UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





x
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      FOR THE FISCAL YEAR ENDED MAY 31,
    2010





 ̈
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      FOR THE TRANSITION PERIOD FROM ____ TO
____





Commission
file Number:  000-52511





PHREADZ,
INC.


(Exact
name of registrant as specified in its charter)











Nevada


(State or
other jurisdiction of incorporation or organization)





98-0471052


(I.R.S.
Employer Identification Number)





63
Main Street, #202, Flemington, New Jersey 08822


(Address
of principal executive offices)


(908)
968-0838


(Issuer's
telephone number)





Securities
registered under Section 12(b) of the Exchange Act:    
None





Securities
registered under Section 12(g) of the Exchange Act:    
Common Stock, Par Value $0.001





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


 ̈
Yes  x
No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


 ̈
Yes  x
No





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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.


x
Yes    ̈
No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


 ̈
Yes    ̈
No


(Does not
currently apply to the Registrant)





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ̈





Indicate
by check mark whether the registrant is a large accelerated file, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer   ̈
              Accelerated
      filer  ̈Non–accelerated
      filer  ̈      (Do
      not check if a smaller reporting company)
              Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


 ̈ Yes
x
No





At August
9, 2010, the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the quoted price of $0.75 at
which the common equity was sold, was approximately
$13,864,854           .





As of
August 9, 2010, the number of shares outstanding of our common stock was
66,941,376 shares.





TABLE
OF CONTENTS




PART
      I
                                                                    1Item
      1.  Business
                                                                    1Item
      1A.  Risk Factors.
                                                                    4Item
      1B. Unresolved Staff Comments.
                                                                    15Item
      2.  Properties.
                                                                    15Item
      3.  Legal Proceedings.
                                                                    15Item
      4.  [Removed and Reserved.]
                                                                    15PART
      II
                                                                    15Item
      5.  Market for Registrant’s Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities.
                                                                    15Item
      6.  Selected Financial Data.
                                                                    18Item
      7.  Management’s Discussion and Analysis of Financial Condition and
      Results of Operations.
                                                                    19Item
      7A.  Quantitative and Qualitative Disclosures about Market
      Risk.
                                                                    24Item
      8.  Financial Statements.
                                                                    24Item
      9.  Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure.
                                                                    25Item
      9A(T).  Controls and Procedures.
                                                                    26Item
      9B.  Other Information.
                                                                    29PART
      III
                                                                    29Item
      10.  Directors, Executive Officers and Corporate
      Governance.
                                                                    29Item
      11.  Executive Compensation.
                                                                    34Item
      12.  Security Ownership of Certain Beneficial owners and Management
      and Related Stockholder Matters.
                                                                    36Item
      13.  Certain Relationships and Related Transactions, and Director
      Independence.
                                                                    38Item
      14.  Principal Accounting Fees and Services.
                                                                    38PART
      IV
                                                                    39Item
      15.  Exhibits and Financial Statement Schedules.
                                                                    39





PART
I





CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS




This
Annual Report on Form 10-K of Phreadz, Inc. contains forward-looking statements
as that term is defined in the Private Securities Litigation Reform Act of
1995.  These statements relate to anticipated future events, future results
of operations or future financial performance.  These forward-looking
statements include, but are not limited to, statements related to our ability to
raise sufficient capital to finance our planned operations, our ability to
develop or market our products, our ability to successfully compete in the
marketplace, our ability to secure additional technologies and licenses relevant
to our business, our ability to protect our intellectual property, and estimates
of our cash expenditures for the next 12 to 36 months. In some cases, you can
identify forward-looking statements by terminology such as “may,” “might,”
“will,” “should,” “intends,” “expects,” “plans,” “goals,” “projects,”
“anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue”
or the negative of these terms or other comparable terminology.




These
forward-looking statements are only predictions, are uncertain and involve
substantial known and unknown risks, uncertainties and other factors which may
cause our (or our industry’s) actual results, levels of activity or performance
to be materially different from any future results, levels of activity or
performance expressed or implied by these forward-looking statements. The “Risk
Factors” section of this Form 10-K  sets forth detailed risks,
uncertainties and cautionary statements regarding our business and these
forward-looking statements.




We
cannot guarantee future results, levels of activity or performance.  You
should not place undue reliance on these forward-looking statements, which speak
only as of the date that they were made.  These cautionary statements
should be considered with any written or oral forward-looking statements that we
may issue in the future.  Except as required by applicable law, including
the securities laws of the United States, we do not intend to update any of the
forward-looking statements to conform these statements to reflect actual
results, later events or circumstances or to reflect the occurrence of
unanticipated events.




Item
1.  Business





The
following describes the business of Phreadz, Inc. (formerly Atwood Minerals and
Mining Corp.) Whenever the terms “our,” “we” “us” and the “Company” are used
herein they refer to Phreadz, Inc., a Nevada corporation, together with UDM USA,
LLC (“UDM”) and Phreadz USA, LLC (“Phreadz”), our wholly-owned subsidiaries,
unless the context otherwise provides.




Corporate
Overview and History of Phreadz, Inc




Organization




Phreadz,
Inc., was incorporated in the State of Nevada on May 12, 2005.




Exploration
Stage Activities




The
Company was previously in the mineral exploration stage since its formation and
had at no time since its formation realized any revenues from its planned
operations.  Prior to the Company’s acquisitions of Phreadz and UDM, the
Company was primarily engaged in the acquisition and exploration of mining
claims.  Had it located a commercial minable reserve, the Company
previously expected to prepare the site for extraction operations and enter a
planned further development stage.


1


In June
2005, the Company acquired a 100% interest in the STEP mineral claim located in
the Nicola Mining Division, British Columbia, and Canada for $5,000.  The
claim was registered in the name of the vendor (the “Trustee”), who had executed
a trust agreement to hold the claim in trust on behalf of the
Company.




At
November 30, 2005, the Company recognized an impairment loss of $5,000 as it had
not been determined whether there were proven or probable reserves on the
property.




On
December 4, 2008, the Trustee advised the Company that he had performed work on
the claim costing $4,750 and that unless the Company notified him of its desire
to maintain the claim and pay him $4,750 by December 8, 2008, he would either
allow the claim to expire on December 9, 2008 or take control of the claim and
apply the work to extend the expiry date of the claim.  On December 9,
2008, the Trustee applied the work as assessment to extend the expiry date to
December 9, 2009.  On May 24, 2009, the Trustee acquired control over the
claim, at which time we no longer had any interest in the claim or any operating
business.  As a result, we became a “shell” corporation and began to seek
an attractive operating business with which to merge or otherwise
acquire.




On April
27, 2010, pursuant to share purchase agreements (the “Purchase Agreements”),
Phreadz, Inc.,  completed the acquisitions of Phreadz and UDM. 
The acquisitions were accounted for as a recapitalization effected by a reverse
merger, wherein Phreadz and UDM were considered the acquirer for accounting and
financial reporting purposes.  The pre-merger assets and liabilities of the
acquired entities have been brought forward at their book value and no goodwill
has been recognized.  The consolidated accumulated deficit of Phreadz and
UDM has been brought forward, and common stock and additional paid-in-capital of
the combined Company have been retroactively restated to give effect to the
exchange rates as set forth in the Purchase Agreements.




As set
forth above, on April 27, 2010 and pursuant to the terms and conditions of the
Purchase Agreements, we: (i) consummated the acquisitions of Phreadz and UDM,
and (ii) each of Phreadz and UDM became our wholly owned subsidiary. More
specifically, pursuant to and in connection with the Purchase
Agreements:




·
            in
      exchange for 100% of the issued and outstanding membership interests of
      Phreadz, we issued to the holders of the Phreadz membership interests an
      aggregate of 21,659,200 shares of our common stock;
  and




·
            in
      exchange for 100% of the issued and outstanding membership interests of
      UDM, we issued to the holders of the UDM membership interests an aggregate
      of 21,659,200 shares of our common
stock.




·
            in
      addition, pursuant to the terms of the Purchase Agreements, 32,712,176
      shares of our issued and outstanding common stock previously held by
      certain stockholders were
cancelled..




As a
result of the Company’s acquisitions of Phreadz and UDM, we experienced a change
in control and ceased to be a “shell” company as defined in Rule 12b-2
promulgated under the Exchange Act.




The
Business of Phreadz and UDM




Phreadz
was organized as a limited liability company in the State of Nevada in April
2009.  Its principal place of business is located at 63 Main Street #202,
Flemington, New Jersey 08822.  On May 11, 2009, Phreadz entered into a
Consulting Agreement with Jonathan Kossmann.  Mr. Kossmann is the engineer
and the architect of the Phreadz social networking platform. Since its
inception, Phreadz has not undertaken any material business
activities.




UDM was
organized as a limited liability company in the State of Nevada in April
2009.  Its principal place of business is located at 63 Main Street,
Flemington, New Jersey 08858.  On May 29, 2009, UDM consummated an asset
purchase agreement with Jacques Krischer and UDM, Ltd. pursuant to which it
acquired a music database and search tools.  Since its inception, UDM has
not undertaken any material business activities.


2


The
following business description refers to the business we propose to conduct
through each of Phreadz and UDM taken as a whole.




Overview




The
Company intends to provide Internet and mobile phone users multimedia social
networking forums and  communication channels to broadcast to
worldwide audiences.   The Company’s multimedia social platform,
called Phreadz (pronounced freds), has similarities to
both Facebook and Twitter.  However, this multimedia social platform was
designed for users to move content between and among all major social networking
sites and media and to create information and entertainment channels to publish
multimedia entertainment and information to large audiences.





Phreadz
will interact with all major multi-media platforms on the World Wide Web.
Additionally, the Company believes that its entertainment database may be
expanded to become one of the larger and more extensive databases of music that
may be able to  provide a continually expanding multimedia music
entertainment selection to its users.  The music database, which the
Company calls Universal Database of Music or UDM is complemented by music
entertainment channels on Phreadz and graphical music discovery applications for
internet browsers—which, in the view of the Company, will also become native to
smart phones.





The
Company believes that it has two unique product lines – one centered on social
media, the other on music.  Although these product lines are integrated,
they also stand individually as distinct revenue categories and serve multiple
markets.    Phreadz, rooted in consumer interactive
entertainment, may be able to benefit from revenue derived from two
sources:  advertisers who are willing to pay their host to reach
consumers and consumers who are interested in subscribing to the Phreadz
network.





The
Phreadz Social Network




Phreadz
is intended to be a social multimedia conversation network of videos, audio,
photos and slide presentations posted and shared globally.




Phreadz
supports the creation of posts and replies from video recorded through the web
browser, multimedia uploads from desktop and mobiles and also posts shared from
YouTube, Blip.tv, Flickr, Seesmic, DailyMotion, 12Seconds, Qik, Vimeo, Viddler,
SlideShare, CollegeHumor, TEDTalks, BBC News, ABC News and others.




Phreadz
is designed to make it easy to share posts and threads to anyone’s blogs,
microblogs and social networks with integration to Wordpress, Blogger,
LiveJournal, Tumblr, Drupal, Facebook, MySpace, Windows Live, Flickr, TwitPic,
Twitter and the networks supported by ping.fm.




Our
Phreadz network can also offer a type of multimedia “Twitter,” which allows
users to post videos, images, texts, audios, and links (V.I.T.A.L.) to all major
social network sites.  We anticipate that Phreadz may also be licensed as a
Software as a Service (SaaS) white label product, as it enhances social media
marketing. Additionally, Phreadz may be utilized as a publishing and
distribution tool, creating a vehicle for conversation/dialogue via a social
network that has the capacity for its users to share posts from a host of
content providers and to cross-post information out to blogs, twitter, Facebook,
MySpace, Windows live, and other social networking sites.





We will
use what we believe to be a proprietary technology to connect viewers with
channels, matching their interests and whims.  At launch, we expect
Phreadz’s channels to include, among others, two music channels, that will be
integrated with our UDM music databases.  We intend for Phreadz’s channels
to allow for not only the publishing and distribution of multimedia to large
audiences, but also for users to post their responses in multimedia form, as
well. Ourtechnology can be
designed to be compatible with iPhone, Blackberry, and Android
applications.


3


Our
Phreadz service has been beta tested in the United Kingdom and we expect that
this service will be rolled out across North America beginning before the end of
May 2010.




The
Universal Database and Music Search Tools




Our UDM
database is a collection of 23 linked databases, including metadata, on over
500,000 titles (in more than 100 music related fields) and “baseline” data on
millions of titles (comprising between 10 and 40 music related fields). 
Within the repository are more than 100,000 artist entries.  The databases
contain extensive coverage of works from all genres of music primarily in
English, French and German, and includes coverage in other European languages as
well.




UDM’s database has been developed to
allow and encourage public input contributions and updates, similar to
Wikipedia.The
Companyexpects that UDM’s
database will eventually offer a comprehensive search of music over the
internet, with users invited to search graphically by way of music attributes,
lyrics, contributing artists, and music properties (unlike Google which provides
for a text-only search).  It also may allow music fans to find similar
music by matching a song’s attributes, mood, time period, or genre with others
to discover new songs for downloading, sampling, or forwarding to a
friend.  Through the database, users may locate performances.  The web
site may also be used to license music for use in business web sites,
television, films, or internet videos.




Item
1A.  Risk Factors.





An
investment in our common stock involves various risks. You should carefully
consider the risk factors set forth below in conjunction with the other
information contained in this report before purchasing our common stock. If any
of the risks discussed in this report actually occur, our business, operating
results, prospects and/or financial condition could be adversely impacted. 
This could cause the market price of our common stock to decline and could cause
you to lose all or part of your investment.




Risks
Related to our Business and Our Industry




We
have no operating history on which to evaluate our potential for future
success.




Phreadz
and UDM were formed in April 2009 and have had no material operations to
date.  Consequently, evaluating an investment in us and predicting our
future results based upon our past performance is not possible, particularly
with respect to our ability to develop our products and services, to generate
and sustain a revenue base sufficient to cover operating expenses or to achieve
profitability.  We face many of the risks and uncertainties encountered by
early stage companies, and our future operating results may differ from what we
expect due to many factors, including: (i) slower than expected growth, or a
downturn in the “real-time” communications industry; (ii) the uncertain adoption
by consumers of the services that we intend to provide; and (iii) potential
competition from other service providers.




Based
on our historical financials, there is uncertainty as to our ability to continue
as a going concern.




In the
event that we are unable to achieve or sustain profitability or are otherwise
unable to secure additional external financing, we may not be able to meet our
obligations as they come due, raising substantial doubts as to our ability to
continue as a going concern.  Any such inability to continue as a going
concern may result in our security holders losing their entire investment. 
Our financial statements, which have been prepared in accordance with generally
accepted accounting principles, contemplate that we will continue as a going
concern and do not contain any adjustments that might result if we were unable
to continue as a going concern. Notwithstanding the foregoing our cash flow
deficiencies raise substantial doubt as to our ability to continue as a going
concern. Also, changes  in our operating plans, our existing and
anticipated working capital needs, the acceleration or modification of our
expansion plans, lower than anticipated revenues, increased expenses, potential
acquisitions or other events may also affect our ability to continue as a going
concern.


4


We
anticipate incurring operating losses and negative cash flows in the foreseeable
future resulting in uncertainty of future profitability and limitation on our
operations.




We
anticipate that the Company will incur operating losses and negative cash flows
in the foreseeable future, and to accumulate increasing deficits as we increase
our expenditures for (i) our website and database expansions, (ii)
infrastructure, (iii) sales and marketing, (iv) research and development, (v)
personnel, and (vi) general business enhancements.  Any increases in our
operating expenses will require us to achieve significant revenue before we can
attain profitability.  In the event that we are unable to achieve
profitability or raise sufficient funding to cover our losses, we may not be
able to meet our obligations as they come due, raising substantial doubts as to
our ability to continue as a going concern.




We
will need additional capital to pursue our marketing strategies, conduct our
operations and develop our products, and our ability to obtain the necessary
funding is uncertain.




We will
require significant additional capital resources from outside sources including
equity and/or debt financings, license arrangements, grants and/or collaborative
research arrangements in order to execute on our marketing strategy, develop
products and continue operations, and we intend to seek to raise such additional
capital.  In addition, we anticipate needing additional capital for our
anticipated need to hire additional employees, increase our marketing budget,
lease additional office space and increase our research and development
investment.  However, we do not know if such capital will be available to
us on reasonably favorable terms, or at all.  If we are able to raise such
additional capital, our existing stockholders will experience dilution.  If
we fail to obtain additional capital as and when required, our business will not
succeed.




Our
business model depends on our ability to successfully develop and operate our
networks and deploy new offerings and technology.




There can
be no assurances that we will be able to successfully design or engineer our
networks or that we will not experience problems with the reliability of our
network if we are able to make it operational in the future.  Any
reliability problems that adversely affect our ability to operate our networks
would likely reduce revenues and restrict the growth of our business.  Our
future success will also depend in part on other factors, including, but not
limited to, our ability to:




·
            Find
      secure hosting;




·
            Enhance
      our offerings;




·
            Address
      the needs of our prospective users;




·
            Respond
      to technological advances and emerging industry standards and practices on
      a timely and cost-effective basis;
and




·
            Develop,
      enhance and improve the responsiveness, functionality and features of our
      infrastructure services and
networks.




If we are
unable to integrate and capitalize on new technologies and standards
effectively, our business could be adversely affected.




Our
business model is new and unproven, and, therefore, we can provide no assurance
that we will be successful in pursuing it.




Our UDM
and Phreadz operations represent new and untested business models, for which
there are no assurances that we will succeed in building a profitable
business.  Our ability to generate advertising is highly dependent on
market adoption of our services and products.  If we are unable to attract
revenues, our operations and financial condition will be adversely
affected.


5


The
departure of the President of the Phreadz division could impact our ability to
implement the Phreadz business plan.




Jonathan
Kossman, the President of our Phreadz division, resigned his employment with the
Company on August 4, 2010, which resignation was accepted by the Board of
Directors.  Mr. Kossman was instrumental in developing the Phreadz network
and the loss of his services may impact the Company’s ability to successfully
roll-out the Phreadz network.  Additionally, Mr. Kossman has raised certain
issues with respect to the ownership of certain of the Company’s assets. 
While the Company does not believe this dispute with Mr. Kossman will materially
impact the Company’s business, there can be no assurances that the disputes will
be resolved in the Company’s favor.




The
departure of our Chairman, Chief Executive Officer and the President of our UDM
division and/or other key personnel could compromise our ability to execute our
strategic plan and may result in additional severance costs to us.




Our
success largely depends on the skills, experience and efforts of our key
personnel, including Georges Daou, Chairman, Christina Domecq, Chief Executive
Officer, and Jacques Krischer, President of our UDM division.  The loss of
these persons, or our failure to retain other key personnel, would jeopardize
our ability to execute our strategic plan and materially harm our
business.  We have currently entered into employment agreements with each
of Messrs. Daou and Krischer.  In particular, termination of Mr. Daou’s
employment without cause will result in significant severance obligations to
us.  In addition, we intend to enter into a written employment agreement
with each of our other key executives that can be terminated at any time by us
or the executives.




We
will need to recruit and retain additional qualified personnel to successfully
grow our business.




Our
future success will depend in part on our ability to attract and retain
qualified operations, marketing and sales personnel as well as engineers. 
Inability to attract and retain such personnel could adversely affect the growth
of our business.  We expect to face competition in the recruitment of
qualified personnel, and we can provide no assurance that we will attract or
retain such personnel.




We
will rely on third parties for software and hardware development, manufacturing
content and technology services.




We expect
to rely on third party developers to provide software and hardware.  If we
experience problems with any of our third party technology or products, our
customers’ satisfaction could be reduced, and our business could be adversely
affected.  In addition, we expect to rely on third parties to provide
content through strategic relationships and other arrangements.  If we
experience difficulties in maintaining these relationships or developing new
relationships on a timely basis and on terms favorable to us, our business and
financial condition could be adversely affected.




Malfunctions
of third party hosting services could adversely affect their business, which may
impede our ability to attract and retain strategic partners and
customers.




To the
extent the number of users of networks utilizing our products suddenly
increases, the technology platform and hosting services which will be required
to accommodate a higher volume of traffic may result in slower response times or
service interruptions.  System interruptions or increases in response time
could result in a loss of potential or existing users and, if sustained or
repeated, could reduce the appeal of our networks to users.  In addition,
since users depend on real time communication, outages caused by increased
traffic could result in delays and system failures.  These types of
occurrences could cause users to perceive that our solution does not function
properly and could therefore adversely affect our ability to attract and retain
licensees, strategic partners and customers.


