Attached files

file filename
EX-32.1 - CERTIFICATION - Attitude Drinks Inc.f10q090932i_attitude.htm
EX-31.1 - CERTIFICATION - Attitude Drinks Inc.f10q0909ex31i_attitude.htm
EX-4.6 - CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF DESIGNATION OF THE - Attitude Drinks Inc.f10q0909ex4vi_attitude.htm



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

FORM 10-Q
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2009
 
 
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from _________ to _________
 
Commission file number: 000-52904

 
  ATTITUDE DRINKS INCORPORATED  
  (Exact name of registrant as specified on its charter)  
 
 
Delaware
 
65-0109088
 
 
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 

10415 Riverside Drive, #101, Palm Beach Gardens, Florida 33410 USA
(Address of principal executive offices)

(561) 799-5053
(Registrant’s telephone number, including area code)

 
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
Large accelerated filer    o Accelerated filer                      o
Non-accelerated filer      o Smaller reporting company    x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS:
 
State the number of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date: 44,882,231 shares issued and outstanding as of November 23, 2009.

 
1

 
 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company

INDEX
 
   
PAGE(S)
PART I
FINANCIAL INFORMATION
 
     
Item 1 .
Condensed Consolidated Financial Statements:
 
     
  Balance Sheets – September 30, 2009 (unaudited) and March 31, 2009 3
     
  Statements of Operations – Three  Months Ended September 30, 2009 and 2008, Six Months Ended September 30, 2009 and 2008 and the Periods from Inception (June 18, 2007) to September 30, 2009 (unaudited) 4
     
  Statements of Cash Flows – Six Months Ended September 30, 2009  and 2008 and the Periods from Inception (June 18, 2007) to September 30, 2009 (unaudited) 5
     
 
Notes to Condensed Consolidated Financial Statements (unaudited)
6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
41
     
Item 4.
Controls and Procedures
41
     
PART II
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
42
     
Item 2.
Unregistered Sales of Equity and Use of Proceeds
42
     
Item 3.
Defaults upon Senior Securities
42
     
Item 4.
Submission of Matters to a Vote of Security Holders
42
     
Item 5.
Other Information/Subsequent Events
42
     
Item 6.
Exhibits
43
     
SIGNATURES
 
44
 
EXHIBITS
 
DOCUMENTS INCORPORATED BY REFERENCE: See Exhibits

 
2

 



ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
CONDENSED CONSOLIDATED BALANCE SHEETS
 
    September 30, 2009     March 31, 2009  
    (Unaudited)        
- ASSETS -
           
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 2,866     $ 119,637  
Accounts receivable, net of allowance for doubtful accounts of $957 for September 30, 2009 and March 31, 2009
    69       5,540  
Inventories, net of reserve for obsolescence of $119,511 and $43,102 for September 30, 2009 and March 31, 2009, respectively
    18,674       95,259  
    Deferred financing costs, net     36,860       203,842  
Prepaid expenses and other current assets
    125,769       111,343  
TOTAL CURRENT ASSETS
    184,238       535,621  
                 
FIXED ASSETS, NET     39,647       44,657  
                 
OTHER ASSETS:
               
                 
Trademarks, net
    532,662       529,789  
Deposits and other
    24,389       24,389  
                 
     TOTAL OTHER ASSETS
    557,051       554,178  
                 
TOTAL ASSETS
  $ 780,936     $ 1,134,456  
                 
- LIABILITIES AND STOCKHOLDERS' (DEFICIT) -
               
CURRENT LIABILITIES:
               
    Accounts payable   $ 1,237,225     $ 1,145,348  
    Accrued liabilities     3,367,921       2,667,557  
    Derivative liabilities     232,753       123,279  
    Short-term bridge loans payable     388,000       388,000  
    Convertible notes payable – current portion
    3,470,531       3,041,727  
    Loans payable to related parties
    21,463       46,463  
   TOTAL CURRENT LIABILITIES
    8,717,893       7,412,374  
                 
STOCKHOLDERS'  (DEFICIT):
               
    Series A convertible preferred stock, par value $0.001, 20,000,000 shares authorized, 9,000,000
         and 0 shares issued and outstanding at September 30, 2009 and March 31, 2009, respectively
    9,000       -  
    Common stock, par value $0.001, 100,000,000 shares authorized,  34,482,231 and 14,400,121 shares issued and outstanding at September 30, 2009
         and March 31, 2009, respectively
    34,482       14,400  
    Additional paid-in capital
    4,087,992       2,081,458  
Deficit accumulated during the development stage     (12,068,431 )     (8,373,776 )
                 
TOTAL STOCKHOLDERS'  (DEFICIT)
    (7,936,957 )     (6,277,918 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT)
  $ 780,936     $ 1,134,456  
 
See accompanying notes to consolidated financial statements
 
3


ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

   
Three Months Ended September 30, 2009
   
Three Months Ended September 30, 2008
   
Six Months Ended September 30, 2009
   
Six Months Ended September 30, 2008
   
Development Stage Period From Inception (June 18, 2007) to September 30, 2009
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
REVENUES:                              
        Net revenues   $ 168     $ 10,826     $ (4,791 )   $ 34,529     $ 19,806  
        Product and shipping costs     (76,451 )     (10,656 )     (76,536 )     (29,526 )     (153,279 )
GROSS PROFIT
    (76,283 )     170       (81,327 )     5,003       (133,473 )
                                         
OPERATING EXPENSES:
                                       
Salaries, taxes and employee benefits
    1,852,681       339,030       2,187,941       991,161       4,827,314  
        Marketing and promotion     88,939       477,247       190,716       956,622       1,975,154  
        Consulting fees     16,731       82,915       16,731       85,973       459,009  
        Professional and legal fees     109,641       80,189       161,907       137,073       600,338  
        Travel and entertainment     (1,362 )     29,761       9,241       74,696       216,532  
        Product development costs     1,500       -       9,000       950       103,950  
Other operating expenses
    63,596       88,182       136,002       144,889       687,553  
      2,131,726       1,097,324       2,711,538       2,391,364       8,869,850  
                                         
LOSS FROM OPERATIONS
    (2,208,009 )     (1,097,154 )     (2,792,865 )     (2,386,361 )     (9,003,323 )
                                         
OTHER INCOME (EXPENSE):                                        
       Derivative income (expense)     102,593       15,446,395       (148,294 )     2,499,335       86,246  
       Loss on extinguishment of debt     -       (161,573     -       (592,020     (1,125,804 )
       Interest and other financing costs     (229,210 )     2,549,905       (753,496 )     (453,269 )     (2,025,550 )
      (126,617 )     17,834,727       (901,790 )     1,454,046       (3,065,108 )
                                         
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES     (2,334,626 )     16,737,573       (3,694,655 )     (932,315 )     (12,068,431 )
Provision for income taxes     -       -       -       -       -  
                                         
NET INCOME (LOSS)
  $ (2,334,626 )   $ 16,737,573     $ (3,694,655 )   $ (932,315 )   $ (12,068,431 )
                                         
Basic income/(loss) per common share   $  (.11 )   $ 1.69     $ (.20 )   $ (.10 )        
                                         
Diluted income/(loss) per common share
  $ (.11   $ 1.18     $ (.20 )   $ (.10 )        
                                         
Weighted average common shares outstanding – basic
    21,474,328       9,925,600       18,655,713       9,328,844          
                                         
Weighted average common shares outstanding – diluted
    21,474,328       14,250,680       18,655,713       9,328,844          

See accompanying notes to consolidated financial statements.

4

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Six Months Ended September 30, 2009
   
Six Months Ended September 30, 2008
   
Development Stage Period From Inception
(June 18, 2007) to
September
30, 2009
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
Net  loss
  $ (3,694,655 )   $ (932,315 )   $ (12,068,431 )
Adjustment to reconcile net loss to net cash used in operating activities:
                       
    Depreciation and amortization     5,657       19,580       25,289  
    Amortization of deferred financing costs     176,982       223,171       809,989  
    Compensatory stock and warrants     1,876,828       824,553       3,322,792  
    Derivative expense/(income)     148,294       (2,499,335 )     (125,066 )
    Fair value adjustment of convertible note     403,763       (168,094 )     (111,148 )
    Loss on debt extinguishment     -       592,020       1,125,804  
    Amortization of debt discount     -       273,736       547,359  
    Loss on disposal of fixed assets     -       -       3,914  
    Changes in operating assets and liabilities:                        
        Accounts receivable     5,471       (3,653 )     (69 )
    Prepaid expenses and other assets
    (14,426 )     22,625       (150,157 )
    Inventories
    76,585       (39,744 )     (18,674 )
    Accounts payable and accrued liabilities
    718,583       1,221,401       4,275,960  
Net cash used in operating activities
    (296,918 )     (466,055 )     (2,362,438 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
    Purchase of equipment     -       (29,500 )     (29,300 )
    Trademarks     (3,520     (5,983 )     (64,712 )
Net cash used in investing activities
    (3,520 )     (35,483 )     (94,012 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
    Proceeds from convertible notes payable     145,000       100,000       1,630,000  
    Proceeds from short-term bridge loans payable     -       707,666       1,370,000  
    Costs associated with financing     (10,000 )     (140,938 )     (331,851 )
    Default Redemption     48,667       -       48,667  
    Repayment of notes     -       -       (260,000 )
    Capital contribution – common stock     -       -       2,500  
                         
Net cash provided by financing activities
    183,667       666,728       2,459,316  
                         
NET INCREASE IN CASH AND CASH EQUIVALENTS
    (116,771 )     165,190       2,866  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    119,637       3,737       -  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 2,866     $ 168,927     $ 2,866  

See accompanying notes to consolidated financial statements.

5

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009

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

(a)           Organization:

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

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

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

The Company is a development stage enterprise as defined by the Financial Accounting Standards Codification. All losses accumulated since the inception of the Company will be considered as part of the Company's development stage activities.  All activities of the Company to date relate to its organization, history, merger of its subsidiary, fundings and product development.  The Company's fiscal year end is March 31.  Its plan of operation during the next twelve months is to focus on the non-alcoholic single serving beverage business, developing and marketing products in four fast growing segments: energy drinks, functional water, liquid supplements and functional dairy.

(b)           Basis of Presentation/Going Concern:

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements of the Company contain all adjustments necessary to present fairly the Company’s financial position as of September 30, 2009 and 2008 and the results of its operations and cash flows for the periods ended September 30, 2009 and 2008.  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, 2009, which is incorporated herein by reference.  Specific reference is made to that report for a description of the Company’s securities and the notes to consolidated financial statements included therein.  The accompanying unaudited interim financial statements have been prepared in accordance with instructions to Form

6


ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009

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

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

10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America ("U.S. GAAP").

The results of operations for the six months period ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year.

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

The accompanying financial statements have been prepared on a going concern basis, which assumes the Company will realize its assets and discharge its liabilities in the normal course of business.  As reflected in the accompanying financial statements, the Company had insignificant revenues for the six months ended September  30, 2009, a working capital deficit of $8,533,655 as of September 30, 2009 and has incurred losses to date resulting in an accumulated deficit of $12,068,431, including derivative loss/expense. These factors create substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and pay its liabilities when they come due.  Management’s plan includes obtaining additional funds by debt and/or equity financings; however, there is no assurance of additional funding being available.

