UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q/A-1





(Mark One)


x Quarterly Report under Section 13 or 15(d) of the Securities


Exchange Act of 1934





For the quarterly period ended September 30, 2008





 ̈ Transition Report under Section 13 or 15(d) of the Exchange Act For the


Transition Period from ________ to ___________





Adrenalina


(Exact Name of Registrant as Specified in its Charter)





Nevada
333-134568
20-8837626(State or other jurisdiction

of incorporation)
(Commission

File Number)
(IRS Employer

Identification No.)





1250 East Hallandale Beach Blvd. Suite 402


Hallandale, Florida 33009


(Address of principal executive offices)





Phone: 954-454-9978


(Issuer's telephone number)





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 past 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.


YesNo .x .





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





Large accelerated filer  ̈
Accelerated filer  ̈
Non-accelerated filer  ̈
Smaller reporting company x





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





State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:





As of September 30, 2011 the registrant's outstanding common stock consisted of  2,925,837  shares, $0.001 par value.








ADRENALINA





TABLE OF CONTENTS





PagePART I - FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007
1Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and September 30, 2007 (unaudited)
2Condensed Consolidated Statement of Shareholders’ Equity (unaudited)
3Condensed Consolidated Statements of Cash Flows (unaudited)
4Notes to Condensed Consolidated Financial Statements (unaudited)
5Item 2. Management’s Discussion and Analysis or Plan of Operation
16Item 3. Quantitative and Qualitative Disclosure About Market Risk
23Item 4T. Controls and Procedures
23PART II - OTHER INFORMATIONItem 1. Legal Proceedings
27Item 1A. Risk Factors
27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
27Item 3. Defaults Upon Senior Securities
28Item 4. Submission of Matters to a Vote of Security Holders
28Item 5. Other Information
28Item 6. Exhibits
28SIGNATURES
29








PART I. FINANCIAL INFORMATION




ADRENALINA
 Condensed Consolidated Balance Sheets
 
 Septemeber 30, 2008


December 31,(Unaudited)


2007(as restated)Current Assets:Cash and cash equivalents

$
655,908


$
444,843Investments in securities available for sale


-



27,773Accounts receivable, net


234,683



35,197Merchandise inventories


1,923,161



1,678,937Film costs, net


47,450



96,800Prepaid expenses and other current assets


137,274



211,621Total Current Assets


2,998,476



2,495,171Deferred loan costs, net


641,717



643,027Property and equipment, net


8,051,527



4,963,920Intangible assets, net


242,444



248,444Total Other Assets


8,935,688



5,855,391Total Assets

$
11,934,164


$
8,350,562Liabilities and Shareholders’ EquityCurrent Liabilities:Accounts payable and accrued liabilities

$
2,836,247


$
1,106,924Shareholder advances


1,144,203



399,930Current portion of convertible debentures, net of discount of $650,204 and $0, respectively


266,464



-Total Current Liabilities


4,246,914



1,506,854Long-Term Liabilities:Deferred rent


2,589,073



582,114Related party note


3,294,267



3,294,267Convertible debentures, net of discount of $3,960,325 and $2,294,891, respectively


1,623,007



75,109Total Long-Term Liabilities


7,506,347



3,951,490Total Liabilities


11,753,261



5,458,344Commitments and contingencies


-



-Shareholders’ Equity:Common stock, $0.001 par value, 50,000,000 shares authorized, 19,853,000 and 19,453,000 issued and outstanding, respectively


20,168



19,453Additional paid-in-capital


16,235,378



12,312,364Accumulated deficit


(16,074,643
)


(9,439,599
)Total Shareholders’ Equity


180,903



2,892,218Total Liabilities and Shareholders’ Equity

$
11,934,164


$
8,350,562
 
 See accompanying notes to the condensed consolidated financial statements
  1
  ADRENALINA
 Condensed Consolidated Statements of Operations
 (Unaudited)
 
 For the three months ended


For the nine months endedSeptember 30,


September 30,2008


2007


2008


2007Revenues:Merchandise sales

$
1,241,421


$
675,676


$
3,431,242


$
1,647,397Entertainment


20,479



226,200



55,308



702,619Publishing


187,368



29,449



274,276



121,060Total Revenues


1,449,268



931,325



3,760,826



2,471,076Cost of Revenues:Merchandise


732,247



475,843



1,920,937



967,306Entertainment licensing fees


9,782



185,226



29,395



716,466Production


64,310



59,779



205,753



287,626Total Cost of Revenues


806,339



720,848



2,156,085



1,971,398Gross Profit


642,929



210,477



1,604,741



499,678Operating Expenses:Payroll and employee benefits


649,399



490,617



1,780,024



1,333,799Occupancy expense


764,623



282,274



2,504,030



740,565Marketing and advertising expense


28,662



11,309



117,248



250,406Other selling, general and administrative


398,992



441,333



1,220,724



919,278Depreciation and amortization


149,388



247,497



391,519



734,693Total Operating Expenses


1,991,064



1,473,030



6,013,545



3,978,741Other (Income) and Expenses:Interest income


(2,276
)


(2,105
)


(2,573
)


(3,134
)Loss on sale of available for sale securities


-



-



67,740



-Interest and other expenses


749,137



1,808



2,161,073



10,461Total Other (Income) and Expenses


746,861



(297
)


2,226,240



7,327Net Loss

$
(2,094,996
)

$
(1,262,256
)

$
(6,635,044
)

$
(3,486,390
)Net loss per share - basic and diluted

$
(0.10
)

$
(0.07
)

$
(0.34
)

$
(0.18
)Weighted average common shares - basic and diluted


20,061,034



19,100,000



19,785,671



19,100,000
 
 See accompanying notes to the condensed consolidated financial statements
  2
 ADRENALINA
 Condensed Consolidated Statements of Equity
 For the Year Ended December 31, 2007 and the Nine Months Ended September 30, 2008
 
 Common Stock


Additional





TotalMembers' Equity


Shares Outstanding


Amount


Paid-In Capital


Accumulated Deficit


Shareholders' EquityBalance at January 1, 2007

$
8,978,817



-


$
-


$
-


$
(3,640,935
)

$
5,337,882.00Issuance of common stock for services


-



353,000



353



352,647



-



353,000Issuance of warrants & effect of beneficial  conversion related to convertible debt


-



-



-



3,000,000



-



3,000,000Effect of reverse acquisition


(8,978,817
)


19,100,000



19,100



8,959,717



-



-Net loss


-



-



-



-



(5,798,664
)


(5,798,664
)Balance at December 31, 2007 (as restated)


-



19,453,000



19,453



12,312,364



(9,439,599
)


2,892,218Issuance of warrants with beneficially convertible debt


-



-



-



3,256,941



-



3,256,941Issuance of common stock and warrants for cash


-



566,667



567



549,433



-



550,000Issuance of common stock in exchange for liquidated damages on  convertible debt






148,254



148



145,600







145,748Private placement commission paid


-



-



-



(32,000
)


-



(32,000
)Share-based compensation


-



-



-



3,040



-



3,040Net loss


-



-



-



-



(6,635,044
)


(6,635,044
)Balance at September 30, 2008 (Unaudited)

$
-



20,167,921


$
20,168


$
16,235,378


$
(16,074,643
)

$
180,903
 
 See accompanying notes to the condensed consolidated financial statements
  3
  ADRENALINA
 Condensed Consolidated Statements of Cash Flows
 For the Nine Months Ended September 30,
 (Unaudited)
 
 2008


2007Cash from Operating Activities:Net loss

$
(6,635,044
)

$
(3,486,390
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


391,519



734,692Bad debt expense


-



45,490Amortization of discount on convertible debenture


1,571,303



-Deferred loan amortization


241,310



-Deferred compensation expense


3,010



-Reserve for obsolete inventory


150,000



-Deferred Rent Expense


2,006,959



-Loss on sale of investments


67,740



-Changes in assets and liabilities:Accounts receivable


(199,486
)


114,628Merchandise inventories and film cost, net


(394,224
)


(797,841
)Prepaid expenses and other assets


74,347



(906,239
)Accounts payable and accrued liabilities


1,729,354



391,266Net Cash Used in Operating Activities


(993,212
)


(3,904,394
)Cash Flows from Investing Activities:Purchases of investments in available for sale securities


(3,501,189
)


-Proceeds from sales of investments in available for sale securities


3,606,968



-Purchase of property and equipment, net


(3,423,775
)


(1,038,932
)Net Cash Used in Investing Activities


(3,317,996
)


(1,038,932
)Cash Flows from Financing Activities:Repayments of notes receivable - related parties


-



760,787Proceeds from related party notes


744,273



3,891,163Proceeds from sale of common stock


518,000



-Deferred loan costs


(240,000
)


-Proceeds from convertible note payable


3,500,000



-Net Cash Provided by Financing Activities


4,522,273



4,651,950Net Decrease in Cash and Cash Equivalents


211,065



(291,376
)Cash and Cash Equivalents - Beginning of Period


444,843



297,801Cash and Cash Equivalents - End of Period

$
655,908


$
6,425Supplemental Disclosures of Cash Flow Information:Cash paid for interest

$
153,563


$
-Supplemental Disclosure of Non-Cash Financing Activities:Discount on convertible debt attributable to detachable warrants

$
2,026,709


$
-Discount on convertible debt attributable to beneficial conversion feature

$
1,230,232


$
-Issuance of restricted common strock in satisfaction of liquidating damages on registration of convertible debentures and warrants

$
145,748


$
-Interest capitalized

$
100,825


$
-
 
 See accompanying notes to the condensed consolidated financial statements
  4




ADRENALINA


Unaudited Notes to Condensed Consolidated Financial Statements


Nine Months Ended September 30, 2008 and 2007





Note 1 - Description of Business, Basis of Presentation and Summary of Significant Accounting Policies





Description of Business and Basis of Consolidation





Interim Financial Statements





The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2008 and September 30, 2007, are unaudited except for the balance sheet information at December 31, 2007, which is derived from the audited consolidated financial statements filed on October 17, 2008 in the Company’s Annual Report on Form 10-KSB/A for the year ended December 31, 2007. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-KSB/A for the year ended December 31, 2007.





