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Global Future City Holding Inc. – ‘PREM14C’ for 9/30/13

On:  Friday, 9/13/13, at 5:00pm ET   ·   For:  9/30/13   ·   Accession #:  1019687-13-3576   ·   File #:  0-33519

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 9/13/13  Global Future City Holding Inc.   PREM14C     9/30/13    1:718K                                   Publicease Inc/FA

Document/Exhibit                   Description                      Pages   Size 

 1: PREM14C     Preliminary Proxy Information Statement -- Merger   HTML    457K 
                          or Acquisition                                         

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14C

Information Statement Pursuant to Section 14(c) of the Securities Exchange Act of 1934

Amendment No. 3

Filed by the Registrant T

Filed by a Party other than the Registrant £

Check the appropriate box:

Payment of Filing Fee (Check the appropriate box):

FITT HIGHWAY PRODUCTS, INC.

P.O. Box 4709

Mission Viejo, CA 92690

NOTICE OF ACTION TO BE TAKEN PURSUANT TO THE WRITTEN CONSENT OF STOCKHOLDERS

PRELIMINARY COPY

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY

September ___, 2013

To the Stockholders of FITT HIGHWAY PRODUCTS, INC.:

NOTICE IS HEREBY GIVEN, that the holders of the outstanding shares of the common stock (“Common Stock”) and the preferred stock (“Preferred Stock”) of FITT Highway Products, Inc. (“Company”) who, in the aggregate, hold a majority of the voting power of all shares of the Company’s common and preferred stock entitled to vote have, by written consent in lieu of a special meeting of the Company’s stockholders on June 12, 2013, approved of the following action (“Action”):

(1) Entry into a Merger and Reorganization Agreement (the “Agreement) by and between FITT Highway Products, Inc., a Nevada corporation and F.I.T.T. Energy Products, Inc., a Nevada corporation (“Energy”), whereby Energy will be merged into the Company, with the Company being the surviving entity (the “Merger”).

SUMMARY TERMS OF THE MERGER

The following is a bullet point summary of the Merger with cross references to the attached Information Statement which contains further details of each related bullet point. Although we believe that this bullet point summary covers the material terms of the Merger, it may not contain all of the information that is important to you. You should carefully read the entire Information Statement and the other documents we refer to or incorporate by reference in this information statement for a more complete understanding of the Merger Agreement and the transactions.

The cost of furnishing this Information Statement will be borne by us.  We will request brokerage houses, nominees, custodians, fiduciaries and other like parties to forward this Information Statement to the beneficial owners of our voting securities held of record by them and will reimburse such persons for out-of-pocket expenses incurred in forwarding such material.

Your vote is not required to approve the foregoing action, and the enclosed Information Statement is not a request for your vote or a proxy. The accompanying information statement is furnished only to inform stockholders of the Action taken by written consent described above before they take effect in accordance with Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended. This Information Statement is first being mailed to you on or about September ___, 2013, and we anticipate an effective date of the Actions to be October ___, 2013, or as soon thereafter as practicable in accordance with applicable law, including the Nevada Revised Statutes. No dissenters’ rights are afforded to our stockholders under Nevada law in connection with the Action described more fully below.

This Notice and the attached Information Statement are being sent to you for informational purposes only, and you are not being asked to take any action with respect to the Action. 

By Order of the Board of Directors,

2

PRELIMINARY INFORMATION STATEMENT

FITT HIGHWAY PRODUCTS, INC.

a Nevada corporation

P.O. Box 4709

Mission Viejo, CA 92690

WE ARE NOT ASKING YOU FOR A PROXY

AND YOU ARE REQUESTED NOT TO SEND US A PROXY.

GENERAL INFORMATION

This Information Statement (“Information Statement”) has been filed with the United States Securities and Exchange Commission (“SEC”) pursuant to Section 14(c) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and is being furnished to the holders of the outstanding shares of common stock (par value $0.001) of FITT Highway Products, Inc., a Nevada corporation (“Company,” “we,” “us,” “our,” or similar terms).  Effective June 12, 2013, pursuant to Section 78.320 of the Nevada Revised Statutes, the Company received, by written consent in lieu of a meeting, the approval of stockholders holding 491,301 shares of Common Stock and 105,000 shares of Series A Preferred Stock, which represents 52.5% of the total possible vote authorizing the following action (“Action”):

(1) Entry into a Merger and Reorganization Agreement (the “Agreement) by and between FITT Highway Products, Inc., a Nevada corporation and F.I.T.T. Energy Products, Inc., a Nevada corporation (“Energy”), whereby Energy will be merged into the Company, with the Company being the surviving entity (the “Merger”). A complete copy of the Agreement can be found as Exhibit 2.1 to the Company’s Form 8-K filed on June 19, 2013 and such Agreement is attached to this information statement hereto as Exhibit C .

Our Board of Directors (“Board”) fixed June 12, 2013 as the record date for determining the stockholders entitled to vote on the Actions. Stockholders holding an aggregate of 52.5% of the voting power of the Company as of June 12, 2013, with 491,301 shares of our outstanding common stock (“Common Stock”), with a power of one vote per share, plus 105,000 shares of our outstanding Series A Preferred Stock (“Preferred Stock”), with a power of ten (10) votes per share, collectively being equal to 52.5% of the total voting power of all of the Company’s capital stock then outstanding, have executed written consent resolutions approving the Action.  

As our stockholders holding 52.5% of the voting power of our outstanding capital stock have already approved of the Action by written consent, we are not seeking approval for the Action from any of our remaining stockholders, nor will they be given an opportunity to vote on the Action.  All necessary corporate approvals have been obtained, and this Information Statement is being furnished solely for the purpose of providing advance notice to our stockholders of the Action, as required by the Exchange Act.

We will pay all costs associated with the distribution of this Information Statement, including the costs of printing and mailing.  We will reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending this Information Statement to the beneficial owners of our common stock.

Under Section 14(c) of the Exchange Act and Rule 14c-2 promulgated there under, the Action cannot become effective until 20 days after the date this Information Statement is sent to our stockholders. This Information Statement was mailed to our stockholders on or about September ___, 2013 (“Mailing Date”). We expect the Action to become effective approximately twenty (20) days after the Mailing Date. Therefore, the effective date of the Merger is expected to be on or about October ___, 2013 (“Effective Date”).

NO VOTE OR OTHER CONSENT OF OUR STOCKHOLDERS IS SOLICITED IN

CONNECTION WITH THIS INFORMATION STATEMENT.  WE ARE NOT ASKING

YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.

DESCRIPTION OF THE CORPORATE ACTIONS

Entry into Merger and Reorganization Agreement with F.I.T.T. Energy Products, Inc. whereby F.I.T.T. Energy Products, Inc. will be merged into the Company with the Company being the surviving entity.

Effective as of June 12, 2013, our Board executed a unanimous written consent authorizing and recommending that our stockholders approve the Company entering into a merger and reorganization agreement (the “Agreement”) whereby F.I.T.T. Energy Products, Inc. (“Energy”) would be merged into the Company with the Company being the surviving entity (the “Merger”).

The Company’s management has advised the Board the Company should enter into the Merger for the reasons provided below:

1. The Company’s management believes that the Merger will allow the Company to proceed forward with and expand its business operations, provide for a greater ability for the Company to raise necessary capital, and presents an opportunity to increase stockholder value.

Pursuant to Section 78.320 of the Nevada Revised Statutes, the affirmative vote of the holders of a majority of our outstanding voting stock is sufficient to approve the Merger, which vote was obtained by a majority written consent of the holders of the issued and outstanding shares of our Common Stock and our Series A Preferred Stock (representing an aggregate 52.5% of the total voting power of all outstanding shares of our Common Stock and Preferred Stock) on June 12, 2013.  On June 12, 2013, there were 1,885,949 shares of Common Stock of the Company. The voting power of the officers and directors of the Company, including the 105,000 shares of Preferred Stock voted by F.I.T.T. Energy Products, Inc., amounted to 1,541,300 out of a total of 2,935,949, which total represents the issued and outstanding Common Stock plus 1,050,000 shares per the 10-to-1 voting power of the Preferred Stock. Thus, the votes amounted to 52.5% of the total voting power of all issued and outstanding shares of Common Stock and Preferred Stock of the Company. Federal securities laws state that the Merger may not be completed until 20 days after the date of mailing of this information statement the Company stockholders. Therefore, notwithstanding the execution and delivery of the written consent, the Merger will not occur until that time has elapsed. The Company expects the Effective Date of the Merger to be on or about October ___, 2013.

THE MERGER

This section of the information statement and the next section entitled “The Merger Agreement” describe the transaction. Although we believe that the description in this section covers the material terms of the Merger and the transactions, this summary may not contain all of the information that is important to you. You should carefully read the entire Information Statement and the other documents we refer to or incorporate by reference in this information statement for a more complete understanding of the Merger Agreement and the transactions.

General

The Merger and Reorganization Agreement provides that, as of the effective date of the Merger, F.I.T.T. Energy Products, Inc. will merge with and into the Company, and, as a result, the Company will continue in existence as the surviving corporation under the name FITT Highway Products, Inc.

Recommendation of the Boards

Taking into account all of the material facts, matters and information, including those described above, the Board of Directors of the Company and the board of managers of Energy believe that the Merger Agreement is advisable and fair to and in the best interests of each company and their respective stockholders.

No Independent Financial Advisor

Neither the Company nor Energy has engaged an independent financial advisor to consult on the relative advantages and disadvantages of the transactions.

Federal Securities Laws Consequences

The shares of the Company’s common stock to be issued to Energy Shareholders in the Merger initially will be issued with a restrictive legend until such time as they are registered and a registration statement is declared effective or they qualify for removal of the restrictive legend under federal securities regulations.  

