New Leaf Brands, Inc. - FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarter Ended: March 31, 2012

Or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: _____________ to _____________

Commission File Number: 000-22024

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NEW LEAF BRANDS, INC.

(Exact name of registrant as specified in its charter)

———————

Nevada		77-0125664
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

One De Wolf Road Suite 208, Old Tappan, New Jersey 07675

(Address of principal executive offices) (Zip Code)

(201) 784-2400

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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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 o No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of January 24th, 2013, there were 328,533,316 shares of our common stock, $0.001 par value, outstanding.

NEW LEAF BRANDS, INC.

INDEX

		Page
PART I – FINANCIAL INFORMATION

Item 1	Financial Statements		3
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3	Quantitative and Qualitative Disclosures About Market Risk		34
Item 4	Controls and Procedures		35

PART II – OTHER INFORMATION

Item 1	Legal Proceedings		36
Item 1A	Risk Factors		36
Item 4	Removed and Reserved
Item 5	Other Information		42
Item 6	Exhibits		42

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEW LEAF BRANDS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2012			2011
	(Unaudited)

CURRENT ASSETS
Cash & cash equivalents	$	154,436		$	75,762
Accounts receivable, net of allowance of $37,689 for March 31, 2012 and December 31, 2011		39,692			169,490
Inventories		202,472			163,709
Prepaid expenses and other assets		288,833			8,462
Total current assets		685,433			417,423

Property and equipment, net		51,010			58,000
Intangible assets, net		1,073,948			1,117,609
Total assets	$	1,810,391		$	1,593,032

CURRENT LIABILITIES
Accounts payable	$	1,220,436		$	1,805,361
Purchase order financing		-			306,037
Accrued liabilities		227,323			469,447
Accrued liabilities related party		183,585			582,787
Accrued dividend		191,275			196,978
Interest payable		146,857			130,270
Short-term debt		539,530			120,490
Current portion of notes payable to related parties		866,822			752,787
Current portion of long-term debt		21,119			21,119
Other current liabilities		245,275			245,275
Current liabilities of discontinued operations		835,612			835,612
Total current liabilities		4,477,834			5,466,163


Long-term debt		14,338			14,338
Long-term notes payable to related parties		119,024
Derivative liabilities		288,939			45,613
Total long-term liabilities		422,301			59,951

Total liabilities		4,900,135			5,526,114

Commitment and contingencies (Note 12)

STOCKHOLDERS’ DEFICIT
Preferred stock, $0.001 par value per, convertible 10,000,000 shares authorized Series K 10% Convertible Preferred Stock, 1,000 cumulative shares designated; 24 issued and outstanding (liquidation preference $725,744)		-			-
Common Stock, $0.001 par value per share, 500,000,000 shares authorized, issued and outstanding: 161,171,031 at March 31, 2012 and 150,811,031 at December 31, 2011		161,171			150,811
Shares issuable		113,239			5,550
Additional paid-in capital		47,527,712			44,025,118
Accumulated deficit		(50,891,866	)		(48,114,561	)

Total stockholders' deficit		(3,089,744	)		(3,933,082	)

Total liabilities and stockholders' deficit	$	1,810,391		$	1,593,032

See accompanying notes to the condensed consolidated financial statements

NEW LEAF BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended March 31,
	2012			2011

Net Sales				$	687,586
Cost of goods sold	$	20,728			557,118
Gross profit		(20,728)			130,468

Operating expenses:
Shipping & handling		3,408			127,833
Marketing		102,728			617,997
General and administrative		2,715,717			569,829
Depreciation & amortization		50,651			129,292
Total operating expenses		2,872,504			1,444,951

Loss from operations		(2,893,232	)		(1,314,483	)

Other income (expense)
Miscellaneous (expense), net		(25,327	)		(19	)
Interest expense, net		(44,862	)		(49,931	)
Gain (loss) on settlement of accounts payable and extinguishment of long-term debt		562,893			(118,504	)
Amortization of debt discount & deferred financing costs		(102,589	)		(68,943	)
Change in fair value of derivative liabilities		(256,956	)		(64,269	)
Total other income (expense)		(133,159	)		(301,666	)

Loss from operations before provision for income taxes		(2,760,073	)		(1,616,149	)
Provision for income taxes		-			-
Net loss	$	(2,760,073	)	$	(1,616,149	)

Dividend on Series K Preferred Stock		17,232
Net Loss available to common stockholders’	$	(2,777,305)			(1,616,149)

Net loss per share-basic and diluted:
Net loss per share-basic and diluted	$	(0.02	)	$	(0.02	)

Basic and diluted weighted average common shares outstanding		158,757,031			76,233,134

See accompanying notes to the condensed consolidated financial statements

NEW LEAF BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
	2012			2011
Cash flows from operating activities:
Net loss	$	(2,760,073	)	$	(1,616,149	)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation & amortization		50,651			129,293
(Gain) loss on settlement of accounts payable and extinguishment of long-term debt		(562,893)			118,504
Amortization of debt discount & deferred financing cost		102,589			68,944
Warrants issued for services		200,618			10,398
Stock based compensation		12,561			62,217
Common stock issued for services		2,311,158			139,999
Change in fair value of derivative liabilities		256,956			64,269
Changes in assets & liabilities:
Accounts receivable		129,798			(158,166	)
Inventories		(38,763	)		129,536
Prepaid expenses and other current assets		(186,350	)		(51,067	)
Accounts payable		510,370			(119,222	)
Accrued liabilities and other liabilites		(198,037	)		(15,455	)
Net cash (used in) operating activities		(171,415	)		(1,236,899	)

Cash flows from investing activities:
Net cash (used in) investing activities		-			-

Cash flows from financing activities
Proceeds from notes payable		250,000			205,000
Proceeds from exercise of warrants		306,126			-
Payments on purchase order financing		(306,037)			-
Net proceeds from sale of preferred stock and warrants		-			1,068,401
Principal payments on notes payable		-			(11,474	)
Net cash provided by financing activities		250,089			1,261,927

Net increase in cash for the period		78,674			25,028
Cash and cash equivalents at the beginning of period		75,762			13,024
Cash and cash equivalents at the end of period	$	154,436		$	38,052

Cash paid during the period for:
Interest				$	76,482

NONCASH INVESTING AND FINANCING ACTIVITIES:
Settlement of accounts payable for shares and warrants		660,446			100,000
Conversion of debt obligations					4,129,171
Forgiveness of earn-out and reduction of intangibles					325,000
Conversion of accrued expenses - related party into note payable		200,000

See accompanying notes to the condensed consolidated financial statements

NEW LEAF BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

The condensed consolidated financial statements include NEW LEAF BRANDS, INC. (“the Company”) and its wholly-owned subsidiaries Nutritional Specialties and Baywood New Leaf Acquisition, Inc. Nutritional Specialties was acquired by the Company effective March 30, 2007. Skae Beverage International LLC was acquired by Baywood New Leaf Acquisition, Inc. effective September 9, 2008. On July 24, 2009 the Company sold substantially all of our rights and assets of Nutritional Specialties to Nutra, Inc.

The Company develops markets and distributes healthy and functional ready-to-drink (“RTD”) beverages. The Company distributes its products through independent distributors both internationally and domestically.

The Company incorporated as Baywood Financial, Inc. in Nevada on June 13, 1986. In March 1992, the Company changed its name from Baywood Financial, Inc. to Baywood International, Inc. Between 1992 and 1998, the Company directed most of its sales efforts to nutraceutical international markets. In 1999, the Company expanded its nutraceutical business into domestic markets.

Baywood International, Inc. changed its name effective October 16, 2009 to New Leaf Brands, Inc. to reflect the change in strategic direction with the sale of Baywood International, Inc.’s nutraceutical businesses on October 9, 2009. The name change was effective in the market at the opening of business October 19, 2009, at which time the Company’s ticker symbol changed from BAYW.OB to NLEF.OB.

On April 9, 2012 the Company completed the sale of its non-operating subsidiary Nutritional Specialties, Inc. (NSI) to Deep South Capital, LLC (DSCL). The terms of the divestiture included consideration of $1.00 plus the assumption of certain liabilities by DSCL. In addition, the Company gave DSCL 6,000,000 shares of the Company’s stock as a reserve against possible offsets. The transaction may reduce liabilities by approximately $835,000.

Basis of presentation

In the opinion of management, the accompanying unaudited, condensed, consolidated financial statements contain all adjustments necessary to present fairly the financial position of New Leaf Brands, Inc. (“New Leaf” or the “Company”) and its results of operations and cash flows for the interim periods presented. Such financial statements have been condensed in accordance with the applicable regulations of the Securities and Exchange Commission and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with New Leaf's audited financial statements for the year ended December 31, 2011, included in New Leaf's Annual Report filed on Form 10-K for such fiscal year.

The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year.

The condensed consolidated financial statements were prepared using accounting principles generally accepted in the United States (“GAAP”). These principles require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

Reclassification

In connection with the preparation of its March 31, 2012 financial statements, the Company has reclassed $349,243 from notes payable to additional paid in capital to properly account for the convertible debt and warrants issued in December 2011. The Company determined that the amount was not material to the financial statements for the year ended December 31, 2011. There was no impact on the statement of operations for the year ended December 31, 2011 or the quarter ended March 31, 2012.

2. GOING CONCERN

The Company has a history of recurring losses from continuing operations, deficiencies in working capital and limited cash on hand as of March 31, 2012. To date, it has also been unable to generate sustainable cash flows from operating activities. In addition, the Company has $4,477, 834 in current liabilities payable within the next twelve months including an obligation which is currently in default (see Item 3 - DEFAULTS UPON SENIOR SECURITIES). For the three months ended March 31, 2012, the Company’s loss from continuing operations was $2,760,073. As of March 31, 2012, the Company’s cash and cash equivalents and working capital deficiency are $154,436 and $ 3,792,401) respectively. Collectively, these factors raise substantial doubt about the Company’s ability to continue as a going concern.

The Company’s existence is dependent upon its ability to obtain necessary financing. The Company believes that its existing cash resources, combined with projected cash flows from operations, will not be sufficient to execute its business plan and continue operations for the next twelve months without additional funding. The Company intends to continue to explore various strategic alternatives, including asset sales and private placements of debt and equity securities to raise additional capital. In the first half of 2012, the Company raised gross proceeds of $767,606 pursuant to Unsecured Note Issuances in February 2012 and the Warrant reset and Exchange Offer in March and May 2012 (Subsequent Events). In addition, the Company raised an additional $360,000 in the second half of 2012 and $150,000 in January 2013. In addition to paying down and restructuring its debt, management is actively taking steps to reduce the Company’s future operating expenses and increase future sales. However, the Company cannot provide any assurance that operating results will generate sufficient cash flow to meet its working capital needs and service its existing debt or that it will be able to raise additional capital as needed. As such the Company’s corporate strategy has broadened from solely New Leaf lemonades and teas to an acquirer of mature beverage distributors and manufactures.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company has identified the policies below as critical to its business operations and the understanding of the results of its operations. The impact and any of its associated risks related to these policies on the Company’s business operations are discussed throughout this section.

Principles of consolidation

The condensed consolidated financial statements include the accounts of all subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Inventories

Inventories consist primarily of raw material and finished product and are recorded at the lower of cost (on an average cost basis) or market. Inventories consisted of the following:

	March 31, 2012		December 31, 2011
	(unaudited)
Raw material	$	168,567	$	133,376
Finished goods		33,905		30,333
	$	202,472	$	163,709

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of five years. Property and Equipment consisted of the following:

	March 31 2012		December 31 2011
	(unaudited)
Furniture and fixtures	$	19,539	$	19,539
Computers		125,654		125,654
Equipment		21,199		21,199
Total		166,392		166,392
Less: Accumulated depreciation		115,382		108,392
Net property and equipment	$	51,010	$	58,000

Intangible assets

Intangible assets consist of brand value resulted from the September 9, 2008 acquisition of certain net assets from Skae Beverage International, LLC. Intangible assets consisted of the following at March 31, 2012 (unaudited) and December 31, 2011:

	Brand Value – New Leaf Tea
Asset value at December 31, 2011	$	4,760,824
Accumulated amortization		(1,488,215	)
Impairment of intangibles		(2,155,000	)
Net asset value at December 31, 2011	$	1,117,609

Asset value at March 31, 2012	$	2,605,824
Accumulated amortization		(1,531,876	)
Net asset value at March 31, 2012	$	1,073,948

During the quarter ended September 30, 2011, the Company determined that a triggering event occurred and performed an interim impairment analysis. The interim impairment analysis resulted in an impairment of $1,100,000 for the third quarter of 2011. During the year ended December 31, 2011, the Company determined that the economic uncertainty surrounding the Company’s ability to remain in business triggered an impairment analysis. The Company’s interim and annual tests, using predominately a discounted cash flow model derived from internal budgets in assuming fair values for the impairment testing. Factors that could change the result of our impairment test include, but are not limited to, different assumptions used to forecast future net sales, expenses, capital expenditures and resources, and liquidity and working capital requirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the estimated undiscounted cash flow is susceptible to future changes in market conditions, and when unfavorable, can adversely affect our original estimates of fair value. The Company’s key assumptions used in its annual impairment analysis included the following: a discount rate of 18% based on the estimated weighted average cost of capital from the market participant point of view; royalty rate of 4.0%; an average perpetual growth rate of 66% for six years and a tax rate of 38%. An increase in the discount rate of 1% or a 1% deterioration of the perpetual revenue growth rate would increase the impairment loss by approximately $38,000 or $11,000, respectively. The Company bases its fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. For the year ended December 31, 2011, the impairment of the Company’s brand value mainly resulted in the decline in its projected revenues and operating results and cash flows. The Company has concluded that impairment had existed at December 31, 2011 and has recorded an impairment charge, measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value, of $2,155,000 for the year ended December 31, 2011. In conjunction with preparing the revised forecasts, the Company reevaluated the remaining estimated useful lives of the long-lived intangibles and concluded there is no change in its estimated remaining useful lives.