Business





Adrenalina (the “Company” or “Adrenalina”), f/k/a LQD Adrenalina, LLC, was formed as a privately-held Limited Liability Company headquartered in Miami, Florida on September 13, 2004, as a media, retail and entertainment company





Basic Services, Inc. (“BSI”), a Nevada corporation, was organized March 28, 2007 (Date of Inception) and incorporated as a subsidiary of Eaton Laboratories, Inc., ("Eaton"), also a Nevada corporation. On March 30, 2007, BSI's parent corporation, Eaton entered into an Acquisition Agreement and Plan of Merger ("Agreement") with Hydrogen Hybrid Technologies, Inc. ("HHT"), a privately-held Canadian corporation. Pursuant to the terms of the Agreement, HHT acquired Eaton, and Eaton agreed to spin off its wholly-owned subsidiary, Basic Services, Inc. On April 30, 2007, the record shareholders of Eaton received one unregistered, par value $0.001, share of Basic Services, Inc. common stock for every share of Eaton Laboratories common stock owned. The Basic Services, Inc. stock dividend was based on 10,873,750 shares of Eaton common stock that were issued and outstanding as of the record date. The spin off did not include any stock issued to the shareholders of Hydrogen Hybrid Technologies, Inc., who received Eaton shares pursuant to the Agreement with Eaton. Eaton retained no ownership in BSI following the spin off. Further, BSI was no longer a subsidiary of Eaton.





On October 26, 2007, BSI and a newly formed subsidiary of BSI ("Merger Sub") and Adrenalina entered into an Acquisition Agreement and Plan of Merger ("Acquisition") pursuant to which BSI, through its wholly-owned subsidiary, Merger Sub, acquired 100% of the membership interests in Adrenalina in exchange for 18,000,000 shares of the BSI common stock which were issued to the owners of the membership interests in Adrenalina. Immediately after the Acquisition was consummated and further to the Acquisition Agreement, the four largest shareholders of BSI cancelled 9,773,750 shares of the BSI Common Stock held by them. The transaction contemplated by the Agreement was intended to be a "tax-free" reorganization pursuant to the provisions of Section 351 and 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended. Immediately prior to the Acquisition, BSI was a reporting corporation with limited activity.





For accounting purposes, this transaction was accounted for as a reverse acquisition and recapitalization, since the stockholders of Adrenalina own a majority of the issued and outstanding shares of common stock of BSI and the directors and executive officers of Adrenalina became the directors and executive officers of BSI. As a consequence the historical financial information presented herein represents that of Adrenalina, adjusted to give retroactive effect to the recapitalization of Adrenalina.





On December 13, 2007, BSI changed its name to Adrenalina.


5





ADRENALINA


Unaudited Notes to Condensed Consolidated Financial Statements


Nine Months Ended September 30, 2008 and 2007 - continued





Note 1 - Description of Business, Basis of Presentation and Summary of Significant Accounting Policies (Continued)





Basis of Consolidation





As of September 30, 2008 and December 31, 2007, the consolidated financial statements include the company and all wholly-owned subsidiaries. All intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.





Restated Financial Statements





During the third quarter of 2008, the Company discovered an error in their previously issued financial statements as of December 31, 2007, related to the accounting for the Beneficial Conversion Features on their November convertible debt issue. This error occurred because the Company incorrectly applied a marketability discount to the market value of their common stock based on a limited history and insufficient trading volume, which was then used to calculate the fair value of the embedded instruments. The correction of this error resulted in the reduction in the carrying amount of the debt due to an increase in the debt discount and an increase in equity by approximately $1,698,000 from their November convertible debt issue, as well as an understatement of the non-cash interest expense and net loss by approximately $31,700 as of December 31, 2007.





On October 17, 2008 the Company amended their previously issued financial statements on Form 10-KSB/A to reflect the correction of this error.





During the third quarter of 2011, the Company discovered an error in their previously issued financial statements as of  September 30, 2008 related to the accounting of the discount attributable to detachable warrants on convertible debt issued in November2007,  February 2008 and August 2008. This error was due to the application of an incorrect amortization period on the discount attributable to the warrants. The correction of this error resulted in an increase of the carrying value of the convertible debt due to the decrease in the discount amount at September 30, 2008, as well as an increase of in interest expense and net loss by approximately $437,000 for the nine months ended September 30, 2008.





In addition, the amounts reported in the Condensed Consolidated Statement of Cash Flows for the comparative nine months ended September, 30, 2007 were erroneous due to a clerical error in the original filing. The statement has been corrected to reflect the proper amounts.





Use of Estimates





The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ from those estimates. Significant estimates inherent in the preparation of the accompanying consolidated financial statements include accounting for depreciation and amortization, allowance for uncollectible accounts, reserve for obsolete inventory, film costs, goodwill, barter transactions, business combinations, the beneficial conversion feature on the convertible debenture, warrants, deferred rent, loan costs and contingencies.





Recently Adopted Accounting Pronouncements





In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB deferred the effective date of SFAS 157 by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). On January 1, 2008, we adopted the provisions of SFAS 157, except as it applies to those nonfinancial assets and nonfinancial liabilities for which the effective date has been delayed by one year. The adoption of SFAS 157 did not have a material effect on our financial position or results of operations.





On January 1, 2008, we adopted the provisions of SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option: (i) may be applied instrument by instrument, with a few exceptions, such as investments accounted for by the equity method; (ii) is irrevocable (unless a new election date occurs); and (iii) is applied only to entire instruments and not to portions of instruments. We did not elect to report any additional assets or liabilities at fair value and accordingly, the adoption of SFAS 159 did not have a material effect on our financial position or results of operations.


6





ADRENALINA


Unaudited Notes to Condensed Consolidated Financial Statements


Nine Months Ended September 30, 2008 and 2007 - continued





Note 1 - Description of Business, Basis of Presentation and Summary of Significant Accounting Policies (Continued)





Recently Issued Accounting Pronouncements – continued





In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes the principles and requirements for how an acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008, with early adoption prohibited. We are currently evaluating the impact SFAS 141(R) will have upon adoption on our accounting for acquisitions. Previously any changes in valuation allowances as a result of income from acquisitions for certain deferred tax assets would serve to reduce goodwill whereas under SFAS 141(R), any changes in the valuation allowance related to income from acquisitions currently or in prior periods will serve to reduce income taxes in the period in which the reserve is reversed.





In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements - an amendment of ARB No. 51. SFAS No. 160 requires the Company to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company does not expect the implementation of SFAS No. 160 to have a material impact on its consolidated financial statements.





In April 2008, the FASB issued FSP FAS No. 142-3, which amends the factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset under FAS No. 142, “Goodwill and Other Intangible Assets.” The FSP requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset, and is an attempt to improve consistency between the useful life of a recognized intangible asset under FAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FAS No. 141, “Business Combinations.” The FSP is effective for fiscal years beginning after December 15, 2008, and the guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date. The FSP is not expected to have a significant impact on the Company’s results of operations, financial condition or liquidity.





In May 2008 the FASB issued FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” APB 14-1 requires the issuer to separately account for the liability and equity components of convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The guidance will result in companies recognizing higher interest expense in the statement of operations due to amortization of the discount that results from separating the liability and equity components. APB 14-1 will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting APB 14-1 on it consolidated financial statements.





In May 2008, the FASB issued Financial Accounting Standard (FAS) No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are prepared in conformance with generally accepted accounting principles. Unlike Statement on Auditing Standards (SAS) No. 69, “The Meaning of Present in Conformity With GAAP,” FAS No. 162 is directed to the entity rather than the auditor. The statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with GAAP,” and is not expected to have any impact on the Company’s results of operations, financial condition or liquidity.