Shareholders’ Meeting

Upon completion of the Merger, the Company will hold a shareholders’ meeting to discuss the business operations of the Company.

RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN ADDITION TO THE OTHER INFORMATION INCLUDED ELSEWHERE IN THIS INFORMATION STATEMENT AND THE DOCUMENTS THAT THE COMPANY HAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. UNLESS THE CONTEXT REQUIRES OTHERWISE, THE USE OF THE COMPANIES, THE COMBINED COMPANY, “US,” OR “WE” REFERS TO THE COMBINED COMPANY OF FITT HIGHWAY PRODUCTS, INC. AND F.I.T.T. ENERGY PRODUCTS, INC. AFTER GIVING EFFECT TO THE MERGER. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO F.I.T.T. ENERGY PRODUCTS, INC. OR US OR THAT ARE NOT CURRENTLY BELIEVED TO BE IMPORTANT TO YOU, IF THEY MATERIALIZE, ALSO MAY ADVERSELY AFFECT THE MERGER AND THE PRICE OF OUR STOCK.

The following matters, among other things, may have a material adverse effect on the business, financial condition, liquidity, or results of operations of the Company. Reference to these factors in the context of a forward-looking statement or statements shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those in such forward-looking statement or statements. Before you invest in our common stock, you should be aware of various risks, including those described below. Investing in our common stock involves a high degree of risk. You should carefully consider these risk factors, together with all of the other information included in this information statement, before you decide whether to purchase shares of our common stock. Our business and results of operations could be seriously harmed by any of the following risks. The trading price of our common stock could decline due to any of these risks, and you may lose part or all of your investment.

Risks Related to the Company

Our Common Stock is quoted on the OTC Markets, which may limit the liquidity and price of our Common Stock more than if our Common Stock were quoted or listed on the Nasdaq Stock Market or another national securities exchange.

Our securities are currently quoted on the OTC Markets, Inc., an inter-dealer automated quotation system for equity securities. Quotation of our securities on the Bulletin Board may limit the liquidity and price of our securities more than if our securities were quoted or listed on the Nasdaq Stock Market or another national securities exchange. As an OTC quoted company, we do not attract the extensive analyst coverage that accompanies companies listed on exchanges. Further, institutional and other investors may have investment guidelines that restrict or prohibit investing in securities traded on the Bulletin Board. These factors may have an adverse impact on the trading and price of our Common Stock.

The trading price of our common stock may decrease due to factors beyond our control.

Our stock is currently quoted on the OTC Markets.  The stock market from time to time has experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging growth companies and which often have been unrelated to the operating performance of the companies. These broad market fluctuations may adversely affect the market price of our common stock. If our shareholders sell substantial amounts of their common stock in the public market, the price of our common stock could fall. These sales also might make it more difficult for us to sell equity, or equity-related securities, in the future at a price we deem appropriate.   

The application of the “penny stock” rules could adversely affect the market price of our common shares and increase your transaction costs to sell those shares.

The Securities and Exchange Commission (the “SEC”) has adopted rule 3a51-1 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions.   

We do not pay dividends on our Common Stock.

We have not paid any dividends on our common stock and do not anticipate paying dividends in the foreseeable future. We plan to retain earnings, if any, to finance the development and expansion of our business.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of The Sarbanes-Oxley Act Of 2002 could have a material adverse effect on our business and stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 (“the Sarbanes-Oxley Act”) requires that we establish and maintain an adequate internal control structure and procedures for financial reporting and include a report of management on our internal control over financial reporting in our annual report on Form 10-K. That report must contain an assessment by management of the effectiveness of our internal control over financial reporting and must include disclosure of any material weaknesses in internal control over financial reporting that we have identified.

Risks Relating to the Merger

The Company and Energy may not achieve the benefits they expect from the Merger, which may have a material adverse effect on the companies’ business, financial, and operating results.

The Company and Energy intend to enter into the Merger Agreement with the expectation that the Merger will result in benefits to the combined company arising out of the combination of the businesses of the Company and Energy and an active trading market for Company’s common stock. To realize any benefits from the Merger, the combined company’s stock must continue to trade on the OTC Market following the Merger.  

The issuance of shares of the Company’s Common Stock to Energy Shareholders in the Merger will substantially dilute the percentage ownership interests of current Company stockholders.

If the Merger is completed, it is anticipated that the Company will issue to Energy Shareholders approximately 33,000,000 shares in connection with the Merger. Upon completion of the Merger, the former Energy Shareholders will be issued shares of our common stock, representing in the aggregate up to approximately 95% of Company’s outstanding common stock on a fully-diluted basis immediately following the Merger.

The number of Shares to be issued to Energy Shareholders is dependent on a third-party valuation report which will be completed prior to the closing of the Merger.

The Board of Directors of the Company entered into the Merger Agreement with Energy without having begun or completed an independent valuation of Energy. The terms of the Merger Agreement requires that Energy is valued at a number at least nine (9) times that of the Company. If the valuation comes back at less than that, Energy has the right to terminate the Merger. If the valuation does not come back at a number acceptable for Energy to proceed forward, the Company’s operations and financial results will be materially adversely affected. Furthermore, because the terms of the Merger Agreement rely on the third-party valuation, the number of Shares to be issued to Energy shareholders and the dilution that will occur pursuant to the Merger is entirely dependent on the third-party valuation, over which management of the Company has no control.

Material United States Federal Income Tax Consequences

General

Company shareholders are urged to consult their own tax advisors as to the U.S. federal income tax consequences of the Merger based on their own circumstances, as well as the effects of state, local, non-U.S. tax laws and U.S. tax laws other than income tax laws.

Accounting Treatment

It is anticipated that the Merger will be treated as a recapitalization of Energy under generally accepted accounting principles.  

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

The following information concerns the compensation of the named executive officer for each of the last two completed fiscal years:

Summary Compensation Table

Outstanding Equity Awards At Fiscal Year-End

There were no unexercised stock options, stock that has not vested, or equity incentive plan awards for any named officer outstanding at the end of the last fiscal year:

Compensation of Directors

The directors of the Company received the following compensation in fiscal year 2012 for their services as directors. 

Director Compensation

On October 15, 2009 the Board of Directors approved a program to compensate our outside directors at the rate of $3,000 per calendar quarter in cash or in equivalent value of shares of our common stock.  All directors are entitled to reimbursement of expenses incurred in the performance of their duties as directors, including their attendance at Board of Directors meetings.

During 2012 and 2011, the Company accrued director’s fees for Derek Jones in the amount of $12,000 and $12,000, respectively.

(1) These fees have accrued but have not been paid.

Stock Options

During the last two fiscal years, the officers and directors of the Company have received no stock options and no stock options are outstanding for them.

Equity Compensation Plans

The following table gives information about our common stock that may be issued upon the exercise of options under all of our equity compensation plans as of December 31, 2012.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information concerning the Common Stock and Preferred Stock ownership as of the date of this Report, with respect to: (i) each person who is known to the Company to beneficially own more than 5% of the Company’s common stock; (ii) each officer and director; and (iii) all directors and officers as a group; based upon 2,035,949 shares of Common Stock outstanding and 105,000 shares of Preferred Stock outstanding. On the date of the shareholder consent for the Merger, there were 1,885,949 shares of Common Stock issued and outstanding.

*Less than 1%.

(1)  c/o our address, P.O. Box 4709, Mission Viejo, CA  92690, unless otherwise noted.

(2)   Except as otherwise indicated, we believe that the beneficial owners of common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.  Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  Shares of common stock subject to options or warrants currently exercisable or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person.

(3) Our CEO, Michael Dunn, is an owner of F.I.T.T. Energy Products, Inc., along with the Estate of Sam Maywood, MD and Rand Scott, MD, and exercises shared voting and investment power over the shares held by F.I.T.T. Energy Products, Inc. Mr. Dunn, the Estate of Sam Maywood MD, and Dr. Scott disclaim beneficial ownership of the 29,167 shares of Common Stock and 105,000 shares of Preferred Stock held by F.I.T.T. Energy Products, Inc. except to the extent of their pecuniary interest in the entity. The address of F.I.T.T. Energy Products, Inc. is P.O. Box 4709, Mission Viejo, CA 92690.

There are no agreements between or among any of the shareholders that would restrict the issuance of Shares in a manner that would cause any change in control of the Company. There are no voting trusts, pooling arrangements or similar agreements in the place between or among any of the shareholders, nor do the shareholders anticipate the implementation of such an agreement in the near future.

INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON

The Company’s Chief Executive Officer, Michael R. Dunn, is also Chief Executive Officer of Energy. Upon completion of the Merger, Mr. Dunn will hold shares of the Company representing approximately 30% to 35% of the Company.

NO DISSENTERS’ RIGHTS

Under the Nevada Revised Statutes, our dissenting stockholders are not entitled to appraisal rights with respect to the Action, and we will not independently provide our stockholders with any such right.

SOLICITATION COSTS

We will bear the costs of preparing, assembling and mailing the Information Statement in connection with the Action.  Arrangements may be made with banks, brokerage houses and other institutions, nominees and fiduciaries, to forward the Information Statement to beneficial owners.  We will, upon request, reimburse those persons and entities for expenses incurred in forwarding this Information Statement to our stockholders.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We are subject to the Exchange Act and are required to file reports, proxy statements and other information with the SEC regarding our business, financial condition and other matters pursuant to and in accordance with the Exchange Act.  You may read and copy the reports, proxy statements and other information filed by us at the public reference facilities maintained by the SEC at 100 F Street, NE, Room 1580, Washington, DC 20549.  Please call the SEC at 1-800-SEC-0330 for additional information about the public reference facilities.  The reports, proxy statements and other information filed with the SEC are also available to the public over the internet at http://www.sec.gov, the internet website of the SEC.  All inquiries regarding our Company should be addressed to our corporate counsel at Horwitz, Cron & Armstrong, LLP, Attn: Lawrence W. Horwitz, Esq., 26475 Rancho Parkway South, Lake Forest, CA 92630.