The brand value (including Trademarks and Trade Names) of continuing operations are being amortized over the estimated life of ten years. Amortization expense for the three months ended March 31, 2012 and 2011 was $43,662 and $120,624 respectively. The aggregate amortization for the years ended December 31, 2012 through December 31, 2016 and years thereafter is as follows:

Year	Amortization
2012	$	130,997
2013		159,658
2014		159,658
2015		159,658
2016		159,658
Thereafter		304,319
Total	$	1,073,948

Option -Warrants issued on debt and beneficial conversion

The Company estimates the fair value of each option and warrant grant and beneficial conversion on the date of grant using the Black-Scholes option-pricing model. The option and warrant estimates are based on the following assumptions for the three months ended March 31, 2012 and 2011 (unaudited):

	March 31, 2012		March 31, 2011
Dividend yield		0%		0%
Volatility	125.46% to 202.28%		56% to 98%
Risk free interest rate	0.17% to 1.01%		0.2% to 2.4%
Expected term	1.08 to 5 years		0.29 to 5 years

The Company accounts for the beneficial conversion feature of debt and preferred stock using intrinsic value method measure at the date of issuance.

Derivatives

As part of certain note and warrant agreements, the Company has provided holders with the option to convert the note or exercise the warrant into the Company’s common stock at a specified strike price. In order to prevent dilution, if the new strike price may be lower than the original strike price on the day of conversion or exercise, the strike price would be lowered to the new conversion or exercise price. The Company has determined that these types of down round protection terms are considered derivatives.

The Company originally estimated the fair value of these warrants using a Black-Scholes valuation model. The same valuation model approach is applied to the market price of the Company’s common stock at March 31, 2012 and 2011 to determine the amount of the derivative relative to the down round protection. The change in this derivative value is included in the consolidated statement of operations as a change in fair value of derivative liabilities. The Company considers these derivative instruments as used for the purpose of securing financing.

The following table summarizes the fair value of warrants classified as liability instruments, recorded on the consolidated balance sheet as of March 31, 2012 (all of which are calculated using level 3 fair value measurements):

	Total Fair Value
	of Derivative as of
Offering	March 31, 2012
2006 and 2008 Bridge Financing	$	1,210
Warrants issued to Series I and J Preferred Stock holders		436
October 2009 notes		6,309
February 2010 stock and warrant issuance		72,057
April 2010 stock and warrant issuance		67,483
September 2010 notes		141,444
	$	288,939

The following table summarizes the changes in fair value of warrant liabilities (a level 3 fair value measurement) during the three months ended March 31, 2012:

Balance at December 31, 2011	$	45,616
Reclassification of derivative liability on warrant exercised		(13,633)
Change in fair value of derivative instruments included in net loss for the three months ended March 31, 2012		256,956

Balance at March 31, 2012	$	288,939

On March 7, 2012 the Company commenced a warrant reset and exercise offer to eligible holders of its outstanding warrants, pursuant to which all issued and outstanding warrants to purchase common stock of the Corporation issued, irrespective of current exercise price or expiration date, may, in each holder’s sole discretion, be exercised at $0.03 per share during the offer period. Approximately 15 investors elected to exercise their warrants for which the Company received $400,147 and issued 13,338,225 shares of common stock.

On February 3, 2012 one investor in our Series Preferred K converted 4 preferred shares into 2,266,667 shares of common stock and exercised a warrant to purchase 1,333,333 shares of common stock.

On February 24, 2012 one investor in our Series Preferred K converted 1.45 preferred shares into 1,210,000 shares of common stock.

Revenue Recognition, Sales Returns and Allowances

Revenue is recognized when the product is shipped. Sales returns are recorded as a reduction to sales when a customer and the Company agree a return is warranted. All returns must be authorized in advance and must be accompanied by an invoice number within 180 days. If returned, the Company’s customers are responsible for returning merchandise in resalable condition. Full credit cannot be given for merchandise that has been defaced, marked, stamped, or priced in any way. The Company does not accept products kept longer than two years. Management communicates regularly with customers to compile data on the volume of product being sold to the end consumer. This information is used by management to evaluate the need for additional sales returns allowance. The Company’s experience has been such that sales returns can be estimated accurately based on feedback from the customer.

Net Loss per Share of Common Stock

Net loss per share is calculated using the weighted average number of shares of common stock outstanding during the period. The Company has adopted the Earnings Per Share Topic of the Codification (ASC Topic 260-10). Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share may not been presented if the effect of the assumed exercise of options and warrants to purchase common shares would have an anti-dilutive effect.

Income Taxes

The Company accounts for income taxes under the liability method under the Income Taxes Topic of the Codification (ASC Topic 740-10). Deferred taxes arise from temporary differences, due to differences between accounting methods for tax and financial statement purposes. The Company establishes a valuation allowance for the uncertainty related to its ability to generate sufficient future taxable income to utilize the net operating loss carry forwards and other deferred items.

The Company recognizes interest and penalties related to uncertain tax positions in interest and general and administrative expense. As of March 31, 2012, the Company has no unrecognized tax positions, including interest and penalties.

The tax years 2008-2011 are open to examination by the major tax jurisdictions in which the Company operates.

Comprehensive Income (Loss)

The Company accounts for its Comprehensive Income (Loss) under the Topic of the Codification (ASC Topic 220-10), “Comprehensive Income (Loss),” establishes standards for the reporting and display of comprehensive income (loss) and its components within the financial statements. Other comprehensive income (loss) consists of charges or credits to stockholders’ equity, other than contributions from or distributions to stockholders, excluded from the determination of net income (loss). There were no other components of comprehensive income (loss) other than the net loss for the three months ended March 31, 2012 and 2011, respectively.

Financial Instruments

Financial instruments consist primarily of cash and cash equivalents, accounts receivable and obligations under accounts payable, accrued expenses, derivatives and notes payables. The carrying amounts of cash, accounts receivable, accounts payable, short term debt obligations and accrued expenses approximate fair value because of the short term maturity of those instruments.

Fair Value Measurements

The Company applies recurring fair value measurements to its derivative liabilities. In determining fair value, the Company uses a market approach and incorporates assumptions that market participants would use in pricing the liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation techniques. These inputs can be readily observable, market corroborated, or generally unobservable internally-developed inputs. Based upon the observation of the inputs used in these valuation techniques, the Company's derivative liabilities are classified as follows:

●

Level 1: The fair value of derivative liabilities classified as Level 1 is determined by unadjusted quoted market prices in active markets for identical liabilities that are accessible at the measurement date. The Level 1 inputs used in calculating the fair value of derivative liabilities include traded market values and volatilities calculated thereon.

●

Level 2: The fair value of derivative liabilities classified as Level 2 is determined by quoted market prices for similar assets or liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data. The Level 2 inputs used in calculating the fair value of derivative liabilities include current published yields on United States Treasury securities.

●

Level 3: The fair value of derivative liabilities classified as Level 3 is determined by internally-developed models and methodologies utilizing significant inputs that are generally less readily observable from objective sources. The Level 3 inputs used in calculating the fair value of derivative liabilities include the remaining terms of the warrants and effective exercise prices.

4. GEOGRAPHIC AREA INFORMATION

The Company generates its revenues from numerous customers, primarily in the United States. The following table outlines the breakdown of sales to unaffiliated customers domestically and internationally for the three months ended March 31:

	2012		2011
United States	$	-	$	675,038
Other International		-		12,548
Totals	$	-	$	687,586

The Company holds all its assets in the United States.

5. CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and trade receivables. The Company maintains the majority of its cash and cash equivalents in the form of demand deposits with financial institutions that management believes are creditworthy. At March 31, 2012, the cash balances in these institutions were insured in full by the Federal Deposit Insurance Corporation. Concentrations of credit risk relative to trade receivables are limited due to our diverse client base.

As discussed in the section “NEAR TERM BUSINESS STRATEGY”, on February 14, 2012, the Board elected David Fuselier as New Leaf’s Chairman, President, and Chief Executive Officer and simultaneously, Eric Skae stepped down as our Chairman, President and Chief Executive Officer. Mr. Fuselier immediately implemented a turnaround plan to (a) refocus our sales and marketing efforts to our core product markets, (b) restructure corporate operations and product mix to significantly improve operating margins, (c) achieve significant debt restructurings and interim financings to both strengthen the balance sheet and support sustainable growth and (d) achieve additional tactical and strategic financing to support anticipated growth, research and development and release of new product lines and acquisitions.

While the Company made considerable progress towards the turnaround plan during the three months ended March 31, 2012, a delay in interim financing delayed production, shipment of open customer orders and inventory purchases from distributors until after the period ended. Production and sales activity resumed during the first week of April, 2012.

The aggregate accounts receivable from three customers amounted to 81% of the accounts receivable balance outstanding at March 31, 2012.

The aggregate accounts payable due to the top four vendors amounted to approximately 32% of the accounts payable balance outstanding March 31, 2012.

A slowdown or loss of these customers or vendors could materially adversely affect the results of operations and the Company’s ability to generate significant cash flow.

6. NOTES PAYABLE TO RELATED PARTIES

Related party notes payable at December 31, consisted of:

	March 31,			December 31,
Description	2012			2011
	(unaudited)
Unsecured note payable to a former director with a face amounts of $50,000 bearing interest at 10% per annum and payable on October 31, 2012 (E)(F)(G)(I)	$	50,000		$	50,000
Unsecured note payable to a former director with a face amounts of $5,500 bearing interest at 10% per annum and payable on demand (C)		5,500			5,500
Unsecured note payable to a principal shareholder with a face amounts of $55,000 bearing interest at 10% per annum and payable on September 18, 2012 and October 14, 2012 (E)(F)(G)		55,000			55,000
Unsecured note payable to an officer with a face amount of $20,000 bearing interest at 6% per annum and payable on demand (C)		20,000			20,000
Unsecured note payable to a director with a face amount of $75,000 bearing interest at 12% per annum and payable on demand (C)		75,000			75,000
Unsecured note payable to a director with a face amount of $10,000 bearing interest at 10% per annum and payable on demand (D)		10,000			10,000
10% Secured Convertible Subordinated Notes to a principal shareholder with a face amount of $125,000 bearing interest at 10% payable July 23, 2012 (H)		125,000			125,000
Secured factoring loan agreement to a principal shareholder with a face amount of $298,227 bearing interest at 10% payable July 23, 2012 (E)(F)(G)		298,227			298,227
10% Secured Convertible Subordinated Notes to a director with a face amount of $120,517 bearing interest at 10% payable July 23, 2012 (E)(F)(G)		120,517			120,517
Secured note payable to an officer with a face amount of $30,100 bearing interest at 10% payable August 13, 2012 (H)		30,100			30,100
Unsecured note payable to a former director with a face amount of $50,000 bearing interest, which is payable at maturity on July 15, 2013, at 8% per annum. (A)		50,000			-
Unsecured note payable to a principal shareholder with a face amount of $50,000 which is payable at maturity on July 15, 2013, at 8% annum. (A)		50,000			-
Unsecured note payable to a principal shareholder with a face amount of $37,500 bearing interest, which is payable at maturity on September 3, 2013, at 8% per annum. (A)		37,500			-
Unsecured note payable to a former officer with a face amount of $200,000 bearing interest, which is payable at maturity on August 14, 2013, at 8% per annum. (B)		200,000			-
Unsecured note payable to a former officer with a face amount of $100,000 bearing interest, which is payable on demand, at 8% per annum. (B)		100,000			-

Notes payable to related parties	$	1,226,844		$	789,344
Discount on Debt		(240,998	)		(36,557	)
Total notes payable to related parties	$	985,846		$	752,787
Less current maturities		866,822			-
Long-term notes payable to related parties	$	119,024		$	752,787

Between February 15, 2012 and March 2, 2012, the Company received proceeds of $250,000 from four investors in exchange for 8% 18 month Unsecured Convertible Notes (“Unsecured Note”), which Notes were coupled with warrants. One of the investors is a principal shareholder who invested $87,500 and the other was a former director who invested $50,000 in the Unsecured Notes. Each Unsecured Note is convertible thirteen months after their respective issuance dates into common stock at a conversion price equal to the greater of (i) the Variable Conversion Price of 50% of the Market Price and (ii) the Fixed Conversion Price of $0.01. The investors also received 25,000,000 5 year warrants at a strike price of $0.03 per share. In addition the investors received the right to invest in new notes on the same basis as provided.

On February 14, 2012 the Company entered into a Mutual Termination and Release agreement between New Leaf Brands, Inc. and Eric Skae. On February 15, the Company issued Mr. Skae an 8% 18 month Unsecured Note in the Amount of $200,000 which is convertible if asked by Mr. Skae, 13 months after the date of issuance at $0.01 (subject to a beneficial ownership blocker of 4.99%) and an 8% Demand Note in the amount of $100,000.

C)	These notes were issued during the year ended December 31, 2011 to provide short-term financing.

D)	On June 30, 2011, the Company issued a $10,000 Demand 10% Promissory Note to a director of the Company. The note required a $5,000 repayment on July 7, 2011 which the holder converted to due on demand on the same day at no additional cost to the Company.