(c)           Inventories:

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

   
September 30, 2009 (unaudited)
   
March 31, 2009 (audited)
 
Finished goods
  $ 105,419     $ 105,595  
Reserve for obsolescence     (119,511 )     (43,102 )
Raw materials
    32,766       32,766  
                 
Total inventories
  $ 18,674     $ 95,259  

(d)           Deferred Financing Costs:

All costs associated with debt financings are capitalized and amortized on a straight-line basis over the life of the associated debt.  Amortization of deferred financing costs for the six months ended September 30, 2009 was $176,982.

7


ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009

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

(e)           Trademarks:

Trademarks consist of costs associated with the acquisition and development of certain trademarks.  Trademarks, when acquired, will be amortized using the straight-line method over 15 years, once the applicable trademarked products are available for sale.  Amortization of trademarks for the six months ended September 30, 2009 was $647.  On August 8, 2008, we acquired a portfolio of intellectual properties with the issuance of a $507,500 convertible note (see Note 4 f).  We expect to place these trademarks in service during the fiscal year ending March 31, 2012.

(f)           Financial Instruments:

Financial instruments, as defined in the FASB Accounting Standards Codification, consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, notes payable, derivative financial instruments, convertible debt and redeemable preferred stock that we have concluded is more akin to debt than equity.

We carry cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities at historical costs; their respective estimated fair values approximate carrying values due to their current nature.

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

We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by the FASB Accounting Standards Codification, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements. However, we are allowed to elect fair value measurement of the hybrid financial instruments, on a case-by-case basis, rather than bifurcate the derivative. We believe that fair value measurement of the hybrid convertible promissory notes arising from our October 23, 2007, January 8, 2008, January 27, 2009, March 30, 2009 and July 15, 2009 financing arrangements provide a more meaningful presentation of that financial instrument. The fair value of the Company’s financial instruments at September 30, 2009 used valuation approaches which utilize assumptions under the following fair value hierarchy in accordance with the FASB Accounting Standards Codification:
 
8

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 1.   Organization, Basis of Presentation and Significant Accounting Policies (Continued):

(f)           Financial Instruments (Continued):

(1)    
Level 1 inputs are quoted prices in active markets for identical assets and liabilities, or derived there from. Our trading market values are level 1 inputs.
(2)    
Level 2 inputs are inputs other than quoted prices that are observable. We use the current published yields for zero-coupon US Treasury Securities, with terms nearest the remaining term of the warrants for our risk free rate and volatility based on a peer group with similar characteristics to our Company.
(3)    
Level 3 inputs are unobservable inputs. Inputs for which any parts are level 3 inputs are classified as level 3 in their entirety. The remaining term used equals the remaining contractual term as our best estimate of the expected term. The credit-risk adjusted yield utilizes publicly available bond rates and the US Treasury Yields referred to above. However, we do not have a credit-standing and, therefore, we estimate our standing among various reported levels and grades. During all periods we estimated that our standing was in the speculative to high-risk grades (lower C range in the Standard and Poors Rating).

(g)           Income (Loss) Per Common Share:

The basic income (loss) per common share is computed by dividing the income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the reporting period. Diluted loss per common share is computed similar to basic loss per common share 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 six months ended September 30, 2009, potential common shares arising from the Company’s stock warrants, stock options and convertible debt  and preferred stock amounting to 416,220,460 shares were not included in the computation of diluted loss per share because their effect was anti-dilutive.

(h)           Subsequent Events:

The Company has evaluated subsequent events that occurred after September 30, 2009 through the date that the financial statements were issued on November 23, 2009.

(i)           Recent Accounting Pronouncements Applicable to the Company:
 
We have reviewed accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. We believe that the following impending standards may have an impact on our future filings. The applicability of any standard is subject to the formal review of our financial management, and certain standards are under consideration.
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (“Codification”). The Codification is the single source for all authoritative Generally Accepted Accounting Principles (“GAAP”) recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009.  The implementation of the Codification did not impact our financial statements or disclosures other than references to authoritative accounting literature are now made in accordance with the Codification.
 
In May 2009, the FASB issued guidance under ASC 855 “Subsequent Events” which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance required the Company to disclose the date through which the Company has evaluated subsequent events and the basis for the date. The guidance was
 
9

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 1.   Organization, Basis of Presentation and Significant Accounting Policies (Continued):
 
(i)
Recent Accounting Pronouncements Applicable to the Company (Continued):
 
effective for interim periods which ended after June 15, 2009. See Note 10, “Subsequent Events,” for disclosure of the date to which subsequent events are disclosed.
 
In June 2008, the FASB issued authoritative guidance as required by the “Derivative and Hedging” ASC Topic 815-10-15-74 in Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock. The objective is to provide guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock, and it applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative, for purposes of determining whether that instrument or embedded feature qualifies for the first part of the scope exception. This Issue also applies to any freestanding financial instrument that is potentially settled in an entity’s own stock, regardless of whether the instrument has all the characteristics of a derivative. We currently have warrants that embody terms and conditions that require the reset of their strike prices upon our sale of shares or equity-indexed financial instruments at amounts less than the conversion prices. These features will no longer be treated as “equity” once it becomes effective. Rather, such instruments will require classification as liabilities and measurement at fair value. Early adoption is precluded. This standard did not have a material impact on the financial statements due to the Company’s warrants previously requiring liability classification.  See Note 5 Derivative Liabilities of the consolidated financial statements for additional disclosure data.
 
In March 2008, the FASB issued guidance under ASC 815 “Derivatives and Hedging”. The guidance is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged. The Company has provided the required disclosures in the accompanying Notes to Condensed Consolidated Financial Statements. See Note 5 Derivative Liabilities of the consolidated financial statements for additional disclosure data.
 
In December 2007, the FASB issued revised guidance under ASC 805 “Business Combinations”, which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. ASC 805 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of ASC 805 did not have a material impact on the Company’s financial position, results of operations or cash flows because the Company has not been involved in any business combinations during the six months ended September 30, 2009.
 
In December 2007, the FASB issued guidance under ASC 810 “Consolidation” This guidance establishes new accounting and reporting standards for the Non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance will change the classification and reporting for minority interest and non-controlling interests of variable interest entities. The guidance requires the minority interest and non-controlling interest of variable interest entities to be carried as a component of stockholders’ equity. Accordingly we will reflect non-controlling interest in our consolidated variable interest entities as a component of stockholders’ equity. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008, and earlier adoption is prohibited. The Company adopted this guidance beginning March 31,
 
10

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
Note 1.   Organization, Basis of Presentation and Significant Accounting Policies (Continued):
 
(i)
 Recent Accounting Pronouncements Applicable to the Company (Continued):
 
2009. Since we do not currently have minority interest or Variable Interest Entities consolidated in our financial statements, adoption of this guidance has no impact on the Company’s financial statements.
 
In July 2006, the FASB issued guidance under ASC 740 “Income Taxes”. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial. It prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken, or expected to be taken, on a tax return. The adoption of this guidance did not have any impact on our financial statements.

Note 2.   Accrued Liabilities:

Accrued liabilities consist of the following:
 
   
September 30, 2009
(unaudited)
   
March 31, 2009
(audited)
 
Accrued payroll and related taxes
  $ 2,108,683     $ 1,650,976  
Accrued marketing program costs
    580,000       580,000  
Accrued professional fees
    128,538       81,300  
Accrued interest
    359,472       201,776  
Other payables
    191,228       153,505  
   Total
  $ 3,367,921     $ 2,667,557  

Note 3.    Short-term Bridge Loans:

April 2, 2008 financing:

On April 2, 2008, the Company entered into a financing arrangement that provided for the issuance of $120,000 face value short term bridge loans, due June 30, 2008, plus warrants to purchase (i) 200,000 shares of our common stock and (ii) additional warrants to purchase 200,000 shares of our common stock, representing an aggregate 400,000 shares.

We determined that the warrants issued in this financing arrangement met the conditions for equity classification. The Company accounts for debt issued with stock purchase warrants in accordance with  the FASB Accounting Standards Codification. The proceeds of the debt were allocated between the debt and the detachable warrants based on the relative fair values of the debt security and the warrants. We allocated a value of $98,864 to the warrants in accordance with the FASB Accounting Standards Codification.

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

Date
 
Terms
 
Consideration
June 2008
 
Extend maturity to July 30, 2008
 
1) 100,000 shares of common stock
2) Warrants indexed to 100,000 shares of common stock
September 2008
 
Extend maturity to December 15,2008
 
     240,000 shares of restricted stock
January 2009
 
Extend maturity date to July 1,2009
 
1) 240,000 shares of common stock
2) 240,000 shares of restricted stock
 
11


ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 3.   Short-term Bridge Loans (Continued):

The modifications resulted in a loss on extinguishment of $294,646 in accordance with the FASB Accounting Standards Codification. The notes were considered in default on December 15, 2008 due to non-payment. Remedy for default was acceleration of principal so the notes were recorded at face value as of December 15, 2008.

The warrants contain full-ratchet protection so the exercise price of the warrants was reduced to $.165 when the Company issued additional convertible instruments with a lower conversion rate on December 18, 2008. The exercise price of the warrants was reduced again to $.05 when the Company issued additional convertible instruments with a lower conversion rate on January 27, 2009.

April 9, 2008 and April 14, 2008 financing:

On April 9, 2008, the Company entered into a financing arrangement that provided for the issuance of $120,000 face value short term bridge loans, due July 10, 2008, plus warrants to purchase (i) 200,000 shares of our common stock and (ii) additional warrants to purchase 200,000 shares of our common stock, representing an aggregate 400,000 shares. On April 14, 2008, the Company entered into a financing arrangement that provided for the issuance of $60,000 face value short term bridge loan notes payable, due July 15, 2008, plus warrants to purchase (i)  100,000 shares of our common stock and (ii) additional warrants to purchase 100,000 shares of our common stock, representing an aggregate 200,000 shares.

We determined that the warrants issued in these financing arrangements meet the conditions for equity classification so we allocated the proceeds of the debt between the debt and the detachable warrants based on the relative fair values of the debt security and the warrants in accordance with  the FASB Accounting Standards Codification.

We entered into the following Modification and Waiver Agreements related to the April 9, 2008 financing:
 
Date
 
Terms
 
Consideration
June 2008
 
Extend maturity to August 10, 2008
 
Warrants indexed to 150,000 shares of common stock
September 2008
 
Extend maturity to December 15, 2008
 
240,000 shares of restricted stock
January 2009
 
Extend maturity date to April 30, 2009
 
1) 240,000 shares of common stock
2) 240,000 shares of restricted stock

The modifications resulted in a loss on extinguishment of $114,446 in accordance with the Financial Accounting Standards Codification.
 
We entered into the following Modification and Waiver Agreements related to the April 14, 2008 financing:
 
Date
 
Terms
 
Consideration
June 2008
 
Extend maturity to July 19, 2008
 
Warrants indexed to 50,000 shares of common stock
September 2008
 
Extend maturity to December 15, 2008
 
120,000 shares of restricted stock
January 2009
 
Extend maturity date to April 30, 2009
 
1) 66,000 shares of common stock
2) 66,000 shares of restricted stock

The modifications resulted in a loss on extinguishment of $171,622 in accordance with the Financial Accounting Standards Codification.
 
12

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 3.   Short-term Bridge Loans (Continued)

On December 15, 2008, we were in default on the notes for non-payment of the required principle payment.  The remedy for event of default was acceleration of principal and interest so they were recorded at face value.
 
