragraph and Borrower shall have
no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated
above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder.
For purposes of this Section 4(d), in determining the number of outstanding shares of Common Stock, the Holder may rely on the
number of outstanding shares of Common Stock as stated in the most recent of the following: (i) Borrower’s most recent periodic
or annual report filed with the Commission, as the case may be, (ii) a more recent public announcement by Borrower, or (iii) a
more recent written notice by Borrower or Borrower’s transfer agent setting forth the number of shares of Common Stock outstanding.
Upon the written or oral request of a Holder, Borrower shall within two Trading Days confirm orally and in writing to the Holder
the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall
be determined after giving effect to the conversion or exercise of securities of Borrower, including this Note, by the Holder or
its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial
Ownership Limitation” shall be 9.99% of the number of shares of the Common Stock outstanding immediately after giving
effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder. The Holder may decrease
the Beneficial Ownership Limitation at any time and the Holder, upon not less than 61 days’ prior notice to Borrower, may
increase the Beneficial Ownership Limitation provisions of this Section 4(d), provided that the Beneficial Ownership Limitation
in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance
of shares of Common Stock upon conversion of this Note held by the Holder and the Beneficial Ownership Limitation provisions of
this Section 4(d) shall continue to apply. Any such increase will not be effective until the 61st day after such notice
is delivered to Borrower. The Beneficial Ownership Limitation provisions of this paragraph shall be construed and implemented in
a manner otherwise than in strict conformity with the terms of this Section 4(d) to correct this paragraph (or any portion hereof)
which may be defective or inconsistent with the intended Beneficial Ownership Limitation contained herein or to make changes or
supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall
apply to a successor holder of this Note.
Section 5. Certain
Adjustments.
a) Stock
Dividends and Stock Splits. If Borrower, at any time while this Note is outstanding: (i) pays a stock dividend or otherwise
makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any Common Stock Equivalents
(which, for avoidance of doubt, shall not include any shares of Common Stock issued by Borrower upon conversion of the Notes),
(ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of a reverse
stock split) outstanding shares of Common Stock into a smaller number of shares or (iv) issues, in the event of a reclassification
of shares of the Common Stock, any shares of capital stock of Borrower, then the Conversion Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of Borrower) outstanding immediately
before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such
event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination
of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date
in the case of a subdivision, combination or re-classification.
b) Subsequent
Rights Offerings. In addition to any adjustments pursuant to Section 5(a) above, if at any time Borrower grants, issues or
sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders
of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder
had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations
on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record
holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however,
to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the
Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or
beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right
to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the
Holder exceeding the Beneficial Ownership Limitation).
d) Pro
Rata Distributions. During such time as this Note is outstanding, if Borrower shall declare or make any dividend or other distribution
of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise
(including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend,
spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”),
at any time after the issuance of this Note, then, in each such case, the Holder shall be entitled to participate in such Distribution
to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock
acquirable upon complete exercise of this Note (without regard to any limitations on exercise hereof, including without limitation,
the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such
record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in
such Distribution (provided, however, to the extent that the Holder's right to participate in any such Distribution
would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate
in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution
to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if
ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
e) Fundamental
Transaction. If, at any time while this Note is outstanding, (i) Borrower, directly or indirectly, in one or more related transactions
effects any merger or consolidation of Borrower with or into another Person, (ii) Borrower, directly or indirectly, effects any
sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or
a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by Borrower
or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares
for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv)
Borrower, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization
of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged
for other securities, cash or property, (v) Borrower, directly or indirectly, in one or more related transactions consummates a
stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares
of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated
or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination)
(each a “Fundamental Transaction”), then, upon any subsequent conversion of this Note, the Holder shall have
the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence
of such Fundamental Transaction (without regard to any limitation in Section 4(d) and Section 4(e) on the conversion of this Note),
the number of shares of Common Stock of the successor or acquiring corporation or of Borrower, if it is the surviving corporation,
and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental
Transaction by a holder of the number of shares of Common Stock for which this Note is convertible immediately prior to such Fundamental
Transaction (without regard to any limitation in Section 4(d) and Section 4(e) on the conversion of this Note). For purposes of
any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration
based on the amount of Alternate Consideration issuable in respect of one (1) share of Common Stock in such Fundamental Transaction,
and Borrower shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative
value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities,
cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any conversion of this Note following such Fundamental Transaction. Borrower shall cause any successor
entity in a Fundamental Transaction in which Borrower is not the survivor (the “Successor Entity”) to assume
in writing all of the obligations of Borrower under this Note and the other Transaction Documents (as defined in the Purchase Agreement)
in accordance with the provisions of this Section 5(e) pursuant to written agreements in form and substance reasonably satisfactory
to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option
of the holder of this Note, deliver to the Holder in exchange for this Note a security of the Successor Entity evidenced by a written
instrument substantially similar in form and substance to this Note which is convertible for a corresponding number of shares of
capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable
upon conversion of this Note (without regard to any limitations on the conversion of this Note) prior to such Fundamental Transaction,
and with a conversion price which applies the conversion price hereunder to such shares of capital stock (but taking into account
the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital
stock, such number of shares of capital stock and such conversion price being for the purpose of protecting the economic value
of this Note immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form
and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and
be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Note and the other
Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every
right and power of Borrower and shall assume all of the obligations of Borrower under this Note and the other Transaction Documents
with the same effect as if such Successor Entity had been named as Borrower herein.
