0001213900-12-003795.txt : 20120713 0001213900-12-003795.hdr.sgml : 20120713 20120713155524 ACCESSION NUMBER: 0001213900-12-003795 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20120331 FILED AS OF DATE: 20120713 DATE AS OF CHANGE: 20120713 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Attitude Drinks Inc. CENTRAL INDEX KEY: 0001416183 STANDARD INDUSTRIAL CLASSIFICATION: BEVERAGES [2080] IRS NUMBER: 650109088 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-52904 FILM NUMBER: 12961915 BUSINESS ADDRESS: STREET 1: 10415 RIVERSIDE DRIVE, #101 CITY: PALM BEACH GARDENS STATE: FL ZIP: 333410 BUSINESS PHONE: 561-227-2727 MAIL ADDRESS: STREET 1: 10415 RIVERSIDE DRIVE, #101 CITY: PALM BEACH GARDENS STATE: FL ZIP: 333410 10-K 1 f10k2012_attitudedrink.htm ANNUAL REPORT f10k2012_attitudedrink.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

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

For the fiscal year ended March 31, 2012
Commission File Number 000-52904

ATTITUDE DRINKS INCORPORATED
(Exact name of registrant as specified in its charter)

Delaware
  
65-0109088
(State or other jurisdiction of
  
(I.R.S. Employer
incorporation or organization)
  
Identification No.)

10415 Riverside Drive, Suite # 101, Palm Beach Gardens, Florida 33410 USA
(Address of principal executive offices)          (Zip Code)
Telephone number:          (561) 227-2727

Securities registered under Section 12(b) of the Exchange Act:
None
   
Securities registered under Section 12(g) of the Exchange Act
Common Stock, $.001 par value (Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
 
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 x No o
  
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-X (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)

Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
 
The issuer's gross revenues for its most recent fiscal year were $406,315.
 
The aggregate market value of the voting stock held by non-affiliates of the issuer on June 29, 2012, based upon the $.001 per share close price of such stock on that date, was $1,127,500 based upon 1,127,500,234 shares held by non-affiliates of the issuer.  The total number of issuer's shares of common stock outstanding held by affiliates and non-affiliates as of July 13, 2012 was 1,132,789,196 shares. 

Transitional Small Business Disclosure Format (check one): Yeso No x
 
 
 
 
 
 
TABLE OF CONTENTS
 
   
Page
PART I
     
ITEM 1
3
ITEM 2
6
ITEM 3
7
ITEM 4
7
 
PART II

 
PART III


PART IV

ITEM 15
41

DOCUMENTS INCORPORATED BY REFERENCE:  See Exhibits

 
 
 

FORWARD-LOOKING STATEMENTS

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

PART I


The Company
Attitude Drinks Incorporated (“Attitude,” “We” or “Our”) was formed in Delaware on May 10, 1988 under the name International Sportfest, Inc. In January 1994, we acquired 100% of the issued and outstanding common stock of Pride Management Services Plc ("PMS"). PMS was a holding company of six subsidiaries in the United Kingdom engaged in the leasing of motor vehicles throughout the United Kingdom. Simultaneously with the acquisition of PMS, we changed our name to Pride, Inc. From January 1994 through October 1999, we engaged in the leasing of motor vehicles throughout the United Kingdom. On October 1, 1999, we acquired all of the issued and outstanding stock of Mason Hill & Co. and changed our name to Mason Hill Holdings, Inc. During the quarter ended June 30, 2001, our operating subsidiary, Mason Hill & Co., was liquidated by the Securities Investors Protection Corporation. As a result, we became a shell corporation whose principal business was to locate and consummate a merger with an ongoing business.

On September 19, 2007, we acquired Attitude Drink Company, Inc., a Delaware corporation (“ADCI”), under an Agreement and Plan of Merger among Mason Hill Holdings, Inc., MH 09122007, Inc. and ADCI.  Pursuant to the Merger Agreement, each share of ADCI common stock was converted into 40 shares of Company common stock, resulting in the issuance of 4,000,000 shares of our common stock.  The acquisition was accounted for as a reverse merger (recapitalization) with ADCI deemed to be the accounting acquirer, and Attitude deemed to be the legal acquirer.  Accordingly, the financial information presented in the financial statements is that of ADCI as adjusted to give effect to any difference in the par value of the issuer’s and the accounting acquirer’s stock with an offset to capital in excess of par value.  The basis of the assets, liabilities and retained earnings of ADCI, the accounting acquirer, has been carried over in the recapitalization.  On September 30, 2007, we changed our name to Attitude Drinks Incorporated. Our wholly owned subsidiary, ADCI, was incorporated in Delaware on June 18, 2007. Our principal executive offices are located at 10415 Riverside Drive, Suite 101, Palm Beach Gardens, Florida 33410. The telephone number is 561-227-2727.  Our company’s common stock shares (OTCBB: ATTD) began trading in June 2008.  Our fiscal year ends on March 31.
 
Nature of Business
Currently, our plan of operation during the next 12 months is to focus on the non-alcoholic single serving beverage business, developing and marketing milk based products in two fast growing segments: sports recovery and functional dairy. We do not directly manufacture our products but instead outsource the manufacturing process to a third party contract packer.

The Business
From 2001 to 2007, we were a shell corporation, whose principal business was to locate and consummate a merger with an ongoing business which occurred on September 19, 2007.  Once the merger was completed, we developed our first product which was a “healthful” energy drink called VisViva™. This particular product was formulated as a juice blend with our proprietary IQZOL™ energy formula in 12 ounce “slim” cans.  This additive blend provided a unique energy boost with low calories, carbohydrates and caffeine levels, thereby revolutionizing the energy experience derived from energy drinks.  Production began in January 2008 with the first generated sales in late March 2008. Our initial co-packer for the VisViva ™ product was Carolina Beer & Beverage LLC in Mooresville, North Carolina. We stopped the production and sale of the VisViva™ product during 2010 and will consider reintroducing this product as a “focus drink” in late 2012 or 2013.    Our second product which is branded as “Phase III® Recovery” is a milk-based protein drink. Our co-packer for our dairy based product is O-AT-KA Milk Products Cooperative, Inc. in Batavia, New York.  As our company grows and matures, a disruption or delay in production of any of such products could significantly affect our revenues.

Our ability to estimate demand for our products is imprecise and may be less precise during periods of rapid growth, particularly in new markets.  If we materially underestimate demand for our products or are unable to secure sufficient ingredients or raw materials, we might not be able to satisfy demand on a short-term basis.
 
 
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We completed development on our second product “Phase III® Recovery” in 2010 which was introduced to address the growing need for sophisticated, exercise recovery solutions while offering a natural protein/carbohydrate ratio optimal for fitness recovery. This product contains 35 grams of protein that are naturally inherent in ultra filtered milk.  The product is packaged as retort processed shelf stable dairy-based 100% milk based sports recovery drink, currently in both chocolate and vanilla flavors, in new state of the art, eco-friendly convenient re-sealable 14.5 oz aluminum bottles. We began distribution of this product in early 2010. Storage, distribution and sale of this product can be done at room temperature while our current retail presence is predominantly in coolers.

Other products to be considered in the future will be Blenders™ ‘Meal on the Move’ which will be a lactose free milk based meal replacement in various flavors.  This product is expected to be developed and marketed in late 2012, depending on available capital.

In House Intellectual Property
We have a trademark for Phase III® from the United States Patent and Trademark Office that was registered December 28, 2010.

While working on trademark and brand development for the dairy platform of functional drinks and protein delivery, we were approached by the owners of the entire intellectual property portfolio once developed and commercialized at Bravo Brands, Inc. On August 8, 2008, we entered into an Asset Purchase Agreement with RFC BB Holdings, LLC (seller) with a $507,500 secured convertible promissory note to purchase the right, title, trademarks and interest to this intellectual property portfolio, notably “Slammers” and “Blenders”.  As these particular brands have been marketed and sold in the past, it is anticipated that these products can be reintroduced into the market much quicker and less expensive than developing a brand new product.

Production Contracts/Administration
Our operations are only in the United States and are run directly by our subsidiary, Attitude Drink Company, Inc.  On December 16, 2008, the company signed a manufacturing co-packing agreement with O-AT-KA Milk Products Cooperative, Inc. for the production of our latest product, Phase III® Recovery, and future new dairy-based products.  The manufacturer shall manufacture, package and ship such products.  All products shall be purchased F.O.B., the facility by the company.  

Industry Trends
We are an innovative beverage brand-development company that was formed to exploit the accelerating shift in beverage consumption patterns of Americans. Consumers are embracing two distinct trends which have redefined the ever-growing single serve beverage industry. First, consumers representing all demographics are purchasing fewer “empty-calorie”, sugar sweetened, carbonated beverages, a trend that has continued for the last ten years. Second, and according to the CSP 2012 Category Management Handbook, “we’ll definitely see more and more functional beverages offering nutrient, vitamins and probiotics”.  In our opinion, consumers are demanding drinks with functionality, delivering either nutritional or experiential impact. During recent years, our experience has indicated beverage consumers have demonstrated growing enthusiasm to pay significant premiums for these functional beverages while exhibiting passionate brand loyalty to the brands.

Management has extensive experience innovating functional products and pioneered the milk-based platform of this beverage “revolution” previously at Bravo! Brands Inc. During that time, management worked with Coca-Cola Enterprises to launch branded milk beverages nationwide. We enjoy strategic relationships, know-how, creativity and perspective in this space. We believe that the two platforms that we will address, sports recovery and functional dairy, represent the fastest growing, most innovative and highest priced drinks ever seen in the beverage industry.

Market Analysis
While there may be more current information, the most recent data that we have analyzed is informative.  According to preliminary data from New York City based Beverage Marketing Corporation which is a leading research, consulting and financial service firm dedicated to the global beverage industry, the U.S. liquid refreshment beverage market grew by 0.9% in 2011.  This marked a second year of growth after two consecutive declines, but it also represented a slowdown from 2010.  The weakened economy hindered beverages’ performance in 2008 and 2009, and improving conditions contributed to their upticks in 2010 and 2011.  Even so, higher prices did almost certainly contribute to 2011’s deceleration as lower-income consumers continued to struggle.  Even so, total liquid refreshment beverage volume exceeded 29.5 billion gallons in 2011. Premium beverages such as ready-to-drink (RTD) tea and coffee, sports beverages and energy drinks advanced particularly forcefully during 2011.  Larger more established segments such as carbonated soft drinks and fruit beverages failed to grow once again.  Energy drinks moved forward faster than all other segments with a 14.4% volume increase in 2011.  Despite this advance, the segment accounted for a relatively small share of total liquid refreshment beverage volume.  Indeed, the only liquid refreshment beverage type with a smaller share of volume was RTD coffee, which charted the second fastest surge, growing by 9.4%. Not surprisingly, no energy drink or RTD coffee brand ranked among the leading trademarks by volume.  Sports beverages, in contrast, had Gatorade (including all brand variations) as the fifth largest beverage trademark during the year, and the category it led showed exceptional vigor.  The brand topped 1 billion gallons for the first time in 2011.  Carbonated soft drinks still stood by far the biggest liquid refreshment beverage category, but they continued to lose both volume and market share.  Volume slipped by 1.7% from 13.8 billion gallons in 2010 to 13.6 billion gallons in 2011 which lowered their market shares from 47% to 46%.  Four companies accounted for all of the leading refreshment beverage trademarks. Pepsi-Cola had four brands including the only fruit beverage brand to make the list, Tropicana.  Coca-Cola had three while Nestle Waters North American had two and Dr. Pepper Snapple Group, Inc. had one.  Beverages continued growth in 2011 proved their essential vitality, and the strong showing by high-end and functional products shows that consumers, at least the more affluent ones are not concerned exclusively with economic considerations when making their beverage selections.
 
4
 
 
The CSP (convenience store/petroleum) recently released their “2012 Category Management Handbook.” In their release and according to the Nielsen Co. and Dr. Pepper Snapple Group, Inc., the Sports Drinks category represented 9.2% of the nonalcoholic beverages sector for the 52 weeks ended January 28, 2012.  In addition and according to the Symphony/IRI Group, the Sports Drinks category reflected increases in unit sales in 2011 as follows:  food – 9.6%; drug -10.4%; and convenience stores – 12.9%.  In fact the pace of sports-drink sales increases held steady in 2011, with dollars up nearly 10% and units up almost 13%.  In the last quarter of the year, the pace actually accelerated.

Further, findings from the Sports and Performance Nutrition 2011 Conference as published by Multi-Sport Research Ltd. on May 26, 2011 indicated the following:

-  Combined enrollment at Ironman, IM 70.3 and ITU (World Cup & World Championship) events grew more than 20%  on year in 2009 as this growth came amidst global recession.

-  An online and TV push, notably by ITU in 2010, presents strong broadcast and revenue opportunities – particularly leading to 2012 and beyond.

-  Sales are largely via specialty retail rather than ‘big box’ retail.

-  Price segmentation fits within standard premium/mainstream/value pricing brands with some ‘super-premium’ pricing across product sectors.

-  Interviews on sports nutrition usage indicated that 16% of athletes and coaches use the products daily, 24% use the products 4+ times a week and 23% use the products 2-3 times a week.

- Feedback indicated the top four factors that influence choice of sports nutrition:  availability near training facilities; results published in peer review articles; research evidence and blind tests; and taste and consistency.

Market Segment Strategy
As we have operated for nearly five years, our future strategy will be to develop our products in the two fast growing segments: sports recovery and functional milk. We produced our first product, VisViva™ which is an energy drink; however, that product has been tabled for now. Phase III® Recovery is our second product which is a protein sports recovery drink. We expect to develop two to three new products in the next two fiscal years, depending on available capital.

We know from experience that the largest retailers of milk products are demanding new and more diverse refreshment drinks, thus our response to consumer interest and demand with our latest dairy based product, “Phase III® Recovery” that was introduced in early 2010.

Competition
The beverage industry is highly competitive. The principal areas of competition are pricing, packaging, development of new products and flavors and marketing campaigns. Our products will compete with a wide range of drinks produced by a relatively large number of manufacturers, any of which have substantially greater financial, marketing and distribution resources than we do.