It was determined that the extension warrants required liability accounting and are being recorded at fair value with changes in fair value being recorded in derivative (income) expense. The warrants contain full-ratchet protection so the exercise price of the warrants was reduced to $.165 when the Company issued additional convertible instruments with a lower conversion rate on December 18, 2008.  The exercise price of the warrants was reduced again to $.05 when the Company issued additional convertible instruments with a lower conversion rate on January 27, 2009.

May 19, 2008 financing:

On May 19, 2008, the Company entered into a financing arrangement that provided for the issuance of $33,000 face value short term bridge loan notes payable, due June 19, 2008, plus warrants to purchase (i) 100,000 shares of our common stock and (ii) additional warrants to purchase 100,000 shares of our common stock, representing an aggregate 200,000 shares.

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

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

Date
 
Terms
 
Consideration
June 2008
 
Extend maturity to July 30, 2008
 
1)Warrants indexed to 50,000 shares of common stock
2) Additional warrants to purchase 50,000 shares of common stock
September 2008
 
Extend maturity to December 15, 2008
 
120,000 shares of restricted stock
January 2009
 
Extend maturity date to July 1, 2009
 
1) 240,000 shares of common stock
2) 240,000 shares of restricted stock

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

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

The warrants contain full-ratchet protection so the exercise price of the warrants was reduced to $.165 when the Company issued additional convertible instruments with a lower conversion rate on December 18, 2008.  The exercise price of the warrants was reduced again to $.05 when the Company issued additional convertible instruments with a lower conversion rate on January 27, 2009.
 
13

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
 
Note 3.   Short-term Bridge Loans (Continued):

Information and significant assumptions as of September 30, 2009 and March 31, 2009 for the extension warrants related to the April and May financings which are required to be recorded at fair value each reporting period:

May 19, 2008 financing (Continued):

   
June 23, 2009
Extension
warrants
   
January 27, 2009
Extension
warrants
 
   
September 30, 2009
   
March 31,
2009
   
September 30, 2009
   
March 31,
2009
 
   Estimate fair value of the underlying  common share
  $ 0.029     $ 0.015     $ 0.029     $ 0.015  
   Conversion or strike price
  $ 0.050     $ 0.050     $ 0.050     $ 0.050  
   Volatility (based upon Peer Group)
    82.97 %     92.50 %     84.59 %     81.30 %
   Equivalent term (years)
    1.73       2.23       4.33       4.83  
   Risk-free rate
    1.11 %     0.81 %     2.31 %     1.67 %
   Dividends
    --       --       --       --  

August 5, 2008 financing:

On August 5, 2008, the Company entered into a financing arrangement that provided for the issuance of $55,000 face value short term bridge loans, due September 5, 2008, plus warrants to purchase (i) 100,000 shares of our common stock at an exercise price of $0.50 and (ii) additional warrants to purchase 100,000 shares of our common stock at an exercise price of $0.75, representing an aggregate 200,000 shares.  The due date of the loan was extended to December 15, 2008 with 110,000 restricted shares of common stock issued as consideration. On December 15, 2008, we were in default on the notes for non-payment of the required principle payment. Remedies for an event of default are acceleration of principle and interest.  There were no incremental penalties for the event of default; however, the notes were recorded at face value.

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

On January 15, 2009, we extended the term on the note from December 15, 2008 to July 1, 2009, and we issued investor warrants to purchase 240,000 shares of our common stock and 240,000 shares of restricted common stock as consideration for the extension.   We recorded a loss on extinguishment of $2,112 in accordance with the FASB Accounting Standards Codification.

The warrants contain full-ratchet protection so the exercise price of the warrants was reduced to $.165 when the Company issued additional convertible instruments with a lower conversion rate on December 18, 2008.  The
 
14

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009

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

exercise price of the warrants was reduced again to $.05 when the Company issued additional convertible instruments with a lower conversion rate on January 27, 2009.

August 5, 2008 financing (Continued):

Information and significant assumptions as of September 30, 2009 for warrants which are required to be recorded at fair value each reporting period:

   
June 23, 2009
Extension
warrants
   
January 27, 2009
Extension
warrants
 
   
September 30,
2009
   
March 31,
2009
   
September30,
2009
   
March 31,
2009
 
Estimate fair value of the Underlying common share
  $ 0.029     $  0.015     $ 0.029     $  0.015  
   Conversion or strike price
  $ 0.050     $ 0.050     $ 0.050     $ 0.050  
   Volatility (based upon Peer group)
    81.43 %     91.70 %     84.59 %     81.30 %
   Equivalent term (years)
    1.84       2.35       4.33       4.83  
   Risk-free rate
    .95 %     0.81 %     1.88 %     1.67 %
   Dividends
    --       --       --       --  
 
15

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 4.   Convertible Notes Payable

Convertible debt carrying values consist of the following:
 
   
September 30, 2009
   
March 31,
2009
 
    $ 312,000 Convertible Note Financing, due July 1, 2009  (a)
  $ 312,000     $ 312,000  
    $ 600,000 Convertible Note Financing, due July 1, 2009  (b)
    641,946       657,757  
    $ 500,000 Convertible Note Financing, due July 1, 2009  (b)
    693,836       548,131  
    $ 100,000 Convertible Note Financing, due July 1, 2009  (b)
    136,411       109,626  
    $ 243,333 Convertible Note Financing, due July 1, 2009  (c)
    292,000       243,333  
    $   60,833 Convertible Note Financing, due July 1, 2009  (d)
    60,833       60,833  
    $   20,000 Convertible Note Financing, due July 1, 2009 (c)
    20,000       20,000  
    $ 120,000 Convertible Note Financing, due July 27, 2009 (e)
    149,819       151,300  
    $      5,000 Convertible Note Financing, due July 27, 2009 e)
    6,242       6,322  
    $     5,000 Convertible Note Financing, due July 27, 2009 (e)
    6,242       6,322  
    $   60,000 Convertible Note Financing, due July 27, 2009 (e)
    75,945       75,157  
    $   70,834 Convertible Note Financing, due July 27, 2009 (e)
    90,270       89,310  
    $507,500  Convertible Note Financing, due August 7, 2009 (f)
    507,500       507,500  
    $ 200,000 Convertible Note Financing, due December 30, 2009 (e)
    269,784       254,136  
    $161,112 Convertible Note Financing, due December 30, 2009 (e)
    207,703       --  
Total convertible notes payable:
    3,470,531       3,041,727  
Less current maturities
    3,470,531       3,041,727  
Long-term convertible notes payable
  $ --     $ --  

As of September 30, 2009, we did not have sufficient authorized shares to settle all our equity indexed instruments which resulted in an event of default on the notes listed above. The remedies for events of default include acceleration of principal and interest and a portion of the notes also include redemption provisions which allow the holders the options to redeem the notes for 120% of the principal balance plus interest. The investors waived the default interest provisions until June 30, 2009 so beginning July 1, 2009, default interest of 15% will begin accruing on these notes until we are able to obtain sufficient authorized shares. Notes with the redemption provision were recorded at 120% of face value.

(a)   Short term convertible notes payable

On January 8, 2008, we executed secured convertible notes in the aggregate of $520,000 with three lenders, all unrelated entities. We received a net amount of $430,000 with the $90,000 discount being treated as interest.  The loans become payable on May 7, 2008, or we had the option of compelling the holder to convert all, or a portion of, the outstanding principal and accrued interest into Company common stock based on defined criteria.  On February 13, 2008, we repaid $260,000 of these loans.

We have entered into the following Modification and Waiver Agreements related to this financing:
 
Date
 
Terms
 
Consideration
June 2008
 
Extend maturity to July 15, 2008
 
195,000 shares of common stock
September 2008
 
Extend maturity to sooner of January 1, 2009 or closing of another funding
 
Increase principal by $52,000
January 27,2009
 
Extend maturity date to July 1, 2009 and add a conversion option of $0.05
 
2,800,000 shares of restricted stock
 
16

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 4.                      Convertible Notes Payable (Continued):

The addition of a conversion option and the issuance of restricted stock on January 27, resulted in an extinguishment loss of $56,000 under  the FASB Accounting Standards Codification.

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

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

The indexed shares and closing dates for the three tranches of the $1,200,000 financing are as follows:
 
Financing
 
Closing date
 
Shares
indexed
to note
 
Series A
warrants
 
Series B
warrants
 
     $ 600,000 Face Value Convertible
        Note Financing
 
 
October 23, 2007
  1,818,182   2,818,182   2,818,182  
     $ 500,000 Face Value Convertible
        Note Financing
 
February 15, 2008
  1,515,152   1,515,151   1,515,151  
     $ 100,000 Face Value Convertible
         Note Financing
 
June 26, 2008
  303,030   303,030   303,030  
         Total
      3,636,364   4,636,363   4,636,363  

(b)  
$1,200,00 convertible notes payable (continued):

The convertible promissory notes are convertible into common shares based on a fixed conversion price of $0.33, and are subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than those prices. The conversion feature was not afforded the exemption as conventional convertible, and the notes require liability classification under the FASB Accounting Standards Codification. We chose to value the entire hybrid instrument at fair value. We estimate the fair value of the hybrid contract as a common stock equivalent, enhanced by the forward elements (coupon, puts, and calls), because that technique embodies all of the assumptions (including credit risk, interest risk, stock price volatility and conversion behavior estimates) that are necessary to fair value complex, hybrid contracts.

The warrants issued in this financing arrangement did not meet the conditions for equity classification and are also required to be carried as a derivative liability, at fair value. We estimate the fair value of the warrants on the inception dates, and subsequently, using the Black-Scholes valuation technique, adjusted for dilution, because that technique embodies all of the assumptions (including, volatility, expected terms, dilution and risk free rates) that are necessary to fair value freestanding warrants.  See also Note 5 – Derivative Liabilities.

The warrants and the convertible note contain full-ratchet protection so the exercise price of the warrants and the conversion price of the notes were reduced to $.165 when the Company issued additional convertible instruments with this conversion rate on December 18, 2008.  On January 27, 2009, we entered into a modification of the agreement which reduced the maturity date from October 23, 2009 to July 1, 2009 and changed from a periodic debt payment schedule to full payment of principal and interest on July 1, 2009.  In exchange for this modification, we issued 1,250,000 shares of restricted stock, and we agreed to reduce the conversion price of the
 
17

 
 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 4.   Convertible Notes Payable (Continued):

notes and related warrants to $.05.  This modification resulted in a loss on extinguishment of $379,183. During the quarter ended June 30, 2009, $147,664 of the principal balance on the note and $11,124 of interest was converted into shares of stock at a price of $.05.

