U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: MARCH 31, 2006
Commission File Number: 0-23100
HEALTHSPORT, INC.
(Exact name of small business issuer as specified in its charter)
IDEA SPORTS ENTERTAINMENT GROUP, INC.
(Former name of small business issuer as specified in its charter)
DELAWARE 22-2649848
(State of Incorporation) (IRS Employer ID No)
4514 COLE AVE, SUITE 200, DALLAS, TEXAS 75205
(Address of principal executive office)
(817) 675-4319
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of April 30, 2006 was 1,157,288.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
HEALTHSPORT, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I FINANCIAL INFORMATION (Unaudited)
Item 1. Condensed Consolidated Balance Sheet as of March 31, 2006 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2006 and 2005 and the period
from inception (September 9, 2004) through March 31, 2006 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2006 and 2005, and the period
from inception (September 9, 2004) through March 31, 2006 5
Notes to Condensed Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis or Plan of Operation 13-15
Item 3. Controls and Procedures 16
PART II OTHER INFORMATION 17-19
2
HEALTHSPORT, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2006
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 303
------------
Total current assets 303
Goodwill 1,175,000
------------
Total assets $ 1,175,303
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Convertible promissory notes $ 4,530,309
Accounts payable 28,027
Due to related party 291,913
Accrued interest payable 204,153
------------
Total liabilities 5,054,402
------------
Commitments and contingencies
Minority interest 225,000
STOCKHOLDERS' DEFICIT
Preferred stock: $2.75 par value; authorized 2,000,000
shares; no shares issued and outstanding -
Common stock: $.0001 par value; authorized 500,000,000
shares; issued 1,517,882 shares and outstanding
1,517,288 shares 23,140
Additional paid-in capital 18,298,684
Common stock warrants 1,200
Accumulated deficit (22,427,123)
------------
Total stockholders' deficit (4,104,099)
------------
Total liabilities and stockholders' deficit $ 1,175,303
============
See accompanying notes to condensed consolidated financial statements.
3
HEALTHSPORT, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005, AND THE PERIOD
FROM INCEPTION (SEPTEMBER 9, 2004) THROUGH MARCH 31, 2006
(UNAUDITED)
FROM INCEPTION
(9/9/2004)
THREE MONTHS ENDED THROUGH
MARCH 31, MARCH 31,
2006 2005 2006
------------ ------------ ------------
CONTINUING OPERATIONS
Administrative expense $ 18,046 $ 152,347 $ 1,296,268
Asset impairments - - 311,002
Abandoned asset 1,490 - 1,490
Equity in joint venture loss - - 134,691
Interest expense 135,909 97,489 634,075
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (155,445) (249,836) (2,377,526)
------------ ------------ ------------
DISCONTINUED OPERATIONS
Earnings (loss) from discontinued operations - 70,242 -
Income tax benefit - - -
------------ ------------ ------------
NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS - 70,242 -
------------ ------------ ------------
NET LOSS $ (155,445) $ (179,594) $ (2,377,526)
============ ============ ============
NET LOSS PER SHARE, BASIC AND DILUTED, FROM:
CONTINUING OPERATIONS $ (0.23) $ (0.59) $ (4.24)
DISCONTINUED OPERATIONS - 0.16 -
------------ ------------ ------------
TOTAL $ (0.23) $ (0.42) $ (4.24)
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 668,106 426,682 560,522
============ ============ ============
See accompanying notes to condensed consolidated financial statements.