In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years, and is not expected to have a significant impact on the Company’s results of operations, financial condition or liquidity.


7





ADRENALINA


Unaudited Notes to Condensed Consolidated Financial Statements


Nine Months Ended September 30, 2008 and 2007 - continued





Note 1 - Description of Business, Basis of Presentation and Summary of Significant Accounting Policies (Continued)





Summary of Significant Accounting Policies





Revenue Recognition





Retail





Revenue for sales of merchandise is recognized when merchandise is sold and delivered to the customer. The Company maintains a reserve for product returns and discounts. Retail revenue also includes income from its point-of-sale entertainment attraction, the Flow Rider ®. Revenue from the FlowRider ® is recorded at the time services are provided to the customer. Retail revenue is reported net of sales tax which amounted to approximately $59,000, $181,000, $38,000 and $102,000 for the three and nine month periods ended September 30, 2008 and 2007, respectively.





Advertising Costs





The Company expenses advertising costs when incurred. Advertising expense incurred during the three and nine month periods ended September 30, 2008 and 2007 was $29,000, $117,000, $11,000 and $250,000, respectively. Additionally, the Company included in advertising expense bartered transactions with broadcasters, in which the Company provides its film for broadcast and receives in return air time which is used to promote their products.





Capitalized Interest





The Company capitalizes interest as part of the cost of major projects during extended construction periods. Capitalized interest, which is recorded as reduction to interest and financing costs in the condensed statements of consolidated operations, totaled approximately $102,000 for the three and nine months ended September 30, 2008. The Company did not capitalize any interest expense during the three and nine months ended September 30, 2007.





Earnings per share





The Company computed basic and diluted loss per common share by dividing the losses applicable to   common stock by the weighted average number of basic and diluted common shares outstanding. The Company’s basic and diluted EPS calculation for the three and nine month periods ended September 30, 2008 and 2007, respectively are the same since the number of shares that would be included in the dilutive calculation from assumed exercise of common stock equivalents would have been antidilutive due to the net loss in each of the periods reported. For the three and nine month periods ended September 30, 2008 the Company excluded 3,404,762 and 3,089,506 common shares from their earnings per share calculation. The Company did not have dilutive shares during the three and nine month periods ended September 30, 2007.





Reclassifications





Certain amounts from prior consolidated financial statements and related notes have been reclassified to conform to the current year presentation.





Note 2 — Going Concern





The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company continued to incur significant operating losses through the nine months ended September 30, 2008 which raise substantial doubt about the Company’s ability to continue as a going concern. As shown in the accompanying financial statements, the Company has incurred net losses of approximately $6,635,000 and $3,486,000 for the nine months ended September 30, 2008 and 2007, respectively. Additionally, the Company has used cash flows in operations of approximately $993,000 and $3,904,000 for the nine months ended September 30, 2008 and 2007, respectively. The operations of the Company have been funded through related party borrowings, contributed capital and convertible debentures. Management’s plans to generate cash flow include expanding the Company’s operations through additional store openings and raising additional capital through debt or equity offerings in an effort to fund the Company’s anticipated expansion. There is no assurance additional capital or debt financing will be available to the Company on acceptable terms. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


8





ADRENALINA


Unaudited Notes to Condensed Consolidated Financial Statements


Nine Months Ended September 30, 2008 and 2007 - continued





Note 3 — Property and Equipment





Major categories of property and equipment at September 30, 2008 and December 31, 2007 were as follows:





September 30,

2008


December 31,

2007Leasehold improvements

$
2,292,603


$
2,162,295Furniture, fixtures and equipment


2,033,228



1,747,462Software


113,518



90,978Vehicles


15,000



15,000Construction in process


1,848,427



35,929Deposits on FlowRider ® equipment purchase contracts


2,509,163



1,336,5008,811,939



5,388,164Less: accumulated depreciation and amortization


(760,412
)


(424,244
)Total property and equipment

$
8,051,527


$
4,963,920





Depreciation expense totaled approximately $131,000, $336,000, $79,000 and $229,000 for the three and nine month periods ended September 30, 2008 and 2007, respectively.





Note 4 — Long-term Debt





Related party note





On November 1, 2007 the Company issued a $3,294,267, 5% note payable to a shareholder, with monthly payments of $94,122 commencing on November 1, 2010 and continuing monthly through October 2013, when the balance of unpaid principal and interest is due.





Convertible debentures





During November, 2007, the Company issued a $3,000,000 5% Senior Secured Convertible Debenture, with quarterly interest payments commencing in January 2008. Principal amounts under this debenture are payable in 18 equal monthly installments commencing the 12th month following the issuance date. The Company may also elect to make principal payments in shares of common stock if there exists an effective registration statement with respect to the shares issuable upon conversion of the Debenture. If the Company elects to make principal payments in common stock, the conversion rate will be the lesser of the conversion price (see below) or 88% of the volume weighted average price for the ten consecutive trading days ending immediately prior to the applicable date a principal payment is due.





During February 2008, the Company issued a $2,500,000 5% Senior Secured Convertible Debenture, with quarterly interest payments commencing in May 2008. Principal amounts under this debenture are payable in 18 equal monthly installments commencing the 12th month following the issuance date. The Company may also elect to make principal payments in shares of common stock if there exists an effective registration statement with respect to the shares issuable upon conversion of the Debenture. If the Company elects to make principal payments in common stock, the conversion rate will be the lesser of the conversion price (see below) or 88% of the volume weighted average price for the ten consecutive trading days ending immediately prior to the applicable date a principal payment is due.


9





ADRENALINA


Unaudited Notes to Condensed Consolidated Financial Statements


Nine Months Ended September 30, 2008 and 2007 - continued





Note 4 — Long-term Debt - continued





Convertible debentures - continued





At any time during the life of the November and February debentures the holder may convert the debenture into shares of the Company’s common stock at a fixed conversion price of $0.75, subject to adjustment in the event that the Company issues new common stock at a price below the conversion price. Following the effective date of the registration statement filed in connection with the shares, the Company may force conversion of the debentures if the market price of their common stock is at least $2.75 for any 20 out of 30 consecutive trading days. The Company may also prepay these debentures in cash at 115% of the then outstanding principal balance provided there is a registration statement in effect with respect to the shares issuable upon conversion of the debentures.





During August 2008, the Company issued a $1,000,000 5% Senior Secured Convertible Debenture, with quarterly interest payments commencing in September 2008. The principal amount under this debenture are payable in 24 months following the issuance date. The Company may also elect to make principal payments in shares of common stock if there exists an effective registration statement with respect to the shares issuable upon conversion of the Debenture. If the Company elects to make principal payments in common stock, the conversion rate will be the lesser of the then effective conversion price (see below) or 88% of the volume weighted average price for the ten consecutive trading days ending immediately prior to the applicable date a principal payment is due.





At any time during the life of the August debenture the holder may convert the debenture into shares of the Company’s common stock at a fixed conversion price of $1.50, subject to adjustment in the event that the Company issues new common stock at a price below the conversion price. Following the effective date of the registration statement filed in connection with the shares, the Company may force conversion of the debentures if the market price of their common stock is at least $3.00 for any 20 out of 30 consecutive trading days. The Company may also prepay these debentures in cash at 115% of the then outstanding principal balance provided there is a registration statement in effect with respect to the shares issuable upon conversion of the debentures.





These debentures rank senior to all of the Company’s current and future indebtedness and are secured by substantially all of the Company’s assets.





Beneficial Conversion Feature





In connection with the November 2007, February 2008 and August 2008 convertible debentures, the Company determined that a beneficial conversion feature existed on the date the notes were issued. The beneficial conversion feature related to these notes was valued as the difference between the effective conversion price (computed by dividing the relative fair value allocated to the convertible debt by the number of shares the debt is convertible into) and the fair value of the common stock multiplied by the number of shares into which the debt may be converted.





In accordance with EITF 00-27 “Application of Issue No. 98-5 toCertain Convertible Instruments,” the intrinsic value of the beneficial conversion features were recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the life of the instruments. The Company recorded beneficial conversion features related to the August 2008 financing of approximately $412,000. The Company recorded beneficial conversion features related to the November 2007 and February 2008 financing of approximately $1,507,000 and $818,000, respectively. Amortization of the discount from the beneficial conversion features included in interest expense was approximately $267,000 and $677,000 for the three and nine months ended September 30, 2008, respectively.


10





ADRENALINA


Unaudited Notes to Condensed Consolidated Financial Statements


Nine Months Ended September 30, 2008 and 2007 – continued





Note 4 — Long-term Debt - continued





Detachable Common Stock Warrants





In connection with the convertible debentures issued during November 2007, February 2008 and August 2008, respectively, the Company issued five-year warrants to purchase 4,000,000, and 3,333,333 shares of common stock at $2.00 per share and 333,333 at $1.50 per share. The exercise price of these warrants is subject to full ratchet anti-dilution rights in the event that the Company issues securities at less than $1.38 per share. The warrants vested immediately and expire in five years.