Important factors affecting our ability to compete successfully include taste and flavor of products, trade and consumer promotions, rapid and effective development of new, unique cutting edge products, attractive and different packaging, branded product advertising and pricing. We will also compete for distributors who will concentrate on marketing our products over those of our competitors, provide stable and reliable distribution and secure adequate shelf space in retail outlets. Competitive pressures in the sports beverage market could cause our products to be unable to gain market share, or we could experience price erosion, which could have a material adverse effect on our business and results. According to The Beverage Industry magazine for May 2011, the domestic sports drink category is now estimated at approximately $3.8 billion annual sales.

We compete not only for customer acceptance but for maximum marketing efforts by multi-brand licensed bottlers, brokers and distributors, many of which have a principal affiliation with competing companies and brands. Certain large companies such as The Coca-Cola Company and Pepsico Inc. market and/or distribute products in that market segment such as Muscle Milk® and other protein beverages.

 
5
 
 
Marketing
Management believes that the impact of the internet and the enhanced communication systems that it has enabled have dramatically changed the way we live our lives today. There is vastly improved access to information, and the public is bombarded with messages that have diminished the value and impact of traditional media advertising. There have been increases in interest in protein RTD “ready to drink” beverages.

Strong emphasis will be placed on public relations initiatives in an effort to capture and maintain consumer awareness. Validation of the advanced science behind each introduced brand will provide clear and reliable messaging behind each functional line. Carefully developed and executed focus groups will also be conducted, designed to raise awareness about the true functionality and lifestyle enhancement offered with each innovative line.  We plan to focus on gorilla and grass roots marketing programs, investing in sponsorships and spokespeople in venues of competitive sports activities.  This strategy allows promoters to develop brand essence, communicate directly with spectators and participants and promote trial with consumers directly. This marketing approach, best executed by the Red Bull energy drink brand, escapes the filters that consumers use to reduce messaging. When executed properly, as Red Bull has, this technique defines the brand image while consumers embrace the branding as trend setting entertainment. In addition, we intend to continue participating in nationwide events and programs supporting the unique causes.

Government Regulation
The production, distribution and sale in the United States of many of our products are subject to the Federal Food, Drug and Cosmetic Act; the Dietary Supplement Health and Education Act of 1994; the Occupational Safety and Health Act; various environmental statutes; and various other federal, state and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, labeling and ingredients of such products.

Measures have been enacted in various localities and states that require that a deposit be charged for certain non-refillable beverage containers. The precise requirements imposed by these measures vary. Other deposit, recycling or product stewardship proposals have been introduced in certain states and localities and in Congress, and we anticipate that similar legislation and regulations may be proposed in the future at the local, state and federal levels, both in the United States and elsewhere.

We do not expect that compliance with these provisions will have a material adverse effect upon our capital expenditures, net income or competitive position.

Employees
We currently have eleven total employees, all of which are full time.  Most of these individuals are employed at the corporate office with one sales representative in New York and one sale representative in central Florida.

Increase of Authorized Shares
The Company established a record date on March 20, 2012 for the purpose to notify shareholders of a special meeting on April 27, 2012 at the Company’s corporate offices for the purposes to increase the authorized common shares from one billion (1,000,000,000) to five billion (5,000,000,000).  On April 27, 2012, the shareholders approved the amendment to the Company’s Certificate of Incorporation to increase its authorized common shares from one billion (1,000,000,000) to five billion (5,000,000,000). This amendment was effective with the state of Delaware on May 1, 2012.  The comparable financial statements for the year ended March 31, 2012 will still reflect the authorized shares of one billion (1,000,000,000).  The authorized shares for the Series A Preferred Stock remain the same at twenty million (20,000,000).

Research and Development

Over the last two years, the Company spent approximately $2,074 and $7,900, respectively, on research and development activities related to the development of its Phase III® Recovery products.  All costs were borne by the Company.


On June 1, 2008, we moved to our current office at 10415 Riverside Drive, Suite 101, Palm Beach Gardens, Florida 33410.   This five-year lease began on June 1, 2008 and will expire on May 31, 2013.  The minimum monthly base rent for March 2012 is $8,341 (excluding variable common area maintenance charges and taxes), and the lease provides for annual 4% increases throughout its term.  We plan to sign an amended lease agreement in late July, 2012 to decrease the size of the premises.

 
6
 
 

On May 18, 2009, F&M Merchant Group, LLC commenced a lawsuit in the state of Texas to recover the balance owed by us under a Sales Agent Agreement entered by the parties on November 1, 2008.  This agreement requires us to pay $5,000 per month and a 5% commission on all net sales. On September 3, 2009, a final judgment by default was approved by the district court in Denton County, Texas for a total sum of $22,347.  This claim has been recorded on the Company’s records.   Due to the lack of adequate capital financing, we have not been able to make any payments.  We expect to resolve this matter as soon as practical.

On June 5, 2009, Tuttle Motor Sports, Inc. commenced a lawsuit in the state of Florida to recover the balance owed by us under a Letter of Agreement to sponsor a Top Fuel Dragster for the 2008 NHRA racing season in the amount of $803,750. Out of this total amount, only $300,000 is required to be paid in cash with the remainder to be paid in shares of common stock. This amount had already been recorded in our records.  During May, 2010, Tuttle Motor Sports, Inc. dismissed the lawsuit without prejudice.  Prior to that time, the parties went through mediation but were unable to settle.  The likelihood of an unfavorable outcome cannot be evaluated as another lawsuit possibly could be filed against the Company.

On August 21, 2009, CH Fulfillment Services, LLC commenced a lawsuit in the state of Alabama to recover past due amounts owed by us under a contract to provide shipping and fulfillment services.  The claim is for $2,106 plus interest and legal costs.  This amount was already recorded on our records as well as projected interest costs of $682 and estimated court costs of $307 for a total of $3,095. A process of garnishment by the district court in Mobile County, Alabama was approved on September 25, 2009 for the total amount of $3,095.  On October 26, 2009, the same court authorized a garnishment process to pay $657 which was done as part payment of the total due amount. Current outstanding balance due is $2,438.  No other payments have been made.

On April 20, 2012, Arena Advertising and Sports Marketing Inc commenced a lawsuit in the state of Florida to recover past due amounts owed by us in the amount of $15,000 plus interest since January 16, 2012.  The $15,000 was already recorded in our records.  We expect to resolve this matter as soon as practical.


PART II
 

Common stock market price
The Company’s common stock began trading on the OTC Electronic Bulletin Board (ticker symbol ATTD.OB) on June 19, 2008. The approximate number of record holders of the Company’s common stock at March 31, 2012 was 4,599.

The following quarterly quotations for common stock transactions on the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not represent actual transactions. Source is NASDAQ.COM.

QUARTER
  
HIGH BID PRICE
    
LOW BID PRICE
  
             
Fiscal year – 2010/2011
            
             
First Quarter
   $ 1.10     $ 0.05  
Second Quarter
   $ 0.15     $ 0.01  
Third Quarter
   $ 0.045     $ 0.015  
Fourth Quarter
   $ 0.067     $ 0.017  
                 
Fiscal year – 2011/2012
                
                 
First Quarter
   $ 0.022     $ 0.008  
Second Quarter
   $ 0.015     $ 0.001  
Third Quarter
   $ 0.0046     $ 0.0008  
Fourth Quarter
   $ 0.0093     $ 0.001  

Dividends

The holders of common stock are entitled to receive, pro rata, such dividends and other distributions as and when declared by our board of directors out of the assets and funds legally available therefore.  We have not paid dividends on our common stock and do not anticipate paying dividends to holders of our common stock in the foreseeable future.  Management intends to retain future earnings, if any, to finance working capital and to expand our operations.

 
7
 
 
Securities Authorized for Issuance under Equity Compensation Plans
 
                Number of securitiesremaining available for futureissuance under equitycompensation plans, excluding securities
reflected in column		  
    Number of securitiesissued upon exercise ofoutstanding options, warrants and rights            
        Weighted average exerciseprice of outstanding options, warrants and rights      
             
Plan Category
            
               
(a)
  
   
(a)
    
(b)
    
(c)
  
Equity compensation plans
                  
approved by stockholders
     -       -       -  
Equity compensation plans
                        
not approved by stockholders
     1,838,765 (1)(2)     0.06 (3)     1,961,235  
    Total
     1,838,765     $ 0.06       1,961,235  
 
                   
(c) Available to issue in future
  
(1) 2007 Stock Compensation and Incentive Plan for a total of
       50,000       124  
(Filed on April 11, 2008 as an exhibit to Form S-1/A and filed on May 16, 2008 as an exhibit to Form S-8)
                  
(2) 2010 Stock Compensation and Incentive Plan for a total of
       3,750,000       1,961,111  
(Filed on May 25, 2010 as an exhibit to Form S-8)
                  
 
             3,800,000       1,961,235  
(3) Based on 28,129,077 outstanding stock options.
                  
 
Sale of Unregistered Securities
Quarter Ended March 31, 2012

On February 22, 2012, the Company entered into a subscription agreement with institutional and accredited investors for a convertible debt financing in the principal amount of $1,000,000 (J&N Invest LLC - $200,000, Alpha Capital Anstalt - $175,000,  Schlomo & Rochel Rifkind - $100,000, Ramshead Holding Ltd. - $100,000, Naomie Klissman - $100,000, Whalehaven Capital Fund, Ltd. - $50,000, Seth Farbman - $50,000, Louis Goldberg - $50,000, David Lamplough - $50,000, Joseph & Sue Maya - $50,000, Emmy Cutler - $25,000, Jan Veryke - $25,000, and PSM Holdings for $25,000) with an interest rate of 10%. The due date for the notes is August 22, 2013, and the notes are convertible into common stock at a conversion price equal to seventy-five percent (75%) of the average of the three lowest closing bid prices for the Common Stock as reported by Bloomberg L.P. for the principal market for the ten trading days preceding a conversion date but in no event greater than $.02. Subscribers in the offering included some holders of the Company’s senior secured notes and warrants. Associated finance fees of $160,000 includes a 10% finder’s fee of $100,000 which was deducted from the gross proceeds along with payments of October 7, 2011 and a December 1, 2011 short term promissory note and accrued interest totaling $103,451 plus the exchange of three previous short term promissory notes ($75,000 dated October 7, 2011, $25,000 dated December 20, 2011 and $75,000 dated December 28, 2011 for a total of $175,000) for 10% convertible notes led to a net received amount of $561,549.  In addition, the placement agent (Perrin Holden & Davenport Capital Corp (“PHD”) received a total of 5,000,000 restricted shares of the Company’s common stock which was equal to ten percent (10%) of the Class A warrants sold. One Class A Common Stock Purchase Warrant was issued for every share (total of 50,000,000 warrants) which would be issued on the closing date assuming the complete conversion of the notes on the closing date at the conversion price. The exercise price to acquire a Warrant Share upon exercise of a Class A Warrant is equal to $.02, subject to reduction as described in the Class A Warrant.  The Class A Warrants are exercisable until five years (February 21, 2017) after the issue date of the Class A Warrants.    In addition and as part of the February 2012 financing, the Company entered into an amendment and consent agreement with all institutional and accredited investors holding all convertible notes payable  with a due date of March 31, 2012 to extend the maturity date to March 31, 2014. Further, each undersigned subscriber to the Subscription Agreements waives the ratchet/reset benefit that such subscriber is entitled to as a result of any subscriber’s conversion of a note or exercise of a warrant to the extent such conversion or exercise would result in a conversion price or exercise price less than $0.02, provided however all subscribers will get the ratchet/reset benefit to the $0.02 floor as a result of any such conversion of exercise.   In addition, the undersigned subscribers waived the Company’s reservation obligation to the extent such requirement is in excess of 100% required reservation of shares for conversion of principal and interest of the notes until such time as the Company either increases its authorized shares or effectuates a reverse split of its common stock but in any event no later than June 1, 2012. For purposes of clarification commencing June 2, 2012, the Company is required to have a number of shares of common stock equal to 150% of the amount of common stock to all Subscribers to be able to convert all of the notes (including interest that would accrue therein) through the Maturity Date and 100% of the amount of warrant shares issuable upon exercise of the warrants.
 
 
8
 
 
On March 31, 2012, the Company entered into an extension agreement with certain noteholders for their notes that had a maturity date of March 31, 2012 to extend such notes to March 31, 2014.  In consideration for this extension, the Company issued to each applicable noteholder a convertible note in the principal amount representing ten percent (10%) of the principal amount owed to each noteholder (Alpha Capital Anstalt - $162,085, Whalehaven Capital Fund Limited - $7,841, Smivel LLC - $400 and CMS Capital, Inc for $1,885 for a grand total of $172,211).  The conversion price shall be equal to seventy-five percent (75%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal market for the ten trading days preceding a conversion date but in no event greater than $0.02, subject to further reductions as described in the notes.  These notes have an interest rate of 12% and are due March 31, 2014.  There are no warrants associated with these notes.
 
These securities were issued in reliance upon an exemption from registration under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended. All of the investors were accredited investors and/or had preexisting relationships with the Company, there was no general solicitation or advertising in connection with the offer or sale of securities and the securities were issued with a restrictive legend.
 
During the three months ended March 31, 2012, the Company issued a total of 661,046,325 shares of common stock for the conversions of $1,151,717 of principal of convertible notes payable and $196,939 of related accrued interest to note holders of the Company pursuant to the terms of the note instruments.  No additional consideration was given for these conversions by the note holders.  The shares of common stock issued upon conversion of these notes were issued pursuant to an exemption from the registration requirements of the Securities Act provided by Section 3(a)(9) thereof as the conversions were an exchange of securities with existing holders exclusively, and no commission or other remuneration  was paid or given in connection with the exchange.
 
 
Not applicable.


EXECUTIVE LEVEL OVERVIEW

Our Business Model
 
Our plan of operation during the next 12 months is to focus on the non-alcoholic single serving beverage business, developing and marketing milk based products in two fast growing segments; sports recovery and functional dairy,  We do not directly manufacture our products but instead outsource the manufacturing process to a third party contract packer.  Our efforts were focused in our first full year operations primarily on developing our first energy drink which is called VisViva™  which sales began in late March 2008. We have since tabled that product.