4
HEALTHSPORT, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005, AND THE PERIOD
FROM INCEPTION (SEPTEMBER 9, 2004) THROUGH MARCH 31, 2006
(UNAUDITED)
FROM INCEPTION
(9/9/2004)
THREE MONTHS ENDED THROUGH
MARCH 31, MARCH 31,
2006 2005 2006
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (155,445) $ (179,594) $ (2,377,526)
Earnings (loss) from discontinued operations - 70,242 -
------------ ------------ ------------
Loss from continuing operations (155,445) (249,836) (2,377,526)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation - 93 372
Asset impairments - - 311,002
Equity in joint venture loss - - 134,691
Common stock issued for services - - 186,182
Abandoned asset 1,490 - 1,490
Accounts payable 22,500 28,382 (19,642)
Due from related parties - 3,000 370,750
Accrued expenses 130,410 126,533 662,616
------------ ------------ ------------
Net cash used in continuing operations (1,045) (91,828) (730,065)
------------ ------------ ------------
Net cash used in discontinued operations - (163,002) (163,002)
------------ ------------ ------------
Net cash used in operations (1,045) (254,830) (893,067)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of computer equipment - - (1,863)
Investment in joint venture - - (115,500)
------------ ------------ ------------
Net cash used in investing activities - - (117,363)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds - 261,227 880,781
Loan repayment - - (7,500)
Sale of common stock - - 135,000
Cash received in acquisition of IMGI - - 1,200
------------ ------------ ------------
Net cash provided by financing activities - 261,227 1,009,481
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,045) 6,397 (949)
CASH AND CASH EQUIVALENTS, beginning of period 1,348 2,691 1,252
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 303 $ 9,088 $ 303
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities:
Issuance of common stock for investment in Health
Strip Solutions, LLC $ 900,000 $ - $ 900,000
See accompanying notes to condensed consolidated financial statements.
5
HEALTHSPORT, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following notes to the condensed consolidated financial statements and
management's discussion and analysis or plan of operation contain
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements may include projections or
expectations of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for future operations. Words
such as "expects", "anticipates", "approximates", "believes", "estimates",
"hopes", "intends", and "plans", and variations of such words and similar
expressions are intended to identify such forward-looking statements. No
assurance can be given that actual results or events will not differ materially
from those projected, estimated, assumed or anticipated in any such
forward-looking statements. Important factors that could result in such
differences, in addition to other factors noted with such forward-looking
statements, include those discussed in Exhibit 99.1 filed with the Securities
and Exchange Commission as an exhibit to the Company's Annual Report on Form
10-KSB for fiscal year 2002.
NOTE 1--BASIS OF PRESENTATION
-----------------------------
The condensed consolidated financial statements include the accounts of
Healthsport, Inc. ("Healthsport") and its wholly owned subsidiaries, Idea
Management Group, Inc. ("IMGI"), World Championship Poker, Inc. ("Poker"),
Strategic Gaming Consultants, LLC ("Gaming") and Maxx Motorsports, Inc.
("Maxx"), and its wholly owned subsidiary, Team Racing Auto Circuit, LLC
("TRAC") and Health Strip Solutions, LLC ("Health Strip") the 80% subsidiary of
Healthsport (collectively, the "Company"). All significant intercompany balances
and transactions have been eliminated in consolidation. Developing the Company's
film strip product containing electrolytes represents the primary continuing
operations of the Company and the current development stage operations.
On April 24, 2006, the Company filed a Definitive Information Statement pursuant
to Section 14C which provided that effective May 15, 2006; 1) the name of the
Company would be changed to Healthsport, Inc.; 2) the Company's issued and
outstanding shares would be reverse-split one share for each 200 shares; and 3)
the Company's Certificate of Incorporation would be restated to reflect these
amendments. These amendments were approved by the Company's Board of Directors
and in writing by 52.33% of the Company's shareholders on March 31, 2006.
Accordingly, the Company has made the change in outstanding shares and all
references to shares retroactive for all periods presented in the financial
statements.
6
On March 29, 2006, the Company entered into a Unit Purchase Agreement with the
majority of the unit holders of Health Strip, a Nevada limited liability
company, to acquire 80% of Health Strip in exchange for 500,000 shares of the
Company's $.0001 par value common stock. The seller has the right to rescind
this transaction by May 31, 2006, if the Company is unable to cause a minimum of
$4,000,000 of its outstanding liabilities to convert into the Company's common
stock by May 15, 2006, which was extended until May 30, 2006. Health Strip has
use rights to patented process technology for the formulation and for the
manufacture of a thin film electrolyte strip. In addition, Health Strip has
tentative agreements in place for the marketing and distribution of the strip.