6


There
has been increased competition in the “real-time” communications industry., As
more companies seek to provide products and services similar to our proposed
products and services, and because larger and better-financed competitors may
affect our ability to operate our business and achieve profitability, our
business may fail.




Competition
for securing IM and VoIP services is intense.  We are aware of similar
products and services that will compete directly with our proposed products and
services, and some of the companies developing these similar products and
services are larger, better-financed companies that may develop products
superior to our proposed products.  Many of our prospective competitors are
larger and have greater financial resources, which could create significant
competitive advantages for those companies.  Our future success depends on
our ability to compete effectively with our competitors.  As a result, we
may have difficulty competing with larger, established competitor companies.
Generally, these competitors have:




·
            substantially
      greater financial, technical and marketing
  resources;




·
            larger
      customer bases;




·
            better
      name recognition; and




·
            potentially
      more expansive product offerings.




These
competitors are likely to command a larger market share, which may enable them
to establish a stronger competitive position than we have, in part, through
greater marketing opportunities.  Further, our competitors may be able to
respond more quickly than us to new or emerging technologies and changes in user
preferences and to devote greater resources than us to developing and operating
networks of affinity websites.  These competitors may develop products or
services that are comparable or superior.  If we fail to address
competitive developments quickly and effectively, we may not be able to remain a
viable entity.




Growth
of internal operations and business may strain our financial
resources.




We will
be significantly expanding the scope of our operating and financial systems in
order to build out our business.  Our growth rate may place a significant
strain on our financial resources for a number of reasons, including, but not
limited to, the following:




·
            The
      need for continued development of the financial and information management
      systems;




·
            The
      need to manage relationships with licensees, resellers, distributors and
      strategic partners;




·
            Difficulties
      in hiring and retaining skilled management, technical and other personnel
      necessary to support and manage our business;
  and




·
            The
      need to train and manage our growing employee
  base.




The
addition of new infrastructure services, networks, vertical categories and
affinity websites, as well as the attention they demand, may also strain our
management resources.  We cannot give you any assurance that we will
adequately address these risks and, if we do not, our ability to successfully
expand our business could be adversely affected.


7


If
we do not successfully enhance existing products and services or fail to develop
new products and services in a cost-effective manner to meet customer demand in
the rapidly evolving market for Internet and IP-based communications services,
our business may fail.




The
market for communications services is characterized by rapidly changing
technology, evolving industry standards, changes in customer needs and frequent
new service and product introductions.  We are currently focused on
securing “real-time” communications.  Our future success will depend, in
part, on our ability to use new technologies effectively, to continue to develop
our technical and marketing expertise, to enhance our existing services and to
develop new services that meet changing customer needs on a timely and
cost-effective basis.  We may not be able to adapt quickly enough to
changing technology, customer requirements and industry standards.  If we
fail to use new technologies effectively, to develop our technical expertise and
new services, or to enhance existing services on a timely basis, either
internally or through arrangements with third parties, our product and service
offerings may fail to meet customer needs, which would adversely affect our
revenues and prospects for growth.




Our
services may have technological problems or may not be accepted by
consumers.  To the extent we pursue commercial agreements, acquisitions
and/or strategic alliances to facilitate new product or service activities, the
agreements, acquisitions and/or alliances may not be successful.  If any of
these events were to occur, they could damage our reputation, limit our growth,
negatively affect our operating results and harm our business.




In
addition, if we are unable, for technological, legal, financial or other
reasons, to adapt in a timely manner to changing market conditions or customer
requirements, we could lose customers, strategic alliances and market
share.  Sudden changes in user and customer requirements and preferences,
the frequent introduction of new products and services embodying new
technologies and the emergence of new industry standards and practices could
render our existing products, services and systems obsolete.  The emerging
nature of products and services in the technology and communications industry
and their rapid evolution will require that we continually improve the
performance, features and reliability of our products and services. Our success
will depend, in part, on our ability to:




·
            Enhance
      our existing products and services;




·
            Design,
      develop, launch and/or license new products, services and technologies
      that address the increasingly sophisticated and varied needs of our
      current and prospective customers;
and




·
            Respond
      to technological advances and emerging industry standards and practices on
      a cost-effective and timely basis.




The
development of additional products and services and other proprietary technology
involves significant technological and business risks and requires substantial
expenditures and lead time.  We may be unable to use new technologies
effectively.  Updating our technology internally and licensing new
technology from [strategic partners and other third parties may not occur, which
could adversely affect our ability to develop and expand our
business.]




If
the market for our services does not develop as anticipated, our business would
be adversely affected.




The
success of our products and services depend on the growth of social network site
(SNS) users, which in turn depends on wider public acceptance of our websites
and offerings.  Potential new users may view our offerings as unattractive
relative to other traditional services for a number of reasons, including better
perceived offerings or pricings than we currently offer. Potential users may
also view more familiar services as sufficient for their SNS and music search
needs. There is no assurance that our offerings will ever achieve broad public
acceptance.


8


If
our products do not gain market acceptance, we may not be able to fund future
operations.




A number
of factors may affect the market acceptance of our products or any other
products we develop or acquire, including, among others:




·
            the
      price of our products relative to other products that seek to secure
      “real-time” communication;




·
            the
      perception by users of the effectiveness of our
  products;




·
            our
      ability to fund our sales and marketing efforts;
  and




·
            the
      effectiveness of our sales and marketing
  efforts.




If our
products do not gain market acceptance, we may not be able to fund future
operations, including the development of new products and/or our sales and
marketing efforts for our current products, which inability would have a
material adverse effect on our business, financial condition and operating
results.




If
we are not able to adequately protect our proprietary rights, our operations
would be negatively impacted.




Our
ability to compete partly depends on the superiority, uniqueness and value of
our technology and intellectual property.  To protect our proprietary
rights, we rely on a combination of patent, trademark, copyright and trade
secret laws, confidentiality agreements with our employees and third parties,
and protective contractual provisions.  Despite these efforts, any of the
following may reduce the value of our intellectual property:




·
            Our
      applications for patents, trademarks and copyrights relating to our
      business may not be granted and, if granted, may be challenged or
      invalidated;




·
            Issued
      trademarks, copyrights, or patents may not provide us with any competitive
      advantages;




·
            Our
      efforts to protect our intellectual property rights may not be effective
      in preventing misappropriation of our technology;
  or




·
            Our
      efforts may not prevent the development and design by others of products
      or technologies similar to or competitive with, or superior to those we
      develop.




In
addition, we may not be able to effectively protect our intellectual property
rights in certain foreign countries where we may do business in the future or
from which competitors may operate.  While we have numerous pending
international patents, obtaining such patents will not necessarily protect our
technology or prevent our international competitors from developing similar
products or technologies.  Our inability to adequately protect our
proprietary rights would have a negative impact on our operations.




If
we are forced to litigate to defend our intellectual property rights, or to
defend against claims by third parties against us relating to intellectual
property rights, legal fees and court injunctions could adversely affect our
financial condition or end our business.




Disputes
regarding the ownership of technologies and intellectual property rights are
common and likely to arise in the future.  We may be forced to litigate
against other competitors to enforce or defend our intellectual property rights,
to protect our trade secrets or to determine the validity and scope of other
parties’ proprietary rights.  Any such litigation could be very costly and
could distract our management from focusing on operating our business.  The
existence and outcome of any such litigation could harm our business. 
Additionally, any such costs we incur to defend or protect our intellectual
property rights could greatly impact our financial condition.


9


Further,
we can give no assurances that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against us or that any such assertions or prosecutions will not
materially adversely affect our business.  Regardless of whether any such
claims are valid or can be successfully asserted, defending against such claims
could cause us to incur significant costs and could divert resources away from
our other activities.  In addition, assertion of infringement claims could
result in injunctions that prevent us from distributing our
products.




We
could be subject to liability for hacking or spam on our networks.




The
nature and breadth of the content on our networks could result in liability in
various areas, including claims relating to:




·
            Defamation,
      libel, negligence, personal injury and other legal theories based on the
      nature and content of the material appearing on our
    networks;




·
            Copyright
      or trademark infringement or other wrongful acts due to the actions of
      third parties; and




·
            Identity
      theft, misuse of personal data or
information.




Any such
claims could likely result in the Company incurring substantial costs and would
be a drain on our financial and other resources.  In addition, such claims
could disrupt our relationships with licensees, resellers, strategic partners
and other third parties.  This would negatively affect our user base and
could reduce our revenues as a result.




The
laws governing online secure communications are largely unsettled, and if we are
or become subject to various government regulations, costs associated with those
regulations may materially adversely affect our business.




The
current regulatory environment for our services remains unclear.  We can
give no assurance that we will be in or have been in compliance with local,
state and/or federal laws or other laws.  Further, we can give no assurance
that we will not unintentionally violate such laws or that such laws will not be
modified, or that new laws will be enacted in the future which would cause us to
be in violation of such laws.




It is
possible that Congress and some state legislatures may seek to impose increased
fees, regulations and administrative burdens on the services that we provide.
Added consumer protection requirements and other obligations could be imposed.
Such regulations could result in substantial costs depending on the technical
changes required to accommodate the requirements, and any increased costs could
erode our pricing advantage over competing forms of communication and may
adversely affect our business.




In
addition to regulations addressing our services, other regulatory issues
relating to the Internet in general could affect our ability to provide
services.  Congress has adopted legislation that regulates certain aspects
of the Internet, including online content, user privacy, taxation, liability for
third-party activities and jurisdiction.  In addition, a number of
initiatives pending in Congress and state legislatures would prohibit or
restrict advertising or sale of certain products and services on the Internet,
which may have the effect of raising the cost of doing business on the Internet
generally.


10


Telephone
carriers have petitioned governmental agencies to enforce regulatory tariffs,
which, if granted, would increase the cost of online communications, and such
increase in cost may impede the growth of secure online communication and
adversely affect our business.




The
growing popularity and use of online secure communications has burdened the
existing telecommunications infrastructures, and many high traffic areas have
begun to experience interruptions in service.  As a result, certain local
telephone carriers have petitioned governmental agencies to enforce regulatory
tariffs on IP telephony traffic that crosses over the traditional time division
multiplexing (TDM) telephony networks.  If any of these petitions or the
relief that they seek is granted, the costs of communicating online could
increase substantially, potentially adversely affecting the growth in the use of
online networks and communications. Any of these developments could have an
adverse effect on our business.




If
there are large numbers of business failures and mergers in the communications
industry, our ability to manage costs or increase our subscriber base may be
adversely affected.




The
intensity of competition in the communications industry has resulted in
significant declines in pricing for communications services. The intensity of
competition and its impact on communications pricing have caused some
communications companies to experience financial difficulty. Our prospects for
maintaining or further improving communications costs could be negatively
affected if one or more key communications providers were to experience serious
enough difficulties to impact service availability, if communications companies
merge reducing the number of companies from which we purchase wholesale
services, or if communications bankruptcies and mergers reduce the level of
competition among database, SNS and other service providers.




If
we expand into international markets, our inexperience outside the United States
would increase the risk that our international expansion efforts will not be
successful, which would in turn limit our prospects for growth.




We may
explore expanding our business to other countries.  Expansion into
international markets requires significant management attention and financial
resources.  In addition, we may face the following risks associated with
any expansion outside the United States:




·
            challenges
      caused by distance, language and cultural
  differences;




·
            legal,
      legislative and regulatory
restrictions;




·
            currency
      exchange rate fluctuations;




·
            economic
      instability;




·
            longer
      payment cycles in some countries;




·
            credit
      risk and higher levels of payment
fraud;




·
            potentially
      adverse tax consequences; and




·
            higher
      costs associated with doing business
  internationally.




These
risks could harm our international expansion efforts, which could in turn harm
our business prospects.




We
are subject to management risks.




New
ventures have substantial inherent risks including, but not limited to,
development, marketing, sales, distribution, human factors and the coordination
of any and all of these activities.  Notwithstanding our due diligence and
any pre-planning, our products and services may encounter unexpected problems in
connection with any of these activities that could not be foreseen or accurately
predicted and which could have a material adverse effect on our business,
financial condition and results of operations.


11


We
do not have any independent directors and we have not voluntarily implemented
various corporate governance measures, in the absence of which stockholders may
have more limited protections against interested director transactions,
conflicts of interests and similar matters.





Recent
Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in
the adoption of various corporate governance measures designed to promote the
integrity of the corporate management and the securities markets. Some of these
measures have been adopted in response to legal requirements. Others have been
adopted by companies in response to the requirements of national securities
exchanges, such as the NYSE or The NASDAQ Stock Market, on which their
securities are listed. Among the corporate governance measures that are required
under the rules of national securities exchanges are those that address board of
directors’ independence, audit committee oversight, and the adoption of a code
of ethics. Our Board of Directors is comprised of three individuals, two of whom
are also our executive officers and the third of whom is an officer of one of
our significant stockholders. Our executive officers make decisions on all
significant corporate matters such as the approval of terms of the compensation
of our executive officers and the oversight of the accounting
functions.




We have
not yet adopted any of these corporate governance measures and, since our
securities are not yet listed on a national securities exchange, we are not
required to do so. We have not adopted corporate governance measures such as an
audit or other independent committees of our Board of Directors as we presently
do not have any independent directors. If we expand our Board membership in
future periods to include additional independent directors, we may seek to
establish an audit and other committees of our Board of Directors. It is
possible that if our Board of Directors included independent directors and if we
were to adopt some or all of these corporate governance measures, stockholders
would benefit from somewhat greater assurances that internal corporate decisions
were being made by disinterested directors and that policies had been
implemented to define responsible conduct. For example, in the absence of audit,
nominating and compensation committees comprised of at least a majority of
independent directors, decisions concerning matters such as compensation
packages to our senior officers and recommendations for director nominees may be
made by a majority of directors who have an interest in the outcome of the
matters being decided. Prospective investors should bear in mind our current
lack of corporate governance measures in formulating their investment
decisions.




We have agreed to
indemnify our directors and officers




Our
officers and directors are required to exercise good faith and high integrity in
our management affairs. Our articles of incorporation, our bylaws and the Nevada
Revised Statutes provide, however, that our officers and directors will have no
liability to our stockholders for losses sustained or liabilities incurred which
arise from any transaction in their respective managerial capacities unless
they:





•
            violated
      their duty of loyalty,


•
            did
      not act in good faith,


•
            engaged
      in intentional misconduct or knowingly violated the
  law,


•
            approved
      an improper dividend or stock repurchase,
or


•
            derived
      an improper benefit from the
transaction.





Our
articles of incorporation, our bylaws and the Nevada Revised Statutes also
provide for the indemnification by us of our officers and directors against any
losses or liabilities they may incur as a result of the manner in which they
operate our business or conduct the internal affairs, provided that in
connection with these activities they act in good faith and in a manner that
they reasonably believe to be in, or not opposed to, our best interests, and
their conduct does not constitute gross negligence, misconduct or breach of
fiduciary obligations. We have also entered into indemnity agreements with our
officers and directors.  These indemnification obligations could result in
the Company incurring substantial expenditures to cover the cost of settlement
or damage awards against directors and officers, which we may be unable to
recoup. These provisions and resultant costs may also discourage our company
from bringing a lawsuit against directors and officers for breaches of their
fiduciary duties, and may similarly discourage the filing of derivative
litigation by our stockholders against our directors and officers even though
such actions, if successful, might otherwise benefit our company and
stockholders.


12


We
have and will continue to incur increased costs as a result of being a public
company, compared to the Company’s historical operations as a private
company.




As a
public company, we have and will continue to incur significant legal, accounting
and other expenses that UDM and Phreadz did not incur as private
companies.  We expect the laws, rules and regulations governing public
companies to increase our legal and financial compliance costs and to make some
activities more time-consuming and costly.  Additionally, with the
Acquisitions and the termination of our status as a shell company, we will incur
additional costs associated with our public company reporting
requirements.




Risks
Related to our Stock




Trading
in our common stock is limited and the price of our common stock may be subject
to substantial volatility.




Our
common stock is traded on the OTC Bulletin Board, and therefore the trading
volume is more limited and sporadic than if our common stock were traded on a
national stock exchange such as The Nasdaq Stock Market or the NYSE Amex.
Additionally, the price of our common stock may be volatile as a result of a
number of factors, including, but not limited to, the following:




·
            quarterly
      variations in our operating
results;




·
            large
      purchases or sales of our common
stock;




·
            actual
      or anticipated announcements of new products or services by us or
      competitors;




·
            general
      conditions in the markets in which we compete;
  and




·
            economic
      and financial conditions.




“Penny
stock” regulations may impose certain restrictions on the marketability of our
securities.




The SEC
has adopted regulations which generally define a “penny stock” to be any equity
security that has a price of less than $5.00 per share or an exercise price of
less than $5.00 per share, subject to certain exceptions (including the issuer
of the securities having net tangible assets (i.e., total assets less
intangible assets and liabilities) in excess of $2,000,000 or average revenue of
at least $6,000,000 for the last three years). As a result, our common stock
could be subject to these rules that impose additional sales practice
requirements on broker-dealers who sell our securities to persons other than
established customers and accredited investors (generally persons with a net
worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with their spouse).  For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase of
such securities and have received the purchaser’s written consent to the
transaction prior to the purchase.  Additionally, for any transaction
involving a “penny stock,” unless exempt, the rules require the delivery, prior
to the transaction, of a risk disclosure document mandated by the SEC relating
to the “penny stock” market.  The broker-dealer must also disclose the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and, if the broker-dealer is the sole
market maker, the broker-dealer must disclose this fact and the broker-dealer’s
presumed control over the market.  Finally, monthly statements must be sent
disclosing recent price information for the “penny stock” held in the account
and information on the limited market in “penny
stocks.”  Consequently, although the “penny stock” rules do not
currently apply to our securities, if these rules do become applicable in the
future, this may restrict the ability of broker-dealers to sell our
securities.


13


Our
officers and directors collectively own a substantial portion of our outstanding
common stock, and as long as they do, they may be able to control the outcome of
stockholder voting.





Our
officers and directors are collectively the beneficial owners of approximately
[37.51%] of the outstanding shares of our common stock. In addition, under the
terms of Mr. Daou’s employment agreement and Ms Domecq’s employment agreement
with us, they are entitled to receive equity in the Company as part of their
compensation thereunder.  As long as our officers and directors
collectively own a significant percentage of our common stock, our other
shareholders may generally be unable to affect or change the management or the
direction of our company without the support of our officers and directors. As a
result, some investors may be unwilling to purchase our common stock. If the
demand for our common stock is reduced because our officers and directors have
significant influence over our company, the price of our common stock could be
materially depressed. The officers and directors will be able to exert
significant influence over the outcome of all corporate actions requiring
stockholder approval, including the election of directors, amendments to our
certificate of incorporation and approval of significant corporate
transactions.





Securities
analysts may not cover our common stock and this may have a negative impact on
our common stock’s market price.




The
trading market for our common stock may depend on the research and reports that
securities analysts publish about us or our business.  We do not have any
control over these analysts.  There is no guarantee that securities
analysts will cover our common stock.  If securities analysts do not cover
our common stock, the lack of research coverage may adversely affect our common
stock’s market price, if any. If we are covered by securities analysts, and our
stock is downgraded, our stock price would likely decline.  If one or more
of these analysts ceases to cover us or fails to publish regularly reports on
us, we could lose visibility in the financial markets, which could cause our
stock price or trading volume to decline.




We
may seek to raise additional funds, finance acquisitions or develop strategic
relationships by issuing capital stock.




We have
financed our operations, and we expect to continue to finance our operations,
acquisitions and develop strategic relationships, by issuing equity or
convertible debt securities, which could significantly reduce or dilute the
percentage ownership of our existing stockholders.  Furthermore, any newly
issued securities could have rights, preferences and privileges senior to those
of our existing stock.  Moreover, any issuances by us of equity securities
may be at or below the prevailing market price of our stock and in any event may
have a dilutive impact on your ownership interest, which could cause the market
price of stock to decline.




We may
also raise additional funds through the incurrence of debt, and the holders of
any debt we may issue would have rights superior to your rights in the event we
are not successful and are forced to seek the protection of the bankruptcy
laws.




We
have no current intention of declaring or paying any cash dividends on our
common stock.




We do not
plan to declare or pay any cash dividends on our common stock. Our current
policy is to retain all funds and any earnings for use in the operation and
expansion of our business.


14


Item
1B. Unresolved Staff Comments.





None.





Item
2.  Properties.