f) Subsequent
Equity Sales. If, at any time while this Note is outstanding, Borrower or any Subsidiary, as applicable, sells or grants any
option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any sale, grant or
any option to purchase or other disposition), any Common Stock or Common Stock Equivalents entitling any Person to acquire shares
of Common Stock at an effective price per share that is lower than the then Conversion Price (such lower price, the “Base
Conversion Price” and such issuances, collectively, a “Dilutive Issuance”) (if the holder of the Common Stock
or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued
in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is lower than
the Conversion Price, such issuance shall be deemed to have occurred for less than the Conversion Price on such date of the Dilutive
Issuance), then the Conversion Price shall be reduced to equal the Base Conversion Price. Such adjustment shall be made whenever
such Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no adjustment will be made under this
Section 6(b) in respect of an Exempt Issuance. If Borrower enters into a Variable Rate Transaction, despite the prohibition set
forth in the Purchase Agreement, Borrower shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest
possible conversion price at which such securities may be converted or exercised. Borrower shall notify the Holder in writing,
no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 6(b),
indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing
terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not Borrower provides
a Dilutive Issuance Notice pursuant to this Section 6(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled
to receive a number of Conversion Shares based upon the Base Conversion Price on or after the date of such Dilutive Issuance, regardless
of whether the Holder accurately refers to the Base Conversion Price in the Notice of Conversion.
g) Calculations.
All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.
For purposes of this Section 5, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall
be the sum of the number of shares of Common Stock (excluding any treasury shares of Borrower) issued and outstanding.
h) Notice
to the Holder.
i. Adjustment
to Conversion Price. Whenever the Conversion Price is adjusted pursuant to any provision of this Section 5, Borrower shall
promptly deliver to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment.
ii. Notice
to Allow Conversion by Holder. If (A) Borrower shall declare a dividend (or any other distribution in whatever form) on the
Common Stock, (B) Borrower shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) Borrower
shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights, (D) the approval of any stockholders of Borrower shall be required in connection with
any reclassification of the Common Stock, any consolidation or merger to which Borrower is a party, any sale or transfer of all
or substantially all of the assets of Borrower, or any compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property or (E) Borrower shall authorize the voluntary or involuntary dissolution, liquidation or winding up
of the affairs of Borrower, then, in each case, Borrower shall cause to be filed at each office or agency maintained for the purpose
of conversion of this Note, and shall cause to be delivered to the Holder at its last address as it shall appear upon the Note
Register, at least twenty (20) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or
if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that
holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure
to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required
to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public
information regarding Borrower or any of the Subsidiaries, Borrower shall simultaneously file such notice with the Commission pursuant
to a Current Report on Form 8-K. The Holder shall remain entitled to convert this Note during the 20-day period commencing on the
date of such notice through the effective date of the event triggering such notice except as may otherwise be expressly set forth
herein.
Section 6. Redemption
and Mandatory Conversion. Borrower shall have no right to require the Holder to surrender the Note for redemption, nor convert
any part or all of this Note without the consent of the Holder.
Section 7. Negative
Covenants. As long as any portion of this Note remains outstanding, unless the holders of at least 51% in principal amount
of the then outstanding Notes which must include the Lead Investor shall have otherwise given prior written consent, Borrower shall
not, and shall not permit any of the Subsidiaries to, directly or indirectly:
a) other
than Permitted Indebtedness, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for borrowed money
of any kind, including, but not limited to, a guarantee, on or with respect to any of its property or assets now owned or hereafter
acquired or any interest therein or any income or profits therefrom;
b) other
than Permitted Liens, enter into, create, incur, assume or suffer to exist any Liens of any kind, on or with respect to any of
its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;
c) amend
its charter documents, including, without limitation, its certificate of incorporation and bylaws, in any manner that materially
and adversely affects any rights of the Holder;
d) repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of its Common
Stock or Common Stock Equivalents other than as to the Conversion Shares as permitted or required under the Transaction Documents;
e) redeem,
defease, repurchase, repay or make any payments in respect of, by the payment of cash or cash equivalents (in whole or in part,
whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Indebtedness
(other than the Notes if on a pro-rata basis), whether by way of payment in respect of principal of (or premium, if any) or interest
on, such Indebtedness;
f) pay
cash dividends or distributions on any equity securities of Borrower;
g) enter
into any transaction with any Affiliate of Borrower which would be required to be disclosed in any public filing with the Commission,
unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors
of Borrower (even if less than a quorum otherwise required for board approval);
h) any
material damage to, or loss, theft or destruction of, any Collateral, whether or not insured, or any strike, lockout, labor dispute,
embargo, condemnation, or other casualty which causes, for more than fifteen (15) consecutive days, the cessation or substantial
curtailment of revenue producing activities at any facility of Borrower or any Subsidiary, if any such event or circumstance could
have a Material Adverse Effect; or
i) enter
into any agreement with respect to any of the foregoing.
