10-Q/A 1 nlef_10qa.htm AMENDED QUARTERLY REPORT nlef_10qa.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q/A
(Amendment No. 1)
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended: March 31, 2010
 
or
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from: _____________ to _____________

Commission File Number: 000-22024
 
NEW LEAF BRANDS, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
77-0125664
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
One De Wolf Road Suite 208, Old Tappan, New Jersey 07675
 (Address of principal executive offices) (Zip Code)
 
(201)784-2400
 (Registrant’s telephone number, including area code)
 

9380 E. Bahia Drive, Suite A-201 Scottsdale, Arizona 85260
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þ  Yes  ¨  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes  oNo
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o Accelerated filer
¨
Non-accelerated filer
o Smaller reporting company 
þ
(Do not check if a smaller reporting company)       
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes þ No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
As of May 12, 2010, there were 67,076,288 shares of our common stock, $0.001 par value, outstanding.
 


 
 

 
 
EXPLANATORY NOTE REGARDING RESTATEMENT
 
New Leaf Brands, Inc is filing this Amendment No. 1 on Form 10-Q/A (the “Amendment”) to its Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, originally filed May 17, 2010 (the “Original Filing”) to amend and restate the following previously-filed condensed consolidated financial statements (and related disclosures) (the “Restatement”): (1) our condensed consolidated balance sheet as of March 31, 2010 and the related condensed consolidated statements of operations and cash flows for the quarter ended March 31, 2010 contained in Part I Item 1 of this Amendment; and (2) management’s discussion and analysis of our financial condition and results of operations as of and for the quarter ended March 31, 2010 contained in Part I, Item 2 of this Amendment. Subsequent to the filing of the Company’s Form 10-Q for the quarter ended March 31, 2010, Management identified that there were errors in the recording of derivative liabilities for the quarter ended March 31, 2010 and therefore our unaudited condensed consolidated financial statements required restatement. The Company has restated its March 31, 2010 information to correct the error noted above. Refer to Note 1 to the condensed consolidated financial statements included in Item 1 for further discussion of the Restatement.
 
Financial information related to the interim period ended March 31, 2010 included in the reports on Form 10-Q previously filed by us and all related earnings press releases and similar communications issued by us related to these periods, should not be relied upon and in the event there are discrepancies between this Amendment and previous reports, press releases and similar communications, the information in this Amendment shall control.
 
 
 
 
 
 

 
 
NEW LEAF BRANDS, INC.
 
TABLE OF CONTENTS
 
PART I – FINANCIAL INFORMATION
 
       
Item 1
Financial Statements
    1  
           
 
Condensed Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009
   
1
 
           
 
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009
   
2
 
           
 
Unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2010 and 2009
   
3
 
           
 
Footnotes to Unaudited Condensed Consolidated Financial Statements
   
5
 
           
Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
   
25
 
           
Item 3
Quantitative and Qualitative Disclosures About Market Risk
   
27
 
           
Item 4T
Controls and Procedures
   
28
 
           
PART II – OTHER INFORMATION
 
         
Item 1
Legal Proceedings
   
29
 
           
Item 1A
Risk Factors
   
29
 
           
Item 2
Unregistered Sales of Equity Securities and use of Proceeds
   
29
 
           
Item 3
Defaults upon Senior Securities
   
30
 
           
Item 4
Removed and Reserved
    30  
           
Item 5
Other Information
   
30
 
           
Item 6
Exhibits
   
31
 

 
 

 
 
PART I – FINANCIAL  INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
 
New Leaf Brands, Inc
Condensed Consolidated Balance Sheets

   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
       
   
(As Restated)
       
ASSETS                
CURRENT ASSETS
               
Cash & cash equivalents
 
$
141,971
   
$
1,547,924
 
Accounts receivable, net of allowances for uncollectible of $76,023 at March 31, 2010 and $90,000 at December 31, 2009             
   
711,221
     
206,223
 
Inventory
   
1,316,129
     
485,889
 
Prepaid expense
   
77,147
     
17,905
 
Escrow deposit on sale of discontinued operations
   
250,000
     
250,000
 
                 
Total current assets
   
2,496,468
     
2,507,941
 
                 
                 
Property & equipment, net
   
117,267
     
111,031
 
                 
                 
Intangible assets, net
   
4,077,698
     
4,198,324
 
                 
                 
                 
Total assets
 
$
6,691,433
   
$
6,817,296
 
                 
                 
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Accounts payable
 
$
1,912,633
   
$
1,282,793
 
Accrued liabilities
   
1,096,640
     
605,135
 
    Accrued liabilities related party
   
352,601
     
403,247
 
Interest payable
   
60,968
     
53,969
 
Short-term notes
   
1,474,000
     
1,429,000
 
Notes payable to  related party
   
120,157
     
90,727
 
Current portion of long-term debt
   
1,080,759
     
1,125,908
 
Derivative liabilities
   
-
     
110,000
 
                 
Total current liabilities
   
6,097,758
     
5,100,779
 
                 
                 
Long-term debt
   
52,342
     
52,342
 
Derivative liabilities
   
508,596 
         
Total long-term liabilities
   
560,938
     
52,342
 
                 
Total liabilities
   
6,658,696
     
5,153,121
 
                 
Commitment & Contingencies (Note 13)
               
                 
STOCKHOLDERS' EQUITY
               
Preferred stock, $0.001 par value, convertible 10,000,000 shares authorized
   
-
     
-
 
Common Stock, $0.001 par value, 500,000,000 shares authorized, issued and outstanding: 66,430,535 at March 31, 2010 and 63,105,477 at December 31, 2009
   
66,430
     
63,105
 
Additional paid-in capital
   
34,698,022
     
33,706,045
 
Accumulated deficit
   
(34,731,715
)
   
(32,104,975
)
                 
Total stockholders' equity
   
32,737
     
1,664,175
 
                 
Total liabilities and stockholders' equity
 
$
6,691,433
   
$
6,817,296
 
 
See accompanying notes to the condensed consolidated financial statements
 
 
1

 

NEW LEAF BRANDS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)

   
Three months ended
March 31,
 
   
2010
   
2009
 
   
(As Restated)
       
             
Net Sales
 
$
954,549
   
$
701,789
 
                 
Cost of Sales
   
679,699
     
626,579
 
                 
         
   
274,850
     
75,210
 
                 
OPERATING EXPENSES:
               
Shipping & handling
   
120,798
     
66,102
 
Marketing expenses
   
1,186,889
     
630,442
 
General & administrative
   
1,539,545
     
449,180
 
Depreciation & amortization
   
129,356
     
117,126
 
                 
   Total operating expenses
   
2,976,588
     
1,262,850
 
                 
           Loss from continuing operations
   
(2,701,738
)
   
(1,187,640
)
                 
OTHER  INCOME (EXPENSE):
               
Miscellaneous (expense), net
   
(4,288
)
   
3,347
 
Loss on settlement of accounts payable and extinguishment of  long-term debt
   
(75,378
)        
Interest expense, net
   
(68,297
)
   
(269,496
)
Amortization of debt discount & deferred financing cost
   
(74,430
)
   
(715,735
)
Change in fair value of derivative liabilities
   
297,391
     
(280,000
)
                 
    Total other income (expense), net
   
74,998
     
(1,261,884
)
                 
LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES
   
(2,626,740
)
   
(2,449,524
)
                 
PROVISION FOR INCOME TAXES
   
-
     
-
 
LOSS FROM CONTINUING OPERATIONS
   
(2,626,740
)
   
(2,449,524
)
INCOME FROM DISCONTINUED OPERATIONS
               
Income from discontinued operations
   
-
     
567,717
 
Provision for income taxes
   
-
     
-
 
                 
Income (loss) from discontinued operations
   
-
     
567,717
 
                 
NET LOSS 
 
$
(2,626,740
)
 
$
(1,881,807
)
                 
DIVIDENDS ON PREFERRED STOCK
   
-
     
113,988
 
                 
NET LOSS PER SHARE  BASIC AND DILUTED
 
$
(2,626,740
)
 
$
(1,995,795
)
            Net Loss per Share – Basic and Diluted
               
Continuing operations
 
$
(0.04
)
 
$
(0.31
)
Discontinued operations
 
$
-
   
$
0.07
 
Net loss per share-basic and diluted
 
$
(0.04
)
 
$
(0.24
)
                 
WEIGHTED AVERAGE SHARES OUTSTANDING
   
63,834,295
     
8,393,173
 

 See accompanying notes to the condensed consolidated financial statements
 
 
2

 

NEW LEAF BRANDS, INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
 
   
For the Three months ended
March 31,
 
   
2010
   
2009
 
Operating Activities:
 
(As Restated)
       
Continuing operations
           
Net Loss from continuing operations
 
$
(2,626,740
)
 
$
(2,449,524
)
Adjustments to reconcile net loss from continuing extinguishment of operations to net cash used in continuing operating activities:
 
  Loss on settlement of accounts payable and long-term debt
   
75,378
     
-
 
  Depreciation & amortization
   
203,786
     
832,861
 
  Warrants issued for services
   
54,830
     
-
 
  Stock based compensation expense
   
51,575
     
20,607
 
  Common Stock issued for services
   
1,018,226
     
75,000
 
  Change in fair value of derivatives liabilities
   
(297,391
)
   
280,000
 
  Changes in assets & liabilities:
               
  Accounts receivable
   
(504,998
)
   
(319,726
)
  Inventory
   
(830,240
)
   
(242,673
)
  Prepaid expenses
   
(59,242
)
   
28,150
 
  Accounts payable
   
793,620
     
(325,882
)
  Accrued liabilities
   
447,858
     
893,981
 
Net cash (used in) continuing operations
   
(1,673,338
)
   
(1,207,206
)
                 
Discontinued operations
               
Net Income  from discontinued operations
   
-
     
567,717
 
Adjustments to reconcile net income from discontinued operations to net cash used in discontinued operating activities:
 
  Depreciation & amortization
   
-
     
27,198
 
  Stock-based compensation expense
   
-
     
13,594
 
  Changes in current assets & liabilities
   
-
     
(8,473
)
Net cash provided by discontinued operations
   
-
     
600,036
 
Net cash (used in) operating activities
   
(1,673,338
)
   
(607,170
)
                 
Investing Activites:
               
Continuing operations
               
Purchase of property and equipment
   
(14,965
)
   
(1,250
)
                 
Discontinued operations
               
Purchase of property and equipment
   
-
     
(2,120
)
                 
Net cash (used in) investing activities
   
(14,965
)
   
(3,370
)
                 
Financing Activities:
               
Proceeds from notes payable
   
-
     
863,357
 
Net proceeds from sale of common stock
   
327,500
     
-
 
Payments on line of credit, net
   
-
     
(956
)
Principal payments on notes payable
   
(45,150
)
   
(128,347
)
                 
Net cash provided by financing activities
   
282,350
     
734,054
 
                 
Change in cash & equivalents
   
(1,405,953
)
   
123,514
 
Cash & cash equivalents at the beginning of period
   
1,547,924
     
98,410
 
Cash & cash equivalents at the end of period
   
141,971
   
$
221,924
 
                 
Supplemental disclosures:
               
Cash paid during the period for:
               
  Interest
 
$
70,925
   
$
132,523
 
                 
NONCASH INVESTING AND FINANCING ACTIVITIES:
         
Accrued preferred stock dividends
   
-
     
113,988
 
Conversion of preferred stock to common stock
   
-
     
23,558
 
Settlement of accounts payable for common stock
   
163,781
     
-
 
Common stock issued in lieu of dividends
   
-
     
942
 
Value of warrants issued in relationship to debt
   
-
     
496,153
 
Issuance of warrants in connection with common stock and debt offerings     695,987       -  
 
See accompanying notes to the condensed consolidated financial statements
 
 
3

 

Restatement of Prior Period Amounts
 
In preparing its financial statements New Leaf Brands, Inc identified certain  errors related to accounting for derivative liabilities. These errors resulted in the overstatement of accumulated deficit and the understatement of derivative liabilities for the quarter ended March 31, 2010.