Health Strip through its manufacturing agreement has the process technology to
manufacture thin film strips to deliver an electrolyte product.
Idea Sports acquired IMGI and Gaming, both of which are non-operating
development stage enterprises within the meaning of Statement of Financial
Accounting Standards No. 7, ("SFAS No. 7") "Accounting and Reporting by
Development Stage Enterprises." The Company follows the AICPA SOP 98-5,
"Reporting on the Costs of Start-Up Activities" in accounting for its start-up
activities. Accordingly, the costs associated with the new development stage
activities have a new inception date of September 9, 2004, and all prior
development stage costs associated with the discontinued automotive racing
league have been transferred to accumulated deficit.
The condensed consolidated financial statements included in this report have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission for interim reporting and include all
adjustments (consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation. These condensed
consolidated financial statements have not been audited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations for interim reporting. The Company believes that the disclosures
contained herein are adequate to make the information presented not misleading.
However, these condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report for the year ended December 31, 2005,
which is included in the Company's Form 10-KSB for the year ended December 31,
2005. The financial data for the interim periods presented may not necessarily
reflect the results to be anticipated for the complete year.
Certain reclassifications of the amounts presented for the comparative period
have been made to conform to the current presentation.
7
NOTE 2--GOING CONCERN
---------------------
The Company has not established any sources of revenue to fund the development
of business, projected operating expenses and commitments for fiscal year 2006.
Since August 26, 2003, when the Company discontinued its plans to begin a racing
league, the Company attempted to locate and negotiate with a business entity for
the merger of that target business into the Company. As discussed below, the
Company has acquired new development stage businesses commencing on September 9,
2004. Since September 9, 2004, the Company incurred losses in the amount of
$2,222,081 through December 31, 2005 and $155,445 during the three months ended
March 31, 2006. A group of the note holders have agreed to advance funds to
allow the Company to develop its health strip product which management believes
will be a business capable of generating revenues sufficient to fund projected
operating expenses and commitments. However, there can be no assurance that the
group of note holders will be able to continue to provide sufficient funding to
develop the Company's current business plan.
In addition, current liabilities of the Company exceed its current assets by
approximately $5,054,000, and $229,934 of its convertible promissory notes
payable obligations are in default. The remaining balances of the convertible
promissory notes in the total amount of $4,300,375, as amended, are due on June
30, 2006. Pursuant to the acquisition of Health Strip, the Company is required
to convert at least $4,000,000 of its outstanding liabilities into its common
stock by May 15, 2006, which was extended until May 30, 2006. It is the
Company's intention to convert substantially all of its outstanding liabilities
into common stock. However, there can be no assurance that this will be
accomplished by that date.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that may result from the outcome of these uncertainties.
NOTE 3--ACQUISITIONS
--------------------
ELECTROLYTE STRIP
-----------------
On April 19, 2005, the Company entered into a joint development agreement with
InnoZen, Inc. ("InnoZen") to jointly develop a film strip product containing
electrolytes to replenish the body while under physical stress (the "electrolyte
strip"). InnoZen had experience in the formulation, development, manufacturing
and sale of edible thin strips containing drug active ingredients. The Company
has the ability to assist in obtaining endorsements for the electrolyte strips
by well-known athletes and coaches. The Company contributed $115,500 in cash and
250,000 shares of its common stock, valued at $19,191 using the Black-Scholes
valuation model, for its 50% interest in the joint venture. The Company would be
required to issue an additional 250,000 shares of its common stock upon
completion of the development of a saleable product.
As of September 30, 2005, the joint venture had completed a product formulation
of an acceptable thin film prototype containing electrolytes and had completed
laboratory stability testing for the oral dosage product. The joint venture
produced initial electrolyte strips capable of holding a deliverable load of
electrolytes equal to approximately one fluid ounce of most recognized sports
drinks. The electrolyte strips were produced for flavor testing with initial
flavors to be lemon-lime, orange and sour orange.
8
InnoZen has been unable to complete a saleable product and all joint venture
funds were expended by December 31, 2005.