E)	On June 15, 2011, the Company entered into a Secured Factoring Loan with a principal amount of $426,680 with four lenders, the total amount received on the Secured Factoring Loan was $400,000 of which $125,000 was purchased by a director of the Company and $200,000 was purchased by a principal shareholder. These loans matured on August 20, 2011 and are secured by all of the Company assets, subject to subordinations of certain assets to present and future factoring facilities. On August 24, 2011 these notes were converted into the recasted notes described in (G) below. The Company determined that the conversion of the secured notes into the secured recast notes was more than the carrying value of the obligation on the date of the conversion and recorded a loss on extinguishment of debt.
F)	On July 14, 2011, July 28, 2011 and July 29, 2011 the Company issued Original Issue Discount Notes with three lenders receiving amounts of $75,000 from a principal shareholder, $50,000 and $25,000 respectively from other investors. These notes mature on January 14, 2012 at $170,458 and are secured by all of the Company assets, subject to subordinations of certain assets to present and future factoring facilities, of which $85,227 was due to the principal shareholder. On August 24, 2011 these notes were converted into the recast notes described in (G) below. The Company determined that the conversion of the secured notes into the secured recast notes was more than the carrying value of the obligation on the date of the conversion and recorded a loss on extinguishment of debt.
G)	On August 24, 2011, the Company recast $570,281 (principal plus accrued interest) in existing secured loans with six parties (entered into between June and July 2011), one of whom is a director of the Company for $120,517, and another who is a principal shareholder for $298,227, in exchange for 10% Secured Convertible Subordinated Notes (“Secured Notes”) which Notes were coupled with common stock. Each Secured Note is collateralized by all of the Company’s assets and is convertible into common stock at a conversion price of $0.05 per share. Additionally, such lenders were granted an additional 5 shares of our common stock for each $1.00 of interest and principal due them totaling 2,881,405 common shares. The Company determined that the conversion of the secured notes into the secured recast notes was more than the carrying value of the obligation on the date of the conversion and recorded a loss on extinguishment of debt of $144,392 for the year ended December 31, 2011.

Between September 13-16, 2011, the Company borrowed $250,000 from two investors, one of whom is a principal shareholder of the Company ($125,000) and refinanced an existing unsecured loan with one officer in the amount of $30,100. The Company issued these investors and officers the same 10% Secured Convertible Subordinated Notes we had issued to the lenders reported in the above paragraph. Additionally, such investors received an additional 5 shares of our common stock for each $1.00 invested totaling 1,400,500 common shares (625,000 included in shares issuable). The common shares were fair valued at $62,500 as debt discount and will be amortized over the term of the notes.

On October 18, 2011, November 11, 2011 and November 14, 2011, the Company borrowed $25,000, $50,000, and $30,000 from two investors, both of whom are principal shareholders of the Company. The Company issued these investors the same 10% Secured Convertible Subordinated Notes as we had issued to the lenders reported in the above paragraph H. Additionally, such investors received an additional 5 shares of our common stock for each $1.00 invested, totaling 525,000 common shares. The common shares were fair valued at $18,313 as debt discount and will be amortized over the term of the notes.

The following is a schedule of principal maturities for the next five years and the total amount thereafter on these related party notes as of March 31, 2012:

Year Ending December 31,	Principal Maturities
2012	$	889,344
2013		337,500
Total	$	1,226,844

7. SHORT-TERM DEBT

Short-term debt at March 31, 2012 and December 31, 2011 consisted of the following:

	March 31,			December 31,
Description	2012			2011
	(unaudited)
Secured loan agreement with a face amount of $155,000 bearing interest at 10% payable November 21, 2012 ( A) (B) (D)	$	155,000		$	155,000
Secured loan agreement with a face amount of $175,000 bearing interest at 10% payable November 1, 2012 (A) (B) (D)		175,000			175,000
Secured loan agreement with a face amount of $30,000 bearing interest at 10% payable October 14, 2012 ( A) (B) (C) (E)		30,000			30,000
Secured loan agreement with a face amount of $25,000 bearing interest at 10% payable October 18, 2012 ( A) (B) (C) (E)		25,000			25,000
Secured factoring loan agreement with a face amount of $282,537 bearing interest at 10% payable July 23, 2012 and August 13, 2012 ( A) (B)		282,537			282,537

Total short-term debt before discount on debt		667,537			667,537
Discount on Debt (D)		(128,007	)		(547,047)
Total short-term debt	$	539,530		$	120,490

On June 15, 2011, the Company entered into a Secured Factoring Loan with a principal amount of $426,680 with four lenders, total amount received on the Secured Factoring Loans was $400,000 of which $125,000 was purchased by a director of the Company and $200,000 was purchased by a principal shareholder (See Related Party Note 6). These notes matured on August 20, 2011 and are secured by all of the Company assets, subject to subordinations of certain assets to present and future factoring facilities. On August 24, 2011 these notes were converted into recast notes described in (D) below.

On July 14, 2011, July 28, 2011 and July 29, 2011 the Company issued Original Issue Discount Notes with three lenders receiving amounts of $75,000 from a principal shareholder, and $50,000 and $25,000 respectively from other investors. These notes mature on January 14, 2012 at $170,458 and are secured by all of the Company assets, subject to subordinations of certain assets to present and future factoring facilities, of which $85,227 was due to Lorraine DiPaolo, a principal shareholder of the Company. On August 24, 2011 these notes were converted into the recast notes described below.

Between September 13 and 16, 2011, the Company borrowed $250,000 from two investors, one of whom is a principal shareholder of the Company for $125,000 and refinanced an existing unsecured loan with one officer in the amount of $30,100. The Company issued to these investors and officers the same 10% Secured Convertible Subordinated Notes we had issued to the lenders reported in the above paragraph. Additionally, such investors received an additional 5 shares of our common stock for each $1.00 invested totaling 1,400,500 common shares (625,000 included in shares issuable). The common shares were fair valued at $62,500 as debt discount and will be amortized over the term of the notes.

Between December 1 and December 21, 2011 the Company borrowed $330,000 from an investor. We issued to these investors the same 10% Secured Convertible Subordinated Notes we had issued to the lenders reported in the above paragraph. Additionally, such investors received an additional 5 shares of our common stock for each $1.00 invested totaling 1,650,000 common shares (1,650,000 shares included in shares issuable). The shares were valued at $565,890 as debt discount and will be amortized over the term of notes. In addition we agreed in a side letter to revenue participation based on 2% of the first $2,000,000 of revenue and 3% of revenue above $2,000,000 in 2012. This agreement may be terminated by the Company with a penalty of 3 times the annual revenue participation. On July 11, 2012 both notes were converted into common stock.

During first quarter of 2012, the Company reclassified approximately $349,000 of debt discount to additional paid in capital due to previously over allocated embedded beneficial conversation in excess of carrying value of the related notes.

On October 18, 2011 and November 14, 2011 the Company borrowed $25,000 and $30,000 from one investor. The Company issued to this investor the same 10% Secured Convertible Subordinated Notes as we had issued to the lenders reported in the above paragraph E. Additionally, such investor received an additional 5 shares of our common stock for each $1.00 invested, totaling 275,000 common shares (275,000 included in shares issuable). The common shares were fair valued at $12,313 as debt discount and will be amortized over the term of the notes

8. LONG-TERM DEBT

Long-term debt at March 31, 2012 and December 31, 2011 consisted of the following:

Description	March 31, 2012			December 31, 2011
	(unaudited)
$822,920 Note payable to a trust, bearing interest at 5% per annum, unsecured(A)
Unsecured note payable to a shareholder with a face amount of $25,000 bearing interest at 8% per annum and payable July 15, 2013 (C)	$	25,000
Unsecured note payable to a shareholder with a face amount of $50,000 bearing interest at 8% per annum and payable July 15, 2013(C)		50,000
Unsecured note payable to a shareholder with a face amount of $37,500 bearing interest at 8% per annum and payable September 3, 2013(C)		37,500
Equipment loan bearing interest at 11% per annum, mature in November 2013 (B)		35,457		$	35,457
Total long-term debt		147,957			35,457
Less current maturities		21,119			21,119
Discount on Debt		(112,500	)
Long-term debt	$	14,338		$	14,338

Interest expense for the three months ended March 31, 2012 and 2011 amounted to $28,850 and $13,743, respectively. The weighted average interest rate for all long-term borrowings was 17.34% for 2012 and 6% for 2011.

The Company is in negotiation with certain former shareholders of Nutritional Specialties, Inc. The Company stopped making principal and interest payments on these notes in September 2009 and the notes were considered to be in default and presented as a current liability (See Note 12 Contingencies). In March 2012, the Company approved the sale of the Nutritional Specialties, Inc and all outstanding liabilities have been reclassified to discontinued operations for all periods presented. The sale was consummated in April 2012.

B)	On December 3, 2008, the Company completed the purchase of a new ERP system and financed that purchase through a third-party equipment financing arrangement having an interest rate of 11% and requiring payments of monthly interest and principal of $1,719 which matures by December 2013.

The following is a schedule of principal maturities for the next five years and the total amount thereafter on these notes as of March 2012:

Year Ending December 31,	Principal Maturities
2012	$	21,119
2013		126,838
Total	$	147,957

9. STOCKHOLDERS’ DEFICITS

On March 7, 2012 the Company commenced a warrant reset and exercise offer to eligible holders of its outstanding warrants, pursuant to which all issued and outstanding warrants to purchase common stock of the Corporation issued, irrespective of current exercise price or expiration date, may, in each holder’s sole discretion, be exercised at $0.03 per share during the offer period. Approximately 15 investors elected to exercise their warrants for which the Company received proceeds of $400,147 and issued 13,338,225 shares of common stock.

During the quarter ended March 31, 2012, the Company issued 12,401,000 common shares in settlement of accounts payable for $660,446.

On February 3, 2012 one investor in our Series Preferred K converted 4 preferred shares and Series X, Y and Z warrants to purchase 1,333,333 shares of common stock into 3,600,000 shares of common stock.

On February 24, 2012 and June 5, 2012 three investors in our Series Preferred K converted 1.45 and 5.8 preferred shares into 1,210,000 and 4,829,216 shares of common stock, respectively.

On March 21, 2012 the Company granted 25,000,000 restricted shares of common stock to an investor who loaned the Company $330,000 on December 1, 2011 and December 22, 2011 in connection with the termination of the revenue participation agreement.

In February 2011, the Company issued 1,000,000 common shares for marketing services at stated market value on the date of the agreement of $0.14 per share. In June 2011 issued and additional 80,000 shares for marketing services at stated market value on the date of the agreement of $0.0625 per share.

On February 24, 2011, the Company received proceeds of $60,000 and $30,000 of unsecured notes from investors and a director, respectively. On April 29, 2011, these unsecured notes were converted into 800,000 and 400,000 common shares respectively.

On January 12, 2011, the Company’s OID note holders agreed to extend the maturity of their notes to January 17, 2011. In granting the extensions to January 17, 2011, the OID note holders received 402,045 Common Shares in the Company. As this exchange was to extend the term of the debt the Company accounted for the extension as a material modification and recognized a loss on extinguishment of debt of $66,338 in January 2011.

On January 21, 2011, the Company completed a unit offering of an aggregate of $1,215,000 of its Series K 10% Convertible Preferred Stock (“Series K Preferred Stock”) and three series (Series X, Y and Z) of common stock purchase warrants (“Warrants”) to eleven accredited investors. Each unit sold consisted of one share of $25,000 stated value (and liquidation preference) of Series K Preferred Stock and Warrants to purchase up to an aggregate of 333,333 shares of common stock at $0.15 per share, subject to adjustment. A total of 48.6 units were sold. The Series X Warrants are five-year warrants, exercisable immediately to purchase an aggregate of 4,049,999 shares of common stock. The Series Y Warrants are exercisable until 45 days after the effectiveness of a certain registration statement and are exercisable to purchase an aggregate of 4,049,999 shares of common stock. The Series Z Warrants are ‘five-year’ warrants whose effectiveness are conditional upon the exercise of the holder’s Y warrants and are exercisable to purchase an aggregate of 8,100,001 shares of common stock. Pursuant to a Registration Rights Agreement described below, Investors also received the right to demand that the Company file one or more registration statements covering the securities into which the Series K Preferred Stock is convertible and as to which the Warrants are exercisable. As a condition to consummation of the offering, certain individuals converted outstanding debt in the original principal amount of $2,050,000 into 82 shares of the Company’s Series K Preferred Stock and 6,833,334 Series Y warrants. Additionally, all subscribers to the Company’s 12% Original Issue Discount Notes sold in September and October 2010, whose then current balances on such Notes aggregated $2,079,171, were automatically converted into 83.16 units of the Company’s Series K Preferred Stock and were issued X, Y and Z warrants pari- passu to the current unit investors (an aggregate of 6,930,571 Series X warrants, 6,930,571 Series Y warrants and 13,861,139 Series Z warrants).

In connection with the transaction, the Company entered into a Securities Purchase Agreement, dated January 20, 2011, with eleven investors (“SPA”). In addition to providing for the purchase of the Series K Preferred Stock and warrants by such investors as above, the SPA also provided for the Company to amend its earn-out arrangement with Eric Skae, its Chief Executive Officer, as set forth in a certain Amendment to Asset Purchase Agreement; placed certain restrictions on the Company in connection with additional equity offerings by it for a period of 12 months; caused each executive officer and director to enter into a “lock-up” agreement valid until 90 days after the effectiveness of one or more registration statements to be filed to be filed pursuant to the Registration Rights Agreement described below; and caused the conversion to equity of certain outstanding debt of the Company as set forth in the last two sentences of the preceding paragraph.

The Company also entered into a Registration Rights Agreement, dated January 20, 2011 with each unit subscriber pursuant to which the Company agreed, at its expense, to file and gain effectiveness for one or more registration statements covering the Company common stock issuable pursuant to exercise of the Warrants and conversion of the Series K Preferred Stock. The Company further agreed to file such registration statement within 60 days of the closing of the offering and to obtain its effectiveness within 90 days of such closing (or 120 days if such registration statement is subject to full Securities and Exchange Commission review), failing which monetary penalties are imposed. The registration statement(s) is (are) to be maintained effective until all securities registered for sale there under have been sold. On April 29, 2011 holders of the rights agreed to amend the Registration Rights Agreement, dated as of January 21, 2011, between the Corporation and each of the several purchasers signatory thereto and eliminated Section 2(b) thereof in its entirety in order to remove the liquidated damages provisions from the agreement.

The Company also filed a Certificate of Designation of its Certificate of Incorporation which created a class of 1,000 shares of Series K 10% Convertible Preferred Stock, par value $.001 per share. The Series K Preferred Stock ranks senior to the common stock, carries a 10% cumulative rate of interest, has a liquidation preference and is convertible into shares of the Company’s common stock at $.15 per share, subject to adjustment and anti-dilution protection. The Series K Stock is callable and redeemable by the Company under certain circumstances. The Series K Stock may be converted by the Company into shares of its common stock if the market price of the common stock is at least 300% of the conversion price for a period of 30 days and at least 200,000 shares have traded each day during such 30 day period. The Series K Preferred Stock has voting rights, voting with the Company’s common stock on an assumed-converted basis. The Certificate of Designation contains additional restrictions on the Company’s operations, including a restriction prohibiting the payment of any dividends on the Company’s common stock without the affirmative consent of the holders of the Stock.