Milk, while the second highest beverage consumed in America in terms of overall volume, is still under-represented in the American single serve ready-to-drink beverage industry.  While known for generations by nutritionists and more recently identified by sports, hydration, metabolism and protein professionals and scientists as “mother nature’s most perfect food”, milk has yet to be successfully branded and commercialized.

We completed research and development work in developing our latest dairy based product which is called “Phase III® Recovery” and is designed for the third phase of exercise, the “after phase” of before, during and after. This product is the first milk based protein drink ever to be produced in America and is shelf-stable with a twelve (12) months long shelf life. We started to sell this new product in February 2010. Our co-pack partner, O-AT-KA Milk Products, is the largest retort milk processor in America, located in Batavia, New York and has the most advanced retort processor and know-how to produce this product with state-of-the-art milk filtration systems as well as the packaging of this product in new Ball Container aluminum eco-friendly re-sealable bottles.    The primary target for Phase III Recovery® is active sports minded males and females from ages 15 to 35, but we will target active sports and exercise consumers at all levels.  Gyms, sports teams, body builders and even high-endurance athletes are all beginning to focus on sports recovery drinks which we consider the “next generation” sports drink. We anticipate the development of other dairy based drink products in late 2012 or early 2013, depending upon available capital.

 
9
 
 
We organized a Scientific Advisory Board of three well known experts that have extensive experience in sports nutrition.  This board is helpful in communicating the scientific benefits of our sports recovery drink as well as new functional milk drinks.  Their contacts in the world of sports will be very important in our sales efforts, especially in the early days.

We plan to initially focus on the largest markets for beverages in the eastern United States.  We intend to develop key working partnerships with regional direct store delivery (DSD) beverage distributors in these markets and will support them with field representatives to assure sufficient shelf compliance.  Regional distributors have lost four major beverage lines in the last couple of years including Monster Energy (moved to Anheuser Bush), Fuze (purchased by Coca-Cola), Vitamin Water (purchased by Coca-Cola, and the V-8 brands (now distributed by Coca-Cola).  We will develop regionally exclusive DSD agreements that are desperately needed by the distributors to replace these losses as well as shipping direct to our customers via our own warehouse system.

We will pre-sell in four sales channels; grocery, convenience, drug and sports and gym specialty.  Certain accounts like chained convenience stores, grocery and drug stores will require warehouse distribution.  The shelf-stable and long shelf life attributes of our products will accommodate any and all distribution and warehouse systems. To accommodate this business, we will employ beverage brokers and work with the “tobacco & candy” and food service warehouse distributors like McLane Company and Sysco Foods.
 
The pricing and gross profit margin for the products will vary. Each product delivers different functionality and utilizes different types of packaging and package sizes.  Without exception, these products will command premium pricing due to the functionality and value-added formulation and will therefore be priced according to the nearest competitive brands in their respective spaces.  The functional milk drinks are also expected to command approximately the same percentage margin due to the premium pricing commanded by the experiential functionality.  Singles will obtain higher margin than multi-packs.

Plan of Operations

We are continuing to seek other sources of financing to develop our business plan, implement our sales and marketing plan and to meet other operational expense requirements.  Historically, we have had to rely on convertible debt financings to cover operating costs. Based on the available cash, we have no assurance that we will be able to obtain additional funding to sustain our limited operations.  If we do not obtain additional funding, we may need to cease operations until we do so and, in that event, may consider a sale of the rights to our product line(s) and intangible assets such as our trademarks or a joint venture partner that will provide funding to the enterprise.  However, certain of our debt obligations totaling $5,005,539 are secured by our assets.  Failure to fulfill our obligations under these notes and related agreements could lead to the loss of these assets, which would be detrimental to our operations.

Our future operations are totally dependent upon obtaining additional funding.  Past fundings have been subject to defaults by the company’s inability to meet due dates for certain notes payable, thereby triggering anti-dilution rights which created the need to issue additional shares of common stock and/or additional warrants to purchase additional shares of common stock in order to extend the applicable due dates for  certain notes payable.  There can be no assurance that these defaults will not happen again in the future, thereby creating the potential need for additional issuances of shares of common stock and/or warrants, assuming the holders agree to further extensions.

We will consider equity and/or convertible debt financings, either or both of a private sale or a registered public offering of our common stock; however, at this time and with the current economy, it seems unlikely that we can obtain an underwriter.

We anticipate that, depending on market conditions and our plan of operations, we may incur operating losses in the future based mainly on the fact that we may not be able to generate enough gross profits from our sales to cover our operating expenses and to increase our sales and marketing efforts.  Our most recently developed “Phase III® Recovery” drink product was introduced in early 2010 and based on historical spending, we anticipate a need of funding in the range of $1,500,000 to $2,100,000 for the next twelve months to meet our business plan and operating needs only.  This figure does not include any new product research and development activities.

This discussion and analysis of our consolidated financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles that are generally accepted in the United States of America.  Our fiscal year end is March 31.

 
10
 
 
Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most critical estimates included in our financial statements are the following:
 
Financial Instrument Valuation

In estimating the fair value of our hybrid financial instruments that are required to be carried as liabilities at fair value pursuant to the FASB Accounting Standards Codification for the period ended March 31, 2012, we use all available information and appropriate techniques including outside consultants to develop our estimates. However, actual results could differ from our estimates.

Derivative Financial Instruments

We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks.  However, we have and will frequently enter into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts or (iii) may be net-cash settled by the counterparty to a financing transaction.  As required by the FASB Accounting Standards Codification, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.  However, we are allowed to elect fair value measurement of the hybrid financial instruments, on a case-by-case basis, rather than bifurcate the derivative.  We believe that fair value measurement of the hybrid convertible promissory notes arising from our various financing arrangements provides a more meaningful presentation of that financial instrument.

We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring of fair values.  In selecting the appropriate technique(s), we consider, among other factors, the nature of the instrument, the market risks that such instruments embody and the expected means of settlement.  For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes-Merton option valuation technique, since it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments.  For complex hybrid instruments, such as convertible promissory notes that include embedded conversion options, puts and redemption features embedded in them, we generally use techniques that embody all of the requisite assumptions (including credit risk, interest-rate risk, dilution   and exercise/conversion behaviors) that are necessary to fair value these more complex instruments.  For forward contracts that contingently require net-cash settlement as the principal means of settlement, we project and discount future cash flows applying probability-weightage to multiple possible outcomes.

Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors.  In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility.  Since derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.

Impairment of Long-Lived Assets

Our long-lived assets consist principally of intangible assets, and to a much lesser extent, furniture and equipment.  We evaluate the carrying value and recoverability of our long-lived assets when circumstances warrant such evaluation by applying the provisions of the FASB Accounting Standards Codification which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets.  Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

Recent accounting pronouncements

In December 2011, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”) that provides amendments for disclosures about offsetting assets and liabilities.  The amendments require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements.  The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required by the amendments should be provided retrospectively for all comparative periods presented. For the Company, the amendment is effective for fiscal year 2014. The Company is currently evaluating the impact these amendments may have on its disclosures.

 
11
 
 
In June 2011, the Financial Accounting Standards Board issued an ASU that provides amendments on the presentation of comprehensive income. The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented. The amendments do not affect how earnings per share is calculated or presented. The amendments are effective for fiscal years and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. For the Company, the amendment is effective for fiscal 2013. The effect of adoption will have minimum impact on the Company as the Company’s current presentation of comprehensive income follows the two-statement approach.

RESULTS OF OPERATIONS

Revenues

As we recently started to recognize  revenue, there is no meaningful comparison with prior periods. 
 
Consolidated Revenues
                        
   
For The Years Ended March 31,
              
   
2012
    
2011
    
$ Change
    
% Change
  
Revenues
   $ 406,315     $ 61,327     $ 344,988       562.5 %
Less slotting expense
     -       -       -       -  
Less discounts
     (29,878 )     (10,967 )     (18,911 )     172.4 %
Net Revenues
   $ 376,437     $ 50,360     $ 326,077       647.5 %
 
All revenues were generated in the United States. The increase in our revenues for the year ended March 31, 2012 as compared to the prior year ended March 31, 2011 is the result of increased customer accounts mainly in the fourth quarter for our Phase III® Recovery product.

Slotting fees are common in the large store channels and represent cash payments made for rights to place our products on customer retail shelves for a stipulated period of time.  A component of our growth plan includes increasing penetration in the large store channel which may be subject to future slotting fees.  There were no recorded slotting fees for the years ended March 31, 2012 and March 31, 2011. 

We plan to increase our revenues during the next twelve months by implementing marketing and sales promotion programs to introduce our new “Phase III® Recovery” drink to new markets in the 2012 calendar year, increasing our internal sales force, securing additional national distributors, expanding our products offering, increasing our volume per outlet and implementing new grass roots marketing and sample programs.

 
12
 
 
Consolidated Product and Shipping Costs
  
For The Years Ended March 31
              
   
2012
    
2011
    
$ Change
    
% Change
  
Product costs
   $ 278,300     $ 42,613     $ 235,687       553.1 %
Shipping costs
     38,300       9,346       28,954       309.8 %
Inventory Obsolescence
     2,137       -       2,137       N/A  
  Total costs
   $ 318,737     $ 51,959     $ 266,778       513.4 %
 
The computation of the percentage of expenses to revenues is not meaningful at this time and is not representative of expected future operations.

Product and shipping costs for the year ended March 31, 2012 were higher over the year ended March 31, 2011 mainly due to the increased customers for the sales of the Phase III® Recovery product.
 
Operating Expenses
  
For The Years Ended March 31
              
   
2012
    
2011
    
$ Change
    
% Change
  
Salaries, taxes and employee benefit costs
   $ 535,690     $ 311,471     $ 224,219       72.0 %
Marketing and promotion
     461,272       265,358       195,914       73,8 %
Consulting fees
     82,645       40,329       42,316       104.9 %
Professional and legal fees
     228,799       260,951       (32,152 )     -12.3 %
Travel and entertainment
     47,308       (427 )     47,735       -11179.2 %
Product development costs
     2,074       7,900       (5,826 )     -73.7 %
Stock compensation expense
     165,068       195,000       (29,932 )     -15.3 %
Other overhead expenses
     374,902       468,441       (93,539 )     -20.0 %
   Total operating expenses
   $ 1,897,758     $ 1,549,023     $ 348,735       22.5 %

Salaries, taxes and employee benefit costs
For the year ended March 31, 2012, total expenses of $535,690 were higher by $224,219 over last year’s comparable figures of $311,471, partly due to the Company’s policy to record non cash payments for past due salaries in  stock compensation expense instead of salary expense. From the $224,219 increase, an amount of $195,000 was recorded in stock compensation expense for the year ended March 31, 2011 for issued common stock to Roy Warren and Tommy Kee and none in 2012, (see the Stock compensation expense section below) which contributed to most of the increase. The table below reflects a net increase of $29,219 in which this amount was caused by the increase of employees during the year ended March 31, 2012.

   
3/31/2012
    
3/31/2011
    
Variance
  
                   
Salaries
   $ 535,690     $ 311,471     $ 224,219  
Stock compensation expense for employees
     -       195,000       (195,000 )
Net variance   $ 535,690     $ 506,471     $ 29,219  
 
Marketing and promotion
For the year ended March 31, 2012, we incurred total marketing and promotion costs of $461,272 as compared to $265,358 for the year ended March 31, 2011 for an increase of $195,914 or 73.8%.  This increase was due primarily to increased broker commissions costs of $69,234, Walgreen's advertising expense for $65,000, increased sample costs of $18,379 and increase in various marketing programs including costs associated with the use of athlete endorsements for our Phase III® Recovery drink.

Consulting fees
Consulting fees of $82,645 for the year ended March 31, 2012 were $42,316 or 104.9% higher than last year’s figures mainly due to the use of more outside sales consultants and merchandisers in selling our Phase III® Recovery product in 2012.

Professional and legal fees
These costs related to the use of outside legal, accounting and auditing firms. Total costs for the year ended March 31, 2012 of $228,799 were $32,152 lower than the previous year’s comparable costs of $260,951, mainly due to a decrease use of legal services.

 
13
 
 
Travel and entertainment

These costs increased over the prior year ending March 31, 2011 by $47,735 mainly due to increased travel activities for promoting our Phase III® Recovery product in new markets primarily in the northeastern United States.

Product development costs
These costs decreased over the prior year ending March 31, 2011 mainly due to the fact that most development costs for our new product, Phase III® Recovery, were incurred in the previous year.  Due to limited capital, we have delayed the development of other potential new products.

Stock compensation expense
For the year ended March 31, 2012, we recorded stock compensation expense of $165,068 mainly for services rendered to outside vendors as well as the costs of issued stock options to employees.  For the year ended March 31, 2011, these costs for a total of $195,000 related to the recording of costs associated with the conversions of past due salaries for the company’s CEO, Roy Warren, for $125,000 and for the company’s CFO, Tommy Kee, for $70,000 as we record all issuances of common stock to employees in this account instead of salary expense for non-cash identification purposes.

Other operating expenses
The total costs decreased by $93,539 or 20% over the prior year mainly due to decreased investor relations costs of $79,720.   The other main components of this category represent Board of Directors’ fees and rent expense.

Other Income (Expense)

Derivative income/(expense)
Derivative income/(expense) arises from changes in the fair value of our derivative financial instruments and, in rare instances, day-one losses when the fair value of embedded and freestanding derivative financial instruments issued or included in financing transactions exceed the proceeds or other basis.  In addition, the fair value of our financial instruments that are recorded at fair value will change in future periods based upon changes in our trading market price and changes in other assumptions and market indicators used in the valuation techniques.  Future changes in these underlying internal and external market conditions will have a continuing effect on derivative income/expense associated with our derivative financial instruments.

