ZRVT Zurvita Holdings Inc (CE)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)                                                                                                                                                                 

x       Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended April 30, 2012

 

o       Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _________ to _________

 

Commission file number 333-145898

 

ZURVITA HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		26-0531863
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

 

800 Gessner Rd, Suite 110

Houston, Texas 77024

(Address of principal executive offices) (zip code)

 

 

(713) 464-5002

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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.  Yes x       No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 o    No o

 

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

Large accelerated filer    o	Accelerated filer   o
Non-accelerated filer     o (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 o       No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of June 14, 2012:

65,160,954 shares of common stock, par value $0.0001

 

 

 

 

 

 

ZURVITA HOLDINGS, INC.

 

FORM 10-Q

 

PART I - FINANCIAL INFORMATION

 

	Page No.
Item 1.   Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets – April 30, 2012 and July 31, 2011 (audited)	3
Condensed Consolidated Statements of Operations – For the Three and Nine Months Ended April 30, 2012 and 2011	4
Condensed Consolidated Statements of Cash Flows – For the Nine Months Ended April 30, 2012 and 2011	5
Condensed Consolidated Statement of Stockholders’ Deficit – For the Nine Months Ended April 30, 2012	6
Notes to Interim Condensed Consolidated Financial Statements	7
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.	24
Item 3.   Quantitative and Qualitative Disclosures about Market Risk.	31
Item 4.   Controls and Procedures.	21

 

PART II - OTHER INFORMATION

 

	Page No.
Item 1.   Legal Proceedings.	32
Item 1a. Risk Factors.	32
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.	32
Item 3.   Defaults Upon Senior Securities.	32
Item 4.   Mine Safety Disclosures.	32
Item 5.   Other Information.	32
Item 6.   Exhibits.	33
Signatures	34

 

 

ZURVITA HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

						(Audited)
		April 30, 2012				July 31, 2011
ASSETS
Current assets
Cash		$	53,362			$	906
Marketable securities (at fair value)			1,600				36,800
Accounts receivable			407,789				202,710
Deferred expenses			227,488				90,369
Total current assets			690,239				330,785
Property, plant and equipment (net)			53,058				73,551
Deposit			5,000				-
Total assets		$	748,297			$	404,336
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable		$	284,274			$	236,809
Accounts payable - related party			197,115				319,816
Notes payable - current			2,404,111				158,127
Notes payable - related party			200,000				465,000
Accrued expenses			565,371				313,140
Deferred revenue			70,276				114,796
Deferred compensation - related party			-				97,546
Income tax payable			2,903				4,486
Total current liabilities			3,724,050				1,709,720
Notes payable - long term			-				1,961,860
Fair value of warrants			495,408				299,600
Total liabilities			4,219,458				3,971,180
Redeemable preferred stock			8,825,291				6,026,747
Stockholders' deficit
Common stock ($.0001 par value, 300,000,000 shares authorized; 73,160,954 and 69,498,713 shares issued and 65,160,954 and 61,498,713 shares outstanding as of  April 30, 2012 and July 31, 2011, respectively			7,316				6,950
Treasury stock			(210,000	)			(210,000	)
Additional paid-in capital			10,469,399				10,384,491
Accumulated deficit			(22,563,167	)			(19,775,032	)
Total stockholders' deficit			(12,296,452	)			(9,593,591	)
Total liabilities, redeemable preferred stock and stockholders' deficit		$	748,297			$	404,336

 

       

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

       

 

 

ZURVITA HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the Three Months Ended								For the Nine Months Ended
		April 30,								April 30,
		2012				2011				2012				2011
REVENUES
Administrative websites		$	136,294			$	230,265			$	394,092			$	1,081,627
Advertising sales			37,740				137,074				146,219				591,229
Commissions			47,377				91,972				214,209				368,598
Consumable products			1,706,497				463,617				3,460,826				490,385
Marketing fees and materials			44,849				191,512				185,587				749,675
Membership fees			29,940				100,201				94,130				381,580
Total revenues			2,002,697				1,214,641				4,495,063				3,663,094
COST OF SALES
Benefit and service cost			144,319				264,513				480,305				886,914
Consumable products manufacturing cost			459,426				126,895				931,421				126,895
Sales commissions			983,773				475,042				2,320,486				1,465,268
Total cost of sales			1,587,518				866,450				3,732,212				2,479,077
GROSS PROFIT			415,179				348,191				762,851				1,184,017
OPERATING EXPENSES
Depreciation			7,848				8,772				24,300				28,089
Office related expenses			133,275				144,752				403,698				406,277
Payroll and employee benefits			467,510				575,646				1,485,517				1,689,589
Professional fees			177,600				168,413				570,560				663,381
Selling and marketing			193,430				291,160				533,665				1,223,990
Travel			45,009				55,462				88,874				172,688
Total operating expenses			1,024,672				1,244,205				3,106,614				4,184,014
Loss from operations before other (expense) income			(609,493	)			(896,014	)			(2,343,763	)			(2,999,997	)
OTHER (EXPENSE) INCOME
Gain on change in fair value of share conversion feature			-				-				-				462,013
Gain on extinguishment of debt			-				13,000				80,233				13,000
Interest expense			(101,030	)			(88,372	)			(294,465	)			(256,221	)
Interest income			1,008				-				2,315				4,756
Loss on change in fair value of marketable securities			-				(240,000	)			(35,200	)			(400,000	)
(Loss) gain on change in fair value of warrants			(467,972	)			154,400				(194,352	)			6,062,400
Total other income			(567,994	)			(160,972	)			(441,469	)			5,885,948
(Loss) income before income taxes			(1,177,487	)			(1,056,986	)			(2,785,232	)			2,885,951
Income taxes			1,561				448				2,903				3,121
Net (loss) income		$	(1,179,048	)		$	(1,057,434	)		$	(2,788,135	)		$	2,882,830
Basic and diluted (loss) earnings per share		$	(0.02	)		$	(0.02	)		$	(0.04	)		$	0.05
Basic and diluted weighted average number of common shares outstanding			65,160,954				61,498,713				65,160,954				61,498,713

              

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

 

ZURVITA HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Nine Months Ended
		April 30, 2012				April 30, 2011
Cash flows from operating activities
Net (loss) income		$	(2,788,135	)		$	2,882,830
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Amortization of note payable discount			159,822				142,145
Depreciation			24,300				28,089
Share-based compensation			55,274				343,212
Gain on change in fair value of share conversion feature			-				(462,013	)
Gain on extinguishment of debt			(80,233	)			(13,000	)
(Loss) gain on change in fair value of warrants			194,352				(6,062,400	)
Loss on change in fair value of marketable securities			35,200				400,000
Changes in operating assets and liabilities
Increase in accounts receivable			(205,079	)			(34,541	)
Decrease in agent advanced compensation			-				448,553
Increase in other assets			(5,000	)			-
Increase in deferred expenses			(89,199	)			(58,257	)
Increase in accounts payable and accrued expenses			292,052				136,076
Decrease in deferred revenue			(44,520	)			(609,804	)
Decrease in deferred compensation related party			-				(12,692	)
Net cash used in operating activities			(2,451,166	)			(2,871,802	)
Cash flows from investing activities:
Net proceeds from promissory note receivable			-				1,702,000
Purchase of property and equipment			(3,807	)			(10,191	)
Net cash (used in) provided by investing activities			(3,807	)			1,691,809
Cash flows from financing activities:
Advanced security proceeds			-				1,000,000
Proceeds from borrowings			200,000				30,000
Proceeds from exercise of warrants			-				500
Proceeds from sale of preferred stock			2,800,000				-
Principal payments made on notes payable			(492,571	)			(139,831	)
Net cash provided by financing activities			2,507,429				890,669
Net change in cash balance			52,456				(289,324	)
Beginning cash			906				289,442
Ending cash		$	53,362			$	118
Supplemental disclosure of cash flow information
Cash paid for interest		$	6,640			$	13,750
Cash paid for taxes		$	4,531			$	-

 

         

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

 

 

ZURVITA HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT

(Unaudited)

 

		Shares Common Stock				Common Stock				Treasury Stock				Additional Paid-In Capital				Accumulated Deficit				Total Stockholder's Deficit
Balance, July 31, 2011			61,498,713			$	6,950			$	(210,000	)		$	10,384,491			$	(19,775,032	)		$	(9,593,591	)
Share-based compensation			-				-				-				55,274				-				55,274
Issuance of common stock			3,662,241				366				-				29,634				-				30,000
Net loss available to common stockholders			-				-				-				-				(2,788,135	)			(2,788,135	)
																			-
Balance, April 30, 2012			65,160,954			$	7,316			$	(210,000	)		$	10,469,399			$	(22,563,167	)		$	(12,296,452	)

 

                         

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

 

  ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

NOTE 1 – NATURE OF OPERATIONS

 

Our consolidated financial statements include the accounts of Zurvita Holdings, Inc. (referred to herein as the “Company,” “Zurvita Holdings,” “we,” “us” or “our”) and our wholly-owned subsidiary Zurvita, Inc. (Zurvita). Material intercompany transactions and balances have been eliminated upon consolidation. Zurvita Holdings is a national network marketing company offering high-quality products and services targeting individuals, families and small businesses. Products are sold through Zurvita’s network of independent sales consultants.

 

Management’s Assessment of Liquidity

 

Since the Company’s inception, the Company has primarily met its operating cash requirements through equity contributions from The Amacore Group, Inc. (Amacore), who was the Company’s sole shareholder prior to July 30, 2009. Subsequent to July 30, 2009, the Company has sold several series of preferred stock for gross proceeds of $11.4 million to another related party. We are using the proceeds from the sale of preferred stock to subsidize the Company’s operations as the Company’s revenues and operating cash flows are not currently sufficient to support the Company’s current operations.