The aggregate fair value of these warrants was estimated at approximately $1,493,000, $1,682,000 and $345,000, respectively, based on the Black-Scholes option pricing model using the following assumptions: a risk free rate of 3.89%, 2.73% and 3.14%, respectively, an expected life of 5 years, a volatility factor of 69%, 97% and 85%, respectively and an expected dividend yield of 0%.





Amortization of the warrant discount included in interest expense was approximately $346,000 and $894,000 for the three and nine months ended September 30, 2008, respectively.





Interest Expense, net





Three months

ended September 30,


Nine months

ended September 30,2008


2007


2008


2007Interest expense related to debt

$
141,199


$
1,808


$
302,060


$
10,461Amortization of deferred financing costs


89,937



—



237,143



—Amortization of debt discount


613,078



—



1,571,303



—Capitalized interest on construction in process


(100,825
)


—



(100,825
)


—Liquidating Damages on debt


5,748



—



145,748



—Total interest expense

$
749,137


$
1,808


$
2,161,073


$
10,461





In December 2008, the holders of the convertible debt and the Company agreed to modify the terms of the three debt issuances. The terms of each of the 5% Senior Secured Convertible Debenture’s were modified as follows:





-
November 2007 convertible Note –due date of first principal payment extended to July 1, 2009 from November 29, 2008; the maturity date was extended to December 1, 2010 from May 29, 2010; the stock conversion price was reduced to $.50 from $.75.





-
February 2008 convertible note – due date of first principal payment extended to July 1, 2009 from February 28, 2009 from; the maturity date was extended to December 1, 2010 from August 29, 2010; the stock conversion price was reduced to $.50 from $.75.





-
August 2008 convertible note – the stock conversion price was reduced from $1.50 to $.50.





Maturities of the Company’s long term debt for the next five years are as follows:





2009

$
916,6682010


4,666,6722011


1,857,8882012


1,129,4642013


1,129,464Thereafter


94,111Total

$
9,794,267





As part of the November 2007 financing, the Company also entered into a registration rights agreement that requires it to register all of the shares issuable upon conversion of the debentures (calculated by dividing the principal debenture amount by the conversion price) and exercise of the warrants. Since the Company failed to cause the registration statement to be declared effective within 180 days after the closing dates, it became subject to liquidating damages. On August 12, 2008 the Company entered into an agreement with the holders pursuant to which the holders waived any (i) cash payments due as liquidated damages and (ii) default by the Company as a result of the non-effectiveness of the registration statement in consideration for the issuance to them of 148,254 shares of restricted common stock. As such the Company has recorded approximately $146,000 of liquidating damages, based on the fair value of recent sales of restricted common stock, which is included in the interest expense for the nine months ended September 30, 2008.


11





ADRENALINA


Unaudited Notes to Condensed Consolidated Financial Statements


Nine Months Ended September 30, 2008 and 2007 - continued





Note 5 — Commitments and Contingencies





Operating Leases





The Company’s rent expense amounted to approximately $657,000, $2,149,000, $233,000 and $741,000 for the three and nine month periods ended September 30, 2008 and 2007, respectively. The Company has various long-term non-cancelable lease commitments certain of which are guaranteed by officers and shareholders of the Company, for its offices, warehouse and stores which expire through 2019. The minimum rental commitments under non-cancelable long-term operating leases during the next five years are as follows:





2009

$
2,504,0612010


3,027,6692011


3,214,0742012


3,236,3342013


3,270,036Thereafter


14,884,436Total

$
30,136,610





Capital Commitments





FlowRider®





Effective April 2007, the Company entered into an exclusive five year agreement to acquire thirty-six FlowRider®, water-themed entertainment units for placement in its future mall-based retail shops in an aggregate amount approximating $21,000,000. The agreement is subject to a performance schedule governing order timing and equipment deposits. Non-refundable deposits placed as of September 30, 2008 and December 31, 2007 were $2,509,200 and $1,336,500, respectively.





Retail Locations





At September 30, 2008, the Company had signed leases and construction agreements to develop six new retail locations. Capital commitments under these agreements were approximately $5.4 million.





Litigation





The Company is involved in various claims and legal proceedings in the ordinary course of its business activities. The Company believes that any potential liability associated with the ultimate outcome of these matters will not have a material adverse effect on its financial position or results of operations.





Note 6 - Related Party Transactions





Advertising Revenue





During 2007, the Company sold advertising to Parlux, Inc., a company whose Chairman and CEO was also a 67.7% shareholder of Adrenalina. These advertising revenues amounted to approximately $0 and $282,200 for the three and nine month periods ended September 30, 2007. (None for the three or nine month periods ended September 30, 2008).





Related Party Note Payable





On November 1, 2007, the Company issued a 5%, $3,294,267 note to a shareholder. (see note 4)


12





ADRENALINA


Unaudited Notes to Condensed Consolidated Financial Statements


Nine Months Ended September 30, 2008 and 2007 - continued





Note 7 - Concentration of Risk





Vendor Concentration





During the three and nine month periods ended September 30, 2008 and 2007 no single vendor supplied more than 5% of the Companies retail inventories purchases.





FlowRider®





Sales related to the FlowRider® entertainment product, amounted to approximately $224,000, $588,000, $123,000 and $330,000 for the three and nine month periods ended September 30, 2008 and 2007, respectively. These sales represented 18.0%, 17.1%, 18.2% and 20.0% of retail revenues and 15.0%, 15.6%, 13.2% and 13.4% of total revenues for the three and nine month periods ended September 30, 2008 and 2007, respectively.





Note 8 - Income Taxes





The Company has fully reserved its U.S. net deferred tax assets as of September 30, 2008 due to the uncertainty of future taxable income. The Company has U.S. net operating loss carry-forwards of approximately $2,453,000 which will expire through 2028 and state net operating loss carry-forwards of approximately $2,471,000 which will expire through 2028.





Note 9 - Warrants





The following is a summary of the status of all of the Company’s stock warrants for the year ended December 31, 2007 and the nine months period ended September 30, 2008:





Number of

Shares


Weighted-

Average

Exercise

PriceOutstanding at January 1, 2007


—


$
—Granted


4,000,000



2.00Exercised


—



—Cancelled


—



—Outstanding at December 31, 2007


4,000,000



2.00GrIsGranted


3,750,000



2.01Exercised


—



—Cancelled


—



—Outstanding at September 30, 2008


7,750,000



2.00Warrants exercisable at December 31, 2007


4,000,000



2.00Warrants exercisable at September 30, 2008


7,750,000


$
2.00


13





ADRENALINA


Unaudited Notes to Condensed Consolidated Financial Statements


Nine Months Ended September 30, 2008 and 2007 - continued





Note 9 – Warrants – continued





The following tables summarize information about stock warrants outstanding and exercisable at September 30, 2008:





Stock Warrants OutstandingExercise Prices


Number of

Shares

Outstanding


Weighted-

Average

Remaining

Contractual Life

in Years


Weighted-

Average Exercise

Price$
2.00



7,666,666



4.31


$
2.00$
2.25



83,334



4.81


$
2.257,750,000



4.32


$
2.00





In July 2008 and in connection with the Securities Purchase Agreement to sell shares of common stock (see Note 11), the Company issued 83,334 warrants to certain accredited investors. The warrants are exercisable at any time for a period of 5 years at an exercise price of $2.25. The warrants were valued using the Black-Scholes pricing model and resulted in a fair value of $108,387. The fair value of these warrants was recorded as additional paid-in capital and is considered part of the proceeds received from the investors.





Note 10 - Share-Based Compensation





On February 28, 2008, the Company granted 20,000 options to certain non-employee directors, to acquire common stock during a five-year period at $1.50 per share. These options vest over a five-year period at the annual rate of 4,000 shares per year. The fair value of the options at the grant date was determined to be $11,300 and the options are being expensed as share-based compensation over the applicable vesting periods.





The fair value of these options at the date of grant was estimated using a Black-Scholes option pricing model with the following weighted average assumptions.





Expected life (years)


5.0Expected volatility


97.0
%Risk-free interest rate


2.73
%Dividend yield


0.0
%





The expected life of options represented the estimated period of time until exercise based on expectations of future behavior. The expected volatility was estimated using the historical volatility of the Company's stock which management believes is the best indicator at this time. The risk-free interest rate was based on the implied yield available on U.S. Treasury zero coupon issues with an equivalent term. The Company has not paid dividends in the past and does not intend to in the foreseeable future.





Included in compensation expense for the three and nine months ended September 30, 2008, are $1,301 and $3,040 of share-based compensation relating to the options issued in February 2008. The Company did not have any share-based compensation during the three and nine months ended September 30, 2007.





14





ADRENALINA


Unaudited Notes to Condensed Consolidated Financial Statements


Nine Months Ended September 30, 2008 and 2007 - continued





Note 11 – Sales of Restricted Common Stock





During April 2008 the Company sold 400,000 shares of its restricted common stock, in a Securities Purchase Agreement to an accredited investor, at $0.75 per share.