The Warrants are represented by warrant certificates and are exercisable at $.15 per share. They are exercisable in whole or in part and the Series X and Z (but not Y) warrants may be exercised on a cashless basis.

The placement agent for the offering received $72,435 in cash fees and 361,000 warrants valued at $18,804 using the Black-Scholes model described above, to purchase common stock which have terms similar to the Series X warrants.

10. STOCK OPTIONS AND WARRANTS

Set forth below is a description of the Company’s warrants as of March 31, 2012:

Designation / Reason Granted	Original issue date	Shares of Common Stock Upon Exercise	Exercise Price / Share		Expiration Date

Marketing Program Development	October-07	250,000	$	1.00	October-12
Ancillary Warrants	June-07	5,000	$	0.40	June-12
April 2008 Bridge Notes Warrants (1)	April-08	15,625	$	0.80	April-13
September 2008 Bridge Note Warrants (1)	September-08	25,884	$	0.85	September-13
Series J Warrants (1)	December-08	14,368	$	0.87	December-13
October 2009 Note Warrants (1)	October-09	200,000	$	0.25	October-14
Investor Warrants 2009 Private Placement (1)	December-09	531,817	$	0.55	December-14
Investor Warrants 2009 Private Placement (1)	February-10	289,545	$	0.55	February-15
Marketing Program Development	March-10	150,000	$	0.49	March-15
Investor warrants 2009 Private Placement (1)(2)	May-10	1,164,346	$	0.25	May-15
Investor Warrants 2010 Private Placement (1)	June-10	1,821,414	$	0.45	June-15
Investor Warrants 2010 Original Issue Discount Private Placement (1)	September/October 2010	3,338,703	$	0.25	September, October 2015
Placement agent Warrants (1)	October-10	444,609	$	0.25	October-15
Investor X Warrants 2011 Series K Preferred stock	January 2011	8,054,102	$	0.15	January-16
Investor Y Warrants 2011 Series K Preferred stock	January 2011	8,054,102	$	0.15	45 days after registration statement
Investor Z Warrants 2011 Series K Preferred stock	January 2011	16,129,835	$	0.15	January-16
Placement agent X Warrants	January 2011	361,000	$	0.15	January-16
Debt conversion Y Warrants	January 2011	1,833,333	$	0.15	45 days after registration statement
Marketing Program Development	2/1/2011	100,000	$	0.15	February-16
Investor Relations	November-11	5,000,000	$	0.25	11/20/2016
2012 Unsecured Note Warrants	February March 2012	19,166,667	$	0.03	February, March 2017
Warrants issued for services	March 2012	3,750,000	$	0.03	March 2017

(1)

The exercise price of the warrants and the number of warrant shares subject thereto shall be subject to adjustment in the event of stock splits, stock dividends, reverse stock splits, and similar events. Further, in the event that the Company should issue shares of its Common Stock at an effective price per share less than the then effective exercise price of the warrants, the exercise price and the number of warrant shares subject to such warrants shall be adjusted on a weighted average basis to reflect the dilution represented by the issuance of such shares of Common Stock and such lower effective price on a non-fully-diluted basis, subject to similar exceptions to those described for such adjustments above with respect to the Convertible Preferred Stock. The impact of this provision would be to reduce the exercise price. The warrants contain standard reorganization provisions. Therefore, these warrants are qualified as liability instruments upon issuance.

(2)

In February 2010, the Company issued a side letter to investors in the private placements which closed in December 2009 and February 2010 which effectively amended the terms of the private placements to contain a price protection clause through April 30, 2010. The price protection clause required the Company to issue additional warrants to these investors, based upon a formula contained in the side letter, in the event that common stock was issued during the price protection period at an effective price less than the purchase price paid by such investors, subject to certain exceptions.

During the year ended December 31, 2011, the Company issued 100,000 warrants for marketing services at an exercise price of $0.15 per share with a fair value of $10,388, 43,922,280 warrants were issued in conjunction with the issuance of Series K Preferred shares, 361,000 warrants were issued to the placement agent of the Series K Preferred shares, 6,833,333 warrants were issued for the conversion of certain notes payable into Series K Preferred shares, and 1,000,000 warrants were issued in conjunction with the conversion of vendor payables. In April 2011, the Company made an offer to the series X, Y and Z warrant holders to exercise their warrants at an exercise price of $0.075 per warrant share; certain warrant holders accepted the Company’s offer and exercised 6,666,665 warrants for $500,000. In addition a series K Preferred shareholder forfeited 666,667 series X warrants and 1,333,313 series Y warrants and a warrant holder who, as previously described, received warrants as part of the conversion certain notes payable agreed to forfeit 4,066,667 series X warrants.

The fair value was determined using the Black-Scholes-Merton option valuation model using the following assumptions:

Stock price	$	0.015 to 0.06
Term (Years)	5
Volatility		125.46 to 126.53	%
Risk-free interest rate		0.81 to 1.01	%
Exercise price		0.03
Dividend yield		0	%

The following table reflects a summary of common stock warrants outstanding and warrant activity during 2012:

	2012
	# Warrants		Weighted Average Exercise Price		Weighted Average Term (Years)
Warrants outstanding at January 1,		52,893,843		0.20		3.46
Granted during the year		30,536,111		0.03		4.91
Exercised during the year		(12,580,855)		0.03		4.57
Expired during the year		(148,749)		0.15		4.57
Warrants outstanding at December 31,		70,700,350	$	0.1454		3.40

The Common Stock warrants expire in years ended December 31 as follows:

2012			255,000
2013			55,877
2014			731,817
2015			7,208,617
2016 and thereafter			52,561,604
45 days after registration statement			9,887,435
Total			70,700,350

Stock options

Under the Company’s Employee Incentive Stock Option Plan (the “1996 Plan”) approved by the stockholders in 1996, the total number of shares of Common Stock that may be granted is 500,000, amended to 325,000 in 1999. The 1996 Plan provides that shares granted come from the Company’s authorized but unissued Common Stock. The price of the options granted pursuant to these plans will not be less than 100% of the fair market value of the shares on the date of grant. The options expire ten years from date of grant. At the Company’s Annual Meeting held on December 10, 2004, the Company’s stockholders approved the 2004 Stock Option Plan (the "2004 Plan"). At the Company’s Board of Directors meeting held on July 28, 2007, the Board approved an increase in the number of shares of Common Stock that may be granted to 2,000,000 under all plans. At the Company’s Board of Directors meeting on June 27, 2008, the Board approved a new Stock Option Plan (the “2008 Plan”) for a total of 2,000,000 additional shares. At the Company’s Board of Directors meeting held on February 2, 2010, the Board approved a new Stock Option Plan (the “2010 Plan”) for a total of 3,000,000 additional shares. The price of the options granted pursuant to these plans will not be less than 100% of the fair market value of the shares on the date of grant. The option vesting period is determined by the Board of Directors at the time of grant and ranges from immediately to five years. The Company did not grant any stock options to directors and employees during the three months ended March 31, 2012. Compensation cost recognized during the three months ended March 31, 2012 and 2011 related to stock-based awards was $12,561 and $62,217 respectively. Options are usually issued at an exercise price equal to or above the fair value at the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option-pricing model

The summary of activity for the Company's stock options is presented below:

	2012			Weighted Average Exercise Price

Options outstanding at beginning of year		2,241,250		$	0.67
Granted		-		$	-
Exercised		-			-

Terminated/Expired		(736,802	)	$	0.58

Options outstanding at end of year		1,504,448		$	0. 70

Options exercisable at end of year		1,323,945		$	0.70

Options available for grant at end of year

Price per share of options outstanding	$	0.40 to 1.02		$	0.40 to 1.02

Weighted average remaining contractual lives of all options	6.41 years

Weighted Average fair value of options granted during the year		0		$	0-

The Common Stock options expire as follows:

2012
2013			-
2014			-
2015			-
2016			-
After 2016			1,504,448
			1,504,448

The aggregate intrinsic value of the options outstanding at March 31, 2012 was $0 with a weighted average remaining contract term of 6.41 years.

Unrecognized compensation costs related to non-vested share-based compensation for the above options amounted to $49,006 as of March 31, 2012

11. RELATED PARTIES TRANSACTIONS

From time to time, certain officers and directors loan the Company money as well as defer payment of salaries in order to assist the Company in its cash flow needs.

The table below sets forth the amounts of notes payable and accrued salaries of the Company’s officers and directors as of March 31, 2012, the title reflects the position held by the individual as of September 6, 2012:

Officer/Director	Notes Payable				Earn-out	Accrued Salaries &
	Amount		Accrued Interest		Amount	Bonus Amount

Eric Skae, Former C.E.O. & President	$	330,100	$	2,970	$	$

O. Lee Tawes, III Former Director	$	311,017	$	78,690

On January 12, 2011, O. Lee Tawes, a then director of the Company, lent the Company an aggregate of $75,000 for which he received a demand promissory note bearing interest at the rate of 12% per annum. Mr. Tawes lent the Company an additional $30,000 on February 24, 2011 for which he received a promissory note bearing interest at the rate of 0% per annum. This note was converted into 400,000 shares of common stock on April 29, 2011 at $0.075 per share. On June 30, 2011, O. Lee Tawes lent the Company an additional $10,000 for which he received a promissory note bearing interest at the rate of 10% per annum.

On January 12, 2011, Eric Skae, the Company's then CEO and a director, lent the Company an aggregate of $20,000 for which he received a demand promissory note bearing interest at the rate of 0% per annum. On January 28, 2011, the Company repaid $7,500 of this loan. During September 2011, the Company refinanced an existing unsecured loan with one officer in the amount of $30,100. The Company issued the officer the same 10% Secured Convertible Subordinated Notes they had issued to the lenders with the recast notes. Additionally, the officer received an additional 5 shares of its common stock for each $1.00 of interest and principal due them. The Company determined that the conversion of the secured notes into the secured recast notes was more than the carrying value of the obligation on the date of the conversion and recorded a loss on extinguishment of debt of $7,525.

On February 14, 2012 the Company entered into a Mutual Termination and Release agreement between New Leaf Brands, Inc. and Eric Skae. On February 15 the Company issued Mr. Skae an 8% 18 month Unsecured Note in the Amount of $200,000 which is convertible if asked by Mr. Skae, 13 months after the date of issuance at $0.01 (subject to a beneficial ownership blocker) and an 8% Demand Note in the amount of $100,000. As of February 14, 2012, Mr. Skae’s accrued earn out of $260,000 and accrued bonus of $166, 667 was part of the total indebtedness of $508,193 which was recasted into $300,000 in debt and $178,093 of which was forgiven by Mr. Skae.

On May 16, 2012, the Company borrowed $20,000 from CS Healthcare, a related party, in exchange for an 8% 18 month Unsecured Promissory Notes (“Unsecured Note”).

On June 26, 2012, the Company reached an agreement with related party Fuselier Bridge Capital, LLC to provide a secured working capital loan facility up to $300,000. The loan facility is secured by all Company assets including general intangibles (including trademarks, formulations, customer lists) and accounts receivables, fixed assets, inventory (all raw, work in progress and finished goods including labels) present and hereafter acquired. Each advance under the loan facility bears an interest rate of 1.5% per month and is due in full ten months after the issuance date. The investors also received up to 10,000,000 5 year warrants at a strike price of $0.03 per share and up to 10,000,000 shares of common stock at a price of $0.03 per share. On June 26, 2012, the Company borrowed $50,000 under this loan facility. On August 18, 2012, the Company borrowed an additional $100, 913 under this loan facility.

On August 2, 2012 David Fuselier was elected as a director and chairman and appointed the position of chief executive officer of Integrated Freight Corp (Ticker: IFCR.OTCBB), a related party.

12. CONTINGENCIES

In connection with the acquisition of Skae Beverage International LLC (“Skae”) in 2008, the Company agreed to provide the former member of Skae, who is also the Company’s current Chief Executive Officer through February 14, 2012, with a three year earn-out arrangement. Under the terms of the earn-out arrangement, the Company can be required to pay an additional $4,776,100 to the owner of Skae if the acquired operations meet certain performance targets related to sales and gross profit. As of September 30, 2011 and December 31, 2010, the Company has accrued $260,000 and $535,000 respectively related to the achievement of the performance targets. Currently, the Company is unable to determine the likelihood that future performance targets will be met or estimate the future liability that will be incurred. In January 2011, the Company amended the earn-out agreement with the CEO; where by Mr. Skae forgave his 2010 earn-out of $325,000 which also reduced the intangible by a same amount.

On January 29, 2009, the Company was notified that it was named as a defendant, along with 54 other defendants, in a class action lawsuit under California Proposition 65 for allegedly failing to disclose the amount of lead in one of its products. The Company has responded to discovery requests from the Attorney General of California. To date, no trial date has been set. The Company is currently investigating the merits of the allegation and is unable to determine the likelihood of an unfavorable outcome or a range of possible loss. This matter remains pending.