BY ORDER OF THE COMPANY’S BOARD OF DIRECTORS

EXHIBIT A

FINANCIAL INFORMATION

F.I.T.T. ENERGY PRODUCTS INC.

F.I.T.T. Energy Products Inc.(Energy) is a private company and is not subject to SEC reporting requirements regarding 10-Q (Quarterly financial disclosures) or 10-K (Annual financial disclosures). As such the financial information provided in Exhibit A has not been previously filed or submitted to the SEC and have not been audited. The financial information is being provided to disclosure Energy’s most recent financial statements for the periods indicated.

F.I.T.T. ENERGY PRODUCTS, INC.

BALANCE SHEETS

(UNAUDITED)

F.I.T.T. ENERGY PRODUCTS, INC.

STATEMENTS OF OPERATIONS

(UNAUDITED)

F.I.T.T. ENERGY PRODUCTS, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

EXHIBIT B

FINANCIAL INFORMATION

F.I.T.T. HIGHWAY PRODUCTS INC.

F.I.T.T. Highway Products Inc.(FHWY) is a public company and is subject to SEC reporting requirements regarding 10-Q (Quarterly Financial Information) and 10-K (Annual Financial Information). As such the financial information provided in Exhibit B has been previously filed with the SEC. The financial information provided in Exhibit B contains only the financial portions of the most recently filed 10-Q and 10-K, for complete copies you may view these filings online at the SEC’s website http://www.sec.gov or contact the Company at: FITT HIGHWAY PRODUCTS, INC. P.O. Box 4709 Mission Viejo, CA 92690.

FITT HIGHWAY PRODUCTS, INC.

BALANCE SHEETS

See accompanying Notes to Financial Statements.

FITT HIGHWAY PRODUCTS, INC. 

STATEMENTS OF OPERATIONS

See accompanying Notes to Financial Statements.

FITT HIGHWAY PRODUCTS, INC.  

STATEMENTS OF SHAREHOLDERS’ DEFICIT

See accompanying Notes to Financial Statements.

FITT HIGHWAY PRODUCTS, INC.

STATEMENTS OF CASH FLOWS

See accompanying Notes to Financial Statements.

FITT HIGHWAY PRODUCTS, INC.

Notes to Financial Statement

1.          Business and Management’s Plan of Operation

Reverse Stock Split

On November 5, 2012, our Board of Directors approved researching a recapitalization of our company. Based on the results of the research, on November 29, 2012, the 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 following action: perform a one-for-sixty (1:60) reverse stock split of our issued and outstanding shares of common stock and preferred stock while maintaining the number of authorized shares at 150,000,000 shares of Common Stock and 20,000,000 shares of Preferred Stock (the “Reverse Split”). On January 13, 2013 we filed with the Securities and Exchange Commission (“SEC”) a Schedule 14C Definitive Information Statement notifying our shareholders of the Reverse Split and on January 23, 2013 such notice was mailed to our shareholders. The reverse split became effective February 12, 2013. All references to shares and per share information in these financial statements have been restated to give effect to the Reverse Split.

Business

FITT Highway Products, Inc. (the “Company”) is in the business of the manufacturing (on an outsource basis), distribution and sale of energy drinks. Our current active product is a two-ounce energy shot named “F.I.T.T. Energy for Life” (the “FITT Energy Shot”).

We have significant debt that was incurred, for the most part, under previous management. As a result of this significant debt, and other factors, third parties performing marketing, production and fulfillment services have been unwilling to enter into agreements directly with us. In addition, we have been unable to attract necessary investment dollars to conduct operations. Therefore, effective August 12, 2010 we entered into an operating agreement (the “Operating Agreement”) with F.I.T.T. Energy Products, Inc. (“FITT”), a separate entity controlled by certain of our investors and management and whose largest shareholder is our CEO. Under the agreement, FITT is performing a majority of the operating functions for the FITT Energy Shot, and is recording all related results of operations. In exchange, FITT is obligated to pay us a royalty of $0.05 per bottle sold of the FITT Energy Shot.

Management’s Plan of Operations

Our revenues, and related cash flow, are presently limited to the receipt of royalties from FITT of $0.05 per bottle sold of the FITT Energy Shot. FITT is not obligated to pay us royalties for any additional products it has developed and funded. As such, we are currently dependent upon the success of FITT’s operating capabilities with respect to the FITT Energy Shot.

In October 2011, FITT entered into an exclusive Master Marketing Agreement with GRIPS Marketing Corporation (“GRIPS”). GRIPS is managed by an individual with over 40 years’ experience marketing a variety of products to convenience stores and other retail outlets, and who has long-term relationships with some major distributors that service those outlets. In April 2012, with the assistance of GRIPS, FITT received a letter from a national distributor in which the distributor agreed to team up with FITT to distribute FITT’s energy products, including the FITT Energy Shot, to the distributor’s customer base. The distributor’s plan was to launch FITT’s products in California, Nevada and Arizona, then move across the country to other divisions. During the second quarter of 2012, FITT began shipping the FITT Energy Shot, along with other products it has developed, to the distributor who then shipped the products to certain of its convenience store customers in the regions identified.

For the years ended December 31, 2012 and 2011, we had no significant revenues. This was primarily due to a lack of operating capital, our decision in prior years to temporarily suspend our sales activity to focus on a new marketing strategy and product development, and our Operating Agreement with FITT.  In 2010 we began a program to compromise debt, and for the year ended December 31, 2012 we experienced net income of nearly $1.6 million, principally as a result of gains from our continuing debt compromise program. Excluding said non-cash gains, we continued to incur significant operating losses for 2012 as we did in 2011, and continue to have a significant working capital deficit. Our goal has been, and continues to be, to compromise our debt at a rate of no more than $0.10 per one dollar of debt. We believe that, until the debt can be compromised, we will be unable to operate in the normal course of business and our ability to attract capital will continue to be greatly impaired. These factors raise substantial doubt about our ability to continue as a going concern. See Note 3 for a summary of our progress toward the compromise of our debt.

During the first quarter of 2012, FITT proposed negotiating a business combination with us if (1) we are able to mitigate our debt to their satisfaction, (2) assets in the merged entity would be protected from claims of our prior creditors, and (3) our Board of Directors and shareholders approve the proposed business combination agreement once it is negotiated. In proposing such a negotiation, FITT also requires that an independent appraisal be obtained to support any exchange of securities in the transaction. On November 5, 2012, our Board of Directors approved commencing formal negotiations with FITT in this regard, but at this point, there can be no assurance that such negotiations will result in an agreement.

Management continues to seek capital through various sources, but given the present economic environment and our current financial condition, management is not confident it can attract any capital without significantly mitigating our debt. The financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities in the normal course of business.  The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that might result from the outcome of this uncertainty.

2.          Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period.  Our significant estimates relate to the assessment of contingencies related to pending or threatened litigation, and the valuation of stock awards, options and warrants to purchase common stock.

Concentrations of Credit Risks

We will invest any cash balances we may have through high-credit quality financial institutions.  From time to time, we may maintain bank account levels in excess of FDIC insurance limits.  If the financial institution in which we have our accounts has financial difficulties, any cash balances in excess of the FDIC limits could be at risk.

There were no accounts receivable at either December 31, 2012 or 2011. In addition, there were no sales during either 2012 or 2011 – only minor royalty revenue in 2012.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation.  Depreciation is computed using the straight-line method over the estimated useful life of five years.  Significant renewals and betterments are capitalized while maintenance and repairs are charged to expense as incurred.  Leasehold improvements are amortized on the straight-line basis over the lesser of their estimated useful lives or the term of the related lease.

Fair Value of Financial Instruments

The Company follows the guidance of ASC 820 – Fair Value Measurement and Disclosure. Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of our Company. Unobservable inputs are inputs that reflect our Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

Level 1. Observable inputs such as quoted prices in active markets;

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

As of December 31, 2012 and 2011, we did not have any level 1, 2, or 3 assets or liabilities.

Debt Issued with Common Stock

Debt issued with common stock is accounted for under the guidelines established by ASC 470-20 – Accounting for Debt With Conversion or Other Options. We record the relative fair value of common stock related to the issuance of convertible debt as a debt discount or premium.  The discount or premium is subsequently amortized to interest expense over the expected term of the convertible debt.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Due to historical net losses, a valuation allowance has been established to offset the deferred tax assets.

Revenue Recognition

Royalty revenue is recorded when earned in accordance with the underlying agreement. Revenue can be recognized as earned when 1) persuasive evidence of an arrangement exists, 2) delivery has occurred, 3) the price is fixed and determinable, and 4) collection is reasonably assured. Revenue is recognized on the date of sale of the product when transfer of legal title has occurred.

Net Income (Loss) per Share

Basic and diluted net income (loss) attributable to common stockholders per share is calculated by dividing the net income (loss) applicable to common stockholders by the weighted-average number of common shares outstanding during the period. At December 31, 2012 and 2011, we had outstanding warrants to purchase zero and 4,736 common shares, respectively. The exercise prices of all warrants were in excess of the average closing price of our common stock during the years ended December 31, 2012 and 2011. At December 31, 2012, we had 105,000 shares of redeemable preferred stock, which were issued in May 2012, convertible into an equal amount of our common shares. The weighted average number of shares of common stock of the convertible preferred stock were included in the calculation of diluted net income per share for the year ended December 31, 2012 (65,984 shares).