Section 8. Events
of Default.
a) “Event of Default” means, wherever used herein, any of the following events (whatever the reason for such event
and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or
order of any court, or any order, rule or regulation of any administrative or governmental body):
i. any
default in the payment of (A) the principal amount of any Note or (B) liquidated damages and other amounts owing to a Holder on
any Note, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration
or otherwise) which default, solely in the case of a default under clause (B) above, is not cured within 7 Trading Days after Borrower
has become or should have become aware of such default;
ii. Borrower
shall fail to observe or perform any other covenant or agreement contained in the Notes (other than a breach by Borrower of its
obligations to deliver shares of Common Stock to the Holder upon conversion, which breach is addressed in clause (x) below) which
failure is not cured, if possible to cure, within the earlier to occur of (A) 7 Trading Days after notice of such failure sent
by the Holder or by any Other Holder to Borrower and (B) 15 Trading Days after Borrower has become or should have become aware
of such failure;
iii. a
default or event of default (subject to any grace or cure period provided in the applicable agreement, document or instrument)
shall occur under (A) any of the Transaction Documents, or (B) any other material agreement, lease, document or instrument to which
Borrower or any Subsidiary is obligated (and not covered by clause (vi) below);
iv. any
representation or warranty made in this Note, any other Transaction Documents, any written statement pursuant hereto or thereto
or any other report, financial statement or certificate made or delivered to the Holder or any Other Holder shall be untrue or
incorrect in any material respect as of the date when made or deemed made;
v. Borrower
or any Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) shall be subject to a Bankruptcy Event;
vi. Borrower
or any Subsidiary shall default on any of its obligations under any mortgage, credit agreement or other facility, indenture agreement,
factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness
for borrowed money or money due under any long term leasing or factoring arrangement that (a) involves an obligation greater than
$200,000, whether such indebtedness now exists or shall hereafter be created, and (b) results in such indebtedness becoming or
being declared due and payable prior to the date on which it would otherwise become due and payable;
vii. Borrower
shall be a party to any Change of Control Transaction or Fundamental Transaction or shall agree to sell or dispose of all or in
excess of 30% of its assets in one transaction or a series of related transactions (whether or not such sale would constitute a
Change of Control Transaction);
viii. Borrower
does not meet the current public information requirements under Rule 144;
ix. Borrower
shall fail for any reason to deliver certificates to a Holder prior to the seventh Trading Day after a Conversion Date pursuant
to Section 4(c) or Borrower shall provide at any time notice to the Holder, including by way of public announcement, of Borrower’s
intention to not honor requests for conversions of any Notes in accordance with the terms hereof;
x. any
Person shall breach any agreement delivered to the initial Holders pursuant to Section 2.2 of the Purchase Agreement;
xi. any
monetary judgment, writ or similar final process shall be entered or filed against Borrower, any subsidiary or any of their respective
property or other assets for more than $50,000, and such judgment, writ or similar final process shall remain unvacated, unbonded
or unstayed for a period of 90 calendar days;
xii. any
dissolution, liquidation or winding up by Borrower or a material Subsidiary of a substantial portion of their business;
xiii. cessation
of operations by Borrower or a material Subsidiary;
xiv. The
failure by Borrower or any material Subsidiary to maintain any material intellectual property rights, personal, real property,
equipment, leases or other assets which are necessary to conduct its business (whether now or in the future) and such breach is
not cured with twenty (20) days after written notice to the Borrower from the Holder;
xv. An
event resulting in the Common Stock no longer being listed or quoted on a Trading Market, or notification from a Trading Market
that the Borrower is not in compliance with the conditions for such continued quotation and such non-compliance continues for twenty
(20) days following such notification;
xvi. a
Commission or judicial stop trade order or suspension from its Principal Trading Market;
xvii. except
as disclosed in the SEC Reports, the restatement after the date hereof of any financial statements filed by the Borrower with the
Commission for any date or period from two years prior to the Original Issue Date and until this Note is no longer outstanding,
if the result of such restatement would, by comparison to the unrestated financial statements, have constituted a Material Adverse
Effect. For the avoidance of doubt, any restatement related to new accounting pronouncements shall not constitute a default under
this Section;
xviii. the
Borrower effectuates a reverse split of its Common Stock without ten (10) days prior written notice to the Holder;
xix. the
Borrower fails to have authorized and reserved 150% of the Conversion Shares issuable upon conversion of the Notes including Conversion
Shares issuable upon conversion of interest through the Maturity Date;
xx. a
failure by Borrower to notify Holder of any material event of which Borrower is obligated to notify Holder pursuant to the terms
of this Note or any other Transaction Document;
xxi. a
default by the Borrower of a material term, covenant, warranty or undertaking of any other agreement to which the Borrower and
Holder are parties, or the occurrence of an event of default under any such other agreement to which Borrower and Holder are parties
which is not cured after any required notice and/or cure period;
xxii. the
occurrence of an Event of Default under any Other Note; or
xxiii. any
provision of any Transaction Document shall at any time for any reason (other than pursuant to the express terms thereof) cease
to be valid and binding on or enforceable against the parties thereto, or the validity or enforceability thereof shall be contested
by any party thereto, or a proceeding shall be commenced by Borrower or any Subsidiary or any governmental authority having jurisdiction
seeking to establish the invalidity or unenforceability thereof, or Borrower or any Subsidiary shall deny in writing that it has
any liability or obligation purported to be created under any Transaction Document.
b) Remedies
Upon Event of Default, Fundamental Transaction and Change of Control Transaction. If any Event of Default or a Fundamental
Transaction or a Change of Control Transaction occurs, the outstanding principal amount of this Note, liquidated damages and other
amounts owing in respect thereof through the date of acceleration, shall become, at the Holder’s election, immediately due
and payable in cash at the Mandatory Default Amount. Commencing on the Maturity Date and also five (5) days after the occurrence
of any Event of Default interest on this Note shall accrue at an interest rate equal to the lesser of 15% per annum or the maximum
rate permitted under applicable law. Upon the payment in full of the Mandatory Default Amount, the Holder shall promptly surrender
this Note to or as directed by Borrower. In connection with such acceleration described herein, the Holder need not provide, and
Borrower hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it
under applicable law. Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the
Holder shall have all rights as a holder of the Note until such time, if any, as the Holder receives full payment pursuant to this
Section 8(b). No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.