On March 29, 2006, the Company entered into a Unit Purchase Agreement with the
majority of the unit holders of Health Strip to acquire 80% of Health Strip in
exchange for 500,000 shares of the Company's $.0001 par value common stock. The
seller has the right to rescind this transaction by May 31, 2006, if the Company
is unable to cause a minimum of $4,000,000 of its outstanding liabilities to
convert into the Company's common stock by May 15, 2006, which was extended
until May 30, 2006. Health Strip has use rights to patented process technology
for the formulation and for the manufacture of a thin film electrolyte strip. In
addition, Health Strip has tentative agreements in place for the marketing and
distribution of the strip. Health Strip through its manufacturing agreement has
the process technology to manufacture thin film strips to deliver an electrolyte
product.
Health Strip did not have any tangible assets or liabilities, nor did it have
any specific intangible assets to which a portion of the cost could be
allocated. Accordingly, Health Strip recorded goodwill in the amount of
$1,125,000 ($900,000 or 80% of which is equal to the value of the Company's
stock issued on the date of the transaction). The Company's stock closed at
$1.80 per post-split share on the date of the acquisition.
POKER
-----
On June 28, 2005, the Company issued 3,850,000 shares of its common stock, which
were valued at $295,544 using the Black-Scholes valuation model, to acquire
Poker, whose principal asset is the rights to a proprietary fantasy football
format, with the working title, Vegas Roll'em(TM) Fantasy Football ("Vegas
Roll'em"). The Company recorded the investment of $295,544 as goodwill on the
books of Poker.
In January 2005, the Rules of Competition for Vegas Roll'em received a copyright
from the United States Copyright Office. This format allows live filming of the
high stakes action as it unfolds. Each player will have a roll of the dice to
determine which of his players will make up his team. According to the Fantasy
Sports Trade Association, fantasy football was played by nearly fifteen million
participants last year. This internet-based phenomenon has created a four
billion dollar industry.
The Company began its initial sales and commenced operations during the quarter
ended September 30, 2005. However, due to delays encountered in developing a
functional website which delayed the date for commencing sales, the Company
determined it would not have sufficient participants to have a viable program
during the 2005 season. Accordingly, the Company returned all fees collected and
cancelled the program. While the Company may still pursue the project for the
2006 season, its principal focus is on the agreement with Health Strip.
Accordingly, at December 31, 2005, the Company elected to impair its investment
in the goodwill associated with Poker to the $50,000 amount it had determined to
be the fair value of the investment.
9
TELEVISION PROGRAMS
-------------------
On October 15, 2004, the Company acquired two television programs entitled
"America's Top Drivers" and "Women's Racing League" in exchange for warrants to
acquire 1,750,000 shares of the Company's common stock at an exercise price of
$.10 per share. The transaction was valued at $65,458 using the Black-Scholes
option pricing model. As of December 31, 2005, the Company was unable to locate
a venue to produce the shows. Accordingly, the Company fully impaired its
investment of $65,458 at December 31, 2005.
On September 28, 2005, the Company completed the modification of its television
program purchase agreement in order to recognize the compensation element of the
agreement. The warrants to acquire 1,750,000 shares of the Company's common
stock at $.10 per share were cancelled and the Company issued 3,600,000 shares
of its common stock to the seller of the programs. The 3,600,000 shares of
common stock were valued at $251,640, utilizing the Black-Scholes valuation
model. The $251,640 was reduced by the original calculated value of the
warrants, which were cancelled, of $65,458 and a net consulting fee expense of
$186,182 was recorded.
GAMING
------
On October 27, 2004, the Company acquired all of the issued and outstanding
memberships of Gaming, a Nevada limited liability company, in exchange for
warrants to acquire 750,000 shares of the Company's common stock at an exercise
price of $.10 per share. In addition, in the event Gaming generates $2,000,000
in gross revenue within 36 months of closing, the sellers of Gaming would
receive additional warrants to acquire 750,000 shares of the Company's common
stock at an exercise price of $.10. Gaming had no prior operations and has no
assets. Accordingly, the transaction was recorded with no value. Gaming is not
currently active and has not had any activity since its inception.