 

At April 30, 2012, the Company had negative working capital of approximately $3.0 million, an accumulated deficit of approximately $22.6 million and negative cash flows from operating activities of approximately $2.5 million. Since the date of inception, the Company has used approximately $12.6 million in operations.

 

The Company believes that without the support of its related party stockholders its cash resources would be insufficient to sustain current planned operations for the next 12 months. Additional cash resources may be required should the Company not meet its sales targets, exceed its projected operating costs, wish to accelerate sales or complete one or more acquisitions or if unanticipated expenses arise or are incurred.  

 

The Company does not currently maintain a line of credit or term loan with any commercial bank or other financial institution and has not made any other arrangements to obtain additional financing.  We can provide no assurance that we will not require additional financing.  Likewise, we can provide no assurance that if we need additional financing that it will be available in an amount or on terms acceptable to us, if at all.  If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we may be unable to execute our business plan or pay our costs and expenses as they are incurred, which could have a material, adverse effect on our business, financial condition and results of operations.

 

These issues raise substantial doubt about our ability to continue as a going concern for a reasonable period.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Revenue Recognition

 

Administrative Websites

 

Company’s independent representatives pay a fee to the Company entitling them to use of websites that facilitate their business operations.  Revenue is recognized ratably over the website subscription period.

 

Advertising Sales

 

The Company markets subscriptions to a service that facilitates the ability of customers, typically small business owners, to display commercial advertising via an on-line search directory.  Revenue is recognized ratably over the advertising subscription period.

 

Commissions

 

The Company is paid a commission for its sales of third-party products. Commissions are recognized as products are sold and services performed and the Company has accomplished all activities necessary to complete the earnings process.  

 

Consumable Products

 

The company markets a nutritional drink and a weight management program that includes a nutritional drink, protein shakes, herbal and probiotic cleanse tablets and metabolism enhancer tablets. Revenue from the sale of these consumable products are recognized upon shipment and acceptance of the product by the customer.

 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

Marketing Fees and Materials

 

Prior to April 2011, the independent sales consultants paid the Company an annual fee to become marketing representatives on behalf of the Company.  In exchange, the representatives received access, on an annual basis, to various marketing and promotional materials and tools as well as access to a customized management reporting platform. Accordingly, revenue from marketing fees is recognized over an annual period.  

 

The Company also earns ancillary revenue from the sale of marketing materials to sales consultants.  Revenue is recognized when marketing materials are delivered.

 

Membership Fees

 

The Company recognizes revenues from membership fees as earned for the sales of other lifestyle discount benefit programs, such as household protection and personal financial services.  These arrangements are generally renewable monthly and revenue is recognized over the renewal period.  These products often include elements sold through contracts with third-party providers.  Based on consideration of each contractual arrangement, revenue is reported on a gross basis.

 

Refunds and Chargebacks

 

The Company records a reduction in revenue for estimated refunds and chargebacks from credit card companies based upon actual history and management’s evaluation of current facts and circumstances.   Refunds and chargebacks totaled approximately $51 thousand and $24 thousand for the three months ended April 30, 2012 and 2011, respectively, and $89 thousand and $108 thousand for the nine months ended April 30, 2012 and 2011, respectively, and were recorded as a reduction of revenue in the accompanying statements of operations.  Estimates for an allowance for refunds and chargebacks totaled approximately $10 thousand and $10 thousand is included in accrued expenses in the accompanying consolidated balance sheets as of April 30, 2012 and July 31, 2011, respectively.

 

Selling and Marketing Costs

  

The Company classifies merchant account fees, fulfillment costs and lead cost not identifiable with specific product sales within selling and marketing costs within the Statement of Operations.

 

Concentration of Credit Risk

 

All of the Company’s credit card processing is with one merchant processor, as well as all marketing sales commission payments are calculated by a third-party service provider.

 

Use of Estimates

 

The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for sales refunds and chargebacks, capitalization of certain assets, depreciable/amortizable lives, impairment of long-lived assets, determination of amount of allowance for doubtful accounts, the fair value of marketable securities, the expected volatility of common stock, and the fair value of common stock and warrants as well as the allocation of proceeds from the issuance of debt and equity instruments.   We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.

Marketable Securities

 

The Company’s marketable securities consist of non-registered common stock. The Company fair values these securities on a recurring basis and has accounted for these securities as trading securities in accordance with U.S. GAAP.  These investments are carried in the accompanying consolidated balance sheet at fair value, with the difference between cost and fair value (unrealized gains and losses) included in the Statement of Operations.  Marketable securities are classified as current assets as they are available to meet the current operating needs of the Company.

 

 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

Accounts Receivable

 

Accounts receivable are stated at estimated net realizable value. Accounts receivable are primarily comprised of balances due from memberships, net of estimated allowances for uncollectible accounts. In determining collectability, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances. At April 30, 2012 and July 31, 2011, no allowance was recorded.

 

Property, Plant and Equipment

 

Property, plant and equipment are recorded at cost. The cost of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the property as follows: computer hardware, 3 years; furniture and fixtures, 7 years; equipment and machinery, 5 years; and leasehold improvements, the shorter of the term of the lease or the life of the asset. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in the results of operations.

 

Share-Based Compensation

 

The Company recognizes the cost resulting from all share-based payment transactions in the financial statements using a fair-value-based measurement method.  The Company uses the Black-Scholes Option Pricing Model in computing the fair value of warrant instrument issuances.

 

The measurement date for valuing share-based payments made to non-employees is the earlier of the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or the date at which the counterparty’s performance is complete.

 

Convertible Instruments

 

The Company reviews the terms of convertible debt and preferred stock for indications requiring bifurcation, and separate accounting for the embedded conversion feature. Generally, embedded conversion features where the ability to physical or net-share settle the conversion option is not within the control of the Company or the number of shares is variable are bifurcated and accounted for as derivative financial instruments. (See Derivative Financial Instruments below.) Bifurcation of the embedded derivative instrument requires allocation of the proceeds first to the fair value of the embedded derivative instrument with the residual allocated to the host instrument. The resulting discount to the debt instrument or to the redemption value of convertible preferred securities is accreted through periodic charges to interest expense over the term of the note or to dividends over the period to earliest conversion date using the effective interest rate method, respectively.

 

Derivative Financial Instruments

 

The Company does not use derivative financial instruments to hedge exposures to cash-flow or market risks. However, certain other financial instruments, such as warrants to purchase the Company’s common stock and the embedded conversion features of debt and preferred instruments that are not considered indexed to the Company’s common stock are classified as liabilities when either (a) the holder possesses rights to net-cash settlement, (b) physical or net share settlement is not within the control of the Company, or (c) based on its anti-dilutive provisions. In such instances, net-cash settlement is assumed for financial accounting and reporting. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period. Fair value for option-based derivative financial instruments is determined using the Black-Scholes Option Pricing Model.

 

Income Taxes

 

The Company accounts for income taxes using an asset and liability method pursuant to which deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided against deferred tax assets based on the weight of available evidence when it is more likely than not that some or all of the deferred tax assets will not be realized.

 

 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, we believe it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as income tax expense in the statement of operations.

 

Fair Value Measurements

 

U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability to a third party with the same credit standing (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In many cases, the exit price and the transaction (or entry) price will be the same at initial recognition. However, in certain cases, the transaction price may not represent fair value. Fair value is a market-based measurement determined based on a hypothetical transaction at the measurement date, considered from the perspective of a market participant, not based solely upon the perspective of the reporting entity. When quoted prices are not used to determine fair value, consideration is given to three broad valuation techniques: (i) the market approach, (ii) the income approach, and (iii) the cost approach. Entities are required to determine the most appropriate valuation technique to use, given what is being measured and the availability of sufficient inputs. Inputs to fair valuation techniques are prioritized, allowing for the use of unobservable inputs to the extent that observable inputs are not available. The applicable guidance establishes a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. The input levels are defined as follows:

 

Level 1

Unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2

Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1, quoted prices in markets that are not active, or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3

Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.  Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as those for which the determination of fair value requires significant management judgment or estimation.

 

Earnings (Loss) Per Share

 

Basic earnings (loss) per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method. Convertible debt and warrants, officer, employee and non-employee stock options that are considered potentially dilutive are included in the fully diluted shares calculation as long as the effect is not anti-dilutive. Contingently issuable shares are included in the computation of basic loss per share when the issuance of the shares is no longer contingent.

 

Subsequent Events

 

Management has evaluated subsequent events through the date the financial statements were issued. 

 

 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

NOTE 3 – NON CASH INVESTING AND FINANCING ACTIVITIES

 

The following table presents a summary of the various noncash investing and financing transactions that the Company entered into during the nine months ended:

 

		April 30, 2012				April 30, 2011
Financed insurance agreement		$	48,439			$	19,627
Accrued interest converted to principal			103,434				97,014

 

NOTE 4 – DEFERRED EXPENSES

 

Deferred expenses increased to approximately $227 thousand at April 30, 2012 from approximately $90 thousand at July 31, 2011, an increase of approximately $137 thousand. The increase is a result of deposits paid on bulk packaging materials, on sales recognition retreat, and on various insurance renewals.

 

NOTE 5 – NOTES PAYABLE

 

Notes payable consist of the following:

 

		April 30, 2012				July 31, 2011
Related party convertible note payable; face amount $2 million; bearing interest of 6% per annum; secured; principal payment due on October 9, 2012		$	2,225,116			$	1,961,860
Financing agreement; bearing interest at 5.75% per annum; payable in monthly installments of approximately $2.2 thousand due through July 2012			20,868				-
Related party Promissory note payable; bearing interest of 15% per annum; unsecured; due on demand			200,000				465,000
Promissory note payable; bearing interest of 7.5% per annum; unsecured; principal payments due monthly approximately $27 thousand through July 2011; currently in default			158,127				158,127
Total notes payable			2,604,111				2,584,987
Less current portion			2,604,111				623,127
Total long-term debt		$	-			$	1,961,860

 

 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

The convertible note’s principal balance is due three years from the date of issuance and convertible at any time at the option of the holder at a conversion price of $0.25 per share. The Company has accounted for the conversion feature as an embedded derivative instrument requiring it to be separated from the note payable and reported at fair value. The fair value of the conversion feature at issuance date was approximately $593 thousand. The separation of the conversion feature from the note payable resulted in a discount on the note payable and a share conversion liability in the amount of approximately $593 thousand.