The following table summarizes the effects on our income (expense) associated with changes in the fair values of our financial instruments that are carried at fair value from inception through March 31, 2012:
 
       
Inception
  
       
through
  
       
March 31, 2012
  
Our financing arrangements giving rise to derivative
      
instruments and the income effects:
      
Day-on derivative losses:
      
 $      600,000
  
Original Face Value Convertible Note Financing
   $ (2,534,178 )
 $      500,000
  
Original Face Value Convertible Note Financing
     (899,305 )
 $      100,000
  
Original Face Value Convertible Note Financing
     (1,285,570 )
 $        55,000
  
Original Face Value Short Term Bridge Loan Financing
     (12,700 )
 $      120,000
  
Original Face Value Convertible Note Financing
     (72,251 )
 $        60,000
  
Original Face Value Convertible Note Financing
     (38,542 )
 $      200,000
  
Original Face Value Convertible Note Financing
     (119,136 )
 $        27,778
  
Original Face Value Convertible Note Financing
     (6,378 )
 $      161,111
  
Original Face Value Convertible Note Financing
     (45,846 )
 $      111,112
  
Original Face Value Convertible Note Financing
     (185,657 )
 $        50,000
  
Original Face Value Convertible Note Financing
     (182,843 )
 $        55,000
  
Original Face Value Convertible Note Financing
     (80,135 )
 $      137,500
  
Original Face Value Convertible Note Financing
     (1,023,463 )
 $        55,000
  
Original Face Value Convertible Note Financing
     (55,641 )
 $      400,000
  
Original Face Value Convertible Note Financing
     (730,079 )
 $      600,000
  
Original Face Value Convertible Note Financing
     (1,420,653 )
 $      221,937
  
Original Face Value Convertible Note Financing
     (295,144 )
 $      500,000
  
Original Face Value Convertible Note Financing
     (288,718 )
 $   1,000,000
  
Original Face Value Convertible Note Financing
     (1,215,164 )
Total day-one derivative losses
   $ (10,491,403 )
 
 
14
 
 
       
Inception
  
       
through
  
       
March 31, 2012
  
           
Derivative income (expense):
      
 $      600,000
  
Original Face Value Convertible Note Financing
   $ 3,311,574  
 $      500,000
  
Original Face Value Convertible Note Financing
     1,658,448  
 $      100,000
  
Original Face Value Convertible Note Financing
     1,163,487  
 $      120,000
  
Original Face Value Short Term Bridge Loan Financing
     213,769  
 $      120,000
  
Original Face Value Short Term Bridge Loan Financing
     213,769  
 $        60,000
  
Original Face Value Short Term Bridge Loan Financing
     106,885  
 $        33,000
  
Original Face Value Short Term Bridge Loan Financing
     58,786  
 $        55,000
  
Original Face Value Short Term Bridge Loan Financing
     63,162  
 $      243,333
  
Original Face Value Convertible Note Financing
     134,424  
 $        60,833
  
Original Face Value Convertible Note Financing
     6,602  
 $      120,000
  
Original Face Value Convertible Note Financing
     41,039  
 $        60,000
  
Original Face Value Convertible Note Financing
     27,358  
 $      200,000
  
Original Face Value Convertible Note Financing
     111,662  
 $      161,111
  
Original Face Value Convertible Note Financing
     147,820  
 $        50,000
  
Original Face Value Convertible Note Financing
     45,208  
 $        55,000
  
Original Face Value Convertible Note Financing
     48,749  
 $      137,500
  
Original Face Value Convertible Note Financing
     303,644  
 $        55,000
  
Original Face Value Convertible Note Financing
     2,302  
 $      900,000
  
Original Face Value Convertible Note Financing
     (48,610 )
 $      400,000
  
Original Face Value Convertible Note Financing
     286,413  
 $      600,000
  
Original Face Value Convertible Note Financing
     713,055  
 $      221,937
  
Original Face Value Convertible Note Financing
     77,766  
 $      500,000
  
Original Face Value Convertible Note Financing
     64,723  
 $   1,000,000
  
Original Face Value Convertible Note Financing
     36,230  
Total income arising from fair value adjustments
   $ 8,788,265  
Total derivative expense from inception
   $ (1,703,138 )
 
 
15
 

       
Inception
  
       
through
  
       
March 31, 2012
  
           
Interest income (expense) from instruments recorded at fair value:
      
 $      600,000
  
Original Face Value Convertible Note Financing
   $ (832,752 )
 $      500,000
  
Original Face Value Convertible Note Financing
     (617,167 )
 $      100,000
  
Original Face Value Convertible Note Financing
     (145,046 )
 $      312,000
  
Original Face Value Convertible Note Financing
     (1,033,786 )
 $      120,000
  
Original Face Value Convertible Note Financing
     (189,861 )
 $          5,000
  
Original Face Value Convertible Note Financing
     (5,667 )
 $          5,000
  
Original Face Value Convertible Note Financing
     (3,190 )
 $        60,000
  
Original Face Value Convertible Note Financing
     (17,292 )
 $        70,834
  
Original Face Value Convertible Note Financing
     (20,479 )
 $      200,000
  
Original Face Value Convertible Note Financing
     (50,480 )
 $        27,778
  
Original Face Value Convertible Note Financing
     10,262  
 $      161,111
  
Original Face Value Convertible Note Financing
     (65,305 )
 $      111,112
  
Original Face Value Convertible Note Financing
     (57,979 )
 $      507,500
  
Original Face Value Convertible Note Financing
     (590,078 )
 $        50,000
  
Original Face Value Convertible Note Financing
     67,143  
 $        55,000
  
Original Face Value Convertible Note Financing
     (236,231 )
 $      137,500
  
Original Face Value Convertible Note Financing
     167,298  
 $      100,000
  
Original Face Value Convertible Note Financing
     (8,212 )
 $        55,000
  
Original Face Value Convertible Note Financing
     (214,299 )
 $      400,000
  
Original Face Value Convertible Note Financing
     (392,075 )
 $      600,000
  
Original Face Value Convertible Note Financing
     (786,208 )
 $      221,937
  
Original Face Value Convertible Note Financing
     (997,913 )
 $      500,000
  
Original Face Value Convertible Note Financing
     (154,481 )
 $   1,000,000
  
Original Face Value Convertible Note Financing
     375,103  
 $      172,211
  
Original Face Value Convertible Note Financing
     (300,961 )
Total expense arising from fair value adjustments
   $ (6,099,656 )

 
16
 
 
The following tables summarize the effects on our income (expense) associated with changes in the fair values of our financial instruments that are carried at fair value from the twelve months ended March 31, 2012 and the twelve months ended March 31, 2011.

       
Twelve Months
    
Twelve Months
  
Our financing arrangements giving rise to
  
Ended
    
Ended
  
  derivated financial instruments and the income effects:
  
March 31, 2012
    
March 31, 2011
  
Derivative income (expense):
            
 $          600,000
  
Original Face Value Convertible Note Financing
   $ 18,337     $ 1,809,873  
 $          500,000
  
Original Face Value Convertible Note Financing
     13,891       1,371,024  
 $          100,000
  
Original Face Value Convertible Note Financing
     2,779       274,272  
 $          120,000
  
Original Face Value Short Term Bridge Loan Financing
     101       36,521  
 $          120,000
  
Original Face Value Short Term Bridge Loan Financing
     101       36,521  
 $            60,000
  
Original Face Value Short Term Bridge Loan Financing
     50       18,260  
 $            33,000
  
Original Face Value Short Term Bridge Loan Financing
     28       10,043  
 $            55,000
  
Original Face Value Short Term Bridge Loan Financing
     6       17,991  
 $          120,000
  
Original Face Value Convertible Note Financing
     1,186       102,972  
 $            60,000
  
Original Face Value Convertible Note Financing
     593       51,486  
 $          200,000
  
Original Face Value Convertible Note Financing
     4,119       357,544  
 $          161,111
  
Original Face Value Convertible Note Financing
     3,318       288,022  
 $            50,000
  
Original Face Value Convertible Note Financing
     1,030       89,386  
 $            55,000
  
Original Face Value Convertible Note Financing
     1,030       89,386  
 $          137,500
  
Original Face Value Convertible Note Financing
     2,832       245,812  
 $            55,000
  
Original Face Value Convertible Note Financing
     1,133       1,169  
 $          900,000
  
Original Face Value Convertible Note Financing
     560,148       (608,758 )
 $          400,000
  
Original Face Value Convertible Note Financing
     157,071       129,342  
 $          600,000
  
Original Face Value Convertible Note Financing
     456,044       257,011  
 $          221,937
  
Original Face Value Convertible Note Financing
     77,766       -  
 $          500,000
  
Original Face Value Convertible Note Financing
     64,723       -  
 $       1,000,000
  
Original Face Value Convertible Note Financing
     36,229       -  
Total derivative income (expense) arising from fair value adjustments
     1,402,515       4,577,877  
Day-one derivative losses
     (1,799,027 )     (2,206,373 )
   Total derivative income (expense)
   $ (396,512 )   $ 2,371,504  
 
 
17
 

       
Twelve Months
    
Twelve Months
  
       
Ended
    
Ended
  
       
March 31, 2012
    
March 31, 2011
  
Interest income (expense) from instruments recorded at fair value:
            
 $          600,000
  
Original Face Value Convertible Note Financing
   $ (334,764 )   $ 1,492,317  
 $          500,000
  
Original Face Value Convertible Note Financing
     22,502       2,032,631  
 $          100,000
  
Original Face Value Convertible Note Financing
     -       169,943  
 $          312,000
  
Original Face Value Convertible Note Financing
     (75,181 )     796,457  
 $          120,000
  
Original Face Value Short Term Bridge Loan Financing
     (90,383 )     553,390  
 $              5,000
  
Original Face Value Short Term Bridge Loan Financing
     700       20,652  
 $              5,000
  
Original Face Value Short Term Bridge Loan Financing
     955       23,057  
 $            60,000
  
Original Face Value Convertible Note Financing
     32,393       276,694  
 $            70,834
  
Original Face Value Convertible Note Financing
     38,242       326,655  
 $            27,778
  
Original Face Value Convertible Note Financing
     22,357       136,487  
 $          200,000
  
Original Face Value Convertible Note Financing
     116,037       911,251  
 $          111,112
  
Original Face Value Convertible Note Financing
     (24,656 )     502,756  
 $          161,111
  
Original Face Value Convertible Note Financing
     284,241       514,534  
 $          507,500
  
Original Face Value Convertible Note Financing
     (391,426 )     2,188,319  
 $            50,000
  
Original Face Value Convertible Note Financing
     100,922       112,763  
 $            55,000
  
Original Face Value Convertible Note Financing
     (84,077 )     118,033  
 $          137,500
  
Original Face Value Convertible Note Financing
     (80,516 )     295,083  
 $          100,000
  
Original Face Value Convertible Note Financing
     (11,041 )     495,787  
 $            55,000
  
Original Face Value Convertible Note Financing
     (84,076 )     (135,222 )
 $          900,000
  
Original Face Value Convertible Note Financing
     -       (20,921 )
 $          400,000
  
Original Face Value Convertible Note Financing
     (476,520 )     67,052  
 $          600,000
  
Original Face Value Convertible Note Financing
     (1,056,806 )     264,798  
 $          221,937
  
Original Face Value Convertible Note Financing
     (997,913 )     -  
 $          500,000
  
Original Face Value Convertible Note Financing
     (154,481 )     -  
 $       1,000,000
  
Original Face Value Convertible Note Financing
     375,103       -  
 $          172,211
  
Original Face Value Convertible Note Financing
     (300,962 )     -  
 Total interst income (expense) arising from fair value adjustments
     (3,169,350 )     11,142,516  
     Other interest expense
     (729,078 )     (576,502 )
       Interest income (expense) and other financing costs
   $ (3,898,428 )   $ 10,566,014  
 
 
18
 

The following tables summarize the effects on our income (expense) associated with changes in the fair values of our financial instruments that are carried at fair value for the three months ended March 31, 2012 and the three months ended March 31, 2011.
 
       
Three Months
    
Three Months
  
Our financing arrangements giving rise to
  
Ended
    
Ended
  
  derivated financial instrumentsand the income effects:
  
March 31, 2012
    
March 31, 2011
  
Derivative income (expense):
            
 $          600,000
  
Original Face Value Convertible Note Financing
   $ (2,654 )   $ (15,227 )
 $          500,000
  
Original Face Value Convertible Note Financing
     (2,010 )     (11,535 )
 $          100,000
  
Original Face Value Convertible Note Financing
     (402 )     (2,308 )
 $          120,000
  
Original Face Value Short Term Bridge Loan Financing
     (8 )     18  
 $          120,000
  
Original Face Value Short Term Bridge Loan Financing
     (8 )     -  
 $            60,000
  
Original Face Value Short Term Bridge Loan Financing
     (4 )     -  
 $            33,000
  
Original Face Value Short Term Bridge Loan Financing
     (3 )     -  
 $            55,000
  
Original Face Value Short Term Bridge Loan Financing
      -       (5 )
 $          120,000
  
Original Face Value Convertible Note Financing
     (159 )     (845 )
 $            60,000
  
Original Face Value Convertible Note Financing
     (80 )     (423 )
 $          200,000
  
Original Face Value Convertible Note Financing
     (554 )     (2,936 )
 $          161,111
  
Original Face Value Convertible Note Financing
     (446 )     (2,365 )
 $            50,000
  
Original Face Value Convertible Note Financing
     (138 )     (734 )
 $            55,000
  
Original Face Value Convertible Note Financing
     (138 )     (734 )
 $          137,500
  
Original Face Value Convertible Note Financing
     (380 )     (2,019 )
 $            55,000
  
Original Face Value Convertible Note Financing
     (152 )     (808 )
 $          900,000
  
Original Face Value Convertible Note Financing
     (75,283 )     (460,459 )
 $          400,000
  
Original Face Value Convertible Note Financing
     (20,340 )     129,342  
 $          600,000
  
Original Face Value Convertible Note Financing
     (58,471 )     257,011  
 $          221,937
  
Original Face Value Convertible Note Financing
     (28,859 )     -  
 $          500,000
  
Original Face Value Convertible Note Financing
     (37,896 )     -  
 $       1,000,000
  
Original Face Value Convertible Note Financing
     36,230       -  
Total derivative income (expense) arising from fair value adjustments
     (191,755 )     (114,027 )
  Day-one derivative loss
     (1,215,165 )     (2,150,631 )
        $ (1,406,920 )   $ (2,264,658 )
 
