Attached files
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2010
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number: 0-33519
WHO’S
YOUR DADDY, INC.
(Exact
name of Registrant as specified in its charter)
Nevada
|
98-0360989
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification No.)
|
26381 Crown Valley Parkway,
Suite 230, Mission Viejo, CA 92691
(Address
of principal executive offices)
(949)
582-5933
(Issuer’s
telephone number)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
ý No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company: in Rule 12b-2 of the Exchange Act (Check one):
Large
Accelerated Filer o
|
Accelerated
Filer o
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Non-Accelerated
Filer (Do not check if smaller reporting company) o
|
Smaller
Reporting Company ý
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No ý
As of May
21, 2010, there were 70,419,938 shares of our common stock issued and
outstanding.
FORM
10-Q
MARCH
31, 2010
INDEX
Part
I – Financial Information
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||
Item
1.
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Financial Statements
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1
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Item
2.
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Management’s Discussion and Analysis of Financial
Condition or Plan of Operation
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12
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Item
3.
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Quantitative and Qualitative Disclosures about
Market Risk
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19
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Item
4.
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Controls and Procedures
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19
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Item
4T.
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Controls and Procedures
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20
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Part
II – Other Information
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||
Item
1.
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Legal Proceedings
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20
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Item
1A.
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Risk Factors
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21
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Item
2.
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Unregistered Sales of Equity
Securities
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21
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Item
3.
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Defaults Upon Senior
Securities
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21
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Item
4.
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Submission of Matters to a Vote of Security
Holders
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21
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Item
5.
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Other Information
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21
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Item
6.
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Exhibits
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21
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Signatures
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22
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Certifications
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PART I
-- FINANCIAL INFORMATION
ITEM
I -- FINANCIAL STATEMENTS
WHO’S
YOUR DADDY, INC.
BALANCE
SHEETS
March
31,
2010
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December
31,
2009
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|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
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$ | — | $ | — | ||||
Inventories
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43,285 | — | ||||||
Prepaid
and other
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15,538 | 6,945 | ||||||
Total
current assets
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58,823 | 6,945 | ||||||
Property
and equipment, net
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2,947 | 3,642 | ||||||
Total
assets
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$ | 61,770 | $ | 10,587 | ||||
Liabilities
and Shareholders’ Deficit
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||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 814,371 | $ | 868,626 | ||||
Accrued
expenses
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406,801 | 442,543 | ||||||
Accrued
compensation
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867,453 | 1,168,704 | ||||||
Customer
deposits
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227 | 227 | ||||||
Accrued
litigation
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1,790,000 | 1,790,000 | ||||||
Notes
payable
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603,982 | 812,567 | ||||||
Advances
from officers
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48,956 | 390,025 | ||||||
Total
current liabilities
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4,531,790 | 5,472,692 | ||||||
Notes
payable, net of current portion
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— | 373,065 | ||||||
Total
liabilities
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4,531,790 | 5,845,757 | ||||||
Shareholders’
deficit
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||||||||
Preferred
stock, $0.001 par value: 20,000,000 shares authorized, no shares issued
and outstanding at March 31, 2010 and December 31, 2009,
respectively.
|
— | — | ||||||
Common
stock, $0.001 par value: 100,000,000 shares authorized, 58,724,938 and
52,795,781 shares issued and outstanding at March 31, 2010 and December
31, 2009, respectively.
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58,725 | 52,796 | ||||||
Additional
paid-in capital
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27,337,599 | 25,828,049 | ||||||
Accumulated
deficit
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(31,866,344 | ) | (31,716,015 | ) | ||||
Total
shareholders’ deficit
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(4,470,020 | ) | (5,835,170 | ) | ||||
Total
liabilities and shareholders’ deficit
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$ | 61,770 | $ | 10,587 |
See
accompanying Notes to Financial Statements.
1
WHO’S
YOUR DADDY, INC.
STATEMENTS
OF OPERATIONS
(UNAUDITED)
Three
Months Ended March 31,
|
||||||||
2010
|
2009
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|||||||
Sales
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$ | — | $ | 160,420 | ||||
Cost
of sales
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— | 93,239 | ||||||
Gross
profit
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— | 67,181 | ||||||
Operating
expenses:
|
||||||||
Selling
and marketing
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141,685 | 119,174 | ||||||
General
and administrative
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218,004 | 239,338 | ||||||
Total
operating expenses
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359,689 | 358,512 | ||||||
Operating
loss
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(359,689 | ) | (291,331 | ) | ||||
Interest
expense
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52,611 | 48,957 | ||||||
Gain
on extinguishment of debt and creditor obligations
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(263,970 | ) | — | |||||
Other
expense, net
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2,000 | 400 | ||||||
Loss
before income taxes
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(150,330 | ) | (340,688 | ) | ||||
Income
taxes
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— | — | ||||||
Net
loss
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$ | (150,330 | ) | $ | (340,688 | ) | ||
Basic
and diluted net loss per share
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$ | (0.00 | ) | $ | (0.02 | ) | ||
Weighted
average number of common shares used in basic and diluted per share
calculations
|
55,088,991 | 20,497,722 |
See
accompanying Notes to Financial Statements.
2
WHO’S
YOUR DADDY, INC.
STATEMENTS
OF CASH FLOWS
(UNAUDITED)
Three
Months Ended March 31,
|
||||||||
2010
|
2009
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|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
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$ | (150,330 | ) | $ | (340,688 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Gain
on extinguishment creditor settlements
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(263,970 | ) | — | |||||
Common
stock issued for services rendered
|
194,175 | 95,790 | ||||||
Depreciation
|
695 | 4,901 | ||||||
Amortization
of debt discount
|
19,504 | 35,000 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
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— | (2,536 | ) | |||||
Inventories
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(43,285 | ) | (1,348 | ) | ||||
Prepaid
expenses and other assets
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(7,593 | ) | 35,288 | |||||
Accounts
payable
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5,952 | 26,803 | ||||||
Accrued
expenses
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33,583 | 48,030 | ||||||
Accrued
compensation
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112,014 | — | ||||||
Advances
from officers
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34,255 | 98,760 | ||||||
Net
cash used in operating activities
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(65,000 | ) | — | |||||
Cash
flows from financing activities:
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||||||||
Proceeds
from issuance of notes payable, net of fees
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55,000 | — | ||||||
Proceeds
from the sale of common stock
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10,000 | — | ||||||
Net
cash provided by financing activities
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65,000 | — | ||||||
Net
decrease in cash and cash equivalents
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— | — | ||||||
Cash
and cash equivalents at beginning of year
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— | — | ||||||
Cash
and cash equivalents at end of year
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$ | — | $ | — | ||||
Supplemental
disclosure of cash flow information:
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||||||||
Cash
paid for interest
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$ | 5,525 | $ | — | ||||
Cash
paid for income taxes
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$ | — | $ | — | ||||
Supplemental
disclosure of non-cash investing and financing activities:
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||||||||
Forgiveness of former officer obligations
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$ | 848,795 | $ | — | ||||
Issuance of common stock for conversion of notes payable and
interest
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$ | 436,664 | $ | — | ||||
Settlement of note payable and interest for zero value assets | $ | 267,661 | $ | — |
See
accompanying Notes to Financial Statements.
3
WHO’S
YOUR DADDY, INC.
NOTES
TO FINANCIAL STATEMENTS
March
31, 2010
(UNAUDITED)
1.
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Business
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Business
Prior to
the second quarter of 2009, Who’s Your Daddy, Inc. (the
“Company”) manufactured (on an outsource basis), marketed, and
distributed it’s The King of Energy® energy drinks, including two-ounce energy
shots and canned energy drinks, centered on its trademark-protected brand, Who’s
Your Daddy®. In the second quarter of 2009, we temporarily suspended
our sales activity to focus on a new marketing strategy which will emphasize the
sale of a new energy shot product over the internet to people in their late
twenties, thirties, forties and fifties who are interested in fitness and health
as well as gaining an energy boost. The development of the new energy
shot product was completed in December 2009. The new product, named
F.I.T.T. Energy With
Resveratrol (the “FITT Energy Shot”), contains a number of ingredients
which various scientific studies describe as having certain possible health and
fitness benefits. The first production run of the FITT Energy Shot
occurred in the first quarter of 2010, and we expect sales to begin in the
second quarter of 2010. The Company intends to develop additional
products in the future for this market niche.
As a
result of our decision to pursue a new marketing direction with our FITT Energy
Shot product, we decided in 2009 to no longer use the Who’s Your Daddy® and The
King of Energy® tradenames, and effective January 19, 2010, we entered into a
settlement agreement with Fish & Richardson, P.C. (“Fish”), a previous
provider of legal services to us, wherein we agreed to transfer all right, title
and interest in our tradenames to Fish, and Fish agreed to acknowledge a full
satisfaction of any debt owed Fish by the Company. See Note
8.
