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, 2007
Commission File Number: 0-23100
HEALTHSPORT, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-2649848
(State of Incorporation) (IRS Employer ID No)
7633 EAST 63RD PLACE, SUITE 220, TULSA, OKLAHOMA 74133
(Address of principal executive office)
(877) 570-4776
(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 [ ].
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of March 31, 2007, was 21,069,612.
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, 2007 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2007 and 2006 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2007 and 2006 5
Notes to Condensed Consolidated Financial Statements 6-13
Item 2: Management's Discussion and Analysis or Plan of Operation 14-15
Item 3: Controls and Procedures 16
PART II OTHER INFORMATION 17
Exhibits 18-21
-2-
HEALTHSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2007
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,977,660
Accounts receivable 9,247
Inventory 141,865
Notes receivable and advances to InnoZen, Inc. 750,000
Prepaid stock compensation 564,495
Prepaid expenses 45,148
------------
Total current assets 3,488,415
Property and equipment, net 41,510
Goodwill 1,785,998
Patent costs, net 1,870,100
Prepaid stock compensation, non-current 59,528
Other assets 6,572
------------
Total assets $ 7,252,123
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 132,299
Accrued expenses 194,155
------------
Total liabilities 326,454
------------
Commitments and contingencies
Stockholders' equity:
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;
21,069,612 shares issued and outstanding 2,107
Additional paid-in capital 32,815,484
Intrinsic value of common stock options (1,134,756)
Common stock warrants 1,200
Accumulated deficit (24,758,366)
------------
Total stockholders' equity 6,925,669
------------
Total liabilities and stockholders' equity $ 7,252,123
============
See accompanying notes to condensed consolidated financial statements.
-3-
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
2007 2006
------------ ------------
Revenue $ 5,897 $ --
Cost of goods sold 3,877 --
------------ ------------
Gross profit 2,020 --
------------ ------------
General and administrative expense 262,771 18,045
Marketing and selling expense 409,173 --
Non-cash compensation expense 387,944 --
Abandoned asset -- 1,491
------------ ------------
Total deductions 1,059,888 19,536
------------ ------------
Net loss from operations (1,057,868) (19,536)
------------ ------------
Other income (expense):
Interest income 9,227 --
Interest expense -- (135,909)
------------ ------------
Other income (expense) 9,227 (135,909)
------------ ------------
Net loss before income taxes (1,048,641) (155,445)
Provision for income taxes -- --
------------ ------------
Net loss $ (1,048,641) $ (155,445)
============ ============
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.05) $ (0.23)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 19,995,308 668,106
============ ============
See accompanying notes to condensed consolidated financial statements.
-4-
HEALTHSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,048,641) $ (155,445)
Adjustment to reconcile net loss to net cash used
in operating activities:
Amortization of non-cash stock compensation 387,944 --
Depreciation and amortization 29,232 --
Abandoned asset -- 1,491
Accounts receivable (5,497) --
Inventory 3,877 --
Prepaid expenses and other assets (51,720) --
Accounts payable 85,110 22,499
Accrued expenses 183,495 130,410
----------- -----------
Net cash used in operating activities (416,200) (1,045)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of furniture and office equipment (42,335) --
Loan to InnoZen, Inc (500,000) --
----------- -----------
Net cash used in investing activities (542,335) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Collect stock subscription receivable 250,000 --
Sale of common stock 2,368,051 --
----------- -----------
Net cash provided by financing activities 2,618,051 --
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,659,516 (1,045)
CASH AND CASH EQUIVALENTS, beginning of period 318,144 1,348
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,977,660 $ 303
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ -- $ --
Income taxes -- --
NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock for:
Investment in Health Strip Solutions, LLC $ -- $ 900,000
See accompanying notes to condensed consolidated financial statements.