 
19
 

       
Three Months
    
Three Months
  
       
Ended
    
Ended
  
       
March 31, 2012
    
March 31,2011
  
Interest income (expense) from instruments recorded at fair value:
            
 $          600,000
  
Original Face Value Convertible Note Financing
   $ (363,579 )   $ (121,500 )
 $          500,000
  
Original Face Value Convertible Note Financing
     (66,882 )     (89,976 )
 $          100,000
  
Original Face Value Convertible Note Financing
     -       (55,707 )
 $          312,000
  
Original Face Value Convertible Note Financing
     (79,070 )     (245,062 )
 $          120,000
  
Original Face Value Short Term Bridge Loan Financing
     (155,902 )     11,322  
 $              5,000
  
Original Face Value Convertible Note Financing
     (2,030 )     (1,446 )
 $              5,000
  
Original Face Value Convertible Note Financing
     (1,775 )     471  
 $            60,000
  
Original Face Value Short Term Bridge Loan Financing
     (368 )     5,661  
 $            70,834
  
Original Face Value Convertible Note Financing
     (433 )     6,683  
 $            27,778
  
Original Face Value Convertible Note Financing
     13,529       10,196  
 $          200,000
  
Original Face Value Convertible Note Financing
     48,704       1,960  
 $          111,112
  
Original Face Value Convertible Note Financing
     (49,778 )     6,706  
 $          161,111
  
Original Face Value Convertible Note Financing
     39,235       (215,199 )
 $          507,500
  
Original Face Value Convertible Note Financing
     (474,593 )     80,378  
 $            50,000
  
Original Face Value Convertible Note Financing
     6,924       (112,664 )
 $            55,000
  
Original Face Value Convertible Note Financing
     (212,084 )     (130,464 )
 $          137,500
  
Original Face Value Convertible Note Financing
     (275,786 )     (342,205 )
 $          100,000
  
Original Face Value Convertible Note Financing
     (35,230 )     33,928  
 $            55,000
  
Original Face Value Convertible Note Financing
     (212,084 )     (131,086 )
 $          900,000
  
Original Face Value Convertible Note Financing
     -       (20,921 )
 $          400,000
  
Original Face Value Convertible Note Financing
     (177,665 )     67,052  
 $          600,000
  
Original Face Value Convertible Note Financing
     (835,101 )     264,798  
 $          221,937
  
Original Face Value Convertible Note Financing
     (899,307 )     -  
 $          500,000
  
Original Face Value Convertible Note Financing
     30,038       -  
 $       1,000,000
  
Original Face Value Convertible Note Financing
     375,103       -  
 $          172,211
  
Original Face Value Convertible Note Financing
     (300,962 )     -  
Total derivative income (expense) arising from fair value adjustments
     (3,629,096 )     (977,075 )
   Other interest expense
     (540,464 )     (485,568 )
        $ (4,169,560 )   $ (1,462,643 )
 
 
20
 
 
Our derivative liabilities as of March 31, 2012, and our derivative income/ expense during the twelve months ended March 31, 2012 and from inception through March 31, 2012 are significant to our consolidated financial statements. The magnitude of derivative income (expense) reflects the following:

 
In connection with our accounting for the:
$600,000, $500,000, $100,000 face value convertible promissory notes and warrant financings for the October 23, 2007 financing arrangement,
the $55,000 face value short term bridge loan and warrant financing dated August 5, 2008,
the $120,000 face value convertible note and warrant financing dated January 27, 2009,
the $60,000 face value convertible note and warrant financing dated February 17, 2009,
the $200,000 face value convertible note and warrant financing dated March 30, 2009,
the $161,111 face value convertible note and warrant financing dated July 15, 2009,
the $27,778 face value convertible note and warrant financing dated October 1, 2009,
the  $111,112 face value convertible note issuance dated November 13, 2009,
the $50,000 face value convertible note issuance dated January 28, 2010,
the $50,000 face value convertible note and warrant financing dated January 28, 2010,
the $55,000 face value convertible note and warrant financing dated February 19, 2010,
the $137,500 face value convertible note and warrant financing dated March 26, 2010,
the $55,000 face value convertible note and warrant financing dated May 13, 2010,
the $900,000 face value convertible note and warrant financing dated July 15, 2010,
the $400,000 face value convertible note and warrant financing dated January 21, 2011,
the $600,000 face value convertible note and warrant financing  dated March 17, 2011,
the $500,000 face value convertible note and warrant financing dated July 15, 2011 and
the $1,000,000 face value convertible note and warrant financing dated February 22, 2012
 
We encountered the unusual circumstance of a day-one derivative loss related to the recognition of (i) the hybrid notes and (ii) the derivative instruments arising from the arrangement at fair values. That means that the fair value of the hybrid notes and warrants exceeded the proceeds that we received from the arrangement, and we were required to record a loss to record the derivative financial instruments at fair value.
  
 
In addition, our financial instruments that are recorded at fair value will change in future periods based upon changes in our trading market price and changes in other assumptions and market indicators used in the valuation techniques.

Generally, the FASB Accounting Standards Codification provides for the exclusion of registration payment arrangements, such as the liquidated damage provisions that are included in the financing contracts underlying the convertible debt financing arrangements, from the consideration of classification of financial instruments. Rather, such registration payments will require recognition when they are both probable and reasonably estimable. As of March 31, 2012, our management concluded that registration payments are not probable.

Loss on extinguishment of debt
We recorded a loss on extinguishment of debt for the fiscal year ended March 31, 2011 for $3,264 as these costs represent the changes caused to common stock equivalents from certain modifications of terms normally associated with extending the due dates of certain debts.  There was no loss on extinguishment of debt for the fiscal year ended March 31, 2012 due to no term modifications of existing debt instruments.

Interest and Other Financing Costs:
We recorded interest expense for the fiscal year ended March 31, 2012 for $3,898,428 and interest income for $10,566,014 for the year ended March 31, 2011 in connection with our debt obligations at interest rates from 10% to 15%.  The change of $14,464,442 over the prior fiscal year was attributed to the recording of debt instruments at fair value (debt discount expense) due to the changes in the stock price. We recorded the amortization of debt discounts for $365,127 for the year ended March 31, 2012 with the July 2010, January 2011, March 2011, June 2011 debt exchange into a convertible note financing, July 2011 and February 2012 convertible note financings as well as $84,078 with the July, 2010, January, 2011 and March, 2011 convertible note financings for the year ended March 31, 2011.

Net Loss
We reported a net loss for the year ended March 31, 2012 of $6,149,343 and a net profit of $11,383,632 for the year ended March 31, 2011.  The majority of the expenses for the year ended March 31, 2012 related to salary related costs, marketing and promotion costs for promotion of our Phase III® Recovery drink, professional and legal fees, investor relations costs included in other overhead expenses, recognition of derivative expense and interest expense reflecting the changes in the fair value of the convertible debts.  Most of the costs incurred in the prior year ended March 31, 2011 related to salary related costs, marketing and promotion costs for introduction and promotion of our Phase III® Recovery drink, professional and legal fees and investor relations costs included in other overhead expenses. The net profit for March 31, 2011 was due to the recognition of derivative income and interest income reflecting the changes in the fair value of the convertible debts. As a result, our current revenue volume was not sufficient to recover all of our operating expenses.  We expect that both our revenues and expenses will increase in the next fiscal year, new products will be developed and sold as well as the expectation of certain cost containment programs that will be based on incremental increased unit sales such as shipping of full truck loads of products, lower product production costs, etc.

 
21
 
 
Loss per Common Share Applicable to Common Stockholders
The Company’s basic and diluted loss per common share applicable to common stockholders for the period ended March 31, 2012 was $(0.03), and the basic and diluted earnings per common share for the period ended March 31, 2011 was $ 0.66 and $.0.03, respectively.  Because the Company experienced a net loss for the period ended March 31, 2012, all potential common share conversions existing in our financial instruments would have an anti-dilutive impact on earnings per share; therefore, diluted loss per common share equals basic loss per common share for this period.  The weighted average common shares outstanding for the period ended March 31, 2012 and 2011 were 225,250,685 and 17,302,251, respectively for the basic earnings/loss calculation and 225,250,685 and 355,511,621for the diluted earnings/loss calculation for the period ended March 31, 2012 and March 31, 2011, respectively.  Potential common stock conversions (non-weighted) excluded from the computation of diluted earnings per share amounted to 425,538,843 for March 31, 2011 as there is no consideration for these potential common stock conversions due to the loss for the period ended March 31, 2012.

LIQUIDITY AND CAPITAL RESOURCES

Being a company with less than five years of operations, we have yet to achieve any substantial revenues or profitability, and our ability to continue as a going concern will be dependent upon receiving additional third party financings to fund our business at least throughout the next twelve months in our new fiscal year.  Ultimately, our ability to continue is dependent upon the achievement of profitable operations.  We anticipate that, depending on market conditions and our plan of operations, we may incur operating losses in the future based mainly on the fact that we may not be able to generate enough gross profits from our sales to cover our operating expenses and to increase our sales and marketing efforts.  There is no assurance that further funding will be available at acceptable terms, if at all, or that we will be able to achieve profitability or receive adequate funding for new product research and development activities.  These conditions raise substantial doubt about our ability to continue as a going concern.  The accompanying financial statements do not reflect any adjustments that may result from the outcome of this uncertainty.

Working Capital Needs and Major Cash Expenditures
 
We currently have monthly working capital needs of approximately $150,000 to $175,000.  This amount is, however, expected to increase in the next fiscal year, primarily due to the following factors:
 
●      Increased employees and related travel costs
●      Required interest payments on our convertible promissory notes payable
●      Increased product development costs for new products, packaging and marketing materials

External Sources of Liquidity-External Debt Financing and Use of Common Stock for the last two years:

External Debt Financing:

On April 9, 2010, the Company received $59,400 for one of the March, 2010 allonges that had been recorded as a stock subscription receivable in March 2010.
 
On May 13, 2010, the Company executed an allonge to the March, 2009 Secured Notes in the amount of $55,000, increasing the aggregate face values of these notes from $359,834 to $414,834. Associated finance fees of $5,000 were deducted from the gross proceeds for a net received amount of $50,000.  In addition, we issued 114,583 warrants with an exercise price of $0.16 as these warrants are exercisable up to July 15, 2015.
 
On June 17, 2010, the Company entered into a promissory note in the amount of $25,000.  This note is subject to an interest rate of 18% and is due the sooner of July 1, 2010 or upon the next financing.  This note was paid in August 2010.
 
On July 15, 2010, the Company entered into a subscription agreement for a convertible debt financing in the principal amount of $900,000 with an interest rate of 10%.   The due date is July 15, 2012.
 
On December 21, 2010, the Company entered into a promissory note in the amount of $100,000.  This note is subject to an interest rate of 10% and is due the sooner of (i) January 21, 2011 or (ii) from the proceeds of the next funding.  The note was paid in connection with a January 11, 2011 agreement to extend the due date to March 31, 2011 for a non-convertible short-term bridge loan with an accredited investor for $120,000, the Company issued on March 4, 2011 Class A Warrants to purchase 12,000 common shares at an exercise price of $.05 as well as issued 100,000 shares of restricted stock to the lender.
 
 
22
 
 
On January 21, 2011, the Company entered into a subscription agreement with institutional and accredited investors for a convertible debt financing in the principal amount of $400,000 with an interest rate of 10%. The due date for the notes is July 15, 2012, and the notes are convertible into common stock at a conversion price equal to seventy-five percent (75%) of the average of the three lowest closing bid prices for the Common Stock as reported by Bloomberg L.P. for the principal market for the ten trading days preceding a conversion date but in no event greater than $.08. Subscribers in the offering included some holders of the Company’s senior secured notes and warrants. Associated finance fees of $70,000 which includes a 10% finder’s fee of $40,000 were deducted from the gross proceeds along with payment of a December 21, 2010 short term promissory note and accrued interest of $102,500 for a net received amount of $227,500 ($128,500 received in first closing on January 21, 2011 and $99,000 received in second closing on February 1, 2011).  In addition, the placement agent received a total of 2,046,035 restricted shares of the Company’s common stock which was equal to ten percent (10%) of the Class A warrants sold. One Class A Common Stock Purchase Warrant was issued for every share (total of 20,460,357 warrants) which would be issued on the closing date assuming the complete conversion of the notes on the closing date at the conversion price. The exercise price to acquire a Warrant Share upon exercise of a Class A Warrant is equal to $.035, subject to reduction as described in the Class A Warrant.  The Class A Warrants are exercisable until five years after the issue date of the Class A Warrants.
 
On March 17, 2011, the Company entered into a subscription agreement with institutional and accredited investors for a convertible debt financing in the principal amount of $600,000 with an interest rate of 10%. The due date for the notes is September 17, 2012, and the notes are convertible into common stock at a conversion price equal to seventy-five percent (75%) of the average of the three lowest closing bid prices for the Common Stock as reported by Bloomberg L.P. for the principal market for the ten trading days preceding a conversion date but in no event greater than $.02. Subscribers in the offering included some holders of the Company’s senior secured notes and warrants. Associated finance fees of $90,000 which includes a 10% cash finder’s fee of $60,000 were deducted from the gross proceeds for a net received amount of $510.000.  In addition, the placement agent received 3,973,510 warrants to purchase common shares which was equal to ten percent (10%) of the Class A warrants sold as well as a convertible note payable (same terms as the March 17, 2011 convertible notes payable) for a three percent (3%) non accountable expense allowance of $18,000. One Class A Common Stock Purchase Warrant was issued for every share (total of 39,735,100 warrants) which would be issued on the closing date assuming the complete conversion of the notes on the closing date at the conversion price. The exercise price to acquire a Warrant Share upon exercise of a Class A Warrant is equal to $.02, subject to reduction as described in the Class A Warrant.  The Class A Warrants are exercisable until five years after the issue date of the Class A Warrants.
 
