TMCnet News
Management's Plan of Operations(Edgar Glimpses Via Acquire Media NewsEdge) We have not generated significant revenues for the three-and six month periods ended June 30, 2014 and 2013, respectively. Management continues to seek capital through various sources. On June 10, 2013 we entered into a Financial Advisory & Investment Banking Agreement with CIM Securities, LLC ("CIM"). Under the agreement, CIM agreed to attempt to raise a maximum of $5.0 million for us on a best efforts basis. In July 2013, together with CIM, we produced a private placement memorandum for $1.5 million in bridge loan financing. Once the bridge loan financing was arranged, CIM was to turn its efforts to the $5.0 million offering. Unfortunately, CIM's efforts have not been successful. Our inability to raise capital has adversely affected our efforts to expand our distribution network, develop our sales and marketing programs, and increase brand awareness. As such, we have sought additional merger partners. As a result, on March 28, 2014, we received a Letter of Intent ("LOI") from Greenome Development Group Inc. ("Greenome") to sell to Greenome 80% of our outstanding common stock and on May 6, 2014, we entered into a Share Exchange Agreement with Greenome with respect to this transaction. See Notes 11 and 12 for additional information. 5 Our consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that might result from the outcome of this uncertainty. We are continuing to generate losses and to attempt to seek capital. In addition, we have significant debt. We intend to continue to attempt to compromise our remaining debt. These factors raise substantial doubt about our ability to continue as a going concern. If we are unable to generate positive cash flow from operations or raise adequate capital we may have to reduce or cease operations. 2. Reverse Stock Split On November 29, 2012, our Board executed a unanimous written consent authorizing and recommending that our stockholders approve a proposal to institute a one-for-sixty (1:60) reverse stock split. On the same day, holders of a majority of the voting power of all shares of our common and preferred stock entitled to vote, by written consent in lieu of a special meeting of our stockholders, approved the Board's recommendation. The reverse split became effective February 15, 2013. All references to shares and per share information in these consolidated financial statements have been restated to give effect to the Reverse Split. 3. Basis of Presentation and Significant Accounting Policies Basis of Presentation The consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Notes to the consolidated financial statements which would substantially duplicate the disclosures contained in the audited consolidated financial statements for the most recent fiscal year 2013 as reported in our Form 10-K have been omitted. In the opinion of management, the consolidated financial statements include all adjustments, consisting of normal recurring accruals necessary to present fairly our financial position, results of operation and cash flows. The results of operations for the three and six month periods ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the consolidated financial statements and related notes which are part of our Annual Report on Form 10-K for the year ended December 31, 2013. Principles of Consolidation The accompanying consolidated financial statements include the accounts of FITT Highway Products, Inc. and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Management makes estimates and assumptions that affect the amounts reported in the consolidated financial statements and footnotes. Actual results could differ from those estimates. Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates. Recent Accounting Pronouncements The FASB issues ASUs to amend the authoritative literature in ASC. There have been a number of ASUs to date that amend the original text of ASC. We believe those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to our Company or (iv) are not expected to have a significant impact on us. 6 4. Inventories Inventories consist of the following at: June 30, December 31, 2014 2013 Finished goods $ 51,905 $ 51,905 Raw materials - boxes and labels 591 591 $ 52,496 $ 52,496 5. Accrued Expenses Accrued expenses consist of the following at: June 30, December 31, 2014 2013 Accrued interest $ 371,886 $ 312,057 Accrued royalties and commissions 11,666 11,666 Securities exchange agreement deposit 180,000 - Other 799 799 $ 564,351 $ 324,522 6. Accrued Compensation Accrued compensation consists of the following at: June 30, December 31, 2014 2013 Accrued officers compensation $ 1,039,578 $ 912,343 Other accrued compensation 414,820 330,599 Accrued payroll taxes - delinquent 318,865 311,595 Accrued payroll taxes on accrued payroll (not yet due) 176,505 158,187 $ 1,949,768 $ 1,712,724 During the three and six months ended June 30, 2014, we made minimal payments to our employees and accrued most of their compensation. In addition, effective January 14, 2014 an employee repaid certain advances made to him in 2013 in the amount of $27,551 through an agreement to surrender 27,350 shares of common stock of our post-merged company which were beneficially owned by him. The shares were valued at the volume weighted adjusted price of the common stock for the 20 trading days prior to his agreement to surrender the shares. In October 2010, the IRS filed a federal tax lien against us in the amount of $136,678 related to past-due payroll taxes. The Company has accrued estimated interest for non-payment of those past due payroll liabilities. Commitments and Contingencies Prior to the Merger, FITT made advances to our CEO, either personally or to a company he owns, of $691,805, including annual interest of 6%. During the fourth quarter of 2013, our CEO repaid the advances through an agreement to surrender 668,386 shares of common stock of our post-merged company which were beneficially owned by him as part of the Merger. The shares were valued at approximately $1.04, the volume weighted adjusted price of the common stock for the 20 trading days prior to his agreement to surrender the shares. While the advances were formally relieved in fiscal 2013, the shares were surrendered during the first quarter 2014. We continue to owe our CEO $1,039,578 in accrued compensation and $123,798 in advances made by him (see Note 6 & 8). 