-5-
HEALTHSPORT, INC. AND SUBSIDIARIES
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", "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: ORGANIZATION AND NATURE OF BUSINESS
-------------------------------------------
ORGANIZATION AND BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
HealthSport, Inc. ("HealthSport") and its wholly owned subsidiaries, Enlyten,
Inc. ("Enlyten"), Health Strip Solutions, LLC ("Health Strip"), Cooley
Nutraceuticals, Inc. ("Nutraceuticals"), and the following inactive
subsidiaries, 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") (collectively, the
"Company" or the "Companies"). All significant intercompany balances and
transactions have been eliminated in consolidation.
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, effective May 15, 2006, the Company's name was changed to
HealthSport, Inc., the shares were reverse-split one for 200 and the Company's
Certificate of Incorporation was restated to reflect these amendments. The
Company has made the change in outstanding shares and all references to shares
retroactive for all periods presented in the financial statements.
-6-
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, 2006,
which is included in the Company's Form 10-KSB for the year ended December 31,
2006. 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.
NATURE OF BUSINESS
HealthSport is a holding company with six wholly owned subsidiaries.
Enlyten was formed to market and sell the Company's edible film strip products.
Health Strip, in conjunction with InnoZen, holds the proprietary technology for
the formulation of a thin film electrolyte strip and has filed a provisional
patent for this process. Electrolytes such as those found in Health Strip's
ENLYTEN(TM) SPORTSTRIPS along with water, can be used in oral rehydration
therapy to replenish the body's electrolyte levels after dehydration caused by
exercise, diarrhea or vomiting. Health Strip and InnoZen also hold the
proprietary technology for ENLYTEN(TM) SURVIVAL STRIPS which are formulated with
antioxidants, non-cavity causing sweeteners, vitamins, herbal extracts,
electrolytes, caffeine and other proven beneficial compounds as a remedy to
fatigue, drowsiness and dehydration.
Nutraceuticals holds the proprietary technology for the formulation of a
nutritional supplement that quickly and effectively provides natural energy
enhancers, caffeine, electrolytes, antioxidants and other essential vitamins and
minerals. In conjunction with InnoZen, Nutraceuticals has designed the
ENLYTEN(TM) Energy Strip, our formulation to supply the body with a healthy
boost in energy, while replenishing and maintaining the essential vitamins and
minerals lost during activity, after a long flight, bad night of sleep or over
indulgence of alcohol.
On May 15, 2006, the Company changed its name to HealthSport, Inc. On November
8, 2004, the Company changed its name to Idea Sports Entertainment Group, Inc.
On May 15, 2001, the Company changed its name from Logisoft Corp. to Team Sports
Entertainment, Inc.
-7-
NOTE 2: INNOZEN, INC.
---------------------
On December 20, 2006, the Company signed a non-binding Letter of Intent ("LOI")
to acquire InnoZen, Inc. ("InnoZen") through a merger with one of its wholly
owned subsidiaries. A condition of the LOI required the Company to fund a Bridge
Loan for $250,000 (which was made on December 26, 2006) and the investment by
the Company of $750,000 in working capital into InnoZen at closing. The Company
initiated a private placement on January 15, 2007, to sell up to 8,000,000
shares of its common stock at $1.50 per share.
InnoZen is the preeminent formulator, developer and manufacturer of edible thin
film strips that deliver drug actives and was the first company to deliver a
drug active ingredient in a thin film strip when it completed the development of
Chloraseptic(R) Sore Throat Relief Strips in June 2003. With Chloraseptic Relief
Strips, InnoZen established a new process which prevented irritants and
incorporated additional compounds to make the strips more suitable for various
drug delivery needs. Relying on its expertise in the development of edible film
strips that deliver drug actives, InnoZen moved forward with its proprietary
technology to develop two new thin film strip products for cough. InnoZen
launched its two new film strip products under its own Suppress(R) brand
(http://www.suppress.com) in September 2004.