On March 17, 2011 and as part of the above March 2011 financing, the Company entered into amendment and consent agreements with all institutional and accredited investors holding all convertible notes payable to extend the maturity date of these applicable notes to March 31, 2012 except for the July 2010 and January 2011 convertible notes as they already have a due date of July 15, 2012. These agreements also allowed the conversion price of all convertible notes payable prior to the above March, 2011 financing to equal the conversion criteria of the above March 17, 2011 financing as follows:  seventy-five percent (75%) of the average of the three lowest closing bid prices for the common stock as reported by Bloomberg L.P. for the principal market for the ten trading days preceding a conversion date, but in no event greater than $.02.  In addition, all warrants issued from convertible note financings prior to the March, 2011 financing had the exercise price reduced to $.02.
 
On June 3, 2011, the Company entered into a promissory note in the amount of $100,000 with the Centaurian Fund LP, an accredited investor.  This note is subject to an interest rate of 10% and is due the sooner of July 3, 2011 or from the proceeds of the next funding by the Company.  This note was paid in July 2011from the $500,000 gross proceeds financing of the July 2011 financing.
 
On June 30, 2011, the Company entered into a promissory note in the amount of $25,000 with the Centaurian Fund LP, an accredited investor.  This note is subject to an interest rate of 10% and is due the sooner of July 30, 2011 or from the proceeds of the next funding by the Company.  This note was paid in July 2011from the $500,000 gross proceeds of the July 2011 financing.
 
On July 15, 2011, the Company entered into a Subscription Agreement for convertible debt financing up to $1,000,000 with an interest rate of 10% in which we received $500,000 gross proceeds. The notes are due January 15, 2013. One Class A Common Stock Purchase Warrant (total warrants to purchase 25,000,000 shares of common stock) was issued for every share which would be issued on the closing date assuming the complete conversion of the notes on the closing date at a conversion price of $0.02.   The exercise price to acquire a Warrant Share upon exercise of a Class A Warrant is $0.02, subject to reduction as described in the Class A Warrant.  The Class A Warrants are exercisable until five years after the issue date of the Warrants. Subscribers in the offering included holders of the Company’s senior secured notes and warrants. In addition, an additional warrant to purchase 2,500,000 shares of common stock and a convertible note for $15,000 was issued to the placement agent for finder’s fees.
 
On October 7, 2011, the Company entered into two non-convertible notes payables with two current accredited investors in the total amount of $150,000 (one note for $75,000 with Alpha Capital Anstalt and the other note for $75,000 with Centaurian Fund LP).  These notes are subject to an interest rate of 10% and are due the sooner of (i) January 30, 2012 or (ii) from the proceeds of the next funding by the Company.  The $75,000 note held by Centaurian was paid through proceeds from the February 2012 financing (part of the overall total payment of $100,000 plus interest of $3,451 for a grand total payment of $103,451), and the other $75,000 note held by Alpha was transferred as part of a new note totaling $175,000 of the overall $1,000,000 February, 2012 financing.
 
 
23
 
 
On November 3, 2011, the Company entered into a promissory note with conversion rights with outside legal counsel (Weed & Co. LLP) in the amount of $59,359.  This note is subject to an interest rate of 5% and is payable on or before May 5, 2012.    This note at the option of the holder at the due date may convert the unpaid interest and principal into newly issued shares of common stock.  The conversion shall be at a price equal to (1) the closing price on the day prior to the conversion date or (2) the lowest conversion price for other convertible debt.  The conversion price will be such as not to trigger any reset or anti-dilution rights in existing convertible notes on the due date. Weed & Co. LLP converted $50,000 on May 29, 2012 into 46,728,972 shares of common stock.
 
On December 1, 2011, the Company entered into two promissory notes with current accredited investors in the total amount of $50,000 (one note for $25,000 with Centaurian Fund and the other note for $25,000 with Alpha Capital Anstalt).  We received payment from Centaurian on December 1, 2011 and received the payment from Alpha on December 20, 2011.  Both notes are subject to an interest rate of 10% and are due the sooner of (i) January 30, 2012 or (ii) from the proceeds of the next funding by the Company.  The $25,000 note held by Centaurian was paid through proceeds from the February 2012 financing (part of the overall total payment of $100,000 notes plus interest of $3,451 for a grand total of $103,451), and the other $25,000 held by Alpha was transferred as part of a new note totaling $175,000 of the overall $1,000,000 February 2012 financing.
 
On December 28, 2011, the Company entered into a two years discount non-convertible note with a current accredited investor, Alpha Capital Anstalt, in the amount of $75,000.  This is a discount note in which the purchase price was $75,000, and the principal amount to be paid on December 28, 2013 will be $100,000.  This note is guaranteed by the Company’s CEO, Roy Warren.  This Alpha note was transferred as part of a new note totaling $175,000 of the overall $1,000,000 February 2012 financing.  The personal guarantee was eliminated.
 
All of the net proceeds from the above new financings were used for research and development activities as well as working capital purposes.

The foregoing securities were issued in reliance upon an exemption from registration under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended.  All of the investors were accredited investors and/or had preexisting relationships with the Company, there was no general solicitation or advertising in connection with the offer or sale of securities and the securities were issued with a restrictive legend.

Commitments for Common Stock for the last two years:

On June 2, 2010, the Board of Directors approved the issuance of 138,889 (valued at $25,000) and 150,000 (valued at $30,000) for a total of 288,889 shares for payment of past due services.  These shares were issued from the Company’s 2010 Stock Compensation Plan which was registered on a Form S-8 registration statement filed and declared effective on May 25, 2010.
 
On June 30, 2010, we issued 12,000 shares of common stock for the extension of the due date for certain April, 2008 short term notes payable to December 31, 2010.  These shares were valued at $624 or $.052 per share.
 
On July 21, 2010, we issued 8,333,333 shares of common stock to Roy Warren, CEO, for payment of past due salary for $125,000 at a conversion price of $.015 per share.
 
On January 21, 2011, we issued 2,046,035 restricted shares of common stock to the private placement agent for a finder’s fee for the January, 2011 $400,000 financing.
 
On February 25, 2011, the Company issued 4,156,566 shares of its restricted common stock and 1,500,000 shares from its stock plan to Tommy E. Kee, its chief financial officer, in exchange for conversion of $70,000 in accrued salary.  In addition, the Company issued 1,500,000 shares from its stock plan to two outside legal counsel members for past due services.

On May 5, 2011, certain employees converted a total $327,248 of past due salaries into 22,261,770 shares of common stock at a conversion price of $.0147 per share.
 
On May 5, 2011, we issued 2,000,000 shares of common stock to an investor relations firm for services rendered at a conversion price of $.0157 valued at $31,400.
 
 
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On May 6, 2011, we issued 6,000,000 shares of common stock for the conversion of the original April 9, 2008 short-term bridge loan with principal balance of $120,000 at a conversion price of $.02.
 
On August 31, 2011, we issued 3,000,000 shares of restricted common stock to outside legal counsel for past due services at a conversion price of $.002 with a recorded value of $6,000.
 
On December 30, 2011, company employees returned 27,918,336 shares of common stock previously granted to them earlier in the year for past due services in exchange for a similar number of employee stock options at an exercise price of $.02 per share. These shares were cancelled and reduced the total outstanding number of common shares.
 
On February 22, 2012, we issued 5,000,000 shares of common stock as a finder’s fee for the February, 2012 financing. This amount represents 10% of the total 50,000,000 warrants that were issued in connection with this financing. We recorded a cost of $13,177 as financing fee expense for these shares.
 
Information about our cash flows

   
For The Year Ended
  
   
March 31,
    
March 31,
  
   
2012
    
2011
  
Cash provided by (used in):
            
             
Operating activities
   $ (1,585,215 )   $ (1,732,422 )
                 
Investing activities
   $ (16,002 )   $ (4,102 )
                 
Financing activities
   $ 1,500,000     $ 1,931,250  

For the year ended March 31, 2012, we reported a net loss of $6,149,343 which was offset by recording the fair value adjustment of the convertible notes for $3,169,350, derivative expense of $396,512, recording of $165,068 for compensatory stock and changes in accounts payable and accrued expenses for $642,836. Cash flows generated from our operating activities were inadequate to cover our cash disbursement needs as we had to rely on new convertible debt financings and bridge loans to cover operating costs.  Cash used by investing activities were attributed mainly to the purchase of a company vehicle.  Cash provided by financing activities increased due to the proceeds from the issuance of additional convertible debt financings for proceeds of $1,325,000.

For the year ended March 31, 2011, we reported a net profit of $11,383,632 which was offset by recording the fair value adjustment of the convertible notes for $11,142,516, derivative income for $2,371,504 and recording of $195,000 for compensatory stock.  Cash flows generated from our operating activities were inadequate to cover our cash disbursement needs as we had to rely on new convertible debt financings to cover operating costs. Cash provided by investing activities increased due to the proceeds from the issuance of additional convertible debt financings for proceeds of $1,955,000.

Defaults for Short-Term Non-Convertible Loans for the Year Ended March 31, 2012:

At March 31, 2012, two short-term bridge notes for a total of $115,000 were past due.

 
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The following table sets forth various details of all convertible notes and short-term bridge loans including applicable interest and default rates for the period ended March 31, 2012:

  RECAP ANALYSIS OF ALL CONVERTIBLE NOTES PAYABLE
   AND SHORT-TERM BRIDGE NON-CONVERTIBLE LOANS
       FOR THE TWELVE MONTHS ENDED MARCH 31, 2012
 
           
 
                    
 
  
Original Note
  
Issue
      
Default
  
$ Amount
    
Interest
    
Default
Interest
    
Accrued
Default
  
Amount
  
Date
  
Due Date
  
Yes/No
  
Past Due
    
Rate
    
Rate
    
Interest
  
                                     
CONVERTIBLE NOTES
                                
                                     
 $     600,000
  
October, 2007
  
3/31/2014
  
No
     -       10 %     15 %     -  
 $     312,000
  
January, 2008
  
3/31/2014
  
No
     -    
None-discount note
       15 %     -  
 $     500,000
  
February, 2008
  
3/31/2014
  
No
     -       10 %     15 %     -  
 $     100,000
  
June, 2008
  
3/31/2014
  
No
     -       10 %     15 %     -  
 $     263,333
  
September, 2008
  
3/31/2014
  
No
     -    
None-discount note
       15 %     -  
 $       60,833
  
December, 2008
  
3/31/2014
  
No
     -    
None-discount note
       15 %     -  
 $     200,834
  
January, 2009
  
3/31/2014
  
No
     -       15 %     15 %     -  
 $       60,000
  
February, 2009
  
3/31/2014
  
No
     -       15 %     15 %     -  
 $     361,112
  
March, 2009
  
3/31/2014
  
No
     -       12 %     20 %     -  
 $       27,778
  
October, 2009
  
3/31/2014
  
No
     -       12 %     20 %     -  
 $     618,612
  
November, 2009
  
3/31/2014
  
No
     -       12 %     20 %     -  
 $     150,000
  
January, 2010
  
3/31/2014
  
No
     -       12 %     20 %     -  
 $     192,500
  
March, 2010
  
3/31/2014
  
No
     -       12 %     20 %     -  
 $       55,000
  
May, 2010
  
3/31/2014
  
No
     -       10 %     20 %     -  
 $     900,000
  
July, 2011
  
7/15/2012
  
No
     -       10 %     20 %     -  
 $     400,000
  
January, 2011
  
7/15/2012
  
No
     -       10 %     20 %     -  
 $     600,000
  
March, 2011
  
9/17/2012
  
No
     -       10 %     20 %     -  
 $     221,937
  
June, 2011
  
9/17/2012
  
No
     -       10 %     20 %     -  
 $     500,000
  
July, 2011
  
1/15/2013
  
No
     -       10 %     20 %     -  
 $       59,359
  
November, 2011
  
5/5/2012
  
No
     -       5 %  
NONE
       -  
 $  1,000,000
  
February, 2012
  
8/22/2013
  
No
     -       10 %     20 %     -  
 $     172,211
  
March, 2012
  
3/31/2014
  
No
     -       12 %     20 %     -  
 $  7,355,509
                                            
                                             
SHORT-TERM BRIDGE LOANS
                                        
                                             
 $       60,000
  
April 14, 2008
  
Past due
  
Yes (a)
   $ 60,000               15 %   $ 25,883  
 $       55,000
  
August 5, 2008
  
Past due
  
Yes (a)
   $ 55,000               15 %   $ 40,349  
 $     115,000
  
Total amount past due
       $ 115,000                     $ 66,232  
 
(a) Notes indicated in default are in default because they are past due.
              
 
 
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CERTAIN BUSINESS RISKS:

Investing in our securities involves a high degree of risk. You should carefully consider the risk factors discussed below, together with all the other information contained or incorporated by reference in this report and in our filings under the Securities Exchange Act of 1934, as amended, or the Exchange Act, before deciding whether to purchase any of our securities. Each of the risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our securities, and the occurrence of any of these risks might cause you to lose all or part of your investment.
 
Risks Relating to Our Business

We have a limited history of operating losses. If we continue to incur operating losses, we eventually may have insufficient working capital to maintain or expand operations according to our business plan.
 
As of March 30, 2012, we had total shareholders’ deficit of $14,018,894 and a working capital deficit of $8,743,079, compared to a total shareholders’ deficit of $14,215,259 and a working capital deficit of $11,861,608 at March 31, 2011. Cash and cash equivalents were $132,120 as of March 31, 2012 as compared to $233,337 at March 31, 2011. The main contributing factor to the working capital deficit was primarily attributable to the changes in the fair value calculations for the valuation of our convertible notes payable as well as changes in the derivative liabilities.
 
Ability to continue as a going concern.

Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
 
For the foreseeable future, we will have to fund all of our operations and capital expenditures from the net proceeds of equity or debt offerings we may have and cash on hand.  Although we plan to pursue additional financing, there can be no assurance that we will be able to secure financing when needed or obtain such financing on terms satisfactory to us, if at all, or that any additional funding we do obtain will be sufficient to meet our needs in the long term. Obtaining additional financing may be more difficult because of the uncertainty regarding our ability to continue as a going concern.  If we are unable to secure additional financing in the future on acceptable terms, or at all, we may be unable to complete planned development of certain products.