Section 9. Security
Interest/Waiver of Automatic Stay. This Note is secured by a security interest granted to the Holder pursuant to a Security
Agreement, as delivered by Borrower to Holder. The Borrower acknowledges and agrees that should a proceeding under any bankruptcy
or insolvency law be commenced by or against the Borrower or a Subsidiary, or if any of the Collateral (as defined in the Security
Agreement) should become the subject of any bankruptcy or insolvency proceeding, then the Holder should be entitled to, among other
relief to which the Holder may be entitled under the Transaction Documents and any other agreement to which the Borrower or a Subsidiary
and Holder are parties (collectively, “Loan Documents”) and/or applicable law, an order from the court granting
immediate relief from the automatic stay pursuant to 11 U.S.C. Section 362 to permit the Holder to exercise all of its rights and
remedies pursuant to the Loan Documents and/or applicable law. THE BORROWER EXPRESSLY WAIVES THE BENEFIT OF THE AUTOMATIC STAY
IMPOSED BY 11 U.S.C. SECTION 362. FURTHERMORE, THE BORROWER EXPRESSLY ACKNOWLEDGES AND AGREES THAT NEITHER 11 U.S.C. SECTION 362
NOR ANY OTHER SECTION OF THE BANKRUPTCY CODE OR OTHER STATUTE OR RULE (INCLUDING, WITHOUT LIMITATION, 11 U.S.C. SECTION 105) SHALL
STAY, INTERDICT, CONDITION, REDUCE OR INHIBIT IN ANY WAY THE ABILITY OF THE HOLDER TO ENFORCE ANY OF ITS RIGHTS AND REMEDIES UNDER
THE LOAN DOCUMENTS AND/OR APPLICABLE LAW. The Borrower hereby consents to any motion for relief from stay that may be filed by
the Holder in any bankruptcy or insolvency proceeding initiated by or against the Borrower and, further, agrees not to file any
opposition to any motion for relief from stay filed by the Holder. The Borrower represents, acknowledges and agrees that this provision
is a specific and material aspect of the Loan Documents, and that the Holder would not agree to the terms of the Loan Documents
if this waiver were not a part of this Note. The Borrower further represents, acknowledges and agrees that this waiver is knowingly,
intelligently and voluntarily made, that neither the Holder nor any person acting on behalf of the Holder has made any representations
to induce this waiver, that the Borrower has been represented (or has had the opportunity to he represented) in the signing of
this Note and the Loan Documents and in the making of this waiver by independent legal counsel selected by the Borrower and that
the Borrower has discussed this waiver with counsel.
Section 10. Miscellaneous.
a) Notices.
All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return
receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted
by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine,
at the address or number designated below (if delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service,
fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be: (i) if to Borrower, to: Harrison Vickers and Waterman Inc., 4224 White Plains Road, 3rd
Floor, Bronx, New York 10466, Attn: Roy Warren, and (ii) if to the Holder, to: the address and fax number indicated on the front
page of this Note, with an additional copy by fax only to (which shall not constitute notice): Grushko & Mittman, P.C., 515
Rockaway Avenue, Valley Stream, New York 11581, facsimile: (212) 697-3575.
b) Absolute
Obligation. Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of Borrower,
which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest, as applicable, on this Note
at the time, place, and rate, and in the coin or currency, herein prescribed. This Note is a direct debt obligation of Borrower.
This Note ranks pari passu with all other Notes now or hereafter issued under the terms set forth herein.
c) Lost
or Mutilated Note. If this Note shall be mutilated, lost, stolen or destroyed, Borrower shall execute and deliver, in exchange
and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed
Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed, but only upon receipt of evidence
of such loss, theft or destruction of such Note, and of the ownership hereof, reasonably satisfactory to Borrower.
d) Governing
Law. All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by
and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict
of laws thereof. Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions
contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective Affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York,
Borough of Manhattan (the “New York Courts”). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby
irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such proceeding. Each
party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding
by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other
manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable
law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note or the transactions contemplated
hereby. If any party shall commence an action or proceeding to enforce any provisions of this Note, then the prevailing party in
such action or proceeding shall be reimbursed by the other party for its attorneys fees and other costs and expenses incurred in
the investigation, preparation and prosecution of such action or proceeding. This Note shall be deemed an unconditional obligation
of Borrower for the payment of money and, without limitation to any other remedies of Holder, may be enforced against Borrower
by summary proceeding pursuant to New York Civil Procedure Law and Rules Section 3213 or any similar rule or statute in the jurisdiction
where enforcement is sought. For purposes of such rule or statute, any other document or agreement to which Holder and Borrower
are parties or which Borrower delivered to Holder, which may be convenient or necessary to determine Holder’s rights hereunder
or Borrower’s obligations to Holder are deemed a part of this Note, whether or not such other document or agreement was delivered
together herewith or was executed apart from this Note.
e) Waiver.