In April
2010, the Board of Directors approved a resolution to change the Company’s
corporate name to FITT Energy, Inc., which we consider to be non-offensive to
our market demographic while being more descriptive of our new
products. We are in the process of securing shareholder approval for
the name change, which will result in a new trading symbol.
Management’s
Plan of Operations
For the
year ended December 31, 2009, revenues declined to $160,695 from the 2008
level of $745,050, primarily due to the lack of operating capital and our
decision to temporarily suspend our sales activity to focus on our new marketing
strategy and product development. The Company has also incurred net losses
of $2,587,334 and $2,644,172 for the years ended December 31, 2009 and
2008, respectively. For the three months ended March 31, 2010, we had
no revenues and experienced a net loss of $150,330. This net loss can
be broken down as follows:
Stock
based expenses for services rendered
|
$ | 194,175 | ||
Debt
discount amortization and depreciation
|
20,199 | |||
Gain
on extinguishment of debt obligations
|
(263,970 | ) * | ||
All
other operations
|
199,926 | |||
Total net
loss
|
$ | 150,330 | ||
* This gain does not include a credit to Additional Paid-in Capital of $835,295 which resulted from settlement agreements reached during the first quarter of 2010 with three former officers of the Company. See Note 10. |
As of
March 31, 2010, we had negative working capital in excess of $4.4 million, which
includes $1.8 million of an accrued arbitration award for a lawsuit against the
Company.
Management
believes our operating losses have resulted from a combination of insufficient
revenues generated to support our sales and marketing efforts, new product
development and administrative time and expense of being a small publicly-traded
company. The Company has finalized a new internet-based marketing
plan for the FITT Energy Shot which we plan to roll-out in the second quarter of
2010. We believe this marketing approach will allow us to reach a far
greater number of customers than currently possible using traditional
distribution networks at significantly
reduced costs for marketing, shipping, and product placement than we have
historically experienced. The Company has also decided to limit any
future sales of our canned energy drink products to those situations where
marketing, shipping and product placement costs are
minimal.
4
Cash
required to implement the internet marketing plan will be significant and we
have been in discussions with a number of interested investors. The
investors are requiring that investment dollars be used to 1) build the internet
landing page, 2) produce inventory, 3) provide for call and fulfillment centers,
4) obtain the services of merchant accounts for customer credit card use, 5)
develop internet leads, and 6) pay basic ongoing business expenses including
current employee wages and benefits and all other costs necessary to keep the
Company’s government filings current. In addition, investors are
requiring the Company develop a structure that will protect their investments
from prior creditor claims. Finally, investors have asked us to
pursue additional funding to be used to mitigate existing debt at 10 to 15 cents
per dollar of debt.
Because
of the magnitude of our debt burden, the Company has experienced significant
difficulty raising capital from investors to pursue our operations and our new
marketing plan. As a result, the Company is negotiating an Operating
Agreement (the “Operating Agreement”) with F.I.T.T. Energy Products, Inc.
(“FITT”), a Nevada corporation owned by our CEO, which recently commenced
operations. Terms of an Operating Agreement are still being
discussed, but we expect that they will include requirements for FITT to raise
capital and perform certain operating services for the Company, including
product production and internet marketing, with respect to the Company’s FITT
Energy Shot. As consideration for the performance of their
obligations under the Operating Agreement, the Company and FITT have discussed
that FITT will provide the Company funds sufficient to pay a license fee which
will provide for 1) salaries and benefits of the Company’s employees, 2) public
company costs of the Company including, but not limited to, legal and audit
costs, SEC filing fees, transfer agent fees, and investor relations fees, 3)
other ongoing operating costs of the Company including, but not limited to costs
for office and equipment rent, telephone and internet service, supplies, etc.,
and 4) a percentage of FITT’s net after tax income resulting from its operations
on behalf of the Company. In its discussions with FITT, the Company
has expressed a willingness to issue shares of its common stock to investors as
an inducement for their investment and will reserve enough of its common shares
to allow for conversion of the notes into shares of the Company. The
Company and FITT have also discussed that FITT will record in its books all
sales, cost of sales and operating expenses connected with its operations in
connection with the Operating Agreement, and all cash, inventory and other
assets resulting from either the investment dollars or from FITT’s operations
will be the property of FITT and under the Operating Agreement. There
can be no assurance that the Company and FITT will successfully conclude their
negotiations of the Operating Agreement and, as a result, all operating revenue
and expenses, as well as assets and liabilities, continue to be recorded on the
Company’s books.
Management
continues to actively seek capital through various sources. Due to
the current economic environment and the Company’s current financial condition,
management cannot be assured there will be adequate capital available when
needed and on acceptable terms. The factors described above raise
substantial doubt about the Company’s ability to continue as a going
concern. The financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets and liabilities that might
result from the outcome of this uncertainty.
2.
|
Basis
of Presentation and Significant Accounting
Policies
|
Basis
of Presentation
The
financial statements are unaudited and have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information, pursuant to the rules and regulations of the
Securities and Exchange Commission. Notes to the financial statements which
would substantially duplicate the disclosures contained in the audited financial
statements for the most recent fiscal year 2009 as reported in the Company’s
Form 10-K have been omitted. In the opinion of management, the
financial statements include all adjustments, consisting of normal recurring
accruals necessary to present fairly the Company’s financial position, results
of operation and cash flows. The results of operations for the
three-month period ended March 31, 2010 are not necessarily indicative of the
results to be expected for the full year. These statements should be read in
conjunction with the financial statements and related notes which are part of
the Company’s Annual Report on Form 10-K for the year ended December 31,
2009.
5
Accounting
for Equity Instruments Issued to Non-Employees
The
Company accounts for its equity-based payments to non-employees under ASC
Subtopic 505 – Equity-Based Payments to Non-Employees, formerly Emerging Issues
Task Force (“EITF”) No. 96-18 “Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.” The fair value of the equity instrument issued or committed to be
issued is used to measure the transaction, as this is more reliable than the
fair value of the services received. The fair value is measured at the value of
the Company’s common stock on the date the commitment for performance by the
counterparty has been reached or the counterparty’s performance is complete. The
fair value of the equity instrument is charged directly to the statement of
operations and credited to common stock and/or additional paid-in capital as
appropriate.
Debt
Issued with Common Stock
Debt
issued with common stock is accounted for under the guidelines established by
ASC Subtopic 470-20 – Accounting for Debt With Conversion or Other
Options, formerly Accounting Principles Board ("APB") Opinion No. 14 “Accounting
for Convertible Debt and Debt issued with Stock Purchase Warrants” under the
direction of EITF 98-5, “Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios”, EITF 00-27
“Application of Issue No 98-5 to Certain Convertible Instruments”, and EITF 05-8
Income Tax Consequences of Issuing Convertible Debt with Beneficial Conversion
Features. The Company records the relative fair value of common stock related to
the issuance of convertible debt as a debt discount or premium. The
discount or premium is subsequently amortized over the expected term of the
convertible debt to interest expense.
Net
Loss per Share
Basic and
diluted net loss attributable to common stockholders per share is calculated by
dividing the net loss applicable to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted net loss per
common share is the same as basic net loss per common share for all periods
presented. The effects of potentially dilutive securities are anti-dilutive in
the loss periods. At March 31, 2010 and 2009, there were no options
and warrants outstanding that would have had a dilutive effect should we have
had net income during the years. For the three months ended March 31,
2010, the Company had 518,248 warrants outstanding, for which all of the
exercise prices were in excess of the average closing price of the Company’s
common stock during the corresponding period and thus no shares are considered
as dilutive under the treasury-stock method of accounting. For the
three months ended March 31, 2009, the Company had 1,161,167 options and
1,023,010 warrants outstanding, for which all of the exercise prices were in
excess of the average closing price of the Company’s common stock during the
corresponding period and thus no shares are considered as dilutive under the
treasury-stock method of accounting.
Recent
Accounting Pronouncements
In June
2009, the FASB issued ASC 105 “Generally Accepted Accounting Principles”
(formerly SFAS No. 168 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB
Statement No. 162). ASC 105 establishes the FASB Accounting Standards
Codification as the source of authoritative U.S. GAAP recognized by the FASB to
be applied by nongovernmental entities. ASC 105, which changes the referencing
of financial standards, is effective for interim or annual financial periods
ending after September 15, 2009. The Company adopted ASC 105 during the
three months ended September 30, 2009 with no impact to its financial
statements, except for the changes related to the referencing of financial
standards.
In
January 2010, the Financial Accounting Standards Board (“FASB”) amended
authoritative guidance for improving disclosures about fair-value measurements.
The updated guidance requires new disclosures about recurring or nonrecurring
fair-value measurements including significant transfers into and out of Level 1
and Level 2 fair-value measurements and information on purchases, sales,
issuances, and settlements on a gross basis in the reconciliation of Level 3
fair-value measurements. The guidance also clarified existing fair-value
measurement disclosure guidance about the level of disaggregation, inputs, and
valuation techniques. The guidance became effective for interim and annual
reporting periods beginning on or after December 15, 2009, with an
exception for the disclosures of purchases, sales, issuances and settlements on
the roll-forward of activity in Level 3 fair-value measurements. Those
disclosures will be effective for fiscal years beginning after December 15,
2010 and for interim periods within those fiscal years. The Company does not
expect that the adoption of this guidance will have a material impact on the
consolidated financial statements.