            The Company recorded an adjustment for the fair value of warrant liabilities of $549,305 as an adjustment to its opening balance of additional paid-in capital as of January 1, 2010.

The following table summarizes the adjustments to the Company’s Consolidated Statements of Operations and Cash Flows for the quarter ended March 31, 2010.The Consolidated Balance Sheet at March 31, 2010 was revised to reflect the effect of this error which resulted in an decrease in Accumulated deficit of $107,013.
 
Condensed Consolidated Balance Sheet — March 31, 2010
 
   
As previously
             
   
Reported
   
Adjustment
   
As Restated
 
   
(In thousands)
 
                   
Derivative liabilities
  $ 20     $ 489     $ 509  
Total liabilities
    6,170       489       6,659  
Additional paid-in capital
    35,294       (596 )     34,698  
Accumulated deficit
    (34,839 )     107       (34,732 )
Total stockholder’s equity (deficit)
    521       (489 )     32  
Total liabilities and stockholders’ equity (deficit)
    6,691       (- )     6,691  
 
Condensed Consolidated Statement of Operations — Three Months Ended March 31, 2010
 
   
As previously
             
   
Reported
   
Adjustment
   
As Restated
 
   
(In thousands)
 
                   
Change in fair value of derivative liabilities
  $ 115     $ 182     $ 297  
Loss on settlement of accounts payable and extinguishment of long-term debt     (- )     (75 )     (75 )
Total other income (expense), net
    (32 )     107       75  
Net loss from continuing operations before provision for income taxes
    (2,734 )     107       (2,627 )
Net loss available to common stockholders
    (2,734 )     107       (2,627 )
Net loss per share basic and diluted
    (0.04 )           (0.04 )
 
Condensed Consolidated Statement of Cash Flows — Three Months Ended March 31, 2010
 
 
As previously
         
 
Reported
 
Adjustment
 
As Restated
 
 
(In thousands)
 
                   
Net loss from continuing operations
  $ (2,734 )   $ 107     $ (2,627 )
Changes in fair value of derivative liabilities
    (115 )     (182 )     (297 )
Loss on settlement of accounts payable and extinguishment of long term debt
    -       75       75  

 
4

 

NOTE 1 - BASIS OF PRESENTATION
 
In the opinion of management, the accompanying unaudited, condensed, consolidated financial statements contain all adjustments necessary to present fairly the financial position of New Leaf Brands, Inc. (“New Leaf” or the “Company”) and its results of operations and cash flows for the interim periods presented. Such financial statements have been condensed in accordance with the applicable regulations of the Securities and Exchange Commission and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America.  These financial statements should be read in conjunction with New Leaf’s audited financial statements for the fiscal year ended December 31, 2009, included in New Leaf’s Annual Report filed on Form 10-K for such fiscal year.

The accompanying condensed consolidated balance sheet as of December 31, 2009, which has been derived from audited consolidated financial statements, and the unaudited condensed consolidated financial statements of Baywood International, Inc., effective October 16, 2009,  of New Leaf Brands, Inc. (“New Leaf” or the “Company”).  The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year.

On July 24, 2009, the Company entered into an Asset Purchase Agreement (“the Agreement”) with Nutra, Inc., a subsidiary of Nutraceutical International Corporation.   Pursuant to the Agreement, the Company sold substantially all of the rights and assets of Nutritional Specialties, Inc.’s business, including but not limited to its accounts, notes and other receivables, inventory, tangible assets, rights existing under assigned purchase orders, proprietary rights, government licenses, customer lists, records, goodwill and assumed contracts.  Certain rights and assets were excluded from the purchased assets, including the right to market, sell and distribute beverages as described in the Agreement. In exchange for the foregoing, Nutra, Inc. agreed to pay an aggregate purchase price of $8,250,000 in cash, less payment of liabilities, a $250,000 retention and certain pre-closing working capital adjustments.  Pursuant to the Agreement, the assets of Nutritional Specialties, Inc. were evaluated at closing to see if they had a minimum net asset value as of the closing date, after giving effect to normal generally accepted accounting principles, adjustments for reserves and except for routine reductions related to normal amortization and depreciation, equal to $1,848,604. If the net asset value was greater or less than $1,848,604 at the closing, the purchase price payable at closing would be increased or decreased by the amount of such difference on a dollar-for-dollar basis. At closing, the net asset value was $2,176,411 and therefore the initial purchase price of $8,250,000 was increased by $327,807.   The asset sale contemplated by the Agreement closed on October 9, 2009.  Included in the purchase price is a $250,000 hold-back, of which the proceeds are being held by Nutra, Inc.  No later than six months after the closing date, or April 9, 2010, if Nutra, Inc. determines that there is a material difference between the actual net asset value and the net asset value at closing, it may prepare a written statement setting forth the calculation of the actual net asset value and that amount may be deducted from the hold-back.  On March 18, 2010, the Company received a letter from Nutra indicating their intent to withhold certain funds from the hold-back, however the letter did not specify a dollar amount.  The Company has challenged Nutra’s letter and believes that most or all of these hold-back funds will be received. The remaining receivable of $250,000 is included in the accompanying condensed consolidated balance sheet at March 31, 2010. On June 30, 2010 the Company and Nutra, Inc. agreed to reduce the retention to $200,000 for immediate payment of the retention and recognized a loss of $50,000 at that time.

Baywood International, Inc. changed its name effective October 16, 2009 to New Leaf Brands, Inc. to reflect the change in strategic direction that occurred with the sale of Baywood International, Inc.’s nutraceutical businesses on October 9, 2009. The name change was effective in the market at the open of business on October 19, 2009, at which time the Company’s ticker symbol changed from BAYW.OB to NLEF.OB.
 
NOTE 2 – LIQUIDITY AND FINANCIAL CONDITION
 
The Company’s condensed consolidated financial statements have been prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  As reflected in the condensed consolidated financial statements accompanying this Quarterly Report on Form 10-Q, the Company had negative net working capital of $3,601,290  and an accumulated deficit of $34,731,715 at March 31, 2010.  The Company has not yet created positive cash flows from operating activities and its ability to generate profitable operations on a sustainable basis is uncertain.  Collectively, these factors raise substantial doubt about the Company’s ability to continue as a going concern.
 
The Company believes that its existing cash resources, combined with projected cash flows from operations may not be sufficient to execute its business plan and continue operations for the next twelve months.   Management believes its existing beverage business can achieve profitability and positive cash flow.    In addition to paying down and restructuring its debt, management has taken steps to increase the Company's revenues and reduce the Company’s operating expenses.  The Company intends to continue to explore various strategic alternatives, including business combinations and private placements of debt and or equity securities to raise capital.   However, the Company cannot provide any assurance that operating results will generate sufficient cash flow to meet its working capital needs and service its existing debt or that it will be able to raise additional capital as needed.
 
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

 
5

 
 
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
The Company has identified the policies below as critical to its business operations and the understanding of its results of operations.  The impact and any associated risks related to these policies on the Company’s business operations are discussed throughout this section.
 
Use of Estimates
 
The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
Options and Warrants issued on debt and beneficial conversion
 
The Company estimates the fair value of each option and warrant grant on the date of grant using the Black-Scholes-Merton option-pricing model.  The option and warrant estimates are based on the following assumptions for the three months ended March 31, 2010 and 2009:
 
   
March 31,
2010
   
March 31,
2009
 
Dividend yield
   
     
 
Volatility
   
99% - 111
%
 
106% to 107
 %
Risk free interest rate
 
2.4% to 3.3
 %
 
1.8% to 2.9
 %
Expected term
 
5 to 7 years
   
5 years
 
Forfeiture rate (options)
   
8
%
   
8
%

The Company accounts for the beneficial conversion feature of debt and preferred stock under the Debt Topic of the Codification (ASC Topic 470-20) using intrinsic value method measure at the date of the note.

Revenue Recognition, Sales Returns and Allowances
 
Revenue is recognized when the product is shipped.  Sales returns are recorded as a reduction to sales when a customer and the Company agree a return is warranted.  All returns must be authorized in advance and must be accompanied by an invoice number within 180 days.  If returned, the Company’s customers are responsible for returning merchandise in resalable condition.  Full credit cannot be given for merchandise that has been defaced, marked, stamped, or priced in any way.  The Company does not accept products kept longer than two years. Management communicates regularly with customers to compile data on the volume of product being sold to the end consumer.  This information is used by management to evaluate the need for additional sales returns allowance prior to the release of any financial information.  The Company’s experience has been such that sales returns can be estimated accurately based on feedback within 30 days of customer receipt.
 
 
6

 
 
Inventories
 
Inventories consist primarily of finished product, but at times will include certain raw materials, packaging and labeling materials and are recorded at the lower of cost or market on an average cost basis. The Company does not process raw materials, but rather has third-party suppliers formulate, encapsulate and package finished goods.
 
Management analyzes inventory for possible obsolescence on an ongoing basis, and provides a write down of inventory costs when items are no longer considered to be marketable. Management’s estimate of a fair market value is inherently subjective and actual results could vary from the estimate, thereby requiring future adjustments to inventories and results of operations.
 
   
March 31,
 2010
   
December 31,
 2009
 
   
(Unaudited)
       
Raw materials
  $ 828,709     $ 91,351  
Finished goods
    487,420       394,538  
                 
   Totals
  $ 1,316,129     $ 485,889  
 
Property, Equipment and Depreciation

Furniture, fixtures, computers and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of five years.  Leasehold improvements are recorded at cost and amortized over the lesser of the estimated useful life of five to seven years or the remaining term of the underlying lease.

Intangibles

Intangible assets consist of brand value resulted from the September 9, 2008 acquisition of certain net assets from Skae Beverage International, LLC.  Intangible assets consisted of the following at March 31, 2010 and December 31, 2009:

   
Brand Value – New Leaf Brands
 
       
Asset value at December 31, 2009
 
$
4,760,824
 
Accumulated amortization as of December 31, 2009
 
$
562,500
 
Net asset value at December 31, 2009 
 
$
4,198,324
 
         
Asset value at March 31, 2010
 
$
4,760,824
 
Accumulated amortization as of March 31, 2010
 
$
683,126
 
Net asset value at March 31, 2010
 
$
4,077,698
 
 
 
7

 
 
The Company evaluates its intangible assets for potential impairment on an annual basis or whenever events or circumstances indicate that an impairment may have occurred in accordance with the provisions of the Intangibles - Goodwill and Other Topic of the Codification (“ASC Topic 350-30”), which requires that intangible assets be tested for impairment using a two-step process. The first step of the  impairment test, used to identify potential impairment, compares the estimated fair value of the reporting unit containing the Company’s intangible asset with the related carrying amount. If the estimated fair value of the reporting unit exceeds its carrying amount, the reporting unit’s intangible asset is not considered to be impaired and the second step is unnecessary.

The brand value (including Trademarks and Trade Names) of continuing operations is being amortized over a ten-year period.  Amortization expense for the quarters ended March 31, 2010 and 2009 was $120,626 and $112,500, respectively.  

Debt instruments, offering costs and the associated features and instruments contained therein

Deferred issuance costs are amortized over the term of their associated debt instruments.

The Company evaluates the terms of the debt instruments to determine if any embedded derivatives or beneficial conversion features exist.  The Company allocated the aggregate proceeds of the debt instrument between the warrants and the debt based on their relative fair values, if applicable, as modified in accordance with ASC 470.  The fair value of the warrants issued to debt holders or placement agents are calculated utilizing the Black-Scholes-Merton or probability weighted binomial method depending on the terms of the warrant agreements.  The Company amortizes the resultant discount or other features over the terms of the debt through its earliest maturity date using the straight line method which approximates the effective interest method.  If the maturity of the debt is accelerated because of defaults or conversions, then the amortization is accelerated.