7 Although we believe these advances made to our CEO by FITT have been appropriately accounted for, it is reasonably possible that a future examination by an external party may deem a portion of these advances to be compensatory. If such determination is made, the Company may be liable for employer payroll taxes on advances deemed compensatory. Based on our estimation, if such a determination is made, the corresponding liability could range from approximately $17,000 to approximately $50,000. 7. Notes Payable Notes payable consists of the following at: June 30, December 31, 2014 2013 Convertible promissory notes - debt acquisition $ 200,000 $ 200,000 Notes payable - original bridge 170,000 170,000 Notes payable - bridge loan #1 355,000 405,000 Notes payable - bridge loan #2 350,000 350,000 Notes payable - bridge loan #3 500,000 500,000 Convertible promissory note - Asher Note payable - maturity date 42,500 - Debt discount - remaining on issue discount (909 ) - Convertible promissory note - service agreement 20,000 20,000 Note payable - other - 5,000 Subtotal 1,636,591 1,650,000 Less current portion (1,636,591 ) (1,650,000 ) Long-term portion $ - $ - Convertible Promissory Notes - Debt Acquisition During the first quarter of 2013 we entered into Debt Acquisition Agreements ("Debt Agreements") with two parties affiliated with each other (the "Debt Funders"). Under the Debt Agreements, we issued convertible promissory notes for cash received totaling $150,000, $50,000 of which was subsequently converted to equity. The notes bear interest at 10% per annum and are repayable at two times the principal amount of the notes. Repayment is to be made by conversion into shares of our common stock based on a 20-day volume weighted average price with the minimum conversion price based on a market valuation for our company of $10 million the maximum based on a market valuation of $20 million. The due date by which the Debt Funders were to convert the notes is December 31, 2013, but such conversion has not yet been made. Note Payable - Original Bridge These notes payable were transferred to us from FHWY in November 2010 with all noteholders consenting to the transfer. The notes, which had an original face value of $245,000, bear interest from 10% to 12% per annum and are repayable from a pool of 10% of gross proceeds from the sales of the FITT Original product. In December 2013, a noteholder converted $75,000 of this debt to equity. Although we have received sales proceeds from FITT Original, no payments have been made to date on these notes payable. As such, the notes payable are in default and have been recorded as current liabilities in the accompanying Consolidated Balance Sheets for all periods presented. Note Payable - Bridge Loan #1 This debt arose from an offering we initiated in 2010 of up to $1.0 million of units of securities, each unit consisting of a 12% unsecured promissory note and 0.083 shares of common stock of FHWY for every dollar invested. In connection with this offering, we issued notes with face value totaling $580,000. During the three months ended December 31, 2013, $175,000 in face amounts were converted to equity. During the six months ended June 30, 2014, a noteholder converted $50,000 in face amounts to equity. The notes were repayable 12 months from the date of issue and repayment was to come from a pool of 10% of cash receipts from the sales of the FITT Original product. Although we have received sales proceeds from FITT Original, no payments have been made to date on these notes payable. As such, the Bridge Loan #1 notes payable are in default and have been recorded as current liabilities in the accompanying Consolidated Balance Sheets for all periods presented. 8 Note Payable - Bridge Loan #2 In November 2011, we initiated a Bridge Loan offering of up to $1.0 million of units of securities, each unit consisting of a 10% convertible promissory note (interest rate increasing to 18% upon an event of default) and 5.5 shares of our common stock for every dollar invested with repayment to be made at two times the principal amount of the notes. The notes matured at various dates, all of which were within twelve months of the date of issuance. In connection with this offering, we received cash and issued notes with principal amounts totaling $255,000. These notes are repayable at two times the cash received which totaled $510,000. During the three-month period ended December 31, 2013, $160,000 was converted to equity. In the event we file a registration statement with the SEC and it is declared effective, we have the option to repay the original principal plus accrued interest in shares of our common stock calculated at the offering price within the registration. No payments have been made to date on these notes payable. As such, the Bridge Loan #2 notes payable are in default and have been recorded as current liabilities in the accompanying Consolidated Balance Sheets for all periods presented. The additional principal of $255,000 was accreted on an effective interest method over the respective term of each of the notes. We also recorded an initial discount on the notes of $11,275 based on the estimated fair market value of our common shares on the