NOTE 4--DISCONTINUED OPERATIONS
-------------------------------
The Company, which has been in the development stage since its inception, May
15, 2001, did not establish sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,054,021 from inception through December 31, 2003. Accordingly, on August 26,
2003, the Board of Directors of the Company unanimously approved a plan to
immediately discontinue its racing operation.
In March 2005, the Company and all other parties to the litigation agreed to
dismiss with prejudice all claims and counterclaims. As a result, the Company
was relieved of previously recorded liabilities in the amount of $281,181. The
Company recorded $210,939 in additional legal fees, which resulted in a net gain
from discontinued operations of $70,242 during the three months ended March 31,
2005.
10
NOTE 5--STOCK OPTION PLANS
--------------------------
In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment"
(SFAS 123(R)). Among other things, SFAS 123(R) requires expensing the fair value
of stock options, previously optional accounting. For transition, upon adoption
on January 1, 2006, SFAS 123(R) would require expensing any unvested options and
will also require the Company to change the classification of certain tax
benefits from option deductions to financing rather than operating cash flows.
No options were granted during the three months ended March 31, 2006 or 2005.
Until December 31, 2005, the Company applied the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25 (APB No.
25), "Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its stock option plan. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
NOTE 6--NOTES PAYABLE
---------------------
Activity in convertible promissory notes for the three months ended March 31,
2006 is as follows:
Accrued
Principal Interest
Balance, January 1, 2006 $ 4,530,309 $ 68,244
Accrued interest - 135,909
------------- -------------
Balance, March 31, 2006 $ 4,530,309 $ 204,153
============= =============
At December 31, 2005, note agreements with a principal balance of $4,300,375
were amended and are now due June 30, 2006, including interest of 12%, payable
monthly commencing on January 31, 2006. Accrued interest has not been paid. The
remaining notes in the principal amount of $229,934 are in default and the
default rate of interest is 12% since the default occurred.
NOTE 7--COMMITMENTS AND CONTINGENCIES
-------------------------------------
The Company, which has been in the development stage since its inception, May
15, 2001, did not establish sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,054,021 from inception through December 31, 2003. As a result of the
continuing losses, on August 26, 2003, the Board of Directors of the Company
unanimously approved a plan to immediately discontinue its racing operation.
This discontinued operation had a loss of $28,960 and $671,289 during the years
ended December 31, 2005 and 2004, respectively. While the Company does not
expect any additional liability, the Company had agreements in place for racing
car design and construction, team sales brokerage and broadcasting which have
not been formally terminated.
11
NOTE 8--RELATED PARTIES
-----------------------
During 2005, Godley Morris Group, LLC ("GMG"), a company 50% owned and managed
by the Company's former CEO notified the Company they were claiming
reimbursement for $291,913 for expenditures they claimed to have made on behalf
of the Company. The Company recorded this amount in due to related party in
December 2005.
The Company's CEO is currently providing office space for the Company at no
charge.
NOTE 9--SUBSEQUENT EVENTS
-------------------------
On April 24, 2006, the Company filed a Definitive Information Statement pursuant
to Section 14C which provided that effective May 15, 2006; 1) the name of the
Company would be changed to Healthsport, Inc.; 2) the Company's issued and
outstanding shares would be reverse-split one share for each 200 shares; and 3)
the Company's Certificate of Incorporation would be restated to reflect these
amendments. These amendments were approved by the Company's Board of Directors
and in writing by 52.33% of the Company's shareholders on March 31, 2006.
Accordingly, the Company has made the change in outstanding shares retroactive
for all periods presented in the financial statements.
The Company entered into a Unit Purchase Agreement with the majority of the unit
holders of Health Strip on March 29, 2006, which provided in part that the
seller could rescind the transaction if a minimum of $4,000,000 of the Company's
liabilities were not converted into the Company's common stock by May 15, 2006.