Warrant  Liabilities and Other Derivative Financial Instruments

Derivatives are recognized at fair value as required by ASC 815 “Derivatives and Hedging” (“ASC 815”).  ASC 815 affects the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions).  For example, warrants with such provisions will no longer be recorded in equity.  Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price.  The Company evaluated whether its warrants contain provisions that protect holders from declines in its stock price or otherwise could result in modiication of either the exercise price or the shares to be issued under the respective warrant agreements.  The Company determined that a portion of its outstanding warrants contained such provisions thereby concluding they were not indexed to the Company’s own stock.

Estimating the fair value of these financial instruments requires the development of significant and subjective estimates that are likely to change over the duration of the instrument with related changes in internal and external market factors.  In addition, option-based techniques are highly volatile and sensitive to changes in the traded market price of the Company’s common stock.  Since the warrant liabilities are initially and subsequently carried at fair value, the Company’s statement of operations reflects the volatility in these estimates and assumption changes.

Derivatives

As part of certain note and warrant agreements, the Company has provided holders with the option to convert the note or exercise the warrant into the Company’s common stock at a specified strike price. In order to prevent dilution, if the new strike price may be lower than the original strike price on the day of conversion or exercise, the strike price would be lowered to the new conversion or exercise price.  Under the Derivatives and Hedging Topic of the Codification (“ASC Topic 815-40”), the Company has determined that these types of down round protection terms are considered derivatives.
 
 
8

 
 
The Company originally estimated the fair value of these warrants using a Black-Scholes-Merton valuation model. The same valuation model approach is applied to the market price of the Company’s common stock at January 1, 2009, December 31, 2009 and March 31, 2010 to determine the amount of the derivative relative to the down round protection. The fair value of these derivatives at December 31, 2009 was $110,000 and at March 31, 2010 was $508,596. The change in this derivative value is included in the consolidated statement of operations as a change in fair value of derivative liabilities. The Company considers these derivative instruments as used for the purpose of securing financing.
 
In August 2009, pursuant to agreements between the Company and individual warrant holders, the Company offered the warrant holders the opportunity to exercise their warrants at an exercise price of $0.25 per share or to exercise their remaining warrants on a cashless basis into common shares.
 
Additionally, pursuant to agreements between the Company and individual note holders, the Company offered the note holders a lower conversion price of certain outstanding notes and accrued interest of $0.25, with an effective date of August 31, 2009. The Company completed the conversion of the notes into common stock for those investors who agreed to exercise this conversion right utilizing the reduced conversion price.

During December 2009, the Company commenced a private placement offering of common stock and warrants with certain accredited investors. On February 16, 2010, the Company issued a side letter agreement to the shareholders of this offering which included down round protection through April 30, 2010 in which additional shares of common stock and/or warrants would be issued, subject to certain conditions in the side letter agreement. As of April 6, 2010, the Company initiated a new private placement offering where the terms are more favorable than the December 2009 private placement offering.  Shareholders who participated in the December 2009 offering will receive an aggregate of 1,499,410 additional warrants with an exercise price of $0.45 per warrant.

The fair value of the derivative payable associated with the private placement in the side letter as of the grant date of February 8, 2010 was $25,000. The fair value of the derivative liabilities as of March 31, 2010 and December 31, 2009 was $508,596 and $110,000, respectively. The decrease in fair value of the Company’s derivative liabilities resulted in a gain of $297,000 for the three months ended March 31, 2010 and is included in the change in fair value of the derivative liabilities. The gain includes a decrease in the derivative liabilities due to the passage of time.

Fair Value Measurements

The Company measures fair value in accordance with Statement ASC 820, Fair Value Measurements (“ASC 820”). ASC 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
 
 
• Level 1 -
unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
 
 
• Level 2 -
inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
 
 
• Level 3 -
unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.
 
 
9

 
 
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

The following table summarizes the changes in fair value of warrant liabilities (a level 3 fair value measurement) for the three months ended March 31, 2010: 
 
 
Balance December 31, 2009
  $ 110,000  
Adjustment for fair value of warrant liabilities as of January 1, 2010
    549,305  
Fair value at date of issuance:
       
February  2010 stock and warrant issuance
    146,682  
Change in fair value of derivative instruments included in net loss
    (297,391 )
Balance March 31, 2010
  $ 508,596  

Net Loss Per Share

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

NOTE 4 - GEOGRAPHIC AREA DATA BY PRODUCT LINE
 
The Company generates its revenues from numerous customers, primarily in the United States.  The Company’s product lines include ready-to-drink beverages.  The Company operates in only one reportable segment and holds all of its assets in the United States. The sales of nutritional and dietary supplements for the three months ended March 31, 2009 was $3,702,506, and are included in the results of discontinued operations.  The following table outlines the breakdown of sales to unaffiliated customers domestically and internationally for the three months ended March 31:
 
Net Sales
 
2010
   
2009
 
Ready-to-Drink Beverages:
           
   United States
 
$
951,276
   
$
571,219
 
   Canada
   
-
     
103,835
 
   Other International
   
3,273
     
26,735
 
      Totals
 
$
954,549
   
$
701,789
 
 
 
10

 
 
NOTE 5 - CREDIT RISK AND OTHER CONCENTRATIONS
 
As of March 31, 2010, approximately 20% of accounts receivable was due from one customer.  Sales to this customer totaled approximately $192,000 for the three month period ended March 31, 2010.
 
As of March 31, 2009 approximately 15% and 14% of accounts receivable  from continuing operations were due from two customers.  Sales  from continuing operations to these customer totaled approximately $112,000 and $58,000, respectively, for the three month period ended March 31, 2009.
 
As of March 31, 2010, approximately 21%, 18% and 11% of accounts payable were due to three vendors.  Purchases from these vendors totaled approximately $402,000, $0, and $209,000, respectively, for the three month period ended March 31, 2010.
 
As of March 31, 2009 approximately 29%, and 28% of accounts payable from continuing operations were due to two vendors.  Purchases from these vendors totaled approximately $303,000, and $266,955, respectively, for the three month period ended March 31, 2009.
 
A slowdown or loss of these customers or vendors could materially adversely affect the results of operations and the Company’s ability to generate significant cash flow.
 
NOTE 6 – NOTES PAYABLE TO RELATED PARTY
 
Notes payable to related parties  at March 31, 2010 and December 31, 2009 consisted of the following:
 
   
March 31,
   
December 31,
 
Description
 
2010
   
2009
 
Unsecured note payable to a director,  with a face amount of $150,000 bearing interest  which is payable at maturity, at 10% per annum.
   
150,000
     
150,000
 
                 
Less: debt discount
   
(29,843
)
   
(59,273
)
                 
Total notes payable to related party
 
$
120,157
   
$
90,727
 

Interest expense for the three months ended March 31, 2010 and 2009 amounted to $3,750 and $215,584, respectively, for notes payable to related party.  The weighted average financing rate for all related party borrowings amounts to 10% for 2010 and 22% for 2009.

On March 20, 2009, the Company entered into a transaction with Eric Skae, the Company’s Chief Executive Officer and Chairman of the Board, whereby it issued to Mr. Skae an 18% Subordinated Note, with an effective date of March 17, 2009, for a principal amount of $325,000 and a warrant to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.85 per share, with an expiration date of March 20, 2014.  The value of the warrant was $31,285 and was accounted for as debt discount.  The Note was due on April 12, 2009, unless due earlier in accordance with the terms of the Note.  Interest accrues on the Note at a rate of 18% per year.  Between March 30, 2009 and October 12, 2009, the Company made payments to Mr. Skae on outstanding debt, including $325,000 due on the 18% Note.
 
 
11

 
 
On October 14, 2009, Mr. Tawes, a member of the Company’s Board of Directors agreed to convert all of his outstanding notes totaling $2,798,357, including accrued interest of $300,022, and 1,369,792 warrants into an aggregate of 10,993,516 shares of the Company’s common stock at a conversion rate of $0.25 per share ($2,448,357 in principal plus $300,022 in interest divided by $0.25 per share) and agreed to receive $200,000 in cash, a $150,000 10%  unsecured note due in June 2010 and a warrant to purchase 350,000 shares of the Company’s common stock with an exercise price of $0.25, with an expiration date of in October 2014.  The fair value of these warrants of $82,817 was recorded as debt discount.  Mr. Tawes assigned the warrants to third parties, including 150,000 warrants to David Tsiang who is  the Company’s Chief Financial Officer.
 
The following is a schedule of principal maturities for the next five years and the total amount thereafter on this related party note as of March 31, 2010:

Year Ending December 31,
 
Principal
Maturities
 
2010
 
$
150,000
 
2011
   
-
 
2012
   
-
 
2013
   
-
 
2014
   
-
 
Total
 
$
150,000
 

On April 1, 2010 Mr. Skae, the Company’s Chief Executive Officer provided financing to the Company in the amount of $50,000 in exchange for a non-interest bearing demand note.

On April 29, 2010 Mr. Tawes, a member of the Company’s Board of Directors provided financing to the Company in the amount of $50,000 in exchange for 10% demand note.

NOTE 7 - SHORT-TERM DEBT
 
Short-term debt at March 31, 2010 and December 31, 2009 consisted of the following:
 
   
March 31,
   
December 31,
 
Description
 
2010
   
2009
 
Secured notes payable with an aggregate original face amount of $1,500,000 bearing interest at 10%, which is payable at maturity on May 24, 2010. The notes are secured by the Company’s accounts receivable and inventory. (A)
 
$
1,500,000
   
$
1,500,000
 
Less: debt discount
   
(26,000
)
   
(71,000
)
Total Short-term Debt
 
$
1,474,000
   
$
1,429,000
 

 
12

 
 
(A)
On November 24, 2009, the Company completed a private placement of 15 Units.  Each Unit consisted of $100,000 principal amount of 10% Senior Secured Notes, referred to as “Notes,” and 24,000 shares of its common stock.  The Units were sold to accredited investors in exchange for $100,000 per Unit.  The Company’s gross proceeds from the private placement were $1,500,000 and the Company agreed to issue an aggregate of $1,500,000 principal value of Notes and 360,000 shares of its common stock, valued at $0.25 per share.  The fair value of the common stock of $90,000 was recorded as debt discount.  Amortization of this debt discount of $45,000 and $19,000 is recorded in the consolidated statements of operations for the three months ended March 31, 2010 and the year ended December 31, 2009, respectively.  The Notes bear interest at a rate of 10% per year and are payable monthly beginning on December 21, 2009.  The Notes mature on May 24, 2010 or in the event of (i) the consummation by the Company of a merger, business combination, sale of all or substantially all of the Company’s assets or other change of control; or (ii) the Company securing a bank financing for working capital and when accomplished the funds will first be used to pay off the note holders fully. If the bank financing does not materialize or is insufficient to pay the Notes, future financings will first be used to pay off the Notes. The requirement to pay off the Notes with a future financing excludes a Friends and Family Offering by the Company. In addition, the December 2009 Private Placement Offering  that closed February 22 , 2010 will not require a prepayment of the Notes.  The Company has the right to redeem all or a portion of the Notes for cash at any time without premium or penalty.  The obligations of the Company under the Notes are secured by all accounts receivable and present and after acquired inventory of the Company and each subsidiary to be shared on a pari-passu basis relative to the number of Notes purchased by each Holder up to an aggregate total of $1,500,000 plus any accrued and outstanding interest on the Notes.