Stock-Based Compensation

We account for our stock-based compensation in accordance with ASC 718 – Stock Compensation. We account for all stock-based compensation using a fair-value method on the grant date and recognizes the fair value of each award as an expense over the requisite vesting period.

Accounting for Equity Instruments Issued to Non-Employees

We account for our equity-based payments to non-employees under ASC 505 – Equity. The fair value of the equity instrument issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of our common stock on the date the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to the statement of operations and credited to common stock and/or additional paid-in capital as appropriate.

Recent Accounting Pronouncements  

In December 2011, the FASB issued changes to the disclosure of offsetting assets and liabilities. These changes require an entity 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. The enhanced disclosures will enable users of an entity's financial statements to understand and evaluate the effect or potential effect of master netting arrangements on an entity's financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. These changes become effective for us on January 1, 2013. Management does not believe the adoption of these changes will have an impact on our financial statements.

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.

3.          Debt Compromise Program

As stated in Note 1, we have significant debt that was incurred, for the most part, under previous management, and we are continuing with our program to compromise this debt in a substantial way. Our goal is to settle the debt at an overall rate of no more than $0.10 per one dollar of debt. During 2012, through actions conducted by our legal counsel, we reached tentative verbal settlement agreements with certain of our creditors and, subsequent to December 31, 2012, a number of these verbal settlements were finalized. With respect to any remaining verbal settlements, nothing definitive is yet in place. In addition, we determined that the statute of limitations for certain of our creditors to enforce collection of any amounts they might be owed has now, or will soon elapse. We have written off those accounts for which the statute of limitations has expired. The Company also reviewed any claims or liens on these accounts before mitigation. Finally, we determined that certain debt will not be owed based on non-performance by certain creditors. Based on our negotiations and determinations, we have during the year ended December 31, 2012, or may in the near future, reduce our balance sheet debt as shown below:

Amounts written-off in 2012 include $1,790,000 in settled litigation obligations (see Note 11), $61,000 in canceled notes payable and accrued interest thereon and $806,049 for other factors, mainly due to the expiration of statute of limitations.

Amounts to be written-off in future periods include $653,406 in settled obligations which were finalized and funded during the first quarter of 2013 and $50,991 due to the expiration of statute of limitations. Funding of $150,000 for the obligations settled in the first quarter of 2013 was arranged with third party investors. See Note 16 for more information. As of December 31, 2012, under the condition that statutes of limitations continue to pass on certain creditor balances, we anticipate future write-offs will be made in the following periods ending:

Amounts expected to be compromised in future periods identified above are dependent on the continued willingness of our creditors to honor tentative verbal settlement agreements and the inability of creditors to enforce collection after certain statute of limitations expires. Management cannot make any assurances that such conditions will be met.

4.          Property and Equipment

Property and equipment consist of the following at December 31:

Depreciation expense for the years ended December 31, 2012 and 2011 was $543 and $977, respectively.

5.          Accounts Payable

During 2012 we wrote-off $344,450 in accounts payable mainly as a result of the expiration of the statute of limitation for creditors to enforce collection of their debt. In addition, our legal counsel reached tentative verbal settlement agreements to settle certain accounts payable obligations totaling $273,579, and subsequent to December 31, 2012, we were able to finalize and fund these settlements. See Notes 3 and 16 for further information. We also expect to write-off an additional $50,991 in accounts payable in future periods due to the expiration of the statute of limitations to enforce collection. Such write-offs are dependent upon the absence of additional claims on aged balances expected to be written off.

Accounts payable at December 31, 2012 consists of the following:

Amounts owed to ongoing vendors are mainly the result of obligations for legal, accounting and outside director fees which are necessary to maintain our status as a fully reporting public company.

6.          Accrued Expenses

Accrued expenses consist of the following at:

During 2012 we extinguished accrued expenses totaling $164,297 in connection with compromising our debt. Accrued interest on Notes Payable – Bridge Loans was extinguished along with the cancellation of those notes based on agreements with the creditors. Accrued interest on the Notes Payable – Other was eliminated as a result of the expiration of the statute of limitations for creditors to enforce collection of their debt. See Note 8. Also written off due to statute of limitations expiration was other accrued expenses totaling $59,347.

Subsequent to December 31, 2012, we finalized and funded a settlement agreement for our Note Payable – Distributor settlement (to which the $40,327 accrued interest relates) and for our Note Payable – Trademark settlement (to which $37,500 of other accrued expenses relates). During the first quarter of 2013, these amounts will be written-off as more fully discussed in Note 8.

7.          Accrued Compensation

Accrued compensation consists of the following at:

During 2012 we wrote-off $138,302 in accrued compensation as a result of a number of factors including the expiration of the statute of limitation for creditors to enforce collection of their debt. Due to a continuing lack of capital, we have been unable to pay the majority of the compensation owed to our officers and employees. In addition, in 2007 and 2008, our prior management did not pay certain federal and state payroll tax obligations and they became delinquent. The delinquent tax amounts shown above consist of

In October 2010, the IRS filed a federal tax lien against us in the amount of $136,678 related to past-due payroll taxes. Also in October 2010, the IRS served FITT with a Notice of Levy in the amount of $152,974 attaching all royalty payments payable to us by FITT over and above $83,166, which was the amount owed by us to FITT as of October 15, 2010. The amount of the levy represents the amount of the IRS tax lien plus statutory additions. Through our legal counsel, we are actively attempting to work with the IRS and Franchise Tax Board to mitigate these liabilities; however, until such time that formal agreements are in place, penalties and interest will continue to accrue on past due balances.

In November of 2011, we entered into a settlement agreement with a former employee under which we settled all prior wage and other claims for 333 shares of our common stock valued at $1,200 and $500 cash. We recorded a gain on extinguishment of debt and creditor obligations of $9,347 and reduced Other Accrued Compensation by $11,047 in connection with this settlement.

During 2011, our two existing employees elected to accept common shares in lieu of a portion of their accrued compensation. On March 28, 2011, we filed a registration statement on Form S-8 under which a total of 29,167 common shares were registered and issued to an officer and an employee at a value of $4.80 per share, or $140,000. On May 18, 2011, we filed another registration statement on Form S-8 under which a total of 45,833 common shares were registered and issued to an officer and an employee at a value of $6.00 per share, or $275,000. In connection with their agreement to accept the common shares, the two employees have agreed not to sell any of these shares issued them until March 31, 2013. During the time the two employees have been prohibited from selling these shares to make-up for wages they were not paid, the market price has declined significantly to $0.21 per share based on the closing price of the stock on April 8, 2013. During 2012 there were no shares issued to officers or employees.

8.          Notes Payable

Notes payable consists of the following at:

Note Payable – Distributor Settlement

This note payable arose from a February 1, 2008 settlement agreement with Christopher Wicks (“Wicks”) and Defiance U.S.A., Inc., under which we agreed to pay Wicks the sum of $252,000 under a payment schedule detailed therein, with the final payment due February 2010. Interest was to accrue at 5% per annum beginning in August 2008. We have made payments totaling $50,000. In July 2012, the noteholder agreed, on a tentative verbal basis, to accept a payment of $20,200 in full settlement of all amounts owing under this note payable, including accrued interest (see Note 6). Subsequent to December 31, 2012, we were able to finalize and fund this settlement. As a result, during the first quarter of 2013 this debt, as well as the related accrued interest described in Note 6, will be written-off and we will record an overall gain on extinguishment of debt of approximately $221,000. At December 31, 2012 and 2011, the outstanding balance of $202,000 at the end of each period was classified as a current liability in the accompanying balance sheet.

Note Payable – Trademark Settlement

This note payable arose from a March 4, 2009 settlement agreement with Who’s Ya Daddy, Inc. (“Daddy”) concerning an alleged infringement on a trademark of Daddy. The settlement amount totaled $125,000 and called for $25,000 to be paid immediately with additional payments of $10,000 to be made every 60 days, beginning April 30, 2009, until the obligation was fully paid. The payment of $25,000 was paid through an advance by a former officer. The note payable contains no provision for interest. Subsequent to December 31, 2012, we were able to negotiate a settlement of this debt for a total value of $50,000 ($25,000 cash and 100,000 shares of our common stock valued at $0.25 per share). The shares were fully vested on March 5, 2013, the date of issuance. During the first quarter of 2013, this debt will be written-off along with a related accrued expense described in Note 6, and we will record an overall gain on extinguishment of debt of $87,500. As of December 31, 2012 and 2011, we were in default for non-payment and the outstanding balance of $100,000 at the end of each period was classified as a current liability in the accompanying balance sheet.

Notes Payable – Bridge Loans

On April 18, 2011, we issued two notes with face value totaling $50,000, along with 8,333 shares of our common stock, and the proceeds were used to repay advances to FITT. On April 26, 2012, the two noteholders agreed to cancel the notes, forgive interest thereon and enter into new note payable agreements directly with FITT. In connection with the cancellation of the notes, during the second quarter of 2012, we reduced notes payable and accrued interest by a total of $61,000, adjusted our payable to FITT by $50,000 and recorded the remaining $11,000 as a gain on extinguishment of debt.

Notes Payable – Other

This category consists of notes payable to two individuals, one for $100,000 and the other for $50,000. We have determined that the statute of limitation for the noteholders to enforce collection of their debt has expired. As a result, during 2012 we extinguished the notes payable of $150,000 and the related accrued interest of $83,950, and recorded a gain on extinguishment of debt of $233,950. 

9.          Related Parties

As previously discussed, we have limited capital resources and liquidity.  As a result, during the periods covered by this report, related parties advance funds to us in order for us to pay certain obligations. Advances from related parties consist of the following at:

During 2012 we wrote-off $20,000 in advances from a former officer after determining that the statute of limitations for the enforcement of debt collection had expired.