During July 2008, the Company entered into a Securities Purchase Agreement to sell certain accredited investors 166,667 shares of restricted common stock and 83,334 warrants to purchase shares of common stock at $1.50 per share, for the sum of $250,000. Professional fees paid in connection with a finder’s fee and related legal expenses were $32,000.





During August 2008 the Company issued 148,254 shares of its restricted common stock to an accredited investor in satisfaction of liquidated damages on convertible debentures.





Note 12 - Subsequent Events





On October 10, 2008, the Company opened its third retail store in the International Mall of Tampa, Florida.


15





Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.





Cautionary Note about Forward-Looking Statements





Forward-Looking Statements





We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by our management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. You can identify these statements as those that may predict, forecast, indicate or imply future results, performance or advancements and by forward-looking words such as“believe,” “anticipate,” “expect,” “estimate,” “predict,” “intend,” “plan,” “project,” “will,” “will be,” “will continue,” “will result,” “could,” “may,” “might” or any variations of such words or other words with similar meanings. Forward-looking statements address, among other things, our expectations, our growth strategies, including our plans to open new stores, our efforts to increase our gross margins and create a return on invested capital, plans to grow our private label business, projections of our future profitability, results of operations, capital expenditures or our financial condition or other “forward-looking” information and includes statements about revenues, earnings, spending, margins, liquidity, store openings and operations, inventory, private label products, our actions, plans or strategies. We are including this cautionary statement in this report to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf, of us.





The following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results and could cause actual results for fiscal 2008 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this report or otherwise made by our management: the intense competition in the sporting goods industry and actions by our competitors; our inability to manage our growth, open new stores on a timely basis and expand successfully in new and existing markets; the availability of retail store sites on terms acceptable to us; the cost of real estate and other items related to our stores; our ability to access adequate capital; changes in consumer demand; risks relating to product liability claims and the availability of sufficient insurance coverage relating to those claims; our relationships with our suppliers, distributors or manufacturers and their ability to provide us with sufficient quantities of products; any serious disruption at our distribution or return facilities; the seasonality of our business; the potential impact of natural disasters or national and international security concerns on us or the retail environment; risks related to the economic impact or the effect on the U.S. retail environment relating to instability and conflict in the Middle East or elsewhere; risks relating to the regulation of the products we sell, risks associated with relying on foreign sources of production; risks relating to implementation of new management information systems; factors associated with our pursuit of strategic acquisitions; risks and uncertainties associated with assimilating acquired companies; risks associated with our exclusive brand offerings; the loss of our key executives, our ability to meet our labor needs; changes in general economic and business conditions and in the specialty retail or sporting goods industry in particular; our ability to repay or make the cash payments under our senior convertible notes; changes in our business strategies; any factor described under Part II-Item 1A Risk Factors in our Form 10-Q filings and other factors discussed in other reports or filings filed by us with the Securities and Exchange Commission.





In addition, we operate in a highly competitive and rapidly changing environment; therefore, new risk factors can arise, and it is not possible for management to predict all such risk factors, nor to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. We do not assume any obligation and do not intend to update any forward-looking statements except as may be required by securities laws.


16


Overview





Adrenalina is a retail, entertainment, media and publishing company that is focused on the nature and lifestyle surrounding extreme sports and outdoor adventures. We offer an  enhanced e retail shopping experience, with our particular mix of shopping and entertainment that includes the FlowRider®. Currently we have three stores open and are in the process of opening [six] additional stores during 2008 and the first quarter of 2009.





Historically we were considered a media company which produced the show “Adrenalina” primarily in Latin America. However over the last twelve months we have moved away from our original focus and placed a greater emphasis on our retail stores, with current plans of expanding into new markets throughout the United States. During 2008 we will continue our transformation to a retail focused operation. Although we will continue to produce our television show we will no longer receive any material revenues related to its production. Instead our focus will be on getting the show as much air time as possible in an effort to increase our brand awareness and to put us in front of our targeted audience.





We expect the next 12 months to be our most challenging as we transform our operations and expand into new markets. We are also going to face extreme financial pressure as we continue the construction of our Atlanta and Houston stores and start building out our stores in Dallas and Denver. Each of these endeavors will take significant cash to open and currently we do not have sufficient financial capacity to fund their openings.





Also, through the rest of 2008 we anticipate that our current trend of losses will continue and that these losses will exceed our losses incurred during 2007. These continued losses have placed greater pressures on our existing employees which may in turn lead to greater turnover. Coupled with the fact that we may not be able to find suitable additional employees or replacements for key personnel, this may hamper our growth strategy. We may also face delays in opening our new stores and, if they are not completed on time, we may miss retail sales opportunities fourth quarter retail sales opportunities which is traditionally the retail industry’s most profitable quarter. We may additionally face economic pressures if our sales in our new markets do not meet up to our anticipated results, because of the continued pressure placed on our buying capacity as a result of a declining currency or our customers ability to purchase our products because of a decline in their disposable income.





We are however, developing additional channels to make our products available with our wholesale operations. During 2007 our total wholesale operations were not material to our financial results. We believe that this will turn during the fourth quarter of 2008 as we expect to see our sales in this area increase. These increased sales, in turn will help provide us with some of the cash flows that will be necessary to support our operations.





While many of our competitors are slowing their expansion because of recent declines in the national retail sales, we believe that now is the time to push into new markets which will be key drivers in our future success. As recent economic trends have softened the real estate market, we believe that incentives offered by malls will help to finance most of our development costs during the fourth quarter of 2008 and our 2009 fiscal year.





Critical Accounting Policies and Estimates





We have prepared our financial statements in conformity with U.S. generally accepted accounting principles, and these financial statements necessarily include some amounts that are based on our informed judgments and estimates. Our senior management has discussed the development and selection of these critical accounting estimates, and the disclosure in this section of this report regarding them, with the Board of Directors. Our significant accounting policies are discussed in Note 1 of Notes to Condensed Consolidated Financial Statements. Our critical accounting policies represent those policies that are subject to judgments and uncertainties. As discussed below, our financial position and results of operations may be materially different when reported under different conditions or when using different assumptions in the application of these policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information. Our critical accounting policies include:


17





Merchandise Inventories—Merchandise inventories are valued at the lower of cost or market, with cost determined using a weighted average method. Included in our cost basis are costs incurred in making inventories available for sale in our stores, such as freight and other distribution costs. We utilize perpetual inventory records to value inventory in our stores. Physical inventory counts are performed during each fiscal quarter and we adjust our perpetual records based on the results of the physical counts. Cost is calculated based upon the purchase order cost of an item at the time it is received by us, reconciled to actual vendor invoices, and also includes the cost of warehousing, handling, purchasing, and transporting the inventory to the stores. The cost of warehousing, handling, purchasing, and transporting, as well as vendor allowances, are recognized through cost of sales when the inventory is sold.  Due to systems limitations, it is impracticable for us to assign specific costs and allowances to individual units of inventory. As such, to properly match net costs against the related revenues, we must use all available information to appropriately estimate the costs and allowances to be deferred and recognized each period. Our estimate of when inventory is sold affects the deferral, and subsequent income statement recognition, of costs incurred in preparing inventory for sale and represents the most significant estimate in that calculation; any changes in this estimate could have a material impact on the financial statements.  Vendor allowances, which primarily represent volume rebates and cooperative advertising funds, are recorded as a reduction of the cost of the merchandise inventories. We earn vendor allowances as a consistent percentage of certain merchandise purchases with no minimum purchase requirements. We did not have any vendor allowance programs in fiscal 2008 and 2007 that were based on purchase volume milestones.





We maintain a provision for estimated shrinkage based on the actual historical results of our physical inventories. We compare our estimates to the actual results of the physical inventory counts as they are taken and adjust the shrinkage estimates accordingly. We also record adjustments to the value of inventory equal to the difference between the carrying value and the estimated market value, based on assumptions about future demand.





Film Costs— We account for our film costs and related revenues (“film accounting”), in accordance with the guidance in SOP 00-2, which requires the exercise of judgment related to the film’s ultimate revenues. Our current film costs consist of the costs of completed television episodes, completed and unreleased episodes and in process production costs, all reflected at the lower of cost, less accumulated amortization, or fair value. Prior to release, we estimate our ultimate revenues for each film on factors such as our historical performance of similar films. On an annual basis we evaluate and update our estimates based on information available on the progress of the film’s production and, upon release, the actual results of each film. Changes in our estimate of the ultimate revenues from period to period affect the amount of film costs amortized in a given period and, therefore, could have an impact on the financial results for that period.





Intangible Assets— We perform annual impairment tests of our intangible assets by comparing the book values of our reporting units to their estimated fair values. The estimated fair values of our reporting units are computed using estimates that include a discount factor in valuing future cash flows. There are assumptions and estimates underlying the determination of fair value and any resulting impairment loss. Another estimate using different, but still reasonable, assumptions could produce different results.