Our
principal executive offices are located at 63 Main Street, Flemington, New
Jersey 08858. This office space is provided by Groupmark Financial Services
Ltd., with no cost to the Company. This arrangement began on April 1, 2009. The
telephone number at this address is (908) 968-0838.  It is intended that
the Company will be headquartered in San Francisco, California.





Item
3.  Legal Proceedings.





We are
not a party to any legal proceedings. Management is not aware of any legal
proceedings proposed to be initiated against the Company. However, from time to
time, the Company may become subject to claims and litigation generally
associated with any business venture operating in the ordinary
course.





Item
4.  [Removed and
Reserved.]





Not
applicable.





PART
II





Item
5.  Market for Registrant’s Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.





The
Company’s common stock is traded on the Over-the-Counter Bulletin Board. On June
18, 2010 we changed our Company name to Phreadz, Inc. and on July 6, 2010 our
symbol changed from “AWDM” to “PHDZ”. All share prices have been adjusted to
provide for the 7-1 forward stock split effected on September 28, 2009. We
consider our stock to be “thinly traded” and any reported sale prices may not be
a true market–based valuation of its stock. The following table sets forth, for
the periods indicated, the high and low bid prices of a share of our common
stock for the last two fiscal years.





HIGH BID
                  
                  
                  LOW BID2010Quarter
      Ended August 2009
                  
                  $
                  0.179
                  
                  
                  $
                  0.146Quarter
      Ended November 30, 2009
                  
                  $
                  0.146
                  
                  
                  $
                  0.021Quarter
      Ended February 28, 2010
                  
                  $
                  0.146
                  
                  
                  $
                  0.146Quarter
      Ended May 31, 2010
                  
                  $
                  1.000
                  
                  
                  $
                  0.1462009Quarter
      Ended August 31, 2008
                  
                  $
                  0.036
                  
                  
                  $
                  0.036Quarter
      Ended November 30, 2008
                  
                  $
                  0.146
                  
                  
                  $
                  0.036Quarter
      Ended February 28, 2009
                  
                  $
                  0.429
                  
                  
                  $
                  0.286Quarter
      Ended May 31, 2009
                  
                  $
                  0.286
                  
                  
                  $
                  0.179





The above
quotations are taken from information provided by OTCMarkets.com and may not
represent actual transactions.





Holders
of Common Equity





At August
9, 2010, the Company had 57 shareholders of record, and an unknown number of
additional holders whose stock is held in "street form".  The transfer
agent of our common stock is Island Stock Transfer.


15


The
acquisition of Phreadz and UDM by the Company on April 27, 2010 was accounted
for as a recapitalization by the Company. The recapitalization was the merger of
two private LLCs into a non-operating public shell corporation (the Company)
with nominal net assets and as such is treated as a capital transaction, rather
than a business combination. The transactions is the equivalent to the issuance
of stock by the private company for the net monetary assets of the shell
corporation. The pre-acquisition consolidated financial statements of Phreadz
and UDM are treated as the historical financial statements of the consolidated
Company. Therefore, the capital structure of the consolidated enterprise, being
the capital structure of the legal parent, is different from that appearing in
the financial statements of Phreadz and UDM in earlier periods due to the
recapitalization.





On April 3, 2009, 1,920,000 shares were
issued for cash.





On May
28, 2009, 12,480,000 shares were issued for cash.





On August
25, 2009, 23,136,000 shares were issued for cash.





On March
10, 2010, 5,782,400 shares were issued for cash.





On April
27, 2010, 42,700,000 shares were issued and 32,712,176 shares were cancelled
upon the recapitalization due to the reverse merger.





On May
20, 2010, 1,933,333 shares were issued at $0.15 per share, for an aggregate cash
amount of $290,000





On April
27, 2010, we completed the acquisitions under the Purchase Agreements entered
into with both Phreadz and UDM. As a condition of closing, 32,712,176 shares of
our issued and outstanding common stock previously held by certain stockholders
were cancelled pursuant to the terms of the Purchase Agreements. We issued
21,659,200 shares of our common stock in exchange for 100% of the membership
units of Phreadz and 21,659,200 shares of our common stock in exchange for 100%
of the membership units of UDM, at which time Phreadz and UDM became our wholly
owned subsidiaries.





On May
20, 2010, we entered into a Unit Purchase Agreement with a single accredited
investor (the “May 20th
Purchaser”) pursuant to which the May 20th
Purchaser purchased 10.74074 Units (each, a “Unit”) at a purchase price of
$27,000 per Unit, for an aggregate purchase price of $290,000.  Each Unit
purchased consisted of: (a) one hundred eighty thousand (180,000) shares of the
Company’s common stock; (b) a Series A Warrant  (the “Series A
Warrants”) to purchase ninety thousand (90,000) shares of common stock at an
exercise price of $0.30 per share; and (c) a Series B Warrant (the “Series B
Warrants”) to purchase ninety thousand (90,000) shares of common stock at an
exercise price of $0.60 per share.  Accordingly, the May 20th
Purchaser received 1,933,333 shares of common stock (the “Shares”); a Series A
Warrant to purchase 966,666 shares of common stock and a Series B Warrant to
purchase 966,666 shares of common stock.





On May
31, 2010, we entered into Unit Purchase Agreements with nine (9) accredited
investors (the “May 31st
Purchasers) pursuant to which the May 31st
Purchasers purchased 33.0425 Units at a purchase price of $27,000 per Unit, for
an aggregate purchase price of $892,147.34.  The purchase price for the
Units was paid via assignment of certain outstanding promissory notes originally
issued by our subsidiaries UDM and Phreadz.  In addition, one May 31st
Purchaser also received the “right” with its note to receive the equivalent
amount of the face amount of such note in Units with the consideration of such
May 31st
Purchaser’s original note. Each Unit purchased consisted of: (a) one hundred
eighty thousand (180,000) shares of the Company’s common stock; (b) a Series A
Warrant to purchase ninety thousand (90,000) shares of common stock at an
exercise price of $0.30 per share; and (c) a Series B Warrant to purchase ninety
thousand (90,000) shares of common stock at an exercise price of $0.60 per
share.  Accordingly, in total, the May 31st
Purchasers received 6,514,310 shares of common stock; Series A Warrants to
purchase 3,257,154 shares of common stock; and Series B Warrants to purchase
3,257,154 shares of common stock.


16


In April
2007 the Company entered into an Exchange Agreement (“Exchange Agreement”) with
Professional Capital Partners, Ltd. ("PCP"),  pursuant to which the
Company and PCP agreed to exchange 5,325,824 shares of the Company's common
stock (the “Original Shares”) for $1,000,000 worth of Units in its next
financing. The Company has offered and sold Units in a financing, with each Unit
consisting of: (i) 180,000 shares of the Company's common stock; (ii) a Series A
warrant to purchase 90,000 shares of common stock at an exercise price of $0.30
per share; and (iii) a Series B Warrant to purchase 90,000 shares of common
stock at an exercise price of $0.60 per share.





On June
22, 2010 PCP exercised this Exchange Agreement and exchanged its Original Shares
for 37 Units. As  a result, PCP received 6,660,000 shares of common
stock; a Series A Warrant to purchase 3,330,000 shares of common stock; and a
Series B Warrant to purchase 3,330,000 shares of common stock.





A
financing expense of $1,000,632 was recorded at May 31, 2010 as a stock issuance
liability with the exercise of the Exchange Agreement on June 22, 2010 because
this cost became known prior to the report date of this disclosure. The
financing cost was determined using the last trade of $0.75 as reported on
OTCBB.com on June 11, 2010, prior to the June 22, 2010 exercise date, on the
additional 1,334,176 shares of common stock issued to PCP pursuant to the
Exchange Agreement





Dividends





The
Company has never paid a cash dividend on its common stock nor does it
anticipate paying cash dividends on its common stock in the near future. It is
the present policy of the Company not to pay cash dividends on the common stock
but to retain earnings, if any, to fund growth and expansion. Any payment of
cash dividends on the common stock in the future will be dependent upon the
Company’s financial condition, results of operations, current and anticipated
cash requirements, plans for expansion, as well as other factors the Board of
Directors deems relevant.





Warrants





The fair
value of the 4,223,820 Series A Warrants, with an exercise price of $0.30 per
share, issued in connection with the Unit Purchase Agreements described herein
during the period April 3, 2009 (Inception) to May 31, 2010 was estimated using
the Black-Scholes option pricing model and based on the following
assumptions:





Series A Warrants
                    
                    2010Risk-free
      interest rate (based on US Treasury Note Yield (2 year)
                    
                    
                    1.00
                    %Dividend
      yield
                    
                    
                    0.00
                    %Expected
      stock price volatility (Cumulative)
                    
                    
                    275.06
                    %Weighted
      average expected warrants life
                    
                    9 years





The
Company analyzed the beneficial nature of the conversion terms and determined
that no material beneficial conversion feature exists.





The fair
value of the 4,223,820 Series B Warrants, with an exercise price of $0.60 per
share, issued in connection with the Unit Purchase Agreements described herein
during the period April 3, 2009 (Inception) to May 31, 2010 was estimated using
the Black-Scholes option pricing model and based upon the following
assumptions:





Series B Warrants
                    
                    2010Risk-free
      interest rate (based on US Treasury Note Yield (2 year)
                    
                    
                    1.00
                    %Dividend
      yield
                    
                    
                    0.00
                    %Expected
      stock price volatility (Cumulative)
                    
                    
                    275.06
                    %Weighted
      average expected warrants life
                    
                    9 years




17


The
Company analyzed the beneficial nature of the conversion terms and determined
that no material beneficial conversion feature exists.





Securities
Authorized for Issuance Under Equity Compensation Plans




As of May
31, 2010, the Company had no equity securities authorized for issuance under any
compensation plans (including individual compensation
arrangements).





Section 15(g) of the Securities Exchange Act of
1934




Our
shares are covered by section 15(g) of the Securities Exchange Act of 1934, as
amended, and Rules 15g-1 through 15g-6, and 15g-9 promulgated thereunder. They
impose additional sales practice requirements on broker/dealers who sell our
securities to persons other than established customers and accredited investors
(generally institutions with assets in excess of $5,000,000 or individuals with
net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouses).




Rule
15g-1 exempts a number of specific transactions from the scope of the penny
stock rules.




Rule
15g-2 declares unlawful broker/dealer transactions in penny stocks unless the
broker/dealer has first provided to the customer a standardized disclosure
document.




Rule
15g-3 provides that it is unlawful for a broker/dealer to engage in a penny
stock transaction unless the broker/dealer first discloses and subsequently
confirms to the customer current quotation prices or similar market information
concerning the penny stock in question.




Rule
15g-4 prohibits broker/dealers from completing penny stock transactions for a
customer unless the broker/dealer first discloses to the customer the amount of
compensation or other remuneration received as a result of the penny stock
transaction.




Rule
15g-5 requires that a broker/dealer executing a penny stock transaction, other
than one exempt under Rule 15g-1, disclose to its customer, at the time of or
prior to the transaction, information about the sales persons
compensation.




Rule
15g-6 requires broker/dealers selling penny stocks to provide their customers
with monthly account statements.




Rule
15g-9 requires broker/dealers to approve the transaction for the customer’s
account; obtain a written agreement from the customer setting forth the identity
and quantity of the stock being purchased; obtain from the customer information
regarding his investment experience; make a determination that the investment is
suitable for the investor; deliver to the customer a written statement for the
basis for the suitability determination; notify the customer of his rights and
remedies in cases of fraud in penny stock transactions; and, the FINRA’s toll
free telephone number and the central number of the North American
Administrators Association, for information on the disciplinary history of
broker/dealers and their associated persons.




The
application of the penny stock rules may affect a stockholder’s ability to
resell his, her or its shares.





Item
6.  Selected Financial Data.





We are a
smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this
Item.


18


Item
7.  Management’s Discussion and Analysis of Financial Condition and Results
of Operations.





The
information contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operation contains “forward looking statements.” Actual
results may materially differ from those projected in the forward-looking
statements as a result of certain risks and uncertainties set forth in this
report. Although management believes that the assumptions made and expectations
reflected in the forward looking statements are reasonable, there is no
assurance that the underlying assumptions will, in fact, prove to be correct or
that actual future results will not be materially different from the
expectations expressed in this Annual Report. The following discussion should be
read in conjunction with the audited Consolidated Financial Statements and
related Notes thereto included in Part II, Item 8 of this Annual Report on Form
10-K, with the Risk Factors section under Part I, Item 1A of this Annual Report
on Form 10-K, and the Special Note regarding forward-looking statements included
elsewhere in this Annual Report on Form 10-K.





Company
Overview





We are a
development stage company, with Phreadz (pronounced “freds”) developed to be a
multi media social network similar to Facebook and Twitter but supporting
additional functionality.  Phreadz will represent the next generation of
online community, as its architecture allows members to post videos, images,
texts, audio, and links (aka VITAL) to the Phreadz network, as well as to
numerous additional online social communities – all distributed seamlessly with
the click of a button.  Phreadz may also be defined as an interactive
entertainment platform that enables members, who create and discover content,
the ability to “manage,” “monitor,” and “monetize” their content through
specific Phreadz channels.  Examples of these channels include, movies,
technology, golf, news, music, sports, art, wine, and cooking.  These
vertical channels, produced within Phreadz, will allow users to not only follow
their friends, but to also follow their personal interests. These interests are
divided into and contained within the Phreadz universe.





A unique
feature of the Phreadz network is the channel, which will be licensed to a
member at a monthly fee.  The license permits the member (“Licensee”) to
publish and distribute targeted multimedia content to a large audience, along
with the capacity for viewers to post responses in any format, thereby creating
a “truly threaded” history of responses.  This capability will allow
members to monitor replies and view who is responding to whom.   The
mechanics of posting is simple, one can enter a posting either locally via a web
cam or by utilizing a set of APIs (Application Programming Interfaces) to
access third-party websites to “pull-in” content from outside sources. 
These tasks may all be accomplished without leaving the Phreadz network.  
Further, the Phreadz platform can use these APIs to help its members connect and
share information within their Phreadz community on and off the Phreadz
network.  This capability will, thereby, increase engagement for their
channel (“manage”).  Consequently, the channel options within Phreadz
foster the growth of professional content within the specific channels, and
brings economic purpose to social networking.





This
increased engagement is also referred to as “driving traffic.”  In
essence, the more traffic driven to a channel, the greater the opportunity for
the channel manager to generate revenue with his/her content (“monetize”). 
There are four ways in which a channel may produce revenue for its
Licensee:  (a) advertising, (b) the sale of premium content, (c)
product sales, and (d) the donate feature (a discretionary interaction feature
that allows the viewer to pledge money in small increments to the channel
provider, based upon his/her enjoyment of the content).  It is intended
that there be a symbiotic relationship between Phreadz and the channel: The more
revenue generated by the channel, the greater the benefit to
Phreadz.


19


Phreadz
also has an extensive music channel forthcoming.  Through its acquisition
of UDM, Phreadz has obtained a collection of metadata on 22 million
titles.  This collection will become Phreadz’s online music discovery
engine.  Like Wikipedia, Phreadz is developing the database for public
input contributions and updates.  Phreadz’s music channel will offer a
comprehensive search of music, with users invited to search graphically by way
of music attributes, lyrics, contributing artists, and music properties (unlike
google which provides for a text-only search).  The Phreadz database of
tools also allows music fans to find similar music by matching a song’s
attributes, mood, time period, or genre with others to discover new songs for
downloading, sampling, or forwarding to a friend.  Through the Phreadz
music channel users may follow bands or performers, interact with them via the
Phreadz platform, discover new music, follow tours, and much more.  For
performers, the Phreadz music channel offers a unique opportunity for
interaction with their fan base.  For example, performers may offer fans a
behind-the-scenes look at the band or advertise tours and new music — The
possibilities are limitless.  Additionally, the Phreadz music channel will
offer users avenues for purchasing new music.





Unlike
many of the social media networks that lack a discernible revenue model, the
channel concept within Phreadz is designed as a multifaceted approach to
revenue.  In addition to the monthly licensing fee Phreadz receives for
each channel, it will also share in a percentage of the total revenue generated
on each channel.   Further, Phreadz will derive revenue from three
additional sources: (a) advertising within the general social networking
platform; (b) commissions generated on the sale of music; and (c) subscriptions
to the music channel.





Corporate
Events





On June
15, 2010 we entered into an employment agreement with Ms. Christina Domecq to
serve as our Chief Executive Officer (“CEO”).  In 2003, Ms. Domecq
co-founded SpinVox Limited, a technology company specializing in voice to text
conversion, where she was served as Chief Executive Officer until its sale to
Nuance Communications in December 2009.  Ms. Domecq has a Masters from
Nôtre Dame University as well as a B.A. in Systematic Theology and a B.Sc. in
Economics from Boston College.  Ms. Domecq has won a number of awards for
her entrepreneurship, including ‘The Young Entrepreneur of the Year' and the
‘Science and Technology Entrepreneur of the Year’ from Ernst &
Young.





On August
4, 2010, Jonathan Kossmann submitted his resignation.




Results
of Operations





The
Company is in the development stage and consequently is subject to the risks
associated with development stage companies, including the need for additional
financing; the uncertainty of the Company’s technology and intellectual property
resulting in successful commercial products or services as well as the marketing
and customer acceptance of such products or services; competition from larger
organizations; dependence on key personnel; and dependence on corporate partners
and collaborators.  To achieve successful operations, the Company will
require additional capital to continue research and development and marketing
efforts.  No assurance can be given as to the timing or ultimate success of
obtaining future funding.




The
processes of developing new approaches to music database management, access,
search for UDM and the novel SNS of Phreadz are inherently highly complex,
time-consuming, expensive and uncertain.  The Company must make long-term
investments and commit significant resources before knowing whether its
development programs will result in products that will achieve market
acceptance.  Product candidates that may appear to be promising at all
stages of development may not reach the market for a number of reasons. 
Product candidates may be found ineffective or may take longer to progress
through the beta trials than had been anticipated, may not be able to achieve
the pre-defined endpoint due to changes in the environment, may fail to receive
necessary approvals, may prove impracticable to manufacture in commercial
quantities at reasonable cost and with acceptable quality, or may fail to
achieve market acceptance.  For these reasons,  the Company is
unable to predict the period in which material net cash inflows from its
products and services will commence.




The
consolidated Company has generated no revenue from operations and incurred total
operating expenses for the period from April 3, 2009 (dates of inception for UDM
USA, LLC and Phreadz USA, LLC) to May 31, 2010 and June 1, 2009 to May 31, 2010
of  $2,645,140 and $2,479,369 respectively and incurred interest
expenses of $216,852 and $195,720 respectively. The total net losses for the
period from April 3, 2009 (dates of inception for UDM USA, LLC and Phreadz USA,
LLC) to May 31, 2010 and June 1, 2009 to May 31, 2010 of $13,177,646 and
$12,990,743 respectively. This is primarily the non cash items of a $5,000,000
impairment of the UDM music database to fully impair the original attributed
value, a $5,537,163 loss on settlement of debt and the deemed stock issuance
liability of $1,000,632. As the Company has been in the development/organization
stage there has been no sales and marketing expenses.


20


Liquidity
and Capital Resources





As of May
31, 2010, we had a working capital deficit of ($1,413,594) compared to working
capital of $83,110 as of May 31, 2009. This decrease is primarily a result of an
increase in accounts payable consisting of legal fees and of accrued management
fees, a stock issuance liability of $1,000,632, and the origination of short
term note payables that were used to fund initial working capital
requirements.




Operating
Activities




Net cash
used in operating activities for the period from April 3, 2009 (dates of
inception for UDM USA, LLC.,  and Phreadz USA, LLC., respectively) to
May 31, 2010 and from June 1, 2009 to May 31, 2010 was approximately $1,234,122
and $1,053,460, respectively.  The consolidated Company expects net cash
used in operating activities to increase going forward as the Company pursues
its business plan and undertakes additional product development and the
enforcing of IP claims.




Financing
Activities




Net cash
provided by financing activities for the period from April 3, 2009 (dates of
inception for UDM and Phreadz) to May 31, 2010 and from June 1, 2009 to May 31,
2010 was approximately $1,393,147 and $1,143,135 respectively, which consisted
of net proceeds received from the issuance of notes payable and debt
forgiven.




Research
and Development Expenses




Future
Research and development costs will include expenses paid to outside development
consultants and compensation related expenses for our engineering staff. 
Research and development costs are expensed as incurred.