date of issuance. In connection with the debt discount and accretion, during the three and six months ended June 30, 2013, we charged interest expense of $9,205 and $23,253, respectively. As of December 31, 2013, there was no remaining unamortized discount. Note Payable - Bridge Loan #3 In December 2012 we initiated a Bridge Loan offering of up to $1.0 million of units of securities, each unit consisting of a 10% convertible promissory note (interest rate increasing to 18% upon an event of default). During the second quarter of 2013, we issued a note with face value totaling $250,000 in connection with the offering and received proceeds of $225,000. The note is repayable at two times the principal amount of the note (repayment amount of $500,000) and matured June 30, 2013. We have the option to repay the note in cash, shares of common stock of the merged entity, or a combination of cash and shares of common stock. Any portion of payment made in shares of our common stock are to be valued at the 20-day volume weighted adjusted market price of the stock of the merged entity. No payments have been made to date on these notes payable. As such, the Bridge Loan #3 notes payable are in default and have been recorded as current liabilities in the accompanying Consolidated Balance Sheets for all periods presented. We recorded an initial discount of $25,000 on this note which we amortized through June 30, 2013, the effective maturity date of the note. The additional principal of $250,000 was accreted through the effective maturity date of June 30, 2013. Convertible Promissory Note - Asher On January 6, 2014 we issued a convertible promissory note to Asher Enterprises, Inc. ("Asher") in the amount of $42,500. The note bore interest at 8% per annum and was to mature on October 8, 2014. We recorded an initial discount of $2,500 on this note which we were amortizing on a straight-line basis through October 8, 2014, the effective maturity date of the note. During the three and six months ended June 30, 2014, $827 and $1,591, respectively was amortized to expense. Any amount of principal or interest which was not paid by the maturity date was to bear interest at 22% per annum from the maturity date. The note had a conversion feature under which it was convertible into common stock beginning 180 days from the date of the note at a conversion price of 58% of the market price of our stock. The conversion feature had a ratchet provision, which adjusts the conversion price in the event of a capital raise at a lower amount per share than the conversion price. The conversion feature was to be accounted for as a derivative liability upon the passage of time and the note becoming convertible if not extinguished as defined above. Derivative accounting applies upon the conversion feature being available to the holder, as it is variable and does not have a floor as to the number of common shares into which it could be converted. 9 On July 15, 2014, prior to the date the note became convertible we entered into an Assignment Agreement with Asher and Goldenrise Development, Inc. ("Goldenrise") under which Asher agreed to assign the note to Goldenrise for consideration of $55,000. Also effective on July 15, 2014 and subsequent to the assignment, we amended the note to revise the principal amount to $55,000 and to modify the conversion feature so that the conversion price cannot be lower than $0.15 per share. The amendment also eliminated the note's ratchet provision. As such, derivative accounting no longer applies to the new note. During the third quarter ending September 30, 2014, we will account for the July 15, 2014 assignment as an extinguishment of the convertible note and issuance of a new note due to the substantially different terms. Convertible Promissory Notes - Service Agreement During the first quarter of 2013, FHWY became obligated to issue convertible promissory notes totaling $20,000 to a company under a Service Agreement. The notes bear no interest and were to be repayable through a conversion into shares of our common stock. We have determined that the service provider has not performed any services under the agreement and the note is in dispute. Note Payable - Other On April 3, 2013, we issued a note payable in the amount of $5,000 together with 28,440 shares of our restricted common stock. The note carried an interest rate of 10% per annum and matured on October 3, 2013. During the second quarter of 2013, we recorded an initial discount on this note of $5,000 based on the estimated fair market value of our common shares on the date of issuance. The debt discount was amortized over the 6-month term of the note. This note was converted to equity as noted under Debt Conversions below. Debt Conversions In February 2014, a creditor holding notes payable with repayment amounts totaling $55,000 ($50,000 in Notes Payable- Bridge Loan #1 and $5,000 in Notes Payable - Other) converted his notes and related accrued interest into 115,637 shares of common stock. We valued the shares at their fair market value on the date of conversion and during the six months ended June 30, 2014, we recorded a loss on extinguishment of debt totaling $33,594 in connection with this transaction. 8. Related Parties Advances from related parties consist of the following at: June 30, December 31, 2014 2013 Advances from CEO $ 123,797 $ 144,074 Advances from Shareholder 15,000 15,000 $ 138,797 $ 159,074 Also see Note 6 for additional information regarding related parties transactions. 