Information and significant assumptions embodied in our valuations (including ranges for certain assumptions during the subject periods that instruments were outstanding) as of September 30, 2009 and March 31, 2009 for this financing are illustrated in the following tables:

(b)  
$1,200,00 convertible notes payable (continued):

$600,000 Convertible Promissory Note Financing (Initial Closing):
 
Hybrid Note
   
Warrants
 
   
September 30,
2009
   
March 31,
2009
   
September 30,
2009
   
March 31,
2009
 
Estimate fair value of the underlying common share
  $ 0.029     $ 0.015     $ 0.029     $ 0.015  
Conversion/exercise price
  $ 0.050     $ 0.050     $ 0.050     $ 0.050  
Volatility (based upon Peer Group)
    --       --       82.45 %     86.70 %
Term (years)
    --       .25       3.06       3.56  
Risk-free rate
    --       --       1.64 %     1.15 %
Credit-risk adjusted yield
    15.51 %     16.32 %     --       --  
Dividends
    --       --       --       --  
 
$500,000 Convertible Promissory Note Financing (Second Closing):
 
Hybrid Note
   
 Warrants
 
   
September 30,
2009
   
March 31,
2009
   
September 30,
2009
   
March 31,
2009
 
Estimate fair value of the underlying common share
  $ 0.029     $ 0.015     $ 0.029     $ 0.015  
Conversion/exercise price
  $ 0.050     $ 0.05     $ 0.050     $ 0.050  
Volatility (based upon Peer Group)
    --       --       80.12 %     86.70 %
Term (years)
    --       .25       3.39       3.89  
Risk-free rate
    --       --       1.45 %     1.67 %
Credit-risk adjusted yield
    15.51 %     16.32 %     --       --  
Dividends
    --       --       --       --  
 
18


ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 4.   Convertible Notes Payable (Continued):

$100,000 Convertible Promissory Note Financing (Third Closing):
 
Hybrid Note
   
Warrants
 
   
September 30,
2009
   
March 31,
2009
   
September 30,
2009
   
March 31,
2009
 
Estimate fair value of the underlying common share
  $ 0.029     $ 0.015     $ 0.029     $ 0.015  
Conversion/exercise price
  $ 0.050     $ 0.050     $ 0.050     $ 0.050  
Volatility (based upon Peer Group)
    --       --       87.59 %     84.90 %
Term (years)
    --       .25       3.74       4.24  
Risk-free rate
    --       --       1.88 %     1.55 %
Credit-risk adjusted yield
    15.51 %     16.32 %     --       --  
Dividends
    --       --       --       --  

(c)   $243,333 convertible notes payable

On September 29, 2008, we entered into a financing arrangement that provided for the issuance of $243,333 face value convertible notes, due March 29, 2009, plus warrants to purchase (i) 567,667 shares of our common stock at an exercise price of $0.50 and (ii) additional warrants to purchase 567,667 shares of our common stock at an exercise price of $0.75, representing an aggregate 1,135,334 shares.  The note is convertible, only at the Company’s option, into Common Stock at $.165 and is subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than that price. The notice of conversion must be given to the Holder on the first day following the twenty consecutive trading days during which the stock price is greater than $5.00 per share each trading day and the daily trading volume is greater than 100,000 shares.  The Holder of the note does not have an option to convert the instrument. The note is secured by a security interest in all the tangible and intangible assets of the Company. According to the original terms of the note, 50% of the interest was due on December 28, 2008 and fifty percent due and payable on March 29, 2009; however we modified the agreement on January 27, 2009 to require full payment of principal and interest on July 1, 2009 in exchange for a reduction of the conversion price of the note and exercise price of the warrants to $.05.  The change in cash flows resulting from this modification was less than 10%, so extinguishment accounting did not apply. On January 27, 2009, the warrants (1,135,334 warrant shares) were redeemed in exchange for a convertible note in the amount of $70,834. The exchange resulted in an extinguishment loss of $82,484.  See Note (e).

We received the following proceeds from the financing transactions:
 
   
Gross proceeds
   
Finance costs
   
Net proceeds
 
  September 29, 2008 Financing:
                 
$243,333 Face Value Convertible Note Financing
  $  200,000     $  7,500     $  192,500  

In originally evaluating the financing transaction, we concluded that the conversion feature was not clearly and closely related to the debt instrument since the risks are those of an equity security; however, we determined that the conversion feature met the paragraph 11(a) exemption and did not require liability classification under the FASB Accounting Standards Codification.  Since the embedded conversion feature did not require liability classification, we were required to consider if the contract embodied a beneficial conversion feature (“BCF”). The
 
19

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 4.    Convertible Notes Payable (Continued):

conversion option is contingent on a future stock price so under the guidance of The FASB Accounting Standards Codification, the beneficial conversion feature was calculated at inception but will not be recognized until the contingency is resolved.  The aggregate BCF at its intrinsic value amounted to $192,739. This amount gives effect to the (i) the trading market price on the contract date and (ii) the effective conversion price after allocation of proceeds to the warrants. Notwithstanding, BCF was limited to the value ascribed to the note (using the relative fair value approach).

We also evaluated the warrants to determine if they required liability or equity accounting. The warrants issued in conjunction with the financing are redeemable for cash upon the occurrence of acquisition, merger or sale of substantially all assets of the Company in an all cash transaction; therefore,  the FASB Accounting Standards Codification requires that they be recorded as derivative liabilities on our balance sheet and marked to fair value each reporting period.

(c)  
$243,333 convertible notes payable (Continued):

The warrants and the convertible note contain full-ratchet protection so the exercise price of the warrants and the conversion price of the notes were reduced to $.165 when the Company issued additional convertible instruments with a lower conversion rate on December 18, 2008.

In addition, we incurred a 10% finders’ fee note payable in the amount of $20,000 which is under the same terms as the $243,333 note but did not include warrants.

(d)   $60,833 convertible notes payable

On December 18, 2008, we entered into a financing arrangement that provided for the issuance of $60,833.33 face value convertible notes with a purchase price of $50,000, due March 29, 2009, plus warrants to purchase (i) 141,667 shares of our common stock at an exercise price of $0.50 and (ii) additional warrants to purchase 141,667 shares of our common stock at an exercise price of $0.75, representing an aggregate 283,334 shares.  The note is convertible, only at the Company’s option, into $.165 and is subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than that price. The notice of conversion must be given to the Holder on the first day following the twenty consecutive trading days during which the stock price is greater than $5.00 per share each trading day and the daily trading volume is greater than 100,000 shares.  The Holder of the note does not have an option to convert the instrument. The note is secured by a security interest in all the tangible and intangible assets of the Company.  According to the original terms of the note, fifty percent of the note was due on December 28, 2008 and fifty percent due and payable on March 29, 2009 and if the note was not paid by its maturity date; a default rate of 15% applied. The note was considered in default as of December 28, 2008 due to non-payment of the required principle payment, therefore, it is recorded at face value and default interest of 15% is being accrued. We modified the note agreement on January 27, 2009 to require full payment of principal and interest on July 1, 2009 in exchange for a reduction of the conversion price of the note and exercise price of the warrants to $.05.  The change in cash flows resulting from this modification was less than 10%, so extinguishment accounting did not apply.  On January 27, 2009, the warrants (283,334 warrant shares) were redeemed in exchange for a convertible note in the amount of $70,834. The exchange resulted in an extinguishment loss of $82,484. See Note (e).

In originally evaluating the financing transaction, we concluded that the conversion feature was not clearly and closely related to the debt instrument; however, it did meet the paragraph 11(a) exemption and did not require liability classification. We considered if the contract embodied a beneficial conversion feature (“BCF”) however
 
20

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 4.    Convertible Notes Payable (Continued):

there was no beneficial conversion feature present, since the effective conversion price was greater than the market value of the stock.

We also evaluated the warrants to determine if they required liability or equity accounting. The warrants issued in conjunction with the financing are redeemable for cash upon the occurrence of acquisition, merger or sale of substantially all assets of the Company in an all cash transaction; therefore, the FASB Accounting Standards Codification  requires that they be recorded as derivative liabilities on our balance sheet and marked to fair value each reporting period.

(d)  
$60,833 convertible notes payable (Continued):

We received the following proceeds from the financing transactions:

   
Gross proceeds
   
Finance costs
   
Net proceeds
 
  December 18, 2008 Financing:
                 
$60,833 Face Value Convertible Note Financing
  $ 50,000     $ --     $ 50,000  

(e)   $621,945 convertible notes payable

On January 27, 2009 , March 30, 2009 and Ju;ly 15, 2009, we entered into Subscription agreements with a group of accredited investors that provided for the sale of an aggregate $621,945 face value secured convertible notes and warrants to purchase an aggregate 14,211,112 shares of our common stock.  The notes and warrants are based on a fixed conversion price of $0.05 and are subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than those prices.  The following table provides the details of each of the financings:

 
Face Value
 
 
 
Closing date
 
 
 
Maturity date
 
Shares
indexed
to note
 
Shares
indexed
to warrants
 
$ 130,000 (1)
January 27, 2009
 
July 27, 2009
  8,666,666   2,400,000  
  70,834 (2)
January 27, 2009
 
July 27, 2009
  4,722,267   --  
  60,000  
February 17, 2009
 
July 27, 2009
  4,000,000   1,200,000  
  200,000  
March 30, 2009
 
December 30, 2009
  13,333,333   8,333,334  
  161,111  
July 15, 2009
 
December 30, 2009
  5,555,552   1,611,112  
$ 621,945           36,277,818   13,544,446  

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

(2)  
The $70,834 convertible notes payable was issued in exchange for the redemption of 1,135,334 warrants shares issued in connection with the September 29, 2008 convertible note financing and 283,334 warrant shares issued in connection with the December 18, 2008 convertible note financing. The exchange resulted in an extinguishment loss of $82,484.
 
 
21

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
 
Note 4.    Convertible Notes Payable (Continued):
 
(e)           $460,834 convertible notes payable (Continued):

We received the following proceeds from the financing transactions:

   
Gross proceeds
   
Debt discount &
finance costs
   
Net proceeds
 
     $ 130,000 Face Value Convertible
           Note Financing
  $ 120,000     $ 23,750     $ 96,250  
     $  60,000 Face Value Convertible Note
           Financing
    60,000       10,000       50,000  
     $ 200,000 Face Value Convertible Note
            Financing
    200,000       41,900       158,100  
     $161.111 Face Value  Convertible Note
           Financing
    161,111       16,111       145,000  
                Total
  $ 541,111     $ 91,761     $ 449,350  
:
The holder has the option to redeem the convertible notes payable for cash in the event of defaults and certain other contingent events, including events related to the common stock into which the instrument was convertible, registration and listing (and maintenance thereof) of our common stock and filing of reports with the Securities and Exchange Commission (the “Default Put”). The conversion feature was not afforded the exemption as conventional convertible and the notes require liability classification under the FASB Accounting Standards Codification.  We chose to value the entire hybrid instrument at fair value. We estimate the fair value of the hybrid contract as a common stock equivalent, enhanced by the forward elements (coupon, puts, and calls), because that technique embodies all of the assumptions (including credit risk, interest risk, stock price volatility and conversion behavior estimates) that are necessary to fair value complex, hybrid contracts.

We also evaluated the warrants to determine if they required liability or equity accounting. The warrants issued in conjunction with the financing are redeemable for cash upon the occurrence of acquisition, merger or sale of substantially all assets of the Company in an all cash transaction; therefore, the FASB Accounting Standards Codification requires that they be recorded as derivative liabilities on our balance sheet and marked to fair value each reporting period.