NOTE 8 - LONG-TERM DEBT
 
Long-term debt at March 31, 2010 and December 31, 2009 consisted of the following:
 
   
March 31,
   
December 31,
 
Description
 
2010
   
2009
 
             
Notes payable bearing interest at 8% per annum, unsecured and matured on March 31, 2009
 
$
87,500
   
$
87,500
 
Note payable bearing interest at 8% convertible into common stock of the Company, unsecured and matured on March 31, 2009
   
125,000
     
125,000
 
Notes payable bearing interest at 28% per annum, unsecured and matures June 2010.
   
24,712
     
64,862
 
Note payable to a trust, bearing interest at 5% per annum, unsecured, matures in May 2013
   
822,920
     
822,920
 
Equipment loan bearing interest at 11% per annum, matures in November 2013
   
65,459
     
65,459
 
Note Payable bearing interest at 12%, unsecured and matures October 2010
   
7,510
     
12,510
 
                 
Total long-term debt
   
1,133,101
     
1,178,251
 
Less:  current maturities
   
1,080,759
     
1,125,909
 
Long-term debt
 
$
52,342
   
$
52,342
 
 
The Company is in default on $1,035,420 of the notes that mature before May 12, 2010.  The Company intends to continue to convert certain of the remaining long-term debt into equity and renegotiate the terms and due dates of the debt that matures in 2010 but may not be successful in doing so. These Notes have been classified as short-term at March 31, 2010. Subsequent to March 31, 2010, other debt holders agreed to convert $212,500 of debt into 531,250 shares of common stock at $0.40 per share as described in more detail in Note 12, Subsequent Events. The effect of these conversions will be a charge to expense of approximately $37,000 based on the quoted market value of the Company stock compared to the conversion price. As of May 14, 2010, the shares have not yet been issued.
 
 
13

 
 
Interest expense for the three months ended March 31, 2010 and 2009 amounted to $19,186 and $647,238, respectively.  The weighted average interest rate for all short-term borrowings amounts to 7% for 2010 and 35% for 2009.
 
The following is a schedule of principal maturities for the next five years and the total amount thereafter on these note as of March 31 2010:

Year Ending December 31,
 
Principal
Maturities
 
       
    2010
 
$
1,080,759
 
    2011
   
15,821
 
    2012
   
17,567
 
    2013
   
18,954
 
    2014
   
-
 
       Total
 
$
1,133,101
 

NOTE 9 - STOCKHOLDERS’ EQUITY

2009 RESTRUCTURING
 
During the third and fourth quarters of the fiscal year ended December 31, 2009, the Company initiated a restructuring of its balance sheet by converting its preferred stock and accrued dividends into common stock, offering to convert debt into common stock and offering to convert warrants into common stock.  On October 20, 2009, pursuant to the approval by the Company’s preferred stock holders and the Board of Directors, the Company filed Certificates of Amendment to the Certificates of Designation of its Class A Preferred Shares (the “Series A Preferred Stock”), its Series I 8% Cumulative Convertible Preferred Stock (the “Series I Preferred Stock”), and its Series J 6% Redeemable Convertible Preferred Stock (the “Series J Preferred Stock”) (together, the “Amendments”).  The Amendments have the effect of causing the outstanding shares of its Series A, Series I and Series J Preferred Stock to be converted into shares of its common stock, with an effective date of August 31, 2009.  Pursuant to the Amendments, on October 21, 2009, the Company converted 35,000 shares of Series A Preferred Stock into 1,750 shares of common stock, 535,000 shares of Series I Preferred Stock plus $557,041 in accrued dividends into 19,690,172 shares of common stock and 20,000 shares of Series J Preferred Stock plus $8,000 in accrued dividends into 693,335 shares of common stock. The conversion price of $0.30 per share was based on the estimate of fair value of $0.25 per share, the Company recognized no loss  on the conversion.
 
The Company also converted certain of its outstanding notes and warrants into common stock pursuant to agreements between certain holders and the Company.  The individual agreements provide that the holders’ existing securities will be exchanged for new securities and that defaults and obligations under such existing securities, if any, will be waived.  Further, the Company offered warrant holders the opportunity to exercise their outstanding warrants at an exercise price of $0.25 per share using funds owing to the holder from the Company, or to exercise the warrants on a cashless basis.  The Company also offered debt holders the opportunity to convert the Company’s existing debt obligations to the debt holder, at a conversion rate of $0.25 per share, into shares of its common stock.  These debt holders were also given the opportunity to apply such existing debt to payment of the exercise price of warrants held by that debt holder.  As of December 31, 2009, the closing of the restructuring, the Company agreed to convert an aggregate of $6,924,106 of notes and accrued interest into an aggregate of 27,696,450 shares of its common stock at a conversion rate of $0.25 per share. Additionally, the Company received $301,588 from warrant holders for the exercise of 1,206,354 warrants to purchase common stock at an exercise price of $0.25 per share and through a cashless exercise has converted 3,232,707 warrants into 1,847,169 shares of common stock. Based on the estimate of fair value of $0.25 per share the Company recognized no loss on the conversions.
 
 
14

 
 
In the determination of fair value the Company considered that the historical volatility of the common stock for the 5 month period prior to August 31, 2009 was 247% above the 35% volatility of the companies derived under the Guideline Publicly-Traded Company method and therefore the Company’s share price as a proxy for value of the Common Stock. In estimating fair value the Company utilized the Discounted Cash Flow method and the Guideline Publicly-Traded Company Method to determine fair value. The Discounted Cash Flow method utilized a prospective financial analysis of the estimated future un-levered net cash flows and Company cost of capital. The Cost of Capital considered the risk-free rate of 4.1% equity risk, firm specific risk, industry risk and size premium of 10.5%. The Guideline Publicly-Traded Company method was derived from the trading prices of companies in a similar line of business that are actively traded. Revenue multiples for comparable companies had a range between 0.7x to 4.2x with a median of 1.6x and average of 2.0x. Earnings before interest, taxes, depreciation and amortization of comparable companies had a range between 8.2x to 22.2x with a median of 11.7x and average of 12.1x.
 
Effective August 31, 2009, the Company completed a restructuring of Preferred stock and accrued dividends in which the preferred stock and accrued dividends were converted into common stock at a rate of $0.30 per share agreed between the Company and the shareholder. The following tables summarize this restructuring:

Preferred Shares
                 
Preferred shareholder
 
Converted
common
shares
   
Common
Stock at
Par
   
Additional
paid-in
capital
 
Directors
                 
Series I - O Lee Tawes
   
1,722,223
   
$
1,723
   
$
(1,671
)
Series I - N. Russell
   
83,334
     
83
     
(82
)
Series I - D. Tsiang
   
116,667
     
117
     
(115
)
Series J - R Scott Ricketts
   
333,334
     
333
     
(323
)
                         
Total Directors
   
2,255,558
   
$
2,256
   
$
(2,191
)
                         
Non-Affiliates
                       
Series A
   
1,750
   
$
2
   
$
37
 
Series I
   
15,911,145
     
15,911
     
(15,435
)
Series J
   
333,334
     
333
     
(323
)
                         
Total non-affiliates
   
16,246,229
   
$
16,246
   
$
(15,721
)
                         
Total
   
18,501,787
   
$
18,502
   
$
(17,912
)

 
15

 
 
Accrued Dividend
 
Accrued
dividend
   
Converted
common
 shares
   
Common
Stock at
 Par
   
Additional
paid-in
capital
 
Directors
                       
Series I - O Lee Tawes
 
$
70,930
     
236,434
   
$
236
   
$
70,694
 
Series I - N. Russell
   
2,834
     
9,446
     
9
     
2,825
 
Series I - D. Tsiang
   
4,843
     
16,142
     
16
     
4,827
 
Series J - R Scott Ricketts
   
4,000
     
13,333
     
13
     
3,987
 
                                 
Total director & officer
 
$
82,607
     
275,355
   
$
274
   
$
82,333
 
                                 
Non-affiliates
                               
Series A
   
-
     
-
     
-
     
-
 
Series I
 
$
478,434
     
1,594,781
   
$
1,595
   
$
476,839
 
Series J
   
4,000
     
13,334
     
13
     
3,987
 
                                 
Total non-affiliates
 
$
482,434
     
1,608,115
   
$
1,608
   
$
480,826
 
                                 
Total
 
$
565,041
     
1,883,470
   
$
1,882
   
$
563,159
 
 
 
16

 
 
From August 31, 2009 to December 31, 2009 the Company converted certain debt and accrued expenses into common stock at $0.25 per share, which the Company determined to be fair value.

Notes holder
 
 Date of note
 
Note payable
 
Conversion date
 
Converted
common
shares
 
Common
Stock at
Par
 
Additional
paid-in
capital
 
Officers & Directors
                                 
Director - O. Lee Tawes
 
From March 2007 to September 2008
 
$
2,448,357
 
October 14, 2009
   
9,793,428
 
$
9,794
 
$
2,438,563
 
Officer - Eric Skae
 
September 2008
   
1,374,281
 
November 2, 2009
   
5,497,152
   
5,497
   
1,368,784
 
                                                                                                     
Total director & officer
     
 $
3,822,638 
       
15,290,580 
 
$
15,291 
 
$
3,807,347 
 
                                   
Non-affiliates
                                 
Convertible notes payable – Other
 
June 2006 and February 2008
 
$
240,000
 
December 17,2009
   
960,000
 
$
960
 
$
239,040
 
Notes payable
 
From October 2005 to November 2008
   
721,500
 
From July 2009 to November 2009
   
2,886,000
   
2,886
   
718,614
 
April 2008 Bridge loans
 
April 2008
   
705,000
 
From August 2009 to November 2009
   
2,820,000
   
2,820
   
702,180
 
September 2008 Bridge loans
 
September 2008
   
150,000
 
From August 2009 to October 2009
   
600,000
   
600
   
149,400
 
February 2009 Bridge loans
 
February 2009
   
400,000
 
From July 2009 to October 2009
   
1,600,000
   
1,600
   
398,400
 
April 2009 Bridge loans
 
April 2009
   
170,825
 
From July 2009 to October 2009
   
683,297
   
683
   
170,142
 
                                   
Total non-affiliates
     
$
2,387,325
       
9,549,297
 
$
9,549
 
$
2,377,776
 
                                   
Total Notes payable
     
 $
6,209,963 
       
24,839,877 
 
 $
24,840 
 
 $
6,185,123 
 

 
17

 
 
Accrued Interest
 
Accrued interest
 
Conversion date
 
Converted
common shares
   
Common
Stock at Par
   
Additional
paid-in capital
 
Officers & Directors
                         
Director - O. Lee Tawes
 
$
300,023
 
10/14/2009
   
1,200,092
   
$
1,200
   
$
298,822
 
Officer - Eric Skae
   
192,579
 
11/2/2009
   
770,316
     
770
     
191,809
 
                                   
Total director & officer
 
$
492,602
       
1,970,408
   
$
1,970
   
$
490,631
 
                                   
Non-affiliates
                                 
                               
Convertible notes payable - Other
 
$
106,572
 
From July 2009 to November 2009
   
426,293
   
$
426
   
$
106,146
 
April 2008 Bridge loans
   
95,159
 
From August 2009 to November 2009
   
380,635
     
381
     
94,778
 
September 2008 Bridge loans
   
7,688
 
From August 2009 to October 2009
   
30,750
     
31
     
7,657
 
February 2009 Bridge loans
   
12,122
 
From July 2009 to October 2009
   
48,487
     
48
     
12,074
 
                                   
Total non-affiliates
 
$
221,541
       
886,165
   
$
886
   
$
220,655
 
                                   
Total
 
$
714,143
       
2,856,573
   
$
2,856
   
$
711,286
 
 
Other accrued expenses
 
Other accrued
expenses
 
Conversion date
 
Converted
common shares
   
Common
Stock at Par
   
Additional
paid-in capital
 
Officers & Directors
                         
Officer – Eric Skae
 
$
8,175
 
November 2, 2009
   
32,700
   
$
32
   
$
8,143
 
                                   
Non-affiliates
                                 
Preferred Series I holders
 
$
180,944
       
723,776
   
$
724
   
$
180,220
 
                                   
Total
 
$
189,119
       
756,476
   
$
756
   
$
188,363
 
 
 
18

 
 
During the period August 31, 2009 to December 31, 2009, the Company received $301,588 in cash for conversion of the following warrants.