Advances from our CEO consist of monies advanced personally by him or through a company he owns. In addition, during the periods covered by this report, we received advances from FITT, an entity controlled by certain of our investors and management and whose largest shareholder is our CEO. The advances from related parties are due upon demand, are expected to be settled within one year, and therefore do not incur interest.

Activity in advances from related parties during 2012 and 2011 consists of the following:

While our Operating Agreement with FITT requires that it makes royalty payments to us based on sales of the FITT Energy Shot, royalties earned to date have been insignificant. Until FITT begins making significant sales of the FITT Energy Shot, any royalty payments we receive will not be large enough to reduce in any meaningful way the amount we owe FITT. Therefore during the periods presented by this report, FITT has several times requested that we reduce the amount we owe them. As discussed in Note 12, on May 15, 2012, we issued 105,000 shares of our preferred stock, valued at $315,000, to FITT as a partial reduction of the debt we owed them. On April 1, 2011, we issued to FITT 50,000 shares of our common stock, valued at $216,000, as a partial reduction of amounts we owed them.

Additionally, in May 2011, we entered into agreements with Dr. Rand Scott and Havas under which we agreed to issue a total of 20,834 shares of our common stock, valued at a total of $125,000, for services Dr. Scott and Havas would perform for FITT.

10.          Commitments and Contingencies

We lease our current office space in Mission Viejo, California on a month-to-month basis and has no other non-cancellable operating leases.  The monthly payment under the lease is $2,000. Rent expense under operating leases amounted to $24,000 and $23,750, respectively, for the years ended December 31, 2012 and 2011, respectively.

11.          Litigation

Sacks Motor Sports Inc.

In 2006, we received a Demand for Arbitration filed with the American Arbitration Association from Sacks Motor Sports Inc. (“Sacks”) seeking damages arising out of a sponsorship contract.  On February 13, 2007, the Arbitrator awarded Sacks $1,790,000.  This amount was recorded as an expense in the quarter ending December 31, 2006 and was fully reserved on the balance sheet. In 2008, after we appealed the award, the Middle District of Florida (“Florida Court”) denied our petition and entered judgment in favor of Sacks for the principal sum of $1,790,000 together with post-award interest from February 13, 2007 (the “Florida Judgment”). On August 30, 2008, Sacks had the Florida Judgment filed in the United States District Court for the Southern District of California (“California Court”) in an attempt to make collection against any of our California assets.

On May 2, 2012, we entered into a Settlement Agreement and Release (“Sacks Settlement”) with Sacks. Under the Sacks Settlement, we provided Sacks with a total of 66,667 shares of our restricted common stock and cancelled 16,667 shares previously issued to Sacks in March 2010 under a settlement agreement that was never finalized. In exchange Sacks executed and delivered to us forms of Acknowledgement of Full Satisfaction of Judgment for filing with the Florida Court and the California Court. We also agreed that one year from the effective date of the Sacks Settlement, we would request, based on legally available rules and exemptions, that the shares become free-trading. The shares were fully vested on the date of the Sacks Settlement and were valued based on the market price of the shares on the agreement date. During 2012, in connection with this settlement, we recorded a gain on extinguishment of debt of approximately $1.57 million.

Oswald & Yap

On January 13, 2012, a complaint was filed against us in the Superior Court of the State of California, County of Orange, by Oswald & Yap LLP (“Oswald”).  The complaint, which was for unpaid legal services in the amount of $40,734, also named our CEO and FITT as defendants.  Our CEO, as an individual, and FITT, as a company, were never a party to any agreement with Oswald.  Effective October 17, 2012, we entered into an Agreement for Use of Stipulation for Judgment under which we agreed to pay Oswald $25,000 no later than December 17, 2012 and Oswald agreed to release all defendants, but we were unable to make the required payment.

On October 12, 2012, attorneys for our CEO and FITT filed a Motion for Summary Judgment, essentially requesting they be dismissed from the case. The judge heard the motion on January 17, 2013 and indicated he was likely to rule in favor of the motion which would have allowed for the collection from Oswald of legal fees and costs associated with the defense of our CEO and FITT. On January 30, 2013 we, along with our CEO and FITT, reached a settlement with Oswald whereby Oswald would drop litigation against all defendants and release them from any and all obligations, and the defendants agreed not to attempt to collect from Oswald legal fees and costs related to this matter. In connection with this settlement, during the first quarter of 2013 we will record a gain on extinguishment of debt in the amount of 32,711.

H.G. Fenton

On or about July 22, 2009, H.G. Fenton Property Company (“Fenton”) filed a complaint against us in the Superior Court of California, County of San Diego, alleging Breach of Lease at our former office in Carlsbad, California (the “Carlsbad Lease”.) The complaint claimed damages in the amount of $420,000. Effective December 17, 2010, we executed a Stipulation for Entry of Judgment and Conditional Dismissal. In full satisfaction of the obligations under the Stipulation, in January 2011, a shareholder and one of our former officers transferred 3,333 of his free-trading shares to Fenton on our behalf and in March 2011, we made the final payment of $10,000 through an advance from FITT. In January 2011, we issued 3,333 shares to the shareholder and former officer to replace the shares he transferred to Fenton.

Christopher Wicks/Defiance

On May 8, 2007, we were served with a summons and complaint in a lawsuit filed in the San Diego Superior Court by Christopher Wicks and Defiance U.S.A., Inc. seeking judgment against us and two of our former officers, Edon Moyal and Dan Fleyshman, under a contract allegedly calling for the payment of $288,000 in cash plus stock in our subsidiary, Who’s Your Daddy, Inc., a California corporation, and a certain percentage of the revenues of that subsidiary.  On February 1, 2008, we entered into a Settlement Agreement and Mutual Release with the plaintiffs pursuant to which we agreed to pay the plaintiffs the sum of $252,000 under a payment schedule detailed therein.  As security for the settlement payment, defendants Fleyshman and Moyal together pledged 5,287 shares of our common stock owned and held by them.  Subsequent to December 31, 2012, we were able to finalize and fund a settlement of the obligation related to this litigation. See Note 8.

Who’s Ya Daddy  

On April 1, 2005, we received a complaint filed by Who’s Ya Daddy, Inc., a Florida corporation (“Daddy”), alleging that we were infringing on Daddy’s trademark, Who’s Ya Daddy®, with respect to clothing.  On April 7, 2006, we entered into a settlement agreement with Daddy pursuant to which we were granted an exclusive license to use Daddy’s trademark on clothing in exchange for a royalty payment of 6% of gross sales for clothing products in the United States, excluding footwear.  As part of the settlement, we also agreed to remit to Daddy 12% of the licensing revenues received from third parties to which we had granted a sublicense for use of the trademarks on clothing.  By early 2008, we had not made any of the required payments under the settlement agreement.  On March 26, 2008, our Company, and two of our former officers each received a Notice of Levy from the United States District Court for the Southern District of California in the amount of $143,561 allegedly pursuant to the terms of the settlement agreement with Daddy.  We settled the debt on March 4, 2009 for $125,000 of which $25,000 was paid through an advance by Edon Moyal.  The remaining balance was to be repaid with bi-monthly payments of $10,000 beginning April 30, 2009. Subsequent to December 31, 2012, we were able to finalize and fund a settlement of the obligation related to this litigation. See Note 8.

Straub Distributing 

On July 30, 2008, we entered into a Compromise and Settlement Agreement and Mutual Release with Straub Distributing, L.L.C. (“Straub”), a California Limited Liability Corporation (the “Straub Settlement”).  We paid $7,500 on July 30, 2008 and were required to make two additional payments of $7,250 every sixty days for total payments to Straub of $22,000.  As part of the Straub Settlement, the parties executed a Stipulation for Entry of Judgment (the “Stipulation”) which could be pursued by Straub in the event any of the payments were late by more than fifteen days. The Stipulation was in the amount of $40,000 against us plus attorney fees, costs and expenses to enforce the judgment, and was to be reduced by the amount of payments previously received.  We made one payment of $7,250, but were unable to make additional payments.  On January 2, 2009, Straub filed an action requesting entry of judgment against us in the principal sum of $25,250 as per the Stipulation. Subsequent to December 31, 2012, we were able to finalize and fund a settlement of the obligation related to this litigation for a payment of $2,525.

Markstein Beverage

On December 22, 2009, a Default Judgment was entered against us by Markstein Beverage Co. (“Markstein”) in the amount of $5,000. The matter, which was heard in Superior Court of California, Small Claims Division, arose from purported unpaid product distribution costs borne by Markstein. Subsequent to December 31, 2012, we were able to finalize and fund a settlement of the obligation related to this litigation for a payment of $500.

Get Logistics

On March 19, 2008, a complaint was filed against us by Get Logistics, LLC (formerly known as GE Transport) seeking damages of $30,279 for unpaid shipping charges.  Subsequent to December 31, 2012, we were able to finalize and fund a settlement of the obligation related to this litigation for a payment of $3,027.

Worldwide Express

On March 3, 2009, a judgment was entered against us in favor of Worldwide Express for unpaid delivery services. The amount of the judgment was $8,794 inclusive of interest and costs. The amount, or an immaterial difference thereto, has been recorded in our financial statements as of December 31, 2012 and 2011 in connection with this matter.

12.          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. At December 31, 2011 we had not issued any preferred stock. 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. We valued the Series A preferred stock at $3.00 per share, which represents a slight premium over the 30 day volume weighted average price (“VWAP”) for our common shares of $2.70 per share, due to the rights attached to the preferred shares.