General
and Administrative Expenses




Consulting
fees as a component of operating expenses from April 3, 2009 (date of inception
for UDM and Phreadz) to May 31, 2010 and for June 1, 2009 to May 31, 2010 was
$1,090,674, or 42% of operating expenses and $939,624, or 38% of operating
expenses, respectively.  We expect general and administrative expenses to
further increase significantly as we hire additional personnel, assumes the
costs for full time senior personnel, and as outside counsel and accounting fees
increase due to the significantly higher costs associated with becoming a public
company and the associated expenses for reporting and other securities law
compliance activities.




Impact
of Inflation




[Inflation
has not had a significant effect on the Company’s operations during the periods
from April 3, 2009 (date of inception for UDM and Phreadz) to May 31, 2010 and
from June 1, 2009 to May 31, 2010, respectively.  However, there can be no
assurance that future inflation would not have an adverse impact on our
operating results and financial condition.]




From
inception, we have financed operations through notes payable.  We expect to
finance future cash needs primarily through proceeds from equity financings,
loans, and/or collaborative agreements with corporate partners.  We have
used net proceeds from the issuance of notes payable for general corporate
purposes, which has been funding working capital needs.


21


We
anticipate that our existing cash and cash equivalents will not be sufficient to
fund operations. The Company intends to immediately seek additional financing to
fund the Company’s continued operations.  There can be no assurance that
the Company will be successful in raising this additional financing on
acceptable terms, if at all.




To obtain
additional capital when needed, the Company will evaluate alternative financing
sources, including, but not limited to, the issuance of equity or debt
securities, corporate alliances, joint ventures and licensing agreements;
however, there can be no assurance that funding will be available on favorable
terms, if at all.  The Company cannot assure you that it will successfully
commercialize its products under development or that its products, if
successfully developed, will generate revenues sufficient to enable it to earn a
profit.  If the Company is unable to obtain additional capital, management
may be required to explore alternatives to reduce cash used by operating
activities, including the termination of development efforts that may appear to
be promising to  the Company, the sale of certain assets, possibly
including  the Company’s IP property, and the reduction in overall
operating activities.




The
auditors’ report on the Company's May 31, 2010 consolidated financial statements
contains an explanatory paragraph that states that the Company has suffered
losses and negative cash flows from operations that raise substantial doubt
about the Company’s ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





Material
Off-Balance Sheet Arrangements





None.





Critical
Accounting Policies




Our
discussion and analysis of the financial condition and results of operations are
based upon Phreadz, Inc.’s  financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States (“GAAP”). The
Company is a development-stage entity and has disclosed inception-to-date
information within these financial statements.The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We believe that the estimates,
assumptions and judgments involved in the accounting policies described below
have the greatest potential impact on our financial statements, so we consider
these to be our critical accounting policies. Because of the uncertainty
inherent in these matters, actual results could differ from the estimates we use
in applying the critical accounting policies. Within the context of these
critical accounting policies, we are not currently aware of any reasonably
likely events or circumstances that would result in materially different amounts
being reported.





The
consolidated financial statements have been prepared on the going concern basis,
which assumes the realization of assets and liquidation of liabilities in the
normal course of operations. If we were not to continue as a going concern, we
would likely not be able to realize on our assets at values comparable to the
carrying value or the fair value estimates reflected in the balances set out in
the preparation of the consolidated financial statements. There can be no
assurances that we will be successful in generating additional cash from equity
or other sources to be used for operations. The consolidated financial
statements do not include any adjustments relating to the recoverability of
assets and classification of assets and liabilities that might be necessary
should the Company be unable to continue as a going concern.


22


Recent
Accounting Pronouncements





In June
2009, FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles – a replacement of
FASB Statement No. 162”. The FASB Accounting Standards Codification
(“Codification”) has become the source of authoritative GAAP recognized by FASB
to be applied by nongovernmental entities. Rules and interpretive releases of
the Securities and Exchange Commission (“SEC”) under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of this statement, the Codification superseded all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
has become non-authoritative. This statement is effective for financial
statements issued for interim and annual periods ending after September 30,
2009. The adoption of this statement is not expected to have a material effect
on the Company’s financial statements.





In
May 2009, the FASB issued SFAS No. 165 (Codification reference ASC
855), “Subsequent Events.” SFAS No. 165 sets standards for the disclosure of
events that occur after the balance-sheet date, but before financial statements
are issued or are available to be issued. SFAS No. 165 sets forth the
following: (1) the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements;
(2) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements;
and (3) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. SFAS No. 165 is
effective for interim and annual periods ending after June 15, 2009. The
Company adopted SFAS No. 165 effective April 1, 2009. The Company uses
the date of the filing of its periodic report with the SEC as the date through
which subsequent events have been evaluated, which is the same date as the date
the financial statements are issued. The adoption of SFAS No. 165 did not
have a material impact on the Company’s consolidated financial
statements.





In
September 2006, the FASB issued SFAS No. 157 (Codification reference
ASC 820), “Fair Value Measurements.” SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosure about
fair value measurements. It applies to other pronouncements that require or
permit fair value measurements but does not require any new fair value
measurements. The statement defines fair value as “the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.” SFAS
No. 157 establishes a fair value hierarchy (i.e., Levels 1, 2 and 3) to
increase consistency and comparability in fair value measurements and
disclosures. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FASB Staff
Position (“FSP”) 157-2 (Codification reference ASC 820), “Effective Date of FASB
Statement No. 157” (“FSP SFAS 157-2”), which permits a one-year deferral of
the application of SFAS No. 157 for all 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). The
Company adopted SFAS No. 157 and FSP SFAS 157-2 for financial assets and
liabilities effective January 1, 2008, which did not have a material impact
on the Company’s consolidated financial statements. The Company adopted SFAS
No. 157 for non-financial assets and non-financial liabilities effective
January 1, 2009, which did not have a material impact on the Company’s
consolidated financial statements. In October 2008, the FASB issued FSP
157-3 (Codification reference ASC 820), “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active” (“FSP SFAS
157-3”), which clarifies the application of SFAS No. 157 in a market that
is not active. The adoption of this standard did not have a material impact on
the Company’s consolidated financial statements.





Determination
of Fair Value




At May
31, 2010, the Company applied fair value to all assets based on quoted market
prices, where available. For financial instruments for which quotes from recent
exchange transactions are not available, the Company determines fair value based
on discounted cash flow analysis and comparison to similar instruments.
Discounted cash flow analysis is dependent upon estimated future cash flows and
the level of interest rates. Valuation adjustments may be made to ensure that
financial instruments are recorded at fair value.




The
methods described above may produce a current fair value calculation that may
not be indicative of net realizable value or reflective of future fair values.
If readily determined market values became available or if actual performance
were to vary appreciably from assumptions used, assumptions may need to be
adjusted, which could result in material differences from the recorded carrying
amounts. The Company believes its methods of determining fair value are
appropriate and consistent with other market participants. However, the use of
different methodologies or different assumptions to value certain financial
instruments could result in a different estimate of fair value.


23


Valuation
Hierarchy




SFAS
No. 157 establishes a three-level valuation hierarchy for the use of fair
value measurements based upon the transparency of inputs to the valuation of an
asset or liability as of the measurement date:




Level 1.
    Inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets. Level 1
assets and liabilities include debt and equity securities and derivative
financial instruments actively traded on exchanges, as well as U.S. Treasury
securities and U.S. Government and agency mortgage-backed securities that are
actively traded in highly liquid over the counter markets.





Level 2.
    Observable inputs other than Level 1 prices such as
quoted prices for similar assets and liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets that are not
active, and inputs that are observable or can be corroborated, either directly
or indirectly, for substantially the full term of the financial instrument.
Level 2 assets and liabilities include debt instruments that are traded
less frequently than exchange traded securities and derivative instruments whose
model inputs are observable in the market or can be corroborated by market
observable data. Examples in this category are certain variable and fixed rate
non-agency mortgage-backed securities, corporate debt securities and derivative
contracts.




Level 3.
    Inputs to the valuation methodology are unobservable but
significant to the fair value measurement. Examples in this category include
interests in certain securitized financial assets, certain private equity
investments, and derivative contracts that are highly structured or
long-dated.




Application
of Valuation Hierarchy




A
financial instrument's categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement.





In April
2009, the FASB issued updated guidance relating to intangible asset valuation,
which is included in the Codification in ASC 350-30-55, General Intangibles Other Than
Goodwill – Implementation (“ASC 350-30-55”). ASC 350-30-55 amends ASC
350-30, Intangibles – Goodwill
and Other, to identify the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. ASC 350-30-55 is effective for fiscal years
beginning after December 31, 2008. The Company adopted the amendment to ASC
350-30 effective January 1, 2009, and such amendment did not have a
material effect on the Company’s results of operations, financial position or
liquidity.





Item
7A.  Quantitative and Qualitative Disclosures about Market
Risk.





We are a
smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are
not required to provide information required under this Item.





Item
8.  Financial Statements.





The
financial statements of the Company and related schedules described under “Item
15. Financial Statements and Financial Statement Schedules” are included
following this page.


24


PHREADZ,  INC.


(Formerly
Atwood Minerals and Mining Corp.)


Audited
Financial Statements
 (Expressed
in U.S. Dollars)
  May 31,
2010
  Index


Report
      of Independent Registered Public Accounting Firms
                                                  F-2Consolidated
      Balance Sheets
                                                  F-3Consolidated
      Statement of Stockholders’ Deficiency
                                                  F-4Consolidated
      Statements of Operations
                                                  F-5Consolidated
      Statements of Cash Flows
                                                  F-6Notes
      to Consolidated Financial Statement
                                                  F-7


F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and


Stockholders
of Phreadz, Inc. & Subsidiaries


We have
audited the accompanying consolidated balance sheets of Phreadz, Inc. &
Subsidiaries as of May 31, 2010 and 2009, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for the year
ended May 31, 2010, and for the period from April 3, 2009 (inception) to May 31,
2009, and for the period from April 3, 2009 (inception) to May 31, 2010.
Phreadz, Inc.’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.


We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Phreadz, Inc. &
Subsidiaries as of May 31, 2010 and 2009, and the results of its operations and
its cash flows for the year ended May 31, 2010, and for the period from April 3,
2009 (inception) to May 31, 2009, and the period from April 3, 2009 (inception)
to May 31, 2010 in conformity with accounting principles generally accepted in
the United States of America.




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
net capital deficiencies, and negative cash flows from operations that raise
substantial doubt about its ability to continue as a going concern. Management’s
plan in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.




De
      Leon & Company, P.A.Pembroke
      PinesAugust
      31, 2010




F-2





PHREADZ,
      INC.(A
      Development Stage Company)Consolidated
      Balance SheetsMay
      31, 2010 and 2009


(Expressed in U.S. Dollars)2010
                                          
                                          
                                          2009ASSETSCurrentCash
      and cash equivalents
                                          
                                          $
                                          159,025
                                          
                                          
                                          $
                                          69,350Prepaid
                                          
                                          
                                          25,000
                                          
                                          
                                          
                                          15,000Total
      current assets
                                          
                                          
                                          184,025
                                          
                                          
                                          
                                          84,350Intangible
      (database)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          5,000,000Total
      assets
                                          
                                          $
                                          184,025
                                          
                                          
                                          $
                                          5,084,350LIABILITIESCurrentAccounts
      payable
                                          
                                          $
                                          336,448
                                          
                                          
                                          $
                                          108Accrued
      liabilities
                                          
                                          
                                          2,829
                                          
                                          
                                          
                                          -Interest
      payable
                                          
                                          
                                          14,664
                                          
                                          
                                          
                                          1,132Member
      holder loan
                                          
                                          
                                          2,046
                                          
                                          
                                          
                                          -Notes
      payable
                                          
                                          
                                          241,000
                                          
                                          
                                          
                                          -Stock
      issuance liability
                                          
                                          
                                          1,000,632
                                          
                                          
                                          
                                          -Total
      current liabilities
                                          
                                          
                                          1,597,619
                                          
                                          
                                          
                                          1,240Long
      term loan payable
                                          
                                          
                                          -
                                          
                                          
                                          
                                          270,000Total
      Liabilities
                                          
                                          $
                                          1,597,619
                                          
                                          
                                          $
                                          271,240STOCKHOLDERS'
      (DEFICIENCY) EQUITYShare
      capitalAuthorized:525,000,000
      shares of common stock par value $0.001Issued,
      allotted and outstanding:61,753,867
      and 14,400,000 shares as of May 31, 2010 and 2009,
      respectively
                                          
                                          
                                          61,754
                                          
                                          
                                          
                                          14,400Subscription
      receivable
                                          
                                          
                                          
                                          
                                          
                                          
                                          (90
                                          )Additional
      paid-in capital
                                          
                                          
                                          11,702,297
                                          
                                          
                                          
                                          4,985,702Deficit
      accumulated during development stage
                                          
                                          
                                          (13,177,645
                                          )
                                          
                                          
                                          (186,902
                                          )Total
      stockholders' (deficiency) equity
                                          
                                          
                                          (1,413,594
                                          )
                                          
                                          
                                          4,813,110Total
      liabilities and stockholders' (deficiency) equity
                                          
                                          $
                                          184,025
                                          
                                          
                                          $
                                          5,084,350


The
accompanying notes are an integral part of these financial
statements.


F-3





PHREADZ,
      INC.(A
      Development Stage Company)Consolidated
      Statement of Stockholders' (Deficiency) EquityFor
      the period April 3, 2009 (Inception) to May 31, 2010
                Page
      1 of  1(Expressed in U.S. Dollars)


TotalCommon
      stock
                  
                  
                  Additional
                  
                  
                  Subscription
                  
                  
                  Deficit
                  
                  
                  Stock-holders'Shares
                  
                  
                  Amount
                  
                  
                  paid-in
      capital
                  
                  
                  Receivable
                  
                  
                  accumulated
                  
                  
                  (deficiency)Shares
      issued for property April 3, 2009
                  
                  
                  1,920,000
                  
                  
                  $
                  1,920
                  
                  
                  $
                  4,998,092
                  
                  
                  $
                  (90
                  )
                  
                  $
                  -
                  
                  
                  $
                  4,999,922Shares
      issued for cash May 28, 2010
                  
                  
                  12,480,000
                  
                  
                  $
                  12,480
                  
                  
                  $
                  (12,390
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  90Net
      Loss April 3, 2009 (Inception) to May 31, 2010
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (186,902
                  )
                  
                  $
                  (186,902
                  )Balance,
      May 31, 2009
                  
                  
                  14,400,000
                  
                  
                  $
                  14,400
                  
                  
                  $
                  4,985,702
                  
                  
                  $
                  (90
                  )
                  
                  $
                  (186,902
                  )
                  
                  $
                  4,813,110Subscription
      receivable
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  90
                  
                  
                  
                  
                  
                  
                  $
                  90Shares
      issued for cash August 25, 2009
                  
                  
                  23,136,000
                  
                  
                  $
                  23,136
                  
                  
                  $
                  (22,991
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  145Shares
      issued for cash March 10, 2010
                  
                  
                  5,782,400
                  
                  
                  $
                  5,782
                  
                  
                  $
                  (5,746
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  36Recapitalization
      due to reverse merger
                  
                  
                  42,700,000
                  
                  
                  $
                  42,700
                  
                  
                  $
                  (83,243
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (40,543
                  )Shares
      cancelled due to reverse merger
                  
                  
                  (32,712,176
                  )
                  
                  $
                  (32,712
                  )
                  
                  $
                  32,712
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  -Issuance
      of common stock @ $0.15 May 20, 2010
                  
                  
                  1,9333,333
                  
                  
                  $
                  1,933
                  
                  
                  $
                  288,067
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  290,000Issuance
      of common stock in settlementof
      notes payable May 31, 2010
                  
                  
                  6,514,310
                  
                  
                  $
                  6,515
                  
                  
                  $
                  6,507,796
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  6,514,311Net
      loss for the year ending May 31, 2010
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (12,990,743
                  )
                  
                  $
                  (12,990,743
                  )Balance,
      May 31, 2010
                  
                  
                  61,753,867
                  
                  
                  $
                  61,754
                  
                  
                  $
                  11,702,297
                  
                  
                  $
                  -
                  
                  
                  $
                  (13,177,645
                  )
                  
                  $
                  (1,413,594
                  )




F-4





PHREADZ,
      INC.(A
      Development Stage Company)Consolidated
      Statements of OperationsFor
      the year ended May31, 2010 and 2009 the period from
                  April
      3, 2009 (inception) to May 31 2009, andFor
      the period April 3, 2009 (Inception) to May 31, 2010(Expressed
      in U.S. Dollars)





From InceptionDate
                                  of April 3,2009 to
                                  May 31,2010
                                
                                
                                For the Year
                                  Ended May 31
                                  2010
                                
                                
                                For the period
                                  from April 3,
                                  2009 (inception)
                                  to May 31 2009Revenue
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -Accounting
                                
                                
                                53,639
                                
                                
                                
                                53,583
                                
                                
                                
                                56Consulting
                                
                                
                                1,090,674
                                
                                
                                
                                939,624
                                
                                
                                
                                151,050Corporate
      finance fees
                                
                                
                                15,000
                                
                                
                                
                                15,000
                                
                                
                                
                                -Financing
      expense
                                
                                
                                1,000,632
                                
                                
                                
                                1,000,632
                                
                                
                                
                                -G&A
                                
                                
                                40,118
                                
                                
                                
                                39,447
                                
                                
                                
                                671Legal
                                
                                
                                321,985
                                
                                
                                
                                321,985
                                
                                
                                
                                -Travel
                                
                                
                                123,092
                                
                                
                                
                                109,098
                                
                                
                                
                                13,993Operating
      loss
                                
                                
                                (2,645,140
                                )
                                
                                
                                (2,479,369
                                )
                                
                                
                                (165,770
                                )Other
      expenseImpairment
      of IP music database
                                
                                
                                (5,000,000
                                )
                                
                                
                                (5,000,000
                                )
                                
                                
                                -Interest
      expense (related party)
                                
                                
                                (216,852
                                )
                                
                                
                                (195,720
                                )
                                
                                
                                (21,132
                                )Gain
      on forgiveness of debt
                                
                                
                                221,509
                                
                                
                                
                                221,509
                                
                                
                                
                                -Loss
      on settlement of debt
                                
                                
                                (5,537,163
                                )
                                
                                
                                (5,537,163
                                )
                                
                                
                                -Net
      loss for the year
                                
                                $
                                (13,177,646
                                )
                                
                                $
                                (12,990,743
                                )
                                
                                
                                (186,902
                                )Loss
      per share –basic and dilutedNet
      loss
                                
                                
                                
                                
                                
                                $
                                (0.38
                                )
                                
                                $
                                (0.07
                                )Weighted
      average number of commonshares outstanding - basic and
      diluted
                                
                                
                                
                                
                                
                                
                                34,269,637
                                
                                
                                
                                2,565,517


The
accompanying notes are an integral part of these financial
statements.