Information and significant assumptions embodied in our valuations (including ranges for certain assumptions during the subject periods that instruments were outstanding) as of September 30, 2009 and March 31, 2009 for this financing are illustrated in the following tables:

22

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 4.   Convertible Notes Payable (Continued):

(e)           $621,945 convertible notes payable (Continued):


$130,000 and $70,834 Convertible Promissory Note Financing:
 
Hybrid Note
   
Warrants
 
   
September
 30, 2009
   
March 31,
2009
   
September 30,
2009
   
March 31,
2009
 
Estimate fair value of the underlying common share
  $ 0.029     $ 0.015     $ 0.029     $ 0.015  
Conversion/exercise price
  $ 0.050     $ 0.050     $ 0.050     $ 0.050  
Volatility (based upon Peer Group)
    --       --       85.12 %     81.30 %
Term (years)
    0.25       0.32       4.33       4.83  
Risk-free rate
    --       --       1.88 %     1.67 %
Credit-risk adjusted yield
    15.6 %     16.32 %     --       --  
Dividends
    --       --       --       --  


$60,000 Convertible Promissory Note Financing:
 
Hybrid Note
   
Warrants
 
   
September 30,
2009
   
March 31,
2009
   
September 30,
2009
   
March 31,
2009
 
Estimate fair value of the underlying common share
  $ 0.025     $ 0.015     $ 0.029     $ 0.015  
Conversion/exercise price
  $ 0.050     $ 0.050     $ 0.050     $ 0.050  
Volatility (based upon Peer Group)
    --       --       85.12 %     81.30 %
Term (years)
    0.25       0.32       4.33       4.83  
Risk-free rate
    --       --       1.88 %     1.67 %
Credit-risk adjusted yield
    15.6 %     16.32 %     --       --  
Dividends
    --       --       --       --  
 
$200,000 Convertible Promissory Note Financing:
 
Hybrid Note
   
Warrants
 
   
September 30,
2009
   
March 31,
2009
   
September 30,
2009
   
March 31,
2009
 
Estimate fair value of the underlying common share
  $ 0.015     $ 0.015     $ 0.029     $ 0.015  
Conversion/exercise price
  $ 0.050     $ 0.050     $ 0.050     $ 0.050  
Volatility (based upon Peer Group)
    --       80.29 %     84.20 %     80.29 %
Term (years)
    0.25       5.00       4.50       5.00  
Risk-free rate
    --       1.72 %     2.31 %     1.72 %
Credit-risk adjusted yield
    16.32 %     --       --       --  
Dividends
    --       --       --       --  
 
23


ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009

Note 4.    Convertible Notes Payable (Continued):

(e)           $621,945 convertible notes payable (Continued):

$161,111 Convertible Promissory Note Financing:
 
Hybrid Note
   
Warrants
 
   
September 30,
2009
   
March 31,
2009
   
September 30,
2009
   
March 31,
2009
 
Estimate fair value of the underlying common share
  $ 0.029       --     $ 0.029        --  
Conversion/exercise price
  $ 0.050       --     $ 0.050       --  
Volatility (based upon Peer Group)
    --       --       83.38 %     --  
Term (years)
    0.50       --       4.79       --  
Risk-free rate
    --       --       2.31 %     --  
Credit-risk adjusted yield
    15.56 %     --       --       --  
Dividends
    --       --       --       --  

 (f)           $507,500 convertible note payable:

On August 8, 2008, the Company executed a secured convertible promissory note in the aggregate amount of $507,500 with one lender, an unrelated entity.  The note becomes payable on August 7, 2009 with interest on the outstanding principal to accrue at 10%.  This note was entered into pursuant to the terms of a Secured Promissory Note and Security Agreement, Asset Purchase Agreement and Registration Rights Agreement to purchase certain trademarks, notably “Slammers” and “Blenders” from a company that previously acquired such trademarks through a foreclosure sale of certain assets of Bravo! Brands, Inc.  The holder of this note payable has the right but not the obligation to convert all or any portion of the then aggregate outstanding principal amount together with interest at the fixed conversion price of $1.00.
 
Note 5.   Derivative Liabilities:

 
The following table summarizes the components of derivative liabilities as of September 30, 2009 and March 31, 2009:
Our financing arrangement giving rise to derivative financial instruments:
 
September 30, 2009
   
March 31,
2009
 
     $ 600,000 Face Value Convertible Note Financing
  $ (41,697 )   $ (31,565 )
     $ 500,000 Face Value Convertible Note Financing
    (23,524 )     (19,394 )
     $ 100,000 Face Value Convertible Note Financing
    (6,122 )     (4,121 )
     $ 120,000 Face Value Short Term Bridge Loan Note Financing
    (2,544 )     (1,088 )
     $ 120,000 Face Value Short Term Bridge Loan Note Financing
    (2,526 )     (1,088 )
     $   60,000 Face Value Short Term Bridge Loan Note Financing
    (1,263 )     (544 )
     $   33,000 Face Value Short Term Bridge Loan Note Financing
    (856 )     (452 )
     $   55,000 Face Value Short Term Bridge Loan Note Financing
    (1,623 )     (947 )
     $ 120,000 Face Value Convertible Note Financing
    (26,291 )     (12,720 )
     $   60,000 Face Value Convertible Note Financing
    (13,145 )     (6,360 )
     $ 200,000 Face Value Convertible Note Financing
    (94,322 )     (45,000 )
     $ 161,111 Face Value Convertible Note Financing
    (18,840 )     -  
        Total derivative liabilities
  $ (232,753 )   $ (123,279 )
 
24

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009

 
Note 5.   Derivative Liabilities (Continued):

We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes-Merton option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. For complex hybrid instruments, such as convertible promissory notes that include embedded conversion options, puts and redemption features embedded in, we generally use techniques that embody all of the requisite assumptions (including credit risk, interest-rate risk, dilution and exercise/conversion behaviors) that are necessary to fair value these more complex instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, we project and discount future cash flows applying probability-weightage to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.

25

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009

 
Note 5.   Derivative Liabilities (Continued):

The following table summarizes the effects on our income (expense) associated with changes in the fair values of our financial instruments that are carried at fair value from inception through September 30, 2009:
 
 
Our financing arrangements giving rise to
derivative financial instruments and the income effects:
 
Inception through September 30, 2009
 
Day-one derivative losses:
     
   $ 600,000 Face Value Convertible Note Financing
  $ (2,534,178 )
   $ 500,000 Face Value Convertible Note Financing
    (899,305 )
   $ 100,000 Face Value Convertible Note Financing
    (1,285,570 )
   $   55,000 Face Value Short Term Bridge Loan Note Financing
    (12,700 )
   $ 120,000 Face Value Convertible Note Financing
    (72,251 )
   $   60,000 Face Value Convertible Note Financing
    (38,542 )
   $ 200,000 Face Value Convertible Note Financing
    (119,136 )
   $ 161,111 Face Value Convertible Note Financing
    (45,846 )
Total day-one derivative losses:
  $ (5,007,528 )
 
     
Derivative income (expense):
     
  $ 600,000 Face Value Convertible Note Financing
  $ 2,398,286  
  $ 500,000 Face Value Convertible Note Financing
    898,305  
  $ 100,000 Face Value Convertible Note Financing
    1,285,570  
  $ 120,000 Face Value Short Term Bridge Loan Financing
    277,463  
  $ 120,000 Face Value Short Term Bridge Loan Financing
    109,182  
  $   60,000 Face Value Short Term Bridge Loan Financing
    54,591  
  $   33,000 Face Value Short Term Bridge Loan Financing
    138,922  
  $   55,000 Face Value Short Term Bridge Loan Financing
    61,539  
  $ 243,333 Face Value Convertible Note Financing
    134,424  
  $   60,833 Face Value Convertible Note Financing
    6,602  
  $ 120,000 Face Value Convertible Note Financing
    (5,171 )
  $   60,000 Face Value Convertible Note Financing
    295  
  $ 200,000 Face Value Convertible Note Financing
    (49,322 )
  $ 161,111 Face Value Convertible Note Financing
    (11,813 )
Total income (expense) arising from fair value adjustments
  $ 5,298,873  
       
Interest income (expense) from instruments recorded at fair value:
     
  $ 600,000 Face Value Convertible Note Financing
    (59,416 )
  $ 500,000 Face Value Convertible Note Financing
    (193,753 )
  $ 100,000 Face Value Convertible Note Financing
    206,688  
  $ 120,000 Face Value Convertible Note Financing
    1,312  
  $      5,000 Face Value Convertible Note Financing
    55  
  $      5,000 Face Value Convertible Note Financing
    55  
  $   60,000 Face Value Convertible Note Financing
    (843 )
  $   70,834 Face Value Convertible Note Financing
    (1,060 )
  $ 200,000 Face Value Convertible Note Financing
    (15,648 )
  $ 161,111 Face Value Convertible Note Financing
    (7,772 )
    $ (70,382 )
 
26

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 5.    Derivative Liabilities (Continued):

The following tables summarize the effects on our income (expense) associated with changes in the fair values of our financial instruments that are carried at fair value from three months ended September 30, 2009 and the year ended March 31, 2009.
 
 
Our financing arrangements giving rise to
derivative financial instruments and the income effects:
 
Six Months Ended
September 30, 2009
   
Year Ended
March 31,
2009
 
Derivative income (expense):
           
  $ 600,000 Face Value Convertible Note Financing
  $ (10,133 )   $ 1,690,346  
  $ 500,000 Face Value Convertible Note Financing
    (4,130 )     926,364  
  $ 100,000 Face Value Convertible Note Financing
    (2,001 )     1,052,484  
  $ 120,000 Face Value Short Term Bridge Loan Financing
    (1,456 )     278,920  
  $ 120,000 Face Value Short Term Bridge Loan Financing
    (1,438 )     110,620  
  $   60,000 Face Value Short Term Bridge Loan Financing
    (719 )     55,310  
  $   33,000 Face Value Short Term Bridge Loan Financing
    (403 )     139,325  
  $   55,000 Face Value Short Term Bridge Loan Financing
    (676 )     62,215  
  $ 243,333 Face Value Convertible Note Financing
    --       134,424  
  $   60,833  Face Value Convertible Note Financing
    --       6,602  
  $ 120,000 Face Value Convertible Note Financing
    (13,571 )     8,400  
  $   60,000 Face Value Convertible Note Financing
    (6,785 )     7,080  
  $ 200,000 Face Value Convertible Note Financing
    (49,323 )     --  
  $ 161,111 Face Value Convertible Note Financing
    (57,659 )     --  
Total derivative income (expense) arising from fair value adjustments
  $ (148,294 )   $ 4,472,090  

   
Six Months Ended
September 30, 2009
   
Year Ended
March 31,
2009
 
Interest income (expense) from instruments recorded at Fair value:
           
  $ 600,000 Face Value Convertible Note Financing
  $ (188,100 )   $ (11,490 )
  $ 500,000 Face Value Convertible Note Financing
    (183,308 )     (9,576 )
  $ 100,000 Face Value Convertible Note Financing
    (34,306 )     240,994  
  $ 120,000 Face Value Convertible Note Financing
    1,481       (169 )
  $     5,000 Face Value Convertible Note Financing
    80       (25 )
  $     5,000 Face Value Convertible Note Financing
    80       (25 )
  $   60,000 Face Value Convertible Note Financing
    (788 )     (55 )
  $   70,834 Face Value Convertible Note Financing
    (960 )     (100 )
  $ 200,000 Face Value Convertible Note Financing
    (15,648 )     --  
  $ 161,111 Face Value Convertible Note Financing
    (7,772 )        
    $ (429,241 )   $ 219,554  

27

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009

 
Note 5.   Derivative Liabilities (Continued):

Our derivative liabilities as of September 30, 2009, and our derivative income during the six months ended September 30, 2009 and from inception through September 30, 2009 are significant to our consolidated financial statements. The magnitude of derivative income (expense) reflects the following:

 
In connection with our accounting for the $600,000, $500,000, $100,000 face value convertible promissory notes and warrant financings for the October 23, 2007 financing arrangement, the $55,000 face value short term bridge loan and warrant financing dated August 5, 2008, the $120,000 face value convertible note and warrant financing dated January 27, 2009, the $60,000 face value convertible note and warrant financing dated February 17, 2009, the $200,000 face value convertible note and warrant financing dated March 30, 2009 and the $161,111 face value convertible note and warrant financing dated July 15, 2009, we encountered the unusual circumstance of a day-one derivative loss related to the recognition of (i) the hybrid notes and (ii) the derivative instruments arising from the arrangement at fair values. That means that the fair value of the hybrid notes and warrants exceeded the proceeds that we received from the arrangement and we were required to record a loss to record the derivative financial instruments at fair value. We did not enter into any other financing arrangements during the periods reported that reflected day-one loss.
·     
In addition, our financial instruments that are recorded at fair value will change in future periods based upon changes in our trading market price and changes in other assumptions and market indicators used in the valuation techniques.
 