6
3.
|
Inventories
|
The
Company had no inventory on December 31, 2009. At March 31, 2010, our
inventory consisted of the following:
Raw
materials – boxes and labels
|
$ | 8,784 | ||
Finished
goods – FITT Energy Shots
|
34,501 | |||
Total
inventory
|
$ | 43,285 |
4.
|
Accrued
Expenses
|
Accrued
expenses consisted of the following at:
March
31,
2010
|
December
31,
2009
|
|||||||
Estimated
future cost of office lease abandoned
|
$ | 209,950 | $ | 209,950 | ||||
Interest
|
84,004 | 125,746 | ||||||
Other
|
112,847 | 106,847 | ||||||
$ | 406,801 | $ | 442,543 |
5.
|
Accrued
Compensation
|
Accrued
compensation consists of the following at:
March
31,
2010
|
December
31,
2009
|
|||||||
Accrued
officers (and former officers) compensation
|
$ | 457,086 | $ | 769,776 | ||||
Other
accrued compensation
|
93,433 | 59,995 | ||||||
Accrued
payroll taxes
|
312,548 | 334,547 | ||||||
Other
|
4,386 | 4,386 | ||||||
$ | 867,453 | $ | 1,168,704 |
During
the three month period ended March 31, 2010, we entered into settlement
agreements with three former officers under which these former officers agreed
to forgo the repayment of $379,141 in accrued compensation. These
settlements also allowed for a reduction in accrued payroll taxes on unpaid
payroll in the amount of $34,123. See Note 10.
The
accrued payroll taxes category includes amounts recorded for delinquent payments
of $262,803 and $258,489 at March 31, 2010 and December 31, 2009,
respectively. Due to our lack of capital, we have been unable to pay
compensation to certain of our employees and also have unpaid payroll
taxes. As part of our settlement agreements with two of the three
former officers, which is more fully discussed in Note 10, the two former
officers agreed to allow the Company to liquidate a total of 2,044,428 shares of
our common stock held in their name, and use the proceeds to repay certain debt
including delinquent payroll taxes.
6.
|
Notes
Payable
|
Notes
payable consists of the following at:
March
31,
2010
|
December
31,
2009
|
|||||||
Convertible
promissory notes – 2010 issuance
|
$ | 55,000 | $ | — | ||||
Less: unamortized
debt discount
|
(19,903 | ) | — | |||||
Convertible
promissory notes – 2009 issuance
|
145,000 | 145,000 | ||||||
Less: unamortized
debt discount
|
(28,115 | ) | (39,433 | ) | ||||
Convertible
promissory notes – 2008 issuance
|
— | 380.000 | ||||||
Less: unamortized
debt discount
|
— | (6,935 | ) | |||||
Note
payable – vendor settlement
|
— | 255,000 | ||||||
Note
payable – distributor settlement
|
202,000 | 202,000 | ||||||
Note
payable – trademark settlement
|
100,000 | 100,000 | ||||||
Notes
payable – other
|
150,000 | 150,000 | ||||||
Subtotal
|
603,982 | 1,185,632 | ||||||
Less
current portion
|
(603,982 | ) | (812,567 | ) | ||||
Long-term
portion
|
$ | — | $ | 373,065 |
7
Convertible
Promissory Notes – 2010 Issuance
In
September 30, 2009, we commenced a $300,000 offering consisting of a convertible
promissory note bearing 12% interest and five shares of the Company’s common
stock for every dollar invested. In March 2010, we increased the
amount of the offering from $300,000 to $400,000, and in April 2010 we again
increased the amount of the offering to $500,000.
During
the three months ended March 31, 2010, we issued notes with face value totaling
$55,000 together with 275,000 shares of common stock in connection with this
offering, and recorded an initial discount on the notes of $21,154.
Convertible
Promissory Notes – 2008 Issuance
During
the three month period ended March 31, 2010, we modified the conversion feature
of the 2008 convertible promissory notes to allow the noteholders to convert the
principal and accrued interest owed them at $0.16 per share, which qualified for
extinguishment accounting. All of the noteholders elected to convert,
and as a result, we issued them a total of 2,729,157 shares of our common stock
in full settlement of notes payable and accrued interest totaling
$436,664. In connection with the settlement, the Company recorded a
loss on extinguishment of debt of $3,691 during the first quarter of
2010.
Notes
Payable – Vendor Settlement
Effective
January 19, 2010, we entered into a settlement agreement with Fish &
Richardson, P.C. (“Fish”), a previous providerof legal services to us, wherein
we agreed to transfer all right, title and interest in our tradenames to Fish,
and Fish agreed to acknowledge a full satisfaction of all debt owed by the
Company to Fish, consisting of a note payable in the principal amount of
$255,000 and accrued interest of $12,661. In connection with the
settlement, the Company recorded a gain on extinguishment of debt of $267,661
during the first quarter of 2010. See Note 8.
7.
|
Related
Parties
|
As
described in Note 1, the Company has limited capital resources and
liquidity. As a result, during the periods covered by this report,
our CEO and one of our former officers each advanced funds to the Company in
order for it to pay certain obligations. In addition, prior to the
2009 calendar year, four former officers advanced funds to the Company, which
amounts had not been fully repaid. At December 31, 2009 the Company
owed a total of $390,025 to the four former officers for these
advances. During the three months ended March 31, 2010, we entered
into settlement agreements with three of the four former officers under which
they each agreed to forgo the repayment of $375,324 in amounts owed for these
advances. See Note 10.
As
described in Note 1, the Company is negotiating an Operating Agreement with
FITT, a Nevada corporation owned by our CEO, which recently commenced
operations. During the first quarter of 2010, FITT made net advances
to the Company in the amount of $2,848. The outstanding balance of
advances made by our CEO, including the FITT advances, totaled $28,956 at March
31, 2010.
The
outstanding advances are due upon demand and do not incur
interest.
8
8.
|
Litigation
|
Sacks
Motor Sports Inc.
Effective
March 30, 2010, we entered into a Settlement Agreement and Release (the “Sacks
Settlement”) with Sacks Motor Sports Inc. (“Sacks”) and with Greg Sacks
(“Greg”). Under the Sacks Settlement, the Company agreed to pay Sacks
$100,000 on or before April 15, 2010 and issue to Sacks 1,000,000 shares of its
common stock in the form of 10 certificates of 100,000 shares each (the “Sacks
Shares”). The Sacks Settlement calls for the Sacks Shares to be
delivered to the Company’s law firm, Solomon Ward Seidenwurm & Smith, LLP
(“SWSS”) with an irrevocable instruction to mail to Sacks one stock certificate
of 100,000 shares per month for 10 consecutive months commencing July 15, 2010.
The Sacks Shares will be free-trading upon receipt of a legal opinion from the
Company’s counsel. Sacks has agreed that it will not directly or
indirectly sell, transfer or assign more than 100,000 shares of the Sacks Shares
during any thirty day period at any time.
Once the
Company makes the $100,000 payment and delivers the Sacks Shares to SWSS, Sacks
has agreed that it will irrevocably waive, release and surrender all rights
relating to or arising from its May 28, 2008 judgment against us and will take
all actions reasonable requested by us to cause the judgment to be permanently
rendered of no force or effect including without limitation by stipulating to
set aside and vacate the judgment and cause then entire litigation to be
dismissed with prejudice.
While the
Company issued the Sacks Shares to Sacks on March 30, 2010, we were unable to
raise the $100,000 payment due April 15, 2010, and therefore were could not
perform our obligations under the Sacks Settlement including the delivery of the
Sacks Shares to SWSS. We are in process of raising the $100,000 and,
if successful, believe that Sacks will agree to honor the Sacks
Settlement. Therefore, we have recorded the Sacks Shares at their par
value of $1,000 and included the amount in prepaid expenses in the Company’s
March 31, 2010 Balance Sheet. In the event we are not able to
complete the Sacks Settlement, the Sacks Shares will be cancelled. If
the Sacks Settlement is completed, the Company will value the shares on the date
of settlement for use in the calculation of gain or loss on extinguishment of
accrued litigation.