9. Capital Stock Preferred Stock We have authorized the issuance of a total of 20,000,000 shares of our preferred stock, each share having a par value of $0.001. On May 15, 2012, our Board of Directors agreed to issue 105,000 shares of our preferred stock, designated as Series A, to FITT as a reduction of $315,000 in debt we owed them. Upon finalization of the Merger, these shares were cancelled and no shares remain outstanding. Common Stock We have authorized the issuance of 150,000,000 shares of our common stock, each share having a par value of $0.001. Following is the activity for our shares of common stock during the six months ended June 30, 2014: Shares Shares outstanding December 31, 2013 38,018,748 Issuance for extinguishment of debt 115,637 See Note 7 Surrender of shares to repay advances: CEO (668,386 ) See Note 6 Employee (27,350 ) See Note 6 Shares outstanding June 30, 2013 37,438,649 10 Common Stock Issued for Services During the six months ended June 30, 2013, we issued 526,599 shares of common stock in payment for services relating to retail distribution, product representation and strategic counseling. The shares were valued at $27,500 which was our determination of the fair market value of the shares. We recorded selling and marketing expense of $20,000 and general and administrative expense of $7,500 in connection with the share issuances. Common Stock Issued for Compensation In 2013, we hired our Director of Sales. As part of the employment arrangement, we issued this individual a total of 170,640 shares of our common stock. During the three and six months ended June 30, 2013 we recorded selling and marketing expense of $60,000 in connection with the share issuances based on our determination of the fair market value of the shares. 10. Significant Agreements On March 28, 2014 we executed a Letter of Intent ("LOI") from Greenome Development Group Inc. ("Greenome") whereby we agreed to sell to Greenome 80% of our outstanding common stock at a purchase price of $400,000. On May 6, 2014, we entered into a Share Exchange Agreement with Greenome. Under the agreement, Greenome will acquire 30,600,000 shares of our common stock which will equal exactly 80% of the outstanding shares. The purchase price is $400,000, $30,000 of which was received in March 2014 on execution of the LOI and recorded as a deposit. Another $150,000 was received during the three months ended June 30, 2014, for total funds of $180,000. An additional $45,000 was due 10 days after the effective date of the Share Exchange Agreement and has not been received as of the date of this Report. The final $175,000 is due when certain conditions have been met, but no later than December 31, 2014. Our Company's conditions include the mitigation of certain of our debt to Greenome's satisfaction and the restructure of our notes payable with the following features: · New interest rates of no greater than 10% per annum · New maturity dates on debt no earlier than August 1, 2015 · A forced conversion into free-trading shares of our common stock at any time our common stock has a closing bid price per share of $1.00 or more for 20 consecutive trading days after the closing as defined in the agreement For their part, Greenome's conditions include completing the necessary requirements to be able to merge our two companies including completing applicable audit and SEC filing requirements. While Management believes we will be able to restructure our notes payable, it may prove to be difficult. If we do not meet the conditions imposed on us by the agreement by December 31, 2014, we will be obligated to repay Greenome for monies received from them (50% in cash and 50% in common stock valued at $0.20 per share) and may have difficulty finding another merger partner. If Greenome does not meet their conditions, no monies received from them will need to be repaid. On May 30, 2014, on behalf of Greenome, we entered into a stock purchase transaction with a significant shareholder for the purchase of 9,669,575 shares of our common stock. Per the agreement, we are to receive funds as indicated above from Greenome, and remit a portion of those funds totaling $125,000 to the shareholder in the following tranches: $25,000 upon the signing of the agreement with the shareholder, $25,000 within ten days of the shares being turned over to an escrow agent, and $75,000 when the Company receives the final payment of $175,000 from Greenome as part of the Share Exchange Agreement described above. In turn, the shareholder is to submit to an escrow agent, shares of our common stock totaling 9,669,575 shares. These shares are to be released to Greenome after the second tranche of $25,000 is paid to the shareholder. If the closing cannot take place by December 31, 2014 and the final $75,000 payment to the shareholder is not made, the Company will issue 5,769,231 common shares to the shareholder. To date, only the first payment of $25,000 has been remitted. 11. Subsequent Events On July 21, 2014, we entered into a Consulting Agreement with The Scott Group, whose CEO is Steve Scott. Under the agreement, which has a term of sixty (60) days, The Scott Group will provide a variety of public relations services to assist us in increasing our investor base and shareholder awareness and in obtaining sponsorship from the brokerage community. In addition, The Scott Group will assist us with converting our debt. As compensation for the services, we agreed to pay The Scott Group $2,500 per month for the months of July and August 2014 and to issue them 50,000 shares of our common stock in those same two months. In connection with this agreement, we will record a general and administrative expense during the third quarter ending September 30, 2014. See Note 7 for convertible debt assignment. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION Disclaimer Regarding Forward-Looking Statements Our Management's Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission. Although the forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects. Description of Business Our business is the manufacturing (on an outsource basis), distribution and sale of energy drinks. We market three two-ounce energy shots named "F.I.T.T. Energy for Life" (the "FITT Energy Shot"), "F.I.T.T. Energy Extreme" and "F.I.T.T. Energy Rx". We have significant debt and our profitability and cash flow are dependent upon our success in marketing our three energy shot products. We have not generated significant revenues for the three- and six-month periods ended June 30, 2014 and 2013, respectively. Management continues to seek capital through various sources. On June 10, 2013 we entered into a Financial Advisory & Investment Banking Agreement with CIM Securities, LLC ("CIM"). Under the agreement, CIM agreed to attempt to raise a maximum of $5.0 million for us on a best efforts basis. In July 2013, together with CIM, we produced a private placement memorandum for $1.5 million in bridge loan financing. Once the bridge loan financing was arranged, CIM was to turn its efforts to the $5.0 million offering. Unfortunately, CIM's efforts have not been successful. Our inability to raise capital has adversely affected our efforts to expand our distribution network, develop our sales and marketing programs, and increase brand awareness. As such, we have sought additional merger partners and, on May 6, 2014 we entered into a Share Exchange Agreement with Greenome which is discussed in Note 10 to the accompanying consolidated financial statements. Greenome has represented that they will continue to market, in some fashion, the FITT energy shot products, along with other products they are currently working on. However, our agreement with them does not require them to do so. The following information regarding products, operations, marketing, distribution, production and the industry assumes the continuation of our current business. 12 Products We are marketing three two-ounce energy shots, which are F.I.T.T. Energy for Life, F.I.T.T. Energy Extreme and F.I.T.T. Energy Rx. All three energy shots were designed in collaboration with Dr. Rand Scott, a Board Certified Anesthesiologist and Pain Management Specialist. Dr. Scott incorporated a number of unique ingredients into the products which allows for the use of lower levels of caffeine. We believe that higher levels of caffeine may be unhealthy and potentially dangerous for our consumers, especially for adolescents or people with blood pressure issues. Dr. Scott is a well-known medical/legal expert witness in his areas of medical expertise and has significant experience with the use of herbal products. In addition, Dr. Scott is one of our shareholders and has no rights to our energy shots beyond the payment of a royalty of $0.02 per bottle of each energy shot sold. Dr. Scott worked under a Product Development & Marketing Agreement with FITT (the "Scott Agreement"). According its terms, the Scott Agreement was transferred to us after the Merger and continues in full force and effect. The Scott Agreement is dated March 1, 2012 and has an initial term of 24 months. After the initial term, unless sooner terminated, the Scott Agreement automatically renews for successive one-year periods. Ingredients: The energy shot formulae contain ingredients selected to not only provide energy, but to also enhance mental focus, muscle strength and endurance, and promote cardiovascular health. The energy shots feature Resveratrol, a substance found naturally in grapes. While there is no scientific consensus regarding the health benefits of Resveratrol, it has the scientific world fascinated by its potential to affect age related declines and is being widely studied for that as well as its potential to cause the body to act as if it is already on a diet, and to change the distribution of fat tissue in the body. It should be noted that neither the Food and Drug Administration ("FDA") nor any comparable regulatory agency has approved resveratrol or resveratrol-based products for the treatment of any illness, injury or condition. Our energy shots also contain L-Arginine, an amino acid in dairy, brown rice and nuts which is essential for optimum growth, and regulation of protein metabolism. L-Arginine can make blood vessels wider, as opposed to the narrowing effect of caffeine. Further, L-Arginine may benefit in the treatment of sports related injuries, as well in building lean muscle and burning fat, since it facilitates the natural release of growth hormone (HGH) and is a building block for creatine. Additionally, the drink features L-Arginine AKG. L-Arginine AKG has been shown in a University study to help build additional strength when used during training. Beyond this, the FITT Energy Shot features antioxidant Green Tea extract, and Chromium. These ingredients have good safety profiles and have support as weight-loss aides. More than just a caffeine drink, our FITT Energy Shot adds natural energy boosters including Taurine & Guarana, as well as essential Vitamins B3, B5, B6, and B12. To optimize workouts, the FITT Energy Shot has a touch of Fructose, an easily absorbed fuel for the body and brain. All this is built on a base of healthy pomegranate and orange. Operations Since 2005, when we completed a merger with Snocone Systems, Inc., we have been unable to generate operating income and have become burdened with substantial debt. Due to a number of factors, including our substantial debt, we have had significant difficulty attracting the necessary investment dollars to produce and market our products. In addition, third parties performing marketing, production and fulfillment services have been unwilling to enter into agreements directly with us due to our poor financial condition, among other reasons. These factors raise substantial doubt about our ability to continue as a going concern unless we can substantially mitigate our debt and raise capital, as well as increase revenue producing activities. Marketing Marketing