 

The share conversion liability is subject to recurring fair value adjustments each reporting period (see Note 9 - Assets and Liabilities Measured at Fair Value). The discount is amortized over the life of the note payable using the effective interest method and recorded as interest expense in the statement of operations. During the three and nine months ended April 30, 2012 , total interest expense related to the convertible note payable was approximately $88 thousand and $263 thousand, respectively. During the three and nine months ended April 30, 2011, total interest expense related to the convertible note payable was approximately $81 thousand and $239 thousand, respectively . Of the interest expense recognized for the nine months ended April 30, 2012 and 2011, approximately $103 thousand and $97 thousand, respectively, was elected by the Company to be deferred and added to the principal of the note.

 

At April 30, 2012, the said note was convertible into approximately 9.3 million shares of common stock with a market value of approximately $327 thousand.

 

The Company is in default with respect to the promissory note due July 2011. Consequently, the Company has accrued interest in accordance with the promissory notes default provision at an interest rate of 18%.

 

The following is a schedule of the future maturity payments required under the Company’s promissory notes payable.

 

As of April 30, 2012
Current		$	2,740,314
			2,740,314
Net of discount on convertible note payable			(136,203	)
		$	2,604,111

 

Of the notes payable, approximately $2.6 million is classified as a current liability as of April 30, 2012.

 

NOTE 6 - ACCRUED EXPENSES

 

Accrued expenses consist of the following at April 30, 2012 and July 31, 2011:

 

		April 30, 2012				July 31, 2011
Commissions		$	284,065			$	130,705
Interest			55,250				32,286
Marketing materials			728				1,284
Payroll			100,843				58,252
Refund reserve			10,000				10,000
Rent			1,191				4,757
Sales tax payable			72,739				34,601
Unclaimed property			40,555				41,255
Total		$	565,371			$	313,140

 

 

 

 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

NOTE 7 - DEFERRED REVENUE

 

Deferred revenue consists of the following at April 30, 2012 and July 31, 2011:

 

		April 30, 2012				July 31, 2011
Advertising		$	8,590			$	20,574
Conference			1,404				-
Consumable products			26,942				6,806
Direct response media			25,689				45,854
Marketing fees			-				15,875
Member fees			7,651				25,687
Total		$	70,276			$	114,796

 

 

NOTE 8 – DEFERRED COMPENSATION

 

Deferred compensation at July 31, 2011 was approximately $98 thousand and consisted of compensation due to Mark Jarvis, Co-Chief Executive Officer, and a consultant.  These individuals deferred their compensation in an effort to manage cash flow while the Company undertook several capital intensive initiatives.  Subsequent to July 31, 2011, the Company and Mark  Jarvis entered into an employment agreement amendment which eliminated the deferred compensation due Mark Jarvis, and the Company issued 62,241 shares of restricted common stock to satisfy the deferred compensation due consultant. No deferred compensation was due at April 30, 2012.

NOTE 9 – ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

 Financial instruments which are measured at estimated fair value on a recurring basis in the consolidated financial statements include marketable securities, an embedded share conversion feature and non-compensatory warrants. The fair value of the marketable securities was determined by the market price as quoted on the OTC. The fair value of the share conversion feature and warrants was determined by an independent expert valuation specialist using the Black-Scholes Option Pricing Model.

 

 

 

 

 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

Assets and liabilities measured at estimated fair value and their corresponding fair value hierarchy is summarized as follows: 

 

April 30, 2012
Fair Value Measurements at Reporting Date Using
			Quoted Prices in  Active Markets for  Identical Assets				Significant Unobservable Inputs				Total
			(Level 1)				(Level 3)				Fair Value
Marketable securities		$	1,600			$	-			$	1,600
Total Assets		$	1,600			$	-			$	1,600
Share conversion feature		$	-			$	-			$	-
Warrants		$	-			$	495,408			$	495,408
Total liabilities		$	-			$	495,408			$	495,408

 

 

 

(Audited)
July 31, 2011
Fair Value Measurements at Reporting Date Using
			Quoted Prices in  Active Markets for  Identical Assets (Level 1)				Significant Unobservable Inputs (Level 3)				Total Fair Value
Marketable securities		$	36,800			$	-			$	36,800
Total Assets		$	36,800			$	-			$	36,800
Share conversion feature		$	-			$	-			$	-
Warrants		$	-			$	299,600			$	299,600
Total liabilities		$	-			$	299,600			$	299,600

 

The Company has categorized its assets and liabilities measured at fair value into the three-level fair value hierarchy, as defined in Note 2, based upon the priority of inputs to respective valuation techniques. Assets included in the level 1 of the fair value hierarchy include marketable securities which are fair valued on a recurring basis using quoted market prices. Liabilities included within level 3 of the fair value hierarchy presented in the preceding table include a share conversion feature and noncompensatory warrants. The valuation methodology for liabilities within level 3 uses a combination of observable and unobservable inputs in calculating fair value. The share conversion feature had no fair value at April 30, 2012 or July 31, 2011.

 

The Company recorded an unrealized loss of approximately $0 thousand and approximately $35 thousand on its marketable securities for the three and nine months ended April 30, 2012, respectively, and a unrealized loss of $240 thousand and $400 thousand for the three and nine months ended April 30, 2012, respectively. The loss has been included in the Statement of Operations caption “(Loss) gain on change in fair value of marketable securities.”

 

 

 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

 

The changes in level 3 liabilities measured at fair value on a recurring basis during the three and nine months ended April 30, 2012 and the year ended July 31, 2011 is summarized as follows:

 

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)
			Balance Beginning of Period				Issuance				(Gain) or Loss Recognized in Earnings from Change in Fair Value				Balance End of Period
For the three months ended April 30, 2012
Share conversion feature		$	-			$	-			$	-			$	-
Warrants		$	27,436			$	-			$	467,972			$	495,408
For the nine months ended April 30, 2012
Share conversion feature		$	-			$	-			$	-			$	-
Warrants		$	299,600			$	1,456			$	194,352			$	495,408
For the year ended July 31, 2011 (Audited)
Share conversion feature		$	462,013			$	-			$	(462,013	)		$	-
Warrants		$	6,370,000			$	24,000			$	(6,094,400	)		$	299,600

 

For the three and nine months ended April 30, 2012, unrealized losses of approximately $468 thousand and $194 thousand, respectively, are included in earnings within the Statement of Operations caption “(Loss) gain on change in fair value of warrants.” The unrealized losses from the change in the fair value of warrants are a result of a increase in the Company’s share price from $0.02 to $0.035, which is used as an input valuing the warrants.

 

Fair Value of Financial Instruments

 

The fair values of accounts receivable, accounts payable and accrued expenses approximate their carrying values due to the short term nature of these instruments. The fair values of notes payable approximate their carrying amounts as interest rates on these obligations are representative of estimated market rates available to the Company on similar instruments.

 

NOTE 10—REDEEMABLE PREFERRED STOCK

 

On December 28, 2011, the Company filed an amendment to its Certificate of Incorporation increasing its authorized preferred stock from 10 million shares to 11.35 million shares with a par value of $0.0001 per share. The Company has issued 11.35 million shares of preferred stock as of April 30, 2012 with a par value of $0.0001 per share. The following table summarizes the Preferred Stock issuances and number of Preferred Shares outstanding:

 

				Shares Outstanding at
Preferred Stock		Date of
Issuance		Issuance		April 30, 2012		July 31, 2011
Series A		July 30, 2009		1,750,000		1,750,000
Series B		October 6, 2009		2,000,000		2,000,000
Series C		January 29, 2010		1,000,000		1,000,000
Series C		June 3, 2010		2,300,000		2,300,000
Series C		June 9, 2011		1,500,000		1,500,000
Series C		December 28, 2011		2,800,000		-
				11,350,000		8,550,000

 

Series A, Series B and Series C Convertible Preferred Stock is collectively referred to herein as “Convertible Preferred Stock.”

 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

Significant rights of the Convertible Preferred Stock are discussed below:

 

Dividends

 

The Convertible Preferred Stock does not accrue dividends.

 

Voting Rights

 

Each holder of the shares of Convertible Preferred Stock shall have the right to the number of votes equal to the number of Conversion Shares then issuable upon conversion of the Convertible Preferred Stock held by such holder in all matters as to which shareholders are required or permitted to vote, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled to vote, together with the holders of Common Stock as a single class, with respect to any question upon which holders of Common Stock have the right to vote; provided, however, as to any holder of Convertible Preferred Stock, the right to vote such shares shall be limited to the number of shares issuable to such holder pursuant to certain beneficial ownership limitations (as listed below) as of the record date for such vote. To the extent permitted under applicable corporate law, but subject to certain limitations on corporate actions as disclosed below, the Corporation’s shareholders may take action by the affirmative vote of a majority of all shareholders of the Company entitled to vote on an action. Without limiting the generality of the foregoing, the Company may take any of the actions by the affirmative vote of the holders of a majority of the Convertible Preferred Stock and the Common Stock and other voting common stock equivalents, voting together as one class.