The Company extended the due date until May 30, 2006 for conversion of the
liabilities into its common stock.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
We have been in the development stage for our planned racing operation since our
inception, May 15, 2001, and did not establish sources of revenue sufficient to
fund the development of business and pay operating expenses, resulting in a net
loss of $15,054,021 from inception through December 31, 2003. On August 26,
2003, our Board of Directors unanimously approved a plan to immediately
discontinue its racing operation. Since August 26, 2003 and until September 9,
2004, we attempted to find a suitable acquisition candidate. On September 9,
2004, with the acquisition of IMGI, we ceased one development stage and
commenced a new development stage operation.
ELECTROLYTE STRIP
-----------------
On April 19, 2005, we entered into a joint development agreement with InnoZen,
Inc. ("InnoZen") to jointly develop a film strip product containing electrolytes
to replenish the body while under physical stress (the "electrolyte strip").
InnoZen had experience in the formulation, development, manufacturing and sale
of edible thin strips containing drug active ingredients. We have the ability to
assist in obtaining endorsements for the electrolyte strips by well-known
athletes and coaches. We contributed $115,500 in cash and 250,000 shares of our
common stock, valued at $19,191 using the Black-Scholes valuation model, for our
50% interest in the joint venture. We would be required to issue an additional
250,000 shares of our common stock upon completion of the development of a
saleable product.
As of September 30, 2005, the joint venture had completed a product formulation
of an acceptable thin film prototype containing electrolytes and had completed
laboratory stability testing for the oral dosage product. The joint venture
produced initial electrolyte strips capable of holding a deliverable load of
electrolytes equal to approximately one fluid ounce of most recognized sports
drinks. The electrolyte strips were produced for flavor testing with initial
flavors to be lemon-lime, orange and sour orange.
InnoZen has been unable to complete a saleable product and all joint venture
funds were expended by December 31, 2005.
On March 29, 2006, we entered into a Unit Purchase Agreement with the majority
of the unit holders of Health Strip Solutions, LLC, ("Health Strip"), to acquire
80% of Health Strip in exchange for 500,000 shares of our $.0001 par value
common stock. The seller has the right to rescind this transaction by May 31,
2006, if we are unable to cause a minimum of $4,000,000 of our outstanding
liabilities to convert into our common stock by May 15, 2006, which was extended
until May 30, 2006. Health Strip has use rights to patented process technology
for the formulation and for the manufacture of a thin film electrolyte strip. In
addition, Health Strip has tentative agreements in place for the marketing and
distribution of our strip. Health Strip, through its manufacturing agreement has
the process technology to manufacture thin film strips to deliver an electrolyte
product.
13
Health Strip did not have any tangible assets or liabilities, nor did it have
any specific intangible assets to which a portion of the cost could be
allocated. Accordingly, Health Strip recorded goodwill in the amount of
$1,125,000 ($900,000 or 80% of which is equal to the value of our common stock
issued on the date of the transaction). Our common stock closed at $1.80 per
post-split share on the date of the acquisition.
IMGI
----
On September 9, 2004, we acquired all of the issued and outstanding common stock
of IMGI, a concept development company.
POKER
-----
On June 28, 2005, we issued 3,850,000 shares of our common stock, which were
valued at $295,544 using the Black-Scholes valuation model, to acquire Poker,
whose principal asset is the rights to a proprietary fantasy football format,
with the working title, Vegas Roll'em(TM) Fantasy Football ("Vegas Roll'em").
Poker recorded the investment of $295,544 as goodwill.
In January 2005, the Rules of Competition for Vegas Roll'em received a copyright
from the United States Copyright Office. This format allows live filming of the
high stakes action as it unfolds. Each player will have a roll of the dice to
determine which of his players will make up his team. According to the Fantasy
Sports Trade Association, fantasy football was played by nearly fifteen million
participants last year. This internet-based phenomenon has created a four
billion dollar industry.
We began our initial sales during the quarter ended September 30, 2005 and
believed we had commenced operations and completed our development stage as of
that date. However, due to delays encountered in developing a functional
website, which delayed the date for commencing sales, we determined we would not
have sufficient participants to have a viable program during the 2005 season.