functions have been directed mainly to the retail market segment. Our marketing program described below requires significant capital which, to date, we've been unable to raise. If we are able to raise enough capital, we may also direct some future efforts to private labeling as well as to the use of electronic media such as the internet and social media. Marketing Plan - Retail The retail market space for our product includes convenience stores, grocery chains, drug stores, and health and fitness centers to name a few. We believe sales into the retail market will provide the most stable method for marketing our energy shots. However, significant funds are required in order to conduct a sustained and supported rollout of our products. The Company has estimated that approximately $5.0 million would be needed to conduct a proper rollout, but to date such funds have not been obtained. 13 In October 2011, we entered into an exclusive Master Marketing Agreement with GRIPS Marketing Corporation ("GRIPS"), a corporation managed by an individual with over 40 years' experience marketing a variety of products to convenience stores and other retail outlets. In April 2012, with the assistance of GRIPS, we received a letter from Core-Mark International, a major national distributor, in which Core-Mark agreed to team up with the Company to distribute our energy shot products. The terms of the agreement with GRIPS were negotiated with the Company's understanding that the sales personnel of large distributors like Core-Mark would be a significant factor in the sales and servicing of their retail customers. In addition, the Company was led to believe that GRIPS would be able to provide significant assistance in the acquisition of retail customers as well as in the development of programs to encourage trial of our products by ultimate end users. The Company later determined that its role in these areas needed to increase dramatically, and therefore costs, are expected to be significantly greater than initially believed. Specifically, the Company will need a larger than expected field service team to both acquire and support its retail customers, including those to which Core-Mark distributes. We will also be totally responsible for developing marketing strategies and programs including promotional programs aimed at increasing consumption frequency and product adaption. Given that the Company costs will be greater than originally anticipated, the Company believes it should negotiate new terms of its agreement with GRIPS that more properly reflect the additional costs and effort required by the Company. Marketing Plan - Representation In April 2010, we entered into an agreement with Sports 1 Marketing LLC, an entity whose principal owner is Warren Moon, NFL Hall of Fame quarterback. As part of the agreement, Mr. Moon agreed to endorse our F.I.T.T. Energy for Life energy shot and has been featured in a number of the advertising campaigns for the product including several of our test-marketing email broadcasts. In March 2013, the Company entered into an agreement with Anna Rawson for product representation services including product endorsement. Ms. Rawson is a former member of the Ladies Professional Golf Association and is a well-known model and fitness expert with a large social media following. Relationships with high-profile personalities and athletes provide an opportunity to achieve much broader brand recognition. Distribution As noted above, in April 2012, with the assistance of GRIPS, we received a letter from Core-Mark International, a major national distributor, in which Core-Mark agreed to team up with the Company to distribute our energy shot products to Core-Mark's customer base. Core-Mark is one of the largest broad-line, full-service marketers and distributors of packaged consumer products in North America. Founded in 1888, Core-Mark provides distribution and logistics services as well as marketing programs to over 29,000 retail locations across the United States and Canada through its 28 distribution centers. Core-Mark services traditional convenience retailers, grocers, mass merchandisers, drug, liquor and specialty stores, and other stores that carry consumer packaged goods. Core-Mark's plan was to launch our products in California, Nevada and Arizona, then move across the country to other divisions. During the second quarter of 2012, the Company began shipping our energy shots to Core-Mark who then shipped the products to certain of its convenience store customers. The Company's marketing program for sales into this market include in-store display racks and signage, and also include support by field sales reps and by various forms of media designed to drive the consumer to purchase the product at the retail outlets. However, without sufficient financing, we will be unable to support programs necessary to make our distribution program successful. Production Our energy shots are produced at Wellington Foods Incorporated, a contract manufacturer of liquid and powder nutritional supplements since 1974. In addition to its manufacturing facilities, Wellington has the in-house capabilities to develop products from concept for flavoring ingredient content to production, or to take an existing formula and extend the product line with new flavors or innovative ingredients. Dr. Rand Scott, one of our medical experts and a shareholder, researched and recommended the ingredients and their quantities for our energy shots, and Wellington provided the final flavoring and formulations. Wellington owns the formulae for our energy shots and is under no obligation to provide us with these products for commercial sale. We are a party to a non-disclosure agreement ("NDA") with Wellington which precludes either party from divulging information provided, which in our view includes the ingredient components of our energy shots. However, the NDA also acknowledges that Wellington provides products to many other clients and that some of these products may be similar in formulation content or manufacturing procedures. The principal raw materials used to manufacture the energy shot are plastic bottles, nutritional supplements, flavoring agents, and concentrates as well as other ingredients from independent suppliers. These raw materials are readily available from any number of sources in the United States. 