On January 31, 2007, the Company entered into a Merger Agreement with InnoZen
and InnoZen Acquisition Sub, Inc. ("Acquisition Sub"), the Company's wholly
owned subsidiary, all Delaware corporations. At the effective time and upon the
terms and conditions of the Merger Agreement and in accordance with Delaware
General Corporate Law, in exchange for 17,500,000 shares of the Company's common
stock, Acquisition Sub will be merged with and into InnoZen, after which,
InnoZen will become our wholly owned subsidiary and will continue as the
surviving corporation and the separate existence of Acquisition Sub will cease.
Conditions precedent to effect the Merger include that the Company shall have
consummated the private placement of at least $6 million but not more than $12
million of our common shares at a price not less than $1.50 per share on the
following timetable: (a) execution and delivery by the investors of subscription
agreements for the minimum amount of the private placement by no later than
February 15, 2007; and (b) the closing of the private placement by no later than
February 28, 2007.
On March 15, 2007, this agreement was amended to extend the closing date to as
late as April 30, 2007 and would require increasing the number of shares issued
to InnoZen in 250,000 share increments up to 18,250,000 depending upon the
ultimate closing date of the private placement.
On May 4, 2007, the Company issued 18,250,000 shares of its common stock to the
shareholders of InnoZen and completed the acquisition of InnoZen.
NOTE 3: ELECTROLYTE STRIP
-------------------------
HEALTH STRIP - 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 common stock.
Health Strip, in conjunction with InnoZen, holds certain proprietary technology
-8-
for the formulation of a film strip product containing electrolytes to replenish
the body while under physical stress (the "electrolyte strip"), which is the
subject of a provisional patent filed in the U.S. Patent and Trademark office on
June 14, 2006. In addition, Health Strip reached an agreement for InnoZen to
manufacture and distribute the electrolyte strips through its California based
manufacturing facility. Through the use of InnoZen's patented manufacturing
process, the electrolyte strips have now been produced. Product names and
packaging were finalized and initial sales began at the end of 2006.
At the time it was acquired, Health Strip did not have any tangible assets or
liabilities, but it did have certain proprietary technology for an electrolyte
replenishment system and the rights to file for a patent of this process.
Accordingly, Health Strip recorded $1,125,000 as an intangible asset for patent
technology rights, 80% of which is equal to the value of our stock issued on the
date of the transaction. As stated above, the Company has filed a provisional
patent in the US Patent & Trademark office and has twelve months to file a final
application. InnoZen has completed its bi-layer and nutritional supplement
provisionals for final applications to include our electrolyte replenishment
system. The Company commenced amortization of our total patent costs in July
2006 over seventeen years, the life of the expected patent. The Company will
periodically evaluate the unamortized balance of the patent and technology costs
and record an impairment loss if warranted.
During December 2006, the Company issued 925,000 shares of its common stock to
acquire the remaining 20% of Health Strip, which was valued at $1,871,250, based
upon the trading price of the Company's stock on the acquisition dates. This
amount was reduced by the book value of the associated minority interest of
$135,252 and the resulting $1,735,998 was recorded as goodwill.
NUTRACEUTICALS - On December 6, 2006, the Company issued 375,000 shares of its
common stock to acquire 100% of Nutraceuticals. At the time it was acquired,
Nutraceuticals had a receivable for $3,750 and did not have any liabilities, but
it did have certain proprietary technology for the formulation of a nutritional
supplement that quickly and effectively provides natural energy enhancers,
caffeine, electrolytes, antioxidants and other essential vitamins and minerals.
In conjunction with InnoZen, Nutraceuticals has designed our formulation to
supply the body with a healthy boost in energy, while replenishing and
maintaining the essential vitamins and minerals lost during activity, after a
long flight, bad night of sleep or over indulgence of alcohol. This transaction
was recorded based upon the trading price of the Company's common stock on the
date of the purchase and the $806,250 was allocated $3,750 to accounts
receivable and $802,500 to an intangible asset for patent technology rights. The
Company commenced amortization of the patent costs over seventeen years, the
life of the expected patent in January 2007. The Company will periodically
evaluate the unamortized balance of the patent and technology costs and record
an impairment loss if warranted.