Accordingly, we returned all fees collected and cancelled the program. We have
re-instituted the development stage for our business from the original inception
date of September 9, 2004. While we may still pursue the project for the 2006
season, our principal focus is on the agreement with Health Strip. Accordingly,
at December 31, 2005, we elected to impair our investment in the goodwill
associated with Poker to the $50,000 amount we have determined to be the fair
value of the investment.
GOING CONCERN FACTORS--LIQUIDITY
We have not established any sources of revenue to fund the development of
business, projected operating expenses and commitments for fiscal year 2006.
Since August 26, 2003, when we discontinued our plans to begin a racing league,
we attempted to locate and negotiate with a business entity for a merger with
that target business. As discussed below, we acquired new development stage
businesses commencing on September 9, 2004. Since September 9, 2004, we incurred
losses in the amount of $2,222,081 through December 31, 2005 and $155,445 during
the three months ended March 31, 2006. A group of the note holders have agreed
to advance funds to allow us to develop our health strip product which
management believes will be a business capable of generating revenues sufficient
to fund projected operating expenses and commitments. However, there can be no
assurance that the group of note holders will be able to continue to provide
sufficient funding to develop our current business plan.
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In addition, our current liabilities exceed our current assets by approximately
$5,054,000, and $229,934 of our convertible promissory notes payable obligations
are in default. The remaining balances of the convertible promissory notes in
the total amount of $4,300,375, as amended, are due on June 30, 2006. Pursuant
to the acquisition of Health Strip, we are required to convert at least
$4,000,000 of our outstanding liabilities into our common stock by May 15, 2006,
which was extended to May 30, 2006. It is our intention to convert substantially
all of our outstanding liabilities into common stock. However, there can be no
assurance that this will be accomplished by that date.
These conditions raise substantial doubt about our ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that may result from the outcome of these uncertainties.
DISCONTINUED OPERATIONS
We have been in the development stage since our inception, May 15, 2001, and we
did not establish sources of revenue sufficient to fund the development of
business and pay operating expenses, resulting in a net loss of $15,054,021 from
inception through December 31, 2003. As a result of the continuing losses, on
August 26, 2003, our Board of Directors unanimously approved a plan to
immediately discontinue our racing operation. This discontinued operation had a
loss of $28,960 and $671,289 during the year ended December 31, 2005 and 2004,
respectively. While we do not expect any additional liability, we were a party
to a racing car design and construction agreement, a team sales brokerage
agreement and a broadcasting agreement which have not been formally cancelled.
In March 2005, all parties to the litigation agreed to dismiss with prejudice
all claims and counterclaims. As a result, we were relieved of previously
recorded liabilities in the amount of $281,181. We recorded $210,939 in
additional legal fees, which resulted in a net gain from discontinued operations
of $70,242 during the three months ended March 31, 2005.
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ITEM 3. CONTROLS AND PROCEDURES
The Company discontinued its planned racing operations on August 26, 2003,
and subsequently terminated the majority of its employees. A third-party
consultant was retained to communicate to management the disclosures
required by reports that are filed under the Exchange Act.
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
reports that are filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
the reports that are filed under the Exchange Act is accumulated and
communicated to management, including the principal executive officer, as
appropriate to allow timely decisions regarding required disclosure. Under
the supervision of and with the participation of management, including the
principal executive officer, the Company has evaluated the effectiveness of
the design and operation of its disclosure controls and procedures as of
March 31, 2006, and, based on its evaluation, our principal executive
officer has concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
Other than as discussed above, there have been no significant changes in
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation described above,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
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PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During March 2006, the Company issued 100,000,000 shares of its common stock to
acquire 80% of Health Strip Solutions, LLC. The shares were sold pursuant to an
exemption from registration under Section 4(2) promulgated under the Securities
Act of 1933, as amended.
ITEM 6. EXHIBITS
(a) Exhibits--
Exhibit 31.1 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTHSPORT, INC.
May 18, 2006 By: /s/ Terry Washburn
---------------------------------------
Terry Washburn, Chief Executive Officer
and principal financial and accounting
officer
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