Fish
& Richardson
On or
about May 15, 2008, Fish filed an action against us in the Superior
Court of California, County of San Diego, asserting claims for breach of a
settlement agreement purportedly entered into in connection with fees allegedly
owed by us to Fish for Fish’s providing of legal services on the Company’s
behalf in the approximate amount of $255,000. The settlement
agreement, dated September 27, 2006, also granted Fish a security interest in
all of the tradenames owned by the Company and all associated
goodwill. In our response to the Fish action, we asserted that the
settlement agreement was void and that Fish failed to act as reasonably careful
attorneys in connection with their representation of us. Fish brought
a motion for summary judgment which was heard on April 17, 2009, and the
motion was granted. On May 21, 2009, a judgment was entered against
the Company for $273,835 plus interest of $74,817 through the date of the
judgment. On September 10, 2009, Fish filed an action to foreclose on
their security interest in the Company’s tradenames, which action was served on
our registered agent on approximately October 19, 2009. Given our
decision to no longer use our tradenames, we began working on an agreement with
Fish to affect an orderly transfer of the tradenames to Fish and, effective
January 19, 2010, we entered into a settlement agreement with Fish wherein the
Company agreed to transfer all right, title and interest in its tradenames to
Fish and Fish has agreed to acknowledge a full satisfaction of its judgment and
to dismiss the Federal Action with prejudice. The Fish Settlement
Agreement was executed on January 21, 2010. During the three months
ended March 31, 2010, we recorded a gain of $267,661 on this
settlement.
9.
|
Common
Stock
|
Following
is the activity for the Company’s shares of common stock during the three-month
period ended March 31, 2010:
Shares
|
|||
Shares
outstanding December 31, 2009
|
52,795,781
|
||
Issued
January 13, 2010
|
75,000
|
||
Issued
January 13, 2010
|
75,000
|
See
Note 10
|
|
Issued
January 15, 2010
|
75,000
|
See
Note 10
|
|
Issued
January 25, 2010 through March 16, 2010
|
2,729,157
|
See
Note 6
|
|
Issued
March 1, 2010
|
125,000
|
See
Note 6
|
|
Issued
March 1, 2010
|
150,000
|
See
Note 6
|
|
Issued
March 3, 2010
|
1,000,000
|
See
Note 10
|
|
Issued
March 23, 2010
|
1,000,000
|
See
Note 10
|
|
Issued
March 30, 2010
|
1,000,000
|
See
Note 8
|
|
Canceled
March 3, 2010
|
(300,000
|
)
|
|
Shares
outstanding March 31, 2010
|
58,724,938
|
9
On
January 13, 2010, the Company sold 75,000 shares of its common stock to an
investor for $10,000.
On March
3, 2010, the Company and Dr. Robert Maywood reached an agreement whereby we
canceled 300,000 shares of common stock previously issued to Dr. Maywood in
October 2009, as certain services were not rendered.
During
the three months ended March 31, 2010, warrants to purchase 500,000 shares of
our common stock expired.
10.
|
Agreements
|
Agreement
with MRR Investments
On
January 13, 2010, the Company entered into a Marketing & Representation
Agreement with MRR Investments, LLC (the “MRR Agreement”), a company with
significant experience in marketing and strategic alliances. The MRR
Agreement calls for MRR Investments to provide services in the areas of product
endorsement, strategic marketing, product support and strategic
introductions. Under the MRR Agreement, which has a term of 12
months, MRR received 75,000 shares of our common stock. The shares
were fully vested on January 13, 2010, the date of issuance, and the Company
recorded a stock-based marketing expense of $10,000, based on the market price
on the date of issuance, during the three-month period ended March 31,
2010.
Debt
Compromise – Former Officers
The
Company entered into letter agreements (the “Letter Agreements”) dated January
13, 2010 with two former officers and directors, Dan Fleyshman (“Fleyshman”) and
Edon Moyal (“Moyal”), whereby Fleyshman and Moyal agreed that the Company would
not be required to repay indebtedness owed them totaling $630,691 ($200,458 in
accrued salaries, $370,026 in unpaid loans and advances, and $60,207 in unpaid
services provided.) Additionally, the Letter Agreements require
Fleyshman and Moyal to allow the Company to liquidate a total of 2,044,428
shares of our common stock (the “Former Officer’s Shares”) held in their name,
and use the proceeds to repay certain other specified debt (the “Specified
Debt”). In the Letter Agreements, the Company gave no assurance that
it would be able to liquidate the Former Officer’s Shares or, if liquidated, the
proceeds, net of costs of settlement of the Specified Debt (including legal
fees) and costs of liquidation of the Former Officer’s Shares, would be
sufficient to repay the Specified Debt. Therefore the Letter
Agreements do not provide a release by the Company to Fleyshman and Moyal of any
liability they may have for the Specified Debt. On January 20, 2010,
Fleyshman and Moyal completed their obligations under the Letter Agreements by
providing the Former Officer’s Shares to the Company.
The
Company entered into a Settlement Agreement and General Release (the “Officer
Settlement Agreement”) dated January 15, 2010 with another former officer (the
“Officer”) whereby the Officer agreed to accept 75,000 shares of the Company’s
common stock (the “Shares”) as full repayment of indebtedness owed by the
Company totaling $183,981 ($178,683 in accrued salaries and $5,298 in unpaid
loans and advances.) The Officer Settlement Agreement provides that
the Company will endeavor to obtain an opinion from counsel confirming that the
Shares need not contain a restrictive legend under Rule 144. The
Officer signed the Officer Settlement Agreement on January 19,
2010.
In
connection with the Letter Agreements and the Officer Settlement Agreement, the
Company recorded an adjustment to Additional Paid-in Capital in the amount of
$835,295 during the three-month period ended March 31, 2010. In
addition, the Company may record an additional adjustment in future periods if
it can successfully liquidate some or all of the Former Officer’s Shares and
repay some or all of the Specified Debt. The adjustment to Additional
Paid-in Capital is comprised of the following:
10
Accrued
salaries – not repaid
|
$ | 379,141 | ||
Officer
advances – not repaid
|
375,324 | |||
Accounts
payable obligation – not repaid
|
60,207 | |||
Reduction
in accrued payroll taxes on accrued payroll
|
34,123 | |||
Subtotal
|
848,795 | |||
Less: value
of shares received by Officer
|
(13,500 | ) | ||
Adjustment
to additional paid-in capital as of March 31,
2010
|
$ | 835,295 |
Amendment
#2 to Sam Maywood Agreement
On July
28, 2009 the Company entered into a Marketing & Representation Agreement
with Sam Maywood M.D. (the “S. Maywood Agreement”), a Board Certified
Anesthesiologist and pain management specialist, who has extensive experience in
understanding the use and benefits of herbal products and their associated
marketing. On March 3, 2010, the Company entered into Amendment No. 2
to the S. Maywood Agreement which included the issuance of 1,000,000 more
shares. The shares were fully vested on March 3, 2010, the date of
issuance, and the Company recorded a stock-based marketing expense of $120,000
based on the market price on the date of issuance, during the three-month period
ended March 31, 2010.
Agreement
with APPL
On March
23, 2010, the Company entered into a Financial Public Relations Agreement with
APPL International Inc. (“APPL”) (the “APPL Agreement”) under which APPL agreed
to provide a variety of public relations services including press release and
other correspondence with the public, investors, portfolio managers, brokers and
analysts on behalf of the Company. The APPL Agreement has a term of 6
months and can be terminated by either party with immediate
notice. In connection with the APPL Agreement, the Company agreed to
issue 1,000,000 shares of its common stock to an employee of
APPL. The shares were fully vested on March 23, 2010, the date of
issuance, and will be released to APPL’s employee on a schedule set forth in the
APPL Agreement. The Company recorded a stock-based general and
administrative expense of $60,000 based on the market price on the date of
issuance, during the three-month period ended March 31, 2010.
11.
|
Subsequent
Events
|
Amendment
to Articles of Incorporation
In April
2010, the Board of Directors approved a resolution to amend the Company’s
Articles of Incorporation to change the corporate name to FITT Energy, Inc. and
to increase the authorized number of common shares from 100,000,000 to
150,000,000. The amendment is subject to shareholder approval and the
Company is in the process of obtaining such approval.
Agreement
with ICA
On April
9, 2010, the Company entered into a Consulting Agreement with Issuers Capital
Advisors, LLC (“ICA”) (the “ICA Agreement”) under which ICA agreed to provide a
variety of public relations services including press release and other
correspondence with the public, investors, portfolio managers, brokers and
analysts on behalf of the Company. The ICA Agreement has a term of 6
months and can be terminated by either party after sixty days for any
reason. In connection with the ICA Agreement, the Company agreed to
issue 570,000 shares of its common stock to ICA. The shares were
fully vested on April 9, 2010, the date of issuance, and will be released to ICA
on a schedule set forth in the ICA Agreement. The Company expects to
record a stock-based general and administrative expense of $57,000 based on the
market price on the date of issuance, during the three-month period ending June
30, 2010.