On December 7, 2009, the Company received a demand notice for payment for $822,920 from the estate of a former owner of Nutritional Specialties, Inc. Without acknowledging liability, the Company offered to settle any claims against us in this matter for cash and restricted common stock. The Company's offer lapsed before it was accepted. The Company intends to continue to attempt to negotiate a settlement for this debt. The Company has accrued for this payment of $822,920 as of December 31, 2010 as a current portion of note payable. On July 7, 2010, the Company was served with a Complaint demanding payment of the remaining balance of a $1,200,000 note payable with a current balance of $822,920 from the estate of a former owner of Nutritional Specialties, Inc. The parties have attended mediation and the Company is hopeful that this may be amicably resolved. This matter remains pending. As discussed in Note 14 “Subsequent Events” on April 9, 2012 the Company completed the sale its non-operating subsidiary Nutritional Specialties, Inc. (NSI) to Deep South Capital, LLC (DSCL). As part of the security purchase agreement, DSCL assumed this obligation and indemnified the Company for the note payable with a current balance of $822,920 from the estate of a former owner of Nutritional Specialties, Inc

On March 12, 2010, the Company was notified that it was named as a defendant in lawsuit in the United States District Court, Eastern District of Texas, brought by Vitro Packaging de Mexico, SA de CV, the assignee of a former supplier. Vitro Packaging alleges the Company owed unpaid accounts payable and is seeking payment of approximately $345,000. The Company has entered into a Side Compromise Settlement Agreement, Indemnity and Release with Vitro Packaging De Mexico, S.A. DE C.V. with Vitro agreeing not to execute on an Agreed Final Judgment for $245,275 until after May 16, 2011, which the Company has not paid and is recorded as a current liability. On August 17, 2011, the judgment was recorded in the State of New Jersey. During September 2012, the Company re-initiated negotiations to settle this matter. In October 2012, Management negotiated an agreement with Vitro whereby the Company would pay $125,000 in three installments to settle all claims relating to the litigation. To date, no payments have been made under the agreement, however, Vitro and Company continue to discuss a beginning date for the installment payments

On January 21, 2011, The Company filed a Certificate of Designation to its Certificate of Incorporation which created a class of 1,000 shares of Series K 10% Convertible Preferred Stock with a par value of $.001 per share. As of March 31, 2012, Series K 10% Preferred stock dividends of $ 191,275 are accrued.

On July 11, 2011, the Company was served with a complaint from Bett-A-Way Traffic Systems, Inc. demanding payment of $90,928 in an accounts payable collection matter. The parties settled this matter on April 15, 2012 for a combination of stock and cash. The stock component has been paid and the cash component remains open. At December 2012, the parties continue to discuss payment of the cash component.

On January 12, 2012 Key Equipment filed a complaint demanding payment of $81,943 and on August 29, 2012 a Final Judgment was attained. In November 2012, the parties agreed to a Stipulation of Settlement for $65,000 requiring an initial payment of $5,000 and subsequent monthly payments of $1,666 until fully retired. To date, the Company has not begun the payments as required under the Stipulation.

On February 4, 2012, we were served with a complaint by Hartford Meir, Inc demanding payment of $160,009 in a collection matter regarding a trade receivable conveyed to them by Mode Transportation (with whom the Company originally incurred the debt). We have accrued for this payment of $136,920 as of March 31, 2012 and December 31, 2011 as part of accounts payable. The Company reached a settlement agreement with this creditor which was completed upon a final payment of $20,000 on July 18, 2012. The case has been dismissed.

On January 9, 2013, we received a complaint from Stephen Gould Corporation alleging that we were in breach of contract and sought $47,587 for such breach. The Company’s counsel is reviewing the complaint.

Purchase Order Financing

On September 20, 2011 the Company entered into secured Purchase Order Financing agreements with certain suppliers for additional trade payable to produce and ship approximately $750,000 in orders to Company customers. The agreements are secured by certain future sales and inventory provided by the suppliers. The agreement provided for the repayment of $307,563 of outstanding accounts payable at September 30, 2011 and $443,000 in additional trade credit by the Company.

In connection with this facility, the Company also received consent from Secured Note holders to consent to (a) the Company entering into the Escrow Agreement with the Escrow Agent and the Suppliers for the benefit of each Supplier, and (b) consent to the Company’s segregation of proceeds from Customer accounts receivable to the Escrow Account and waive each such Secured Note holder’s security interest in and lien on all cash proceeds in the Escrow Account so long as the Escrow Agreement and the Escrow Account remains in place.

As of March 31, 2012 the Company’s accounts payable to those Suppliers was $120,917 of which $0 represented Purchase Order Financing.

13. NET LOSS PER SHARE

Convertible preferred stock and outstanding options and warrants were not considered in the calculation for diluted net loss per share for the periods ended March 31, 2012 and 2011 because the effect of their inclusion would be anti-dilutive.

As of March 31, 2012, there were warrants and options to purchase 70,700,350 shares of common stock outstanding and Series K Preferred shares were convertible into 20,584,118 shares of common stock.

14. DISCONTINUED OPERATIONS

On April 9, 2012, the Company completed the sale of its non-operating subsidiary of Nutritional Specialties, Inc. (NSI) to Deep South Capital, LLC (DSCL). The accompanying consolidated financial statements have been reclassified for all prior periods to report the assets and liabilities of this subsidiary.

The major classes of assets and liabilities of the discontinued operations on the balance sheet are as follows:

	March 31, 2012 (unaudited)		December 31, 2011

ASSETS	$	—	$	—

LIABILITIES
Note payable to trust		822,920		822,920
Accounts payable and accrued expenses	$	12,692	$	12,692
Current liabilities of discontinued operations	$	835,612	$	835,612

15. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This update is intended to increase the prominence of other comprehensive income in the financial statements by requiring public companies to present comprehensive income either as a single statement detailing the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income or using a two statement approach including both a statement of income and a statement of comprehensive income. The option to present other comprehensive income in the statement of changes in equity has been eliminated. The amendments in this update, which should be applied retrospectively, are effective for public companies for fiscal years, and interim periods beginning after December 15, 2011. The Company adopted this pronouncement in the first quarter of 2012.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Testing Goodwill for Impairment” (ASU 2011-08).

Under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If an entity believes, as a result of its qualitative assessment that the fair value of a reporting unit is greater than its carrying amount, performing the current two-step impairment test is not required. The guidance also includes a number of events and circumstances that an entity to consider in conducting the qualitative assessment. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, if an entity has not yet issued financial statements for the most recent annual or interim period, provided the entity has not yet performed its annual impairment test. We do not expect this guidance to have a material impact on our financial statements.

16. SUBSEQUENT EVENTS

On April 9, 2012 the Company completed the sale its non-operating subsidiary Nutritional Specialties, Inc. (NSI) to Deep South Capital, LLC (DSCL). The terms of the divestiture was for a consideration of $1.00 plus the assumption of certain liabilities by DSCL. In addition, the Company issued 6,000,000 shares of the Company’s stock valued at approximately $180,000 to DSCL as a reserve against possible offsets. The Company estimated a charge of approximately $180,000 in connection with this transaction.

On May 31, 2012 the Company granted a financial advisor 700,000 restricted shares of common stock, per the agreement dated May 31, 2012.

On May 4, 2012 the Company commenced a warrant reset and exercise offer to eligible holders of its outstanding warrants, pursuant to which all issued and outstanding warrants to purchase common stock of the Corporation issued, irrespective of current exercise price or expiration date, may, in each holder’s sole discretion, be exercised at $0.03 per share during the offer period. Approximately 7 investors elected to exercise their warrants for which the Company received $117,459 and issued 3,915,295 shares of common stock.

On May 16, 2012, the Company borrowed $20,000 from CS Healthcare, a related party, in exchange for an 8% 18 month Unsecured Promissory Notes (“Unsecured Note”).

Between August 24, 2011 and December 22, 2011 we borrowed an aggregate of $ 1,346,381 from eight investors, in exchange for 10% Secured Convertible Subordinated Notes (“Secured Notes”) which Notes were coupled with common stock. Each Secured Note is collateralized by all of the Company’s assets and an assignment of the Company’s trademark with the US Patent and Trademark Office and is convertible into common stock at a conversion price of $0.05 per share. Additionally, such lender was granted an additional 5 shares of our common stock for each $1.00 of interest and principal due them. Subsequent to the year ended 2011, between May 10 and May 17, 2012 six of the eight lenders agreed to waive and release its first priority and perfected security interest in and lien on the Company’s assets, and consents to the filing of a form UCC3 for the above UCC1 financing statements. In consideration for this waiver, we issued each lender 200,000 shares of common stock in New Leaf Brands, Inc.

The Company issued 1,200,000 shares of common stock to these six parties.

On June 26, 2012, the Company reached an agreement with related party Fuselier Bridge Capital, LLC (“FBC”) to provide a secured working capital loan facility up to $300,000. The loan facility is secured by all Company assets including general intangibles (including trademarks, formulations, customer lists) and accounts receivables, fixed assets, inventory (all raw, work in progress and finished goods including labels) present and hereafter acquired. Each advance under the loan facility bears an interest rate of 1.5% per month and is due in full ten months after the issuance date. The investors also received up to 10,000,000 5 year warrants at a strike price of $0.03 per share and up to 10,000,000 shares of common stock at a price of $0.03 per share. On June 26, 2012, the Company borrowed $50,000 under this loan facility and subsequently borrowed an additional $ 170,613.

On July 10, 2012, Terry L. Kinder has been appointed to its Board of Directors

On July 17, 2012, former CEO Eric Skae served a notice of default on the Settlement and Mutual Release Agreement and the Consulting Agreement signed on February 15, 2012.

On August 2, 2012 David Fuselier was elected as a director and chairman and appointed the position of chief executive officer of Integrated Freight Corp (Ticker: IFCR.OTCBB), a related party.

On August 23, 2012, Edward (Ted) H. Eppel was appointed to our Board of Directors.

On September 20, 2012 the Company borrowed $ 60,000 from an outside lender in exchange for an 11% 7 month Secured Promissory Note. The Company’s Chief Executive Officer and Fuselier and Co, Inc., personally and corporately, guaranteed this Note.

On September 24 and 25, 2012, the Company borrowed an aggregate of $250,000 from two investors in exchange for an 8% 18 month Unsecured Promissory Notes (“Unsecured Note”). A substantial portion of these proceeds were loaned to a potential acquisition candidate of the Company.

On December 7,, 2012 the Company’s Chief Executive Officer executed a promissory note for $ 105,000 with the Company’s auditor, the Company’s Chief Executive Officer and Fuselier and Co, Inc., personally and corporately, guaranteed the Note .

On December 14, 2012 the Company borrowed $ 50,000 from an investor in exchange for a 12% 14 month Unsecured Promissory Notes (“Unsecured Note”). The Company’s Chief Executive Officer and Fuselier and Co, Inc., personally and corporately, guaranteed the Note.

Between January 8 and 30, 2013, the Company borrowed an aggregate of $150,000 from three investors in exchange for an 8% 18 month Unsecured Promissory Notes (“Unsecured Note”).

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report on Form 10-Q contains forward-looking statements that involve risk and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described in this report, our annual report on Form 10-K and other filings we make from time to time with the Securities and Exchange Commission. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our Financial Statements, including the related Notes, appearing in our annual report on Form 10-K for the year ended December 31, 2011.

The preparation of this quarterly report on Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our Financial Statements, and the reported amounts of revenue and expenses during the reporting period. Our actual results reported in the future may differ from those estimates and revisions of these estimates may become necessary in the future.

GENERAL STRATEGY

We are a diversified beverage holding company acquiring brands, distributors and manufacturers within the beverage industry. Our strategy follows the initial success of our award winning New Leaf Brands ready-to-drink teas and lemonades. We intend to continue to market broadly our New Leaf branded products as well as acquire additional regional beverage brands in complementary categories. As part of our brand acquisition strategy, we will acquire a portfolio of branded proprietary products, with distinctive packaging and deep regional appeal, in the following categories:

●	Ready–to-drink Lemonades and Teas

●	Carbonated Beverages

●	Juice and Juice Blends

●	Weight Control drinks

●	Water and Enhanced Water

●	Functional/Health and Wellness drinks

These categories are tailored toward premium, gourmet and healthy lifestyles for the “quality-value” expectations of our consumers. We believe that each acquired brand, in its category, will provide established regional distribution for the Company’s full array of other beverage products and, ultimately, lead to more channels of distribution.

New Leaf is the company’s flagship brand in the ready to drink Lemonade and Iced Tea category. We intend to acquire additional brands to enhance our flagship brand in the coming years. We believe that our products are well-positioned to continue to grow and possess a competitive advantage in creativity, flavor, ingredients and packaging. As of May 30, 2012, New Leaf Brands’ beverages are sold in seven states, through 30 distributors in over 8,000 outlets. We anticipate organic expansion of our business by targeting additional wholesale distributors, larger mainstream grocery stores, convenience and drug store channels.

At New Leaf Beverages we develop, market and distribute healthy and functional ready-to-drink teas and lemonades under the New Leaf® brand. We focus primarily on functional ready-to-drink beverages, which include teas, lemonades and other functional drinks. New Leaf offers natural iced-tea and lemonade beverage which are sweetened with evaporated pure cane sugar and specifically formulated to address an unmet consumer demand in the very competitive but rapidly growing ready-to-drink beverage market. The pure cane sugar sweetening creates a premium product with 20-30% fewer calories than competing brands who use high fructose corn syrup. New Leaf is available in 17 varieties of teas (including white, black, green, and blue teas) and lemonades (including half tea/half lemonade beverages).

Our broader strategy is to acquire established beverage distributors and manufacturers who choose to utilize New Leaf’s financial structure and access to capital. We intend to pursue moderate-sized regional distributors who will internalize our array of beverage products through proprietary distribution channels. Similarly, we intend to pursue beverage production, where appropriate, to reduce our internal cost of production and to increase our delivered margin per case.

NEAR TERM BUSINESS STRATEGY

Throughout 2012, we experienced significant financial challenges. We reported in our annual report for the year ended December 31, 2011 on Form 10-K, filed on July 30, 2012, that without additional funding we would be forced to cut back or cease operations. We sought legal counsel to investigate reorganization and bankruptcy options and, upon consideration of the opinion of our advisors and the Board, retained Fuselier and Co. to evaluate turnaround alternatives. After consideration of the alternatives, on February 14, 2012, the Board elected David Fuselier as New Leaf’s Chairman, President, and Chief Executive Officer. Simultaneously, Eric Skae stepped down as our Chairman, President and Chief Executive Officer. Mr. Fuselier immediately began implementing a restructuring and turnarounds plan that:

Refocused New Leaf Brands beverages to:

●	Focus and deliver growth on the core product markets

●	Focus on four key geographic markets: New York Metro, Mid-Atlantic, Florida, Southern California

●	Reduce supply chain costs

●	Focus on key distributors and value added partnerships

●	Restructure corporate operations and product mix to significantly improve operating margins.