The Series A preferred stock has been designated with the following rights:

Since the preferred stock is contingently redeemable by FITT, it has been classified as temporary equity in the accompanying balance sheet as of December 31, 2012.

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.

Common Stock to Consultants and Advisors for Services

During 2012, we issued 20,000 shares of common stock, valued at $24,369 in payment for litigation support and investor relations services. During 2011, we issued 56,667 shares of common stock, valued at $271,481 in payment for strategic alliance, investor relations and legal services. This included a total of 29,167 shares, with an aggregate value of $135,000, registered on Forms S-8 filed March 28, 2011, May 18, 2011 and November 4, 2011 issued to our corporate counsel for providing legal services.

The fair value of the issued shares was determined based on the closing stock price on the date of issuance or commitment, and the shares were earned on their respective vesting dates.

We have recorded expenses for shares issued for services rendered in the accompanying Statements of Operations for December 31, 2012 and 2011 as follows:

Common Stock Issued to Settle Litigation

In 2012, in connection with the Sacks Settlement discussed in Note 11, we issued Sacks a total of 66,667 shares of our restricted common stock and cancelled 16,667 shares issued to Sacks in March 2010, but never released, under a settlement agreement that was never finalized.

In finalization of our settlement of litigation with Fenton, the landlord of the abandoned office lease property in Carlsbad, California, in January 2011 a shareholder and one of our former officers transferred 3,333 of his free-trading shares to Fenton on our behalf. Shortly thereafter, we issued 3,333 shares to the shareholder and former officer to replace the shares he transferred to Fenton.

Common Stock issued for Accrued Compensation

As discussed in Note 7, during 2011 we issued our two existing employees, one of whom is an officer, 75,000 shares of our common stock in lieu of a portion of their accrued compensation. The two employees agreed not to sell any shares issued them for a one-year period. Accrued Officers Compensation and Other Accrued Compensation were reduced by $280,000 and $135,000, respectively, in connection with the issuance of these shares. Also as discussed in Note 7, in 2011 we issued 333 shares of our common stock to a former employee in connection with a settlement of all prior wage and other claims.

No shares were issued for accrued compensation in 2012.

Common Stock Cancelled

During 2011 we cancelled 16,833 shares which we had previously issued to the following service providers.

Pentony Enterprises LLC (“Pentony”) – see Note 15 for a description of the agreement with Pentony and the cancellation in 2011 of 4,583 shares previously issued to them.

Issuers Capital Advisors, LLC (“ICA”) – on April 9, 2010, we entered into a Consulting Agreement with ICA under which ICA agreed to provide a variety of public relations services. In connection with the agreement, we issued 9,500 shares of our common stock to ICA. On June 6, 2011, we determined that ICA had not fully performed the services it had agreed to and we instructed our Transfer Agent to cancel 3,167 shares previously issued to them.

S.A. Frederick & Co., LLC (“Frederick”) – see Note 15 for a description of the agreement with Frederick and the cancellation in 2011 of 9,083 shares previously issued to them.

Warrants

A summary of the status of warrants for the years ended December 31, 2012 and 2011 is as follows:

The weighted-average remaining life of warrants outstanding at December 31, 2011 and 2010 was 0.86 years and 1.53 years, respectively. There was no expense related to warrants during the years ended December 31, 2012 and 2011.

Stock Options

During the years ended December 31, 2012 and 2011, there were no stock options outstanding and there was no expense related to stock options.

On June 29, 2007, our Board of Directors adopted the 2007 Equity Incentive Plan (the “2007 Plan”).  The 2007 Plan provides for the grant of equity awards to our directors, officers, other employees, consultants, independent contractors and agents, including stock options to purchase shares of our common stock, stock appreciation rights (“SARs”), restricted stock, restricted stock units, bonus stock and performance shares.  Up to 13,889 shares of our common stock may be issued pursuant to awards granted under the 2007 Plan, subject to adjustment in the event of stock splits and other similar events.  The 2007 Plan is administered by our Board of Directors, and expires ten years after adoption, unless terminated earlier by the Board.  As of December 31, 2012, no stock option grants have been made under the 2007 Plan.

13.          Gain on Extinguishment of Debt and Creditor Obligations

Following are the components of the gain on extinguishment of debt and creditor obligations for the years ended December 31:

14.          Income Taxes

Reconciliations of the U.S. federal statutory rate to the actual tax rate are as follows for the years ended December 31:

The major components of the deferred taxes are as follows at December 31:

Based on federal tax returns filed or to be filed through December 31, 2012, we had available approximately $24,434,000 in U.S. tax net operating loss carryforwards, pursuant to the Tax Reform Act of 1986, which assesses the utilization of a Company’s net operating loss carryforwards resulting from retaining continuity of its business operations and changes within its ownership structure.  Net operating loss carryforwards expire in 20 years for federal income tax reporting purposes.  For Federal income tax purposes, the net operating losses begin to expire in 2026.  State net operating loss carryforwards through December 31, 2012 are approximately $23,416,000 and begin to expire in 2013. We have relied on the issuance of common stock to fund certain operating expenses.  We may have experienced a change in ownership as defined in Section 382 of the Internal Revenue Code.  In the event we experienced a change in ownership, net operating loss carryforwards for federal income tax reporting will be limited based on the fair value of our Company on the date of change in ownership.  Such change is expected to provide benefit to us only upon the attainment of profitability.

During the years ended December 31, 2012 and 2011, our valuation allowance increased by approximately $824,666 and $547,503, respectively.

The United States Federal return years 2009 through 2012 are still subject to tax examination by the United States Internal Revenue Service, however, we do not currently have any ongoing tax examinations. We are subject to examination by the California Franchise Tax Board for the years 2009 through 2012 and currently does not have any ongoing tax examinations.

15.          Agreements

2012 AGREEMENTS

Debt Satisfaction Agreement

On February 21, 2012, we entered into a Debt Satisfaction Agreement with a shareholder, Dr. Sam Maywood, under which we agreed to issue 8,333 shares of our common stock to Dr. Maywood, or his designees, in satisfaction of $15,000 we owed to him. The value of these shares was $15,000 based on the market price of the stock on the effective date of the Debt Satisfaction Agreement.

Completion of Agreement with Atlanta Capital

On December 7, 2011, we entered into a Consulting Agreement with Atlanta Capital Partners, LLC (“ACP”). Under the agreement, ACP agreed to create a mutually acceptable plan which could include, but not be limited to, the following services: an investment opinion issued via GlobeNewsWire; an email alert sent to OTCstockreview.com subscribers; and/or inclusion in the OTC Stock Review bi-monthly printed newsletter that ACP distributes to 10,000 subscribers. The agreement called for the payment to ACP of $5,000 upon execution of the agreement. In addition, the agreement called for the issuance of a total of 12,500 shares of common stock, all of which were to be free-trading under the agreement. The first issuance of 4,167 free-trading shares was made in 2011 on our behalf by one of our shareholders.

On March 2, 2012, another shareholder, Dr. Sam Maywood, directed that we issue the 8,333 shares described under “Debt Satisfaction Agreement” above to two parties in satisfaction of our obligations under the agreement with ACP. In connection with this agreement, we recorded a general and administrative expense in 2011 in the amount of $23,481 and an additional expense in 2012 in the amount of $4,769 based on the fair value of the common stock issued to ACP. In addition, $15,000 remains due to Dr. Maywood as of December 31, 2012.

Issuance of Common Stock for Litigation Support

As described in Note 11 under Sacks Motor Sports, Inc., on May 2, 2012, we entered into the Sacks Settlement. In March 2012, in pursuit of achieving the Sacks Settlement, we issued 5,833 shares of our common stock to each of two parties and we made a payment of $1,000 to one of the parties, all in consideration for the time and expenses incurred by the parties for their assistance in helping achieve the Sacks Settlement, including providing Declarations supporting certain of our positions. The total of 11,666 shares were fully vested on the dates of each of the agreements and, during 2012, we recorded a general and administrative expense of $19,600, based on the market price of the shares on the dates of issuance, in connection with these transactions.

Cancellation of Notes Payable – Bridge Loans

As discussed in Note 8, in 2011 we issued two notes with face value totaling $50,000, and the proceeds were used to repay advances to FITT. On April 26, 2012, the two noteholders agreed to cancel the notes, forgive accrued interest thereon, and enter into new notes payable agreements directly with FITT. In connection with the cancellation of the notes, during the second quarter of 2012, we reduced notes payable and accrued interest by $61,000, adjusted our payable to FITT by $50,000 and recorded the remainder as a gain on extinguishment of debt.

Cancellation of Marketing & Representation Agreement

In August 2009, we entered into a Marketing & Representation Agreement with Rand Scott, MD (the “Scott Agreement”). Dr. Scott is a shareholder and one of the designers of the FITT Energy Shot. Under the Scott Agreement, Dr. Scott had agreed to perform various services for us and we had agreed to pay Dr. Scott a royalty for each bottle sold of the FITT Energy Shot once certain sales levels had been achieved. On May 20, 2012, we terminated the Scott Agreement and he entered into a similar agreement with FITT. No royalties have been paid by us to Dr. Scott under the Scott Agreement.

2011 AGREEMENTS

Agreement with E 2 Investments, LLC

On January 24, 2011, we entered into a Consulting Agreement with E 2 Investments, LLC, a company with significant experience in acquisitions, joint ventures, business relations and public company relations.  The agreement, which had a term of 8 weeks, called for E 2 Investments to provide advice on financing, acquisitions, joint ventures, public company relations and to introduce us to potential investors.  In connection with agreement, we issued to E 2 Investments 11,667 shares of our common stock, 5,000 of which we issued directly and which carried a Rule 144 restriction. The remaining 6,667 shares, which were required to be free-trading, were transferred to E 2 Investments on our behalf by one of our employees and shareholders. The shares issued were fully vested as of the effective date of the agreement and we have recorded a stock-based general and administrative expense of $31,500 in 2011, which equates to the aggregate value of all shares issued to E 2 Investments based on the market value on the date of the agreement. On January 31, 2011, we issued 6,667 shares to the employee and shareholder to replace the shares he transferred to E 2 Investments.