Cash exercised warrants
                     
   
Conversion date
 
Converted common shares
   
Common
Stock at Par
   
Additional
paid-in capital
 
Director
                     
Director - D Tsiang
 
August 31, 2009
   
8,750
   
$
8
   
$
2,179
 
                             
Non-Affiliates
                           
Preferred Series I holders
 
From August 31 to December 15, 2009
   
435,629
     
436
     
108,471
 
Preferred Series J holders
 
August 31, 2009
   
14,368
     
14
     
3,578
 
March 2007 Bridge loan
 
August 31, 2009
   
143,159
     
143
     
35,647
 
September 2008 Bridge loans
 
From August 31 to  October 20, 2009
   
117,648
     
118
     
29,294
 
February 2009 Bridge loans
 
August 31, 2009
   
36,800
     
37
     
9,163
 
April 2009 Bridge loans
 
August 31, 2009
   
450,000
     
450
     
112,050
 
                             
Total non-affliliates
       
1,197,604
   
$
1,198
   
$
298,203
 
                             
Total cash exercised warrants
   
1,206,354
   
$
1,206
   
$
300,382
 

During the period July 31 to December 31, 2009, certain warrant holders exercise a cashless conversion of warrants into common stock as follows:
 
Warrants converted cashless
 
Conversion date
 
Converted common shares
   
Common
Stock at Par
   
Additional paid-in capital
 
Officers & Directors
                     
Director - R. Scott Ricketts
 
August 3, 2009
   
16,420
   
$
16
   
$
4,089
 
Director - N Russell
 
July 31, 2009
   
3,571
     
4
     
889
 
Officer - Eric Skae
 
November 2, 2009
   
140,327
     
140
     
34,942
 
                             
Total director & officer
       
160,318
   
$
160
   
$
39,920
 
                             
Non-affiliates
                           
Preferred Series I holders
 
August 2009
   
602,817
   
$
603
   
$
150,101
 
Preferred Series J holders
 
August 2009
   
5,714
     
6
     
1,423
 
April 2008 Bridge loans
 
August 2009 to November 2009
   
57,144
     
57
     
14,229
 
September 2008 Bridge loans
 
From August 2009 to October 2009
   
1,021,176
     
1,021
     
254,272
 
                             
Total non-affiliates
       
1,686,851
   
$
1,687
   
$
420,025
 
                             
Total
       
1,847,169
   
$
1,847
   
$
459,945
 
 
 
19

 
 
COMMON STOCK
 
For the three months ended March 31, 2010 the Company issued  common stock for services which included:

   
Value per share
   
Common shares
   
Common
Stock at Par
   
Additional
paid-in capital
 
Shares for services:
                       
Investor Relations
  $ 0.25 to 0.49       2,075,000     $ 2,075     $ 996,675  
Marketing programs
  $ 0.43 to 0.49       42,500       43       19,433  
                                 
Total
            2,117,500     $ 2,118     $ 1,016,108  
 
In addition to the securities surrendered by the note and preferred stock holders noted above, the security holders provided the Company a blanket waiver forgoing any right the security holder may have had, including for example registration rights or default rights, as part of the restructuring exchange agreement.
 
During the three month period ended March 31, 2010 the Company converted $163,781 of accrued expense and accounts payable into 440,923 common shares with prices based on mutual settlement agreements ranging from $0.25 to $0.50 per share.

On February 22, 2010, the Company closed a private placement of common stock and warrants with certain accredited investors.  Pursuant to the private placement, the Company agreed to issue an aggregate of 1,988,889 (1,222,219 shares was issued in 2009) shares of common stock, plus warrants to purchase 1,057,727 (649,999 warrants was issued in 2009) shares of common stock at an exercise price of $0.55 per share, subject to adjustment.  Gross proceeds from the private placement were approximately $895,000 ($550,000 was received in 2009).  The Warrants will expire on or about five years from the date of issuance and have anti-dilution provisions, including that through the period ended April 30, 2010, if the Company issues any common stock or securities that can be converted or exercised for common stock at an effective price that is less than the unit price, then the purchasers would receive additional common stock and/or warrants.. As of April 6, 2010, the Company initiated a new private placement offering where the terms are more favorable than the December 2009 private placement offering.  Shareholders who participated in the December 2009 offering will receive an aggregate of 568,253 additional shares of common stock and 1,499,407 additional warrants with an exercise price of $0.45 per warrant and a term of five years.

During April 2010, the Company commenced a private placement offering of common stock and warrants with certain accredited investors. The offering was for the sale of up to 40 Units  at a price of $25,000 per Unit, each Unit consisting of 71,428 shares of its common stock  and warrants  to purchase 71,428 shares of its common stock at an exercise price of $0.45 per share.  The warrants expire on or about five years from the date of issuance and have anti-dilution provisions during that period.
 
 
20

 
 
NOTE 10 – STOCK OPTIONS AND WARRANTS

Options
 
In January 2010, under the terms of the 2008 Stock Option and Incentive Plan, the Company issued to the Chief Financial Officer an aggregate of 350,000 options to purchase common stock at an exercise price of $0.63 per share which vest ratably over a five year period and expire January 2020. On February 2, 2010 the Board of Directors approved a new stock option plan (the “2010 Plan”) for a total of 3,000,000 additional shares.. The Company did not grant any stock options to directors and employees during the three months ended March 31, 2009. Compensation cost recognized during the three months ended March 31, 2010 and 2009 related to stock-based awards was $51,575 and $34,197, respectively. Options are issued at an exercise price equal to or above the fair value at the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option-pricing model.
 
The summary of activity for the Company's stock options is presented below:
 
   
March 31,
2010
   
Weighted Average
Exercise Price
 
             
Options outstanding at December 31, 2009
    2,958,250       0.75  
Granted for the period
    350,000       0.63  
Exercised for the period
    -       -  
Terminated/Expired
    (12,500 )     0.79  
Options outstanding at March 31, 2010
    3,295,750       0.73  
Options exercisable at March 31, 2010
    1,380,850       0.90  
Options available for grant at March 31, 2010
    3,704,250          
                 
Exercise price per share of options outstanding
  $ 0.53 to 3.00          
                 
Weighted average remaining contractual lives
 
7.9 years
         
                 
Fair value of options granted during the quarter
  $ 193,000          
 
The common stock options expire as follows:
 
Year
Number of options
 
201
-
 
2011
1,500
 
2012
10,000
 
2013
-
 
2014-2019
3,284,250
 
Total
3,295,750
 

The aggregate intrinsic value of the options outstanding at March 31, 2010 was approximately $2,278,000 with a weighted average remaining contract term of 7.9 years.
 
Unrecognized compensation costs related to non-vested share-based compensation for the above options amounted to $1,914,000 as of March 31, 2010.
 
 
21

 
 
Warrants
 
Set forth below is a description of the Company’s warrants as of March 31, 2010:

Designation / Reason Granted
 
Original issue date
 
Shares of Common Stock
Upon Exercise
   
Exercise
Price / Share
 
Expiration
Date
New Product Development
 
July 2007
    250,000     $ 1.00  
July 2010
Bridge Warrants / Bridge financing (1)
 
September 2006
    21,429     $ 1.00  
September 2011
Marketing Program Development
 
October 2007
    250,000     $ 1.00  
October 2012
Investor Warrants / 2007 Private Placement (1)
 
March 2007
    58,749     $ 0.40  
March 2012
Placement Agent Warrants
 
March 2007
    155,000     $ 0.80  
March 2012
12% Bridge Note Warrants (1)
 
March 2007
    35,000     $ 1.00  
March 2012
Ancillary Warrants
 
June 2007
    5,000     $ 0.40  
June 2012
April 2008 Bridge Notes Warrants (1)
 
April 2008
    15,625     $ 0.80  
April 2013
September 2008 Bridge Note Warrants(1)
 
September 2008
    25,884     $ 0.85  
September 2013
Series J Warrants (1)
 
December 2008
    14,368     $ 0.87  
December. 2013
October 2009 Note Warrants (1)
 
October 2009
    350,000     $ 0.25  
October 2014
Investor Warrants 2009 Private Placement (1)
 
December 2009
    649,999     $ 0.55  
December 2014
Investor Warrants 2009 Private Placement (1)
 
February 2010
    407,727     $ 0.55  
February 2015
Marketing Program Development
 
March 2010
    150,000     $ 0.49  
March 2015
 
(1)
The exercise price of the warrants and the number of warrant shares subject thereto shall be subject to adjustment in the event of stock splits, stock dividends, reverse stock splits, and similar events. Futher, in the event that the Company issues shares of its common stock at an effective price per share less than the then effective exercise price of the warrants, the exercise price and the number of warrant shares subject to such warrants shall be adjusted to the lower effective price. The warrants contain standard reorganization provisions. Therefore, these warrants are classified as liability instruments upon issuance.
 
During the three months ended March 31, 2010, the Company issued 150,000 warrants for marketing services at an exercise price of $0.49 per share, and 407,727 warrants at an exercise price of $0.55 per share for an investment in the Company.  The following table reflects a summary of common stock warrants outstanding and warrant activity during the three months ended March 31, 2010:
 
         
Weighted
Average Exercise
Price
   
Weighted
Average Term
(Years)
 
Warrants outstanding at January 1, 2010
    1,831,054     $ 0.65       2.79  
   Granted during the period
    557,727       0.53       4.9  
                         
Warrants outstanding at March 31, 2010
    2,388,781     $ 0.62       3.5  

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

Year
 
Amount
 
2010
   
250,000
 
2011
   
21,429
 
2012
   
503,749
 
2013
   
55,877
 
2014
   
999,999
 
2015
   
557,727
 
Total
   
2,388,781
 

 
22

 
 
NOTE 11 - RELATED PARTY TRANSACTIONS
 
From time to time, certain officers and directors loan the Company money as well as defer payment of salaries in order to assist the Company in its cash flow needs.
 
The table below sets forth the amounts of notes payable and accrued salaries of the Company’s officers, directors and significant shareholders as of March 31, 2010.  Additional related party transaction are also discussed in Note 12 – Subsequent events:
 
   
Notes Payable
           Accrued Salaries &  
   
Amount
   
Accrued Interest
   
Earn-out accrued
   
Bonus Amount
 
                         
Eric Skae Chairman of the Board, Chief Executive Officer & President
  $     $     $ 260,000     $ 75,004  
O. Lee Tawes, III Director (Note 4)
  $ 150,000     $ 7,597     $     $  
    $ 150,000     $ 7,597     $ 260,000     $ 75,004  

Any such transaction must be reviewed by the Company’s independent director.

NOTE 12 - SUBSEQUENT EVENTS
 
On April 1, 2010, Mr. Tsiang, the Company’s Chief Financial Officer exercised 40,000 warrants with a exercise price of $0.25 to purchase Common stock.

On April 1, 2010 Mr. Skae, the Company’s Chief Executive Officer provided financing to the Company in the amount of $50,000 in exchange for a non-interest bearing demand note.

On April 29, 2010 Mr. Tawes, a member of the Company’s Board of Directors provided financing to the Company in the amount of $50,000 in exchange for a 10% demand note.