Any waiver by Borrower or the Holder of a breach of any provision of this Note shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of this Note. The failure of Borrower or the Holder
to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that
party of the right thereafter to insist upon strict adherence to that term or any other term of this Note on any other occasion.
Any waiver by Borrower or the Holder must be in writing.
f) Severability.
If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any
provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances.
g) Usury.
If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury,
the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under
applicable law. Borrower covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead,
or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would
prohibit or forgive Borrower from paying all or any portion of the principal of or interest on this Note as contemplated herein,
wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Note, and
Borrower (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants
that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holder, but
will suffer and permit the execution of every such as though no such law has been enacted.
h) Next
Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day.
i) Headings.
The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit
or affect any of the provisions hereof.
j) Amendment.
Unless otherwise provided for hereunder, this Note may not be modified or amended or the provisions hereof waived without the written
consent of Borrower and the Holder.
k) Facsimile
Signature. In the event that the Borrower’s signature is delivered by facsimile transmission, PDF, electronic signature
or other similar electronic means, such signature shall create a valid and binding obligation of the Borrower with the same force
and effect as if such signature page were an original thereof.
*********************
(Signature Pages Follow)
IN WITNESS WHEREOF, Borrower has
caused this Note to be signed in its name by an authorized officer as of the date written above.
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HARRISON VICKERS AND WATERMAN, INC. |
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By: |
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Name: |
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Title: |
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby
elects to convert principal under the Convertible Note due October 20, 2017 of Harrison Vickers and Waterman, Inc., a Nevada corporation
(the “Borrower”), into shares of common stock (the “Common Stock”), of Borrower according
to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such
certificates and opinions as reasonably requested by Borrower in accordance therewith. No fee will be charged to the holder for
any conversion, except for such transfer taxes, if any.
By the delivery of
this Notice of Conversion the undersigned represents and warrants to Borrower that its ownership of the Common Stock does not exceed
the amounts specified under Section 4 of this Note, as determined in accordance with Section 13(d) of the Exchange Act.
The undersigned agrees
to comply with the prospectus delivery requirements under the applicable securities laws in connection with any transfer of the
aforesaid shares of Common Stock.
Conversion calculations:
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Date to Effect Conversion: ____________________________ |
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Principal Amount of Note to be Converted: $__________________ |
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Number of shares of Common Stock to be issued: ______________ |
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* Interest Amount to be Converted: $_______________ |
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Signature: _________________________________________ |
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Name: ____________________________________________ |
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Address for Delivery of Common Stock Certificates: __________ |
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Or |
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DWAC Instructions: _________________________________ |
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Broker No:_____________ |
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Account No: _______________ |
* Interest on Principal Amount of $____________ for period of
______________ through ________________.
NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY
IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF
WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY
BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
COMMON STOCK PURCHASE CLASS A WARRANT
HARRISON
VICKERS AND WATERMAN INC.
Warrant Shares: 28,000,000 |
Initial Exercise Date: October 20, 2015 |
Warrant No: A_
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”)
certifies that, for value received, Tarpon Bay Partners LLC, 90 Grove Street, Suite 206, Ridgefield, Connecticut 06877 or its assigns
(the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter
set forth, at any time on or after the date hereof (the “Initial Exercise Date”) and on or prior to the close
of business on the seven (7) year anniversary of the Initial Exercise Date (the “Termination Date”) but not
thereafter, to subscribe for and purchase from HARRISON VICKERS AND WATERMAN INC., a Nevada corporation (the “Company”),
up to 62,400,000 shares (as subject to adjustment hereunder, the “Warrant Shares”) of Common Stock. The
purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).
Section 1. Definitions.
Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Asset Purchase Agreement
(the “Purchase Agreement”), dated April 21, 2015, among the Company and the purchasers signatory thereto.
Section 2. Exercise.
a)
Exercise of the purchase rights represented by this Warrant
may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date
by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered
Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy of the Notice of Exercise
Form annexed hereto. Within two (2) Trading Days following the date of exercise as aforesaid, the Holder shall deliver the aggregate
Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on
a United States bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice
of Exercise. Notwithstanding anything herein to the contrary (although the Holder may surrender the Warrant to, and receive a replacement
Warrant from, the Company), the Holder shall not be required to physically surrender this Warrant to the Company until the Holder
has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder
shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date the final Notice of Exercise
is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant
Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in
an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing
the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of
Exercise Form within one (1) Trading Day of delivery of such notice. The Holder and any assignee, by acceptance of this Warrant,
acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares
hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on
the face hereof.
b)
Exercise Price. The initial exercise price per share
of the Common Stock under this Warrant shall be $0.0025, subject to adjustment hereunder (the “Exercise Price”).
c)
Cashless Exercise. If at any time after the Initial Exercise
Date, there is no effective registration statement registering, or no current prospectus available for the resale of the Warrant
Shares by the Holder, then this Warrant may also be exercised at the Holder’s election, in whole or in part, at such time
by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal
to the quotient obtained by dividing [(A-B) (X)] by (A), where:
(A) = the VWAP on the Trading Day
immediately preceding the date on which Holder elects to exercise this Warrant by means of a “cashless exercise,” as
set forth in the applicable Notice of Exercise;
(B) = the Exercise Price of this
Warrant, as adjusted hereunder; and
(X) = the number of Warrant
Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were
by means of a cash exercise rather than a cashless exercise.