14 The Industry Energy drinks, including two-ounce shots and canned drinks, are beverages with legal stimulants, vitamins, and minerals that give users a lift of energy. It should be noted that neither the FDA nor any comparable regulatory agency reviews or pre-approves the sale of energy drinks, including ours, since they are marketed as dietary supplements rather than drugs. Common ingredients are caffeine, taurine, ginseng, sugars, and various amounts of vitamins and minerals. The products are consumed by individuals who are explicitly looking for the extra boost in energy. While canned energy drinks are most commonly consumed by individuals in the 18-to-34 age group, energy shots have been appealing to a more expanded demographic. In an article discussing energy drinks published in the August 2011 issue of Beverage Industry, Garima Goel-lal, beverage analyst with Mintel International, a global leading market research company, states that "a lot of adults in the older age [group] who don't want sugar in their beverages, but want the same benefit of an energy boost, are going toward energy shots". In the same article, Jared Koerten, U.S. research associate for Euromonitor International, states "The appeal and benefits that energy shots offer consumers has driven sales in recent years. These products have capitalized on many consumer demands in the fast-paced global economy of today. First, these products offer extended energy to consumers who need to stay alert for long work hours. In addition, by promising 'no crash later', energy shots can provide a boost of energy without the accompanying loss in productivity that often stems from drinking coffee or other sugary drinks". In its June 2012 Executive Summary Report on energy drinks and energy shots, Mintel reports that sales of energy shots were nearly $1.6 billion in 2011, an increase of nearly $330 million over 2010 sales. Mintel also forecasts continued growth in energy shot sales to in excess of $3.4 billion by 2016. In this report, Ms. Goel-lal states "Energy drinks and shots continue to grow unabated, especially after the recession. In order to enjoy uninterrupted growth, the category needs to add new customers, engage in innovation, broaden its functional platform, and allay product safety concerns." Mintel also reports that Living Essential's 5-Hour Energy "continues to account for the lion's share in the segment." Results of Operations for the Three Months Ended June 30, 2014 and 2013 Net Sales We had no net sales during the three months ended June 30, 2014 compared to $1,037 for the comparable period in 2013. Due to lack of funding we lost our sales staff in the fourth quarter of 2013. Cost of Goods Sold There was no cost of goods sold for the three months ended June 30, 2014 versus $29,482 in the same period of 2013. The 2013 period included a charge of $28,994 for inventory impairment. Because of the limited amount of sales, margins indicated may not be indicative of future margins at different sales levels. Selling and Marketing Expenses Selling and marketing expenses were $16,769 and $93,272 for the three months ended June 30, 2014 and 2013, respectively. The 2013 period includes $60,000 in expense for common shares we issued to an employee and a service provider. Additionally, the 2013 period includes approximately $14,000 in expenses for advertising and samples which we did not incur in 2014. General and Administrative Expenses General and administrative expenses for the second quarter of 2014 were $186,880, compared to $82,653 for the comparable period in 2013. In the 2014 period, we incurred certain post-merger expenses which were shown in fair value of contributed services in the 2013 period. These include $113,371 in post-Merger payroll and related expenses for our CEO and Controller, the majority of which were accrued and unpaid. 15 Fair Value of Contributed Services Fair value of contributed services was zero and $70,085 for the second quarters of 2014 and 2013, respectively. The 2013 amount represents a full quarter's worth of costs of certain shared administrative services and the costs for services provided by our CEO and Controller who did not receive compensation from FITT prior to the Merger. Interest Expense Interest expense in the second quarter of 2014 was $42,171 compared to $320,655 for the same period in 2013, mainly due to prior year accretion of debt discounts which were fully accreted as of 2014, net of increased debt levels during 2014. Interest Income There was no interest income during the three months ended June 30, 2014 versus $8,033 for the comparable period in 2013. The interest income in 2013 represents an interest accrual on the advances to shareholder. Results of Operations for the Six Months Ended June 30, 2014 and 2013 Net Sales We had no net sales during the six months ended June 30, 2014 compared to $2,489 for the comparable period in 2013. Due to lack of funding we lost our sales staff in the fourth quarter of 2013. Cost of Goods Sold There was no cost of goods sold for the six months ended June 30, 2014 versus $29,983 in the same period of 2013. The 2013 period included a charge of $28,994 for inventory impairment. Because of the limited amount of sales, margins indicated may not be indicative of future margins at different sales