 

As long as any shares of Convertible Preferred Stock are outstanding, the Company shall not, without the written consent or affirmative vote of the holders of no-less than 51 percent of the then outstanding stated value of the Convertible Preferred Stock consenting or voting as a separate class from the common stock, the Company shall not, either directly or by amendment, merger, consolidation or otherwise:

 

(i)   amend its certificate or articles of incorporation in any manner that adversely affects the rights of the holders of Convertible Preferred Stock;

 

(ii)   alter or change adversely the voting or other powers, preferences, rights, privileges, or restrictions of the Convertible Preferred Stock;

 

(iii)   increase the authorized number of shares of preferred stock or  Convertible Preferred Stock or reinstate or issue any other series of preferred stock;

 

(iv)    redeem, purchase or otherwise acquire directly or indirectly any junior securities or any shares pari passu with the Convertible Preferred Stock;

 

(v)   directly or indirectly pay or declare any dividend or make any distribution in respect of, any junior securities, or set aside any monies for the purchase or redemption (through a sinking fund or otherwise) of any junior securities or any shares pari passu with the Convertible Preferred Stock;

 

(vi)   authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to or otherwise pari passu with the Convertible Preferred Stock; or

 

(vii) enter into any agreement with respect to any of the foregoing.

 

Liquidation Preferences

 

Upon any liquidation, dissolution or winding-down of the Company, whether voluntary or involuntary (a “Liquidation”), the holders of the shares of Convertible Preferred Stock shall be paid in cash, before any payment shall be paid to the holders of common stock, or any other junior stock, an amount for each share of Convertible Preferred Stock held by such holder equal to the sum of the Stated Value thereof (such applicable amount payable with respect to a share of Convertible Preferred Stock sometimes being referred to as the “Individual Preferred Liquidation Preference Payment” and with respect to all shares of Convertible Preferred Stock in the aggregate sometimes being referred to as the “Aggregate Liquidation Preference Payment”).  If, upon such liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the assets to be distributed among the holders of shares of Convertible Preferred Stock shall be insufficient to permit payment to the holders of Convertible Preferred Stock of an aggregate amount equal to the Aggregate Liquidation Preference Payment, then the entire assets of the Corporation to be so distributed shall be distributed ratably among the holders of Convertible Preferred Stock (based on the Individual Preferred Liquidation Preference Payments due to the respective holders of Convertible Preferred Stock).

 

The liquidation value of Series A, Series B and Series C Convertible Preferred Stock was $1.75 million, $2 million and $7.6 million, respectively, as of April 30, 2012. 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

Conversion Rights

 

Each share of Convertible Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the original issue date (subject to beneficial ownership limitations as listed below), and without the payment of additional consideration by the holder thereof, into such number of fully-paid and nonassessable shares of common stock as is determined by dividing the Stated Value per share, by the Conversion Price in effect at the time of conversion. The Conversion Price originally for Series A, B and C shall be $0.0625, $0.25 and $0.25, respectively; provided, however, that the Conversion Price, and the rate at which shares of Convertible Preferred Stock may be converted into shares of common stock, shall be subject to adjustment as a result of stock dividends, stock splits, and subsequent equity sales at a price lower than the Convertible Preferred Stock’s Conversion Price. Shares of Convertible Preferred Stock converted into common stock shall be canceled and shall not be reissued.

 

At April 30, 2012, Series A, Series B and Series C Convertible Preferred Stock is convertible into 28 million, 8 million and 30.4 million common shares, respectively. If the Convertible Preferred Stock had been converted as of April 30, 2012, the aggregate market price of the common shares for Series A, Series B and Series C would have been approximately $980 thousand, $280 thousand, and $1.1 million, respectively.

 

Beneficial Ownership Limitations

 

The Company shall not affect any conversion of the Convertible Preferred Stock, and a holder shall not have the right to convert any portion of the Convertible Preferred Stock, to the extent that, after giving effect to the conversion, such holder (together with such holder’s affiliates, and any other person or entity acting as a group together with such holder or any of such holder’s affiliates) would beneficially own in excess 4.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable upon conversion of Convertible Preferred Stock held by the applicable holder.  The Beneficial Ownership Limitation provisions may be waived by such holder, at the election of such holder, upon not less than sixty one (61) days’ prior notice to the Company, to change the Beneficial Ownership Limitation to 9.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of Convertible Preferred Stock held by the applicable holder and the provisions of this section shall continue to apply.  Upon such a change by a holder of the Beneficial Ownership Limitation from such 4.99% limitation to such 9.99% limitation, the Beneficial Ownership Limitation shall not be further waived by such holder.

 

Redemption Rights of the Company

 

Shares of the Convertible Preferred Stock shall be redeemable, in whole or in part, at the option of the Company, by resolution of its Board of Directors at any time after the original issue date and before the first (1st) anniversary of the original issue date at a price equal to one hundred and ten percent (110%) of the Stated Value.

 

Redemption Rights of Holder

 

The Convertible Preferred Stock is redeemable for cash in an amount representing the Stated Value of outstanding Convertible Preferred Stock. The following events give rise to a redemption triggering event:

 

·

The Company shall be party to a change of control transaction;

·

The Company shall fail to have available a sufficient number of authorized and unreserved shares of common stock to issue to such holder upon a conversion;

·

Unless specifically addressed elsewhere in the Convertible Preferred Stock’s Certificate of Designation as a Triggering Event, the Corporation shall fail to observe or perform any other covenant, agreement or warranty contained in the Certificate of Designation, and such failure or breach shall not, if subject to the possibility of a cure by the Company, have been cured within 20 calendar days after the date on which written notice of such failure or breach shall have been delivered;

·

There shall have occurred a bankruptcy event or material monetary judgment.

 

If the Company fails to pay the redemption amount as a result of a triggering event on the date it is due, interest will accrue at a rate equal to the lesser of 18% per year, or the maximum rate permitted by applicable law, accruing daily from the date of the triggering event until the amount is paid in full.

 

Events that may result in the redemption for cash of preferred stock, and that are not within a company’s control may require the preferred stock to be classified outside of stockholders’ equity (in the mezzanine section). All of the above triggering events are presumed not to be within our control. Accordingly, these instruments are recorded in our balance sheet in the caption Redeemable Preferred Stock, which is outside of stockholders’ equity. Management estimates the probability of the triggering events to be remote due to the Company’s affiliation with stockholders that represent a majority of the outstanding common and preferred stock. Therefore, the carrying value of the preferred stock has not been increased to the full redemption value. The reason the carrying value is not equal to the redemption amount is due to the allocation of value to certain warrants issued in connection with the preferred stock. The following table summarizes for each preferred stock issuance the value allocated to the warrants and preferred stock: 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

				Total				Value				Preferred Stock
Preferred Stock		Date of		Proceeds				Allocated to				Carrying
Issuance		Issuance		Received				Warrants				Amount
Series A		July 30, 2009		$	1,750,000			$	539,000			$	1,211,000
Series B		October 6, 2009		$	2,000,000			$	930,838			$	1,069,162
Series C		January 29, 2010		$	1,000,000			$	431,415			$	568,585
Series C		June 3, 2010		$	2,300,000			$	598,000			$	1,702,000
Series C		June 9, 2011		$	1,500,000			$	24,000			$	1,476,000
Series C		December 28, 2011		$	2,800,000			$	1,456			$	2,798,544

 

NOTE 11 - COMMON STOCK

 

On December 28, 2011, the Company filed an amendment to its Certificate of Incorporation increasing its total number of authorized shares from 310 million to 311.25 million shares, consisting of 300 million common shares with a par value of $0.0001 per share. On all matters required by law to be submitted to a vote of the holders of common stock, each share of common stock is entitled to one vote per share. As of April 30, 2012, the Company had 65,160,954 shares issued and outstanding.

 

On July 30, 2009, the Company granted Mr. Jarvis 1.8 million shares of common stock, to be held in escrow, in connection with the execution of an employment agreement. These shares will be issued to Mr. Jarvis in accordance with the vesting period or upon completion of certain performance measures. Due to the forward stock split, the amount of shares was increased to 7.2 million shares of common stock. The shares were subject to a vesting period in which 3.6 million shares vested on July 30, 2010 and July 30, 2011, respectively. The grant date fair value was approximately $306 thousand. As of April 30, 2012, all shares were vested and issued.

 

For the three and nine months ended April 30, 2012, approximately $8 thousand and $55 thousand, respectively, of stock-based compensation expense was recognized, as a result of various share issuances. For the three and nine months ended April 30, 2011, approximately $19 thousand and $57 thousand, respectively, of stock-based compensation expense was recognized, as a result of various share issuances.

 

On July 31, 2009, the Company entered into a stock repurchase agreement with a majority shareholder to purchase 8 million shares for $210 thousand or $0.26 per share. The treasury stock was recorded at cost. Management’s plan is to retire these shares.

 

NOTE 12–WARRANTS

 

During 2009, Zurvita’s Board of Directors adopted the 2009 Incentive Stock Plan (the 2009 Plan), pursuant to which we reserved for issuance 6 million shares of Zurvita common stock to be used as awards to employees, directors, consultants, and other service providers. The purpose of the 2009 Plan is to provide an incentive to attract and retain officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons into Zurvita’s development and financial success. Under the 2009 Plan, Zurvita is authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long term incentive awards. The 2009 Plan is administered by the Board’s designated Compensation Committee. As of April 30, 2012 approximately 5.6 million total options were issued under the 2009 Plan.

 

 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

The following table summarizes the status of all warrants outstanding and exercisable at April 30, 2012. 

 

Outstanding Warrants
Range of Exercise Prices			Number of Warrants				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life in Years
$0.01 to $0.49			71,908,000			$	0.17				4.86
$0.50 to $0.99			100,000			$	0.75				2.78
			72,008,000			$	0.17				4.86

 

 

Exercisable Warrants
Range of Exercise Prices			Number of Warrants				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life in Years
$0.01 to $0.49			71,822,580			$	0.17				4.86
$0.50 to $0.99			100,000			$	0.75				2.78
			71,922,580			$	0.17				4.86

 

 

Compensatory Equity Warrants

 

During the nine months ended April 30, 2012, the Company issued compensatory equity warrants to purchase an aggregate of approximately 433 thousand shares of common stock.