Notwithstanding anything herein
to the contrary, on the Termination Date, unless the Holder notifies the Company otherwise, if there is no effective Registration
Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder, then this Warrant
shall be automatically exercised via cashless exercise pursuant to this Section 2(c).
d)
Mechanics of Exercise.
| i. | Delivery of Certificates Upon Exercise. Certificates
for shares purchased hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s
prime broker with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”)
if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the
issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) this Warrant is being exercised via cashless
exercise and Rule 144 is available, and otherwise by physical delivery to the address specified by the Holder in the Notice of
Exercise by the date that is three (3) Trading Days after the latest of (A) the delivery to the Company of the Notice of Exercise,
(B) surrender of this Warrant (if required) and (C) payment of the aggregate Exercise Price as set forth above (including by cashless
exercise, if permitted) (such date, the “Warrant Share Delivery Date”). The Warrant Shares shall be deemed
to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder
of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise
Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 2(d)(vi)
prior to the issuance of such shares, having been paid. The Company understands that a delay in the delivery of the Warrant Shares
after the Warrant Share Delivery Date could result in economic loss to the Holder. As compensation to the Holder for such loss,
the Company agrees to pay (as liquidated damages and not as a penalty) to the Holder for late issuance of Warrant Shares upon
exercise of this Warrant the proportionate amount of $10 per Trading Day (increasing to $20 per Trading Day after the fifth (5th)
Trading Day) after the Warrant Share Delivery Date for each $1,000 of Exercise Price of Warrant Shares for which this Warrant
is exercised which are not timely delivered. The Company shall pay any payments incurred under this Section in immediately available
funds upon demand. Furthermore, in addition to any other remedies which may be available to the Holder, in the event that the
Company fails for any reason to effect delivery of the Warrant Shares by the Warrant Share Delivery Date, the Holder may revoke
all or part of the relevant Warrant exercise by delivery of a notice to such effect to the Company, whereupon the Company and
the Holder shall each be restored to their respective positions immediately prior to the exercise of the relevant portion of this
Warrant, except that the liquidated damages described above shall be payable through the date notice of revocation or rescission
is given to the Company. |
ii. Delivery
of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder
and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant
Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called
for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii. Rescission
Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing
the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right, at any
time prior to issuance of such Warrant Shares, to rescind such exercise.
iv. Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon Exercise. In addition to any other rights available to the Holder,
if the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant
Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its
broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares
of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving
upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by
which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased
exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the
Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation
was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant
Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder
the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery
obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In
with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation
of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon
request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other
remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock
upon exercise of the Warrant as required pursuant to the terms hereof.
v. No
Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise
of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the
Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction
multiplied by the Exercise Price or round up to the next whole share.
vi. Charges,
Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or
transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall
be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed
by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other
than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto
duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any
Notice of Exercise.
vii. Closing
of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this
Warrant, pursuant to the terms hereof.
e)
Holder’s Exercise Limitations. The Company shall
not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant
to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable
Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with
the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as
defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder
and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which
such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise
of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise
or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation,
any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein
beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of
this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder
that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules
required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination
of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of
which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise
shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities
owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to
the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination.
In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d)
of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the
number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected
in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent
public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number
of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading
Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the
number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities
of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares
of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 9.99% of the number of shares of
the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of
this Warrant. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial
Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99%
of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock
upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any such increase
or decrease will not be effective until the 61st day after such notice is delivered to the Company. The provisions of
this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section
2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership
Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation.
The limitations contained in this paragraph shall apply to a successor holder of this Warrant.
Section 3. Certain
Adjustments.
a)
Stock Dividends and Splits. If the Company, at any time
while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its
Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt,
shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant or pursuant to any of the other
Transaction Documents), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including
by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification
of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied
by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding
immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately
after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the
aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become
effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
b)
Subsequent Rights Offerings. In addition to any adjustments
pursuant to Section 3(a) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase
stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase
Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon
complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial
Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in
any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be
entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result
of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such
time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
c)
Pro Rata Distributions. If the Company, at any time while
this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to the Holder) evidences of its indebtedness
or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common
Stock (which shall be subject to Section 3(b)), then in each such case the Exercise Price shall be adjusted by multiplying the
Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of
which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the
portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined
by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holder
of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common
Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record
date mentioned above.
d)
Fundamental Transaction. If, at any time while this Warrant
is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation
of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment,
transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions,
(iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed
pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or
property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly,
in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash
or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase
agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme
of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding
shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to,
or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business
combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder
shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the
occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the
exercise of this Warrant) the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if
it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable
as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant).
