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EX-32 - CERTIFICATIONS PURSUANT TO 18 U.S.C., SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Global Future City Holding Inc.wydi10q20100331ex32.htm
EX-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 - Global Future City Holding Inc.wydi10q20100331ex31-2.htm
EX-10.1 - MARKETING AND REPRESENTATION AGREEMENT WITH SPORTS 1 MARKETING DATED APRIL 21, 2010 - Global Future City Holding Inc.wydi10q20100331ex10-1.htm
EX-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 - Global Future City Holding Inc.wydi10q20100331ex31-1.htm


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
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
   
Non-Accelerated Filer (Do not check if smaller reporting company) o
Smaller Reporting Company ý

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.

 
 

 

WHO’S YOUR DADDY, INC.
FORM 10-Q
MARCH 31, 2010

INDEX

     
Part I – Financial Information
 
     
Item 1.
Financial Statements
  1
Item 2.
Management’s Discussion and Analysis of Financial Condition or Plan of Operation
  12
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
  19
Item 4.
Controls and Procedures
  19
Item 4T.
Controls and Procedures
  20
     
Part II – Other Information
 
     
Item 1.
Legal Proceedings
  20
Item 1A.
Risk Factors
  21
Item 2.
Unregistered Sales of Equity Securities
  21
Item 3.
Defaults Upon Senior Securities
  21
Item 4.
Submission of Matters to a Vote of Security Holders
  21
Item 5.
Other Information
  21
Item 6.
Exhibits
  21
     
Signatures
  22
     
Certifications
 
 
 

 
 
 

 

PART I -- FINANCIAL INFORMATION
ITEM I -- FINANCIAL STATEMENTS

WHO’S YOUR DADDY, INC.
BALANCE SHEETS
   
March 31,
2010
   
December 31,
2009
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $     $  
Inventories
    43,285        
Prepaid and other
    15,538       6,945  
Total current assets
    58,823       6,945  
Property and equipment, net
    2,947       3,642  
Total assets
  $ 61,770     $ 10,587  
                 
Liabilities and Shareholders’ Deficit
               
Current liabilities:
               
Accounts payable
  $ 814,371     $ 868,626  
Accrued expenses
    406,801       442,543  
Accrued compensation
    867,453       1,168,704  
Customer deposits
    227       227  
Accrued litigation
    1,790,000       1,790,000  
Notes payable
    603,982       812,567  
Advances from officers
    48,956       390,025  
Total current liabilities
    4,531,790       5,472,692  
Notes payable, net of current portion
          373,065  
Total liabilities
    4,531,790       5,845,757  
                 
Shareholders’ deficit
               
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.
    58,725       52,796  
Additional paid-in capital
    27,337,599       25,828,049  
Accumulated deficit
    (31,866,344 )     (31,716,015 )
Total shareholders’ deficit
    (4,470,020 )     (5,835,170 )
Total liabilities and shareholders’ deficit
  $ 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
 
             
Sales
  $     $ 160,420  
Cost of sales
          93,239  
Gross profit
          67,181  
                 
Operating expenses:
               
Selling and marketing
    141,685       119,174  
General and administrative
    218,004       239,338  
Total operating expenses
    359,689       358,512  
Operating loss
    (359,689 )     (291,331 )
                 
Interest expense
    52,611       48,957  
Gain on extinguishment of debt and creditor obligations
    (263,970 )      
Other expense, net
    2,000       400  
Loss before income taxes
    (150,330 )     (340,688 )
Income taxes
           
Net loss
  $ (150,330 )   $ (340,688 )
                 
Basic and diluted net loss per share
  $ (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
 
Cash flows from operating activities:
           
Net loss
  $ (150,330 )   $ (340,688 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Gain on extinguishment creditor settlements
    (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
          (2,536 )
Inventories
    (43,285 )     (1,348 )
Prepaid expenses and other assets
    (7,593 )     35,288  
Accounts payable
    5,952       26,803  
Accrued expenses
    33,583       48,030  
Accrued compensation
    112,014        
Advances from officers
    34,255       98,760  
Net cash used in operating activities
    (65,000 )      
                 
Cash flows from financing activities:
               
Proceeds from issuance of notes payable, net of fees
    55,000        
Proceeds from the sale of common stock
    10,000        
Net cash provided by financing activities
    65,000        
                 
Net decrease in cash and cash equivalents
           
Cash and cash equivalents at beginning of year
           
Cash and cash equivalents at end of year
  $     $  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ 5,525     $  
Cash paid for income taxes
  $     $  
Supplemental disclosure of non-cash investing and financing activities:
               
    Forgiveness of former officer obligations
  $ 848,795     $  
    Issuance of common stock for conversion of notes payable and interest
  $ 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.
Business

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
   
 
 
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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:

 
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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.

 
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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.

 
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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.

 
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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.

 
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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.

 
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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.

 
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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.

 
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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

 
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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)
 
 

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