Agreement
with Sports 1 Marketing LLC
In 2009,
we entered into a Marketing & Lead Generation Agreement with LSSE, LLC, an
Iowa corporation (“LSSE”) (the “LSSE Agreement”). Under the LSSE
Agreement, LSSE agreed to provide a variety of services including marketing,
public relations, and merchandising services, including introductions,
negotiations, and support for our products, and the Company agreed to compensate
LSSE by issuing them 10,000,000 shares of our common stock. On
November 25, 2009, we were informed by LSSE they would not be able to obtain
final endorsement contracts, which were called for under the LSSE Agreement,
until our new FITT Energy Shot was manufactured and our internet landing page
was completed and available for review; therefore, LSSE could not fulfill their
obligations under the LSSE Agreement. LSSE instructed us to inform
our transfer agent not to issue the 10,000,000 shares. Due to recent
changes at LSSE, we agreed that we would rework the LSSE Agreement, under the
same terms and
conditions, with a company owned by NFL Hall of Fame quarterback, Warren Moon,
since Mr. Moon has the same athlete and media contacts to be able to perform the
consulting services outlined in the LSSE Agreement.
11
During
the first quarter of 2010, Mr. Moon was able to review our FITT Energy Shot and
internet landing page, and has agreed to provide his
endorsement. Additionally, Mr. Moon agreed to a reworking of the LSSE
Agreement whereby he will provide similar consulting services to those agreed to
by LSSE. The Company has reworked the LSSE Agreement with Sports 1
Marketing LLC (“Sports 1”), a company owned by Mr. Moon, and on April 21, 2010,
we entered into a Marketing and Representation Agreement with Sports 1 (the
“Sports 1 Agreement”). In connection with the Sports 1 Agreement, we
have issued the 10,000,000 previously committed shares as of April 21,
2010. 1,000,000 shares were immediately released to Mr. Moon and the
remaining 9,000,000 shares will be released to Sports 1 on a schedule set forth
in the Sports 1 Agreement. All shares were previously expensed in
2009 upon initial agreement with LSSE. No additional expense will be
recognized.
Amendment
#3 to Sam Maywood Agreement
On May 1,
2010, the Company entered into Amendment No. 3 to the S. Maywood Agreement which
included the issuance of 1,000,000 more shares. The shares were fully
vested on May 1, 2010, the date of issuance, and the Company expects to record a
stock-based marketing expense of $170,000 based on the market price on the date
of issuance, during the three-month period ending June 30, 2010.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
|
Disclaimer
Regarding Forward-Looking Statements
Our
Management’s Discussion and Analysis contains not only statements that are
historical facts, but also statements that are forward-looking (within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934). Forward-looking statements are, by
their very nature, uncertain and risky. These risks and uncertainties
include international, national and local general economic and market
conditions; demographic changes; our ability to sustain, manage, or forecast
growth; our ability to successfully make and integrate acquisitions; raw
material costs and availability; new product development and introduction;
existing government regulations and changes in, or the failure to comply with,
government regulations; adverse publicity; competition; the loss of significant
customers or suppliers; fluctuations and difficulty in forecasting operating
results; changes in business strategy or development plans; business
disruptions; the ability to attract and retain qualified personnel; the ability
to protect technology; and other risks that might be detailed from time to time
in our filings with the Securities and Exchange Commission.
Although
the forward-looking statements in this report reflect the good faith judgment of
our management, such statements can only be based on facts and factors currently
known by them. Consequently, and because forward-looking statements
are inherently subject to risks and uncertainties, the actual results and
outcomes may differ materially from the results and outcomes discussed in the
forward-looking statements. You are urged to carefully review and consider
the various disclosures made by us in this report and in our other reports as we
attempt to advise interested parties of the risks and factors that may affect
our business, financial condition, and results of operations and
prospects.
Description
of Business
We had
originally marketed our energy drinks through retail outlets mainly to a
demographic of customers in their late teens through mid-thirties who were
seeking alternatives to bad tasting energy drinks, coffee and other stimulants
and were attracted to our products because of their energy boosting
capabilities, pleasant taste, and also because of our edgy and provocative
tradename. Given the crowded energy drink market and high cost of
acquiring shelf space, in late 2008, we developed and began marketing a new
product, our Sport Energy Shot, on a test basis in limited retail markets to
determine the best marketing strategy and demographic for this
product. Based on what we learned from marketing our Sport Energy
Shot, the Company determined during the second quarter of 2009 we should change
our marketing strategy and demographic in order to be competitive in the energy
product marketplace. During the last three quarters of 2009 and the
first quarter of 2010, the Company temporarily suspended its sales activity to
focus on a new marketing strategy which will emphasize the sale of a new energy
shot product over the internet to people in their late twenties, thirties,
forties and fifties who are interested in fitness and health as
well as gaining an energy boost. The Company has developed the new
energy shot product, F.I.T.T.
Energy With Resveratrol (the “FITT Energy Shot”), which contains a number
of ingredients which certain scientific studies claim have various health and
fitness benefits, and the Company intends to develop additional products in the
future for this market niche.
12
Former
Energy Shot Product
In late
2008, we began marketing our Sports Energy Shot, a concentrated two-ounce energy
drink, designed to provide a zero calorie, sugar free, rapid and lasting energy
boost which enhances muscle strength and endurance. One of the important
ingredients in the energy shot is L-Arginine. Arginine is an amino acid
and is essential for optimum growth and in the regulation of protein metabolism.
It is well established that Arginine facilitates the release of growth hormone
(HGH), stimulates the pancreas for insulin production, and is a component in the
hormone vasopressin produced by the pituitary gland. HGH-release by means of
Arginine may offer benefits in the treatment of injuries, as well as
strengthening the immune system, building lean muscle, and burning
fat. Arginine is also required by the body to carry out the synthesis
of nitric oxide, a compound that, working through cGMP, relaxes blood vessels
and allows more blood to flow through arteries. It has been hypothesized that
taking extra Arginine will increase nitric oxide levels and increase blood
flow. In the second quarter of 2009, we suspended sales of the Sports
Energy Shot to concentrate on the development of a new energy shot
product.
New
Energy Shot Product
Our new
FITT Energy Shot contains some of the most exiting supplements of this
generation. These ingredients have been selected to enhance mental
focus, muscle strength and endurance, and promote cardiovascular health.
The FITT Energy Shot features Resveratrol. A substance found naturally in
grapes, Resveratrol may cause the body to act as if it is already on a diet, and
change the distribution of fat tissue in the body. In fact, Resveratrol has the
scientific world fascinated by its potential to affect age related
decline. Our FITT Energy Shot also contains L-Arginine, an amino acid in
dairy, brown rice and nuts which is essential for optimum growth, and regulation
of protein metabolism. L-Arginine can make blood vessels wider, as
opposed to the narrowing effect of caffeine. Further, L-Arginine may benefit in
the treatment of sports related injuries, as well in building lean muscle and
burning fat, since it facilitates the natural release of growth hormone (HGH)
and is a building block for creatine. Additionally, the drink features
L-Arginine alphaketoglutarate (AKG). Arginine AKG has been shown in a
University study to help build additional strength when used during
training. Beyond this, the FITT Energy Shot features antioxidant Green Tea
extract, and Chromium. These ingredients have good safety profiles and
have support as weight-loss aides. More than just a caffeine drink, our
FITT Energy Shot adds natural energy boosters including Taurine & Guarana,
as well as essential Vitamins B3, B5, B6, and B12. To optimize workouts,
the FITT Energy Shot has a touch of Fructose, an easily absorbed fuel for the
body and brain. All this is built on a base of healthy pomegranate and
orange. .
Canned
Energy Drink Products
We
previously distributed our canned energy drinks in two flavors,
Cranberry-Pineapple and Green Tea, with a Regular and Sugar-Free version of
each. Shipments began in 2005 with the Cranberry-Pineapple
flavor. During the first quarter of 2009, we suspended sales of our
canned energy drink products to focus on our energy shots, but we may elect to
resume sales of these products in the future, under the FITT brand, in those
situations where marketing, shipping, and product placement costs are
minimal.
Business
Plan
In 2009,
we entered into a Marketing & Lead Generation Agreement with LSSE, LLC, an
Iowa corporation (“LSSE”) (the “LSSE Agreement”). Under the LSSE
Agreement, LSSE agreed to provide a variety of services including marketing,
public relations, and merchandising services, including introductions,
negotiations, and support for our products, and the Company agreed to compensate
LSSE by issuing them 10,000,000 shares of our common stock. On
November 25, 2009, we were informed by LSSE they would not be able to obtain
final endorsement contracts, which were called for under the LSSE Agreement,
until our new FITT Energy Shot was manufactured and our internet landing page
was completed and available for review; therefore, LSSE could not fulfill their
obligations under the LSSE Agreement. LSSE instructed us to inform
our transfer agent not to issue the 10,000,000 shares. Due to recent
changes at LSSE, we agreed that we would rework the LSSE Agreement, under the
same terms and conditions, with a company owned by NFL Hall of Fame quarterback,
Warren Moon, since Mr. Moon has the same athlete and media contacts to be able
to perform the consulting services outlined in the LSSE
Agreement.