For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting
the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice
as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice
as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. Notwithstanding
anything to the contrary, in the event of a Fundamental Transaction that is (1) an all cash transaction, (2) a “Rule 13e-3
transaction” as defined in Rule 13e-3 under the Exchange Act, or (3) a Fundamental Transaction involving a person or entity
not traded on a national securities exchange or trading market (with such exchange or market including, without limitation, the
Nasdaq Global Select Market, the Nasdaq Global Market, or the Nasdaq Capital Market, The New York Stock Exchange, Inc., the NYSE
or Amex), the Company or any Successor Entity (as defined below) shall, at the Holder’s option, exercisable concurrently
with the consummation of the Fundamental Transaction, purchase this Warrant from the Holder by paying to the Holder the higher
of (i) an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of this Warrant on the date of the
consummation of such Fundamental Transaction, or (ii) the positive difference between the cash per share paid in such Fundamental
Transaction minus the then in effect Exercise Price. “Black Scholes Value” means the value of the unexercised
portion of this Warrant based on the Black and Scholes Option Pricing Model obtained from the “OV” function on Bloomberg,
L.P. (“Bloomberg”) determined as of the day of consummation of the applicable Fundamental Transaction for pricing
purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between
the date of the public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility
equal to the greater of 100% and the 100 day volatility obtained from the “HVT” function on Bloomberg as of the Trading
Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share
used in such calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash
consideration, if any, being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between
the date of the public announcement of the applicable Fundamental Transaction and the Termination Date. The Company shall cause
any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”)
to assume in writing all of the obligations of the Company under this Warrant and the other Transaction Documents in accordance
with the provisions of this Section 3(d) pursuant to written agreements in form and substance reasonably satisfactory to the Holder
and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder,
deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially
similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such
Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this
Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an
exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative
value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such
number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant
immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance
to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted
for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant and the other Transaction
Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and
power of the Company and shall assume all of the obligations of the Company under this Warrant and the other Transaction Documents
with the same effect as if such Successor Entity had been named as the Company herein.
e)
Subsequent Equity Sales. If the Company or any Subsidiary thereof,
as applicable, at any time while this Warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any
right to reprice, or otherwise issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common
Stock or Common Stock Equivalents, at an effective price per share less than the Exercise Price then in effect, excluding Exempt
Issuances as defined in the Purchase Agreement (such lower price, the “Base Share Price” and such issuances collectively,
a “Dilutive Issuance”) (it being understood and agreed that if the holder of the Common Stock or Common Stock Equivalents
so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise
or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance,
be entitled to receive shares of Common Stock at an effective price per share that is less than the Exercise Price, such issuance
shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance at such effective price),
then simultaneously with the consummation of each Dilutive Issuance the Exercise Price shall be reduced and only reduced to equal
the Base Share Price and the number of Warrant Shares issuable hereunder shall be increased such that the aggregate Exercise Price
payable hereunder, after taking into account the decrease in the Exercise Price, shall be equal to the aggregate Exercise Price
prior to such adjustment. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. Notwithstanding
the foregoing, no adjustments shall be made, paid or issued under this Section 3(e) in respect of an Exempt Issuance. The Company
shall notify the Holder, in writing, no later than the Trading Day following the issuance or deemed issuance of any Common Stock
or Common Stock Equivalents subject to this Section 3(e), indicating therein the applicable issuance price, or applicable reset
price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For
purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 3(e), upon the
occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price
regardless of whether the Holder accurately refers to the Base Share Price in the Notice of Exercise. If the Company enters into
a Variable Rate Transaction, despite the prohibition thereon in the Purchase Agreement, the Company shall be deemed to have issued
Common Stock or Common Stock Equivalents at the lowest possible conversion or exercise price at which such securities may be converted
or exercised. Notwithstanding the foregoing, the issuance of any Common Stock or Common Stock Equivalents pursuant to the Purchase
Agreement shall not be deemed a Dilutive Issuance.
f) Calculations.
All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.
For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall
be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
g)
Notice to Holder.
i. Adjustment
to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly
mail to the Holder a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of
Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice
to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the
Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the
Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares
of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection
with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer
of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted
into other securities, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of
the affairs of the Company, then, in each case, to the extent that such information constitutes material non-public information
(as determined in good faith by the Company) the Company shall follow the procedure described in Section 13 of the Subscription
Agreement and shall deliver to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least
fifteen (15) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date
on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record
is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the
Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice
or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified
in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding
the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current
Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such
notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
Section 4. Transfer
of Warrant.
a)
Transferability. Subject to compliance with any applicable
securities laws and the provisions of the Purchase Agreement, this Warrant and all rights hereunder (including, without limitation,
any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company
or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed
by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer.
Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name
of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment,
and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly
be cancelled. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant
Shares without having a new Warrant issued.
b)
New Warrants. This Warrant may be divided or combined
with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying
the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance
with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver
a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All
Warrants issued on transfers or exchanges shall be dated the initial issuance date of this Warrant and shall be identical with
this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
c)
Warrant Register. The Company shall register this Warrant,
upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record
Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof
for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the
contrary.
Section 5. Miscellaneous.
a)
No Rights as Stockholder Until Exercise. This Warrant
does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise
hereof as set forth in Section 2(a).
b)
Loss, Theft, Destruction or Mutilation of Warrant. The
Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction,
of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any
bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver
a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
c)
Saturdays, Sundays, Holidays, etc. If the last or appointed
day for the taking of any action or the expiration of any right required or granted herein shall not be a Trading Day, then, such
action may be taken or such right may be exercised on the next succeeding Trading Day.
d)
Authorized Shares.
The Company covenants that, during the period the Warrant
is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the
issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that
its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates
to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant.
The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided
herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common
Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights
represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant
Shares in accordance herewith, be duly authorized, validly issued, fully paid and non-assessable and free from all taxes, liens
and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously
with such issue).
Except and to the extent as waived
or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of
incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will
at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary
or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality
of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon
such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant
and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory
body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.
Before taking any action which would
result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company
shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.
e)
Jurisdiction. All questions concerning the construction,
validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Purchase
Agreement.
f) Restrictions.