Generally, the FASB Accounting Standards Codification provides for the exclusion of registration payment arrangements, such as the liquidated damage provisions that are included in the financing contracts underlying the convertible debt financing arrangements, from the consideration of classification of financial instruments. Rather, such registration payments will require recognition when they are both probable and reasonably estimable. As of September 30, 2009, our management concluded that registration payments are not probable.

Note 6.    Loans Payable – Related Parties:

In connection with the reverse merger (see Note 1), the Company assumed $46,463 in advances payable to the officers of MHHI.  These advances are non-interest bearing and payable upon demand.  The Company issued 500,000 shares of common stock  valued at $.05 or $25,000 in September, 2009  which reduced the above amount to $21,463.

In addition, the Company issued aggregate notes of $100,000 to Roy Warren, the Company’s CEO, an accredited investor with whom the Company entered into subscription agreements for 10% convertible notes (see Note 4). During September, 2009, Roy Warren assigned the $100,000 notes to another party.

Note 7.   Stockholders’ Deficit:

(a) Series A Preferred Stock:

The Company’s articles of incorporation authorize the issuance of 20,000,000 shares of convertible preferred stock which the Company has designated as Series A Preferred (“Series A”), $.001 par value.  Each share of Series A is convertible into six shares of the Company’s common stock for a period of five years from the date of issue.  The conversion basis is not adjusted for any stock split or combination of the common stock.  The Company must at all times have sufficient common shares reserved to effect the conversion of all of the outstanding A. The holders of the Series A shall be entitled to receive common stock dividends when, as, if and in the amount declared by the directors of the Company to be in cash or in market value of the Company’s common stock.  The Company is restricted from paying dividends or making distributions on its
 
28

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 7.    Stockholders’ Deficit (Continued):

(a) Series A Preferred Stock (continued):

common stock without the approval of a majority of the Series A holders.  During the quarter ended September 30, 2008, all 75,000 shares of Series A were converted into 450,000 shares of common stock.  During the quarter ended September 30, 2009, 9,000,000 shares of Series A were granted to Roy Warren. We recorded a non-cash expense for $1,620,000 which is based on the then market price of $.03 per common share times the convertible stock equivalents (9,000,000 preferred shares x 6 = 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 deleted in its entirety and the following shall be substituted in lieu thereof- Rights, Powers and Preferences:  The Series A shall have the voting powers, preferences and relative, participating, optional and other special rights, qualifications, limitations and restrictions as follows:
 
Designation and Amount- Out of the Twenty Million (20,000,000) shares of the $.001 par value authorized preferred stock, all Twenty Million (20,000,000) shares shall be designated as shares of “Series A.”
 
(b) Common Stock Warrants:

As of September 30, 2009, the Company had the following outstanding warrants:

Issued Class A Warrants
 
Grant date
 
Expiration date
 
Warrants/ Options Granted
 
Exercise Price
 
                   
October, 2007 Convertible Notes Financing
 
10/23/2007
 
10/22/2012
 
2,818,181
 
$
0.05
 
January, 2008 Investment Banker Agreement
 
1/1/2008
 
12/31/2012
 
125,000
   
0.05
 
February, 2008 Convertible Note Financing
 
2/15/2008
 
2/14/2013
 
1,515,151
   
0.05
 
April, 2008 Supply Agreement
 
4/16/2008
 
4/15/2013
 
100,000
   
0.75
 
April, 2008 Financing
 
4/2-9-14/08
 
4/1-8-13/2011
 
500,000
   
0.05
 
April, 2008 Finder’s Fees
 
4/14//2008
 
4/13/2008
 
62,500
   
0.05
 
May, 2008 Financing
 
5/19/2008
 
5/18/2011
 
100,000
   
0.05
 
May, 2008 Finder’s Fees
 
5/19/2008
 
5/18/2013
 
37,500
   
0.05
 
June, 2008 Debt Extension
 
6/23/2008
 
6/22/2011
 
150,000
   
0.05
 
June, 2008 Convertible Note  Financing
 
6/26/2008
 
6/25/2013
 
303,030
   
0.05
 
July, 2008 Debt Extensions
 
7/14/2008
 
7/13/2011
 
150,000
   
0.05
 
August, 2008 Financing
 
8/5/2008
 
8/4/2011
 
100,000
   
0.05
 
January, 2009  Convertible Note Financing
 
1/27/2009
 
1/26/2014
 
2,400,000
   
0.05
 
January, 2009 Debt Extensions
 
1/27/2009
 
1/26/2014
 
776,000
   
0.05
 
February, 2009 Convertible Note Financing
 
1/27/2009
 
1/26/2014
 
1,200,000
   
0.05
 
March, 2009 Convertible Note Financing
 
3/30/2009
 
3/29/2014
 
8,333,334
   
0.05
 
July, 2009 Convertible Note Financing
 
7/15/2009
 
  7/14/2014
 
1,611,112 
   
0.05 
 
   Total issued Class A warrants
         
20,281,808
       
 
29


ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 7.   Stockholders’ Deficit (Continued):

(b) Common Stock Warrants (Continued):
 
Unissued  Class B warrants (b):
         
October, 2007 Convertible Notes   Financing
 
2,818,181
 
0.75
 
January, 2008 Investment Banker Agreement
 
125,000
 
0.75
 
February, 2008 Convertible Notes Financing
 
1,515,151
 
0.75
 
April, 2008 Financing
 
500,000
 
0.75
 
April, 2008 Finder’s Fees
 
62,500
 
0.75
 
May, 2008 Financing
 
100,000
 
0.75
 
May, 2008 Finder’s Fees
 
37,500
 
0.75
 
June, 2008 Debt Extension
 
150,000
 
0.75
 
June, 2008 Convertible Note  Financing
 
303,030
 
0.75
 
July, 2008 Debt Extensions
 
150,000
 
0.75
 
August, 2008 Financing
 
100,000
 
0.75
 
           
   Total unissued Class B warrants
 
5,861,362
     
           
   Total Warrants
 
26,143,170
     
 
No warrants were exercised for the six months ended September 30, 2009.

(c) Common Stock Issued During the Six Months Ended September 30, 2009:

At September 30, 2009, we had issued and outstanding 34,482,231 shares of common stock of which 3,871,014 shares are owned by one of our officers.  Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the shareholders.  Holders of common stock have no cumulative voting rights.  In the event of liquidation, dissolution or winding down of the Company, the holders of shares of common stock are entitled to share, pro rata, all assets remaining after payment in full of all liabilities.  Holders of common stock have no preemptive rights to purchase our common stock.  There are no conversion rights or redemption or sinking fund provisions with respect to the common stock.  All of the outstanding shares of common stock are validly issued, fully paid and non-assessable.

On April 17, 2009, we issued 689,817 shares of common stock pursuant to a conversion of its October, 2007 convertible notes for $30,000 plus accrued interest of $4,491.

On April 22, 2009, we issued 600,800 shares of common stock pursuant to a conversion of its October, 2007 convertible notes for $30,000 plus accrued interest of $40.

On April 23, 2009, we issued 100,000 shares of common stock pursuant to a conversion of its October, 2007 convertible notes for $5,000.

On April 30, 2009, we issued 200,000 shares of common stock pursuant to a conversion of its October, 2007 convertible notes of $10,000.

30

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009

Note 7.    Stockholders’ Deficit (Continued):

(c) Common Stock Issued During the Six Months Ended September 30, 2009 (Continued):

On May 18, 2009, we issued 212,060 shares of common stock pursuant to a conversion of its October, 2007 convertible notes of $10,000 and accrued interest of $603.

On June 26, 2009, we issued 583,836 shares of common stock pursuant to a conversion of its October, 2007 convertible notes of $25,000 and accrued interest of $4,192.

On June 29, 2009, we issued 766,104 shares of common stock pursuant to a conversion of its October, 2007 convertible notes of $12,664.

On June 29, 2009, we issued 535,972 shares of common stock pursuant to a conversion of its October, 2007 convertible notes of $2,500 and accrued interest of $1,799.

On September 12, 2009, we issued 15,893,521 shares of common stock as payment for past due services.

On September 12, 2009, we issued 500,000 shares of common stock to reduce a loan payable to an officer of the previous parent company (see Note 6 above).

d) Warrants Issued During the Six Months Ended September 30, 2009:

On July 15, 2009, we issued 1,611,112 class A warrants for five years at an exercise price of $.05. These warrants related to the July, 2009 $161,111 convertible notes financing.    

(e) Options Issued During the Six Months Ended September  30, 2009:

None
 
Note 8     Fair Value Measurements:

The FASB Accounting Standards Codification clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
 
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
 
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
 
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
 
The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.
 
31

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 8      Fair Value Measurements (Continued):
 
         
Fair Value Measurements at Reporting Date Using
 
Description
 
September 30, 2009
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets
  $ -     $ -     $ -     $ -  
                                 
Total Assets
  $ -     $ -     $ -     $ -  
                                 
Liabilities:
                               
Derivative Instrument (See Note 5)
  $ 232,753     $ -     $ -     $ 232,753  
                                 
Total Liabilities
  $ 232,753     $ -     $ -     $ 232,753  

   
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
 
Beginning Balance
  $ 123,279  
Total gains or (losses) (realized/unrealized):
       
Included in earnings
    148,294  
Included in other comprehensive income
    (38,820
Purchases, issuances and settlements
    -  
Transfer in and/or out of Level 3
    -  
Ending Balance
  $ 232,753  

Note 9.   Commitments and Contingencies:

In December 2007, the Company entered into a five year agreement for office space in Palm Beach Gardens, Florida with a commencement date of June 1, 2008.  The minimum monthly base rent is $7,415, and the lease provides for annual 4% increases throughout its term.  As of September 30, 2009, the future minimum rental payments for the new office lease, which exclude variable common area maintenance charges, are as follows:

Years ending March 31,
 
Amount
 
2010
  $ 23,133  
2011
    95,620  
2012
    99,444  
2013
    103,422  
2014
    17,348  
         
    $ 338,967  

Rental expense, which also includes maintenance and parking fees, for the six months period ended September 30, 2009 was $62,828.

32


ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 9.   Commitments and Contingencies (Continued):

Production and Supply Agreements

Due to the current small size of our company, no formalized production agreement has been signed with Carolina Beer & Beverage LLC, our current co-packer.  Production runs are based on purchase orders issued to this co-packer.  As our company grows, we intend to enter into a formal signed production agreement with Carolina Beer & Beverage LLC as well as any other co-packers as needed.