13
During
the first quarter of 2010, Mr. Moon was able to review our FITT Energy Shot and
internet landing page, and has agreed to provide his
endorsement. Additionally, Mr. Moon agreed to a reworking of the LSSE
Agreement whereby he will provide similar consulting services to those agreed to
by LSSE. The Company has reworked the LSSE Agreement with Sports 1
Marketing LLC (“Sports 1”), a company owned by Mr. Moon, and on April 21, 2010,
we entered into a Marketing and Representation Agreement with Sports 1 (the
“Sports 1 Agreement”). In connection with the Sports 1 Agreement, we
have issued the 10,000,000 previously committed shares as of April 21,
2010. 1,000,000 shares were immediately released to Mr. Moon and the
remaining 9,000,000 shares will be released to Sports 1 on a schedule set forth
in the Sports 1 Agreement.
During
2009, we were introduced to Core Support Services, Inc. (“Core Support”), a
company with significant experience in the areas of marketing of internet
products and furthering business transactions and relationships through its
existing lead lists and M-Wallet leads. In 2009, we entered into a
Marketing & Lead Generation Agreement with Core Support under which they
agreed to provide up to 48 million email leads and provide a merchant account
relationship to allow for credit card use by our customers. In
connection with this agreement, the Company agreed to issue 1,000,000 of its
shares of common stock to a principal of Core Support and pay for email
broadcasts.
In 2009,
the Company entered into a Marketing & Lead Generation Agreement with
Gigamind Inc. (“Gigamind”), a Canadian corporation, under which Gigamind agreed
to provide services similar to Core Support with respect to Gigamind’s 40
million email leads. The Company has agreed to pay Gigamind a fee of
$20.00 for each customer lead that results in the first billable sale to that
customer, an additional fee equal to approximately 17% of the product sales
price for each additional sale to that same customer. In addition,
the Company agreed to pay for Gigamind’s email broadcasts. On April
7, 2010, the Company terminated the agreement with Gigamind prior to
any services being performed, and entered into an agreement with Mochizmo LLC
(“Mochizmo”), a Nevada Limited Liability Company with similar obligations and
financial terms.
With the
substantial email lists and merchant account relationships of both Core Support
and Mochizmo, we now can begin our internet marketing program with up to 88
million double opt-out email addresses, two merchant accounts, and two landing
pages which will be completed in April 2010.
Operating
and Marketing
Because
of the magnitude of our debt burden, the Company has experienced significant
difficulty raising capital from investors to pursue our operations and our new
marketing plan. The investors have required that we use the invested
dollars to 1) build the websites, 2) produce inventory, 3) provide for call and
fulfillment centers, 4) develop merchant account relationships for customer
credit card use, 5) develop internet leads, and 6) pay basic business expenses
including those necessary to keep the Company’s government filings
current. In addition, investors are requiring the Company develop a
structure that will protect their investments from prior creditor
claims. Finally, investors have asked us to pursue additional funding
to be used to mitigate existing debt at 10 to 15 cents per dollar of
debt.
Operating
Plan
The
Company is negotiating an Operating Agreement (the “Operating Agreement”) with
F.I.T.T. Energy Products, Inc. (“FITT”), a Nevada corporation owned by our
CEO. Terms of an Operating Agreement are still being evaluated, but
we expect to include requirements for FITT to raise capital or pay us a license
fee and perform certain operating services, including product production and
internet marketing, with respect to the Company’s FITT Energy
Shot. As consideration for the performance of their obligations under
the Operating Agreement, the Company and FITT have discussed that FITT will
provide the Company funds sufficient to pay 1) salaries and benefits of the
Company’s employees, 2) public company costs of the Company including, but not
limited to, legal and audit costs, SEC filing fees, transfer agent fees, and
investor relations fees, 3) other ongoing operating costs of the Company
including, but not limited to costs for office and equipment rent, telephone and
internet service, supplies, etc., and 4) a percentage of FITT’s net after tax
income resulting from its operations on behalf of the Company. In its
discussions with FITT, the Company has expressed a willingness to issue shares
of its common stock to investors as an inducement for their investment and will
reserve enough of its common shares to allow for conversion of the notes into
shares of the Company.
The
Company and FITT have also discussed that FITT will record in its books all
sales, cost of sales and operating expenses connected with its operations in
connection with the Operating Agreement, and all cash, inventory and other
assets resulting from either the investment dollars or from FITT’s operations
will be the property of FITT and under the Operating
Agreement.
14
There can
be no assurance that we and FITT will successfully conclude our negotiations of
the Operating Agreement and, as a result, all operating revenue and expenses, as
well as assets and liabilities, continue to be recorded on the Company’s
books.
Marketing
Plan – Health and Fitness Clubs
On April
22, 2010 we announced an agreement that will deliver Warren Moon, to our current
joint venture with Club Solutions Magazine and 24 Hour Fitness. Under
the terms of the agreement, the Company will integrate Mr. Moon into our
advertising campaign featured in the new 24 Hour Fitness Digital
Magazine and the promotion of the FITT Energy Shot product beginning in
May 2010.
24 Hour
Fitness is an innovative leader in the health and fitness industry and serves
more than 3 million members in more than 425 clubs. Founded in 1983 as a
one-club operation, 24 Hour Fitness pioneered the concept of making fitness
accessible, affordable and a way of life for everyone. 24 Hour Fitness has
partnered with superstar athletes and celebrities like Magic Johnson, Andre
Agassi, Lance Armstrong, Shaquille O’Neal, Jackie Chan, Yao Ming and Derek Jeter
to open co-branded clubs around the world. The company demonstrates its
leadership through sponsorships like that of the U.S. Olympic Team and a
commitment to the community through various charitable and in-kind donations. In
addition, 24 Hour Fitness enjoys strategic partnerships with major consumer
brands like Coca-Cola and Nike, and for six seasons has partnered with NBC’s
popular reality TV show, The Biggest Loser. For more information and to find the
location nearest you, visit their contact us page.
The
Company believes the 24 Hour
Fitness Digital Magazine offers us a strategic multi-level electronic
platform for our FITT Energy Shot advertising campaign and will allow us the
ability to benefit from the enormous positive exposure 24 Hour Fitness received
through their sponsorship of The Biggest Loser television
program. The digital magazine is mailed monthly by electronic email
to its members and is posted on the 24 Hour Fitness website which garners in
excess of 10 million
impressions per month. Additionally, all 24 Hour Fitness
FACEBOOK and Twitter followers will receive the magazine on a monthly
basis.
Marketing
Plan - Internet
The
internet marketing will begin with an internet email campaign using an
endorsement from Warren Moon and three medical experts, Dr. Sam Maywood, Dr.
Robert Maywood and Dr. Vince Valdez, who are also investors in the
Company. The internet rollout will be directed to the 88 million
leads from Core Support and Mochizmo. It will begin with an initial
free trial offer consisting of a box of 12 free FITT Energy Shots for every
customer who clicks through to our landing page, www.thefitthighway.com, and
provides their credit card for the billing of shipping, handling and processing
fees (“SHP”). The customer will then be automatically enrolled in a
continuity program and, after 17 days from their agreement to receive the free
trial offer, will be billed $40.00 plus $9.99 in SHP for 24 additional energy
shots. This equates to an effective cost of $1.11 for each of the
first 36 shots the customer receives (excluding SHP), which is well below the
price paid at retail establishments. After the customer is billed for
the 24 additional energy shots, he will have the option to continue his program
at special discounts while customizing the quantity of product ordered and
frequency of delivery. Secondly, we will be creating an infomercial using
the high-profile athletes and two physicians (Dr. Sam Maywood and Dr. Rand
Scott) to explain and endorse the energy shot. It is hoped that the
infomercial will begin airing in the third quarter of 2010. We
anticipate being able to use media contacts to put up the TV air time for the
infomercial on a joint venture based upon the initial test results for a
negotiated profit split. Thirdly, we will work in geographic areas where our
athlete endorsers have strong affiliations with local charities to provide an
offer which benefits the consumer and charity. Lastly, the Company
through its strategic alliances has excellent contacts with which to penetrate
the retail market place. In summary, we would be using the internet rollout and
infomercial to build brand recognition for our products. The brand
recognition will then create consumer awareness for the retail
market.
We expect
that, because of our association with Warren Moon and his connections with
high-profile athletes, we will be able to bring nationally recognizable sport
figures to assist with the implementation of our marketing
plan. These well-known athletes will work with our medical expert,
Dr. Rand Scott, a Board Certified Anesthesiologist and Pain Management
Specialist. Dr. Scott is a former player and physician for Penn
State’s football team and a graduate of Penn State. He is on the board of
PriCara Pharmaceutical, a Johnson & Johnson Company and is currently a
consultant to Scisco Group, Inc. as well as an expert in herbal
products. Dr. Scott is also a member of the Speakers Board for Pfizer
Pharmaceutical and speaks across the United States on pain management. We
are confident these relationships will greatly enhance the Company’s image and
provide even greater brand awareness which we think will lead to a substantial
increase in sales. We believe this strategy will be the most cost
efficient way to build brand recognition with the least amount of
capital.