Revenue Recognition





Retail Items— Revenue from sales of our merchandise is recognized at the time of the merchandise sale. Revenue is presented net of sales taxes collected. We allow for merchandise to be returned under most circumstances and provide for a reserve of estimated returns. Additionally, retail revenue includes income from our point-of-sale attraction, Flow Rider ® revenue, which is recorded at the time services are provided to the end user.





Gift cards—We record a gift card liability on the date we issue the gift card to the customer. We record revenue and reduce the gift card liability as the customer redeems the gift card. Gift card breakage is recorded as revenue based on an estimated amount of gift cards that are expected to go unused that are not subject to escheatment. For the periods ended September 30, 2008 and December 31, 2007, we did not record an estimate for breakage due to our limited history and the limited estimated amount of gift cards expected to remain unused.





Film— Revenue from our entertainment series are recognized when we have persuasive evidence of a sale or licensing arrangement; the film is complete and has been delivered or is available for immediate and unconditional delivery and the license period of the arrangement has begun.





Publishing— We record magazine advertising revenues and subscriptions at the magazine cover date. Our magazine sales revenues are primarily generated from bulk orders from retail outlets such as newsstands, supermarkets and convenience stores. Revenues from bulk sales are recorded when the magazines are placed with the vendor, less an allowance for returns, based on our historical performance of the closed sales of our magazines.





Internet Sales—Revenue from internet sales are recognized upon estimated receipt by the customer.


18





Barter— From time to time and in the normal course of operations we enter into various barter transactions whereby, we exchange programming product for advertising time that we can use or resell. Generally, this advertising time is provided to us by broadcasting companies in the United States and Central and South America. For all recorded barter transactions we record the fair value of the related programming products based on comparable arrangements in the broadcast areas or from our existing contracts. These transactions are accounted for at the time the programming is broadcast and the advertising is used.





Beneficial Conversion and Warrant Valuation—We account for our convertible debentures with beneficial conversion features, in accordance with EITF No. 98-5 , Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios and EITF No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments . We record a beneficial conversion feature (“BCF”) related to the issuance of convertible debt instruments that have conversion features at fixed rates that are in the money when issued and the fair value of warrants issued in connection with those instruments as a discount to the debt. The discounts recorded in connection with the BCF and warrant valuation are recognized as non-cash interest expense over the term of the instruments.





The valuation of the warrants and conversion feature require us to make certain estimates about their fair value. If actual results differ from estimated results and these notes and warrants convert to common stock, then the differences on the date of conversion could be material to our financial position.





Income Taxes—We record income tax expense using the liability method for taxes and are subject to federal, state, and local jurisdictions. As necessary, our current tax liability or asset is recognized for the estimated taxes payable or refundable on the tax returns for the current year and a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carry-forwards. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. Also a valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. If different assumptions had been used, our tax expense, assets, and liabilities could have varied from recorded amounts. If actual results differ from estimated results or if we adjust these assumptions in the future, we may need to adjust our deferred tax assets or liabilities, which could impact our effective tax rate.





General





Restatement





During the third quarter of 2008, we discovered errors in our previously issued financial statements as of December 31, 2007, March 31, 2008 and June 30, 2008 related to the accounting for the Beneficial Conversion Features on our November and February convertible debt issues. These errors occurred because we incorrectly applied a marketability discount to the market value of our common stock based on our limited trading history and low trading volume. This discounted market value was then used to calculate the fair value of the embedded instruments. In October 2008 we filed an amended 10-KSB and amended our quarterly reports to correct these errors. The correction these errors resulted in the reduction in the carrying amount of the debt due to an increase in the debt discount and an increase in the equity by approximately $1,698,000 and $1,455,000 from their November and February convertible debt issues, as well as an understatement of our non-cash interest expense and net loss by approximately $31,700, $119,300 and $286,800 for the periods ended December 31, 2007, March 31, 2008 and June 30, 2008, respectively.





During the third quarter of 2011, the Company discovered an error in their previously issued financial statements as of  September 30, 2008 related to the accounting of the discount attributable to detachable warrants on convertible debt issued in November 2007 and February 2008. This error was due to the application of an incorrect amortization period on the discount attributable to the warrants. The correction of this error resulted in an increase of the carrying value of the convertible debt due to the decrease in the discount amount at September 30, 2008, as well as an increase of in interest expense and net loss by approximately $437,000 for the nine months ended September 30, 2008.





In addition, the amounts reported in the Condensed Consolidated Statement of Cash Flows for the comparative nine months ended September, 30, 2007 were erroneous due to a clerical error in the original filing. The statement has been corrected to reflect the proper amounts.


19





Results of Reporting Lines





We classify our business interests in three reportable lines:





Retail sales from our stores which focus on extreme sports and adventure themed clothing and merchandise; Entertainment which is comprised of theatrical and TV films as well as musical productions and distribution; and Publishing which is made up of publications centered around the life styles of extreme sports enthusiast and alternative music trends.





The following table sets forth the percentage relationship net sales to costs of sales for each of our reporting lines in our condensed consolidated statements of operations. This table should be read in conjunction with the following discussion and with our consolidated financial statements, including the related notes.





For the nine months endedSeptember

30,


September

30,(Amounts in thousands of dollars)

2008


2007Retail Sales

$
3,431



1,647Cost of sales

$
1,921



967Gross profit


44.0
%


41.3
%Entertainment

$
55



703Cost of sales

$
29



716Gross profit


47.3
%


(1.8
)%Publishing

$
274



121Cost of sales

$
206



288Gross profit


24.8
%


(138.0
)%Total Sales

$
3,761



2,471Cost of sales

$
2,156



1,971Gross profit


42.7
%


20.2
%





Results of Operations





Three Months Ended September 30, 2008 compared to September 30, 2007





Revenues. Total revenues for the three months ended September 30, 2008 increased $518,000 or 55.6% as compared to the three months ended September 30, 2007, primarily due to increased volume in retail operations. Revenues from our retail stores amounted to $1,241,000 for the three months ended September 30, 2008 as compared to $676,000 for the three months ended September 30, 2007 resulting in an increase of $566,000 or 83.7% primarily resulting from the revenues of an additional store, which opened in December 2007. Revenues from entertainment and publishing were $20,000 and $187,000 for the three months ended September 30, 2008 as compared to $226,000 and $29,000 for the three months ended September 30, 2007; resulting in a total decrease of $48,000 in entertainment and publishing revenue from the same period in 2007. This decrease is attributable to a shift in corporate strategy from a film based entertainment company to one focused on expanding its revenue base primarily through merchandise sales and entertainment via retail operations nationwide.





Gross Profit. Our gross profit for the three months ended September 30, 2008 increased $432,000 to $643,000 from $210,000 for the three months ended September 30, 2007. This $432,000 increase, equal to a 205.5% increase, is due to an increase in gross profit from retail sales of $310,000 and an increase in gross profit from our entertainment and publishing activities equal to $122,000.


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Payroll and Employee Benefits. Payroll and employee benefits increased to $649,000 for the three months ended September 30, 2008 from $491,000 for the three months ended September 30, 2007, an increase of $159,000 or 32.4%. This increase is primarily attributable to additional employees to support the retail operations and an increase in support personnel in anticipation of increased operations.





Occupancy Expense. Occupancy expense includes rent, utilities, insurance and other costs necessary for the occupancy of the stores and main office. During the three months ended September 30, 2008 this cost increased to $765,000 from $282,000 or 170.9% from the three months ended September 30, 2007. This increase is primarily attributable to our new stores which opened during the fourth quarter of 2007 and 2008, as well as our recognition of rent expense for stores currently under construction.





All Other Selling, General and Administrative Expenses. Other Selling, general and administrative expenses are primarily made up of marketing and advertising expenses, professional fees, bad debt expense, amortization expense, depreciation expense and costs related to maintaining our patents and trademarks. For the three months ended September 30, 2008 these costs decreased by $123,000, a decrease of 17.6% from the three months ended September 30, 2007. This change was mainly comprised of lower professional fees of $55,000; due to merger related costs, along with a decrease in amortization expense on our film products of $150,000, which was partially offset with an increase in depreciation expense of $52,000, from the three months ended September 30, 2007.





Net Loss. The net loss for the three months ended September 30, 2008 increased to $2,095,000 from $1,262,000 for the three months ended September 30, 2007, an increase of $833,000or  66%This increase is primarily due to increased interest expense of $613,000 from our convertible debentures from amortization of the debt discount and an increase in our occupancy expense of $482,000 related to the leases we signed during the fourth quarter of 2007, partially offset by an increase in gross profit of $432,000.