 

Assumptions used to determine the fair value of the compensatory warrants granted during the nine months ended April 30, 2012 and during the year ended July 31, 2011 are as follows.

 

				(Audited)
		April 30, 2012		July 31, 2011
Expected dividends		0%		0%
Expected volatility		70%		65%
Risk free interest rate		0.35% - 0.81%		0.70% - 1.30%
Expected life		5 years		5 years

 

The following table summarizes the activity for compensatory warrants classified as equity for the nine months ended April 30, 2012.

 

		Compensatory Equity Warrants				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term				Aggregate Intrinsic Value
Outstanding at July 31, 2011 (Audited)			5,175,000			$	0.22				3.89			$	-
Granted			433,000				0.23				-				-
Exercised			-				-				-				-
Cancelled or Expired			-				-				-				-
Outstanding at April 30, 2012			5,608,000			$	0.22				3.25			$	-
Exercisable at April 30, 2012			5,522,580			$	0.22				3.04			$	-

 

There were no warrants exercised during the nine months ended April 30, 2012 and therefore no intrinsic value realized. The total fair value of warrants vested during the nine months ended April 30, 2012 was approximately $178 thousand. The weighted average grant date fair value of warrants granted during the nine months ended April 30, 2012 and 2011 was $0 and $0, respectively.

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

A summary of the status of the Company's non-vested compensatory equity warrants as of April 30, 2012, and the changes during the nine months ended April 30, 2012, is presented below.

 

		Compensatory Equity Warrants				Weighted Average Grant-Date Fair Value
Non-vested at July 31, 2011 (Audited)			1,316,503			$	0.14
Issued			433,000				0.23
Exercised			-				-
Expired			-				-
Vested			(1,664,083	)			0.52
Non-vested at April 30, 2012			85,420			$	0.01

 

 

All compensation cost related to non-vested awards has been recognized.

 

Non-compensatory Liability Warrants

 

During the nine months ended April 30, 2012, Zurvita issued in conjunction with preferred stock non-compensatory warrants to purchase an aggregate of approximately 11.2 million shares of common stock. There were approximately 66.4 million non-compensatory warrants outstanding as of April 30, 2012, all of which were classified as liabilities. These warrants are classified as liability instruments as net share settlement is not considered within the Company’s control or certain exercise prices are not fixed which has the potential to cause a variable number of shares and/or value exchange upon exercise.

 

The fair value of each option award classified as a liability on the balance sheets is estimated on the date of the grant using the Black-Scholes Pricing Model and the assumptions noted in the following table. The stock price used approximates the market price less a marketability discount of 30%. Expected volatility was determined by independent valuation specialist. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury Strip yield curve in effect at the time of grant. The expected term of options granted represents the period of time that options granted are expected to be outstanding.

 

Assumptions used to determine the fair value of the non-compensatory warrants outstanding during the nine months ended April 30, 2012 and granted at and during the year ended July 31, 2011 are as follows.

 

			(Audited)
	April 30, 2012		July 31, 2011
Expected dividends	0%		0%
Expected volatility	70%		65%
Risk free interest rate	0.69% - 1.28%		1.41% - 2.50%
Expected life	7 years		7 years

 

 

The following table summarizes the activity for non-compensatory warrants classified as liabilities for the nine months ended April 30, 2012.

 

		Compensatory Equity Warrants				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term
Outstanding at July 31, 2011 (Audited)			55,200,000			$	0.15				5.41
Granted			11,200,000				0.25				6.66
Exercised			-				-				-
Cancelled or Expired			-				-				-
Outstanding and exercisable at April 30, 2012			66,400,000			$	0.17				4.99

 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

As of April 30, 2012, there was no unrecognized compensation cost related to non-compensatory liability warrants as all were immediately vested upon issuance. There were no warrants exercised during the nine months ended April 30, 2012, therefore no intrinisc value realized. The total fair value of vested warrants at April 30, 2012 was approximately $1 thousand. The weighted average grant date fair value of warrants granted during the nine months ended April 30, 2012 and 2011 was $0 and $0, respectively.

 

A summary of the status of the Company’s non-vested non-compensatory liability warrants as of April 30, 2012, and the changes during the nine months ended April 30, 2012, is presented below.

 

		Non-Compensatory Warrants				Weighted Average Grant-Date Fair Value
Non-vested at July 31, 2011 (Audited)			-			$	-
Issued			11,200,000				-
Exercised			-				-
Expired			-				-
Vested			(11,200,000	)			-
Non-vested at April 30, 2012			-			$	-

 

Amacore Stock Warrants Issued

During 2008, The Amacore Group, Inc (“Amacore”) granted to Mr. Jarvis 800 thousand warrants to purchase common stock in connection with his employment agreement with the Company. In the event the warrants are exercised, Amacore will issue the corresponding authorized and available common stock to Mr. Jarvis. The contractual term of the warrants issued was five years.

Amacore had accelerated the vesting conditions of the original award prior to July 31, 2009 and, therefore, no compensation expense is recorded in fiscal 2010. As of April 30, 2012, there were 800 thousand warrants outstanding and exercisable. No warrants expired, nor were any warrants exercised or forfeited during the nine months ended April 30, 2012 and, therefore, no intrinsic value has been realized. As of April 30, 2012, the weighted average exercise price of warrants granted was $0.60. The grant date fair value of the warrants granted was $0.43.

Stock-Based Compensation Expense

For the nine months ended April 30, 2012 and 2011, the Company recognized stock-based compensation expense, including both expense related to compensatory warrants and expense related to share awards, with the Statement of Operations as follows:

		Three Months Ended April 30,								Nine Months Ended April 30,
		2012				2011				2012				2011
Stock-based compensation:
Payroll and employee benefits			7,911				85,745				55,274				266,288
Total		$	7,911			$	85,745			$	55,274			$	266,288

NOTE 13 - RELATED PARTY TRANSACTIONS

 

Commissions Paid

 

There are immediate family members of Mr. Jarvis, who operate as independent sales consultants who were paid leader subsidies and commission compensation which approximated $0 thousand and $53 thousand for the three months ended

April 30, 2012, respectively, and approximately $0 thousand and $116 thousand for the nine months ended April 30, 2012, respectively. These payments were for work they performed on behalf of the Company.

 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

Leader subsidies and commission compensation for the work performed were approximately were approximately, $1.5 thousand and $25 thousand for the three months ended April 30, 2011, respectively, and approximately $10.5 thousand and $50 thousand, for the nine months ended April 30, 2011, respectively.

 

Interest on Note Payable to Infusion Brands International, Inc. f/k/a OmniReliant Holdings, Inc.

 

The Company recognized interest expense with respect to the note payable due to Infusion Brands, who is a significant shareholder of the company. For the three and nine months ended April 30, 2012 interest expense was approximately $88 thousand and $263 thousand, respectively, and approximately $81 thousand and $239 thousand for the three and nine months ended April 30, 2011, respectively. During the three and nine months ended April 30, 2012 , total interest expense related to the convertible note payable was approximately $88 thousand and $263 thousand, respectively. During the three and nine months ended April 30, 2011, total interest expense related to the convertible note payable was approximately $81 thousand and $239 thousand, respectively . Of the interest expense recognized for the nine months ended April 30, 2012 and 2011, approximately $103 thousand and $97 thousand, respectively, was elected by the Company to be deferred and added to the principal of the note.

 

Agreement with Amacore

 

The Company entered into a Marketing and Sales Agreement on July 31, 2009, pursuant to which Amacore agreed to provide certain services to Zurvita. In addition, pursuant to the Agreement, Zurvita shall continue to have the right to benefit from certain agreements which Amacore maintains with product and service providers. For the nine months ended April 30, 2012, Zurvita paid Amacore $545 thousand, for these services, as compared to $381 thousand for the same period in the prior year.

 

On June 30, 2011, the Company issued to Amacore an on-demand promissory note for $150 thousand. The note accrued interest at 15% per annum. As of April 30, 2012, the Company repaid the note plus accrued interest of $3 thousand.

 

On June 30, 2011, the Company issued to Amacore an on-demand promissory note for $295 thousand. The note accrued interest at 15% per annum. As of April 30, 2012, the Company repaid the note plus accrued interest of $2.9 thousand.

 

On January 31, 2012, the Company was issued by Amacore an on-demand promissory note for $210 thousand. The note accrued interest at 15% per annum. As of April 30, 2012, Amacore had repaid the note plus accrued interest of $2.4 thousand.

 

On April 20, 2012, the Company issued to Amacore an on-demand promissory note for $200 thousand. The note accrues interest at 15% per annum. As of April 20, 2012, the Company has not repaid the note plus accrued interest of $1.7 thousand.

 

Note Payable to Mark Jarvis

 

On July 19, 2011, the Company issued to Mark Jarvis an on-demand promissory note for $20 thousand. The note accrued interest at 15% per annum. As of April 30, 2012, the Company repaid the note plus accrued interest of $213.

 

NOTE 14- SUBSEQUENT EVENTS

 

Transaction with Amacore

 

On May 8, 2012, the Company and Amacore entered into a Stock Purchase Agreement (the “Amacore Purchase Agreement”) whereby the Company purchased 37.21 million shares of the Company’s common stock from Amacore. Pursuant to the Amacore Purchase Agreement, the Company paid to Amacore a purchase price equal to $300 thousand. In connection with the Amacore Purchase Agreement, Amacore forgave the Company’s indebtedness to Amacore in principal and interest equal to $362 thousand.

 

Furthermore, in connection with and concurrently with the Amacore Purchase Agreement, the Company and Amacore entered into an Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations (the “Conveyance Agreement”) whereby the Company assigned, sold, conveyed and transferred all of the Company’s right, title and interest in certain intellectual property rights related to the Company’s ZLinked technology, which intellectual property rights are defined and identified in a Conveyance Agreement (the “Assets”). Pursuant to the Conveyance Agreement, Amacore agreed to assume any and all liabilities and obligations associated with the Assets, regardless of when such liabilities and obligations arose.