15
The
online marketing blueprint, which will begin with the new FITT Energy Shot, will
use testing and scientific marketing methodologies to determine the best offer
and appeal for the product. This will be accomplished by creating
multiple offers and multiple appeals by sending paid traffic to the various
landing pages. The traffic we send will result in conversions to sales and or
some predetermined free trial offer. Once we know the offer and
appeal with the best click-through-rate (CTR) and conversion, we will refine
that offer and do further testing to improve our metrics. Once we are satisfied
with our offer and appeal, we will insert our offer into a cost-per-action (CPA)
network. In essence, CPA networks broker leads for a fixed cost. The
CPA network will run a limited test to determine conversions within the network.
If we are satisfied with front end conversions and re-bill rates, we will do a
full release to the other affiliates in the CPA network.
Marketing
- Retail
On
November 21, 2008, we entered into a Master Distributor Agreement (the
“Distributor Agreement”) with Beryt Promotion, LLC, a Nevada limited liability
company ( “Beryt”). The Distributor Agreement had an initial term of
one year, renewable annually, and provides that, in exchange for Beryt acting as
the exclusive distributor of our energy drink products, with the right to
sub-distribute, we shall: (1) sell our products to Beryt at a discount to
the retail price; and (2) issue to Beryt an initial issuance of 100,000
shares of our common stock. Subsequently, we issued an additional
1,000,000 common shares to Ramon Desage, owner of Beryt, for marketing and
promotional expenses in December 2008, another 1,000,000 shares stock in
February 2009, and another 1,000,000 shares in December
2009. Also, in July 2009, we issued 500,000 shares of our common
stock to several of Mr. Desage’s employees. Our initial intent with
this Distributor Agreement was to test the marketability of our Sport Energy
Shot in a large market, as a precursor to marketing the product on a larger
scale. We have learned by evaluating our rollout of the energy shot
in the Las Vegas market, that entrenched high quality relationships, such as
Ramon Desage’s contacts, are key to obtaining high visibility in a new retail
marketplace.
The
Industry
Energy
drinks, including two-ounce shots and canned drinks, are beverages with legal
stimulants, vitamins, and minerals that give users a lift of
energy. Common ingredients are caffeine, taurine, ginseng, sugars,
and various amounts of vitamins and minerals. The products are
consumed by individuals who are explicitly looking for the extra boost in
energy. Energy shots, in particular, are meant for people who want a
jolt of caffeine without having to drink a big cup of coffee or one of the
16-ounce energy drinks that have become ubiquitous. They go down fast, more like
medicine than a beverage. That is part of the appeal to their most devoted
consumers: students cramming for exams or partying into the night, construction
workers looking for a lift, drivers trying to stay awake, fitness enthusiasts,
the “on-the-go” average person, and those seeking an alternative to coffee.
Tired, stressed-out college students and workers have embraced energy shots,
which promise a quick, convenient boost with fewer calories and less sugar than
full-size energy drinks.
Sales of
the 2-to-3 ounce shots soared to $544 million in 2008, double those of the
previous year, according to Information Resources Inc. (“IRI”), a Chicago-based
market research firm. In fact, energy shots are the fastest-growing segment of
the $4.6 billion energy drink market, according to the market research firm
Mintel International Group Ltd. Living Essentials pioneered energy
shots in 2004 with 5-Hour Energy, which still holds more than 75% of the market,
says IRI. . Living Essentials has spent heavily on advertising to build the
market and hold its position against newcomers. It has been reported that the
company expects to spend $60 million this year on television advertising for
5-Hour Energy. Industry heavyweights such as Red Bull, Monster Energy, and
Coca-Cola have since introduced their own energy shots. Sales of the energy
shots are rising even as sales of traditional energy drinks like Red Bull have
flattened out. Based on sales data collected by IRI it is estimated that energy
shot sales would be about $700 million in 2009, not counting sales of
non-reporting entities like Wal-Mart Stores.
16
Results
of Operations for the Three Months Ended March 31, 2010 and 2009
Sales
Our sales
consist of energy drink products sold through electronic media and to
distributors and retail stores. Our sales are recorded at the selling
price, less promotional allowances, discounts and fees paid to obtain retail
shelf space (referred to as “shelving” or “slotting” fees).
During
the first quarter of 2010, we had no sales compared to $160,420 for the
comparable period in 2009 as we concentrated on developing our new FITT Energy
Shot and our new marketing programs, both of which we roll-out in mid May
2010. In 2009 the majority of our sales consisted of our Sports
Energy Shot.
Gross
Profit
Gross
profit represents revenues less the cost of goods sold. Our cost of goods sold
consists of the costs of raw materials utilized in the manufacturing of
products, packaging fees, repacking fees, in-bound freight charges, and internal
and external warehouse expenses. Raw materials account for the largest portion
of the cost of sales. The principal raw materials used to manufacture our
products are plastic bottles, cans, nutritional supplements, flavoring agents,
concentrates and packaging materials.
We had no
gross profit during the first quarter of 2010 compared to $67,181 for the
comparable period in 2009 and the gross margin for the 2009 period was
42%.
Selling
and Marketing Expenses
Selling
and marketing expenses include personnel costs for sales and marketing
functions, advertising, product marketing, promotion, events, promotional
materials, professional fees and non-cash, stock-based
compensation.
Selling
and marketing expenses for the first quarter of 2010 were $141,685, compared to
$119,174 for the comparable period in 2009. The 2010 period included
$134,175 in stock-based marketing expense resulting from common shares issued to
2 shareholders for marketing assistance, while the 2009 period included $93,290
in stock-based marketing expense.
General
and Administrative Expenses
General
and administrative expenses include personnel costs for management, operations
and finance functions, along with legal and accounting costs, bad debt expense,
insurance and non-cash, stock-based compensation.
General
and administrative expenses for the first quarter of 2010 were $218,004,
compared to $239,338 for the comparable period in 2009. The 2010 period included
stock-based expense of $60,000 related to investor and public relations services
while the 2009 period contained only minor stock-based expenses. The
increase in stock-based expense was more than offset by reductions in salaries
and insurance costs (lower headcount) as well as reductions in rent and
professional fees.
Interest
Expense
Interest
expense during the first quarter of 2009 consisted of cash-based and non-cash
based interest on our convertible promissory notes and other debt
instruments. Interest expense during the 2008 period consisted of
cash-based interest and registration rights penalties.
Interest
expense during the first quarter of 2010 was $52,611 compared to $48,957 during
the comparable period in 2009. Non-cash interest expense on our convertible
promissory notes amounted to $19,503 and $35,000 in 2010 and 2009,
respectively.
Gain
on the Extinguishment of Debt and Creditor Obligations
In the
first quarter of 2010, we entered into settlement agreements a former vendor of
legal services under which this creditor agree to forego a repayment of debt
obligations we owed to them. In connection with this settlement, we
recorded a gain of $267,661. Also during our 2010 first quarter,
holders of our convertible notes issued in 2008 converted the principal and
accrued interest owed to them into 2,729,157 shares of our common stock
resulting in a loss of $3,691. There were no such settlements during
the first quarter of 2009.
17
Liquidity
and Capital Resources
The
report of our independent registered public accounting firm on the financial
statements for the year ended December 31, 2009 contains an explanatory
paragraph expressing substantial doubt about our ability to continue as a
going
concern as a result of recurring losses, a working capital deficiency, and
negative cash flows. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that would be necessary if we are
unable to continue as a going concern.
At
December 31, 2009, our principal sources of liquidity consist of the issuance of
debt and equity securities and advances of funds from officers and
shareholders. In addition to funding operations, our principal
short-term and long-term liquidity needs have been, and are expected to be,
servicing debt, the funding of operating losses until we achieve profitability
and expenditures for general corporate purposes. Funds are expected
to be used for producing inventory, providing for call and fulfillment centers,
developing a merchant account for customer credit card use, developing internet
leads, and paying basic business expenses including those necessary to keep the
Company’s government filings current. While we have a high level of
past-due debt and accounts payable, our investors are requiring that we raise
additional capital to mitigate a substantial portion of this debt at 10 to 15
cents per dollar of debt.
We have
been, and are, actively seeking to raise additional capital with debt and equity
financing through private contacts. Due to the highly competitive
nature of the beverage industry, our significant debt burden, our expected
operating losses in the foreseeable future, and the credit constraints in the
capital markets, we cannot assure you that such financing will be available to
us on favorable terms, or at all. If we cannot obtain such financing,
we will be forced to curtail our operations even further or may not be able to
continue as a going concern, and we may become unable to satisfy our obligations
to our creditors.
Convertible
Promissory Notes
In
September 30, 2009, we commenced a $300,000 offering consisting of a convertible
promissory note bearing 12% interest and five shares of the Company’s common
stock for every dollar invested. In March 2010, we increased the
amount of the offering from $300,000 to $400,000, and in April 2010 we again
increased the amount of the offering to $500,000.