F-5





PHREADZ,
      INC.(A
      Development Stage Company)Consolidated
      Statements of Cash FlowsFor
      the year ended May 31, 2010, the period from April 3, 2009
                (inception)
      to May 31, 2009 , andthe
      period from April 3, 2009 (Inception) to May 31, 2010(Expressed in U.S.
  Dollars)





From Inception
                    Date of April 3,
                    2009 to May 31,
                    2010
                  
                  
                  For the Year
                    Ended May 31,
                    2010
                  
                  
                  For the period
                    from April 3,
                    2009 (inception)
                    to May 31 2009Cash
      flows from (used in) operating activitiesNet
      loss for the year
                  
                  $
                  (13,177,646
                  )
                  
                  $
                  (12,990,743
                  )
                  
                  $
                  (186,902
                  )Adjustments
      to reconcile net loss to net cashProvided
      by operating activities:-
      Impairment of IP music database
                  
                  
                  5,000,000
                  
                  
                  
                  5,000,000
                  
                  
                  
                  --
      Loss on acquisition of Atwood
                  
                  
                  (44,361
                  )
                  
                  
                  (44,361
                  )
                  
                  
                  --
      Loss on settlement of debt
                  
                  
                  5,537,163
                  
                  
                  
                  5,537,163
                  
                  
                  
                  -Changes
      in operating assets and liabilities:-
      (Increase) Decrease in Accrued liabilities
                  
                  
                  2,829
                  
                  
                  
                  2,829
                  
                  
                  
                  --
      (Increase) Decrease in Accounts payable
                  
                  
                  336,449
                  
                  
                  
                  336,342
                  
                  
                  
                  108-
      (Increase) Decrease in Capitalized Interest
                  
                  
                  121,147
                  
                  
                  
                  101,147
                  
                  
                  
                  20,000-
      (Increase) Decrease in Interest payable
                  
                  
                  14,665
                  
                  
                  
                  13,533
                  
                  
                  
                  1,132-
      (Increase) Decrease in Prepaids
                  
                  
                  (25,000
                  )
                  
                  
                  (10,000
                  )
                  
                  
                  (15,000
                  )-
      (Increase) Decrease in Stock issuance liability
                  
                  
                  1,000,632
                  
                  
                  
                  1,000,632
                  
                  
                  
                  -Net
      cash provided by operating activities
                  
                  
                  (1,234,122
                  )
                  
                  
                  (1,053,460
                  )
                  
                  
                  (180,662
                  )Cash
      flows from (used in) investing activitiesPurchase
      of Capital Assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      cash (used) provided by investing activities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Cash
      flows from (used in) financing activities
                  
                  
                  
                  
                  
                  
                  -Proceeds
      from note(s) payable (net)
                  
                  
                  1,101,000
                  
                  
                  
                  851,000
                  
                  
                  
                  250,000Proceeds
      from Shareholder  loan
                  
                  
                  2,045
                  
                  
                  
                  2,045
                  
                  
                  
                  -Shares
      issued for cash
                  
                  
                  290,102
                  
                  
                  
                  290,090
                  
                  
                  
                  12Net
      cash (used) provided by financing activities
                  
                  
                  1,393,147
                  
                  
                  
                  1,143,135
                  
                  
                  
                  250,012Increase
      in cash and cash equivalents
                  
                  
                  159,025
                  
                  
                  
                  89,675
                  
                  
                  
                  69,350Effect
      of exchange rate on cash
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Cash and cash equivalents,beginning of year
                  
                  
                  -
                  
                  
                  
                  69,350
                  
                  
                  
                  -Cash and cash equivalents, end of year
                  
                  $
                  159,025
                  
                  
                  $
                  159,025
                  
                  
                  $
                  69,350Cash
      and cash equivalents  represented by:Cash
                  
                  $
                  159,025
                  
                  
                  $
                  159,025
                  
                  
                  $
                  69,350





The
accompanying notes are an integral part of these financial
statements.


F-6


PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to May 31,
  2010(Expressed in U.S.
  Dollars)




Note
      1.
            Organization
      and Summary of Significant Accounting
Policies




On April
27, 2010 pursuant to share purchase agreements (the “Purchase Agreements”),
Phreadz, Inc. completed the acquisitions of Phreadz USA, LLC (“Phreadz”) and UDM
USA, LLC (“UDM”).The acquisitions were accounted for as a recapitalization
effected by a reverse merger, wherein Phreadz and UDM were considered the
acquirer for accounting and financial reporting purposes.  The pre-merger
assets and liabilities of the acquired entities have been brought forward at
their book value and no goodwill has been recognized.  The consolidated
accumulated deficit of Phreadz and UDM has been brought forward, and common
stock and additional paid-in-capital of the combined Company have been
retroactively restated to give effect to the exchange rates as set forth in the
Purchase Agreements.




As set
forth above, on April 27, 2010 (the “Closing Date”) and pursuant to the terms
and conditions of the Purchase Agreements, we: (i) consummated the acquisitions
of Phreadz and UDM, and (ii) each of Phreadz and UDM became our wholly owned
subsidiary. More specifically, pursuant to and in connection with the Purchase
Agreements:




·
            in
      exchange for 100% of the issued and outstanding membership interests of
      Phreadz, we issued to the holders of the Phreadz membership interests an
      aggregate of 21,659,200 shares of our common stock;
  and




·
            in
      exchange for 100% of the issued and outstanding membership interests of
      UDM, we issued to the holders of the UDM membership interests an aggregate
      of 21,659,200 shares of our common
stock.




·
            in
      addition, pursuant to the terms of the Purchase Agreements, 32,712,176
      shares of our issued and outstanding common stock previously held by
      certain stockholders were
cancelled..




As a
result of the acquisitions of Phreadz and UDM, we experienced a change in
control and ceased to be a “shell” company as defined in Rule 12b-2 promulgated
under the Exchange Act.




Phreadz
was organized as a limited liability company in the State of Nevada in April
2009.  Its principal place of business is located at 63 Main Street #202,
Flemington, New Jersey 08822.  Phreadz has not undertaken any material
business activities.




UDM was
organized as a limited liability company in the State of Nevada in April
2009.  Its principal place of business is located at 63 Main Street,
Flemington, New Jersey 08858.  On May 29, 2009, UDM consummated an asset
purchase agreement with Jacques Krischer and UDM, Ltd., pursuant to which it
acquired a music database and search tools.  Since its inception, UDM has
not undertaken any material business activities.




Nature
of Operations and Going Concern





The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate the Company’s continuation as a going concern. Since April 3,
2009 (inception), the Company has reported net losses of ($13,153,745),
operating activities have used cash of ($1,234,122), and the Company has a
stockholders’ deficit of ($1,389,694) as of May 31, 2010.   These
factors raise substantial doubt about the Company’s ability to continue as a
going concern.




The
Company is actively involved in discussions and negotiations with investors.
Management does not believe the Company has sufficient working capital to
operate beyond May 31, 2010 without additional funding.  Assuming we raise
the necessary capital through the sale of equity or equity equivalents, we
expect that we will have adequate working capital through 2011.  However,
any equity financing may be very dilutive to our existing
shareholders.


F-7




PHREADZ,
    INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to May 31,
  2010(Expressed in U.S.
  Dollars)




Note 1.
            Organization and Summary of
      Significant Accounting Policies(continued)




There is
no assurance that continued financing proceeds will be obtained in sufficient
amounts necessary to meet the Company's needs. In view of these matters,
continuation as a going concern is dependent upon the Company's ability to meet
its financing requirements, raise additional capital, and the future success of
its operations.  The accompanying consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the possible inability of the Company to
continue as a going concern.




Principles of
Consolidation




The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Phreadz and UDM. All intercompany
accounts and transactions have been eliminated in consolidation.




Note
      2.
            Significant
      Accounting Policies




(a)
            Accounting
      Estimates




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the period.  Actual
results may differ from those estimates.




(b)
            Cash
      Equivalents




For
purposes of the statement of cash flows cash equivalents usually consist of
highly liquid investments which are readily convertible into cash with maturity
of three months or less when purchased.




(c)
            Concentration
      of Credit Risk




The
Company has no significant off-balance-sheet concentrations of credit risk such
as foreign exchange contracts, options contracts or other foreign hedging
arrangements.  The Company maintains the majority of its cash balances with
one financial institution, in the form of demand deposits.




(d)
            Income
      Taxes




The
Company uses the asset and liability method to account for income taxes. Under
this method, deferred income taxes are determined based on the differences
between the tax basis of assets and liabilities and their reported amounts in
the consolidated financial statements which will result in taxable or
deductible amounts in future years and are measured using the currently enacted
tax rates and laws. A valuation allowance is provided to reduce net deferred tax
assets to the amount that, based on available evidence, is more likely than not
to be realized.


F-8




PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to May 31,
  2010(Expressed in U.S.
  Dollars)





Note 2.
            Significant Accounting Policies(continued)





(e)
            Net
      Loss per Share





Net loss
per share is computed by dividing net loss attributable to common stockholders
by the weighted average number of shares of common stock outstanding during the
applicable period. Diluted loss per share is determined in the same manner as
basic loss per share, except that the number of shares is increased to include
potentially dilutive securities using the treasury stock method. Since the
Company incurred a net loss in all periods presented, all potentially dilutive
securities were excluded from the computation of diluted loss per share since
the effect of including them is anti-dilutive.





Recent accounting
pronouncements





In
September 2006, the FASB issued SFAS No. 157 (Codification reference
ASC 820), “Fair Value Measurements.” SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosure about
fair value measurements. It applies to other pronouncements that require or
permit fair value measurements but does not require any new fair value
measurements. The statement defines fair value as “the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.” SFAS
No. 157 establishes a fair value hierarchy (i.e., Levels 1, 2 and 3) to
increase consistency and comparability in fair value measurements and
disclosures. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FASB Staff
Position (“FSP”) 157-2 (Codification reference ASC 820), “Effective Date of FASB
Statement No. 157” (“FSP SFAS 157-2”), which permits a one-year deferral of
the application of SFAS No. 157 for all 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). The
Company adopted SFAS No. 157 and FSP SFAS 157-2 for financial assets and
liabilities effective January 1, 2008, which did not have a material impact
on the Company’s consolidated financial statements. The Company adopted SFAS
No. 157 for non-financial assets and non-financial liabilities effective
January 1, 2009, which did not have a material impact on the Company’s
consolidated financial statements. In October 2008, the FASB issued FSP
157-3 (Codification reference ASC 820), “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active” (“FSP SFAS
157-3”), which clarifies the application of SFAS No. 157 in a market that
is not active. The adoption of this standard did not have a material impact on
the Company’s consolidated financial statements.





Determination
of Fair Value





At May
31, 2010, the Company applied fair value to all assets based on quoted market
prices, where available. For financial instruments for which quotes from recent
exchange transactions are not available, the Company determines fair value based
on discounted cash flow analysis and comparison to similar instruments.
Discounted cash flow analysis is dependent upon estimated future cash flows and
the level of interest rates. Valuation adjustments may be made to ensure that
financial instruments are recorded at fair value.





The
methods described above may produce a current fair value calculation that may
not be indicative of net realizable value or reflective of future fair values.
If readily determined market values became available or if actual performance
were to vary appreciably from assumptions used, assumptions may need to be
adjusted, which could result in material differences from the recorded carrying
amounts. The Company believes its methods of determining fair value are
appropriate and consistent with other market participants. However, the use of
different methodologies or different assumptions to value certain financial
instruments could result in a different estimate of fair value.


F-9





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to May 31,
  2010(Expressed in U.S.
  Dollars)





Recent accounting pronouncements(continued)





Valuation
Hierarchy





SFAS
No. 157 establishes a three-level valuation hierarchy for the use of fair
value measurements based upon the transparency of inputs to the valuation of an
asset or liability as of the measurement date:





Level 1.
    Inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets. Level 1
assets and liabilities include debt and equity securities and derivative
financial instruments actively traded on exchanges, as well as U.S. Treasury
securities and U.S. Government and agency mortgage-backed securities that are
actively traded in highly liquid over the counter markets.





Level 2.
    Observable inputs other than Level 1 prices such as
quoted prices for similar assets and liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets that are not
active, and inputs that are observable or can be corroborated, either directly
or indirectly, for substantially the full term of the financial instrument.
Level 2 assets and liabilities include debt instruments that are traded
less frequently than exchange traded securities and derivative instruments whose
model inputs are observable in the market or can be corroborated by market
observable data. Examples in this category are certain variable and fixed rate
non-agency mortgage-backed securities, corporate debt securities and derivative
contracts.





Level 3.
    Inputs to the valuation methodology are unobservable but
significant to the fair value measurement. Examples in this category include
interests in certain securitized financial assets, certain private equity
investments, and derivative contracts that are highly structured or
long-dated.





Application
of Valuation Hierarchy





A
financial instrument's categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement.





In April
2009, the FASB issued updated guidance relating to intangible asset valuation,
which is included in the Codification in ASC 350-30-55, General Intangibles Other Than
Goodwill – Implementation (“ASC 350-30-55”). ASC 350-30-55 amends ASC
350-30, Intangibles – Goodwill
and Other, to identify the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. ASC 350-30-55 is effective for fiscal years
beginning after December 31, 2008. The Company adopted the amendment to ASC
350-30 effective January 1, 2009, and such amendment did not have a
material effect on the Company’s results of operations, financial position or
liquidity.


F-10





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to May 31,
  2010(Expressed in U.S.
  Dollars)





Recent accounting pronouncements(continued)





In May
2009, FASB issued SFAS No. 165, “Subsequent Events”. SFAS 165 establishes
general standards of for the evaluation, recognition and disclosure of events
and transactions that occur after the balance sheet date. Although there is new
terminology, the standard is based on the same principles as those that
currently exist in the auditing standards. The standard, which includes a new
required disclosure of the date through which an entity has evaluated subsequent
events, is effective for interim or annual periods ending after June 15, 2009.
The adoption of SFAS 165 did not have a material effect on the Company’s
consolidated financial statements.





Note
      3.
            Intangible





The
Company has valuation reports from Cethial Bossche Content Network (Montreal,
Canada) dated January 22, 2007 and Copiliot Partners (France) dated January 19,
2007.  The two firms have placed a valuation of between €9.5 and €17
million Euros and €12 million Euros, respectively, on the assets described as
UDM music databases and related tools.  Based on the above and other
comparables, a pro forma five year cash flow analysis, the Company determined
that a fair deemed value of $5,000,000 was appropriate with that deemed value
attributable to the music database at April 3, 2009 (Inception).  As the
Company did not obtain a third party valuation report at the end of the fiscal
period ended February 28, 2010, we fully impaired the $5,000,000 carrying value
of this intellectual property as at that date.





Note
      4.
            Income
      Taxes





As of May 31, 2010, the Company had a
net operating loss carryforward for income tax reporting purposes of
approximately $13,177,646 that may be offset against future taxable income
through 2030.  Current tax laws limit the amount of loss available to be
offset against future taxable income when a substantial change in ownership
occurs.  Therefore, the amount available to offset future taxable income
may be limited.  No tax benefit has been reported in the financial
statements, because the Company believes there is a 50% or greater chance the
carryforwards will expire unused.  Accordingly, the potential tax benefits
of the loss carryforwards are offset by a valuation allowance of the same
amount.





Note
      5.
            Notes
      Payable and Related Party
Transactions





A member
of the Company loaned $250,000 to the Company pursuant to a Note(s) Payable
Agreement dated May 15, 2009. The loan included a $20,000 interest bonus and
accrued simple interest at a rate of 8% per annum. The note was to mature on
April 30, 2012 and become due and payable at that time, including accrued
interest and the interest bonus. The $250,000 was received in two parts on May
5, 2009 and May 18, 2009. Interest accrued at the rate of 8% annually and was
$22,140.43 for the period April 3, 2009 (inception) to May 31, 2010. The note
was assigned by the holder on May 31, 2010 and settled with 1,947,601 shares of
our common stock and 973,801 Series A Warrants, with an exercise price of $0.30
per share, expiring June 30, 2019, and 973,801 Series B Warrants, with an
exercise price of $0.60 per share, expiring June 30, 2019.





A member
of the Company loaned $200,000 to the Company pursuant to a Note(s) Payable
Agreement dated August 10, 2009. The loan terms include a $16,000 interest bonus
and accrues simple interest at a rate of 8% per annum. The note matured on
December 31, 2009 and by agreement was extended to March 31, 2010. Interest
accrued at the rate of 8% annually and was $13,776.64 for the period April 3,
2009 (inception) to May 31, 2010. As of May 31, 2010, this Note(s) Payable was
in default and as of August 3, 2010, $190,000 of the outstanding amount has been
repaid.


F-11


PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to May 31,
  2010(Expressed in U.S.
  Dollars)





Note 5.
            Notes Payable and Related Party
      Transaction(continued)





A member
of the Company loaned $150,000 to the Company pursuant to a Note(s) Payable
Agreement dated August 20, 2009. The loan included a $12,000 interest bonus and
accrued simple interest at a rate of 8% per annum. The note matured on December
31, 2009 and by agreement was extended to March 31, 2010 and then to May 31,
2010. Interest accrued at the rate of 8% annually and was $9,799.90 for the
period from April 3, 2009 (inception) to May 31, 2010. The notes were assigned
by the holder on May 31, 2010 and settled with 1,145,332 shares of our common
stock,  572,666 Series A Warrants, with an exercise price of $0.30 per
share, expiring June 30, 2019, and 572,666 Series B Warrants, with an exercise
price of $0.60 per share, expiring June 30, 2019.





A member
of the Company loaned $25,000 to the Company pursuant to a Note(s) Payable
Agreement dated September 29, 2009. The loan included a $2,000 interest bonus
and accrued simple interest at a rate of 8% per annum. The note matured on
December 31, 2009 and by agreement was extended to March 31, 2009 and then to
May 31, 2010. Interest accrued at the rate of 8% annually and was $1,355.18 for
the period from April 3, 2009 (inception) to May 31, 2010.  The notes were
assigned by the holder on May 31, 2010 and settled with 189,034 shares of our
common shares and 94,516 Series A Warrants, with an exercise price of $0.30 per
share, expiring June 30, 2019, and 94,516 Series B Warrants, with an exercise
price of $0.60 per share, expiring June 30, 2019.





A member
of the Company loaned $100,000 to the Company pursuant to a Note(s) Payable
Agreement dated September 29, 2009. The loan included a $8,000 interest bonus
and accrued simple interest at a rate of 8% per annum. The note matured on
December 31, 2009 and by agreement was extended to March 31, 2009 and then to
May 31, 2010. Interest accrued at the rate of 8% annually was $5,610.10 for the
period from April 3, 2009 (inception) to May 31, 2010. The note was assigned by
the holder on May 31, 2010 and settled with 757,400 shares of our common stock,
378,700 Series A Warrants, with an exercise price of $0.30 per share, expiring
June 30, 2019, and 378,700 Series B Warrants, with an exercise price of $0.60
per share, expiring June 30, 2019.





A member
of the Company loaned $50,000 USD to the Company pursuant to a Note(s) Payable
Agreement dated November 15, 2009. The loan included a $4,000 interest bonus and
accrued simple interest at a rate of 8% per annum. The note matured on December
31, 2009 and by agreement was extended to March 31, 2009 and then to May 31,
2010. Interest accrued at the rate of 8% annually and was $2,236.92 for the
period from April 3, 2009 (inception) to May 31, 2010. The note was assigned by
the holder on May 31, 2010 and settled with 374,912 shares of our common stock,
187,456 Series A Warrants, with an exercise price of $0.30 per share, expiring
June 30, 2019, and 187,456 Series B Warrants, with an exercise price of $0.60
per share, expiring June 30, 2019.





A member
of the Company loaned $100,000 to the Company pursuant to a Note(s) Payable
Agreement dated December 11, 2009. The loan included a $8,000 interest bonus and
accrued simple interest at a rate of 8% per annum. The note matured on January
31, 2010 and by agreement was extended to March 31, 2009 and then to May 31,
2010. Interest accrued at the rate of 8% annually and was $3,929.44 for the
period from April 3, 2009 (inception) to May 31, 2010.  The note was
assigned by the holder on May 31, 2010 and settled with 746,196 shares of our
common stock, 373,098 Series A Warrants, with an exercise price of $0.30 per
share, expiring June 30, 2019, and 373,098 Series B Warrants, with an exercise
price of $0.60 per share, expiring June 30, 2019.





A member
of the Company loaned $100,000 to the Company pursuant to a Note(s) Payable
Agreement dated March 26, 2010. The loan included a $75,000 forgiveness clause
on the completion of our reverse merger as of April 27, 2010. Interest accrued
on a simple basis at a rate of 8% per annum. The note held a maturity date of
June 30, 2010. Interest accrued at the rate of 8% annually and was $887.68 for
the period from April 3, 2009 (inception) to May 31, 2010. On June 30, 2010,
$26,052.06 was paid in settlement of this note, including $164.38 in additional
interest for the period from June 1, 2010 to June 30, 2010.


F-12





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to May 31,
  2010(Expressed in U.S.
  Dollars)





Note 5.
            Notes Payable and Related Party
      Transaction(continued)





A member
of the Company loaned $100,000 to the Company pursuant to a Note(s) Payable
Agreement dated April 9, 2010. The loan included a $75,000 forgiveness clause on
the completion of our reverse merger as of April 27, 2010. Interest accrued on a
simple basis at a rate of 8% per annum. The note held a maturity date of June
30, 2010. Interest accrued at the rate of 8% annually and was $580.82 for the
period from April 3, 2009 (inception) to May 31, 2010. The note was assigned by
the holder on May 31, 2010 and settled with 170,538 shares of our common stock,
85,269 Series A Warrants, with an exercise price of $0.30 per share, expiring
June 30, 2019, and 85,269 Series B Warrants, with an exercise price of $0.60 per
share, expiring June 30, 2019.





A member
of the Company loaned $10,000 to the Company pursuant to a Note(s) Payable
Agreement dated March 18, 2010. The loan terms included a $7,000 forgiveness
clause on the completion of our reverse merger as of April 27, 2010. Interest
accrued on a simple basis at a rate of 8% per annum. The note held a maturity
date of June 30, 2010. Interest accrued at the rate of 8% annually and was
$110.02 for the period from April 3, 2009 (inception) to May 31, 2010. The note
was assigned by the holder on May 31, 2010 and settled with 20,734 shares of our
common stock, 10,368 Series A Warrants, with an exercise price of $0.30 per
share, expiring June 30, 2019, and 10,368 Series B Warrants, with an exercise
price of $0.60 per share, expiring June 30, 2019.