-9-
NOTE 4: SHARE-BASED PAYMENTS
----------------------------
STOCK OPTIONS
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) required expensing any unvested options and also
required the Company to change the classification of certain tax benefits from
option deductions to financing rather than operating cash flows.
Prior to January 1, 2006, the Company accounted for options granted under its
employee compensation plan using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related interpretations including Financial
Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25." Under APB 25, compensation expense was recognized for the
difference between the market price of the Company's common stock on the date of
grant and the exercise price. As permitted by Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), stock-based compensation was included as a pro forma disclosure in the
notes to the consolidated financial statements.
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R
(Revised 2004), "Share-Based Payment" ("SFAS 123R") using the modified
prospective transition method for all stock options issued. SFAS 123R required
measurement of compensation cost for all options granted based on fair value on
the date of grant and recognition of compensation over the service period for
those options expected to vest. The Company had no unvested options outstanding
prior to July 1, 2006. Stock-based compensation expense recorded for the quarter
ended March 31, 2007, includes the estimated expense for stock options granted
on or subsequent to January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123R. The Company recorded
the cost of stock options by increasing additional paid-in capital and
increasing deferred option compensation. The deferred option compensation is
being amortized over the period which the awards are expected to be exercised.
As prescribed under the modified prospective and prospective transition methods,
results for the prior period have not been restated.
The Company recognizes option compensation expense on a straight-line basis over
the period the option is expected to be outstanding before being exercised for
each stock option grant. Total stock-based option compensation expense
recognized for the quarter ended March 31, 2007 and 2006, was $138,196 and $0,
respectively.
The Company currently fully reserves all of its tax benefits. Accordingly, the
adoption of SFAS 123R, which requires the benefits of tax deduction in excess of
the compensation cost recognized for those options to be classified as financing
cash inflows rather than operating cash inflows, on a prospective basis, will
have no current impact on the Company.
-10-
The fair value of each option on the date of grant is estimated using the Black
Scholes option valuation model. The following weighted-average assumptions were
used for options granted during the quarter ended March 31, 2007 (none in the
corresponding 2006 period):
Expected term 2 years
Expected volatility 102.91%
Expected dividend yield 0%
Risk-free interest rate 4.75%
Expected annual forfeiture rate 0%
A summary of option activity as of March 31, 2007, and changes during the three
months then ended is presented below:
WEIGHTED
WEIGHTED AVERAGE AGGREGATE
AVERAGE REMAINING INTRINSIC
EXERCISE CONTRACTUAL VALUE
Options Shares Price Term (yrs) ($000)
------- ------ ----- ---------- ------
Outstanding, December 31, 2006 425,000
Granted 605,000
Exercised -
Forfeited or expired -
-----------
Outstanding, March 31, 2007 1,030,000 $ 2.15 2.68 $ 1,319
=========== ============= ============ ============
Exercisable at March 31, 2007 1,030,000 $ 2.15 2.68 $ 1,319
=========== ============= ============ ============
The weighted-average grant date fair value of options granted during the three
months ended March 31, 2007, was $1.35 and $1.18 during the prior 2006 period.
No options have been exercised.
As of March 31, 2007, there was $1,134,756 of total unrecognized compensation
cost related to share-based option compensation arrangements. The cost is
expected to be recognized over a weighted-average period of 22.54 months.
STOCK GRANTS
In addition to stock option grants to employees, consultants and as a part of
endorsement contracts, the Company has made stock grants to employees,
consultants and as a part of endorsement contracts. These stock grants are for
future services over terms of one to two years, are being amortized over the
period the services are being provided and are summarized below.