Agreement with Gene Stohler

On February 23, 2011, we entered into a Consulting Agreement with Gene Stohler, an individual with significant experience in strategic alliances and marketing.  The agreement calls for Mr. Stohler to provide services in the areas of product development and endorsement, strategic marketing, and product support and to introduce us to potential strategic partners.  Under the agreement, which has a term of 12 months, Mr. Stohler received 1,667 shares of our common stock.  The shares were fully vested on February 23, 2011, the date of issuance, and we have recorded a stock-based marketing expense of $7,000 during 2011 based on the market price of the shares on the date of issuance.

Agreement with The Street Awareness

On March 22, 2011, we entered into an agreement with The Street Awareness. Under the agreement, The Street Awareness agreed to conduct a comprehensive investor relations campaign of approximately 75 days to improve market awareness for our company and our business prospects. As consideration for the services to be performed by Street Awareness, we agreed to pay a fee of $250,000, payable $50,000 per week for five weeks beginning in April 2011. Our first payment of $50,000 was made in April 2011 with funds received in borrowings from two private investors. See Note 8. In June 2011, The Street Awareness agreement was terminated. Prior to the termination, we had made payments to The Street Awareness totaling $99,000, which amount was recorded as a general and administrative expense during 2011. No additional amounts are owed.

Agreement with S.A Frederick & Co., LLC

On March 23, 2011, we entered into a Consulting Agreement with S.A. Frederick & Co., LLC (“Frederick”), an entity with significant experience in marketing and strategic alliances.  The agreement called for Frederick to provide services in the areas of product development and endorsement, strategic marketing, and product support, and to introduce us to potential strategic partners.  During the four (4) month term of the agreement, we agreed to make cash payments of no more than $30,000 and to issue Frederick 10,000 shares of our common stock to be released to Frederick on an agreed upon schedule.  The shares were fully vested on March 23, 2011, the date of issuance.

In May 2011, after making payments totaling $5,000 in cash and releasing to 917 shares to Frederick, the parties cancelled the agreement. In connection with the cancellation, it was agreed that our obligations under the agreement had been fully satisfied with the cash payments of $5,000 and the release of 917 shares, and we instructed our transfer agent to cancel the remaining 9,083 shares which had not been released. During 2011, we recorded a marketing expense of $53,000, $48,000 of which was the value of the 10,000 shares originally issued based on their closing price on the date of issuance.

Agreement with Rand Scott, M.D.

On May 5, 2011, we entered into a Consulting Agreement with Rand Scott, M.D., who is a shareholder and the individual who collaborated with us in the development of the FITT Energy Shot. Under the agreement, Dr. Scott agreed to create a double blind testing program covering changes in blood pressure resulting from the ingestion of the FITT Energy Shot and two other two-ounce energy shots currently being sold in the marketplace. We intended to use the results to assist with the marketing of the product by FITT. In addition, Dr. Scott agreed to identify and retain a reputable testing facility to perform the testing program, work with the testing facility to construct proper testing protocols for the testing program, supervise the testing, and review and approve the final testing report.

In connection with the agreement, we agreed to pay Dr. Scott the amount of $25,000. We further agreed that our payment would be made with shares of our common stock, which would be registered by us on a Form S-8, and the number of which would be determined based on the per share price of the stock on the date of the S-8 filing. On May 18, 2011, we filed a registration statement on Form S-8 under which 4,167 common shares were registered and issued to Dr. Scott, at a value of $6.00 per share, in fulfillment of our payment obligation under the agreement. Since FITT has the responsibility to market the FITT Energy Shot under the Operating Agreement, we recorded this transaction during 2011 as a reduction of our indebtedness to FITT.

Agreement with Havas

On May 11, 2011, we entered into a Consulting Agreement with Havas , a company that is currently performing a wide array of marketing services for FITT related to the FITT Energy Shot. Under the agreement, Havas agreed to provide a number of services including developing an updated business strategy and creative assets, using information derived from the double blind testing program described above, to re-launch the marketing program for the FITT Energy Shot. Havas also agreed to test for effectiveness with media buying, and assist with identifying and retaining a vendor to distribute nationally to the retail market space.

In connection with the agreement, we agreed to pay Havas the amount of $100,000. We further agreed that our payment to Havas would be made with shares of our common stock, which would be registered by us on a Form S-8, and the number of which would be determined based on the per share price of the stock on the date of the S-8 filing. On May 18, 2011, we filed a registration statement on Form S-8 under which 16,667 common shares were registered and issued to Havas, at a value of $6.00 per share, in fulfillment of our payment obligation under the agreement. Since FITT has the responsibility to market the FITT Energy Shot under the Operating Agreement, we recorded this transaction during 2011 as a reduction of our indebtedness to FITT.

Agreement with Del Mar Corporate Consulting

On June 22, 2011, we entered into an investor relations agreement with Del Mar Corporate Consulting, LLC (“Del Mar”). Under the agreement, which was to expire October 31, 2011 and could be terminated on five (5) days’ notice, Del Mar agreed to provide a variety of investor relations services intended to provide market awareness for our company and to help enhance and elevate our presence within the investor community. As consideration for the services, we agreed to make a down payment of $10,000 and make additional scheduled payments totaling $22,500 in cash and 10,000 shares of common stock.

On July 7, 2011, we terminated the agreement. No additional cash was paid, no shares were issued and no additional amounts were owed after the payment of $10,000. During 2011, we recorded the $10,000 payment as a general and administrative expense.

Agreement with Equititrend Advisors

On July 8, 2011, we entered into a Consulting Agreement with Equititrend Advisors, LLC. Under the agreement, which had a term of six (6) months, Equititrend was to provide public relations, communications, advisory and consulting services revolving around a program to increase the investment community’s awareness of our company’s activities. As consideration for the services to be performed, we agreed to issue Equititrend 25,000 shares of common stock on scheduled dates, 12,500 of which would be restricted and 12,500 of which were to be unrestricted and free-trading. As required by the agreement, on its effective date, we issued Equititrend 4,167 shares of our common stock which carried a Rule 144 restriction. The agreement also required the issuance to Equititrend of 8,333 free-trading shares on the agreement’s effective date. The free-trading shares were transferred to Equititrend on our behalf by two of our shareholders and former officers. The shares were vested and valued on the effective date of the agreement. During 2011, we recorded a stock-based general and administrative expense totaling $31,500 in connection with this agreement. During the third quarter of 2011, we terminated the agreement after giving appropriate notice and no further shares were due to be issued to Equititrend.

Agreement with Equities Awareness Group

On September 21, 2011, we entered into a Financial Marketing Consulting Services Agreement with Equities Awareness Group (“EAG”). Under the agreement, which had a term of 8 weeks, EAG was to assist in our investor relations efforts in order to increase the investment community’s awareness of our company. As consideration for the services to be performed by EAG, we agreed to pay a total fee of $340,000, with payments scheduled on a weekly basis and services performed during the week after each payment was received. In October 2011, after making payments totaling $120,000, we determined that any additional services to be provided by EAG would not be effective, and we effectively cancelled the agreement by making no further payments. During 2011, we recorded a general and administrative expense totaling $120,000 in connection with this agreement.

Agreement with Pentony Enterprises LLC

On November 17, 2010, we reached an agreement with Pentony Enterprises LLC (“Pentony”) under which Pentony agreed to provide investor relations services to us, including among other things coverage on Pentony’s website, StockGuru.com, blog coverage on the website, trade alerts, and audio interviews. The agreement expired February 15, 2011. In connection with the agreement, we issued Pentony 4,583 shares of our common stock. The shares were fully vested on November 17, 2010, the date of issuance, and we recorded a general and administrative expense of $30,278 in 2010 in connection with the agreement. Pentony subsequently determined they were unable to perform the required services and returned the shares to us for cancellation. The shares were cancelled May 27, 2011.

16.          Subsequent Events

Debt Acquisition Agreements

In 2010 we initiated a program to compromise our significant debt. In furtherance of this program, during the first quarter of 2013 we entered into Debt Acquisition Agreements (“Debt Agreements”) with two parties affiliated with each other (the “Debt Funders”). The Debt Funders advanced us a total of $150,000 to compromise debt, either through our direct settlement with particular creditors or through the Debt Funders’ acquisition of certain debt for a compromised amount. In the cases where the Debt Funders acquired debt from creditors, the Debt Funders agreed to provide us with a release from the debt they acquired. In connection with the Debt Agreements, during the first quarter of 2013 we issued convertible promissory notes to the Debt Funders with principal amounts totaling $150,000 and used the funds, along with 131,700 shares of our common stock, valued at $31,340, to compromise $653,406 of debt.

The notes bear interest at 10% per annum and are repayable at two times the principal amount of the notes (in this case a total of $300,000). Repayment is to be made by conversion into shares of our common stock based on a 20-day volume weighted average price with the following minimums and maximums, both prior and subsequent to the proposed business combination discussed in Note 1:

If any portion of the notes is not converted into our common shares eight (8) months from the issuance date of each note, the non-converted portion of the notes will be automatically converted as described above.

Also during the first quarter of 2013 one of the Debt Funders converted $10,000 of their note payable into 40,000 shares of our common stock at the minimum conversion rate of $0.25 per share.