A member
of the Company loaned $10,000 USD to the Company pursuant to a Note(s) Payable
Agreement dated March 23, 2010. The loan included a $7,000 forgiveness clause on
the completion of our reverse merger as of April 27, 2010. Interest was accrued
on a simple basis at a rate of 8% per annum. The note held a maturity date of
June 30, 2010. Interest accrued at the rate of 8% annually and was $99.06 for
the period from April 3, 2009 (inception) to May 31, 2010. The note was assigned
by the holder on May 31, 2010 and settled with 20,660 shares of our common
stock, 10,330 Series A Warrants, with an exercise price of $0.30 per share,
expiring June 30, 2019, and 10,330 Series B Warrants, with an exercise price of
$0.60 per share, expiring June 30, 2019.





On March
23, 2010 the Company entered into an $85,000 Note(s) Payable Agreement. The loan
terms also included a “right” with the note to receive the equivalent amount of
the face amount of such note on such terms that notes were settled in
consideration of the note.The original note had a
maturity date of June 30, 2010 and accrued interest at 8% per annum. The “right”
did not accrue interest.Interest accrued was $1,285.48 for the period from April 3, 2009
(inception) to May 31, 2010. The note was assigned by the holder on May 31, 2010
and settled with 1,141,902 shares of our common stock, 570,951 Series A
Warrants, with an exercise price of $0.30 per share, expiring June 30, 2019, and
570,951 Series B Warrants, with an exercise price of $0.60 per share, expiring
June 30, 2019, including the “right” described above.





On April
27, 2010, Professional Opportunity Fund Ltd. (“POOF”) forgave and cancelled
$57,509 that the Company owed to POOF for expenses paid on behalf of the
Company.  This amount was unsecured, non-interest bearing and had no
specific terms of repayment.





A member
of the Company loaned $2,045 to the Company on no terms.





Note
      6.
            Commitments





(a)
Employment Agreements


F-13


PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to May 31,
  2010(Expressed in U.S.
  Dollars)





Note 6.
            Commitments(continued)





Employment
Agreement with Georges Daou





On the
Closing Date, we entered into an employment agreement with Georges Daou to serve
as Chief Executive Officer and Chairman of our Board of Directors.  The
agreement is for an initial term ending on December 31, 2014 and provides for an
annual base salary during the term of the agreement of not less than $300,000,
subject to potential upwards adjustments at the discretion of the compensation
committee of the Board of Directors. Mr. Daou is eligible to receive a bonus of
up to 100% of his then current base salary based upon criteria to be established
byMr.
Daou, the board of directors and the compensation committee as well as a
discretionary bonus.  In addition, Mr. Daou received an option to purchase
$375,000 worth of securities to be issued by us in our next equity
financing.  This option has a 5 year term and the securities issued
thereunder will be immediately vested upon issuance.  Immediately upon our
establishment of an employee stock option plan, we agreed to grant Mr. Daou an
option to purchase not less than 5% of our common stock on a fully diluted
basis.  These options shall vest in thirty six (36) equal monthly
installments.





On April
27, 2010 we entered into a letter agreement with Georges Daou rescinding his
employment agreement and replacing it with a Consulting agreement by and between
the Company and GJD Holdings, LLC a wholly owned entity of Georges Daou, on
substantially the same terms as those found in the aforementioned employment
agreement.





Employment
Agreement with Jonathan Kossmann





On April
27, 2010, we entered into an employment agreement with Jonathan Kossmann to
serve as President – Phreadz division (the “Kossmann Agreement”).  The
Kossmann Agreement has an initial term of two (2) years from the Closing Date,
after which it will automatically renew for successive one (1) year periods
unless either party terminates the Kossmann Agreement on not less than thirty
(30) days notice.  The Kossman Agreement provides for Mr. Kossmann to be
paid a monthly salary of $10,000 while he provides services to the Company
pursuant to the Kossman Agreement.  Additionally, the Kossman Agreement
provides that Mr. Kossmann is eligible to receive a cash bonus, at the
discretion of the Board.  The Kossman Agreement provides that, for so long
as he is an employee of the Company, Mr. Kossmann is allowed to participate in
such employee benefit plans of the Company that may be in effect from time to
time and that are offered to the Company’s other similarly situated, full-time
employees to the extent he is eligible under the terms of those
plans.





Mr.
Kossman submitted his resignation August 4, 2010, which resignation was accepted
by the Board of Directors, at which time the Kossman Agreement was
terminated.





Employment
Agreement with Jacques Krischer





On April
27, 2010, we entered into an employment agreement with Jacques Krischer to serve
as President –Music division (the “Krischer Agreement”).  The Krischer
Agreement is for an initial term of two (2) years from the Closing Date, after
which it will automatically renew for successive one (1) year periods unless
either party terminates the Krischer Agreement on not less than thirty (30) days
notice.  Mr. Krischer will be paid a monthly salary of $10,000.  Mr.
Krischer is eligible to receive a cash bonus, at the discretion of the Board of
Directors.  Mr. Krischer will be allowed to participate in such employee
benefit plans of the Company that may be in effect from time to time and that
are offered to the Company’s other similarly situated, full-time employees to
the extent you are eligible under the terms of those plans.


F-14





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to May 31,
  2010(Expressed in U.S.
  Dollars)





Note
      7.
            Warrants





The value
of the warrants have been calculated using the Black–Scholes method as of the
date of grant based on the following assumptions: an average risk free rate of
1.00%; a dividend yield of 0.00%; a cumulative volatility factor of the expected
market price of the Company’s common stock of 275.06%; and an expected life of 9
years.




On May
20, 2010, we entered into a Unit Purchase Agreement with a single accredited
investor (the May 20th
Purchaser) pursuant to which the May 20th
Purchaser purchased 10.74074 Units (“Units”) at a purchase price of $27,000 per
Unit, for an aggregate purchase price of $290,000.  Each Unit purchased
consisted of: (a) one hundred eighty thousand (180,000) shares of the Company’s
common stock; (b) a Series A Warrant to purchase ninety thousand
(90,000) shares of common stock at an exercise price of $0.30 per share; and (c)
a Series B Warrant to purchase ninety thousand (90,000) shares of common stock
at an exercise price of $0.60 per share.  Accordingly, the May 20th
Purchaser received 1,933,333 shares of common stock; a Series A Warrant to
purchase 966,666 shares of common stock; and a Series B Warrant to purchase
966,666 shares of common stock.





On May
31, 2010, we entered into Unit Purchase Agreements with nine (9) accredited
investors (the May 31st
Purchasers) pursuant to which the May 31st
Purchasers purchased 33.0425 Units at a purchase price of $27,000 per Unit, for
an aggregate purchase price of $892,147.34.  The purchase price for the
Units were paid via assignment of certain outstanding promissory notes
originally issued by our subsidiaries UDM and Phreadz.  In addition, one
May 31st
Purchaser also received the “right” with their note to receive the equivalent
amount of the face amount of such note in Units with the consideration of the
original note. Each Unit purchased consisted of: (a) one hundred eighty thousand
(180,000) shares of the Company’s common stock; (b) a Series A Warrant to
purchase ninety thousand (90,000) shares of common stock at an exercise price of
$0.30 per share; and (c) a Series B Warrant to purchase ninety thousand (90,000)
shares of common stock at an exercise price of $0.60 per share. 
Accordingly, in total, the May 31st
Purchasers received 6,514,310 shares of common stock; a Series A Warrant to
purchase 3,257,154 shares of common stock; and a Series B Warrant to purchase
3,257,154 shares of common stock.





The
Company analyzed the beneficial nature of the 4,223,820 Series A Warrants and
4,223,820 Series B Warrants based on the conversion terms described above and
determined that no material beneficial conversion feature exists.





Note
      8.
            Common
      Stock





The
acquisition of Phreadz and UDM by the Company on April 27, 2010 was accounted
for as a recapitalization by the Company. The recapitalization was the merger of
two private LLCs into a non-operating public shell corporation (the Company)
with nominal net assets and as such is treated as a capital transaction, rather
than a business combination. The transaction is the equivalent to the issuance
of stock by the private company for the net monetary assets of the shell
corporation. The pre-acquisition consolidated financial statements of Phreadz
and UDM are treated as the historical financial statements of the consolidated
Company. Therefore the capital structure of the consolidated enterprise, being
the capital structure of the legal parent, is different from that appearing in
the financial statements of Phreadz and UDM in earlier periods due to the
recapitalization.





On April
3, 2009, 1,920,000 shares were issued for property.


On May
28, 2009, 12,480,000 shares were issued for cash.


On August
25, 2009, 23,136,000 shares were issued for cash.


On March
10, 2010, 5,782,400 shares were issued for cash.


On April
27, 2010, 42,700,000 were issued and 32,712,176 shares were cancelled upon
recapitalization due to the reverse merger.


On May
20, 2010 1,933,333 shares were issued at $0.15 for cash of
$290,000


F-15




PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to May 31,
  2010(Expressed in U.S.
  Dollars)





Note 8.
            Common Stock(continued)





On May
31, 2010, 6,514,310 shares were issued in settlement of $892,147.34 in notes
assigned to the Company with one note-holder also receiving the “right” with
their settled note to receive the equivalent amount of the face amount of their
note in consideration of their note.





Note
      9.
            Taxes




As at May
31, 2010, and 2009 the Company has non-capital losses and undepreciated capital
costs of approximately $ 4,472,273 and $ 63,547, respectively, which can be
carried forward for tax purposes and are available to reduce taxable income of
future years. The non-capital losses expire commencing in 2009 through
2013.




(a)
            The
      tax effect of temporary differences that give rise to the Company’s
      deferred tax assets are as follows:


2010
                          
                          
                          2009Undepreciated
      capital cost of capital assets Over their net book value
                          
                          $
                          13,177,645
                          
                          
                          $
                          186,902Estimated
      tax loss carryforward
                          
                          
                          4,480,399
                          
                          
                          
                          63,547Less: valuation allowance
                          
                          
                          (4,480,399
                          )
                          
                          
                          (63,547
                          )-
                          
                          
                          
                          -


The
valuation allowance reflects the realization of the tax assets is
unlikely.


Note
      10.
            Contingencies




There is
currently a dispute that arose approximately August 14, 2010, between former
Phreadz President Jonathan Kossmann and Phreadz, regarding certain intellectual
property and confidential information of the Company. Mr. Kossmann has claimed
that $30,000 is owed to him pursuant to his 2009-2010 Consulting Agreement with
the Company. The Company has conducted an investigation into Mr. Kossmann's
claim with the assistance of counsel and does not believe any money is due to
him. Management believes it is unlikely that the outcome of this matter will
have an adverse impact on its result of operations and financial
condition.


F-16





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to May 31,
  2010(Expressed in U.S.
  Dollars)




Note
      11.
            Subsequent
      Events




On June
8, 2010, we entered into a Unit Purchase Agreement with a single accredited
investor (the “June 8th
Purchaser”) pursuant to which the June 8th
Purchaser purchased 7.4074 Units at a purchase price of $27,000 per Unit, for an
aggregate purchase price of $200,000.  Each Unit purchased consisted of:
(a) one hundred eighty thousand (180,000) shares of the Company’s common stock;
(b) a Series A Warrant to purchase ninety thousand (90,000) shares of common
stock at an exercise price of $0.30 per share; and (c) a Series B Warrant to
purchase ninety thousand (90,000) shares of common stock at an exercise price of
$0.60 per share.  Accordingly, the June 8th
Purchaser received 1,333,333 shares of common stock; a Series A Warrant to
purchase 666,666 shares of common stock; and a Series B Warrant to purchase
666,666 shares of common stock.




On July
16, 2010, we entered into Unit Purchase Agreements with 13 accredited investors
(the “July 16th
Purchasers”) pursuant to which the July 16th
Purchasers purchased 14 Units at a purchase price of $27,000 per Unit, for an
aggregate purchase price of $378,000. Each Unit purchased consisted of: (a) one
hundred eighty thousand (180,000) shares of the Company’s common stock; (b) a
Series A Warrant to purchase ninety thousand (90,000) shares of common stock at
an exercise price of $0.30 per share; and (c) a Series B Warrant to purchase
ninety thousand (90,000) shares of Common Stock at an exercise price of $0.60
per share.  Accordingly, in total, the July 16th
Purchasers received 2,520,000 shares of common stock; Series A Warrants to
purchase 1,260,000 shares of common stock; and Series B Warrants to purchase
1,260,000 shares of common stock.





Southridge
Investment Group LLC. an SEC Registered Broker/Dealer, Member FINRA/SIPC
(“Southridge”) acted as placement agent in connection with the sale of the 14
Units referred to above in the preceding paragraph.  Southridge received
$22,140 in commissions and expenses, 126,000 Series A Warrants, and 126,000
Series B Warrants.  We also paid $3,500 in escrow fees.  The net
proceeds of the offering after payments of the commissions and expenses and
escrow fees were approximately $352,360.





In April
2007 the Company entered into an Exchange Agreement with Professional Capital
Partners, Ltd.(“PCP”),  pursuant to which the Company and PCP agreed
to exchange 5,325,824 shares of the Company’s common stock (the "Original
Shares") for $1,000,000 worth of Units in its next financing. The Company has
offered and sold Units in a financing, with each Unit consisting of: (i) 180,000
shares of the Company’s common stock; (ii) a Series A Warrant to purchase 90,000
shares of common stock at an exercise price of $0.30 per share; and (iii) a
Series B Warrant to purchase 90,000 shares of common stock at an exercise price
of $0.60 per share.





On June
22, 2010 PCP exercised this Exchange Agreement and exchanged its Original Shares
for 37 Units.  As a result, PCP received 6,660,000 shares of common stock;
a Series A Warrant to purchase 3,330,000 shares of common stock; and a Series B
Warrant to purchase 3,330,000 shares of common stock.





A
financing expense of $1,000,632 was recorded as of May 31, 2010 as a stock
issuance liability with the exercise of the exchange agreement on June 22, 2010
as this cost became known prior to the report date of this disclosure. The
financing cost was determined using the last price of $0.75 as reported on
OTCBB.com on June 11, 2010 prior to the June 22, 2010 exercise date, on the
additional 1,334,176 shares of common stock issued to PCP pursuant to the
Exchange Agreement.


F-17




PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to May 31,
  2010(Expressed in U.S.
  Dollars)





Note 11.
            Subsequent
      Events(continued)




On June
15, 2010, our Board of Directors appointed Christine Domecq to serve as our
chief executive officer.  Ms. Domecq’s employment commenced on July 5, 2010
and we entered into an employment agreement with Ms. Domecq.  The agreement
provides for an annual base salary during the term of the agreement of $250,000,
subject to potential upwards adjustments at the discretion of the compensation
committee of the Board of Directors. Ms. Domecq is eligible to receive a bonus
of up to 100% of her then current base salary, with 50% of such bonus to be
awarded at the discretion of the Board of Directors or the compensation
committee and the remaining 50% subject to achievement of milestones to be
established by Ms. Domecq, the Board of Directors and the compensation
committee.  Immediately upon our establishment of an employee stock option
plan, we agreed to grant Ms. Domecq an option to purchase 6,748,316 shares of
our common stock.  The option shall have an exercise price equal to the
fair market value of our common stock as of the date of the employment
agreement.  The option shall vest as follows:  (1) 25% on July 5,
2011 and (2) the remaining 75%  in 18 equal monthly installments
beginning July 5, 2011.





Mr.
Kossman submitted his resignation August 4, 2010, which resignation was accepted
by the Board of Directors.


F-18


Item
9.  Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.





On April
27, 2010, we dismissed Michael Studer, CPA (“Studer”) as our independent
registered public accounting firm in connection with the reverse merger. We
engaged a new independent registered public accounting firm, Julio Le Deon, CPA
(“De Leon”). Pursuant to Item 304(a) of Regulation S-K promulgated under the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, we report as follows:





(a)
              (i)
              Studer
      was dismissed as our independent registered public accounting firm
      effective on April 27, 2010.(ii)
              The
      Company’s financial statements for its previous fiscal years ended
      November 30, 2009 and 2008 were audited by Studer.  Studer’s 2009 and
      2008 reports did not contain any adverse opinion or disclaimer of opinion,
      nor were they qualified or modified as to uncertainty, audit scope or
      accounting principles.  However, both Studer’s 2009 and 2008 reports
      included explanatory paragraphs regarding the Company’s ability to
      continue as a going concern.(iii)
              The
      termination of Studer and engagement of De Leon was approved by our Board
      of Directors.(iv)
              We
      and Studer did not have any disagreements with regard to any matter of
      accounting principles or practices, financial statement disclosure, or
      auditing scope or procedure for the audited financials for the Company’s
      previous fiscal years ended November 30, 2009 and 2008, and subsequent
      interim period from December 1, 2009 through the date of dismissal, which
      disagreements, if not resolved to the satisfaction of Studer, would have
      caused it to make reference to the subject matter of the disagreements in
      connection with its reports.(v)
              During
      the Company’s previous fiscal years ended November 30, 2009 and 2008, and
      subsequent interim period from December 1, 2009 throughout the date of
      dismissal, we did not experience any reportable events.(b)
              
              On
      April 27, 2010, in connection with the reverse merger entered into by the
      Company, we engaged De Leon as  our new independent registered
      public accounting firm.(i)
              The
      appointment of De Leon was approved by our Board.  During our two (2)
      most recent fiscal years and the subsequent interim periods through April
      27, 2010 (the date of engagement of De Leon), we did not consult De Leon
      regarding either: (i) the application of accounting principles to a
      specific completed or contemplated transaction, or the type of audit
      opinion that might be rendered on the Company’s financial statements; or
      (ii) any matter that was the subject of a disagreement as defined in Item
      304(a)(1)(iv) of Regulation S-K.(ii)
              We
      did not have any disagreements with Studer and therefore did not discuss
      any past disagreements with Studer.(c)
              
              The
      dismissal of Studer as our independent registered public accounting firm
      and our engagement of De Leon as our new independent registered public
      accounting firm was previously disclosed in our Current Report on Form 8-K
      filed with the SEC on April 27, 2010 (the “April 27th
      Form 8-K”).  We made the contents of the April 27th
      Form 8-K available to Studer and requested it to furnish a letter
      addressed to the SEC as to whether Studer agreed or disagreed with, or
      wished to clarify our expression of, our views, or that contained any
      additional information.  A copy of Studer’s letter to the SEC is
      attached as Exhibit 16.1 to the April 27th
      Form 8-K.


25


Item
9A(T).  Controls and Procedures.





The
Company’s Chief Executive Officer and Chief Financial Officer are responsible
for establishing and maintaining disclosure controls and procedures for the
Company.





(a) Evaluation of Disclosure
Controls and Procedures





Based on
their evaluation as of the end of the period covered by this Annual Report on
Form 10-K, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) are not effective to ensure that
information required to be disclosed by us in report that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms and to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.





(b) Management's Report on
Internal Control over Financial Reporting





The Company’s
management is responsible for establishing and maintaining internal control over
financial reporting and disclosure controls.  Internal control over
financial reporting is a process designed by, or under the supervision of, the
Company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the Company’s Board of
Directors, management and other personnel, 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:





1.
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;


2.
            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


3.
            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.


Disclosure
controls and procedures are designed to ensure that information required to be
disclosed in reports filed by the Company under the Exchange is appropriately
recorded, processed, summarized and reported within the specified time
periods.





Management
has conducted an evaluation of the effectiveness of our internal control over
financial reporting as of May 31, 2010 based on the framework established in the
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).





Based on
this assessment, management concluded that as of May 31, 2010 the Company had
material weaknesses in its internal control procedures.





A
material weakness is a control deficiency, or combination of control
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of our annual or interim
financial statements would not be prevented or detected on a timely
basis.





We have
concluded that our internal control over financial reporting was ineffective as
of May 31, 2010.





The
Company’s assessment identified certain material weaknesses which are set forth
below:


26


Financial
Statement Close Process





1.
            During
      the fiscal year ended May 31, 2010, the Company maintained its accounting
      books and records in three different
locations.





2.
            There
      are insufficient written policies and procedures for accounting and
      financial reporting with respect to the requirements and application of US
      GAAP and SEC disclosure
requirements.





3.
            There
      is insufficient supervision and review by our corporate management,
      particularly relating to complex transactions requiring analysis of equity
      and debt instruments.