During April 2010, the Company commenced a private placement offering of common stock and warrants with certain accredited investors. The offering is for sale of up to 40 Units at a price of $25,000 per Unit, each Unit consisting of 71,428 shares of  common stock and warrants to purchase 71,428 shares of  common stock at an exercise price of $0.45 per share.  The Warrants will expire on or about five years from the date of issuance  and have anti-dilution provisions.  If the Company issues any common stock or securities that can be converted or exercised for common stock at an effective price that is less than the exercise price of the warrants the investors will receive additional warrants and the exercise price of the warrants will decrease. Through May 12, 2010, the Company has received $400,000 and will issue 1,142,848 shares of common stock and 1,142,848 warrants with an exercise price of $0.45 per share, subject to adjustment. As a result of anti-dilution provisions in our private placement that closed in February 2010, investors who participated in that offering will receive an aggregate of 568,253 additional shares of common stock and 1,499,407 additional warrants with an exercise price of $0.45 per share.
 
NOTE 13 – CONTINGENCIES
 
On December 27, 2007, Farmatek IC VE DIS TIC, LTD, STI, a former distributor of Nutritional Specialties, filed a claim in the Superior Court of California, County of Orange, against the Company’s wholly-owned subsidiary, Nutritional Specialties, Inc.  Farmatek alleged a breach of contract and a violation of California Business and Professional Code.  Farmatek was seeking $4,000,000 plus punitive damages and costs.  On June 12, 2009, the Company entered into a settlement  agreement with Farmatek pursuant to which it agreed to pay Farmatek an aggregate of $250,000 over the following twelve months.  The Company has previously accrued for this possible settlement and this amount  was recognized as operating expense in the year ended December 31, 2008. As of March 31, 2010, $50,000 is unpaid and reflected in accrued expenses.

 
23

 
 
On January 29, 2009, the Company was notified that it was named as a defendant, along with 54 other defendants, in a class action lawsuit under California Proposition 65 for allegedly failing to disclose the  amount of lead in one of its products.  The Company believes that this case is without merit and plans on defending it vigorously.  The Company believes that this suit will not have a material adverse effect on its results of operations, cash flows or financial condition.

On March 12, 2010, the Company was notified that it was named as a defendant in a lawsuit for the payment of approximately $345,000 to a former supplier. As of December 31, 2009 and March 31, 2010 this amount is recorded in liabilities.

On March 18, 2010, the Company received a Notice of Indemnification under Asset Purchase Agreement with Nutra, Inc., the acquirers of the Company’s former nutraceutical businesses. Nutra contends that certain products distributed under the Baywood brand failed to disclose the presence of certain components to Nutra or on the product label and are therefore in violation of certain regulations. The Company believes the notice  is without merit and has challenged the allegation.

On September 9, 2008 as part of the acquisition agreement between Skae Beverage International LLC and Mr. Eric Skae and the Company, Mr. Skae agreed to an three-year earn-out payment based on the annual increase in sales and gross profit margin in relationship to a targeted gross profit margin of 20%, 34% and 37% each of the three year respectively.  The maximum cumulative earn-out over the three period is $4,776,100 which includes a $500,000 incentive if the cumulative earn-out exceeds $2,850,733. At the time of agreement the cumulative earn-out was not capable of being estimated.  For the year ended December 31, 2009 and the three month period ended March 31, 2010 the Company has estimated a first year earn-out of $260,000, which is included in related party liability. The final earn-out is subject to the approval of both parties.

NOTE 14 – LOSS PER SHARE
 
Convertible preferred stock and notes payable and outstanding options and warrants were not considered in the calculation for diluted earnings per share for the periods ended March 31, 2010 and 2009 because the effect of their inclusion would be anti-dilutive.

As of March 31, 2010, there were warrants and options to purchase 5,684,531 shares of common stock outstanding. As of March 31, 2009, there was preferred stock convertible into 6,748,145 shares of common stock and warrants and options to purchase 9,508,621 shares of common stock outstanding. These securities were excluded from the computation of diluted earnings per share because the effect of their inclusion would be anti-dilutive.
 
 
24

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

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

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our Financial Statements, including the related Notes, appearing in our annual report on Form 10-K for the year ended December 31, 2009.

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

GENERAL

Effective July 24, 2009, we entered into an Asset Purchase Agreement with Nutra, Inc., a subsidiary of Nutraceutical International Corporation, referred to as the Agreement.  The transactions contemplated by the Agreement closed on October 9, 2009.  Pursuant to the Agreement, we sold substantially all of the rights and assets of Nutritional Specialties, Inc.’s business, including but not limited to its accounts, notes and other receivables, inventory, tangible assets, rights existing under assigned purchase orders, proprietary rights, government licenses, customer lists, records, goodwill and assumed contracts.  Certain rights and assets were excluded from the purchased assets, including the right to market, sell and distribute beverages as described in the Agreement. In exchange for the foregoing, Nutra, Inc. agreed to pay an aggregate purchase price of $8,250,000 in cash, less payment of certain liabilities and certain pre-closing working capital adjustments.

Pursuant to the Agreement, the assets of Nutritional Specialties, Inc. were evaluated at closing to see if they had a minimum net asset value as of the closing date, after giving effect to normal generally accepted accounting principles, adjustments for reserves and except for routine reductions related to normal amortization and depreciation, equal to $1,848,604. If  the net asset value was greater or less than $1,848,604 at the closing, the purchase price payable at closing would be increased or decreased by the amount of such difference on a dollar-for-dollar basis. At closing, the net asset value was $2,176,411 and therefore the initial purchase price of $8,250,000 was increased by $327,807. No later than six months after the closing date, if Nutra, Inc. determines that there is a material difference between the actual net asset value and the net asset value at closing, it may prepare a written statement setting forth the calculation of the actual net asset value.  On March 18, 2010, we received a letter from Nutra indicating their intent to withhold certain funds from the hold-back, however the letter did not specify a dollar amount.  We have challenged Nutra’s letter and believe that most or all of these hold-back funds will be received. The remaining receivables of $250,000 is included in our accompanying condensed consolidated balance sheet at March 31, 2010.

Our new planned strategic direction is to build a beverage company around our New Leaf brand of ready-to-drink teas and other new functional beverages. Additionally, following the October 9, 2009 closing of the asset sale, we no longer develop, market and distribute nutraceutical products. Even with limited access to capital, we have grown the New Leaf brand.  As of April 2010, New Leaf beverages are sold in 35 states, through 121 distributors and 14 well-known retailers in over 10,000 outlets. We sold 113,119 cases in the first quarter of 2010, up over 37% from 82,196 cases in the first quarter of 2009. In April 2010, we sold 79,890 cases; a 114% increase over our April 2009 sales of 37,360 cases. We anticipate that after our debts are repaid and renegotiated, we will be able to raise additional capital to grow our New Leaf brand as well as develop additional brands.
 
Our condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  As reflected in the condensed consolidated financial statements accompanying this Quarterly Report on Form 10-Q/A, we had negative net working capital of approximately $3,601,290 at March 31, 2010.  We have not yet created positive cash flows from operating activities and our ability to generate profitable operations on a sustainable basis is uncertain.  These factors  raise substantial doubt about our ability to continue as a going concern.
 
We believe that our existing cash resources, combined with projected cash flows from operations may not be sufficient to execute our business plan and continue operations for the next twelve months.  We changed our strategic direction with the sale of our Lifetime and Baywood brands operating under our former wholly-owned subsidiary, Nutritional Specialties, Inc., to provide the necessary resources aimed at achieving profitability and positive cash flow. Additionally, we have taken steps to increase our revenue and reduce our operating expenses.  We will continue to explore various strategic alternatives, including business combinations and private placements of debt and or equity securities to raise capital. 
 
 
25

 
 
OUR PRODUCTS

New Leaf is a natural iced-tea beverage that is sweetened with organic cane sugar and specifically formulated to address what we believe is an unmet consumer demand in the very competitive, but rapidly growing, ready-to-drink tea market.  The organic cane sugar sweetening creates a premium and more healthy product with 20-30% fewer calories than high fructose corn syrup competitors.  New Leaf is available in 12 varieties that are all-natural and organically-sweetened, and 2 diet varieties.  Varieties include white, black, green and blue teas.  New Leaf products include:

Blue Teas
•           Diet Blue Tea with Lemon
•           Diet Blue Tea with Peach
•           Blue Tea with Lemon
•           Blue Tea with Peach
•           Blue Tea with Raspberry
White Tea
•           White Tea with Ginseng & Honey
•           White Tea with Honey Dew Melon
•           White Tea with Strawberry
•           White Tea with Tangerine
Green Teas
•           Green Tea with Plum
•           Green Tea with Ginseng
•           Green Tea with Mango
Black Tea
•           Black Tea with Mint & Lime
•           Sweet Tea

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

In April 2010, we introduced a lemonade brand.  New Leaf's lemonades are available in three flavors -- Homemade, Black Cherry and Strawberry. Additionally, "The Tiger," half-iced tea / half lemonade, debuted as part of our lemonade line-up. Our 100% natural lemonades are made with pure organic cane juice and contain 10% real fruit juice.

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

Results of  Continuing Operations for the Three Months  Ended March 31, 2010 and 2009

Net sales of our continuing operations, New Leaf Brands, for the three months ended March 31, 2010 were $954,549, compared to $701,789 for the same period last year.  The increase in net sales is due to an increase in the number of distributors of our products which has resulted in an increase in the number of cases sold. We believe the increase in our marketing budget also increased sales.
 
Cost of sales of continuing operations increased to $679,699 for the three months period ending March 31, 2010 compared to $626,579 for the same period in 2009.  The increase of $53,120, or 8% was a result of greater sales, tempered by increased efficiencies in production due to higher sales volumes.  Our gross profit margin for the three months period ended March 31, 2010 was 28%, compared to 11% for the same period in 2009.  The overall increase of 21 percentage points in gross profit margin is primarily due to greater efficiency realized as volumes increased.
 
Shipping and handling expenses were $120,798 for the three months period ending March 31, 2010, and $66,102 for the same period in the prior year.  The increase of $54,696, or 83% was due primarily to greater sales volumes and the employment of additional distributors located further from our co-packer.  Marketing expenses increased $556,447, or 88% from $630,442 for the three months ended March 31, 2009 to $1,186,889 in the same period in 2010.  The increase was attributable to an increased focus on establishing new markets for our products.  General and Administrative costs were $1,539,545 for the first three months in 2010 and $449,180 for the first three months in 2009.  The increase of $1,090,365, or 243% was primarily due to option and stock-based compensation expenses and transition cost to our new location. Depreciation and amortization expense was $129,356 in the first quarter of 2010, and $117,126 in the first quarter of 2009.  The increase of $12,230, or 10% reflected increase in brand value associated with an earn-out provision and the corresponding adjustments to asset values.
 
Total other (expense) for the three month periods ended March 31, 2010 and 2009 was $74,998 and  ($1,261,884), respectively. The decrease of $1,336,882 or 106% was due primarily to  interest expense decreased resulting from the repayment of debt from the proceeds of the sale of our Nutritional Specialties, Inc. business and the restructuring of our balance sheet in the third and fourth quarters of 2009 and the reduction in derivative liability.
 
 
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There is no income tax benefit recorded for either period because any potential benefit of the income tax net operating loss carryforwards has been equally offset by an increase in the valuation allowance on the deferred income tax asset.
 
Liquidity and Capital Resources
 
As of March 31, 2010, we had $2,496,468 in current assets of which $853,192, or 34%, was cash and receivables.  On average, our receivables are collected after 43 days outstanding.  Inventories were $1,316,129 at March 31, 2010, an increase of $830,240 over the December 31, 2009 balance of $485,889.  The increase in inventories was primarily due to the purchase of raw materials.  Total current liabilities at March 31, 2010 totaled $6,097,758, of which $3,009,273, or 49%, represented trade and operating payables.  Our ratio of current assets was current liabilities of 1 to 2.44 at March 31, 2010.
 