NON-CASH STOCK COMPENSATION
The intrinsic value of stock option grants and the value of stock grants are
being amortized as non-cash stock compensation on a straight-line basis over the
relevant period. A summary of the activity follows:
-11-
OPTIONS GRANTS TOTAL
------- ------ -----
Balance, December 31, 2006 $ 457,190 $ 694,521 $ 1,151,711
Grants 815,762 415,500 1,231,262
Forfeiture -- (236,250) (236,250)
Amortization (138,196) (249,748) (387,944)
----------- ----------- -----------
Balance, March 31, 2007 $ 1,134,756 $ 624,023 $ 1,758,779
=========== =========== ===========
NOTE 5: NOTES RECEIVABLE
------------------------
On December 26, 2006, the Company loaned InnoZen $250,000 pursuant to the LOI to
acquire InnoZen executed on December 20, 2006. The loan is interest free for a
term of 210 days and shall be convertible by the Company into InnoZen common
stock at the rate of $.40 per share. If the Company does not convert on the due
date of the loan, then InnoZen has ten days to elect to apply the loan as a
pre-payment or payment for product.
On January 12, 2007, and again on March 19, 2007, the Company loaned InnoZen an
additional $250,000, for a cumulative total of $750,000 as a non-interest
bearing advance which will be applied toward the working capital requirement of
the merger.
NOTE 6: INTANGIBLE ASSETS
-------------------------
The Company accounts for goodwill and intangible assets in accordance with SFAS
142. Goodwill and patent costs are tested annually, at a minimum, for
impairment. Patent costs are amortized over their life of seventeen years from
the date the patent application is filed. Patent costs include the costs
allocated to the proprietary technology for the formulation of thin film
electrolyte strip products and associated legal costs.
The Company's intangible assets consist of the following at March 31, 2007:
The Company's excess of purchase cost over the fair value of net assets of
businesses acquired (goodwill):
Health Strip $ 1,735,998
Poker 50,000
-----------
Total goodwill $ 1,785,998
===========
Identifiable patent costs:
Health Strip $ 1,129,216
Nutraceuticals 802,500
-----------
1,931,716
Accumulated amortization (61,616)
-----------
Net patent costs $ 1,870,100
===========
-12-
NOTE 7: COMMITMENTS AND CONTINGENCIES
-------------------------------------
The Company maintains its corporate office in the office of its accountant at no
cost to the Company.
In January 2007, the Company executed a three-year lease agreement for the
Enlyten office in Amherst, New York. The lease requires monthly payments of
$2,364 for the year ending January 31, 2008, $2,409 for the year ending January
31, 2009 and $2,455 for the year ending January 31, 2010.
The Company has the following royalty obligations:
1. Royalty agreement for 2 years of .5% of sales of the ENLYTEN(TM)
SPORTSTRIPS. Annual minimum royalty of $18,000 and maximum of $75,000;
2. Royalty agreement for 2 years of .5% of sales of the ENLYTEN(TM)
SPORTSTRIPS. Annual minimum royalty of $15,000 and maximum of $50,000;
3. Royalty agreement for an indefinite period of .5% of sales of the
ENLYTEN(TM) SPORTSTRIPS. Annual minimum royalty of $36,000 and maximum
of $100,000;
4. Royalty agreement for an indefinite period of 1.0% of the first
$100,000,000 in sales of the ENLYTEN(TM) SPORTSTRIPS and .5% of the
next $150,000,000 in sales of the ENLYTEN(TM) SPORTSTRIPS;
5. Royalty agreement for an indefinite period of 1.0% of the first
$20,000,000 in sales of the ENLYTEN(TM) RESTORE STRIPS and ENLYTEN(TM)
Energy strips and .5% of the next $80,000,000 in sales of the
ENLYTEN(TM) RESTORE STRIPS and ENLYTEN(TM) Energy strips; and
6. Royalty agreement for 2 years of 1.5% of sales of the ENLYTEN(TM)
SURVIVAL STRIP with annual minimUM royalty payments of $4,200.
The Company is a party to a number of endorsement contracts requiring minimum
payments which average approximately $31,000 per month.
NOTE 8: RELATED PARTIES
-----------------------
The Company's acting CFO was paid consulting fees of $4,500 during the three
months ended March 31, 2007 and none during 2006.