The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, or unless exercised
in a cashless exercise when Rule 144 is available, and the Holder does not utilize cashless exercise, will have restrictions upon
resale imposed by state and federal securities laws.
g)
Non-waiver and Expenses. No course of dealing or any
delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice
the Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant or the Purchase Agreement,
if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages
to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including,
but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting
any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
h)
Notices. Any notice, request or other document required
or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions
of the Purchase Agreement.
i) Limitation
of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase
Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder
for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company
or by creditors of the Company.
j) Remedies.
The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled
to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation
for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert
the defense in any action for specific performance that a remedy at law would be adequate.
k)
Successors and Assigns. Subject to applicable securities
laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors
and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended
to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant
Shares.
l) Amendment.
This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holders
of not less than a majority of the outstanding Warrants issued pursuant to the Purchase Agreement.
m)
Severability. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant
shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
n)
Headings. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
********************
(Signature Page Follows)
IN WITNESS WHEREOF, the Company has caused
this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
|
HARRISON VICKERS AND WATERMAN INC. |
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By: |
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Name: |
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Title: |
NOTICE OF EXERCISE
To: HARRISON VICKERS
AND WATERMAN INC.
(1) The
undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only
if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes,
if any.
(2) Payment
shall take the form of (check applicable box):
o
in lawful money of the United States; or
o
[if permitted] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in
subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the
cashless exercise procedure set forth in subsection 2(c).
(3) Please
issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is
specified below:
(4) After
giving effect to this Notice of Exercise, the undersigned will not have exceeded the Beneficial Ownership Limitation.
The Warrant Shares shall be delivered to the following DWAC
Account Number or by physical delivery of a certificate to:
[SIGNATURE OF HOLDER]
Name of Investing Entity:
________________________________________________________________________
Signature of Authorized Signatory of Investing Entity:
_________________________________________________
Name of Authorized Signatory:
___________________________________________________________________
Title of Authorized Signatory:
____________________________________________________________________
Date:
________________________________________________________________________________________
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
HARRISON
VICKERS AND WATERMAN INC.
FOR VALUE RECEIVED, [____] all
of or [_______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to
_______________________________________________ whose address
is
_______________________________________________________________.
_______________________________________________________________
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Dated: ______________, _______ |
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Holder’s Signature: |
_____________________________ |
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Holder’s Address: |
_____________________________ |
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_____________________________ |
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond
with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be
guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
NOTICE OF EXERCISE
| TO: | HARRISON VICKERS AND WATERMAN INC.
4224 White Plains Road, 3rd Floor
Bronx, New York 10466 |
(1) The undersigned
hereby elects to purchase $35,000 principal amount of secured convertible promissory notes of HARRISON VICKERS AND WATERMAN
(the “Company”) pursuant to the terms of the attached AIR and tenders herewith payment of the amount equal to such
Stated Value.
(2) Payment shall take the form of (check
applicable box) in lawful money of the United States,
¨ Cash;
x Wire
Transfer; or
¨ Check
(3) Please issue a
certificate or certificates representing said AIR Notes and AIR Warrants representing the right to purchase 28,000,000 shares
of the Company’s Common Stock in the name of the undersigned or in such other name as is specified below:
Tarpon
Bay Partners LLC
The AIR Notes and AIR Warrants shall be delivered to the following:
90 Grove
Street, Suite 206
Ridgefield,
Connecticut 06877
(4) ACCREDITED INVESTOR. The undersigned
is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.
[SIGNATURE OF HOLDER]
Name of Investing Entity: Tarpon Bay Partners LLC
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY:
_________________________
Name of Authorized Signatory: Steve Hicks
Title of Authorized Signatory: President
EXHIBIT (21)
Subsidiaries of Registrant
Attitude Drinks Incorporated (parent company) owns the following
companies:
Attitude Drink Company Inc. (100% subsidiary)
Attitude Drinks Incorporated has majority ownership of the shares
of common stock of:
Harrison, Vickers and Waterman, Inc. which owns 100% of:
Attitude Beer Holding Co. (100% subsidiary)
Exhibit 31.(i)
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Roy G. Warren, certify that:
(1) |
I have reviewed this quarterly report on Form 10-Q of Attitude Drinks Incorporated. |
(2) |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
(3) |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
(4) |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
(5) |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/s/Roy G. Warren |
|
Roy G. Warren |
|
President and Chief Executive Officer |
|
Dated: November 2, 2015 |
|
Exhibit 31.(ii)
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Tommy E. Kee, certify that:
(1) |
I have reviewed this quarterly report on Form 10-Q of Attitude Drinks Incorporated. |
(2) |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
(3) |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
(4) |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
(5) |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/s/Tommy E. Kee |
|
Tommy E. Kee |
|
Chief Financial Officer and Principal Accounting Officer |
|
Dated: November 2, 2015 |
|
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Report
of Attitude Drinks Incorporated (the "Company") on Form 10-Q for the period ending June 30, 2015 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Roy G. Warren, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with
the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in
the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
By: |
/S/ Roy G. Warren |
|
|
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Roy G. Warren |
|
|
|
President and Chief Executive Officer |
|
November 2, 2015
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Report
of Attitude Drinks Incorporated (the "Company") on Form 10-Q for the period ending June 30, 2014 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Tommy E. Kee, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with
the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in
the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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By: |
/S/ Tommy E. Kee |
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Tommy E. Kee |
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Chief Financial Officer and Principal Accounting Officer |
November 2, 2015