levels. Selling and Marketing Expenses Selling and marketing expenses were $24,673 and $121,331 for the six months ended June 30, 2014 and 2013, respectively. The 2013 period includes $80,000 in expense for common shares we issued to an employee and a service provider. Additionally, the 2013 period includes approximately $20,000 in expenses for advertising and samples which we did not incur in 2014. General and Administrative Expenses General and administrative expenses for the first half of 2014 were $401,101, compared to $125,170 for the comparable period in 2013. In the 2014 period, we incurred certain post-merger expenses which were shown in fair value of contributed services in the 2013 period. These include $221,850 in post-Merger payroll and related expenses for our CEO and Controller, the majority of which were accrued and unpaid, along with $27,168 in insurance benefits. The 2014 period also contains higher professional fees of $68,617 and $22,407 in shared office expenses. Fair Value of Contributed Services Fair value of contributed services was zero and $140,170 for the first halves of 2014 and 2013, respectively. The 2013 amount represents a full six months' worth of costs of certain shared administrative services and the costs for services provided by our CEO and Controller who did not receive compensation from FITT prior to the Merger. Interest Expense Interest expense in the first half of 2014 was $82,180 compared to $365,444 for the same period in 2013, mainly due to prior year accretion of debt discounts which were fully accreted as of 2014, net of increased debt levels during 2014. Interest Income There was no interest income during the six months ended June 30, 2014 versus $15,466 for the comparable period in 2013. The interest income in 2013 represents an interest accrual on the advances to shareholder. Loss on Extinguishment of Debt During the first half of 2014, a creditor holding notes payable with repayment amounts totaling $55,000 converted his notes and related accrued interest into 115,637 shares of common stock of our merged company. We valued the shares issued upon conversion at their fair market value and recorded a loss on extinguishment of debt totaling $33,594 in connection with this transaction. 16 Liquidity and Capital Resources The report of our independent registered public accounting firm on the consolidated financial statements for the year ended December 31, 2013 contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern as a result of recurring losses, a working capital deficiency, and negative cash flows. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that would be necessary if we are unable to continue as a going concern. As of June 30, 2014, our principal source of liquidity is from the receipt of deposits from Greenome in accordance with the terms of the May 6, 2014 Share Exchange Agreement. See Note 10 to the accompanying consolidated financial statements. Our principal short-term and long-term liquidity needs have been, and are expected to be, funding operating losses until profitability is achieved and making expenditures for general corporate purposes. Management continues to seek capital through various sources. At June 30, 2014, our cash and cash equivalents were $30,743 and we had negative working capital in excess of $4.9 million. DEBT In prior years, we issued a number of notes payable and used the proceeds to fund operations. These notes payable were, in most cases, issued along with common shares of FITT or common shares of FHWY which were owned by FITT prior to the Merger. See Note 7 to the accompanying consolidated financial statements for additional information. During the first quarter ended March 31, 2014, holders of $55,000 of debt (repayment value) elected to convert the obligations, including the related accrued interest totaling $15,479 into 115,637 common stock. Also during the first quarter of 2014, we entered into a convertible promissory note with Asher which, subsequent to June 30, 2014, was assigned to Goldenrise and amended. See Note 7 to the accompanying consolidated financial statements for further information. EQUITY In the first half of 2013, we issued 526,599 shares of common stock (total value of $27,500) in consideration of entering into agreements with two service providers. We also issued 170,640 shares of common stock (valued at $60,000) to our Director of Sales as an incentive for him to accept employment with us. Cash Flows The following table sets forth our cash flows for the six months ended June 30: 2014 2013 Change Operating activities Net loss $ (542,748 ) $ (764,543 ) $ 221,795 Change in non-cash items 38,245 560,104 (521,859 ) Change in working capital 387,489 134,189 253,300 Total (117,014 ) (70,250 ) (46,764 ) Investing activities (47,828 ) (172,735 ) 124,907 Financing activities 195,000 294,500 (99,500 ) Total $ 30,158 $ 51,515 $ (21,357 ) 17 Operating Activities The change in non-cash items includes loss on extinguishment of debt, shares issued for compensation and services, the fair value of contributed services, depreciation, and amortization of debt discount/debt accretion. The change in working capital is primarily related to increases in accounts payable, accrued expenses and accrued compensation. Investing Activities Cash used in investing activities consists of capital expenditures, along with cash advances to and repayments to a related party and our major shareholder. Financing Activities Cash provided from the issuance of notes payable was $40,000 and $230,000 in the 2014 and 2013 periods, respectively. The 2014 period includes proceeds from deposits for a proposed business combination and the 2013 period included $64,500 in capital contributions from a major shareholder. Off Balance Sheet Arrangements We have no off balance sheet arrangements. |