To date, we have generated no material product revenues. Our operating losses have negatively impacted our liquidity, and we are continuing our efforts to develop new products, while focusing on increasing net sales.  However, changes may occur that would consume our existing capital at a faster rate than projected, including, among others, the progress of our research and development efforts and hiring of additional key employees.  If we continue to suffer losses from operations, our working capital may be insufficient to support our ability to expand our business operations as rapidly as we would deem necessary at any time, unless we are able to obtain additional financing. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to pursue our business objectives and would be required to reduce our level of operations, including reducing infrastructure, promotions, personnel and other operating expenses. These events could adversely affect our business, results of operations and financial condition. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage of opportunities, develop products or services or otherwise respond to competitive pressures, could be curtailed or significantly limited.   Any additional sources of financing will likely involve the sale of our equity securities, which will have a dilutive effect on our stockholders.  If we are unable to achieve profitability, the market value of our common stock will decline, and there would be a material adverse effect on our financial condition.
 
At March 31, 2012, we were in default on certain of our short-term bridge notes and have other substantial outstanding debt obligations.
 
At March 31, 2012, we were in default on short term bridge notes totaling $115,000 in principal.  The remedy for default under the notes is acceleration of principal and interest due thereunder.  Further, we have secured convertible notes outstanding totaling $5,005,539 in principal face value at March 31, 2012. Although we were able to extend the maturity dates of the notes issued prior to the July, 2010 financing until March 31, 2014, there is no assurance that we will be able to continue to extend these obligations. Further, an event of default under our convertible notes includes failure to pay certain debts over $50,000-$100,000.  Penalties for default under our convertible notes include but are not limited to acceleration of principal and interest, redemption provisions which allow the holders the option to redeem the notes for 120% of the principal balances plus interest and default interest rates up to 20%.  As of March 31, 2012, we have a total of $1,057,150 in outstanding notes payable that have a maturity date of July 15, 2012.  There is no guarantee that we will be able to obtain an extension, leading to an event of default.
 
 
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Defaults on these obligations could materially adversely affect our business operating results and financial condition to such extent that we may be forced to restructure, file for bankruptcy, sell assets or cease operation.  Further, certain of these obligations are secured by our assets.  Failure to fulfill our obligations under these notes and related agreements could lead to the loss of these assets, which would be detrimental to our operations.
 
We may not be able to develop successful new beverage products which are important to our growth.
 
An important part of our strategy is to increase our sales through the development of new beverage products. We cannot assure you that we will be able to continue to develop, market and distribute future beverage products that will have market acceptance. The failure to continue to develop new beverage products that gain market acceptance could have an adverse impact on our growth and materially adversely affect our financial condition. Further, we may have higher obsolescent product expense if new products fail to perform as expected due to the need to write off excess inventory of the new products.
 
Our results of operations may be impacted in various ways by the introduction of new products, even if they are successful, including the following:
 
  
●
sales of new products could adversely impact sales of existing products;
 
 
●
we may incur higher cost of goods sold and selling, general and administrative expenses in the periods when we introduce new products due to increased costs associated with the introduction and marketing of new products, most of which are expensed as incurred; and
 
 
●
when we introduce new platforms and bottle sizes, we may experience increased freight and logistics costs as our co-packers adjust their facilities for the new products.
 
The beverage business is highly competitive.
 
The premium and functional beverage drink industries are highly competitive. Many of our competitors have substantially greater financial, marketing, personnel and other resources than we do. Competitors in these industries include bottlers and distributors of nationally advertised and marketed products, as well as chain store and private label drinks. The principal methods of competition include brand recognition, price and price promotion, retail space management, service to the retail trade, new product introductions, packaging changes, distribution methods, and advertising. We also compete for distributors, shelf space and customers primarily with other premium beverage companies. As additional competitors enter the field, our market share may fail to increase or may decrease.
 
The growth of our revenues is dependent on acceptance of our products by mainstream consumers.
 
We have limited resources to introduce our products to the mainstream consumer. As such, we will need to increase our sales force and execute agreements with distributors who, in turn, distribute to mainstream consumers at grocery stores, club stores and other retailers. If our products are not accepted by the mainstream consumer, our business could suffer.
 
Our failure to accurately estimate demand for our products could adversely affect our business and financial results.
 
We may not correctly estimate demand for our products. Our ability to estimate demand for our products is imprecise, particularly with new products, and may be less precise during periods of rapid growth, particularly in new markets. If we materially underestimate demand for our products or are unable to secure sufficient ingredients or raw materials including, but not limited to, containers, labels, flavors or packing arrangements, we might not be able to satisfy demand on a short-term basis. Moreover, industry-wide shortages of certain ingredients have been and could, from time to time in the future, be experienced, which could interfere with and/or delay production of certain of our products and could have a material adverse effect on our business and financial results. We do not use hedging agreements or alternative instruments to manage this risk.
 
The loss of our third-party distributors could impair our operations and substantially reduce our financial results.
 
We continually seek to expand distribution of our products by entering into distribution arrangements with regional bottlers or other direct store delivery distributors having established sales, marketing and distribution organizations. Many distributors are affiliated with and manufacture and/or distribute other beverage products. In many cases, such products compete directly with our products.
 
 
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The marketing efforts of our distributors are important for our success. If our brands prove to be less attractive to our existing distributors and/or if we fail to attract additional distributors and/or our distributors do not market and promote our products above the products of our competitors, our business, financial condition and results of operations could be adversely affected.
 
Inability to secure co-packers for our products could impair our operations and substantially reduce our financial results.
 
We rely on third parties, called co-packers in our industry, to produce our products.  We currently have only one co-packing agreement for our products and at this time have only one milk-based product commercially available (Phase III® Recovery). Our co-packing agreement with our principal co-packer was signed on December 16, 2008 and had an initial term of three (3) years which has now expired. This agreement shall automatically renew for consecutive one (1) year periods (next renewal date of December 16, 2012) unless either party provides notice of cancellation at least one hundred twenty (120) calendar days prior to the end of the initial term or subsequent extension period.  Our dependence on one co-packer puts us at substantial risk in our operations.  If we lose this relationship and/or require new co-packing relationships for other products, we may be unable to establish such relationships on favorable terms, if at all.  Further, co-packing arrangements with potential new companies may be on a short term basis, and such co-packers may discontinue their relationship with us on short notice.  Our dependence on co-packing arrangements exposes us to various risks, including:
 
 
●
if any of those co-packers were to terminate our co-packing arrangement or have difficulties in producing beverages for us, our ability to produce our beverages would be adversely affected until we were able to make alternative arrangements; and
 
 
●
our business reputation would be adversely affected if any of the co-packers were to produce inferior quality products.
 
We compete in an industry that is brand-conscious, so brand name recognition and acceptance of our products are critical to our success.
 
Our business is substantially dependent upon awareness and market acceptance of our products and brands by our targeted consumers. In addition, our business depends on acceptance by our independent distributors of our brands as beverage brands that have the potential to provide incremental sales growth rather than reduce distributors’ existing beverage sales.  We believe that the success of our product name brands will also be substantially dependent upon acceptance of our product name brands. Accordingly, any failure of our brands to maintain or increase acceptance or market penetration would likely have a material adverse affect on our revenues and financial results.
 
We compete in an industry characterized by rapid changes in consumer preferences and public perception, so our ability to continue to market our existing products and develop new products to satisfy our consumers’ changing preferences will determine our long-term success.
 
Consumers are seeking greater variety in their beverages. Our future success will depend, in part, upon our continued ability to develop and introduce different and innovative beverages. In order to retain and expand our market share, we must continue to develop and introduce different and innovative beverages and be competitive in the areas of quality and health, although there can be no assurance of our ability to do so. There is no assurance that consumers will continue to purchase our products in the future. Additionally, many of our products are considered premium products and to maintain market share during recessionary periods, we may have to reduce profit margins, which would adversely affect our results of operations. Product lifecycles for some beverage brands and/or products and/or packages may be limited to a few years before consumers’ preferences change. The beverages we currently market are in their early lifecycles, and there can be no assurance that such beverages will become or remain profitable for us. The beverage industry is subject to changing consumer preferences, and shifts in consumer preferences may adversely affect us if we misjudge such preferences. We may be unable to achieve volume growth through product and packaging initiatives. We also may be unable to penetrate new markets. If our revenues decline, our business, financial condition and results of operations will be materially and adversely affected.
 
 
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Our quarterly operating results may fluctuate significantly because of the seasonality of our business.
 
As our products are relatively new, there may be seasonality issues that could cause our financial performance to fluctuate. In addition, beverage sales can be adversely affected by sustained periods of bad weather.
 
Our business is subject to many regulations, and noncompliance is costly.
 
The production, marketing and sale of our unique beverages, including contents, labels, caps and containers, are subject to the rules and regulations of various federal, provincial, state and local health agencies. If a regulatory authority finds that a current or future product or production run is not in compliance with any of these regulations, we may be fined, or production may be stopped, thus adversely affecting our financial conditions and operations. Similarly, any adverse publicity associated with any noncompliance may damage our reputation and our ability to successfully market our products. Furthermore, the rules and regulations are subject to change from time to time and while we closely monitor developments in this area, we have no way of anticipating whether changes in these rules and regulations will impact our business adversely. Additional or revised regulatory requirements, whether labeling, environmental, tax or otherwise, could have a material adverse effect on our financial condition and results of operations.
 
We face risks associated with product liability claims and product recalls.
 
Other companies in the beverage industry have experienced product liability litigation and product recalls arising primarily from defectively manufactured products or packaging. Our co-packer maintains product liability insurance insuring our operations from any claims associated with product liability. This insurance may or may not be sufficient to protect us. We do not maintain product recall insurance. In the event we were to experience additional product liability or product recall claim, our business operations and financial condition could be materially and adversely affected.
 
Our intellectual property rights are critical to our success; the loss of such rights could materially, adversely affect our business.
 
We regard the protection of our trademarks, trade dress and trade secrets as critical to our future success. We have registered our trademarks in the United States that are very important to our business. We also own the copyright in and to portions of the content on the packaging of our products. We regard our trademarks, copyrights and similar intellectual property as critical to our success and attempt to protect such property with registered and common law trademarks and copyrights, restrictions on disclosure and other actions to prevent infringement. Product packages, mechanical designs and artwork are important to our success, and we would take action to protect against imitation of our packaging and trade dress and to protect our trademarks and copyrights, as necessary. We also rely on a combination of laws and contractual restrictions, such as confidentiality agreements, to establish and protect our proprietary rights, trade dress and trade secrets. However, laws and contractual restrictions may not be sufficient to protect the exclusivity of our intellectual property rights, trade dress or trade secrets. Furthermore, enforcing our rights to our intellectual property could involve the expenditure of significant management and financial resources. There can be no assurance that other third parties will not infringe or misappropriate our trademarks and similar proprietary rights. If we lose some or all of our intellectual property rights, our business may be materially and adversely affected.
 
If we are not able to retain the full time services of our management team, including Roy G. Warren, it will be more difficult for us to manage our operations and our operating performance could suffer.
 
Our business is dependent, to a large extent, upon the services of our management team, including Roy G. Warren, our founder and Chief Executive Officer and Chairman of the Board. We depend on our management team, but especially on Mr. Warren’s creativity and leadership in running or supervising virtually all aspects of our day-to-day operations. We do not have a written employment agreement with any member of our management team or Mr. Warren. In addition, we do not maintain key person life insurance on any of our management team or Mr. Warren. Therefore, in the event of the loss or unavailability of any member of the management team to us, there can be no assurance that we would be able to locate in a timely manner or employ qualified personnel to replace him. The loss of the services of any member of our management team or our failure to attract and retain other key personnel over time would jeopardize our ability to execute our business plan and could have a material adverse effect on our business, results of operations and financial condition.
 
 
30
 
 
We need to manage our growth and implement and maintain procedures and controls during a time of rapid expansion in our business.
 
If we are to expand our operations, such expansion would place a significant strain on our management, operational and financial resources.  Such expansion would also require improvements in our operational, accounting and information systems, procedures and controls.  If we fail to manage this anticipated expansion properly, it could divert our limited management, cash, personnel, and other resources from other responsibilities and could adversely affect our financial performance.
 
Our business may be negatively impacted by a slowing economy or by unfavorable economic conditions or developments in the United States and/or in other countries in which we may operate.
 
A general slowdown in the economy in the United States or unfavorable economic conditions or other developments may result in decreased consumer demand, business disruption, supply constraints, foreign currency devaluation, inflation or deflation. A slowdown in the economy or unstable economic conditions in the United States or in the countries in which we operate could have an adverse impact on our business results or financial condition. Currently we do not have any international operations.
 
Risks Relating to Our Securities
 
There has been a very limited public trading market for our securities, and the market for our securities may continue to be limited and be sporadic and highly volatile.
 
There is currently a limited public market for our common stock. Our common stock has been listed for trading on the OTC Bulletin Board (the “OTCBB”). We cannot assure you that an active market for our shares will be established or maintained in the future. Holders of our common stock may, therefore, have difficulty selling their shares, should they decide to do so. In addition, there can be no assurances that such markets will continue or that any shares, which may be purchased, may be sold without incurring a loss. Any such market price of our shares may not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value and may not be indicative of the market price for the shares in the future.
 
 In addition, the market price of our common stock may be volatile, which could cause the value of our common stock to decline. Securities markets experience significant price and volume fluctuations. This market volatility, as well as general economic conditions, could cause the market price of our common stock to fluctuate substantially. Many factors that are beyond our control may significantly affect the market price of our shares. These factors include: 
 
 
●
price and volume fluctuations in the stock markets;
 
 
●
changes in our revenues and earnings or other variations in operating results;
 
 
●
any shortfall in revenue or increase in losses from levels expected by us or securities analysts;
 
 
●
changes in regulatory policies or law;
 
 
●
operating performance of companies comparable to us; and
 
 
●
general economic trends and other external factors.
 
Even if an active market for our common stock is established, stockholders may have to sell their shares at prices substantially lower than the price they paid for it or might otherwise receive than if a broad public market existed.
 
 
31
 
 
Future financings could adversely affect common stock ownership interest and rights in comparison with those of other security holders.
 