●	Achieve significant debt restructurings and interim financings to both strengthen the balance sheet and support sustainable growth.

●	Seek additional tactical and strategic financing to support anticipated growth, research and development and release of new product lines.

Our ability to acquire new products is limited by our access to capital. We intend to continue to explore various strategic alternatives, including business combinations and private placements of debt and or equity securities to raise capital to grow our Company. We also intend to expand our business through mergers and acquisitions of appropriate complementary brands, distributors and manufacturers companies in our industry. We can provide no assurance that we will be able to raise sufficient capital under appropriate terms to complete our strategic objectives.

OUR PRODUCTS

TEAS New Leaf is a natural iced-tea beverage sweetened with organic cane sugar and specifically formulated to address what we believe is an unmet consumer demand in the very competitive, but rapidly growing, ready-to-drink beverage market. The organic cane sugar sweetening creates a premium and healthier product with 20-30% fewer calories than high fructose corn syrup competitors. New Leaf is available in 17 varieties that are all-natural and organically-sweetened, of which 6 are lemonades varieties. Varieties include white, black, green and blue teas, lemonades and half tea/half lemonade beverages. New Leaf products include:

Blue Teas		White Tea
●	Blue Tea with Lemon	●	White Tea with Honey Dew Melon
●	Blue Tea with Peach	●	White Tea with Strawberry
●	Blue Tea with Raspberry
●	Diet Blue Tea with Lemon	Black Tea
●	Diet Blue Tea with Peach		Sweet Tea
Green Teas
●	Green Tea with Ginseng and Honey	Lemonades
●	Green Tea with Plum	●	Strawberry
●	Green Tea with Mango	●	Homemade
		●	Black Cherry
		● ● ●	Tiger – Half and Half Lite Tiger – Half and Half Mango Lemonade

We also distinguish the New Leaf brand by creating unique flavors. For example, New Leaf introduced blue tea, also known as Oolong tea, to mainstream consumers. Oolong tea is sometimes referred to as “blue tea” because its dried leaves have a bluish hue. We believe that unique flavors will continue to attract the attention of consumers.

LEMONADES In April 2010, we introduced a lemonade brand available in three flavors -- Homemade, Black Cherry and Strawberry. Additionally, "The Tiger," half tea / half lemonade, debuted as part of our lemonade offerings. In October 2011, we introduced two new flavors, Mango Lemonade and Lite Tiger – Half and Half (sweetened with Sucralose and pure cane sugar). Our 100% natural lemonades are made with pure cane juice and contain 10% real fruit juice.

Our products are sold in a proprietary 16.9 ounce bottle designed specifically for our New Leaf brand. The bottles are labeled with vibrant colors and the New Leaf logo appeals to, and is recognizable by, consumers. New Leaf products emphasize wellness and innovation. Our non-diet varieties of New Leaf Tea have 70-80 calories per 8 ounce serving and are sweetened with pure cane sugar instead of high-fructose corn syrup.

Results of Operations for the three months Ended March 31, 2012 and 2011

Net sales from our operations, New Leaf Brands, for the three months ended March 31, 2012 were $0 compared to $687,586 for the same period last year. The decrease in net sales is primarily due to the temporary cessation of operations.

Cost of sales decreased to $20,738 for the three months period ending March 31, 2012 compared to $557,118 for the same period in 2011. The overall decrease in gross profit margin is primarily due to the temporary cessation of operations discussed above.

Shipping and handling expenses were $3,408 for the three months period ending March 31, 2012, and $127,833 for the same period in the prior year. The decrease of $124,425 was due primarily to the temporary cessation of activity during the three months ended March 31, 2012. Marketing expenses decreased from $617,997 for the three months ended March 31, 2011 to $102,728 in the same period in 2012. The decrease was attributable to the cessation of operations pending resolution of our capital constraints and progress on the turnaround plan. General and administrative costs were $2,715,717 for the three months ended March 31, 2012 and $569,829 for the same period in the prior year. The increase is primarily due to compensation related to the issuance of 28,000,000 shares under the Fuselier agreement for $173,600 and 54,500,000 shares of common stock as compensation to consultants and employees for $2,137,558. Depreciation and amortization expense was $50,651 for the three months ended March 31, 2012, and $129,292 for the same period in the prior year.

The Company evaluates intangible assets for potential impairment on an annual basis or whenever events or circumstances indicate that impairment may have occurred using a two-step process. The first step of the impairment test, used to identify potential impairment, compares the estimated fair value of the intangible with the related carrying amount. If the estimated fair value of the intangibles exceeds its carrying amount, the intangible is not considered to be impaired and the second step is unnecessary. During the quarter ended September 30, 2011, the Company determined that a triggering event occurred and performed an interim impairment analysis. The interim impairment analysis resulted in an impairment of $1,100,000 for the third quarter of 2011. During the year ended December 31, 2011, the Company determined that the economic uncertainty surrounding the Company’s ability to remain in business triggered an impairment analysis. The Company’s interim and annual tests, using predominately a discounted cash flow model derived from internal budgets in assuming fair values for the impairment testing. Factors that could change the result of our impairment test include, but are not limited to, different assumptions used to forecast future net sales, expenses, capital expenditures and resources, and liquidity and working capital requirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the estimated undiscounted cash flow is susceptible to future changes in market conditions, and when unfavorable, can adversely affect our original estimates of fair value. The Company’s key assumptions used in its annual impairment analysis included the following: a discount rate of 18% based on the estimated weighted average cost of capital from the market participant point of view; royalty rate of 4.0%; an average perpetual growth rate of 66% for six years and a tax rate of 38%. An increase in the discount rate of 1% or a 1% deterioration of the perpetual revenue growth rate would increase the impairment loss by approximately $38,000 or $11,000, respectively. The Company bases its fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. For the year ended December 31, 2011, the impairment of the Company’s brand value mainly resulted in the decline in its projected revenues and operating results and cash flows. The Company has concluded that impairment had existed at December 31, 2011 and has recorded an impairment charge, measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value, of $2,155,000 for the year ended December 31, 2011. In conjunction with preparing the revised forecasts, the Company reevaluated the remaining estimated useful lives of the long-lived intangibles and concluded there is no change in its estimated remaining useful lives.

Total other income (expense) for the three month periods ended March 31, 2012 and 2011 was $ (133,159) and $(301,666), respectively. The decrease of $ 168,507 was due primarily to the change of fair values related to derivative liability of $(256,956) and gain on extinguishment of debt of $562,893.

There is no income tax benefit recorded for either period because any potential benefit of the income tax net operating loss carry forwards has been equally offset by an increase in the valuation allowance on the deferred income tax asset.

Liquidity and Capital Resources

As of March 31, 2012, we had $ 685,433 in current assets of which $194,128, or 28.32%, was cash and receivables. On average, our receivables are collected after 34 days outstanding. Inventories were $202,472 at March 31, 2012, an increase of $38,763 over the December 31, 2011 balance of $163,709. The increase in inventories was primarily due to the slowdown in sales and purchases of raw materials. Total current liabilities at March 31, 2012 totaled $ 4,477,834, of which $1,220,436 or 27.26%, represented trade and operating payables. This represents a ratio of current assets to current liabilities of 0.15:1 at March 31, 2012.

At March 31, 2012, we had a net working capital deficiency of $ 3,792,401. Our need for cash during the three months ended March 31, 2012 was primarily funded through exercise of warrants and borrowings (including borrowings from related parties) totaling $1,261,927.

We have traditionally funded working capital needs through product sales, management of working capital components of our business, and by cash received from private offerings of our common stock, preferred stock, warrants to purchase shares of our common stock and convertible notes.

We believe that our needs for capital over the next 12 to 24 months could be minimized if we are able to increase our sales via the introduction of new products, support our inventory needs and promote our products in the marketplace. Since our existing operations are capable of absorbing growth without any significant operational expense, any increases in sales will allow us to lessen our needs for long-term capital. However, we intend to aggressively expand our distribution channel more rapidly than in the past and implement more aggressive advertising programs. These programs require further significant investments of capital. The amount and nature of how we would raise any necessary funds cannot be determined at this time. It is possible we may not be able to find capital on acceptable terms.

The following table presents future maturities of debt owed through the end of fiscal year 2014:

Year	Amount
2012	$	1,578,000
2013	$	464,338

Contractual obligations and commitments

The Company’s various equity financings are detailed under Item 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES – Recent Sales of Unregistered Securities. The Company’s various borrowings are set forth below.

On June 15, 2011, the Company entered into a Secured Factoring Loan with a principal amount of $426,680 with four lenders, the total amount received on the Secured Factoring Loans was $400,000 of which $125,000 was purchased by a then-director of the Company and $200,000 was purchased by a principal shareholder. These notes matured on August 20, 2011 and are secured by all of the Company assets, subject to subordinations of certain assets to present and future factoring facilities. On August 24, 2011 these notes were converted into the Secured Convertible Subordinated Notes described below.

On July 14, 2011, July 28, 2011 and July 29, 2011 we issued Original Issue Discount Notes to three lenders receiving amounts of $75,000 from a principal shareholder, $50,000 and $25,000 respectively from other investors. These notes matured on January 14, 2012 at $170,458 and are secured by all of the Company assets, subject to subordinations of certain assets to present and future factoring facilities, of which $85,227 was due to Lorraine DiPaolo, a principal shareholder. On August 24, 2011 these notes were converted into the recast notes as described below.

On August 24, 2011, we recast $606,381 (principal plus accrued interest) in existing secured loans with six parties (entered into between June and July 2011), one of whom was then a director of the Company, for $120,517, another of whom is an executive officer and director of the Company for $30,100 and another of whom is a principal shareholder for $298,227, in exchange for 10% Secured Convertible Subordinated Notes (“Secured Notes”) which Notes were coupled with common stock. Each Secured Note is collateralized by all of the Company’s assets and is convertible into common stock at a conversion price of $0.05 per share. Additionally, such lenders were granted an additional 5 shares of our common stock for each $1.00 of interest and principal due them. We determined that the conversion of the secured notes into the secured recast notes was more than the carrying value of the obligation on the date of the conversion and recorded a loss on extinguishment of debt of $144,392 for the year ended December 31, 2011.

Between September 13 and 16, 2011, we borrowed $250,000 from two investors, one of whom is a principal shareholder, for $125,000 and refinanced an existing unsecured loan with one officer in the amount of $30,100. We issued to these investors the same 10% Secured Convertible Subordinated Notes we had issued to the lenders reported in the above paragraph. Additionally, such investors received an additional 5 shares of our common stock for each $1.00 invested totaling 1,450,000 common shares (625,000 included in shares issuable). The shares were valued at $31,250 as discount debt and will be amortized over the term of notes.

On September 20, 2011 the Company entered into Secured Purchase Order Financing agreements with certain suppliers for additional trade credit to produce and ship approximately $750,000 in orders to Company customers. The agreements were secured by certain future sales and inventory provided by the suppliers. The agreement included repayment of $307,563 of existing accounts payable and $ 443,000 in additional trade credit. The Company further agreed to segregate all cash proceeds from specific sales to certain customers (the “Customers”) to enable the Company to pay the suppliers. The Company entered into an Escrow Agreement with the Suppliers and an escrow agent for the purpose of establishing a segregated account controlled by an independent escrow agent to disburse the cash proceeds from such Customer accounts directly to each Supplier based upon a predetermine percentage. In connection with this facility, the Company also received consent from Secured Note holders to consent to (a) the Company entering into an escrow agreement with the escrow agent and the Suppliers for the benefit of each Supplier, and (b) consent to the Company’s segregation of proceeds from Customer accounts receivable to the escrow account and waive each such Secured Note holder’s security interest in and lien on all cash proceeds in the escrow account so long as the escrow agreement and the escrow account remained in place. As of December 31, 2011 the Company’s accounts payable to those Suppliers was $460,490 of which $306,037 represented Purchase Order Financing. The escrow agent received aggregate proceeds of $444,526, all of which have been disbursed to the Suppliers.

On October 18, 2011, the Company borrowed $50,000 from two lenders in exchange for 10% Secured Convertible Subordinated Notes which Notes were coupled with common stock. One of the purchasers was a principal shareholder who subscribed for $25,000. Each Secured Note is collateralized by all of the Company’s assets and an assignment of the Company’s trademark with the US Patent and Trademark Office and is convertible into common stock at a conversion price of $0.05 per share. Additionally, such lenders were granted an additional 5 shares of our common stock for each $1.00 of interest and principal due them.

On November 1, 2011, the Company borrowed $50,000 from a then-director in exchange for 10% Secured Convertible Subordinated Note which Note was coupled with common stock. Each Secured Note is collateralized by all of the Company’s assets and an assignment of the Company's trademark with the US Patent and Trademark Office and is convertible into common stock at a conversion price of $0.05 per share. Additionally, such lenders were granted an additional 5 shares of our common stock for each $1.00 of interest and principal due them.

On November 14, 2011, we borrowed aggregate gross proceeds of $60,000 from two investors, one of whom was a principal shareholder ($30,000) in exchange for 10% Secured Convertible Subordinated Notes (“Secured Notes”) which Notes were coupled with common stock,. Each Secured Note is collateralized by all of the Company’s assets and an assignment of the Company’s trademark with the US Patent and Trademark Office and is convertible into common stock at a conversion price of $0.05 per share. Additionally, such lenders were granted an additional 5 shares of our common stock for each $1.00 of interest and principal due them.

On November 22, 2011 we entered into an investor relations maintenance agreement. In addition to the cash compensation of $50,000 (of which $25,000 was) paid, the party was granted 3,000,000 restricted shares of common stock and we assigned to the principal plus a warrant to purchase 5 million shares of common stock at a strike price of $0.25 per share.