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

Royalties

On August 19, 2008, we signed a “Sublicense Agreement” with Nutraceutical Discoveries, Inc. for the use of exclusive rights to certain intellectual property which will permit unique structure-function metabolic health and weight management claims for dairy functional beverages.  We plan to develop, market and sell to the public dairy functional beverage products based on the Licensed Technology.  The agreement will terminate on December 31, 2011, unless earlier terminated.  The initial term may be extended for consecutive one (1) year terms upon the mutual written consent between the two companies.  The contract calls for payment of royalties equal to 5.75% of the Net Sales (as defined) of any such developed products which are expected to occur in 2009.  Upon the sooner of raising sufficient capital to bring such product(s) to market or October 31, 2008, we shall pay to Nutraceutical Discoveries, Inc. in cash the sum of $55,000 of which $34,000 have not been paid.  Minimum royalties to pay in calendar year 2009 will be $462,500 (represents $18,000 per month x 10 months in 2009 plus start up payment of $55,000 plus cost of the stock options of $227,500) and for calendar year 2010 and thereafter, an amount equal to the greater of the total minimum monthly cash amount for the preceding calendar year or 6.6125% of the annual net sales for the sales of developed product for the immediately preceding calendar year. We issued 350,000 stock options at an exercise price of $.65 per option. We recorded $63,277 in royalty expense for the six months ended September 30, 2009. Due to the delay in developing products under this license, we are in negotiations to modify this “Sublicense Agreement” in which the above terms could change.  Nutraceutical Discoveries, Inc. sent a letter dated on August 14, 2009 to advise that we breached the Sublicense Agreement with them.  This letter represented written notice that Nutraceutical Discoveries, Inc. intended to terminate this agreement from 30 days of August 14, 2009 which was done.  They have exercised their right that this agreement is non-exclusive and available for other licensees.

Note 10. Subsequent Events:
 
The Company has evaluated subsequent events that occurred after September 30, 2009 through the date that the financial statements were issued on November 23, 2009.

As noted in Notes 3 and ,4 the company is in default with most of its debt financing as the company is negotiating with these debt holders to extend the due dates of these debts.

Our obligations with Nutraceutical Discoveries, Inc. ceased at the end of October, 2009.  The agreement and exclusivity with them were terminated at October 31, 2009.  We will still need to pay the remaining $34,000 that is referenced in Note 9.
 
33

 
ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
A Development Stage Company
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2009
 
Note 10. Subsequent Events (Continued):

On November 11, 2009, the Company issued 400,000 shares of common stock from the Company’s 2007 Stock
Compensation and Incentive Plan that were registered on a Form S-8 registration statement filed and declared effective on May 16, 2208 to a consultant to complete the valuations on the company’s debt instruments for the quarter ended September 30, 2009.

On November 13, 2009, the Company entered into a financing agreement in which one of the October 23, 2007 debt holders assigned $80,000 worth of its ownership interest in this note to other parties.  The other parties then converted the total $80,000 debt into 10,000,000 shares of the Company’s common stock.  These shares were then swapped for an equivalent value of other freely tradable stock in which the Company will receive approximately $80,000.  As such, the Company entered into a new convertible note payable with the original debt holder for a purchase price of $100,000 with a principal amount of $111,111.

.
 
34

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

FORWARD-LOOKING STATEMENTS

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

OVERVIEW

Since 2001, we had been a shell corporation, whose principal business was to locate and consummate a merger with an ongoing business which occurred in September 2007.  Our efforts and resources have been focused primarily to develop beverage brands in the non-alcoholic functional beverage category, raise capital and recruit personnel. We are a development stage company with negligible product sales to date.   Our major sources of working capital have been from the October 23, 2007 financing and other short-term bridge loans.  Our efforts to date have been focused primarily in developing our first energy drink which is called VisViva™ in which sales began in late March 2008.  Along with this energy drink, we will launch fortified and experiential beverage brands utilizing platforms of milk, tea, juice and water.  We have developed a proprietary blend which will become our base energy ingredient for use in all platforms trademarked IQZOL™.  This additive blend will provide a unique energy boost with low calories, carbohydrates and caffeine levels, thereby revolutionizing the energy experience derived from energy drinks.

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

The pricing and gross profit margin for the products will vary. Each product delivers different functionality and utilizes different types of packaging and package sizes.  Without exception, these products will 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 energy drink is expected to command gross margins of approximately 50%.  The functional milk drinks (once produced) are also expected to command approximately the same percentage margin due to the premium pricing commanded by the experiential functionality.  We expect that the average gross margin for our shots will be 55%-60% depending upon the consumer response and sales channel mix; clearly singles will command higher margin than multi-packs.

CRITICAL ACCOUNTING POLICIES

A “critical accounting policy” is one which is both important to the portrayal of our financial condition and results and requires our management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.   We use all available information and appropriate techniques to develop our estimates. However, actual results could differ from our estimates.

.
 
35

 

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

CRITICAL ACCOUNTING POLICIES (Continued):

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:
 
-               Estimating the fair value of our hybrid financial instruments that are required to be carried as liabilities at fair value (pursuant to the FASB Accounting Standards Codification, especially with only a limited number of months of active public trading of the Company’s common stock for the period ended September 30, 2009

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 to be carried as derivative liabilities, at fair value, in our financial statements.  However, we are allowed to elect fair value measurement of the hybrid financial instruments, on a case-by-case basis, rather than bifurcate the derivative.  We believe that fair value measurement of the hybrid convertible promissory notes arising from our October 23, 2007 financing arrangement provides a more meaningful presentation of that financial instrument.

We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring of fair values.  In selecting the appropriate technique(s), we consider, among other factors, the nature of the instrument, the market risks that such instruments embody and the expected means of settlement.  For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes-Merton option valuation technique, since it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments.  For complex hybrid instruments, such as convertible promissory notes that include embedded conversion options, puts and redemption features embedded in, we generally use techniques that embody all of the requisite assumptions (including credit risk, interest-rate risk and exercise/conversion behaviors) that are necessary to fair value these more complex instruments.  For forward contracts that contingently require net-cash settlement as the principal means of settlement, we project and discount future cash flows applying probability-weightage to multiple possible outcomes.  Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors.  In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility.  Since derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.

.
 
36

 

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

GOING CONCERN

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

RESULTS OF OPERATIONS

Since we are a development company, negligible revenues have been reported for the period ended September 30, 2009 and 2008. As such, there is no meaningful comparison with prior periods.

Six Months Ended September 30, 2009 Compared to Six Months Ended September  30, 2008:

The majority of the Company’s expenses relate to salaries and related payroll taxes, marketing and promotion and professional fees.  Total operating expenses for the six months ended September 30, 2009 were $2,711,538.  The total loss for this period was $3,694,655 which includes the recognition of derivative expense for $ 148,294 and $753,496 net interest expense.  Basic and diluted loss per common share was $.20 based on a weighted average number of common shares outstanding for 18,655,713.

Total loss for the six months period ended September 30, 2008 was $932,315 which included operating expenses of $2,391,364, the recognition of derivative income of $2,499,335, a loss on the extinguishment of debt for $592,020 and $453,268 net interest expense.  Basic and diluted loss per common share is $0.10 based on a weighted average number of common shares outstanding for 9,328,844.

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008:

Most of the Company’s expenses relate to various general and administrative expenses that were incurred for setting up the Company for the future development of various beverage brands.  Total operating expenses incurred for the three months ended September 30, 2009 were $2,131,726.  As a result of the foregoing plus the recognition of derivative income for $102,593 and $229,210 net interest expense, we reported a net loss for the three month period ended September 30, 2009 of $2,334,626.  Basic and diluted loss per common share was $0.11 based on a weighted average number of common shares outstanding for 21,474,328.

For the three months ended September 30, 2008, total operating expenses were $1,097,324, derivative income was $15,446,395, loss on extinguishment of debt was $161,573 and net interest income was $2,549,905, resulting in a net income of $16,737,573.  The basic and diluted income per common share was $1.69 and $1.18, respectively, based on a weighted average number of common shares outstanding for 9,925,600 and 14,250,680, respectively.

37



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

LIQUIDITY AND CAPITAL RESOURCES

We have not yet begun to generate significant revenues, and our ability to continue as a going concern will be dependent upon receiving additional third party financings to fund our business for at least the next twelve months.

As a development stage company with less than two years of operations, we do not have any meaningful comparable financial information with prior periods.  The net cash used in operating activities is due to a number of factors. For the six months ended September 30, 2009, we reported a net loss of $3,694,655 which includes such non-cash items as derivative expense of $109,474 and fair value adjustment loss of convertible notes for $442,583. Net cash flows generated by our operating activities were inadequate to cover our working capital needs for the period ended September 30, 2009, and we had to rely on new convertible debt financings to cover operating expenses.

Cash used in the period ended September 30, 2009 for investing activities was $3,520 for trademark costs.

Net cash provided by our financing activities for the period ended September 30, 2009 was $183,667.  This is primarily attributed to recognizing a default redemption amount of 20% for certain convertible debts plus the July 2009 financing for $145,000.

For the period ended September 30, 2008, we reported a net loss of $932,315 that included such non-cash items as derivative income of $2,499,335 and $592,020 for the recognition of a loss on debt extinguishment.  Other non-cash items included the recording of $824,553 in costs for the issuance of common stock and warrants.

Cash used in the period ended September 30, 2008 for investing activities was $35,483 for equipment purchases and trademark costs.

Net cash provided by our financing activities for the period ended September 30, 2008 was $666,728.  This is primarily attributed to proceeds received from the short-term bridge loans for $707,666 and the receipt of $100,000 for the last tranche of the October, 2007 subscription.

External Sources of Liquidity:

For the six months ended September 30, 2009:

On July 14, 2009, we entered into another Modification, Waiver and Consent Agreement whereas the subscribers to the March, 2009 agreement agreed to invest an additional $145,000 at substantially the same terms as the March, 2009 funding.  The total principal amount to pay will be $161,112 with these two investors.  In addition, we issued each investor a total of 805,556 warrants for a total of 1,611,112 warrants.  The issuance of common stock pursuant to the conversion features of the convertible notes is a transaction exempt from registration under the Securities Act of 1933 and the Securities Act Rules.

For the six months ended September 30, 2008:

Beginning April 2, 2008 and through April 14, 2008, we borrowed $300,000 from four investors, initially repayable starting June 30, 2008 through July 15, 2008.  The investors subsequently agreed to extend the due dates until July 30, 2008.  We received net proceeds of $237,500 after deducting an original issue discount of $50,000 and due diligence fees of $12,500.  In addition, 500,000 class A warrants at an exercise price of $.50 were issued, and we
 
38

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

LIQUIDITY AND CAPITAL RESOURCES (Continued):
 
are required to issue 500,000 class B warrants ($.75 exercise price) upon exercise of the class A warrants for a total of 1,000,000 warrants.  These borrowings were guaranteed by the Company’s CEO.  We also issued to our
investment banker 62,500 class A warrants ($.50 exercise price), and we are required to issue 62,500 class B warrants ($.75 exercise price) upon exercise of the class A warrants for a total of 125,000 warrants as a finders’ fee.