At March 31, 2010, we had a net working capital deficiency of $3,601,290.  Our need for cash during the three months ended March 31, 2010 was primarily funded through the issuance of additional common stock totaling $345,000.
 
We have traditionally funded working capital needs through product sales, management of working capital components of our business, and by cash received from private offerings of our common stock, preferred stock, warrants to purchase shares of our common stock and convertible notes. We believe that our existing cash resources, combined with projected cash flows from operations may not be sufficient to execute our business plan and continue operations for the next twelve months.  We have taken steps to reduce our operating expense. Additionally, we are evaluating our strategic direction aimed at achieving profitability and positive cash flow. We intend to continue to initiate private placements of debt or equity securities in order to raise additional capital. We are considering  engaging an investment banker to assist management in raising additional capital. However, we may not be successful in obtaining additional financing on acceptable terms, on a timely basis, or at all, in which case, we may be forced to make further cutbacks or cease operations.
 
Financings
 
On February 22, 2010, we closed a private placement of common stock and warrants with certain accredited investors.  Pursuant to the private placement, we agreed to issue an aggregate of 1,988,889 (1,222,219 shares was issued in 2009) shares of common stock, plus warrants to purchase 1,057,727 (649,999 warrants was issued in 2009) shares of common stock at an exercise price of $0.55 per share, subject to adjustment.  Gross proceeds from the private placement were approximately $895,000 ($550,000 was received in 2009.  The warrants will expire on or about five years from the date of issuance and have anti-dilution provisions, including that through the period ended April 30, 2010, if we issue any common stock or securities that can be converted or exercised for common stock at an effective price that is less than the unit price, then the purchasers would receive additional shares and/or warrants. As of April 6, 2010, we initiated a new private placement offering where the terms are more favorable than the December 2009 private placement offering.  Shareholders who participated in the December 2009 offering will receive an aggregate of 568,253 additional shares of common stock and 1,499,407 additional warrants with an exercise price of $0.45 per warrant share and a term of five years.

During April 2010, we commenced a private placement offering of common stock and warrants with certain accredited investors. The offering for sale up to 40 Units at a price of $25,000 per Unit, each Unit consisting of 71,428 shares of our common stock and warrants to purchase 71,428 shares of our common stock, par value $0.001 per share, at an exercise price of $0.45 per share.  The warrants will have a three year life and have customary anti-dilution provisions.  If we issue any common stock or securities that can be converted or exercised for common stock at an effective price that is less than the unit price, the purchasers would receive additional shares or warrants. Through May 12, 2010, we have received $400,000 and intend to issue 1,142,848 shares of common stock and 1,142,848 warrants with an exercise price of $0.45 per share.
 
Off Balance Sheet Arrangements
 
As of March 31, 2010, we did not have any off-balance sheet arrangements.
 
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
 
 
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ITEM 4T - CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our management concluded that our disclosure controls and procedures, including internal control over financial reporting, were not effective as of March 31, 2010 to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to  allow timely decisions regarding required disclosure.  Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management.  Our disclosure controls and procedures include components of our internal control over financial reporting. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, with our Company have been detected.
 
Our management identified control deficiencies during 2009 that continued to exist in the three month periods ended March 31, 2010 because we lacked adequate controls in place to properly evaluate and account for all the complex characteristics of the debt and equity transactions executed by our Company in accordance with U.S. generally accepted accounting principles.  In addition, management concluded that there were not adequate controls in place to properly evaluate and account for stock-based awards issued by our Company in accordance with U.S. generally accepted accounting principles.  These deficiencies are the result of the complexity of the individual debt and equity transactions entered into by our Company and the limited amount of personnel available to provide for the proper level of oversight and expertise needed in accounting for these transactions. Management has determined that these control deficiencies represent material weaknesses. In addition, we lacked sufficient staff to segregate accounting duties.  Based on our review of our accounting controls and procedures, we believe these control deficiencies resulted primarily because we did not have sufficient staffing performing accounting-related duties.  As a result, we did not maintain adequate segregation of duties within our critical financial reporting applications. Management believes these  are “material weaknesses.”
 
A material weakness is defined as a deficiency, or combination of deficiencies in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A  significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
 
In preparing our financial statements and in reviewing the effectiveness of the design and operation of our internal accounting controls and procedures and our disclosure controls and procedures for the three months ended March 31, 2010, we performed transaction reviews and control activities in connection with reconciling and compiling our consolidated financial records for the three months ended March 31, 2010.  These reviews and procedures were undertaken in order to confirm that our financial statements for the three months ended March 31, 2010 were prepared in accordance with generally accepted accounting principles, fairly presented and free of material errors.
 
Our management is in the process of actively addressing and remediating the material weaknesses in internal control over financial reporting described above.  During 2009, we undertook actions to remediate the material weaknesses identified, including installation of a new software system to allow for appropriate checks and reviews of internal control record-keeping and reporting.
 
We believe that the step outlined above will strengthen our internal control over financial reporting and addresses the material weaknesses described above. We also continue to evaluate our staffing needs. Our management will test and evaluate these additional controls to be implemented in 2010 to assess whether they will be operating effectively.
 
We intend to continue to remediate material weaknesses and enhance our internal controls, but cannot guarantee that our efforts will result in remediation of our material weakness or that new issues will not be exposed in this process.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II - OTHER INFORMATION
 
ITEM 1 - LEGAL PROCEEDINGS
 
We may, from time to time, be a party to lawsuits incidental to our business.  On December 27, 2007, Farmatek IC VE DIS TIC, LTD, STI, referred to as Farmatek, a former distributor of Nutritional Specialties, Inc. filed a claim in the Superior Court of California, County of Orange, against our wholly-owned subsidiary, Nutritional Specialties.  Farmatek alleged a breach of contract and a violation of California Business and Professional Code.  Farmatek was seeking $4,000,000 plus punitive damages and costs.  In February 2009, we reached a settlement with Farmatek to pay Farmatek an aggregate of $250,000 over the following twelve months.  This agreement was memorialized on June 12, 2009 pursuant to a final Settlement Agreement and Mutual Release.  As part of the execution of this agreement, Farmatek filed a Request for Dismissal of its original claim and each party forever released and discharged the other from any and all actions, causes of action, demands, damages, debts, obligations, liabilities, accounts, costs, expenses, liens or claims of whatever character, whether known or unknown, suspected or unsuspected, in any way related to, connected with, or arising out of the claims or facts and circumstances which were or could have been the subject of the claim.

On January 29, 2009, we were notified that we were named as a defendant, along with 54 other defendants, in a class action lawsuit under California Proposition 65 for allegedly failing to disclose the amount of lead in one of our products.  We believe this case is without out merit and we plan to defend it vigorously.  We believe this suit will not have a material adverse effect on our results of operations, cash flows or financial condition.

On March 12, 2010, we were notified that we were named as a defendant in lawsuit for the payment of approximately $345,000 to a former supplier. As of December 31, 2009, this amount is recorded in liabilities.

On March 17, 2010, we received a Notice of Indemnification under Asset Purchase Agreement with Nutra, Inc., the acquirers of our former nutraceutical businesses.  Nutra contends that certain products distributed under the Baywood brand failed to disclose the presence of certain components to Nutra or on the product label and is therefore in violation of certain regulations. We believe the notice  is without merit and we have challenged the allegation.

To our knowledge, as of March 31, 2010, there was no other threatened or pending litigation against our Company or our officers or directors in their capacity as such.
 
ITEM 1A – RISK FACTORS
 
There have been no material changes from the risk factors as previously disclosed in our annual report on  Form 10-K for the fiscal year ended December 31, 2008, which was filed with the Securities and Exchange Commission on April 20, 2009 except as follows:

We rely on a limited number of suppliers for our glass bottles.  If we lose any one of these vendors, our production may be slowed as we transition to a new supplier.

We use a proprietary glass bottle designed specifically for our New Leaf brand, and there are a limited number of manufacturers in North America capable of meeting our packaging demands.  The loss of any one of these suppliers could cause interruptions in our product cycle and higher raw materials costs.

We rely on a limited number of key distributors and retailers to sell our products, and if we lose these customers, our revenue will likely decline.

In the first quarter of 2010, approximately 20% of our sales were to one customer.  We currently have limited sales and distribution outlets for our products.  A slowdown or loss of any of these customers or distributors could materially decrease our revenues and our ability to generate cash flow.

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

In the three month periods ending March 31, 2010, we issued 2,075,000 shares of common stock, valued at $998,750 in exchange for investor relations services.  Per share value of the common stock issued was between $0.25 and $0.49.
 
 
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On February 22, 2010, we closed a private placement of common stock and warrants with certain accredited investors.  Pursuant to the private placement, we agreed to issue an aggregate of 1,988,889 shares of common stock, plus warrants to purchase 1,057,727 shares of common stock at an exercise price of $0.55 per share, subject to adjustment.  Gross proceeds from the private placement were approximately $895,000.  The warrants will expire on or about five years from the date of issuance and have anti-dilution provisions

In March 2010, in exchange for marketing services, we issued 42,500 shares of common stock with a per share value ranging from $0.43 to $0.49, and a total value of $19,476, and warrants issuable for 150,000 shares of common stock at an exercise price per share of $0.49.

In the first quarter of 2010, we converted $163,781 of accrued expense and accounts payable into 440,923 shares of common stock with prices based on mutual settlement agreements ranging from $0.25 to $0.50 per share
 
During April 2010, we commenced a private placement offering of common stock and warrants with certain accredited investors. The offering for sale up to 40 Units at a price of $25,000 per Unit, each Unit consisting of 71,428 shares of common stock and warrants to purchase 71,428 shares of common stock at an exercise price of $0.45 per share. The warrants will expire on or about five years from the date of issuance and have anti-dilution provisions. If we issue any common stock or securities that can be converted or exercised for common stock at an effective price that is less than the exercise price of the warrants, then the investors will receive warrants for additional shares of common stock. Through May 12, 2010, we have received $400,000 and intend to issue 1,142,848 shares of common stock and 1,142,848 warrants with an exercise price of $0.45 per share. Additionally, due to anti-dilution provisions in our December 2009 offering, investors who participated in the December 2009 offering will receive an aggregate of 568,253 additional shares of common stock and 1,499,407 additional warrants with an exercise price of $0.45 per warrant share.
 
With respect to the issuance of our securities as described above, we relied on the Section 4(2) exemption from securities registration under the federal securities laws for transactions not involving any public offering. No advertising or general solicitation was employed in offering the securities. The securities were sold to accredited investors. The securities were offered for investment purposes only and not for the purpose of resale or distribution, and the transfer thereof was appropriately restricted by us.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

The Company is in negotiation with certain former shareholders of Nutritional Specialties, Inc. The value of these notes as of December 31, 2009 in the aggregate amount is $1,035,920. As of May 12, 2010, the Company is in default and therefore this amount is reflected as currently due.
 
ITEM 4. - (REMOVED AND RESERVED)
 
ITEM 5 - OTHER INFORMATION
 
ITEM 1.01 -  ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.

ITEM 5.02 -  DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF CERTAIN DIRECTORS; APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS.

On April 1, 2010, we entered into a non-interest bearing note with Eric Skae, our Chief Executive Officer in the amount of $50,000.  Principal is due and payable to Mr. Skae upon demand, and we may prepay the principal at any time without penalty.

On April 29, 2010, we entered into a interest bearing note with O. Lee Tawes, III, our Director for $50,000.  Interest accrues on the note at 10%, compounded annually.  Principal is due and payable to Mr. Tawes upon demand, and we may prepay the principal at any time without penalty.

On May 11, 2010, we entered into an employment agreement with David Tsiang, our Chief Financial Officer.  The agreement is for a four-year term, with compensation set at a base salary of $130,000 per year.  Mr. Tsiang is also eligible for an annual bonus based upon goals set by our Chief Executive Officer.
 