On December 1, 2011, we borrowed $175,000 from one investor in exchange for 10% Secured Convertible Subordinated Notes (“Secured Notes”) which Notes were coupled with common stock. Each Secured Note is collateralized by all of the Company’s assets and an assignment of the Company’s trademark with the US Patent and Trademark Office and is convertible into common stock at a conversion price of $0.01 per share. Additionally, such lenders were granted an additional 5 shares of our common stock for each $1.00 of interest and principal due them. Additionally, for arranging this facility which will total $330,000 assignee of the Lender was granted a Revenue Participation Agreement. This agreement grants the lender a revenue participation of 2% of the Company’s annual net sales of the first $2 million and 3% of any net sales in excess of the first $2 million in annual net sales.

On December 14, 2011, the Company reached an agreement with a former employee to grant common stock and warrants to in exchange for satisfaction of deferred salary of $7,516 and an outstanding note to his wife in the amount of $4,800. We intend to grant 400,000 restricted shares of common to them.

On December 22, 2011, we borrowed $155,000 from one investor in exchange for 10% Secured Convertible Subordinated Note (“Secured Note”) which Note was coupled with common stock. Each Secured Note is collateralized by all of the Company’s assets and an assignment of the Company’s trademark with the US Patent and Trademark Office and is convertible into common stock at a conversion price of $0.01 per share. This loan triggered the Revenue Participation Agreement that was referenced in the discussion of the December 1, 2011 Secured Note.

On December 23rd, 2011 the Company received the required consent to:

● Amend the Certificate of Designation of the Corporation for the Series K Preferred Stock (the “Certificate of Designation”)

● to eliminate paragraph (f) of Section 9 of the Certificate of Designation, “Protective Provisions,” which limits the Company’s ability to enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for borrowed money of any kind, other than “Permitted Indebtedness”

● Amend the Security Purchase Agreement for the Series K Preferred Stock (the “Security Purchase Agreement”)

i. To eliminate paragraph 8.2 “Subsequent Equity Sales,” in its entirety;

ii. To eliminate paragraph 8.3 “Participation in Future Financing,” in its entirety;

In consideration of same, the Company agreed:

● To reduce the conversion price of its Series K Preferred to 3 cents per share.

● To exchange every 5 Warrants (of the X, Y and Z Series) into 1 share of common stock.

Between February 15, 2012 and March 2, 2012, the Company received proceeds of $250,000 from four investors in exchange for 8% 18 month Unsecured Convertible Notes (“Unsecured Note”), which Notes were coupled with warrants. Each Unsecured Note is convertible thirteen months after their respective issuance dates into common stock at a conversion price equal to the greater of (i) the Variable Conversion Price of 50% of the Market Price and (ii) the Fixed Conversion Price of $0.01. The investors also received 25,000,000 5 year warrants at a strike price of $0.03 per share. In addition the investors received the right to invest in new notes on the same basis as provided.

We believe that our existing cash resources, combined with projected cash flows from operations will not be sufficient to execute our business plan and continue operations for the next twelve months. We continue to explore various longer term capital options which we believe will be necessary to provide for the growth of our business. Additionally, we are evaluating our strategic direction aimed at achieving profitability and positive cash flow. We intend to continue to issue debt or equity securities in order to raise additional capital. If we issue additional common stock or securities that could convert into our common stock, our current stockholders will be diluted and the trading price of our common stock may decrease. Additionally, we may not be successful in obtaining additional financing on acceptable terms, on a timely basis, or at all, in which case, we may be forced to make further cutbacks or ultimately cease operations.

Off Balance Sheet Arrangements

We do not have off-balance sheet arrangements, financing, or other relationships with unconsolidated entities or other persons, also known as “variable interest entities”.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our management concluded that our disclosure controls and procedures, including internal control over financial reporting, were not effective as of March 31, 2012 to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, with our Company have been detected.

Our management identified control deficiencies during 2009 that continued to exist in the three months ended March 31, 2012 because we lacked adequate controls in place to properly evaluate and account for all the complex characteristics of the debt and equity transactions executed by our Company in accordance with U.S. generally accepted accounting principles. In addition, management concluded that there were not adequate controls in place to properly evaluate and account for stock-based awards issued by our Company in accordance with U.S. generally accepted accounting principles. These deficiencies are the result of the complexity of the individual debt and equity transactions entered into by our Company and the limited amount of personnel available to provide for the proper level of oversight needed in accounting for these transactions. Management has determined that these control deficiencies represent material weaknesses. In addition, we lacked sufficient staff to segregate accounting duties. Based on our review of our accounting controls and procedures, we believe this control deficiency resulted primarily because we have one person performing all accounting-related duties. As a result, we did not maintain adequate segregation of duties within our critical financial reporting applications. Management believes these are “material weaknesses.”

A material weakness is defined as a deficiency, or combination of deficiencies in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

In preparing our financial statements and in reviewing the effectiveness of the design and operation of our internal accounting controls and procedures and our disclosure controls and procedures for the three months ended March 31, 2012, we performed transaction reviews and control activities in connection with reconciling and compiling our consolidated financial records for the three months ended March 31, 2012. These reviews and procedures were undertaken in order to confirm that our financial statements for the three months ended March 31, 2012 were prepared in accordance with generally accepted accounting principles, fairly presented and free of material errors.

Our management is in the process of actively addressing and remediating the material weaknesses in internal control over financial reporting described above. We intend to continue to remediate material weaknesses and enhance our internal controls, but cannot guarantee that our efforts will result in remediation of our material weakness or that new issues will not be exposed in this process.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

On December 7, 2009, we received a demand notice for payment for $822,920 (see Footnote 7, Long Term Debt) from the estate of a former owner of Nutritional Specialties, Inc. As discussed in Note 14 “Subsequent Events” on April 9, 2012 the Company completed the sale its non-operating subsidiary Nutritional Specialties, Inc. (NSI) to Deep South Capital, LLC (DSCL). As part of a security purchase agreement, DSCL assumed this obligation and indemnified the Company.

On March 12, 2010, the Company was notified that it was named as a defendant in a lawsuit in the United States District Court, Eastern District of Texas, brought by Vitro Packaging de Mexico, SA de CV, the assignee of a former supplier. Vitro Packaging alleged the Company owed unpaid accounts payable and sought approximately $345,000. The Company entered into a Side Compromise Settlement Agreement, Indemnity and Release with Vitro Packaging De Mexico, S.A. DE C.V. with Vitro agreed not to execute on an Agreed Final Judgment for $245,275 until after May 16, 2011, which the Company has not paid and is recorded as a current liability. On August 17, 2011, the judgment was recorded in the State of New Jersey. In October 2012, Management negotiated an agreement with Vitro whereby the Company would pay $125,000 in three installments to settle all claims relating to the litigation. To date, no payments have been made under the agreement, however, Vitro and Company continue to discuss a beginning date for the installment payments.

In December 2010, the Company’s Chief Operating Officer, William Sipper, resigned following an alleged incident involving a prospective employee of the Company. The Company insurance carrier settled this matter in March 2012.

On July 11, 2011, we were served with a complaint from Bett-A-Way Traffic Systems, Inc. demanding payment of $90,928 in a accounts payable collection matter.. The parties settled this matter on April 15, 2012 for a combination of stock and cash. The stock component has been paid and the cash component remains open. At February 2012, the parties continue to discuss payment of the cash component.

On February 4, 2012, we were served with a complaint by Hartford Meir, Inc demanding payment of $160,009 in a collection matter regarding a trade receivable conveyed to them by Mode Transportation (with whom the Company originally incurred the debt). We have accrued for this payment of $136,920 as of December 31, 2011 as part of accounts payable. The Company reached a settlement agreement with this creditor which was completed upon on July 18, 2012. The case has been dismissed.

On July 17, 2012, former CEO Eric Skae served a notice of default on the Settlement and Mutual Release Agreement and the Consulting Agreement signed on February 15, 2012.

Except as described above, we are not a party to any other legal proceeding that we believe would have a material adverse effect on our business, results of operations or financial condition. We may be involved from time to time in ordinary litigation, negotiation and settlement matters that will or will not have a material effect on our operations or liquidity. Other than as set forth above, we are not aware of any pending or threatened litigation against us or our officers and directors in their capacity as such that could have a material impact on our operations or liquidity.

ITEM 1A – RISK FACTORS

There have been no material changes from the risk factors as previously disclosed under 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2011.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On January 28, 2010, we agreed with certain vendors and converted their trade payable in the amount of $85,000 into 170,000 shares of our common stock.

On February 22, 2010, we closed a private placement of common stock and warrants with certain accredited investors. Pursuant to the private placement, we sold an aggregate of 1,988,889 (1,222,219 shares was issued in 2009) shares of our common stock, plus warrants to purchase 1,057,727 (649,999 warrants was issued in 2009) shares of our common stock at an exercise price of $0.55 per share, subject to adjustment. Gross proceeds from the private placement were approximately $895,000 ($550,000 was received in 2009).

In February 2010, we issued a side letter to investors in the private placements which had closed in December 2009 and February 2010 effectively amending the terms of the private placements to grant a price protection clause through April 30, 2010. The price protection clause required us to issue additional common stock and warrants to these investors, based upon a formula contained in the side letter, in the event that common stock was issued during the price protection period at an effective price less than the purchase price paid by such investors, subject to certain exceptions.

The commencement of the private placement in April 6, 2010 triggered the price protection clause contained in the side letter which we issued to certain investors on February 16, 2010. Accordingly, we issued such investors 568,253 shares of common stock and warrants to purchase 1,499,410 shares of common stock at an exercise price of $0.45 per share. The warrants are fully vested, with a five year term and provide their holders with certain anti-dilution and cashless exercise provisions.

On February 22, 2010, we agreed to issue for services rendered (fair value of $1,106,225), 3,000,000 shares of common stock, which consist of 2,557,500 shares issued on February 24, 2010 and the remaining 422,500 shares were to be issued on May 22, 2010. Prior to issuance of the remaining shares on May 22, 2010 the contract was rescinded.

In January and February 2010, we agreed with certain vendors to convert their trade payables in the amount of $78,781 into 270,923 shares of our common stock. Also on February 24, 2010, we agreed to issue for services rendered (fair value of $54,830), a warrant for 150,000 shares of our common stock with a exercise price of $0.49 per share and an expiration date of March 2015.

On April 6, 2010, we commenced a private placement of common stock and warrants with certain accredited investors. Pursuant to the private placement, we agreed to issue an aggregate of 1,821,414 shares of common stock and warrants to purchase 1,821,414 shares of common stock at an exercise price of $0.45 per share for net proceeds of $637,500. The warrants issued in connection with the private placement are fully vested, have a five year term and provide their holders with certain anti-dilution and cashless exercise provisions.

On May 28, 2010, we issued a side letter to investors in the private placement which commenced in April 2010 which effectively amended the terms of the private placement to contain a price protection clause through August 31, 2010. The price protection clause requires us to issue additional common stock to these investors, based upon a formula contained in the side letter, in the event that common stock is issued during the price protection period at an effective price less than the purchase price paid by such investors, subject to certain exceptions.

In August 2010, we issued a side letter to investors in the private placement which commenced on April 6, 2010 which effectively amended the terms of the private placement to extend the price protection clause provided to such investors in a side letter issued to them in May 2010 through September 25, 2010. The price protection clause required us to issue additional common stock to these investors, based upon a formula contained in the side letter, in the event that common stock or common stock equivalents were issued during the price protection period at an effective price less than the purchase price paid by such investors, subject to certain exceptions.

The commencement of the October 8, 2010 promissory note issuance (see below) triggered the price protection clause contained in the side letter which we issued to certain investors on August 26, 2010. Accordingly we issued such investors 728,586 shares of common stock.

In April 2010, the holders of $212,500 of notes agreed to convert the outstanding note balance into 531,250 shares of common stock in exchange for us agreeing to pay all unpaid interest which had accrued on the notes.

In May 2010, we issued 360,000 shares of common stock to the holders of $1,500,000 of notes in exchange for extending the maturity date to June 2010. In June 2010, we issued 4,500,000 shares of common stock to the same holders in exchange for further extending the maturity date to September 2010. In August 2010, the holders agreed to extend the term of these notes to December 24, 2010. In October 2010, the holders agreed to extend the maturity date to January 12, 2011. On January 21, 2011 theses notes were converted into 60 shares of our Preferred Series K shares and Series Y warrants to purchase 5,000,000 shares of common stock at a strike price of $0.15.

In September 2010, we consummated a private placement of promissory notes with a face value of $1,782,955 and detachable warrants to purchase 2,139,546 shares of common stock to accredited investors, excluding related parties which are described later in Note 6, pursuant to a private placement memorandum. The promissory notes were issued at an original issuance discount of $213,955, did not have a stated interest rate and matured on the three month anniversary of their issuance date in December 2010 or January 2011. In addition, the notes are automatically convertible upon the consummation of a qualified offering, as defined, into the type of securities issued in such offering at a conversion price equivalent to the price of the securities sold. The warrants are fully vested and provide its holder with the right to purchase the specified number of shares of common stock at an exercise price of $0.25 per share during its five year term. The warrants also provide its holders with certain anti-dilution and cashless exercise provisions. The terms of the offering also provide investors with a reset feature which gives them the right, for as long as the notes are outstanding, to exchange the promissory notes for securities issued in a subsequent offering in the event that the Company enters into any subsequent transaction other than the qualified offering, as defined, on terms more favorable than those governing the current offering.

As a result of the private placement of promissory notes and warrants we issued to the placement agent 266,760 warrants that are fully vested and provide its holder with the right to purchase the specified number of shares of common stock at an exercise price of $0.25 per share during its five year term. The warrants also provide its holder with certain anti-dilution and cashless exercise provisions.

On January 12, 2011 our note holders agreed to extend the maturity date of such notes to January 17, 2011.