 

Transaction with Infusion

 

On May 8, 2012, the Company and Infusion entered into a Stock Purchase Agreement (the “Infusion Purchase Agreement”) whereby the Company purchased 15.2 million shares of the Company’s common stock from Infusion. Pursuant to the Infusion Purchase Agreement, the Company paid to Infusion a purchase price equal to $100 thousand.

 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

Furthermore, in connection with the Infusion Purchase Agreement, Infusion forgave and surrendered for cancellation that certain promissory note in principal amount of $2,000,000 (the “Note”) along with accrued interest of $334 thousand, which Note was issued by the Company to Infusion in connection with that certain License and Marketing Agreement, dated October 9, 2009, by and between the Company and Infusion. Lastly, Infusion terminated and released any and all of Infusion’s security interest arising out of that certain Security Agreement, dated December 2, 2010, by and between the Company and Infusion.

 

Transaction with Mark Jarvis

 

In exchange for loaning the Company $127 thousand to fund working capital requirements, the Company issued to Mark Jarvis an on-demand promissory note for approximately $127 thousand. The note accrues interest at 15% per annum. The funds were received on June 12, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Information contained in this discussion, other than historical information, is considered “forward-looking statements” that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives including, without limitation, statements about the Company’s ability to continue operations through April 30, 2012, the liability of the Company for claims made in pending litigation, plans for future products, strengthening our relationship with our various sales organizations, our marketing intentions, our anticipated products, efforts to expand distribution channels, Zurvita Holdings Inc. (“Zurvita”) anticipated growth in sales and margins, and our ability to achieve profitability. In some cases, you may identify forward-looking statements by words such as “may,” “should,” “plan,” “intend,” “potential,” “continue,” “believe,” “expect,” “predict,” “anticipate” and “estimate,” the negative of these words or other comparable words.  These statements are only predictions.  One should not place undue reliance on these forward-looking statements.  The forward-looking statements are qualified by their terms and/or important factors, many of which are outside the Company’s control, involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made. The forward-looking statements are based on the Company’s beliefs, assumptions and expectations of our future performance, taking into account information currently available to the Company.  These beliefs, assumptions and expectations can change as a result of many possible events or factors, including those events and factors described in “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended July 31, 2011 filed with the Securities and Exchange Commission on October 28, 2011 (the “2010 Annual Report”), not all of which are known to the Company.  If a change occurs, the Company’s business, financial condition, liquidity and results of operations may vary materially from those expressed in the aforementioned forward-looking statements. The Company will update this forward-looking information only to the extent required under applicable securities laws.  Neither the Company nor any other person assumes responsibility for the accuracy or completeness of these forward-looking statements.

 

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto, and other financial information included elsewhere in this Form 10-Q.

 

Introduction

 

Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is provided as a supplement to and should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere herein to help provide an understanding of our financial condition and results of our operations. The MD&A is organized as follows:

 

•

Overview – This section provides a general description of our business.

 

•

Results of operations –  This section provides an analysis of our results of operations comparing the three and nine months ended April 30, 2012 and 2011.  This analysis is provided on a consolidated basis.

 

•

Liquidity and capital resources  – This section provides an analysis of our cash flows for the nine months ended April 30, 2012 and 2011 as well as a discussion of our liquidity and capital resources.

 

Overview

 

Description of Business

 

Our consolidated financial statements include the accounts of Zurvita Holdings, Inc. (referred to herein as the “Company,” “Zurvita Holdings,” “we,” “us” or “our”) and our wholly-owned subsidiary Zurvita, Inc. (Zurvita). Material intercompany transactions and balances have been eliminated upon consolidation. Zurvita Holdings is a national network marketing company offering high-quality products and services targeting individuals, families and small businesses. Products are sold through Zurvita’s network of independent sales consultants.

 

Business Strategy

 

Zurvita’s business model embraces a direct sales approach that utilizes the power of network marketing.  The business strategy relies on a marketing sales force that compensates independent business owners (“Consultants”) not only for sales of Company products and services they personally generate, but also for the sales of other Consultants whom they introduced to the business, creating a sales organization of Consultants and a hierarchy of multiple levels of compensation.  The products, services and business opportunities are typically marketed directly to potential business partners, consumers and small businesses by means of referrals, national advertising, video promotions, conferences, the Internet, and word-of-mouth marketing.

 

Consultants become associated with the Company through an independent contractor relationship and receive remuneration for selling products and services and for expanding their network of people doing the same by promoting Zurvita’s business opportunity. This model provides each independent sales Consultant an opportunity to make a living on a full-time basis and to obtain long-term financial security through creating long-term residual income.

 

 

Recently, Zurvita entered into the growing Health & Wellness industry with its recent launch of “Zeal”, a nutritional drink, and the weight management market with the launch of Zurvita’s Zeal Weight Management Program.

Zurvita has developed business processes to increase performance success:

 

Strengthen Brand Recognition

 

National and regional marketing efforts are administrated to support corporate and “personal” branding initiatives.  Inherent to the network marketing industry is the axiom that people do not follow products or features, but rather the people with whom they relate to on a personal level.  Zurvita not only invests resources to promote its corporate brand, but has developed a technological platform allowing Consultants to build web-based personal branded sites enhancing their position as affiliate marketers of Zurvita programs and services.

 

Increase Product and Service Offerings

 

Zurvita continues to explore the marketplace for new products and services that are anticipated by consumers. These are essential consumer and business solutions in large and growing markets. The network marketing industry mandates a state of continuous improvement by offering its Consultants and customers products and services that offer time, value and conveniences at cost competitive prices.

 

Marketing

 

Zurvita’s marketing strategies open new, innovative marketing and sales avenues for Consultants to build income through expansion of their sales organization and the residual benefits offered through the sale of products and services. The marketing strategy features unique components beyond the traditional approach indicative of most network marketing companies.

 

Technology

 

Zurvita recognizes the Internet is a powerful platform for the network marketer. The highly social aspect of the Internet lends itself as a natural marketing vehicle and continuously opens a new population of prospects. Zurvita offers Consultants robust “back office” support complimented with sales and marketing tools.

 

Training and Support

 

The success of an external marketing program is only as effective as the internal marketing strategies to keep Consultants informed and engaged. Zurvita is committed to a variety of communication initiatives that promote leadership and business effectiveness. Weekly telephone/webinar meetings as well as informational seminars create opportunities to develop leaders and to promote Zurvita’s business opportunity. National conferences and regional events further support Zurvita’s efforts to train and develop its national sales force.

 

RESULTS OF OPERATIONS

 

Results of Operations

 

		For the Three Months Ended April 30,												For the Nine Months Ended April 30,
										Increase												Increase
		2012				2011				(Decrease)				2012				2011				(Decrease)
Revenues		$	2,002,697			$	1,214,641			$	788,056			$	4,495,063			$	3,663,094			$	831,969
Cost of sales			1,587,518				866,450				721,068				3,732,212				2,479,077				1,253,135
Gross profit			415,179				348,191				66,988				762,851				1,184,017				(421,166	)
Operating expenses			1,024,672				1,244,205				(219,533	)			3,106,614				4,184,014				(1,077,400	)
Operating loss			(609,493	)			(896,014	)			(286,521	)			(2,343,763	)			(2,999,997	)			(656,234	)
Other (expense) income			(567,994	)			(160,972	)			(407,022	)			(441,469	)			5,885,948				(6,327,417	)
(Loss) income before income taxes			(1,177,487	)			(1,056,986	)			(120,501	)			(2,785,232	)			2,885,951				(5,671,183	)
Income taxes			1,561				448				1,113				2,903				3,121				(218	)
Net (loss) income		$	(1,179,048	)		$	(1,057,434	)		$	(121,614	)		$	(2,788,135	)		$	2,882,830			$	(5,670,965	)
Basic and diluted (loss) earnings per share		$	(0.02	)		$	(0.02	)						$	(0.04	)		$	0.05

  

 

 

Revenue:

 

For the three and nine months ended April 30, 2012 and 2011, total revenue increased by $788 thousand and $831 thousand, respectively, over prior periods. Despite material decreases in the administrative websites, advertising sales, marketing fees and materials and membership fees revenue components, the Company was able to achieve increased total revenue due to the Company’s new, consumable health and wellness and weight management products that launched subsequent to January 31, 2012 and have been the sales focus of the Company since then. The various components of total revenue are discussed below.

 

Administrative Websites

Administrative website sales were approximately $136 thousand and $394 thousand for the three and nine months ended April 30, 2012, respectively, as compared to approximately $230 thousand and $1.1 million for the three and nine months ended April 30, 2011. Prior to the Company’s launch of Zeal, the Company experienced various product issues that resulted in significant attrition of the Company’s active consultant base who subscribe for such websites, resulting in an approximate $94 thousand and $688 thousand decrease in administrative website revenue for the three and nine months period respectively.

 

Advertising Sales

The Company’s advertising sales were approximately $38 thousand and $146 thousand for the three and nine months ended April 30, 2012, as compared to approximately $137 thousand and $591 thousand for the three and nine months ended April 30, 2011. The Company has reduced its marketing of ZLinked due to its technology platform having technical shortcomings that led to adverse refund and persistency rates, which caused an approximate $445 thousand decrease in advertising sales from the prior nine months period ended. On May 8, 2012, the Company sold ZLinked to Amacore and will no longer be selling advertising.

Commissions

The Company’s commission revenue for the three and nine months ended April 30, 2012, was approximately $47 thousand and $214 thousand, respectively, as compared to approximately $92 thousand and $369 thousand for the three and nine months ended April 30, 2011. The approximate $154 thousand decrease over the nine months ended is due to run off of the Company’s residential energy block of business as well as lower commercial energy sales. The Company did not market residential energy during the nine months ended April 30, 2012. In January 2012, the Company decided to halt its commercial energy business due to lack of profitability and to focus its resources on health and wellness and weight management products.