 
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ITEM 6 - EXHIBITS
 
3.1
Articles of Incorporation, as amended (included as Exhibit 3.1 to the Form 10-KSB filed March 6, 1997, and incorporated herein by reference).
 
3.2
By-Laws, dated February 14, 1988 (included as Exhibit 3 to the Form S-1 filed January 27, 1987, and incorporated herein by reference).
 
3.3
Amendment to Articles of Incorporation, dated December 6, 2007, and effective on December 18, 2007 (included as Exhibit 3.1 to the Form 8-K filed December 26, 2007, and incorporated herein by reference).
 
3.4
Amendment to Articles of Incorporation, effective October 16, 2009 (included as Exhibit 3.1 to the Form 8-K filed October 14, 2009, and incorporated herein by reference).
 
4.1
Specimen Common Stock Certificate, dated July 9, 1993 (included as Exhibit 1 to the Form 8-A filed July 2, 1993, and incorporated herein by reference).
 
4.2
Certificates of Designation for Class A, Class B and Class C Preferred Shares (included as Exhibit 4.3 to the Form 10-QSB filed August 11, 1997, and incorporated herein by reference).
 
4.3
Certificate of Designation of Preferences and Rights of Series H Preferred Stock, dated December 21, 2005 (included as Exhibit 4.1 to the Form 8-K filed January 3, 2006, and incorporated herein by reference).
 
4.4
Certificate of Designation of Series I 8% Cumulative Convertible Preferred Stock, dated March 30, 2007 (included as Exhibit 4.X to the Form 8-K filed April 11, 2007, and incorporated herein by reference).
 
4.5
Form of Common Stock Purchase Warrant between the Company and investors in the 2007 Private Placement, dated March 30, 2007 (included as Exhibit 4.iii to the Form 8-K filed on April 11, 2007, and incorporated herein by reference).
 
4.6
Common Stock Purchase Warrants between the Company and O. Lee Tawes and John Talty, dated March 30, 2007 (included as Exhibit 4.v to the Form 8-K filed on April 11, 2007, and incorporated herein by reference).
 
4.7
Common Stock Purchase Warrant between the Company and JSH Partners, dated March 30, 2007 (included as Exhibit 4.vii to the Form 8-K filed on April 11, 2007, and incorporated herein by reference).
 
4.8
Common Stock Purchase Warrants between the Company and Thomas Pinkowski, Charles Ung and M. Amirul Karim, dated March 30, 2007 (included as Exhibit 4.ix to the Form 8-K filed on April 11, 2007, and incorporated herein by reference).
 
 
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4.9
Form of Common Stock Purchase Warrant between the Company and Northeast Securities, Inc., dated March 30, 2007 (included as Exhibit 4.23 to the Form SB-2/A filed on October 12, 2007, and incorporated herein by reference).
 
4.10
Common Stock Purchase Warrant between the Company and Ira. J. Gaines, dated June 28, 2006 (included as Exhibit 4.25 to the Form SB-2/A filed on October 12, 2007, and incorporated herein by reference).
 
4.11
Letter Agreement by and between the Company and Northeast Securities, Inc., dated September 7, 2006 (included as Exhibit 4.26 to the Form SB-2/A filed on October 12, 2007, and incorporated herein by reference).
 
4.12
Letter Agreement by and between the Company and Northeast Securities, Inc., dated March 12, 2007 (included as Exhibit 4.27 to the Form SB-2/A filed on October 12, 2007, and incorporated herein by reference).
 
4.13
Letter Agreement by and between the Company and Northeast Securities, Inc., dated August 21, 2006 (included as Exhibit 4.28 to the Form SB-2/A filed on October 12, 2007, and incorporated herein by reference).
 
4.14
Common Stock Purchase Warrant between the Company and Ira J. Gaines, dated April 5, 2005 (included as Exhibit 4.30 to the Form SB-2/A filed October 12, 2007, and incorporated herein by reference).
 
4.15
Certificate of Designation of Series J 6% Redeemable Convertible Preferred Stock, dated December 22, 2008 (included as Exhibit 4.1 to the Form 8-K filed December 23, 2008, and incorporated herein by reference).
 
4.16
Baywood International, Inc. 2008 Stock Option and Incentive Plan, dated May 14, 2008 (included as Exhibit 4.1 to the Registration Statement on Form S-8 filed June 27, 2008, and incorporated herein by reference).
 
4.17
Common Stock Purchase Warrant between the Company and Eric Skae, dated March 20, 2009 (included as Exhibit 4.1 to the Form 8-K filed March 24, 2009, and incorporated herein by reference).
 
4.18
Form of Common Stock Purchase Warrant, dated September 5, 2008 (included as Exhibit 10.2 to the Form 8-K filed September 11, 2008, and incorporated herein by reference).
 
4.19
Common Stock Purchase Warrant between the Company and O. Lee Tawes, III, dated February 4, 2008 (included as Exhibit 4.29 to the Form 10-Q filed May 20, 2009, and incorporated herein by reference).
 
 
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4.20
Common Stock Purchase Warrant between the Company and O. Lee Tawes, III, dated February 19, 2008 (included as Exhibit 4.30 to the Form 10-Q filed May 20, 2009, and incorporated herein by reference).
 
4.21
Form of Subscription Agreement (included as Exhibit 4.31 to the Form 10-Q filed May 20, 2009, and incorporated herein by reference).
 
4.22
Form of Warrant (included as Exhibit 4.32 to the Form 10-Q filed May 20, 2009, and incorporated herein by reference).
 
4.23
Common Stock Purchase Warrant between the Company and O. Lee Tawes, dated July 14, 2008 (included as Exhibit 4.33 to the Form 10-Q filed May 20, 2009, and incorporated herein by reference).

4.24
Common Stock Purchase Warrant between the Company and Eric Skae, dated October 23, 2008 (included as Exhibit 4.34 to the Form 10-Q filed May 20, 2009, and incorporated herein by reference).
 
4.25
Form of Common Stock Purchase Warrant (included as Exhibit 4.25 to the Form 10-Q filed March 31, 2010, and incorporated herein by reference).
 
10.1
Promissory Note between the Company and Ira J. Gaines, dated April 2005 (included as Exhibit 4.29 to the Form SB-2/A filed on October 12, 2007, and incorporated herein by reference).
 
10.2
Bridge Loan Agreement between the Company and O. L. Tawes, dated May 10, 2004 (included as Exhibit 10 to the Form 10-KSB filed May 12, 2005, and incorporated herein by reference).
 
10.3
10% Note Agreement between the Company and Baywood Acquisition, Inc. on one side and O. Lee Tawes, III, on the other side, dated March 30, 2007 (included as Exhibit 4.iv to the Form 8-K filed April 11, 2007, and incorporated herein by reference).
 
10.4
10% Note Agreement between the Company and Baywood Acquisition, Inc. on one side and John Talty on the other side, dated March 30, 2007 (included as Exhibit 4.iv to the Form 8-K filed April 11, 2007, and incorporated herein by reference).
 
10.5
12% 2008 Bridge Loan Agreement between the Company and JSH Partners and Guaranty executed by O. Lee Tawes, dated March 30, 2007 (included as Exhibit 4.vi to the Form 8-K filed April 11, 2007, and incorporated herein by reference).
 
10.6
12% Note between the Company, Baywood Acquisition, Inc. and JSH Partners, dated March 30, 2007 (included as Exhibit 4.vi to the Form 8-K filed on April 11, 2007, and incorporated herein by reference).
 
10.7
8% Convertible Subordinated Promissory Notes of the Company and Baywood Acquisition, Inc. issued to Thomas Pinkowski, Charles Ung and M. Amirul Karim, dated March 30, 2007 (included  as Exhibit 4.viii to the Form 8-K filed April 11, 2007, and incorporated herein by reference).
 
10.8
8% Subordinated Promissory Notes of the Company and Baywood Acquisition, Inc. issued to Thomas Pinkowski, Charles Ung and M. Amirul Karim, dated March 30, 2007 (included as Exhibit 4.ix to the Form 8-K filed April 11, 2007, and incorporated herein by reference).
 
10.9
Real Estate Lease between Baywood International Inc. and Glenn Reithinger, dated October 1, 2008 (included as Exhibit 10.23 to the Form 10-Q filed August 19, 2008, and incorporated herein by reference).
 
10.10
Form of 8% Subordinated Promissory Note, issued by the Company to the creditors signatory thereto, dated September 9, 2008 (included as Exhibit 10.7 to the Form 8-K filed September 15, 2008, and incorporated herein by reference).
 
 
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10.11
8% Convertible Subordinated Promissory Note for $1,000,000, issued by the Company to Skae Beverage International, LLC, dated September 9, 2008 (included as Exhibit 10.8 to the Form 8-K filed September 15, 2008, and incorporated herein by reference).
 
10.12
8% Convertible Subordinated Promissory Note for $100,000, issued by the Company to Skae Beverage International, LLC, dated September 9, 2008 (included as Exhibit 10.9 to the Form 8-K filed September 15, 2008, and incorporated herein by reference).
 
10.13
Employment Agreement between the Company and Eric Skae, dated September 9, 2008 (included as Exhibit 10.10 to the Form 8-K filed September 15, 2008, and incorporated herein by reference).
 
10.14
Form of 12% Subordinated Promissory Note (included as Exhibit 10.41 to the Form 10-Q filed May 20, 2009, and incorporated herein by reference).
 
10.15
12% Subordinated Note issued by the Company to O. Lee Tawes, III, dated July 14, 2008 (included as Exhibit 10.42 to the Form 10-Q filed May 20, 2009, and incorporated herein by reference).
 
10.16
12% Subordinated Note issued by the Company to Eric Skae, dated October 23, 2008 (included as Exhibit 10.43 to the Form 10-Q filed May 20, 2009, and incorporated herein by reference).
 
10.17
Asset Purchase Agreement by and among the Company, Nutritional Specialties, Inc., and Nutra, Inc., dated July 24, 2009 (included as Exhibit 10.1 to the Form 8-K filed July 30, 2009, and incorporated herein by reference).
 
10.18
Settlement Agreement and Mutual Release between Farmatek IC VE DIS TIC, LTD. STI and Oskiyan Hamdemir on the one hand and the Company and Nutritional Specialties, Inc. on the other hand, dated June 12, 2009 (included as Exhibit 10.45 to the Form 10-Q filed August 19, 2009, and incorporated herein by reference).
 
10.19
Assignment of Lease between Nutritional Specialties, Inc. and Boyd Business Center of Orange, dated October 9, 2009 (included as Exhibit 10.1 to the Form 8-K filed October 14, 2009, and incorporated herein by reference).
 
10.20
Non-interest bearing subordinated note issued by the Company to Eric Skae, dated April 1, 2010 (included as Exhibit 10.20 to the Form 10-Q filed May 17, 2010, and incorporated herein by reference ).
 
10.21
10% Subordinated note issued by the Company to O. Lee Tawes, dated April 30, 2010 (included as Exhibit 10.21 to the Form 10-Q filed May 17, 2010, and incorporated herein by reference ).
 
10.22
Employment agreement between the Company and David Tsiang, dated May 11, 2010 (included as Exhibit 10.22 to the Form 10-Q filed May 17, 2010, and incorporated herein by reference ).
 
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (filed herewith).
 
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
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SIGNATURES

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

 
NEW LEAF BRANDS, INC.
 
       
       
Date:  July 13, 2011
By:
/s/ Eric Skae
 
   
Eric Skae
 
   
Chief Executive Officer
(Principal Executive Officer)
 
       
Date:  July 13, 2011
By:
/s/ David Tsiang
 
   
David Tsiang
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
 
       
 
 
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