4.
            There
      is a lack of formal processes and timelines for closing the books and
      records at the end of each reporting
period.





5.
            The
      Company currently has an insufficient level of monitoring and oversight
      controls for review and recording of stock issuances, agreements and
      contracts, including insufficient documentation and review of the
      selection and application of US GAAP to significant non-routine
      transactions. In addition this has resulted in a lack of controls over the
      issuance of the Company's stock which resulted in names of holders being
      spelt incorrectly.





These
weaknesses restrict the Company’s ability to timely gather, analyze and report
information relative to the financial statements.





Entity
Level Controls





1.
            There
      are insufficient corporate governance policies. Our corporate governance
      activities and processes are not always formally documented. Specifically,
      decisions made by the Board of Directors to be carried out by management
      should be documented and communicated on a timely basis to reduce the
      likelihood of any misunderstandings regarding key decisions affecting our
      operations and management.





2.
            The
      Company currently has insufficient resources and an insufficient level of
      monitoring and oversight, which may restrict the Company’s ability to
      gather, analyze and report information relative to the financial
      statements in a timely manner, including insufficient documentation and
      review of the selection and application of US GAAP to significant
      non-routine transactions. In addition, the limited size of the accounting
      department makes it impractical to achieve an optimum segregation of
      duties.





3.
            There
      are limited processes and limited or no documentation in place for the
      identification and assessment of internal and external risks that would
      influence the success or failure of the achievement of entity-wide and
      activity-level objectives.





Functional
Controls and Segregation of Duties





1.
            There
      is an inadequate segregation of duties consistent with control
      objectives.  The Company’s management is composed of a small
      number of individuals resulting in a situation where limitations on
      segregation of duties exist.  In order to remedy this situation we
      would need to hire additional staff to provide greater segregation of
      duties.  Currently, it is not feasible to hire additional staff to
      obtain optimal segregation of duties.  Management will reassess this
      matter in the following year to determine whether improvement in
      segregation of duties is feasible.





2.
            There
      is a lack of top level reviews in place to review targets, product
      development, joint ventures or financing.  All major business
      decisions are carried out by the Company’s officers with Board of
      Directors approval when needed.


27


Accordingly,
as the result of identifying the above material weaknesses, we have concluded
that these control deficiencies resulted in a reasonable possibility that a
material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis by the company’s internal
controls.





Management
believes that the material weaknesses set forth above were the result of the
scale of our operations and are intrinsic to our small size.  Management
believes these weaknesses did not have a material effect on our financial
results and intends to take remedial actions upon receiving funding for the
Company’s business operations.





This
annual report does not include an attestation report of our
independent registered public accounting firm regarding internal control
over financial reporting. Management’s report was not subject to attestation by
our independent registered public accounting firm pursuant to temporary rules of
the SEC that permit the Company to provide only management’s report herein.





Plan
of Remediation





We are
committed to improving our financial organization.  As part of this
commitment, we will create a position to segregate duties consistent with
control objectives and will increase our personnel resources and technical
accounting expertise within the accounting function when funds are available to
us by preparing and implementing sufficient written policies and checklists
which will set forth procedures for accounting and financial reporting with
respect to the requirements and application of US GAAP and SEC disclosure
requirements.





Management
believes that preparing and implementing sufficient written policies and
checklists will remedy the material weaknesses pertaining to insufficient
written policies and procedures for accounting and financial reporting with
respect to the requirements and application of US GAAP and SEC disclosure
requirements.  Further, management believes that the hiring of additional
personnel who have the technical expertise and knowledge will result in proper
segregation of duties and provide more checks and balances within the
department. These personnel will provide the depth of knowledge and time
commitment to provide a greater level of review for corporate activities.
 The appointment of additional outside directors with industry expertise
will greatly decrease any control and procedure issues the company may encounter
in the future.





We will
continue to monitor and evaluate the effectiveness of our internal controls and
procedures and our internal controls over financial reporting on an ongoing
basis and are committed to taking further action and implementing additional
enhancements or improvements, as necessary and as funds allow.





We intend
to take appropriate and reasonable steps to make the necessary improvements to
remediate these deficiencies, including:





1)
            We
      will document a formal code of
ethics


2)
            We
      will revise processes to provide for a greater role of independent board
      members in the oversight and review until such time that we are adequately
      capitalized to permit hiring additional personnel to address segregation
      of duties issues, ineffective controls and insufficient supervision and
      review by our corporate management.


3)
            We
      will continue to update the documentation of our internal control
      processes, including formal risk assessment of our financial reporting
      processes


4)
            Centralize
      accounting books and records to one primary
  location


5)
            Consolidate
      all books and records into one accounting
system


6)
            Commence
      the development of internal controls and procedures surrounding the
      financial reporting process, primarily through the use of account
      reconciliations, and supervision.





(c) Changes in Internal Controls
over Financial Reporting





We intend
to undertake a number of measures to remediate the material weaknesses discussed
under “Management’s Report on Internal Control Over Financial Reporting”
above.  Those measures, described under “Plan of Remediation,” will be
implemented by the Company in accordance with its plan of remediation, and when
implemented, will materially affect, or are reasonably likely to materially
affect, our internal control over financial reporting.  Other than as
described above, there have been no changes in our internal control over
financial reporting during the fiscal year ended May 31, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.


28


Item
9B.  Other Information.





Submission
of Matters to a Vote of Security Holders





On April
27, 2010, in connection with the execution of the Securities Purchase Agreements
with Phreadz USA, LLC and UDM USA, LLC, and by a majority vote of our
shareholders, Georges Daou and Gordon Samson were appointed to our board of
directors.





PART
III





Item
10.  Directors, Executive Officers and Corporate Governance.





The
following table sets forth the names, ages, and positions of our executive
officers and directors as of May 31, 2010. Executive officers are appointed
annually by our Board of Directors. Each executive officer holds his office
until he resigns, is removed by the Board, or his successor is elected and
qualified. Directors are elected annually by our stockholders at the annual
meeting. Each director holds his office until his successor is elected and
qualified or his earlier resignation or removal.





Name
                
                Age
                
                Position(s)Georges
      Daou
                
                49
                
                Chairman,
      DirectorChristina
      Domecq
                
                33
                
                CEOGordon
      A. Samson
                
                52
                
                CFO,
      Secretary, Treasurer and DirectorJacques
      Krischer
                
                53
                
                President
      - UDM divisionJonathan
      Kossmann
                
                39
                
                President
      - Phreadz divisionGreg
      Goldberg
                
                47
                
                Director





Mr.
Georges Daou, Chairman





Mr. Daou
was appointed as Chief Executive Officer, Chairman of our Board of
Directors and a director in connection with the consummation of the
Company’s acquisitions of Phreadz and UDM.  Mr. Daou served as our Chief
Executive Officer until the appointment of Christina Domecq as our new Chief
Executive Officer on July 5, 2010.  Mr. Daou completed a B.S. and an M.S.
degree in Electrical Engineering from the University of California, San Diego
(UCSD) in 1986 before beginning his career at WAVETEK in 1986 as a design
engineer. He started his own company, DAOU Systems Inc., in 1987 to design,
build and manage computer networks for healthcare organizations. He built the
business to over $125 million in revenue and took the company public in 1997.
Mr. Daou was thereafter an investor in select technology companies and currently
serves as chairman of SG Biofuels.





In 2006,
Mr. Daou founded DAOU Vineyards, a 120-acre vineyard based in Paso Robles,
California. Mr. Daou co-founded SG Biofuels in 2007 and currently acts as the
Chief Business Development Officer and Chairman of the Board of that
company.





[Mr.
Daou’s depth of experience in developing and growing companies, as well as his
expertise in the area of technology, led to the conclusion he should serve as a
director of the Company.]


29


Ms.
Christina Domecq, CEO





Ms.
Domecq was appointed on July 5, 2010 as our Chief Executive Officer. Ms. Domecq
was a co-founder of SpinVox Limited, a technology company specializing in voice
to text conversion, in 2003 where she was served as Chief Executive Officer
until its sale to Nuance Communications in December 2009.  Ms. Domecq has a
Masters from Nôtre Dame University as well as a B.A. in Systematic Theology and
a B.Sc. in Economics from Boston College.  Ms. Domecq has won a number of
awards for her entrepreneurship, including ‘The Young Entrepreneur of the Year'
and the ‘Science and Technology Entrepreneur of the Year’ from Ernst &
Young.





Mr.
Gordon A. Samson, CFO





Mr.
Samson was appointed as our Chief Financial Officer and as a director in
connection with the consummation of the Company’s acquisitions of Phreadz and
UDM.  From October 2002 to December, 2005, Mr. Samson was a Director and
Chief Financial Officer of CYOP Systems International Inc. (“OTC BB - CYOS”), a
Nevada media service corporation.  From July, 2003 to May, 2005, Mr. Samson
was President, Chief Financial Officer and Director of UpSnap, Inc. (“OTC BB –
UPSN”) (formerly Manu Forti Group Inc.), a Nevada mining company.  From
January 31, 2006 to August 30, 2006, Mr. Samson was a Director and Chief
Financial Officer of Cascade Energy Inc. (“OTC BB - CSCE”), an oil and gas
company.  From February 7, 2006 to June 30, 2006, Mr. Samson was an
independent Director of Fidelis Energy Inc. (“OTC BB - FDEI”), an oil and gas
company.  From January 17, 2006 to August 30, 2006, Mr. Samson was an
independent Director of Silver Star Energy Inc. (“OTC BB - SVSE”), an oil and
gas company. From March 24, 2006 to September 1, 2006, Mr. Samson was a Director
and the Chief Financial Officer of Tao Minerals Ltd., (“OTC BB – TAOL”), a gold
exploration company.





From
January 2006 to December 2007, Mr. Samson was President, CFO and Director of
Future Now Group Inc. (OTC BB – “FUTR”) (formerly Reperio Exploration Inc.), a
Nevada mining company.  From October 2008 to present, Mr. Samson has been
the CFO and Director of Star Oil, a private Nevada oil and gas
company.





Mr.
Samson received a Diploma of Technology in Business Administration from the
British Columbia Institute of Technology in 1982.  He received his
Certified General Accountant (“CGA”) designation in 1991.  Mr. Samson also
achieved a Certified Financial Planner designation (“CFP”) in 1998 that he does
not maintain.  Mr. Samson has been engaged in a financial capacity for the
past 24 years, through his involvement initially as a financial officer and
Manager of Finance with Revenue Canada, (1985-1989) now Canada Customs Revenue
Agency, as a Senior Banker with TD Canada Trust, a major Canadian institution
(from 1989 - 1996) and as a consultant providing Chief Financial Officer
services to a wide range of public and private companies.





[Mr.
Samson’s extensive background and broad experience serving as an officer and
director of various companies, and his expertise in corporate finance, led to
the conclusion he should serve as a director of the Company]





Mr.
Jacques Krischer, President of UDM division





Mr.
Krischer was appointed as President of our UDM division in connection with the
consummation of the Company’s acquisitions of Phreadz and UDM.  Mr.
Krischer graduated with a degree in Psychoacoustics from INSAS University
(Brussels). He created CD mastering facilities in several European
countries and initiated archiving programs for the National French Library and
EMI Music. Mr. Krischer became a music database specialist, collaborating
with Auchan, BMG, Extrapole, EMI, Fnac, Fors, Leclerc, Philips, SanDisk, SNCF,
Sony, Toshiba, Universal, Virgin, Wal-Mart, and Warner. He is co-creator of
Bernard Arnault’s music project, called mzz.com, and spent the years
between 2002 and 2010 perfecting these assets. From 1999 to 2009, he
constantly developed new concepts to help the final user to get music
recommendation without the need to enter a request with a keyboard (from 1999 to
2009). Mr. Krischer also created some programs to help databases
owners to fine-tune their assets (CDMAIL in France, ENT. UK in UK, Muze
Inc/Muze UK in USA/UK and other smaller entities in France and Germany – from
2004 to 2008). Mr. Krsicher has collaborated to several researches about
new music formats (among others with the Fraunhofer Institute in Germany) and
signed a deal with Bach Technologies (Germany, Norway, China) to help them to
launch the new MPEG7 audio/video format (2009).


30


Mr.
Jonathan Kossmann, President of Phreadz division





Mr.
Kossmann was appointed as President of our Phreadz division in connection with
the consummation of the Company’s acquisitions of Phreadz and UDM.  Mr.
Kossmann devoted fifteen years of research and development to the field of
advanced technology solutions for media distribution, digital content management
and social networking. From May 2009 until consummation of the acquisitions of
Phreadz and UDM, Mr. Kossmann has been a consultant for Phreadz pursuant to
which he was developing the Phreadz network.  From 2006 until 2008, Mr.
Kossoman was CTO at Podcast.com/Treedia.com, a company based in Boston and
Cambridge.  During this time he built an RSS feed management platform used
by clients such as Motorola and Price Waterhouse Coopers.  Prior to this,
from 2002 until 2006 he was with the BBC News interactive research team and was
respected for producing, devising and advising solid new ways to distribute and
collect news to and from the global audiences via pocket mobile screens to
billboard video screens.





Mr.
Kossman submitted his resignation August 4, 2010, which resignation was accepted
by the Board of Directors.





Mr.
Greg Goldberg, Director





Mr.
Goldberg previously served as the Company’s president and principal executive
officer from July 14, 2008 until the closing of the reverse merger on April 27,
2010.. Mr. Goldberg has served as a director of the Company since July 14,
2008.  Mr.  Goldbergis a
manager and member of Professional Traders Management, LLC (“PTM”).  Prior
to joining PTN in 2003. Mr. Goldberg was a Principal at Ocean View Capital LLC
where he managed a long/short equity fund from 1998 to 2003. Mr. Goldberg
received his Bachelors of Science in Business Administration, Marketing/Finance,
cum laude, from Marist
College in 1984.





[Mr.
Goldberg’s previous service as a director of the Company, and his experience as
a manger of investment funds, led to the conclusion that he should continue to
serve as a director of the Company.]





Indemnity
Agreements





The
Company entered into Indemnity Agreements with each person who became one of the
Company’s directors or officers in connection with the consummation of the
acquisitions of Phreadz and UDM, pursuant to which, among other things, the
Company will indemnify such directors and officers to the fullest extent
permitted by applicable law, and provide for advancement of legal expenses under
certain circumstances.





Board
Composition and Committees





Our Board
of Directors currently consists of Georges Daou, Gordon Samson and Greg
Goldberg.  We are planning to expand the number of members constituting our
Board of Directors and will seek persons who are “independent” within the
meaning of the rules and regulations of The NASDAQ Stock Market to fill
vacancies created by any expansion.  Because of our current stage of
development, we do not have any standing audit, nominating or compensation
committees, or any committees performing similar functions.  The Board will
meet periodically throughout the year as necessity dictates.  No current
director has any arrangement or understanding whereby they are or will be
selected as a director or nominee.


31


Audit
Committee Financial Expert





The
Company’s Board of Directors does not have an independent “audit committee
financial expert,” within the meaning of such phrase under applicable
regulations of the SEC, serving on its audit committee. The Company does not
have a separately designated audit committee.  The entire Board of
Directors serves as the audit committee.  The Board of Directors believes
that all members of its audit committee are financially literate and experienced
in business matters, and that one or more members of the audit committee are
capable of (i) understanding generally accepted accounting principles ("GAAP")
and financial statements, (ii) assessing the general application of GAAP
principles in connection with our accounting for estimates, accruals and
reserves, (iii) analyzing and evaluating our financial statements, (iv)
understanding our internal controls and procedures for financial reporting; and
(v) understanding audit committee functions, all of which are attributes of an
audit committee financial expert. Like many small companies, however, it is
difficult for the Company to attract and retain independent Board members who
qualify as “audit committee financial experts,” and competition for these
individuals is significant.  The Board believes that its current audit
committee is able to fulfill its role under SEC regulations despite not having a
designated independent “audit committee financial expert.”





Indebtedness
of Directors and Executive Officer





None of
our directors or our executive officers or their respective associates or
affiliates are indebted to us.





Compensation
Committee





The
Company does not maintain a standing compensation committee.  Due to the
Company’s small size at this point in time, the Board of Directors has not
established a separate compensation committee. All members of the Board of
Directors (with the exception of any member about whom a particular compensation
decision is being made) participate in the compensation award
process.





The
Company understands that in order to attract executive management talent, it
will need to offer competitive market salaries to senior management and Board
members.





Nominating
Committee





The
Company does not maintain a standing Nominating Committee and does not have a
Nominating Committee charter.  Due to the Company’s small size at this
point in time, the Board has not established a separate nominating committee and
feels that all directors should have input into nomination decisions. As such,
all members of the Board generally participate in the director nomination
process. Under the rules promulgated by the SEC, the Board of Directors is,
therefore, treated as a “nominating committee.”





With
respect to the nominations process, the Board does not operate under a written
charter, but under resolutions adopted by the Board of Directors.  The
Board is responsible for reviewing and interviewing qualified candidates to
serve on the Board, for making recommendations for nominations to fill vacancies
on the Board, and for selecting the nominees for selection by the Company’s
shareholders at each annual meeting.  The Board has not established
specific minimum age, education, experience or skill requirements for potential
directors.  The Board takes into account all factors they consider
appropriate in fulfilling their responsibilities to identify and recommend
individuals as director nominees.  Those factors may include, without
limitation, the following:





1.
            an
      individual’s business or professional experience, accomplishments,
      education, judgment, understanding of the business and the industry in
      which the Company operates, specific skills and talents, independence,
      time commitments, reputation, general business acumen and personal and
      professional integrity or
character;





2.
            the
      size and composition of the Board of Directors and the interaction of its
      members, in each case with respect to the needs of the Company and its
      shareholders; and





regarding
any individual who has served as a director of the Company, his or her past
preparation for, attendance at, and participation in meetings and other
activities of the Board of Directors or its committees and his or her overall
contributions to the Board and the Company.





The
Board may use multiple sources for identifying and evaluating nominees for
directors, including referrals from the Company’s current directors and
management as well as input from third parties, including executive search firms
retained by the Board.  The Board will obtain background information about
candidates, which may include information from directors’ and officers’
questionnaires and background and reference checks, and will then interview
qualified candidates.  The Board will then determine, based on the
background information and the information obtained in the interviews, whether
to recommend that a candidate be nominated to the Board of Directors.  We
strongly encourage and, from time to time actively survey, our shareholders to
recommend potential director candidates.


32


Family
Relationships





There are
no family relationships among the directors or executive officers of the
Company.





Conflicts
of Interest





Certain
potential conflicts of interest are inherent in the relationships between our
officers and directors, and us.


From time
to time, one or more of our affiliates may form or hold an ownership interest in
and/or manage other businesses both related and unrelated to the type of
business that we own and operate. These persons expect to continue to form, hold
an ownership interest in and/or manage additional other businesses which may
compete with ours with respect to operations, including financing and marketing,
management time and services and potential customers. These activities may give
rise to conflicts between or among the interests of us and other businesses with
which our affiliates are associated. Our affiliates are in no way prohibited
from undertaking such activities, and neither we nor our shareholders will have
any right to require participation in such other activities.





Further,
because we intend to transact business with some of our officers, directors and
affiliates, as well as with firms in which some of our officers, directors or
affiliates have a material interest, potential conflicts may arise between the
respective interests of us and these related persons or entities. We believe
that such transactions will be effected on terms at least as favorable to us as
those available from unrelated third parties.





With
respect to transactions involving real or apparent conflicts of interest, we
will adopt policies and procedures which require that: (i) the fact of the
relationship or interest giving rise to the potential conflict be disclosed or
known to the directors who authorize or approve the transaction prior to such
authorization or approval, (ii) the transaction be approved by a majority of our
disinterested outside directors, and (iii) the transaction be fair and
reasonable to us at the time it is authorized or approved by our
directors.





Term
of Office





Our
directors are appointed for a one-year term to hold office until the next annual
general meeting of our shareholders or until removed from office in accordance
with our bylaws. Our officers are appointed by our board of directors and hold
office until removed by the board.





All
officers and directors listed above will remain in office until the next annual
meeting of our stockholders, and until their successors have been duly elected
and qualified. There are no agreements with respect to the election of
directors. We have not compensated our directors for service on our board of
directors, any committee thereof, or reimbursed for expenses incurred for
attendance at meetings of our board of directors and/or any committee of our
board of directors. Officers are appointed annually by our board of directors
and each executive officer serves at the discretion of our board of directors.
We do not have any standing committees. Our board of directors may in the future
determine to pay directors’ fees and reimburse directors for expenses related to
their activities.