Consumable Products

The Company’s consumable products revenue represents consumable health and wellness and weight management products. For the three and nine months ended April 30, 2012, consumable products revenue was approximately $1.7 million and $3.5 million, respectively, as compared to $464 thousand and $490 thousand, for the three and nine months ended April 30, 2011. The increase is due to the Company focusing on selling their products subsequent to January 31, 2012.

Marketing Fees and Materials

The Company’s marketing fees and materials revenue for the three and nine months ended April 30, 2012, were approximately $45 thousand and $186 thousand, respectively, as compared to approximately $192 thousand and $750 for the three and nine months ended April 30, 2011, respectively. The aforementioned attrition of the Company’s active consultant base was the significant factor resulting in an approximate $147 thousand and $564 thousand decrease in marketing fees and materials revenue over the prior three and nine months period ended.

 

 

Membership Fees

The Company’s membership fees were approximately $30 thousand and $94 thousand for the three and nine months ended April 30, 2012, as compared to $100 thousand and $382 thousand for the three and nine months ended April 30, 2011. The decrease in membership revenue is a result of the Company’s efforts to focus on the sale of advertising, energy, and consumable products as they are higher margin products.

Cost of Sales:

 

Total cost of sales for the three and nine months ended April 30, 2012, was approximately $1.6 million and $3.7 million, respectively, as compared to approximately $866 thousand and $2.5 million for the three and nine months ended April 30, 2011. The increase in cost of sales is related to an increase in commissions paid to sales consultants on consumable product sales to stimulate sale activity and growth. The various components of cost of sales are discussed below.

Benefit and Service Cost
Benefit and service cost represents the direct cost of the membership and subscription products sold such as administrative websites, advertising sales, marketing materials and membership fees. Benefit and service cost was approximately $144 thousand and $480 thousand for the three and nine months ended April 30, 2012, respectively, as compared to approximately $265 thousand and $887 thousand for the three and nine months ended April 30, 2011, respectively. The decrease is due to less administrative website sales, advertising sales and membership fees.

Consumable Products Manufacturing Cost
Consumable products manufacturing cost represents Zeal’s manufactured cost, ancillary weight management product cost and the cost of shipping the product to customers. For the three and nine months ended April 30, 2012, the Company recognized $460 thousand and $931 thousand of such cost, respectively, as compared to $127 thousand and $127 thousand for the three and nine months ended April 30, 2011, respectively. The increase is due to the Company’s efforts to focus on selling consumable products.

Sales Commissions
The Company pays its independent sales agents on a commission basis. Sales commissions for the three and nine months ended April 30, 2012, were approximately $984 thousand and $2.3 million, respectively, as compared to approximately $475 thousand $1.5 million for the three and nine months ended April 30, 2011, respectively. The increase of $509 thousand and $855 thousand for the three and nine months period ended is a result of various promotions implemented to stimulate consumable product sales growth.

Gross Profit:

 

For the three months ended April 30, 2012, gross profit was approximately $415 thousand or 20%, as compared to approximately $348 thousand or 29% for the three months ended April 30, 2011. Gross profit for the nine months ended April 30, 2012 was approximately $763 thousand or 17% as compared to $1.2 million or 32% for the nine months ended April 30, 2011. Although total revenues increased between the periods, the gross profit amount and percentage decreased due to the significant increase in sales commissions.

 

Operating Expenses:

 

Our operating expenses for the three and nine months ended April 30, 2012 were approximately $1.0 million and $3.1 million, respectively, and for the three and nine months ended April 30, 2011 were approximately $1.2 million and $4.2 million, respectively.

 

The table below sets forth components of our operating expenses for the three and nine months ended April 30, 2012, compared to the corresponding prior year period:

 

		Three Months Ended April 30,												Nine Months Ended April 30,
		2012				2011				Increase (Decrease)				2012				2011				Increase (Decrease)
Depreciation		$	7,848			$	8,772			$	(924	)		$	24,300			$	28,089			$	(3,789	)
Office Related Expenses			133,275				144,752				(11,477	)			403,698				406,277				(2,579	)
Payroll and Benefits			467,510				575,646				(108,136	)			1,485,517				1,689,589				(204,072	)
Professional Fees			177,600				168,413				9,187				570,560				663,381				(92,821	)
Selling and Marketing			193,430				291,160				(97,730	)			533,665				1,223,990				(690,325	)
Travel			45,009				55,462				(10,453	)			88,874				172,688				(83,814	)
Total operating expenses		$	1,024,672			$	1,244,205			$	(219,533	)		$	3,106,614			$	4,184,014			$	(1,077,400	)

 

 

Depreciation expense for the three and nine months ended April 30, 2012, was approximately $8 thousand and $24 thousand, respectively, a decrease of approximately $1 thousand and $4 thousand from the same prior year period. The decrease is due to lower carrying values of depreciable assets during the three and nine months ended April 30, 2012 as compared to the same prior year period.

 

Office related costs include rent, insurance, utilities and office maintenance. For the three months ended April 30, 2012 these costs were approximately $29 thousand, $18 thousand, $10 thousand, and $76 thousand, respectively. For the nine months ended April 30, 2012 these costs were $86 thousand, $43 thousand, $31 thousand, and $244 thousand, respectively. The overall decrease of approximately $11 thousand and $3 thousand is due to cost reduction efforts of the Company.

 

Payroll and related expenses for the three and nine months ended April 30, 2012 was approximately $468 thousand and $1.5 million, respectively, a decrease of approximately $108 thousand and $204 thousand over the same prior year periods. The decrease is due to certain employee salary reductions and a reduction in stock based compensation.

 

Professional fees consist of consulting, accounting fees, contract labor and legal costs. For the three months ended April 30, 2012, these costs were approximately $57 thousand, $50 thousand, $27 thousand and $44 thousand, respectively. For the nine months ended April 30, 2012, these costs were approximately $204 thousand, $189 thousand, $81 thousand, and $97 thousand, respectively.  Significant reductions in consulting and accounting fees led to an overall professional fees decrease of approximately $93 thousand. The higher accounting fees in the prior period was due to the Company changing its auditors and the predecessor auditor’s inability to provide consent to the use of their opinion on prior year financial statements which led to a re-audit of the prior year financial statements by the current auditor. The increase in contract labor is a result of the Company increasing its dependency on contract labor for its Zlinked operations.

 

Selling and marketing expenses for the three and nine months ended April 30, 2012, were $193 thousand and $534 thousand, respectively, as compared to $291 thousand and $1.2 million for the three and nine months ended April 30, 2011, respectively, a decrease of approximately $98 thousand and $690 thousand over the prior reporting period. The significant decrease is due to less amortization of deferred costs such as agent advanced compensation and other prepaid marketing costs between the periods.

 

Business travel expenses for the three and nine months ended April 30, 2012, were approximately $45 thousand and $89 thousand, respectively, a decrease of approximately $10 thousand and $84 thousand as compared to the three and nine months ended April 30, 2011, respectively. Travel expenses decreased as the Company limited its business travel to reduce expenses.

 

Other Income (Expense):

 

Gain on change in fair value of embedded share conversion feature

 

An embedded share conversion feature exists within the Company’s convertible note payable. The Company has determined the conversion feature to be a derivative instrument and has estimated its at fair value at the time of issuance and at each subsequent reporting period. There were no unrealized gains on the conversion feature for the three and nine months ended April 30, 2012, as compared to no unrealized gains for the three months and an unrealized gain of approximately $462 thousand for the nine months ended April 30, 2011. Changes in the fair value of embedded share conversion feature result in either unrealized gains or losses that are a non-cash item not impacting operating cash flows or results of operations before other income and expenses. See Note 9 – Assets and Liabilities Measured at Fair Value, to financial statements contained within Item 1 of Part 1 of this Form 10Q for additional information with respect to the estimation of the fair value of this conversion feature.

 

Interest expense

 

Interest expense for the three and nine months ended April 30, 2012 was approximately $101 thousand and $294 thousand, respectively, as compared to $88 thousand and $256 thousand for the three and nine months ended April 30, 2011.  The increase in interest expense is a result of accreting the discount recognized on the Company’s $2 million interest bearing convertible note issued on October 9, 2009. Accretion of $89 thousand and $263 thousand is included within interest expense for the three and nine months ended April 30, 2012, respectively, as compared to $81 thousand and $240 thousand of accretion included within interest expense for the three and nine months ended April 30, 2011, respectively .

 

Loss on change in fair value of marketable securities

 

The Company’s marketable securities consist of non-registered common stock. The Company fair values these securities on a recurring basis. The Company recorded an unrealized loss of zero and $35 thousand for the three and nine months ended, April 30, 2012, respectively, as compared to an unrealized loss of $240 thousand and $400 thousand for the three and nine months ended April 30, 2011, respectively. These unrealized losses and gains are a non-cash item not impacting operating cash flows or results of operations before other income and expenses. See Note 9– Assets and Liabilities Measured at Fair Value, to financial statements contained within Item 1 of Part 1 of this Form 10Q for additional information with respect to the determination of fair value for the Company’s marketable securities.

 

 

(Loss) gain on change in fair value of warrants

 

The Company’s liability warrants are recorded at fair value. Their fair value is subject to remeasurement on a recurring basis. For the three months ended April 30, 2012 and 2011, the change in fair value of these warrants resulted in an approximate unrealized loss of $468 thousand and an approximate unrealized gain of $154 thousand, respectively. For the nine months ended April 30, 2012 and 2011, the change in fair value of these warrants resulted in an approximate $194 thousand unrealized loss and $6.1 million unrealized gain, respectively. The unrealized loss for the three and nine months end April 30, 2012 is a result of the significant increase in share price from $0.02 to $0.035 which is used as an input in fair valuing the warrants. The gain in fair value for the three and nine months ended April 30, 2011 is a result of the significant decline in share price from $0.24 to $0.04. T hese losses and gains are a non-cash item not impacting operating cash flows or results of operations before other income and expenses. See Note 9 – Assets and Liabilities Measured at Fair Value, to financial statements contained within Item 1 of Part 1 of this Form 10-Q for additional information with respect to the estimation of the fair value of these warrants.