Nine Months Ended September 30, 2008 compared to September 30, 2007





Revenues. Total revenues for the nine months ended September 30, 2008 increased $1,290,000 or 52.2% as compared to the nine months ended September 30, 2007, primarily due to increased volume in retail operations as we had an additional store opened in December 2007. Revenues from our retail stores amounted to $3,431,000 for the nine months ended September 30, 2008 as compared to $1,647,000 for the nine months ended September 30, 2007 resulting in a increase of $1,784,000 or 108.3%. Revenues from entertainment and publishing amounted to $55,000 and $274,000 for the nine months ended September 30, 2008 as compared to $703,000 and $121,000 for the nine months ended September 30, 2007; resulting in a decrease of $495,000 in entertainment and publishing revenue from the same period in 2007. This decrease is attributable to a shift in corporate strategy from a film based entertainment company to one focused on expanding its revenue base primarily through merchandise sales.





Gross Profit. Gross Profit for the nine months ended September 30, 2008 increased $1,105,000 to $1,605,000 from $500,000, for the nine months ended September 30, 2007. This $1,105,000 increase, equal to a 221.2% increase,  is due to an increase in gross profit from retail sales of $830,000 and an increase in gross profit from our entertainment and publishing activities equal to $275,000.





Payroll and Employee Benefits. Payroll and employee benefits increased to $1,780,000 for nine months ended September 30, 2008 from $1,334,000 for the nine months ended September 30, 2007, an increase of $446,000 or 33.4%. This increase is primarily related to our expansion into new stores.





Occupancy Expense. Occupancy expense includes rent, utilities, insurance and other costs necessary for the occupancy of the stores and main office. During the nine months ended September 30, 2008 this cost increased to $2,504,000 from $741,000, an increase of $1,763,000 or 238.1% from the nine months ended September 30, 2007. This increase is primarily attributable to the increase in rent expense related to the additional leases signed. Rent expense for the nine months ended September 30, 2008 was $2,149,000 which was an increase of $1,408,000 or 190.0% for the same period during 2007. This increase is primarily attributable to our new stores which opened during the fourth quarter of 2007 and during the first nine months of 2008, as well as our recognition of rent expense for stores currently under construction.





All Other Selling, General and Administrative Expenses. Other Selling, general and administrative expenses are primarily made up of marketing and advertising expenses, professional fees, bad debt expense, amortization expense, depreciation expense and cost related to maintaining our patents and trademarks. For the nine months ended September 30, 2008 these costs decreased by $175,000 or 9.2% verse the nine months ended September 30, 2007. This decrease was primarily comprised of a decrease in our marketing expense of $133,000 and a decrease in our film amortization of $450,000, which was offset by an increase in our professional fees of $372,000 which was related to our annual audit, residual merger related expenses and registration statement expenses as compared to the nine months ended September 30, 2007.


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Net Loss. The net loss for nine months ended September 30, 2008 increased to $6,635,000 from $3,486,000 for the nine months ended September 30, 2007, an increase of $3,149,000 or 90.3%. This increase is primarily due to an increased interest expense of $1,571,000 on our convertible debentures, an increase in our occupancy expense of $1,763,000 offset by an increase in our gross profit of $1,105,000. This overall increase is primarily attributable to a change in our focus on retail stores as we expand our operations.





Plan of Operation





Currently we do not believe that the Company will be able to generate any significant cash flow during the coming year to fund our planned expansion or to fund our current operations. However, under our current model of funding operations through capital contributions and debt we believe that we can sustain ourselves for the next twelve months. Currently we are seeking additional outside funding to keep the business operational beyond 2009; however there is no assurance additional debt or capital will be available to us on acceptable terms.





Liquidity and Capital Resources





As of September 30, 2008, the Company's current liabilities exceeded its current assets by approximately $1,248,000. This is mainly due to retail operations under construction where the current liability is incurred during the purchase of a long term asset and maturities of our convertible debentures. At September 30, 2008, $428,000 was included in accrued expenses for properties under construction.





As of September 30, 2008, the Company has cash and cash equivalents of $656,000 and net accounts receivable of $235,000, which provided available capital for operations primarily from the proceeds of the debt incurred by the Company during August 2008. The lack of available cash from the operations of the Company has an adverse impact on the Company's liquidity, activities and operations. Without realization of additional capital, it would be unlikely for the Company to execute its business plan. Management is seeking additional working capital through additional debt or equity private placements, additional notes payable to banks or related parties, or from other available funding sources at market rates of interest, or a combination of these. The ability to raise necessary financing will depend on many factors, including the economic and market conditions prevailing at the time financing is sought. No assurances can be given that any necessary financing can be obtained on terms favorable to the Company, if at all.





During February and August 2008, we issued to three accredited investors our 5% Senior Secured Convertible Debentures in the principal amount of $2,500,000 and $1,000,000, respectively. Most of the proceeds from these offerings have already been used in connection with new store openings and equipment purchases. In addition as of September 30, 2008, we had signed commitments to build out our new store locations and had committed under our lease agreements in excess of $35.5 million. Without additional funding, and the rapid generation of significant cash flow from operations, we will likely be unable to meet these commitments and we may have to curtail our operations. We are looking for additional funding which may or may not become available to us on acceptable terms. Any such funding may be in the form of equity and/or debt financing and will likely dilute the ownership interest of our current shareholders.





Net cash flows used in operating activities for the nine months ended September 30, 2008 were approximately $993,000 as compared to net cash used in operating activities of $3,904,000 for the nine months ended September 30, 2007. For the nine months ended September 30, 2008, our net loss amounted to $6,635,000, which included a non-cash adjustment due to depreciation and amortization of $633,000, a non-cash adjustment due to amortization of discount on convertible debenture of $1,571,000 and a non-cash charge due to deferred rent of $2,006,000. Changes in current assets and liabilities provided $1,210,000 in cash. For the nine months ended September 30, 2007 our net loss amounted to $3,486,000, which included a non-cash adjustment due to depreciation and amortization of $735,000. Changes in current assets and liabilities used  $1,198,000 in cash.





Net cash flows used in investing activities for the nine months ended September 30, 2008 was $3,318,000 as compared to $1,039,000 for the nine months ended September 30, 2007. For the nine months ended September 30, 2008 and 2007 our net cash used in investing activities was primarily attributable to the purchase of property and equipment for our retail operations. Additionally during the nine months ended September 30, 2008 we purchased and sold available for sale securities. We held no securities at the end of the quarter.


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Net cash flows provided by financing activities for the nine months ended September 30, 2008 were $4,522,000 as compared to $4,652,000 for the nine months ended September 30, 2007. This cash provided by financing activities was primarily attributable to proceeds of $3,500,000 related to the issuance of convertible debentures and $1,262,000 from the sale of our restricted common stock and proceeds from related party borrowings. Cash provided by financing activities in the nine months ended September 30, 2007 was primarily attributable to proceeds of $4,652,000 in cash from related parties.





The Company has made capital commitments for leases, construction agreements and purchases of equipment. At September 30, 2008, the Company had signed leases and construction agreements to develop six new retail locations. Capital commitments under these agreements were approximately $5.4 million. Further, effective April 2007, the Company entered into an exclusive five year agreement to acquire thirty-six FlowRider®, water-themed entertainment units for placement in its future mall-based retail shops in an aggregate amount approximating $21,000,000. The agreement is subject to a performance schedule governing order timing and equipment deposits. Non-refundable deposits placed as of September 30, 2008 and December 31, 2007 were $2,509,200 and $1,336,500, respectively.





Dividends





Holders of common stock are entitled to receive such dividends as the board of directors may from time to time declare out of funds legally available for the payment of dividends. No cash dividends have been paid on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.





On August 13, 2007, we formed and spun-off our wholly-owned subsidiary, Generic Marketing Services, Inc. a Nevada corporation to its shareholders of record, in a one-for-one special stock dividend. Following the spin-off, we did not retain any ownership in Generic Marketing Services, Inc.





Item 3. Quantitative and Qualitative Disclosure About Market Risk





None.





Item 4T. Controls and Procedures





Disclosure Controls and Procedures





As required by SEC Rule 13a-15 or Rule 15d-15, our Chief Executive and Chief Financial Officer carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing evaluation, we have concluded that our disclosure controls and procedures are not effective as of September 30, 2008, and that they do not allow for information required to be disclosed by the company in the reports that it files or submits under the Exchange Act to be recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Based on the foregoing, our Chief Executive and Chief Financial Officer concluded that our disclosure controls and procedures were not effective. Specifically, the Company identified several material weaknesses in our internal control over financial reporting as described in Item 8A and 8A(T) in our annual report on Form 10-KSB filed with the SEC on April 15, 2008 (as amended on October 17, 2008), which had not been corrected as of September 30, 2008. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.





Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives and our Chief Executive and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events; and, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.


23





Internal Control over Financial Reporting





Pursuant to Rule 13a-15(d) or Rule 15d-15(d) of the Exchange Act, our management, with participation with the Company’s Chief Executive and Chief Financial Officer, are responsible for evaluating any change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act), that occurred during each of our fiscal quarters that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.





Our internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Our internal controls framework is based on the criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).





Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.