Involvement
in Certain Legal Proceedings





None of
our directors or executive officers has, during the past ten years,
been:





1)
            the
      subject of any bankruptcy petition filed by or against any business of
      which such person was a general partner or executive officer either at the
      time of the bankruptcy or within two years prior to that
    time;





2)
            convicted
      in a criminal proceeding or is subject to a pending criminal proceeding
      (excluding traffic violations and other minor
  offenses);


33


3)
            subject
      to any order, judgment, or decree, not subsequently reversed, suspended or
      vacated, of any court of competent jurisdiction, permanently or
      temporarily enjoining, barring, suspending or otherwise limiting his
      involvement in any type of business, securities or banking activities;
      or





4)
            found
      by a court of competent jurisdiction (in a civil action), the SEC or the
      Commodity Futures Trading Commission to have violated a federal or state
      securities or commodities law.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934 requires the Company’s directors
and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission (the “SEC”) initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of the
Company.





Officers,
directors and greater than ten percent stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.





To the
Company’s knowledge, based solely on review of the copies of such reports
furnished to the Company and representations that no other reports were required
during the year ended May 31, 2010, and except as disclosed elsewhere in this
document, the Company's officers, directors and greater than ten percent
beneficial owners have complied with all
Section 16(a) filing requirements in a timely manner through May 31, 2010.





Code
of Ethics





Due to the current stage of the
Company’s development, it has not yet developed a written code of ethics for its
directors or executive officers.





Item
11.  Executive Compensation.





The
following summary compensation table shows certain compensation information for
services rendered in all capacities for the fiscal years ended May 31, 2010 and
2009, respectively. Other than as set forth herein, no executive officer’s cash
salary and bonus exceeded $100,000 in any of the applicable years. The following
information includes the dollar value of base salaries, bonus awards, the value
of restricted shares issued in lieu of cash compensation and certain other
compensation, if any, whether paid or deferred:





Name &
                                          Principal Position
                                        
                                        Year
                                        
                                        Salary
                                          ($)
                                        
                                        
                                        Bonus
                                          ($)
                                        
                                        
                                        Stock
                                          Awards
                                        
                                        
                                        Option
                                          Awards
                                          ($)
                                        
                                        
                                        Non-Equity Incentive
                                          Plan Compensation
                                          ($)
                                        
                                        
                                        Nonqualified
                                          Deferred
                                          Compensation
                                          Earnings ($)
                                        
                                        
                                        All Other
                                          Compensation
                                          ($)
                                        
                                        Total
                                          ($)Georges
      Daou, Chairman
                                        
                                        2010
                                        
                                        
                                        50,000
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —2009
                                        
                                        
                                        -
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Christina
      Domecq, CEO
                                        
                                        2010
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —2009
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Gordon
      Samson, CFO
                                        
                                        2010
                                        
                                        
                                        50,055
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —2009
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Jacques
      Krischer, President
                                        
                                        2010
                                        
                                        
                                        90,965
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —2009
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Jonathan
      Kossmann, President
                                        
                                        2010
                                        
                                        
                                        106,726
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —2009
                                        
                                        
                                        10,000
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —




34


Outstanding
Equity Awards at Fiscal Year-End





There
have been no stock option grants, Stock Appreciation Rights (SARs) grants,
options/SAR exercises, Long Term Incentive Plans (LTIPs) or any other equity
awards granted to the named executive officers during the prior two fiscal
years.





Director
Compensation





[Insert
Director Compensation table or state that no directors have received any
compensation for their services to date. See Regulation S-K,
Item 402(r).]





Employment
Agreements





On April
27, 2010, the Company entered into employment agreements with three of its
executive officers.  On July 5, 2010, The Company entered into an
employment agreement with our CEO. The terms of each employment agreement are
described below.





Employment
Agreement with Georges Daou





On April
27, 2010, we entered into an employment agreement with Georges Daou to serve as
Interim Chief Executive Officer and Chairman of our Board of Directors. 
The agreement is for an initial term ending on December 31, 2014 and provides
for an annual base salary during the term of the agreement of not less than
$300,000, subject to potential upwards adjustments at the discretion of the
compensation committee of the Board of Directors. Mr. Daou is eligible to
receive a bonus of up to 100% of his then current base salary based upon
criteria to be established by Mr. Daou, the Board of Directors and the
compensation committee as well as a discretionary bonus.  In addition, Mr.
Daou received an option to purchase $375,000 worth of securities to be issued by
us in our next equity financing.  This option has a 5 year term and the
securities issued thereunder will be immediately vested upon issuance. 
Immediately upon our establishment of an employee stock option plan, we agreed
to grant Mr. Daou an option to purchase not less than 5% of our common stock on
a fully diluted basis.  These options shall vest in thirty six (36) equal
monthly installments.





The
agreement also contains the following material provisions: (i) reimbursement for
all reasonable travel and other out-of-pocket expenses incurred in connection
with his employment; (ii) four (4) weeks paid vacation leave; (iii) medical,
dental and life insurance benefits; (iv) a $1,000 per month automobile
allowance; and (v) a severance payment equal to the sum of two times his then
current base salary plus two times the amount of his average annual bonus
for the three years preceding such termination without cause; provided,
however, that if termination follows a change in control then Mr. Daou’s
severance payment shall equal the sum of three times his then current base
salary plus three times the amount of his average annual bonus for the
three years preceding such termination.





Employment
Agreement with Christina Domecq





On July
5, 2010 we entered into an employment agreement with Christina Domecq to serve
as our Chief Executive Officer.  The agreement provides for an annual base
salary during the term of the agreement of $250,000, subject to potential
upwards adjustments at the discretion of the compensation committee of the Board
of Directors.  Ms. Domecq is eligible to receive a bonus of up to 100% of
her then current base salary, with 50% of such bonus to be awarded at the
discretion of the Board of Directors or the compensation committee and the
remaining 50% subject to achievement of milestones to be established by Ms.
Domecq, the Board of Directors and the compensation committee.  Immediately
upon our establishment of an employee stock option plan, we agreed to grant Ms.
Domecq an option to purchase 6,748,316 shares of our common stock.  The
option shall have an exercise price equal to the fair market value of our common
stock as of the date of the employment agreement.  The option shall vest as
follows:  (1) 25% on July 5, 2011 and (2) the remaining
75%  in 18 equal monthly installments beginning July 5,
2011.


35


The
agreement also contains the following material provisions: (i) reimbursement for
all reasonable travel (up to $1,000 per month) and other out-of-pocket expenses
incurred in connection with his employment; (ii) 25 paid vacation days and
holidays; (iii) medical, dental and life insurance benefits; (iv) a $500 per
month automobile allowance; and (v) a severance payment equal to 6 months of her
current base salary plus payments of any amounts accrued and not yet
paid.





Employment
Agreement with Jonathan Kossmann





On April 27, 2010, we entered into an
employment agreement with Jonathan Kossmann to serve as President – Phreadz
division (the “Kossmann Agreement”).  The Kossmann Agreement had an initial
term of two (2) years from April 27, 2010, after which it was to automatically
renew for successive one (1) year periods unless either party terminated the
Kossmann Agreement on not less than thirty (30) days notice.  Mr. Kossmann
was paid a monthly salary of $10,000.  Additionally, Mr. Kossmann waseligible to receive a cash
bonus, at the discretion of the Board.Mr. Kossmann was also allowed to
participate in such employee benefit plans of the Company that may have been in
effect from time to time and that were offered to the Company’s other similarly
situated, full-time employees to the extent he would have eligible under the
terms of those plans.





On August
4, 2010, Mr. Kossman resigned as President – Phreadz division and his employment
agreement terminated immediately upon such resignation.





Employment
Agreement with Jacques Krischer





On April
27, 2010, we entered into an employment agreement with Jacques Krischer to serve
as President – Music division (the “Krischer Agreement”).  The Krischer
Agreement has an initial term of two (2) years from April 27, 2010, after which
it will automatically renew for successive one (1) year periods unless either
party terminates the Krischer Agreement on not less than thirty (30) days
notice.  Mr. Krischer is paid a monthly salary of $10,000.  Mr.
Krischer is eligible to receive a cash bonus, at the discretion of the
Board.  Mr. Krischer will be allowed to participate in such employee
benefit plans of the Company that may be in effect from time to time and that
are offered to the Company’s other similarly situated, full-time employees to
the extent you are eligible under the terms of those plans.





Defined
Benefit or Actuarial Plan





The
Company does not have a defined benefit or actuarial plan in place.





Securities
Authorized for Issuance Under Equity Compensation Plans




As of May
31, 2010, the Company had no equity securities authorized for issuance under any
compensation plans (including individual compensation
arrangements).





Item
12.  Security Ownership of Certain Beneficial owners and Management and
Related Stockholder Matters.





The
following table contains information about the beneficial ownership of our
common stock, as of August 9, 2010, for:





(i)
            each
      person who beneficially owns more than five percent of our common
      stock;




(ii)
            each
      of our directors;




(iii)
            the
      named executive officers; and




(iv)
            all
      directors and executive officers as a
group.


36





Name and Address of
                                                                                                                Beneficial Owner
                                                                                                              
                                                                                                              Title of Class
                                                                                                              
                                                                                                              Number of Shares
                                                                                                                Beneficially Owned(1)
                                                                                                              
                                                                                                              
                                                                                                              Percent of
                                                                                                                Class(1) (2)5%
      or Greater Stockholders:GJD
      Holdings LLC
                                                                                                              
                                                                                                              Common Stock
                                                                                                              
                                                                                                              
                                                                                                              6,460,800
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              9.65
                                                                                                              %18632
      Via CataniaRancho
      Santa Fe, CA (3)GJ
      Daou & Company LLC
                                                                                                              
                                                                                                              Common
      Stock
                                                                                                              
                                                                                                              
                                                                                                              4,960,000
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              7.41
                                                                                                              %18632
      Via CataniaRancho
      Santa Fe, CA (4)Groupmark
      Financial Services, Ltd.
                                                                                                              
                                                                                                              Common
      Stock
                                                                                                              
                                                                                                              
                                                                                                              4,385,200
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              6.55
                                                                                                              %Jianwai
      Soho39
      East 3rd
      Ring Road, Building 4, Room 1104Chaoyang
      District, Beijing PR China 100738Cecil
      Bernard
                                                                                                              
                                                                                                              Common
      Stock
                                                                                                              
                                                                                                              
                                                                                                              5,919,376
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              8.84
                                                                                                              %53
      Danson RoadBexleyheath,
      Kent, UKDA6
      8HPProfessional
      Capital Partners, Ltd
                                                                                                              
                                                                                                              Common
      Stock
                                                                                                              
                                                                                                              
                                                                                                              7,741,902
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              11.56
                                                                                                              %1400
      Old Country Road, Suite 206Westbury,
      NY 11590Telperion
      Holding Ltd.
                                                                                                              
                                                                                                              Common
      Stock
                                                                                                              
                                                                                                              
                                                                                                              5,293,866
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              7.91
                                                                                                              %PO
      Box 822 GTSuite
      20, 2nd FloorJack
      and Jill Building, 19 Fort StreetGeorgetown,
      Grand CaymanDirectors
      and NamedExecutive
      Officers:Georges
      Daou (3), (4), (5)
                                                                                                              
                                                                                                              Common
      Stock
                                                                                                              
                                                                                                              
                                                                                                              11,420,800
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              17.06
                                                                                                              %Christina
      Domecq
                                                                                                              
                                                                                                              Common
      Stock
                                                                                                              
                                                                                                              
                                                                                                              2,560,000
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              3.82
                                                                                                              %Jacques
      Krischer
                                                                                                              
                                                                                                              Common
      Stock
                                                                                                              
                                                                                                              
                                                                                                              6,240,000
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              9.32
                                                                                                              %Jonathan
      Kossmann
                                                                                                              
                                                                                                              Common
      Stock
                                                                                                              
                                                                                                              
                                                                                                              3,893,760
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              5.82
                                                                                                              %Gordon
      Samson
                                                                                                              
                                                                                                              Common
      Stock
                                                                                                              
                                                                                                              
                                                                                                              1,000,000
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1.49
                                                                                                              %All
      directors and executive officers as a group (4 persons):
                                                                                                              
                                                                                                              Common
      Stock
                                                                                                              
                                                                                                              
                                                                                                              25,114,560
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              37.51
                                                                                                              %


*Less
than 1%


(1)
Beneficial ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities. The
indication herein that shares are beneficially owned is not an admission on the
part of the listed stockholder that he, she or it is or will be a direct or
indirect beneficial owner of those shares.





(2) Based
upon 66,941,376 shares of common stock issued and outstanding as of August 9,
2010.





(3)
Georges Daou is the Manager and sole member of GJD Holdings, LLC and as such has
the power to direct the vote and disposition of these shares.





(4)
Georges Daou owns 64.632% of GJDaou & Company, LLC and is the sole Manager
of such company.  Mr. Daou has the power to direct the vote and disposition
of the shares owned by GJDaou & Company, LLC.  Mr. Daou disclaims
beneficial ownership of all but 3,205,744 of these shares.


37


Item
13.  Certain Relationships and Related Transactions, and Director
Independence.





A note
holder of the Company loaned $200,000 to the Company pursuant to a Note(s)
Payable Agreement dated August 10, 2009. The loan includes a $16,000 interest
bonus and accrues simple interest at a rate of 8% per annum. The note matured on
December 31, 2009 and by agreement was extended to March 31, 2010. Interest
accrued at the rate of 8% annually and was $13,776.64 for the period from April
3, 2009 (inception) to May 31, 2010. As of May 31, 2010, this Note(s) Payable
were in default and as of August 3, 2010, $190,000 of the outstanding amount has
been repaid.





A note
holder of the Company loaned $25,000 to the Company pursuant to a Note(s)
Payable Agreement dated March 26, 2010. On June 30, 2010 this note was paid out,
including $1,052.06 of accumulated interest.





Director
Independence





We
currently do not have any directors who are “independent” within the meaning of
the rules and regulations of The NASDAQ Stock Market.  We are planning to
expand the number of members constituting our Board of Directors and will seek
persons who are “independent” to fill vacancies created by such an expansion of
our Board of Directors.





Item
14.  Principal Accounting Fees and Services.





The
following table sets forth the fees billed to the Company for professional
services rendered by the Company's principal accountant, for the period from
April 3, 2009 (the date of inception of Phreadz and UDM) through May 31, 2009
and the fiscal year ended May 31, 2010:





Services
                  
                  2010
                  
                  
                  2009Audit
      fees
                  
                  
                  25,000
                  
                  
                  
                  10,000Audit
      related fees
                  
                  
                  -
                  
                  
                  
                  -Tax
      fees
                  
                  
                  -
                  
                  
                  
                  -All
      other fees
                  
                  
                  15,000
                  
                  
                  
                  -Total
      fees
                  
                  
                  40,000
                  
                  
                  
                  10,000





Audit Fees. Consist of fees
billed for professional services rendered for the audits of our financial
statements, reviews of our interim consolidated financial statements included in
quarterly reports, services performed in connection with filings with the SEC
and related comfort letters and other services that are normally provided by
Julio De Leon, CPA in connection with statutory and regulatory filings or
engagements.





Tax Fees. Consist of fees
billed for professional services for tax compliance, tax advice and tax
planning. These services include assistance regarding federal, state and local
tax compliance and consultation in connection with various transactions and
acquisitions.





Board of
Directors Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors





The Board
of Directors is to pre-approve all audit and non-audit services provided by the
Company’s independent auditors.  These services may include audit services,
audit-related services, tax services and other services as allowed by law or
regulation.  Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specifically approved amount.  The
independent auditors and management are required to periodically report to the
Board of Directors regarding the extent of services provided by the independent
auditors in accordance with this pre-approval and the fees incurred to
date.  The Board of Directors may also pre-approve particular services on a
case-by-case basis.


38


The Board
of Directors pre-approved 100% of the Company’s 2010 audit fees, audit-related
fees, tax fees, and all other fees to the extent the services occurred after May
31 2010, the effective date of the Securities and Exchange Commission’s final
pre-approval rules.





PART
IV





Item
15.  Exhibits and Financial Statement Schedules.





The
following documents are filed herewith or have been included as exhibits to
previous filings with the SEC and are incorporated herein by this
reference:





(a)           Financial
Statements and Schedules





See the
Company’s financial statements and notes thereto included in this Annual Report
on Form 8-K under “Item 8. Financial Statements and Supplementary
Data.”





(b)           Exhibits





EXHIBIT
INDEX





Exhibit No.
                
                Exhibit2.1
                
                Securities
      Purchase Agreement dated as of April 21, 2010 by and among the Company,
      Phreadz USA LLC and the members of Phreadz USA, LLC.
(1)2.2
                
                Securities
      Purchase Agreement dated as of April 21, 2010 by and among the Company,
      Universal Database of Music USA LLC and the members of Universal Database
      of Music USA, LLC. (1)3.1
                
                Articles
      of Incorporation. (2)3.2
                
                Certificate
      of Amendment to Articles of Incorporation. (3)3.3
                
                Bylaws.
      (2)3.4
                
                Articles
      of Organization of Phreadz USA, LLC. (1)3.5
                
                Articles
      of Organization of Universal Database of Music USA, LLC.
    (1)3.6
                
                Amended
      and Restated Operating Agreement of Phreadz USA, LLC.
  (1)3.7
                
                Amended
      and Restated Operating Agreement of Universal Database of Music USA, LLC.
      (1)4.1
                
                Form
      of Note. (1)4.2
                
                Secured
      Convertible Note dated March 23, 2010 issued by Universal Database of
      Music USA LLC and Phreadz USA LLC. (1)4.3
                
                Form
      of Corporate Loan Agreement dated April 9, 2010. (1)10.1
                
                Asset
      Purchase Agreement dated May 28, 2009 between Universal Database of Music
      USA LLC, UDM, Ltd. and Jacques Krischer. (1)10.2
                
                Consulting
      Agreement dated May 2009 between Phreadz USA LLC and Jonathan Kossmann.
      (1)


39





Exhibit No.
              
              Exhibit10.3
              
              Subscription
      Agreement dated March 23, 2010. (1)10.4
              
              Security
      Agreement dated March 23, 2010. (1)10.5
              
              Intellectual
      Property Security Agreement dated March 23, 2010. (1)10.6
              
              Employment
      Agreement between the Company and Georges Daou.** (1)10.7
              
              Employment
      Agreement between the Company and Jonathan Kossmann.**
  (1)10.8
              
              Employment
      Agreement between the Company and Jacques Krischer.**
  (1)10.9
              
              Restricted
      Stock Agreement between the Company and Jacques Krischer.**
      (1)10.10
              
              Restricted
      Stock Agreement between the Company and GJD Holdings.**
  (1)10.11
              
              Form
      of Indemnity Agreement.** (1)10.12
              
              Form
      of Unit Purchase Agreement. (4)10.13
              
              Form
      of Registration Rights Agreement.(4)10.14
              
              Form
      of Warrant. (4)31.1
              
              Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.*31.2
              
              Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.*32.1
              
              Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.*32.2
              
              Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.*





* Filed
herewith.


**
Management contract or compensatory plan, contract or arrangement.





(1)
Incorporated by reference from the Company’s Current Report on Form 8-K, filed
with the SEC on April 27, 2010.


(2)
Incorporated by reference from the Company’s Registration Statement on Form
SB-2, No. 333-35336, filed with the SEC on June 8, 2006.


(3)
Incorporated by reference from Appendix A to the Company’s Definitive
Information Statement on Schedule 14C, filed with the SEC on May 24,
2010.


(4)
Incorporated by reference from the Company’s Current Report on Form 8-K, filed
with the SEC on May 26, 2010.


40


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 its behalf by the undersigned, thereunto duly
authorized.





PHREADZ,
      INC.Date:  August
      31, 2010
                  By:
                  /s/ Christina DomecqChristina
      Domecq, Chief Executive
Officer





Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.





Signature
              
              Title
              
              Date/s/ Christina Domecq
              
              Chief
      Executive Officer
              
              August
      31, 2010Christina
      Domecq
              
              (Principal
      Executive Officer)/s/ Gordon A. Samson
              
              Chief
      Financial Officer, Secretary, Treasurer and Director
              
              August
      31, 2010Gordon
      A. Samson
              
              (Principal
      Accounting and Financial Officer)/s/ Georges Daou
              
              Chairman
      and Director
              
              August
      31, 2010Georges
      Daou/s/ Greg Goldberg
              
              Director
              
              August
      31, 2010Greg
      Goldberg


41