 

Income Taxes:

 

For the three and nine months ended April 30, 2012, the Company estimated approximately $2 thousand and $3 thousand, respectively, of income tax expense as compared to $488 and $3 thousand for the three and nine months ended April 30, 2011, respectively. The decrease between the nine month periods is a result of the Company’s lower gross margin as it is the basis for estimating Texas gross margin tax. The Company had increased margin for the three month period which consequently led to the increase in income tax expense for the period.

 

The Company realized no federal tax benefit from the deferred tax asset resulting from its historical net operating loss carryforwards as the deferred tax asset is fully reserved.

 

Net (Loss) Income:

 

The Company had net loss of approximately $1.2 million and $2.8 million for the three and nine months ended April 30, 2012, respectively, as compared to net loss of approximately $1.1 million and net income of approximately $2.9 million for the three and nine months ended April 30, 2011, respectively. The main reason the Company went from earnings to a loss is due to the Company recognizing less of an unrealized gain on the change in fair value of the Company’s liability warrants between the periods.

 

OFF BALANCE SHEET ARRANGEMENTS

 

We do not have any off balance sheet arrangements as of April 30, 2012.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The following table compares our cash flows for the nine month period ended April 30, 2012 to the corresponding prior period:

 

		April 30, 2012				April 30, 2011
Net cash used in operating activities		$	(2,451,166	)		$	(2,871,802	)
Net cash (used in) provided by investing activities			(3,807	)			1,691,809
Net cash provided by financing activities			2,507,429				890,669
Net increase (decrease) in cash		$	52,456			$	(289,324	)

 

 

 

Future minimum rental payments required under the Company’s operating leases that have initial or remaining non-cancelable lease terms in excess of one year on a fiscal year basis are as follows:

 

As of April 30, 2012:
Current		$	111,430
2013		$	112,970
2014		$	112,970
2015		$	28,243
2016		$	-
Thereafter			-
		$	365,612

 

Since its inception, the Company has met its capital needs principally through sale of its equity securities and the issuance of debt. The proceeds from the sale of these securities have been used for the Company’s operating expenses, such as salary expenses, professional fees, rent expenses and other general and administrative expenses discussed above. At April 30, 2012, the Company had negative working capital of approximately $3.0 million, an accumulated deficit of approximately $22.6 million and negative cash flows from operating activities of approximately $2.4 million. Since the date of inception, the Company has used approximately $12.6 million in operations.

 

We believe that without significant equity and debt investment from outside sources, the Company will not be able to sustain its current planned operations for the next 12 months. Since July 31, 2009, the Company has sold several series of preferred stock for gross proceeds of $9.6 million to a related party. In order to raise capital, the Company may sell additional equity or issued additional convertible debt securities which would result in additional dilution to our stockholders. The issuance of additional debt would result in increased expenses and could subject us to covenants that may have the effect of restricting our operations. We can provide no assurance that additional financing will be available in an amount or on terms acceptable to us, if at all. If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we may be unable to execute upon our business plan or pay our costs and expenses as they are incurred, which could have a material, adverse effect on our business, financial condition and results of operations.  Currently, the Company does not maintain a line of credit or term loan with any commercial bank or other financial institution. The Company has approximately $2.6 million of outstanding notes payable as of April 30, 2012. These issues raise substantial doubt about our ability to continue as a going concern for a reasonable period.

 

CRITICAL ACCOUNTING POLICIES

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for sales refunds and chargebacks, capitalization of certain assets, depreciable/amortizable lives, impairment of long-lived assets, determination of amount of allowance for doubtful accounts, the fair value of marketable securities, the expected volatility of common stock, and the fair value of common stock and warrants as well as the allocation of proceeds from the issuance of debt and equity instruments.   We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.

 

While all of our accounting policies impact the consolidated financial statements, certain policies are viewed to be critical. Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and that require management’s most subjective or complex judgments and estimates. Management believes the policies that fall within this category are the policies on revenue recognition and accounts receivable and other intangible assets, investments, financial and derivative instruments.

 

Revenue Recognition

 

Administrative Websites

 

Company’s independent representatives pay a fee to the Company entitling them to use of websites that facilitate their business operations.  Revenue is recognized ratably over the website subscription period.

 

Advertising Sales

 

The Company markets subscriptions to a service that facilitates the ability of customers, typically small business owners, to display commercial advertising via an on-line search directory.  Revenue is recognized ratably over the advertising subscription period.

 

 

Commissions

 

The Company is paid a commission for its sales of third-party products. Commissions are recognized as products are sold and services performed and the Company has accomplished all activities necessary to complete the earnings process.  

 

Consumable Products

 

The company markets a nutritional drink and a weight management program that includes a nutritional drink, protein shakes, herbal and probiotic cleanse tablets and metabolism enhancer tablets. Revenue from the sale of these consumable products are recognized upon shipment and acceptance of the product by the customer.

 

Marketing Fees and Materials

 

Prior to April 2011, the independent sales consultants paid the Company an annual fee to become marketing representatives on behalf of the Company.  In exchange, the representatives received access, on an annual basis, to various marketing and promotional materials and tools, as well as access to a customized management reporting platform. Accordingly, revenue from marketing fees is recognized over an annual period.  

 

The Company also earns ancillary revenue from the sale of marketing materials to sales consultants.  Revenue is recognized when marketing materials are delivered.

 

Membership Fees

 

The Company recognizes revenues from membership fees as earned for the sales of other lifestyle discount benefit programs, such as household protection and personal financial services.  These arrangements are generally renewable monthly and revenue is recognized over the renewal period.  These products often include elements sold through contracts with third-party providers.  Based on consideration of each contractual arrangement, revenue is reported on a gross basis.

 

Fair Value Measurements

 

U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability to a third party with the same credit standing (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In many cases, the exit price and the transaction (or entry) price will be the same at initial recognition. However, in certain cases, the transaction price may not represent fair value. Fair value is a market-based measurement determined based on a hypothetical transaction at the measurement date, considered from the perspective of a market participant, not based solely upon the perspective of the reporting entity. When quoted prices are not used to determine fair value, consideration is given to three broad valuation techniques: (i) the market approach, (ii) the income approach, and (iii) the cost approach. Entities are required to determine the most appropriate valuation technique to use, given what is being measured and the availability of sufficient inputs. Inputs to fair valuation techniques are prioritized, allowing for the use of unobservable inputs to the extent that observable inputs are not available. The applicable guidance establishes a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. The input levels are defined as follows:

 

Level 1

Unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2

Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1, quoted prices in markets that are not active, or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3

Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.  Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as those for which the determination of fair value requires significant management judgment or estimation.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable

 

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on this evaluation, our principal executive and principal financial officer concluded that our disclosure controls and procedures are ineffective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Presently, our disclosure controls and procedures are not designed adequately to provide reasonable assurance that such information is accumulated and communicated to our management. This conclusion was based on the material weaknesses identified with regard to internal controls over financial reporting, as described in the Company’s Annual Report for the year ended July 31, 2011.

 

There was no change in our internal control over financial reporting that occurred during the quarter covered by this Quarterly Report on Form 10-Q that materially affected, or is reasonably likely to materially affect, our control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

As of April 30, 2012, there was no material changes in the Company’s legal proceedings as previously disclosed in the Company’s 2011 Annual Report.

 

Item 1a. Risk Factors

 

Not applicable.

 

Item 2. Unregistered Sales of Equity and Use of Proceeds

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None

 

 

 

 

 

Item 6. Exhibits

 

(a) Exhibits:

 

10.1	Stock Purchase Agreement between the Company and Amacore Group, Inc. dated May 8, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 14, 2012).
10.2	Escrow Agreement between the Company and Amacore Group, Inc. dated May 8, 2012 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 14, 2012).
10.3	Agreement of Conveyance, Transfer and Assignment of Assets and Assumptions of Obligations by and between the Company and Amacore Group, Inc., dated May 8, 2012 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 14, 2012).
10.4	Securities Purchase Agreement by and between the Company and Infusion Brands International, Inc. dated May 8, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 14, 2011).
10.5	Escrow Agreement between the Company and Infusion Brands International, Inc.  dated May 8, 2012 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 14, 2012).
31.1	Certification of the Co-Chief Executive Officer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to Section 906 Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

 

 

101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.DEF	XBRL Definition Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document

 

 

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated : June 14, 2012	/s/ Jay Shafer
	Jay Shafer
	Co-Chief Executive Officer
Dated : June 14, 2012	/s/ Jason Post
	Jason Post
	Chief Financial Officer

 

 

 

 

 

 

 

EXHIBIT INDEX

 

10.1	Stock Purchase Agreement between the Company and Amacore Group, Inc. dated May 8, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 14, 2012).
10.2	Escrow Agreement between the Company and Amacore Group, Inc. dated May 8, 2012 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 14, 2012).
10.3	Agreement of Conveyance, Transfer and Assignment of Assets and Assumptions of Obligations by and between the Company and Amacore Group, Inc., dated May 8, 2012 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 14, 2012).
10.4	Securities Purchase Agreement by and between the Company and Infusion Brands International, Inc. dated May 8, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 14, 2011).
10.5	Escrow Agreement between the Company and Infusion Brands International, Inc.  dated May 8, 2012 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 14, 2012).
31.1	Certification of the Co-Chief Executive Officer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to Section 906 Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

 

101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.DEF	XBRL Definition Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document