Based on the foregoing evaluation, the Company has concluded that there was no change in our internal control over financial reporting that occurred during the nine months ended September 30, 2008, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





We continue to have the following material weaknesses in our internal control over financial reporting, as described in Item 8A and 8A(T) in our annual report on Form 10-KSB filed with the SEC on April 15, 2008..





1.
Lack of sufficient resources in our accounting and finance organization. The Company did not maintain a sufficient complement of personnel to maintain an appropriate accounting and financial reporting structure to support the activities of the Company. As of December 31, 2007, the Company had an insufficient number of personnel with clearly delineated and documented responsibilities in order to timely prepare and file its year-end financial statements and Annual Report on Form 10-KSB. Due to the Company’s limited resources, it has had to rely on an outside consultant to perform period closings and key reconciliations of the Company’s transactions and accounts, and a second outside accountant to prepare its annual financial statements in anticipation of the audit by the independent certified public accountants. In addition, the Company’s Chief Financial Officer is responsible for preparing or compiling certain critical portions of the annual financial information and is often responsible for performing the final review of this information. These represent a material weakness in design of internal controls over financial reporting. Due to the potential pervasive effect on the financial statements and disclosures and the absence of other mitigating controls there is a more than remote likelihood that a material misstatement of the annual financial statements could occur and not be prevented or detected. This material weakness has also contributed to the material weaknesses in Nos. 2 and 3 below





2.
Lack of sufficient resources to provide for suitable segregation of duties. Specifically, in connection with the lack of sufficient accounting and finance resources described in material weakness No. 1 above, certain financial and accounting personnel had incompatible duties that permitted creation, review, processing and potential management override of certain financial data with limited independent review and authorization affecting cash, inventory, accounts payable and accounts receivable. The increase in the Company’s administrative staffing has not been commensurate with the rapid growth in the volume of business transactions. These represent a material weakness in design of internal controls over financial reporting. Due to the potential pervasive effect on the financial statements and disclosures and the absence of other mitigating controls there is a more than remote likelihood that a material misstatement of the annual financial statements could occur and not be prevented or detected.


24





3.
Inadequate access controls with regard to computer master file information. Specifically, certain of the Company’s personnel in accounts payable, accounts receivable and inventory had access and could make changes to master files without approval. The internal controls were not adequately designed. Due to the potential pervasive effect on the financial statements and disclosures and the absence of other mitigating controls there is a more than remote likelihood that a material misstatement of the interim and annual financial statements could occur and not be prevented or detected.





4.
Inadequate controls over the processing of certain expenses.Costs relating to the Company’s products and services are a significant cost of operations. The internal controls were not adequately designed or operating in a manner to establish specific controls to ensure that all expenses were approved and processed on a timely basis. This material weakness is the result of aggregate deficiencies in internal control activities and could result in a material misstatement of financial statements that would not be prevented or detected.





5.
Inadequate controls over the processing of adjustments to accrued expense. The internal controls over accrued expenses, period accruals and adjustments, were not adequately designed or operating in a manner to effectively support the expenditure cycle. Certain adjustments were processed without proper approval, or the Company’s procedures did not specifically document the approvals that would be required. This material weakness is the result of aggregate deficiencies in internal control activities and could result in a material misstatement of the accrued expenses and operating expenditures that would not be prevented or detected.





6.
Inadequate controls over the measurement and adjustments to Capitalized Film Costs.The Company did not have in place adequate processes and procedures for measuring and evaluating capitalized film costs under the ultimate revenues method of accounting. This material weakness resulted in a restatement of our 2006 consolidated financial statements





7.
Inadequate Safeguards of Personnel Files and Customer Information.The Company did not have in place adequate physical safeguards to prevent an employee from gaining access to sensitive customer information and employee records.





8.
Audit Committee and Financial Expert. The Company does not have a formal audit committee with a financial expert, and thus the Company lacks the board oversight role within the financial reporting process.





9.
Fraud Prevention and Detection. In conjunction with the lack of segregation of duties, the company did not institute specific anti-fraud controls.





10.
Whistle Blower Policy. The company did not institute, as of December 31, 2007, a whistle-blower policy and procedure as required by Section 301 of the Sarbanes-Oxley Act.





11.
Written Policies and Procedures. The Company did not have any written policies or procedures that cover the Board of Director, Management or its Employees. Currently the Company lacks any written policy regarding the following:





a)
Code of Ethics


b)
Management and Board over-site


c)
Employee responsibilities


d)
Program application and other IT applications


e)
Data security and Customer Information


f)
Fraud prevention and detection


25





Remediation of Material Weaknesses





As of December 31, 2007 and September 30, 2008, there were control deficiencies which constituted material weaknesses in our internal control over financial reporting. To the extent reasonably possible in our current financial condition, we will continue to seek the advice of outside consultants and internal resources to implement additional internal controls.





In addition, we are taking steps to hire additional personnel, implement new policies and procedures within the financial reporting process with adequate review and approval procedures. During the nine months ended September 30, 2008, the company hired a Director of IT and new Chief Financial Officer. These 2 additions to the Company’s senior management have begun to improve the internal control over financial reporting which may help to mitigate the material weaknesses in the future.





Through these steps, we believe we are addressing the deficiencies that affected our internal control over financial reporting as of December 31, 2007, and September 30, 2008. Because the remedial actions additionally require hiring of personnel, upgrading certain of our information technology systems, and relying extensively on manual review and approval, the successful operation of these controls for at least several quarters may be required before management may be able to conclude that the material weaknesses have been remediated. We intend to continue to evaluate and strengthen our ICFR systems. These efforts require significant time and resources. If we are unable to establish adequate ICFR systems, we may encounter difficulties, which in turn may have a material adverse effect on our ability to prepare financial statements in accordance with GAAP and to comply with our SEC reporting obligations.


26





PART II OTHER INFORMATION





Item 1. Legal Proceedings





The Company is involved in various claims and legal proceedings in the ordinary course of its business activities. The Company believes that any potential liability associated with the ultimate outcome of these matters will not have a material adverse effect on its financial position or results of operations.





Item 1A. Risk Factors





In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-KSB/A for the year ended December 31, 2007, as filed with the Securities and Exchange Commission on October 17, 2008, which could materially affect our business, financial condition, financial results or future performance. Reference is made to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements” of this report which is incorporated herein by reference.





Unauthorized disclosure of sensitive or confidential customer information could harm the Company’s business and standing with our customers.





The protection of our customer, employee and Company data is critical to us. The Company relies on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as payment card and personal information. Despite the security measures the Company has in place, its facilities and systems, and those of its third party service provider, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, whether by the Company or its vendors, could damage our reputation, expose us to risk of litigation and liability, disrupt our operations and harm our business.





We may be subject to claims and our insurance may not be sufficient to cover damages related to those claims.





We may be subject to lawsuits resulting from injuries associated with the use of sporting goods equipment that we sell. In addition, we may also be subject to lawsuits relating to the design, manufacture or distribution of our private label products. Additionally, we may incur losses relating to these claims or the defense of these claims and there is a risk that claims or liabilities will exceed our insurance coverage and we may be unable to retain adequate liability insurance in the future. Although we have entered into product liability indemnity agreements with many of our vendors, we cannot assure you that we will be able to collect payments sufficient to offset product liability losses or in the case of our private label products, collect anything at all.





Our inability to address the special risks associated with acquisitions could adversely impact our business.





We may investigate acquisition opportunities complementary to our business. We may pay for these acquisitions in cash or securities or a combination of both. There is no assurance that attractive acquisition targets will be available at reasonable prices or that we will be successful in any such transaction. Acquisitions involve a number of special risks, including:





·
diversion of our management’s attention;


·
integration of acquired businesses with our business; and


·
unanticipated legal liabilities and other circumstances or events.





Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds


During July 2008, the Company entered into a Securities Purchase Agreement to sell certain accredited investors 166,667 shares of common stock and 83,334 warrants to purchase shares of common stock at $1.50 per share, for the sum of $250,000. Professional fees paid in connection with a finder’s fee and related legal expenses were $32,000. During August 2008 the Company issued 148,254 shares of its common stock to an accredited investor in exchange for liquidated damages on debt.


27





Item 3. Defaults upon Senior Securities





None.





Item 4. Submission of Matters to a Vote of Security Holders





None.





Item 5. Other Information





See Part II. Item 2 above.





The Company filed a Form 8-K on October 20, 2008 and a Form 8-K on October 29, 2008 (together, the “Forms 8-K”).  The Forms 8-K were filed to report our press releases that disclosed our communications with Pacific Sunwear of California, Inc. (“PacSun”).





Item 6. Exhibits





Index to Exhibits





31.1 Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.


31.2 Certifications of the Treasurer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.


32.1 Certifications of President pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


32.2 Certifications of Treasurer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


28





SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on October 5, 2011 on its behalf by the undersigned, thereunto duly authorized.





AdrenalinaBy:
/s/ Ilia LekachIlia LekachChief Executive OfficerBy:
/s/ Ilia LekachIlia LekachChief Financial Officer


29