On January 14, 2011 the Company received consent from all its September OID note holders to:

1.	Lower the amount of a “Qualified Offering” to $1,200,000.”
2.	Extend the “Maturity Date” to “January 21, 2011.”

3.	Waive the full ratchet anti-dilution protection on their Warrant

On January 21, 2011, the Company completed a unit offering of an aggregate of $1,215,000 of its Series K 10% Convertible Preferred Stock (“Series K Preferred Stock”) and three series (Series X, Y and Z) of common stock purchase warrants (“Warrants”) to 11 accredited investors. Each unit sold consisted of one share of $25,000 stated value (and liquidation preference) of Series K Preferred Stock and Warrants to purchase up to an aggregate of 333,333 shares of common stock at $0.15 per share, subject to adjustment. A total of 48.6 units were sold. The Series X Warrants are 5 year warrants, exercisable immediately to purchase an aggregate of 4,049,999 shares of common stock. The Series Y Warrants are exercisable until 45 days after the effectiveness of a certain registration statement that the Company is obliged to file (see below) and are exercisable to purchase an aggregate of 4,049,999 shares of common stock. The Series Z Warrants are five year warrants whose effectiveness is conditional upon the exercise of the holder’s Y warrants and are exercisable to purchase an aggregate of 8,100,001 shares of common stock. Pursuant to a Registration Rights Agreement described below, investors also received the right to demand that the Company file one or more registration statements covering the securities into which the Series K Preferred Stock is convertible and as to which the Warrants are exercisable as further described below. The offering was made under Rule 506 under the Securities Act of 1933, as amended, and was made exclusively to “accredited investors”. As a condition to consummation of the offering, certain individuals converted outstanding debt in the original principal amount of $2,050,000 into the Company’s Series K Preferred Stock. Additionally, all subscribers to the Company’s 12% Original Issue Discount Notes sold in September and October 2010, whose then current balances on such Notes aggregated $2,081,176, were automatically converted into 83.16 shares of the Company’s Series K Preferred Stock and were issued X, Y and Z warrants pari passu to the current unit investors (an aggregate of 6,930,571 Series X warrants, 6,930,571 Series Y warrants and 13,861,139 Series Z warrants).

Additionally, in conjunction with the closing of the Preferred K Offering on January 21, 2011:

1.	Lorraine DiPaolo agreed to convert her $1,500,000 in secured debt into 60 Series Preferred shares plus 5,000,000 Series Y common stock Warrants.
2.	O. Lee Tawes agreed to convert his $500,000 in unsecured debt into 20 Series K Preferred Shares plus 1,666,667 Series Y common stock Warrants

3.	Eric Skae agreed to convert his $50,000 in unsecured debt into 2 Series K Preferred Shares plus 166,667 of Series Y common stock Warrants
4.	Eric Skae agreed to amend his current Earn Out Agreement, by waiving the earn-out of $325,000 earned in 2010 and extending the earn-out for through 2012 to waive certain sums due him and extend the term of the earn-out.

On February 8, 2011, we agreed to issue for investor relation services rendered 1,000,000 common shares. The initial aggregate value of these shares was valued at the closing market price on February 8, 2011 of $0.14 per share.

On April 29, 2011:

We received majority consent to:

Amend the Certificate of Designation for the Company’s Series K Preferred Stock (the “Certificate of Designation”)

●	to eliminate the full ratchet anti-dilution provision contained in Section 6(a)(ii) thereof, “Subsequent Equity Sales,”
●	to add a clause to paragraph (f) of Section 9 thereof permitting an asset-based credit line or factoring agreement pursuant to which the Company may obtain loans in an amount of up to $1.5 million, under certain conditions; and

Amend the Registration Rights Agreement, dated as of January 21, 2011, between the Company and each of the parties thereto to eliminate Section 2(b) to remove the liquidated damages provisions from the agreement.

On April 29, 2011, we closed a private placement of common stock with certain accredited investors. We sold an aggregate of 6,866,667 shares of our common stock. Gross proceeds from the private placement were approximately $515,000.

Also on April 29, 2011, we closed an offer to existing Series K Preferred stockholders to convert their Series K Preferred shares into common stock at a lowered price based upon a formula of 112% of original investment/ $0.10. Of the original 217.77 Series K Preferred Shares, investors owning 187.61 Series K Preferred Shares converted them into 52,531,893 shares of common stock.

Also on April 29, 2011, we closed an offer to existing X, Y and Z Warrant holders to exercise their warrants into common stock at a reduced price of 0.075 per share. 6,666,665 X, Y and Z Warrants were exercised in the process and one warrant holder also voluntarily surrendered 6,400,000 Warrants on the same date.

On July 14, 2011, July 28, 2011 and July 29, 2011 we issued Original Issue Discount Notes with lenders who lent $75,000, $50,000 and $25,000 respectively. These notes mature on January 14, 2012 at $170,458 and are secured by all of the Company assets, subject to subordinations of certain assets to present and future factoring facilities.

On August 24, 2011, the Company recast $570,281 (principal plus accrued interest) in existing secured loans with six parties (entered into between June and July 2011), one of whom is a director of the Company for $120,517, and another who is a principal shareholder for $298,227, in exchange for 10% Secured Convertible Subordinated Notes (“Secured Notes”) which Notes were coupled with common stock. Each Secured Note is collateralized by all of the Company’s assets and is convertible into common stock at a conversion price of $0.05 per share. Additionally, such lenders were granted an additional 5 shares of our common stock for each $1.00 of interest and principal due them totaling 2,881,405 common shares. The Company determined that the conversion of the secured notes into the secured recast notes was greater than the carrying value of the obligation on the date of the conversion and recorded a loss on extinguishment of debt of $144,392 for the year ended December 31, 2011

Between September 13-16, 2011, we borrowed aggregate gross proceeds of $250,000 from two investors and recast an existing unsecured loan from one investor. We issued to these investors the same 10% Secured Convertible Subordinated Notes we had issued to the lenders reported in the above paragraph. Each Secured Note is collateralized by all of the Company’s assets and an assignment of the Company’s trademark with the US Patent and Trademark Office and is convertible into common stock at a conversion price of $0.05 per share. Additionally, such investors received an additional 5 shares of our common stock for each $1.00 invested totaling 1,400,500 common shares (625,000 included in shares issuable).

On September 20, 2011 the Company entered into secured Purchase Order Financing agreements with certain suppliers for additional trade credit to produce and ship approximately $750,000 in orders to Company customers. The agreements are secured by certain future sales and inventory provided by the suppliers. The agreement included repayment of $307,563 of existing accounts payable and $443,000 in additional trade credit.

The Company further agreed to segregate all cash proceeds from specific sales to certain customers (the “Customers”) to enable the Company to pay the suppliers. The Company entered into an Escrow Agreement with the Suppliers and an escrow agent for the purpose of establishing a segregated account controlled by the Escrow Agent to disburse the cash proceeds from such Customer accounts directly to each Supplier based upon a predetermined percentage. In connection with this facility, the Company also received consent from Secured Note holders to consent to (a) the Company entering into the Escrow Agreement with the Escrow Agent and the Suppliers for the benefit of each Supplier, and (b) consent to the Company’s segregation of proceeds from Customer accounts receivable to the Escrow Account and waive each such Secured Note holder’s security interest in and lien on all cash proceeds in the Escrow Account so long as the Escrow Agreement and the Escrow Account remains in place. As of December 31, 2011 the Company’s accounts payable to those Suppliers was $460,490 of which $306,037 represented Purchase Order Financing.

On October 18, 2011, the Company borrowed $50,000 in exchange for 10% Secured Convertible Subordinated Notes which Notes were coupled with common stock. Each Secured Note is collateralized by all of the Company’s assets and an assignment of the Company’s trademark with the US Patent and Trademark Office and is convertible into common stock at a conversion price of $0.05 per share. Additionally, such lenders were granted an additional 5 shares of our common stock for each $1.00 of interest and principal due them.

On November 1, 2011, the Company borrowed $50,000 from a director in exchange for 10% Secured Convertible Subordinated Note which Notes were coupled with common stock. Each Secured Note is collateralized by all of the Company’s assets and an assignment of the Company’s trademark with the US Patent and Trademark Office and is convertible into common stock at a conversion price of $0.05 per share. Additionally, such lenders were granted an additional 5 shares of our common stock for each $1.00 of interest and principal due them.

On November 14, 2011, we borrowed aggregate gross proceeds of $60,000 from two existing investor in exchange for 10% Secured Convertible Subordinated Notes (“Secured Notes”) which Notes were coupled with common stock. Each Secured Note is collateralized by all of the Company’s assets and an assignment of the Company’s trademark with the US Patent and Trademark Office and is convertible into common stock at a conversion price of $0.05 per share. Additionally, such lenders were granted an additional 5 shares of our common stock for each $1.00 of interest and principal due them.

On December 1, 2011, we borrowed $175,000 from one investor in exchange for a 10% Secured Convertible Subordinated Note (“Secured Note”) which Note was coupled with common stock. The Secured Note is collateralized by all of the Company’s assets and an assignment of the Company’s trademark with the US Patent and Trademark Office and is convertible into 875,000 restricted common shares at a conversion price of $0.01 per share. Additionally, such lender was granted an additional 5 shares of our common stock for each $1.00 of interest and principal due him. Additionally, for arranging this facility total $330,000 an assignee of the Lender was granted a Revenue Participation Agreement. This agreement grants the lender a revenue participation of 2% of the Company’s annual net sales of the first $2 million and 3% of any net sales in excess of the first $2 million in annual net sales.

On December 23rd, 2011 the Company received the required consent to:

● Amend the Certificate of Designation of the Corporation for the Series K Preferred Stock (the “Certificate of Designation”) to eliminate paragraph (f) of Section 9 of the Certificate of Designation, “Protective Provisions,” which limits the Company’s ability to enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for borrowed money of any kind, other than “Permitted Indebtedness”

● Amend the Security Purchase Agreement for the Series K Preferred Stock (the “Security Purchase Agreement”) to eliminate paragraph 8.2 “Subsequent Equity Sales,” in its entirety and eliminate paragraph 8.3 “Participation in Future Financing,” in its entirety;

In consideration for same, the Company agreed to reduce the conversion price of its Series K Preferred to 3 cents per share and to exchange every 5 Warrants (of the X, Y and Z Series) into 1 share of common stock.

On December 22, 2011, we borrowed aggregate gross proceeds of $155,000 from one investor in exchange for a 10% Secured Convertible Subordinated Note (“Secured Note”) which Note was coupled with common stock. Each Secured Note is collateralized by all of the Company’s assets and an assignment of the Company’s trademark with the US Patent and Trademark Office and is convertible into 775,000 restricted common shares at a conversion price of $0.01 per share. This loan triggered the Revenue Participation Agreement that was referenced in the discussion of the December 1, 2011 Secured Note.

Between February 15, 2012 and March 2, 2012, the Company received proceeds of $250,000 from four investors in exchange for 8% 18 month Unsecured Convertible Notes (“Unsecured Note”), which Notes were coupled with warrants. Each Unsecured Note is convertible thirteen months after their respective issuance dates into common stock at a conversion price equal to the greater of (i) the Variable Conversion Price of 50% of the Market Price and (ii) the Fixed Conversion Price of $0.01. The investors also received 25,000,000 5 year warrants at a strike price of $0.03 per share. In addition the investors received the right to invest in new notes on the same basis as provided.

On March 2, 2012 the Company entered into a public relations agreement with a consultant. In addition to the cash compensation of $7,000 paid, the party was also granted 1,000,000 restricted shares of common stock.

On March 7, 2012 the Company commenced a warrant reset and exercise offer to eligible holders of its outstanding warrants, pursuant to which all issued and outstanding warrants to purchase common stock of the Company issued, irrespective of current exercise price or expiration date, may, in each holder’s sole discretion, be exercised at $0.03 per share during the offer period. Approximately 15 investors elected to exercise their warrants for which the Company received proceeds of $400,147 and issued 13,338,225 shares of common stock.

Additionally, for arranging this facility which totaled $330,000 the assignee of the Lender was granted a Revenue Participation Agreement. This agreement granted the lender a revenue participation of 2% of the Company’s annual net sales of the first $2 million and 3% of any net sales in excess of the first $2 million in annual net sales. On March 22, 2012 the Company and the assignee of the lender agreed to terminate the Revenue Participation Agreement.

Between February 14, 2012 and March 30, 2012 the Company settled approximately $1.7 million in 105 vendor claims against the Company for approximately $333,454 in cash and $467,567 in common stock to be issued at a later date.

On March 30, 2012 the Company granted approximately 7,000,000 shares of common stock to six key distribution partners as inducement for their continued support and 17,606,556 shares of common stock to 35 vendors to settle certain outstanding claims.

On March 30, 2012 the Company granted certain contract employees and consultants 9,000,000 shares of common stock in New Leaf Brands, Inc and warrants to purchase 3,750,000 shares of common stock at $0.03 per share

With respect to the issuance of our securities as described above, we relied on Section 4(2) exemption from securities registration under the federal securities laws for transactions not involving any public offering. No advertising or general solicitation was employed in offering the securities and the securities were sold to accredited investors. The securities were offered for investment purposes only and not for the purpose of resale or distribution and the transfer thereof was restricted by us.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

We are in negotiation with certain former shareholders of Nutritional Specialties, Inc. The value of these notes as of March 31, 2012 in the aggregate amount of $822,920. As of March 31, 2012, we are in default and therefore this amount is reflected as currently due.

On April 9, 2012, the Company completed the sale of its non-operating subsidiary of Nutritional Specialties, Inc. (NSI) to Deep South Capital, LLC (DSCL). The accompanying consolidated financial statements have been reclassified for all prior periods presented to report the net assets and liabilities of this subsidiary.

ITEM 5 – OTHER INFORMATION

Item 1.01 Entry into a Material Definitive Agreement.

ITEM 6 – EXHIBITS

None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	NEW LEAF BRANDS, INC.

Date: February 5, 2013	By:	/s/ David Fuselier
		David N. Fuselier
		Chairman of the Board, President, and
		Chief Executive Officer

Date: February 5, 2013	By:	/s/ David Fuselier
		David N. Fuselier
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

New Leaf Brands, Inc. - FORM 10-Q - February 5, 2013

New Leaf Brands, Inc. Reports