Payments
of principal and interest will be made monthly beginning with the month of May
2010. Calculation of the amount to be paid will be based on ten
percent (10%) of cash received by the Company from the sale over the internet of
its FITT Energy Shot for the entire amount of the $500,000 offering, apportioned
to each Noteholder for their respective percentage of the offering total (such
cash receipts being paid to the Company from various third-party merchant
accounts established to receive customer credit card payments). All
payments will first be applied to principal. Once the entire
principal balance has been repaid, the remaining payments will be applied to
interest. In no circumstance will the repayment of principal and
interest extend beyond one year from the date of the issuance of each
note.
The
outstanding principal and interest for the notes are convertible into shares of
unregistered common stock at a conversion price equal to 80% of the volume
weighted average price for the last 30 trading days preceding conversion but in
no event shall the conversion price be less than $0.20 per share or greater than
$1.00 per share.
During
the three months ended March 31, 2010, we issued notes with face value totaling
$55,000 together with 275,000 shares of common stock in connection with this
offering, and recorded an initial discount on the notes of $21,154.
Additionally,
during the three-month period ended March 31, 2010, we modified the conversion
feature of the 2008 convertible promissory notes to allow the noteholders to
convert the principal and accrued interest owed them at $0.16 per share which
qualified for extinguishment accounting. All of the noteholders
elected to convert, and as a result, we issued them a total of 2,729,157 shares
of our common stock in full settlement of notes payable and accrued interest
totaling $436,664.
Sales
of Equity Securities
During
the first quarter of 2010 we sold a total of 75,000 shares of our common stock
to an investor for proceeds of $10,000.
At March
31, 2010, our cash and cash equivalents were $0, and we had negative working
capital of approximately $4.5 million. During the first quarter of
2010, because of a lack of capital, we issued 2,075,000 shares of common stock in
payment for investor relations, marketing, promoting and merchandising our
product. The value of the services and shares issued was
$194,175.
Due to
our lack of capital, we are in default of certain note agreements, are past due
with many vendors, and have a levy on any bank accounts we might obtain under
the Who’s Your Daddy corporate name. At March 31, 2010, we had
$603,982 in notes payable obligations, of which $452,000 is in default for
non-payment. If we do not raise additional capital, we may not be
able to meet our financial obligations when they become due which can have a
material adverse impact on our business.
18
Cash
Flows
The
following table sets forth our cash flows for the three months ended March
31:
Three
Months Ended March 31,
|
||||||||||||
2009
|
2008
|
Change
|
||||||||||
Operating
activities
|
$
|
(65,000
|
)
|
$
|
—
|
$
|
(65,000
|
)
|
||||
Investing
activities
|
—
|
—
|
—
|
|||||||||
Financing
activities
|
65,000
|
—
|
65,000
|
|||||||||
Change
|
$
|
—
|
$
|
—
|
$
|
—
|
Operating
Activities
Operating
cash flows for the three months ended March 31, 2010 reflect our net loss of
$150,330, adjusted by the net gain on creditor settlements of $263,970, offset
by changes in working capital of $134,926 and other non-cash items
(depreciation, amortization and stock-based expense) of $214,374. The change in
working capital is primarily related to increases in accrued expenses, accrued
compensation and advances from officers offset by an increase in
inventory. The increase in accrued expenses, accrued compensation and
advances from officers are due to the lack of operating capital to pay vendors
and the deferral of payment of a significant percentage of wages to our
employees.
Investing
Activities
There was
no cash used in investing activities for the three-months ended March 31, 2010
or March 31, 2009.
Financing
Activities
During
the first quarter of 2010, we received proceeds for the sale of common stock and
the issuance of convertible notes totaling $65,000. There was no cash
used in financing activities for the three months ended March 31,
2009.
Off
Balance Sheet Arrangements
We have
no off balance sheet arrangements.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Our
President and Chief Financial Officer (the “Certifying Officer”) has evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of
period covered by this report. Based upon such evaluation, the
Certifying Officer concluded that our disclosure controls and procedures were
effective as of September 30, 2009.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
19
ITEM
4T.
|
CONTROLS
AND PROCEDURES
|
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.
PART
II – OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
Sacks
Motor Sports Inc.
Effective
March 30, 2010, we entered into a Settlement Agreement and Release (the “Sacks
Settlement”) with Sacks Motor Sports Inc. (“Sacks”) and with Greg Sacks
(“Greg”). Under the Sacks Settlement, the Company agreed to pay Sacks
$100,000 on or before April 15, 2010 and issue to Sacks 1,000,000 shares of its
common stock in the form of 10 certificates of 100,000 shares each (the “Sacks
Shares”). The Sacks Settlement calls for the Sacks Shares to be
delivered to the Company’s law firm, Solomon Ward Seidenwurm & Smith, LLP
(“SWSS”) with an irrevocable instruction to mail to Sacks one stock certificate
of 100,000 shares per month for 10 consecutive months commencing July 15, 2010.
The Sacks Shares will be free-trading upon receipt of a legal opinion from the
Company’s counsel. Sacks has agreed that it will not directly or
indirectly sell, transfer or assign more than 100,000 shares of the Sacks Shares
during any thirty day period at any time.
Once the
Company makes the $100,000 payment and delivers the Sacks Shares to SWSS, Sacks
has agreed that it will irrevocably waive, release and surrender all rights
relating to or arising from its May 28,2008 judgment against us and will take
all actions reasonable requested by us to cause the judgment to be permanently
rendered of no force or effect including without limitation by stipulating to
set aside and vacate the judgment and cause then entire litigation to be
dismissed with prejudice.
While the
Company issued the Sacks Shares to Sacks on March 30, 2010, we were unable to
raise the $100,000 payment due April 15, 2010, and therefore were could not
perform our obligations under the Sacks Settlement including the delivery of the
Sacks Shares to SWSS. We are in process of raising the $100,000 and,
if successful, believe that Sacks will agree to honor the Sacks
Settlement. Therefore, we have recorded the Sacks Shares at their par
value of $1,000 and included the amount in prepaid expenses in the Company’s
March 31, 2010 Balance Sheet. In the event we are not able to
complete the Sacks Settlement, the Sacks Shares will be cancelled. If
the Sacks Settlement is completed, the Company will value the shares on the date
of settlement for use in the calculation of gain or loss on extinguishment of
accrued litigation.
Fish
& Richardson
On or
about May 15, 2008, Fish filed an action against us in the Superior
Court of California, County of San Diego, asserting claims for breach of a
settlement agreement purportedly entered into in connection with fees allegedly
owed by us to Fish for Fish’s providing of legal services on the Company’s
behalf in the approximate amount of $255,000. The settlement
agreement, dated September 27, 2006, also granted Fish a security interest in
all of the tradenames owned by the Company and all associated
goodwill. In our response to the Fish action, we asserted that the
settlement agreement was void and that Fish failed to act as reasonably careful
attorneys in connection with their representation of us. Fish brought
a motion for summary judgment which was heard on April 17, 2009, and the
motion was granted. On May 21, 2009, a judgment was entered against
the Company for $273,835 plus interest of $74,817 through the date of the
judgment. On September 10, 2009, Fish filed an action to foreclose on
their security interest in the Company’s tradenames, which action was served on
our registered agent on approximately October 19, 2009. Given our
decision to no longer use our tradenames, we began working on an agreement with
Fish to affect an orderly transfer of the tradenames to Fish and, effective
January 19, 2010, we entered into a settlement agreement
with Fish wherein the Company agreed to transfer all right, title and interest
in its tradenames to Fish and Fish has agreed to acknowledge a full satisfaction
of its judgment and to dismiss the Federal Action with prejudice. The
Fish Settlement Agreement was executed on January 21,
2010.
20
ITEM
1A.
|
RISK
FACTORS
|
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES
|
During
the three months ended March 31, 2010, we issued notes with face value totaling
$55,000 together with 275,000 shares of common stock in connection with an
offering commenced in September 2009. During this same period, we
sold a total of 75,000 shares of our common stock to an investor for proceeds of
$10,000.
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
There
have been no events which are required to be reported under this
item.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None
ITEM
5.
|
OTHER
INFORMATION
|
None
ITEM
6.
|
EXHIBITS
|
10.1
|
Marketing
and Representation Agreement with Sports 1 Marketing dated April 21,
2010
|
31.1
|
Certification
of Chief Executive Officer Pursuant to the Securities Exchange Act of
1934, Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
31.2
|
Certification
of Chief Financial Officer Pursuant to the Securities Exchange Act of
1934, Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
32
|
Certifications
Pursuant to 18 U.S.C., Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
21
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, duly authorized.
WHO’S
YOUR DADDY, INC.
|
|
(Registrant)
|
|
Dated:
May 21, 2010
|
|
By: /s/
Michael R. Dunn
|
|
Michael R. Dunn | |
Its: Chief
Executive Officer and Chief Financial Officer (Principal Executive
Officer, Principal Financial Officer and Principal Accounting
Officer)
|
22