Our board of directors has the power to issue additional shares of common or preferred stock without stockholder approval. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. In addition, as of March 31, 2012, we had issued and outstanding options and warrants that may be exercised into 242,029,518 shares of common stock and 9,000,000 shares of Series A Convertible Preferred Stock that may be converted into 54,000,000 shares of common stock, outstanding principal convertible notes totaling  $5,005,539 and accrued interest payable of $955,806 which together may be converted into 298,067,272 shares of common stock (subject to 4.99-9.99% beneficial ownership limitations) at a maximum conversion cap rate of $.02 per share.  The Series A votes with the common stock on an as converted basis.  Pursuant to the terms and conditions of the Company’s outstanding Series A, the conversion rate and the voting rights of the Series A will not adjust as a result of any reverse stock split.  Further, the authorized but unissued Series A will not adjust as a result of any reverse split.  As a result, in the event of a reverse split of our common stock, the voting power would be concentrated with the Series A holder.
 
Further, if we issue any additional common stock or securities convertible into common stock, such issuance will reduce the proportionate ownership and voting power of each other stockholder. In addition, such stock issuances might result in a reduction of the book value of our common stock.
 
A substantial number of our shares are available for sale in the public market, and sales of those shares could adversely affect our stock price and our ability to obtain financing.
 
Sales of a substantial number of shares of common stock into the public market, or the perception that such sales could occur, could substantially reduce our stock price in the public market for our common stock and could impair our ability to obtain capital through a subsequent financing of our securities. We have 854,047,952 shares of common stock outstanding as of March 31, 2012 of which 848,758,899 shares are held by non-affiliates.  Further, the Company has outstanding convertible notes in the face value of $5,005,539 which may be converted into 250,276,933 shares of common stock and warrants that may be exercised into 213,900,441 shares of common stock (subject to 4.99-9.99% beneficial ownership limitations).  Generally, the holders of the securities convertible or exercisable into our common stock may be able to sell the common stock issued upon conversion or exercise after a six month holding period under Rule 144 adopted under the Securities Act of 1933 (as amended, the “Securities Act”).  As such, you should expect a significant number of such shares of common stock to be sold.  Depending upon market liquidity at the time our common stock is resold by the holders thereof, such re-sales could cause the trading price of our common stock to decline.  In addition, the sale of a substantial number of shares of our common stock, an anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.  In addition, shareholders on April 27, 2012 approved the increase of our authorized shares from one billion to five billion shares which makes more shares available for issuance. 
 
EFFECTS OF INFLATION
 
We believe that inflation has not had any material effect on our net sales and results of operations.


The consolidated financial statements for the years ended March 31, 2012 and 2011 are contained on Pages F-1 to F-56 which follows.


None.

 
Evaluation of Disclosure Controls and Procedures
 
Disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
 
32
 
 
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2012. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting. Under the supervision and with the participation of our management, including our chief executive officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting using framework similar to criteria referenced in the initial steps of the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of the year ended March 31, 2012.
 
A material weakness is a significant deficiency (as defined in the Public Company Accounting Oversight Board’s Auditing Standard No. 2), or a combination of significant deficiencies, that results in reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of the Company’s internal controls over financial reporting, management determined that there were control deficiencies as of the year ended March 31, 2012 that constituted material weaknesses, as described below.
 
 
* We have noted that there may be an insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing internal controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis.
 
* We do not have an audit committee or an independent audit committee financial expert. While not being legally obligated to have an audit committee or independent audit committee financial expert, it is the management’s view that to have an audit committee, comprised of independent board members, and an independent audit committee financial expert is an important entity-level control over the Company's financial statements. Currently, the Board does not have sufficient independent directors to form such an audit committee. Also, the Board of Directors does not have an independent director with sufficient financial expertise to serve as an independent financial expert.
 
* Due to the complex nature of recording derivatives and similar financial instruments, we noted a need for increased coordination and review of techniques and assumptions used in recording derivatives to ensure accounting in conformity with generally accepted accounting principles.
 
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report.
 
Remediation Efforts to Address Deficiencies in Internal Control over Financial Reporting 
 
As a result of the findings from the evaluation conducted of the effectiveness of our internal control over financing reporting as set forth above, management intends to take practical, cost-effective steps in implementing internal controls, including the following remedial measures:
 
 
* Interviewing and potentially hiring outside consultants that are experts in designing internal controls over financial reporting based on criteria established in Internal Control-Integrated Framework issued by COSO.
 
* The Company has hired an outside consultant to assist with controls over the review and application of derivatives to ensure accounting in conformity with generally accepted accounting principles.
 
 
33
 
 
 
* Board to review and make recommendations to shareholders concerning the composition of the Board of Directors, with particular focus on issues of independence. The Board of Directors to consider nominating an audit committee and audit committee financial expert, which may or may not consist of independent members as funds allow.
 
Due to inadequate financing, the Company has not hired any outside experts to design additional internal controls over financial reporting or recommended a new board director that is a financial expert.
 
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
Changes in Internal Control over Financial Reporting
 
No change in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2012, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 

None

PART III


The directors and executive officers as of March 31, 2012 are as follows. Our directors are elected at the annual meeting of our stockholders and serve until their successors are elected and qualified.

Name of Officer and Age
      
Position with the Company
  
Year Appointed
Roy Warren
  56  
Chairman, Chief Executive Officer and President
  
2007
Michael Edwards
  52  
Director
  
2007
H. John Buckman
  66  
Director
  
2007
Tommy Kee
  63  
Chief Financial Officer
  
2007 2010*
 
* Mr. Kee resigned as CFO in July 2009 but rejoined the Company in April 2010. 

The experience and background of the Company’s directors, executive officers and significant employees follow:

Mr. Roy Warren – Chairman, Chief Executive Officer and President since September, 2007

Mr. Warren serves as our Chairman of the Board, Chief Executive Officer and President.  As Chief Executive Officer, Mr. Warren provides overall company leadership and strategy.  Mr. Warren also serves as a director of our wholly owned subsidiary, Attitude Drink Company, Inc.  For 15 years from 1981 through 1996, Mr. Warren was in the securities brokerage industry.  During those years, Mr. Warren acted as executive officer, principal, securities broker and partner with brokerage firms in Florida, most notably Kemper Financial Companies, Alex Brown & Sons and Laffer Warren & Company.  From 1999 to 2007, Mr. Warren was Chief Executive Officer of Bravo! Brands, Inc. in Florida, a public company which was a beverage brand-development company, similar to Attitude Drinks Incorporated.  This experience in the beverage industry as well as with a public company led to the conclusion that he should serve as a director of the Company.

Mr. Michael Edwards – Director since 2007

Mr. Edwards serves on the Board of Directors.  He currently is the sole proprietor of a chain of automobile car washes in Martin County, Florida.  Prior to this, he served as Chief Revenue Officer for Bravo! Brands, Inc. for over five years in which he led the sales team force for introduction and sales of the company’s various developed beverage brands and products.  This expertise in the development and sales of beverage products led to the conclusion that he should serve as a director of the Company.  Prior to that time, he worked for 5 years in beverage marketing research for Message Factors, Inc., a Memphis, Tennessee marketing research firm.  Mr. Edwards has a BS degree from Florida State University in Management and Marketing and spent 13 years in the banking industry, leaving CitiBank to join Message Factors in 1995.
 
 
34
 
 
Mr. H. John Buckman – Director since 2007

Mr. Buckman serves on the Board of Directors.  He is a principal and majority shareholder of Buckman, Buckman and Reid, a licensed broker-dealer co-founded by Mr. Buckman in 1988.  Mr. Buckman also joined the Board of Center for Vocational Rehabilitation (CVR) in 1994 and was a member for ten years.  Presently, Mr. Buckman is President of the Board of Directors for Asian Youth Ministries in New Jersey.  His many years of broker-dealer experience, which provide valuable direction in the Company’s interactions in the securities market as well as his management and director experience, supports his role as director of the Company.
 
Mr. Tommy Kee –Chief Financial Officer since 2007

Tommy Kee joined our company in November, 2007 as Chief Financial Officer.  Mr. Kee was previously the Chief Accounting Officer of Bravo! Brands, Inc.  He graduated with an MBA from the University of Memphis and a BS degree in accounting from the University of Tennessee.  Before joining us, he served for several years as CFO for Allied Interstate, Inc. in the West Palm Beach area.  Prior to that, Mr. Kee served as CFO and Treasurer for Hearx Ltd. a West Palm Beach, Florida public company.  He also served 18 years as International Controller and Financial Director with the Holiday Inns Inc. organization in Memphis and Orlando.  Mr. Kee gave his letter of resignation as CFO, effective July 10, 2009 but rejoined the Company in April, 2010.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely on a review of the appropriate Forms 3, 4 and 5 and any amendments to such forms filed pursuant to Section 16(a) during the most recent fiscal year, we report no late filings.

Code of Ethics

On May 14, 2009, the Board of Directors approved and ratified a Code of Ethics that is applicable to all directors, officers and employees.  A copy of the Code of Ethics was attached an Exhibit 14 in the Form 10-K/A-2 that was filed for the fiscal year that ended March 31, 2009. The Code of Ethics is also available for review on our website at www.attitudedrinks.com.  Furthermore, a copy of the code is available to any person free of charge upon request by writing to our company at 10415 Riverside Drive, Suite 101, Palm Beach Gardens, Florida 33410.

Committees

Although we have a majority of independent directors due to the lack of adequate capital, we do not have a separately designated audit committee, nominating committee, compensation committee or a person designated as an audit committee member financial expert.  We do not have a separately designated audit committee or an audit committee member financial expert because the cost of identifying, interviewing, appointing, educating, and compensating such persons would outweigh the benefits to our stockholders at the present time.  If we are successful in our efforts to secure additional capital, the resources may be available to appoint additional directors, have a separately designated audit committee, nominating committee, compensation committee and a person designated as an audit committee member financial expert. All directors participate in nominations of directors, and there is no formal nomination charter or policy in regard to recommendation of directors by shareholders due to the Company’s size and operations.
 
 
35
 
 

Summary Compensation Table

The following table sets forth the compensation earned during the last two fiscal years by our executive officers as well as any unpaid compensation since the employment date with the company.  Please note that the company did not have sufficient capital to make regular compensation payments to these officers, and unpaid amounts have been accrued and reflected as expense:
 
                                     
Change in
              
                                     
Pension Value
              
                                     
Value &
              
                               
Non-equity
    
Nonqualified
    
 
        
       
Earned
          
 
    
(e)
    
Incentive
    
Deferred
    
(g)
        
 
Principal
    
Salary /
          
Stock
    
Option
    
Plan Comp.
    
Comp.
    
All Other
        
Name
Position
Year
  
Consulting $
    
Bonus $
    
Awards $
    
Awards $
       $    
Earnings $
    
Comp. $
    
Total $
  
Roy Warren(f)
 CEO
2012 (a)
   $ 162,000     $ -     $ -     $ -     $ -     $ -     $ 19,308     $ 181,308  
Roy Warren (f)
 CEO
2011 (b)
   $ 295,077     $ -     $ -     $ -     $ -     $ -     $ 19,577     $ 314,654  
                                                                     
Tommy Kee (f)
 CFO
2012 (c)
   $ 84,000     $ -     $ -     $ 2,642     $ -     $ -     $ 12,042     $ 98,684  
Tommy Kee (f)
 CFO
2011 (d)
   $ 143,500     $ -     $ -     $ -     $ -     $ -     $ 12,344     $ 155,844  
 
(a)  For the year ended March 31, 2012, Roy Warren, CEO, earned an annual base salary of $150,000.  Once the company has adequate capital, his salary will be increased back to his previous salary of $180,000.  The $162,000 amount reflects his salary of $150,000 and unpaid annual director’s fees of $12,000.

(b)  For the year ended March 31, 2011, Roy Warren, CEO, earned an annual base salary of $150,000.  His previous annual salary of $180,000 was reduced during July 2010 with the expectation to return back to this amount once adequate capital is available.  The $295,077 amount reflects his salary of $158,077, unpaid annual director’s fees of $12,000 and $125,000 for a conversion of previous years’ past due salary into 8,333,333 restricted shares of common stock.

(c)  For the year ended March 31, 2012, Tommy Kee, CFO, earned an annual base salary of $84,000. Once the company has adequate capital, his salary will be increased back to his previous salary of $150,000.  The $84,000 amount reflects his salary in which $24,100 was not paid.

(d)  For the year ended March 31, 2011, Tommy Kee, CFO, earned an annual base salary of $84,000. His previous annual salary of $150,000 was reduced during July, 2010 with the expectation to return back to this amount once adequate capital is available.  The $143,500 amount reflects his salary of $73,500 and $70,000 for a conversion of previous years’ past due salary into a total of 5,656,566 shares of common stock with 4,156,566 of the total being restricted shares.  These shares were returned back to the Company in the latter part of the 2011 calendar year.  For this return, the same number of stock options was issued at an exercise price of $.02. Out of the total earned amount for this fiscal year, he has not been paid $21,615.

(e)  This amount represents the aggregate grant date fair value that was computed in accordance with FASB Topic 718 for the grant of non-qualified stock options to the named executives.  These options were granted in December, 2012 and have an exercise price of $.02 and vest immediately with an expiration life of five (5) years.  The stock options were valued at $.000467 per stock option for Tommy Kee (5,656,566 stock options at $.000467 = $2,642).

(f)  Neither executive has an employment or a consulting agreement.  The Company intends to pay accrued but unpaid amounts either by conversions of certain past due amounts in the Company’s common stock and/or cash once the Company’s fundings and financial position will allow such payments.  Since the Company was not able to consistently make salary payments to these two named executives, the Company had to treat most of these payments as consulting fees.

(g)  All other compensation figures represent company paid medical insurance for the above named executives.

 
36
 

Outstanding Equity Awards at March 31, 2012
 
      Option Awards     Stock Awards        
                                               
Equity
  
                                                Incentive  
                                               
Plan
  
                                         
Equity
     Awards:  
                                          Incentive    
 Market
  
               
Equity
                        
Plan
    
or Payout
  
                Incentive                         Awards:    
Value of
  
               
Plan
                  
Market
    
Number
     Unearned  
               
Plan Awards:
            
Number of
    
Value of
    
of Unearned
    
Shares,
  
   
Number of
    
Number of
    
Number of
            
Shares or
    
Shares of
    
Shares, Units
    
Units or
  
   
Securities