NOTE 9: SUBSEQUENT EVENT
------------------------
On May 4, 2007, the Company issued 18,250,000 shares of its common stock to the
shareholders of InnoZen and completed the acquisition of InnoZen through a
merger of InnoZen with the Company's wholly owned subsidiary, Acquisition Sub.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
From time to time, we may publish forward-looking statements relative to such
matters as anticipated financial results, business prospects, technological
developments and similar matters. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. The following
discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and the accompanying Notes to Consolidated Financial
Statements appearing earlier in this report. All statements other than
statements of historical fact included in this report are, or may be deemed to
be, forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934,
as amended. Important factors that could cause actual results to differ
materially from those discussed in such forward-looking statements include, but
are not limited to, the following: our current liquidity needs, as described in
our periodic reports; changes in the economy; our inability to raise additional
capital; our involvement in potential litigation; volatility of our stock price;
the variability and timing of business opportunities; changes in accounting
policies and practices; the effect of internal organizational changes; adverse
state and federal regulation and legislation; and the occurrence of
extraordinary or catastrophic events and terrorist acts. These factors and
others involve certain risks and uncertainties that could cause actual results
or events to differ materially from management's views and expectations.
Inclusion of any information or statement in this report does not necessarily
imply that such information or statement is material. We do not undertake any
obligation to release publicly revised or updated forward-looking information,
and such information included in this report is based on information currently
available and may not be reliable after this date.
ACQUISITION OF INNOZEN
On May 4, 2007, we issued 18,250,000 shares of our common stock to the
shareholders of InnoZen and completed the acquisition of InnoZen through a
merger of InnoZen with our wholly owned subsidiary, Acquisition Sub.
REVENUES
During the three months ended March 31, 2007, we had sales of $5,897,
principally to an Internet sales organization, which resulted in gross profit of
$2,020 (34%). There were no sales in the corresponding 2006 period. We currently
anticipate substantial sales increases to commence in the second quarter after
completion of the acquisition of InnoZen.
COSTS AND EXPENSES
General and administrative expenses increased to $262,771 in the three months
ended March 31, 2007, from $18,045 in the 2006 period. The increase is
consistent with the increases associated with the planned roll-out of the
ENLYTEN(TM) products in the second quarter of 2007. We had minimal operations in
2006 until completing the acquisition of Health Strip at the end of March 2006.
The major components of the increase include salaries and wages of $74,226,
travel and entertainment increases of $85,244, professional fees of $51,254 and
amortization costs of $28,406.
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Selling and marketing costs are $409,173 in the three months ended March 31,
2007, as compared to none in the 2006 period. Selling and marketing costs did
not commence until the end of 2006. The major components of the 2007 selling and
marketing costs include payments on endorsement contracts and minimum royalty
payments of $107,690, staff payroll of $110,438, advertising and package
development costs of $61,223 and costs associated with initial trade shows,
conferences and events of $38,234.
Non-cash compensation expense includes both the amortization of stock grants to
employees and stock grants as part of endorsement contracts over the relevant
service periods and amortization of the intrinsic value of stock options to both
employees and as a part of endorsement contracts.
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ITEM 3: CONTROLS AND PROCEDURES
A third-party consultant has been 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 and principal financial 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 and the
principal financial officer, the Company has evaluated the effectiveness of the
design and operation of its disclosure controls and procedures as of March 31,
2007, and, based on its evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective.
(b) Changes in Internal Controls
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: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2007, the Company sold 1,682,667 shares
for cash proceeds of $2,368,051; issued 175,000 shares pursuant to employment
agreements and endorsement contracts which were valued at $415,500; and
cancelled 120,000 shares valued at $236,250, which had been issued pursuant to a
consulting contract in December that was cancelled at the end of March.
All of the shares issued 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 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 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 4, 2007 By: /s/ Daniel J. Kelly
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Daniel J. Kelly, Chief Executive Officer
(Principal Executive Officer)
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