On May 19, 2008, we borrowed $33,000 from one investor receiving net proceeds of $30,000.  We agreed to repay these notes on June 19, 2008 if not retired sooner upon the occurrence of certain specific events.  The Company and the investor agreed to extend the maturity date until July 30, 2008 for an additional 50,000 warrants with the same terms as the initial warrant grant on this note.  In addition, 100,000 class A warrants at an exercise price of $.50 for three years were issued, and we are required to issue 100,000 class B warrants ($.75 exercise price for three years) upon exercise of the class A warrants for a total of 200,000 warrants.  In addition, we issued 37,500 class A warrants at an exercise price of $.50 for five years to our investment banker for this financing as well an additional issue of 37,500 class B warrants at $.75 exercise price for three years if the class A warrants are exercised.

On June 26, 2008, we received the remaining $100,000 less $8,000 for due diligence fees from the second tranche of the October 23, 2007 Securities Purchase Agreement which completes the receipt of all applicable financings.  This latest financing is subject to the same terms as the other financings.  We issued an additional 303,030 class A warrants at an exercise price of $.50.

On August 5, 2008, we borrowed $55,000 from one investor, receiving net proceeds of $50,000.  We agreed to repay this note on September 5, 2008 and issued additional 100,000 class A warrants at an exercise price of $.50.  We extended the due date of this note to December 15, 2008 for 110,000 additional restricted shares of the company’s common stock.

On September 29, 2008, we signed a subscription agreement to receive $365,000 in additional financing, $300,000 as the purchase price and $365,000 as the notes principal.  We did receive on the same date a net of $192,500 ($200,000 purchase price less legal fees of $7,500).  The principal amount to pay in 90 days is $243,333.  We anticipate receiving the remaining amount sometime during the next quarter.  We agreed to repay this note and interest as follows:  fifty percent (50%) on December 28, 2008 and fifty percent (50%) on March 29, 2009.  We agreed to issue 566,667 class A warrants at an exercise price of $.50.  Not later than 90 days after the issue date of these warrants, the Company will have the option of either (1) redeeming these warrants at a per share price of $.10, or (2) electing to immediately reduce the purchase price to $.01.  In addition and on the same date, we entered into a similar note payable for the finders’ fees for this financing at 10% or $20,000 as the purchase price and $24,333 as the principal price.

Recent Accounting Pronouncements:

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

CURRENT AND FUTURE FINANCING NEEDS

We will require additional capital to finance our future operations.  We can provide no assurance that we will obtain additional financing sufficient to meet our future needs on commercially reasonable terms or otherwise.  If we are unable to obtain the necessary financing, our business, operating results and financial condition will be materially and adversely affected.  See also Note 10 regarding subsequent events.
 
39

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

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.

CERTAIN BUSINESS RISKS:

We currently have no product revenues and will need to raise additional capital to operate our business.
 
To date, we have generated no significant product revenues. 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.  These funds may not be available on favorable terms, if at all. If we are unable to secure additional financing in the future on acceptable terms, or at all, we may be unable to complete our product research and development activities.  In addition, we may be forced to reduce or discontinue product development or product licensing, reduce or forego sales and marketing efforts and forego attractive business opportunities in order to improve our liquidity to enable us to continue operations.  Any additional sources of financing will likely involve the sale of our equity securities, which will have a dilutive effect on our stockholders.

We are not currently profitable and may never become profitable.

We have generated negligible revenues to date from product sales. Our accumulated deficit as of September 30, 2009 is $12,068,431.

We also expect to continue to experience negative cash flow for the foreseeable future as we fund our operating losses and capital expenditures. As a result, we will need to generate significant revenues in order to achieve and maintain profitability.  We may not be able to generate these revenues or achieve profitability in the future.  Our failure to achieve or maintain profitability could negatively impact the value of our common stock.

We have a limited operating history upon which to base an investment decision.

Our subsidiary, ADCI, which is the operating entity, was incorporated in June 2007, and as such our operating history is short. We expect to incur additional operating losses for the immediate near future.  These factors, among others, raise significant doubt about our ability to continue as a going concern.  If we are unable to generate sufficient revenue from our operations to pay expenses or we are unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations will be materially and adversely affected.

Ability to continue as a going concern.

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

For the foreseeable future, we will have to fund all of our operations and capital expenditures from the net proceeds of equity and/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.
 
40

 

Not applicable

ITEM 4. –  CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports, filed under the Securities Exchange Act of 1934, 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 financial consultant, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives.  In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, a control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As required by the Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and financial consultant, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  Based on the foregoing, our chief executive officer and financial consultant concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
41

 

Item 1. Legal Proceedings

Mr. Warren, Mr. Kee and Mr. Edwards all served as executive officers of Bravo! Brands Inc. (“Bravo!”).  On September 21, 2007, Bravo! Brands Inc., reported that it filed a voluntary petition in the United States Bankruptcy Court for the Southern District of Florida pursuant to Chapter 7 of Title 11 of the United States Code, Case No. 07-17840-PGH.  The filing occurred after Mr. Warren, Mr, Kee and Mr. Edwards ended their relationship with Bravo!.  The bankruptcy trustee has named Mr. Warren and Mr. Kee as defendants  in an Adversary Complaint for damages based upon certain allegations.  The proceeding does not involve Attitude and is pending in the United States Bankruptcy Court for the Southern District of Florida as part of the Chapter 7 proceedings of Bravo!.

On May 18, 2009, F&M Merchant Group, LLC commenced a lawsuit in the state of Texas to recover the balance owed by us under a Sales Agent Agreement entered by the parties on November 1, 2008.  This agreement requires us to pay $5,000 per month and a 5% commission on all net sales.  Their claim is for $21,079 plus legal costs whereas our recorded amount is $16,079, resulting in the disagreement of one month of consulting fees.  Due to the lack of adequate capital financing, we have not been able to make any payments, and we recorded the additional $5,000 to equal the total claim.  We expect to resolve this matter as soon as practical.

On June 5, 2009, Tuttle Motor Sports, Inc. commenced a lawsuit in the state of Florida to recover the balance owed by us under a Letter of Agreement to sponsor a Top Fuel Dragster for the 2008 NHRA racing season in the amount of $803,750.  Out of this total amount, only $300,000 is required to be paid in cash with the remainder to be paid in shares of common stock.  This amount had already been recorded in our records.  Due to the lack of adequate capital financing, we have not been able to make any cash payments.  We expect to resolve this matter as soon as practical.

On August 21, 2009, CH Fulfillment Services, LLC commenced a lawsuit in the state of Alabama to recover past due amounts owed by us under a contract to provide shipping and fulfillment services.  The claim is for $2,106.14 plus interest and legal costs.  This amount had already been recorded in our records as well as projected interest costs of $681.76 and estimated court costs of $307.49.  A total of $656.78 has been paid towards this total claim.

On November 9, 2009, Nationwide Distribution Services, Inc. filed a lawsuit in the state of Florida to recover past due amounts owed by us under a contract to provide storage and warehouse fees.  The claim is for $3,033.45 as we have already recorded a similar amount in our records.


The Company signed a Modification, Waiver and Consent Agreement on July 14, 2009 for a new note payable in the amount of $145,000 as substantially the same terms as the March, 2009 funding.  The total principal amount to pay will be $161,112.  In addition, a total of 6,713,000 warrants were issued.

Item 3. Defaults on Senior Securities

As of September 30, 2009, the Company was in default in paying the October-2007, January-2008, February-2008, September-2008 and December-2008 debt obligations in which the debt holders agreed in January, 2009 to extend the due dates to July 1, 2009. The company is working on the extensions of the due dates for these debts.

As of September 30, 2009, the Company was in default in paying the April-2008, May-2008 and August-2008 debt obligations in which the debt holders agreed in January, 2009 to extend the due dates to April 30, 2009.  The company is working on the extension of the due dates for these debts.

As of September 30, 2009, the Company was in default in paying the January-2009 and February-2009 debt obligations.  The company is working on the extension of the due dates for these debts.

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

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

Item 5. Other Information/Subsequent Events

See Note 10 of Notes to Condensed Consolidated Financial Statements

42

Item 6. Exhibits

Exhibit No.
Document Description
Incorporated
by Reference
Filed
Herewith
(2)(1)
Agreement and Plan of Merger dated September 14, 2007
*
 
(3)(1)
Restated Certificate of Incorporation
*
 
(3)(2)
Amended and Restated Bylaws
*
 
(4)(1)
Certificate of Designation of the Series A Convertible Preferred
*
 
(4)(2)
Form of Common Stock Certificate
*
 
(4)(3)
Form of Class A and B Common Stock Purchase Warrant with Schedule of other documents omitted
*
 
(4)(4)
Form of 10% Convertible Note with Schedule of other documents omitted
*
 
(4)(5)
Form of Secured Convertible Note with Schedule of other documents omitted
*
 
(4)(6)
Certificate of Amendment to the Certificate of Designation of the Series A Convertible Preferred Stock
 
X
(10)(1)
Subscription Agreement for Securities dated October 23, 2007
*
 
(10)(2)
2007 Stock Compensation and Incentive Plan
*
 
(10)(3)
Escrow Agreement dated October 23, 2007
*
 
(10)(4)
Security Agreement dated October 23, 2007
*
 
(10)(5)
Subsidiary Guaranty dated October 23, 2007
*
 
(10)(6)
Collateral Agent Agreement dated October 23, 2007
*
 
(10)(7)
Office Lease Agreement dated December 15, 2007
**
 
(10)(8)
Subscription Agreement dated January 8, 2008
*
 
(10)(9)
Funds Escrow Agreement dated January 8, 2008
*
 
(10)(10)
Waiver and Consent dated January 8, 2008
*
 
(10)(11)
Notice of Waiver of Certain Conditions effective February 15, 2008
*
 
(10)(12)
Notice of Waiver effective February 15, 2008
*
 
(10)(13)
Notice of Waiver of Conditions
*
 
(10)(14)
Form of Modification, Waiver and Consent Agreement, September 2008
***
 
(10)(15)
Subscription Agreement, September 2008
***
 
(10)(16)
Form of Note, September 2008
***
 
(10)(17)
Form of Class A Warrant, September 2008
***
 
(10)(18)
Manufacturing Agreement dated December 16, 2008 with O-AT-KA Milk Products Cooperative, Inc.
****  
(14)  Code of Ethics *****  
(21)
Subsidiaries of Registrant *  
*  previously filed with the Commission on April 11, 2008 as exhibits to Form S-1/A (SEC Accession Number 0001144204-08-021783)
** previously filed with the Commission on February 14, 2008 as Exhibit 10.3 to Form 10-Q (SEC Accession Number 0001144204-08-008934)
*** filed with the Commission on November 19, 2008 as Exhibits 10.14-10.17 to Form 10-Q (SEC Accession Number 0001144204-08-0063995)
**** filed with the Commission on March 5, 2009 as Exhibit 10.18 to Form 10-Q (SEC Accession Number 0001213900-09-000385)
***** filed with the Commission on August 14, 2009 as Exhibit 14.1 to Form 10-K (SEC Accession Number 0001213900-09-002104)

43

 
SIGNATURES



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

ATTITUDE DRINKS INCORPORATED
(Registrant)
Date: November 23, 2009
 
/s/Roy G. Warren  
President  
   
   

In accordance with the Securities Exchange Act of 1934, Attitude Drinks Incorporated has caused this report to be signed on its behalf by the undersigned in the capacities and on the dates stated.
Signature   Title     Date  
           
           
           
/S/Roy G. Warren   President and Acting CFO   November 23, 2009  
 Roy G. Warren          
 
 
44