FITT Share Purchase Agreement

We are a party to a March 26, 2013 Amended and Restated Share Purchase Agreement between FITT and Pacello & Reed Enterprises (“P&R”). Under the agreement, P&R agreed to purchase $10 million worth of common shares of FITT with the understanding that once the share purchase is fully funded, FITT and our company will enter into a business combination as discussed in Note 1, with our Company being the surviving corporation. P&R agreed to fund $100,000 of their commitment on or before April 22, 2013, $900,000 on or before May 5, 2013 and the remaining $9 million on or before July 11, 2013; however, no assurances can be made that the transaction will be completed on the timeline provided, if at all. If the share purchase is not fully funded, we will not be required to enter into a business combination with FITT, but this circumstance will not preclude us from pursuing a combination if we elect to do so. 

FITT HIGHWAY PRODUCTS, INC.

BALANCE SHEETS

(UNAUDITED)

See accompanying Notes to Financial Statements.

FITT HIGHWAY PRODUCTS, INC.

STATEMENTS OF OPERATIONS

(UNAUDITED)

See accompanying Notes to Financial Statements.

FITT HIGHWAY PRODUCTS, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

See accompanying Notes to Financial Statements.

FITT HIGHWAY PRODUCTS, INC.

NOTES TO FINANCIAL STATEMENTS

June 30, 2013

(UNAUDITED)

Business

FITT Highway Products, Inc. (the “Company”) is in the business of the manufacturing (on an outsource basis), distribution and sale of energy drinks. Our current active product is a two-ounce energy shot named “F.I.T.T. Energy for Life” (the “FITT Energy Shot”).

We have significant debt that was incurred, for the most part, under previous management. As a result of this significant debt, and other factors, third parties performing marketing, production and fulfillment services have been unwilling to enter into agreements directly with us. In addition, we have been unable to attract necessary investment dollars to conduct operations. Therefore, effective August 12, 2010 we entered into an operating agreement (the “Operating Agreement”) with F.I.T.T. Energy Products, Inc. (“FITT”), a separate entity controlled by certain of our investors and management and whose largest shareholder is our CEO. Under the agreement, FITT is performing a majority of the operating functions for the FITT Energy Shot, and is recording all related results of operations. In exchange, FITT is obligated to pay us a royalty of $0.05 per bottle sold of the FITT Energy Shot.

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 following action: perform a one-for-sixty (1:60) reverse stock split of our issued and outstanding shares of common stock and preferred stock while maintaining the number of authorized shares at 150,000,000 shares of Common Stock and 20,000,000 shares of Preferred Stock (the “Reverse Split”). On January 13, 2013 we filed with the Securities and Exchange Commission (“SEC”) a Schedule 14C Definitive Information Statement notifying our shareholders of the Reverse Split and on January 23, 2013 such notice was mailed to our shareholders. The reverse split became effective February 15, 2013. All references to shares and per share information in these financial statements have been restated to give effect to the Reverse Split.

Merger with FITT

In 2012, FITT proposed negotiating a business combination with us and, on November 5, 2012, our Board of Directors approved commencing formal negotiations with FITT in this regard. On June 12, 2013, the Board, by unanimous written consent, recommended that our stockholders approve the Company entering into a Merger and Reorganization Agreement (the “Merger Agreement”) with FITT and on June 12, 2013, 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 following action: entry into the Merger Agreement with FITT whereby FITT will be merged into the Company, with the Company being the surviving entity (the “Merger”). The Merger Agreement, which was publicly announced on June 19, 2013, was entered into without having begun or completed an independent valuation of FITT. In order to enter into the Merger Agreement, FITT required that we mitigate our debt to their satisfaction which we have done. Since the beginning of our debt compromise program in early 2010, through the June 30, 2013 we have reduced our balance sheet debt nearly $5.2 million through debt settlement or write-off and through conversion of debt to equity. The Merger Agreement itself requires that FITT be valued at a number at least nine (9) times that of the Company. If the valuation is less than that, FITT has the right to terminate the Merger.

On June 27, 2013, FITT retained Aranca US Inc. to perform a business valuation for FITT. On June 27, 2013 we filed with the SEC a Schedule 14C Preliminary Information Statement, which was revised on July 13, 2013, to notify our shareholders of the Merger. If and when approved, we anticipate such notice will be mailed to our shareholders during August 2013 and that the Merger will become effective in September 2013, after the applicable waiting period. However, no assurances can be made that the time-frame indicated will be met or the merger will be completed based on the terms outlined.

Management’s Plan of Operations

Our revenues, and related cash flow, are presently limited to the receipt of royalties from FITT of $0.05 per bottle sold of the FITT Energy Shot. FITT is not obligated to pay us royalties for any additional products it has developed and funded. As such, we are currently dependent upon the success of FITT’s operating capabilities with respect to the FITT Energy Shot. If and when the Merger becomes effective, the Company’s balance sheet, operating results and cash flows will be combined with those of FITT.

We have not generated significant revenues for the three- and six-month periods ended June 30, 2013 and 2012, respectively. This was primarily due to a lack of operating capital and our Operating Agreement with FITT.  For the six months ended June 30, 2013 and 2012, we experienced net income of approximately $30,000 and $1,926,000, respectively, principally as a result of gains from our continuing debt compromise program. Excluding said non-cash gains, we continued to incur significant operating losses in the first six months of 2013 and 2012, and continue to have a significant working capital deficit. 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.

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 will attempt to raise a maximum of $5.0 million for us on a best efforts basis. Subsequent to June 30, 2013, together with CIM, we completed a private placement memorandum for $1.0 million in bridge loan financing. Once the merger with FITT is finalized, CIM will turn its efforts to the $5.0 million offering. See Note 12 for additional information. In addition, on August 13, 2013, we entered into an agreement with a corporation to sell 1,250,000 shares of our common stock for $250,000. See Note 13.

The financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities in the normal course of business.  The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that might result from the outcome of this uncertainty.

Basis of Presentation

The financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year 2012 as reported in our Form 10-K have been omitted.  In the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals necessary to present fairly our financial position, results of operation and cash flows.  The results of operations for the three- and six-month periods ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the financial statements and related notes which are part of our Annual Report on Form 10-K for the year ended December 31, 2012.

Net Income Loss per Share

Basic and diluted net income (loss) attributable to common stockholders per share is calculated by dividing the net income (loss) applicable to common stockholders by the weighted-average number of common shares outstanding during the period. At June 30, 2013 and 2012, we had outstanding warrants to purchase zero and 4,319 common shares, respectively. The exercise prices of all warrants were in excess of the average closing price of our common stock during the three- and six-month periods ended June 30, 2013 and 2012. At June 30, 2013 and 2012, we had 105,000 shares of redeemable preferred stock, which were issued in May 2012, convertible into an equal amount of our common shares. The weighted average number of shares of common stock of the convertible preferred stock were included in the calculation of diluted net income for the following periods – three months ended June 30, 2012 (53,077 shares), six months ended June 30, 2013 (105,000 shares), and six months ended June 30, 2012 (26,538 shares) – but excluded from the three months ended June 30, 2013 as the shares would be anti-dilutive due to the net loss in that period.

Use of Estimates

The preparation of 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 financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates.

We are not aware of any recently issued, but not yet effective, accounting pronouncements that would have a significant impact on our financial position or results of operations.

New Accounting Pronouncements

The Financial Accounting Standards Board issues Accounting Standard Updates (“ASUs”) to amend the authoritative literature in Accounting Standards Codification (“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.

As stated in Note 1, we have significant debt that was incurred, for the most part, under previous management, and we are continuing with our program to compromise this debt in a substantial way. Our goal is to settle the debt at an overall rate of no more than $0.10 per one dollar of debt. During the six months ended June 30, 2013, we finalized settlement agreements with certain of our creditors. In addition, we determined that the statute of limitations for certain of our creditors to enforce collection of any amounts they might be owed has now, or will soon elapse. We have written off those accounts for which the statute of limitations has expired. The Company reviewed any claims or liens on these accounts before mitigation. Based on our negotiations and determinations, we have during the six months ended June 30, 2013, or may in the near future, reduce our balance sheet debt as shown below (exclusive of conversion of convertible notes discussed in Note 7):

Debt reductions shown above include $653,406 in settled obligations and $44,182 due to the expiration of statute of limitations on creditor obligations. Amounts expected to be compromised in future periods identified above are dependent on the ability of creditors to enforce collection after certain statute of limitations expire. Management cannot make any assurances that such conditions will be met. As of June 30, 2013, under the condition that the statute of limitations continues to pass on certain creditor balances, we anticipate the future period write-offs of $6,809 will be made during the three months ended September 30, 2013.

Our remaining debt totals approximately $2.7 million as of June 30, 2013. Of this, $1,328,958 is owed to our officer and employee for accrued and unpaid salaries and advances (inclusive of accrued payroll taxes), $282,755 is owed for delinquent payroll taxes, and $224,168 is owed to our legal counsel.

During the six months ended June 30, 2013, we wrote-off $44,182 in accounts payable as a result of the expiration of the statute of limitation for creditors to enforce collection of their debt. In addition, we finalized and funded agreements to settle certain accounts payable obligations totaling $273,579 for consideration totaling $47,393 ($41,053 in cash and 31,700 shares of common stock valued at $6,340). We also expect to write-off an additional $6,809 in accounts payable in future periods due to the expiration of the statute of limitations to enforce collection. Such write-offs are dependent upon the absence of additional claims on aged balances expected to be written off.

Accounts payable at June 30, 2013 consists of the following:

Amounts owed to ongoing vendors are mainly the result of obligations for legal, accounting and outside director fees which are necessary to maintain our status as a fully reporting public company.

Accrued expenses consist of the following at: