Registration Statement Under the Securities Act of 1933
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM SB-2
HEALTHSPORT, INC.
(Name of small business issuer in its charter)
DELAWARE 2834 22-2649848
-------- ---- ----------
(State or jurisdiction of (Primary Standard (I.R.S. employer
incorporation Industrial classification identification no.)
or organization) Code Number)
7633 E 63rd Place, Suite 220, Tulsa, OK 74133
(Address and telephone number of principal executive offices)
Issuer's Telephone: (877) 570-4776
------------------------------------------
CUSIP NUMBER - 42223C 10 6
Approximate date of proposed sale to public: From time to time after this
Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier registration for
the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of each class Number of Proposed Maximum Proposed Maximum
Of Securities to be Shares to Offering price per Aggregate Offering Amount of
Registered be registered unit (1) Price Registration Fee
---------- ------------- -------- ----- ----------------
Common stock,
Par value $.0001 22,249,952 $2.20 $48,949,894.40 $1,502.77
---------
Total registration fee (2) $1,502.77
=========
_________________
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Previously paid.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell the securities and it is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Subject to Completion: dated June __, 2007
PROSPECTUS
HEALTHSPORT, INC.
22,249,952 Shares
This Prospectus covers 22,249,952 shares of common stock of HealthSport, Inc.
being offered for resale by certain selling shareholders. We will not receive
any proceeds from sales of shares of our common stock by the selling
shareholders named on page 26.
Our common stock is listed on the OTC Bulletin Board under the trading symbol
"HSPO."
Sales will be made on the OTC Bulletin Board at prevailing prices. On May 30,
2007, the closing price of our common stock was $2.25.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.
NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is June _____, 2007.
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TABLE OF CONTENTS
PART I - INFORMATION REQUIRED IN PROSPECTUS
ITEM 1: Front of Registration Statement and Outside Front Cover of Prospectus 1
ITEM 2: Inside Front and Outside Back Cover Pages of Prospectus 2
ITEM 3: Summary Information and Risk Factors 4
ITEM 4: Use of Proceeds 26
ITEM 5: Determination of Offering Price 26
ITEM 6: Dilution 26
ITEM 7: Selling Security Holders 26
ITEM 8: Plan of Distribution 30
ITEM 9: Legal Proceedings 31
ITEM 10: Directors, Executive Officers, Promoters and Control Persons 32
ITEM 11: Security Ownership of Certain Beneficial Owners and Management 35
ITEM 12: Description of Securities 38
ITEM 13: Interest of Named Experts and Counsel 39
ITEM 14: Disclosure of Commission Position on Indemnification for Securities Act
Liabilities 39
ITEM 15: Organization within Last Five Years 39
ITEM 16: Description of Business 43
ITEM 17: Management's Discussion and Analysis or Plan of Operation 53
ITEM 18: Description of Property 61
ITEM 19: Certain Relationships and Related Transactions 61
ITEM 20: Market for Common Equity and Related Stockholder Matters 62
ITEM 21: Executive Compensation 64
ITEM 22: Financial Statements 67
ITEM 23: Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 154
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24: Indemnification of Directors and Officers 154
ITEM 25: Other Expenses of Issuance and Distribution 155
ITEM 26: Recent Sales of Unregistered Securities 155
ITEM 27: Exhibits 155
ITEM 28: Undertakings 156
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ITEM 3: SUMMARY INFORMATION AND RISK FACTORS
PROSPECTUS SUMMARY
This Summary contains what we believe is the most important information about us
and the offering. You should read the entire document for a complete
understanding of our business and the transactions in which we are involved. The
purchase of the securities offered by this Prospectus involves a high degree of
risk. See the "Risk Factors" section of this Prospectus.
ORGANIZATION AND BUSINESS
HealthSport, Inc., a Delaware corporation ("HealthSport," "HSPO" or the
"Company"), is publicly traded on the OTC Bulletin Board under the ticker symbol
HSPO. HealthSport is focused exclusively on the development, manufacturing and
marketing of edible film strip products using its proprietary bi-layer
technology. HealthSport's film strip technology provides rapid dissolution and
release of active ingredients when the strip comes in contact with saliva in the
mouth.
HealthSport operates through two principal subsidiaries, Enlyten, Inc.
("Enlyten"), a Nevada Corporation, and InnoZen, Inc. ("InnoZen"), a Delaware
corporation. Enlyten was formed as a wholly-owned subsidiary in late 2006 and
focuses on marketing and selling edible film strips. The acquisition of InnoZen
was completed on May 4, 2007, for 18,250,000 shares of our common stock which
were issued to the shareholders of InnoZen.
InnoZen is the preeminent formulator, developer and manufacturer of thin film
strips that deliver drug actives and was the first company to deliver a drug
active in a thin film strip when it completed the development of the
Chloraseptic(R) Sore Throat Relief Strips(TM) in June 2003. Relying on its
expertise in developing the Chloraseptic Sore Throat Strips, InnoZen developed
two new thin-strip products for cough in 2003 and the beginning of 2004. InnoZen
launched its two new film-strip products under its own Suppress(R) brand in
September 2004.
Using InnoZen's in-house research and development and manufacturing
capabilities, HealthSport has the ability to more rapidly formulate and develop
new thin film products and other products using various additional oral delivery
systems such as gels. As a result, HealthSport anticipates a steady stream of
new products to expand the Enlyten brand line. The implementation of
HealthSport's sales and marketing models for each product line will play an
integral role in creating brand awareness through the application of traditional
and non-traditional sales techniques.
Our principal executive office is located at 7633 E 63rd Place, Suite 220,
Tulsa, Oklahoma 74133 and our telephone number is (877) 570-4776. We maintain a
website at www.healthsportinc.com. We have not incorporated by reference into
this prospectus the information on our website and, you should not consider it
to be a part of this prospectus.
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THE OFFERING
This Prospectus covers up to 22,249,952 shares of our common stock which may be
sold by the selling shareholders identified in this Prospectus.
As of the date of this Prospectus, there were 41,731,897 shares of our common
stock outstanding. This number of outstanding shares excludes shares of common
stock underlying common stock options and warrants. As of May 21, 2007, options
to acquire 1,040,000 shares of our common stock at an average exercise price of
$2.16 per share are outstanding and options to acquire 2,825,390 shares of our
common stock at an average exercise price of $1.37 per share were granted to
employees, directors and consultants of InnoZen to replace their InnoZen
options. In addition, warrants to acquire 78,750 shares of our common stock at
an exercise price of $20.00 per share are outstanding. The options to acquire
1,040,000 shares have a weighted average life of 2.54 years, the options to
acquire 2,825,390 shares have a weighted average life of 2.95 years and the
warrants expire, 75,000 in August 2007 and the balance in November 2007.
FINANCIAL SUMMARY
The financial data set forth below as of March 31, 2007 and for the three months
ended March 31, 2007 and 2006 is unaudited. The financial data set forth below
as of December 31, 2006 and for the years ended December 31, 2006 and 2005 is
derived from our audited financial statements audited by Creason & Associates,
P.L.L.C., independent registered public accountants, included elsewhere in this
Prospectus. The financial data set forth below should be read in conjunction
with the financial statements and notes thereto included elsewhere in this
Prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." All statistical data set forth herein is unaudited.
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HEALTHSPORT, INC. AND SUBSIDIARIES
Balance Sheets
March 31, 2007 and December 31, 2006
March 31,
2007 December 31,
(Unaudited) 2006
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 1,977,660 $ 318,144
Notes receivable and advances to InnoZen, Inc. 750,000 250,000
Stock subscription receivable -- 250,000
Other current assets 760,755 149,492
------------ ------------
Total current assets 3,488,415 967,636
Property and equipment, net 41,510 --
Intangible assets, net 3,656,098 3,684,504
Other non-current assets 66,100 --
------------ ------------
Total assets $ 7,252,123 $ 4,652,140
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 326,454 $ 57,848
------------ ------------
Total liabilities 326,454 57,848
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock: $.0001 par value; authorized 500,000,000 shares;
issued and outstanding 21,069,612 shares and 19,331,945 shares
at March 31, 2007 and December 31, 2006, respectively 2,107 1,933
Additional paid-in capital 31,681,928 28,302,084
Accumulated deficit (24,758,366) (23,709,725)
------------ ------------
Total stockholders' equity 6,925,669 4,594,292
------------ ------------
Total liabilities and stockholders' equity $ 7,252,123 $ 4,652,140
============ ============
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HEALTHSPORT, INC.
Consolidated Statements of Operations
Years Ended December 31, 2006 and 2005
2006 2005
----------- -----------
Revenues $ 1,137 $ --
Cost of sales 548 --
----------- -----------
Gross profit 589 --
Costs and expenses:
Selling, general and administrative expense 590,603 1,030,861
Non-cash compensation 119,625 --
Asset impairments and abandonments 1,491 311,002
Equity in joint venture loss -- 134,691
----------- -----------
Total costs and expenses 711,719 1,476,554
----------- -----------
Loss from continuing oprations (711,130) (1,476,554)
Other (income) expense:
Interest expense 424,802 400,911
Beneficial conversion feature of convertible debenture 400,000 --
Interest income (8,137) --
----------- -----------
Other expense, net 816,665 400,911
----------- -----------
Net loss from continuing operations before minority interest (1,527,795) (1,877,465)
Minority interest 89,748 --
----------- -----------
Loss from continuing operations (1,438,047) (1,877,465)
----------- -----------
Discontinued operations
Loss from discontinued operations -- (28,960)
----------- -----------
Net loss $(1,438,047) $(1,906,425)
=========== ===========
Net loss per share, basic and diluted
Continuing operations $ (0.29) $ (3.20)
Discontinued operations -- (0.05)
----------- -----------
$ (0.29) $ (3.25)
=========== ===========
Weighted average shares outstanding, basic and diluted 4,989,225 585,945
=========== ===========
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HEALTHSPORT, INC.
Consolidated Statements of Operations
Three Months Ended March 31, 2007 and 2006
2007 2006
------------ ------------
Revenues $ 5,897 $ --
Cost of sales 3,877 --
------------ ------------
Gross profit 2,020 --
Costs and expenses:
General and administrative expense 262,771 18,045
Marketing and selling expense 409,173 --
Non-cash compensation expense 387,944 --
Asset impairments and abandonments -- 1,491
------------ ------------
Total costs and expenses 1,059,888 19,536
------------ ------------
Loss from continuing oprations (1,057,868) (19,536)
Other (income) expense:
Interest expense -- 135,909
Interest income (9,227) --
------------ ------------
Other expense, net (9,227) 135,909
------------ ------------
Net loss before income taxes (1,048,641) (155,445)
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
============ ============
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RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND ALL OF THE OTHER INFORMATION
SET FORTH IN THIS PROSPECTUS AND THE REGISTRATION STATEMENT BEFORE DECIDING TO
INVEST IN SHARES OF OUR COMMON STOCK. IF ANY OF THE EVENTS OR DEVELOPMENTS
DESCRIBED BELOW OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATIONS COULD BE NEGATIVELY AFFECTED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT IN
OUR COMMON STOCK. RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE HAVE A HISTORY OF NET LOSSES AND MAY NOT ACHIEVE OR MAINTAIN
PROFITABILITY.
We recently commenced our current business and have a limited history of
operations and earnings. Since commencing this business, we have had losses of
$1,438,047 in 2006 and $1,877,465 in 2005. These losses exclude our recently
acquired manufacturing operations, which had losses of $__________ in 2006 and
$1,014,994 in 2005. Our losses may increase in the future as we launch and build
our branded products, expand our manufacturing capabilities, incur additional
costs related to our research and development activities, and seek additional
regulatory approvals in domestic and foreign markets. These losses, among other
things, have had and will continue to have an adverse effect on our working
capital, total assets and stockholders' equity. We have historically experienced
considerable quarter-to-quarter variation in our results of operations and may
not generate sufficient revenues from product sales to achieve or maintain
profitable operations in the future. If we are unable to reduce our annual
losses and achieve profitability, the value of our common stock will decline.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL THAT MAY BE NECESSARY
FOR GROWTH AND MARKET PENETRATION OR TO CONTINUE OUR OPERATIONS.
The core of our strategy involves the development of our thin film drug delivery
technology to targeted consumers. This area of product development requires
formulation, stability, validation and analytical testing and in certain
circumstances regulatory approvals prior to realizing any product revenue, which
can experience numerous delays. We may need to raise additional funds through
public or private debt or equity financings in order to develop or acquire new
products or new product candidates, expand our manufacturing capacity, establish
and expand our sales and marketing capabilities, obtain FDA approval for our
product candidates and continue our commercial growth. Any additional equity
financings may be on terms that are dilutive to our stockholders. Any debt
financings we enter into may involve incurring significant interest expense and
include covenants that restrict our operations. If we raise additional funds
through collaborations or licensing arrangements, it may be necessary to
relinquish some rights to our technologies, product candidates or products, or
grant licenses on terms that are not favorable to us. Our ability to raise
additional funds will depend on financial, economic, and market conditions and
other factors, many of which are beyond our control. We may not be able to
obtain financing on terms acceptable to us or at all. If financing is
insufficient or unavailable, we will have to modify our growth and marketing
strategies and scale back operations by delaying, reducing the scope of, or
eliminating one or more of our planned developments, commercialization, or
expansion activities. This may negatively affect the commercial expansion of our
existing products and our ability to bring new products to market, which could
have a material adverse effect on our business, financial condition and results
of operations.
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WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET OUR PRODUCTS.
Our future growth will depend in large part on our ability to successfully
launch and build our branded products. Our primary products are in the sports
nutrition, energy and children's markets and our competitors in these markets
have significantly great resources, brand recognition and sale and marketing
experience than we do. We are developing our marketing and brand-building
strategies and believe that we will reach our target markets and consumers but
there is no guarantee that our marketing and sales strategies will be successful
or that our competitors will not adopt more persuasive or broad marketing and
sales strategies that may harm our sales and our business. If our marketing and
sales strategies are flawed or our competitors develop more successful marketing
strategies, the commercial viability of our products could be significantly
impaired.
IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE WILL BE UNABLE TO
GENERATE SIGNIFICANT REVENUES FROM THEM.
The commercial success of our products will depend primarily on achieving market
acceptance of edible film strip product s among consumers. To accomplish this,
we, together with our collaborators, will have to convince physicians, sports
trainers, consumers and other healthcare professionals that edible film strip
products consistently offer benefits that are comparable to or superior to
existing products. If we are not successful in these efforts, market acceptance
of our products could be limited, if at all. Even if we demonstrate the safety
and effectiveness of our products, the healthcare community and consumers may
prefer already accepted products based upon established delivery technologies or
competing new technologies. Additional factors that may influence market
acceptance of our products include:
o convenience and ease of use edible film strips versus other, more
established products;
o availability of alternative and competing products or drug deliver
technologies;
o effectiveness of our marketing, distribution and pricing
strategies; and
o publicity concerning our edible film strip products as well as our
competitors' products.
10
If, due to any of these factors, our products do not achieve broad market
acceptance, we will be unable to generate significant revenues from them, which
would have a material adverse effect on our business, cash flows and results of
operations.
IF THE SUPPLIERS ON WHICH WE RELY SHOULD FAIL TO SUPPLY US WITH THE RAW
MATERIALS AND OTHER COMPONENTS WE USE IN MANUFACTURING OUR PRODUCTS, WE
MAY BE UNABLE TO SATISFY PRODUCT DEMAND.
We depend on third parties for the supply of certain ingredients and flavors we
use to produce our products. While many of these ingredients are available from
multiple suppliers, some are available from only one supplier without the
benefit of long-term supply agreements.
Our reliance on these suppliers exposes us to significant risks. These
third parties may:
o be unable or unwilling to provide us with sufficient materials to
meet our demands;
o fail to meet our standards of quality or other specifications;
o fail to meet current good manufacturing practices, or cGMP;
o increase significantly the prices they charge us for materials; or
o not carry out their contractual duties or meet anticipated
deadlines, which could result in delays in obtaining or maintaining
regulatory approvals or in satisfying customer orders.
If our suppliers are unwilling or unable to supply us with materials meeting our
specifications, we may not be able to locate any alternative suppliers or enter
into commercially reasonable agreements with suppliers in a timely manner or at
all. Even if we are able to locate, qualify and enter into an agreement with new
suppliers, it could take several months or longer to obtain regulatory clearance
before a new supplier could begin supplying the relevant product to us. If we
are delayed in establishing a secondary supply source for any raw material or
component that we purchase from a single source, or cannot do so at an
acceptable cost, we may suffer a shortage of commercial supply of that product
or a higher cost of procuring the product, either of which would have a material
adverse effect on our revenues, business and financial prospects.
A DISRUPTION AT OUR SOLE MANUFACTURING SITE WOULD SIGNIFICANTLY
INTERRUPT OUR PRODUCTION CAPABILITIES, WHICH COULD HAVE DRASTIC
CONSEQUENCES TO US, INCLUDING THREATENING OUR FINANCIAL VIABILITY.
We currently manufacture all of our products at our sole commercial
manufacturing facility, which is located in Woodland Hills, California.
Accordingly, we face risks inherent in operating a single manufacturing facility
since any disruption, such as a fire, natural disaster, terrorist attack or
military action, could significantly interrupt our manufacturing capability. If
an inspection by the FDA or other regulatory body identifies significant
regulatory issues with respect to our compliance with cGMP, this also could have
a material adverse impact on our ability to manufacture products for commercial
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distribution. Should this occur, we cannot provide any assurance concerning our
ability to timely respond to such inspectional observations and the time it
would take the FDA or other regulatory body to re-inspect our facility. This
could adversely affect the time to approval and our ability to produce products
for the commercial market. We plan on building additional production capacity at
a separate facility but this additional facility will not be operational until
the first half of 2008. In case of a disruption, we will have to establish
alternative manufacturing sources. This would require substantial capital on our
part, which we may not be able to obtain on commercially acceptable terms or at
all. Additionally, we would likely experience months or years of production
delays as we build or locate replacement facilities and seek and obtain
necessary regulatory approvals. If this occurs, we will be unable to satisfy
customer orders on a timely basis, if at all. In addition, a disruption at our
sole manufacturing site may impair or delay our ability to meet product demands
from our customers. Also, operating any new facilities may be more expensive
than operating our current facility. Furthermore, our business interruption
insurance may not adequately compensate us for losses that may occur and we
would have to bear the additional cost of any disruption. For these reasons, a
significant disruptive event at our manufacturing facility could have drastic
consequences on us, including threatening our financial viability.
WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR GROWTH, WHICH COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
In connection with the growth of our business, we may experience rapid and
significant growth in the number of our employees and the scope of our
operations. Our future financial performance and our ability to commercialize
our products and to compete effectively will depend, in part, on our ability to
manage any future growth effectively. This growth and expansion is expected to
place a significant demand on our financial, managerial and operational
resources, and will require rapid analysis of new technologies, new markets, and
new business relationships with a variety of industry players. Rapid growth, or
mismanagement of such growth, could cause our operating costs to rise at a
faster pace than is currently anticipated and could have a material adverse
effect on our business, financial condition and results of operations.
IF OUR COMPETITORS DEVELOP AND MARKET PRODUCTS FASTER THAN WE DO OR IF
THOSE PRODUCTS ARE LESS EXPENSIVE OR MORE EFFECTIVE THAN OUR PRODUCTS,
OUR COMMERCIAL OPPORTUNITIES WILL BE REDUCED OR ELIMINATED.
The consumer health and sport product markets and the drug delivery industry are
characterized by intense competition and rapidly evolving technology. Our
competitors have longer operating histories than we do, greater name
recognition, and significantly greater resources and expertise in product
development, brand recognition, regulatory matters, finance, marketing and
sales. These organizations also compete with us in recruiting and retaining
qualified scientific and management personnel and acquiring and licensing
technologies. As a result, these competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements.
Competitors may use their extensive resources to develop products that are more
effective, safer, more convenient or less costly than any that we are
developing.
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IF WE LOSE THE SERVICES OF OUR KEY MANAGEMENT OR SCIENTIFIC PERSONNEL,
OUR BUSINESS WOULD SUFFER.
The success of our business is highly dependent on our management as well as our
senior manufacturing and scientific personnel. In addition, we require
additional skilled personnel in areas such as business development. We do not
maintain key-person life insurance on any of our officers, employees or
consultants. While we do have employment agreements and other retention
inducements with certain key employees and consultants, those agreements do not
prevent employees from leaving us to pursue other non-competing interests. The
pool of individuals with relevant experience in the thin film drug delivery
technology industry is very limited, and retaining and training personnel with
the skills necessary to operate our business effectively is challenging, costly
and time consuming. If we lose the services of any key personnel, our business,
financial condition and results of operations could be materially and adversely
affected.
IF PRODUCT LIABILITY LAWSUITS ARE BROUGHT AGAINST US AS A RESULT OF,
FOR EXAMPLE, PRODUCT RECALLS, OR SERIOUS, UNEXPECTED ADVERSE EVENTS, WE
MAY INCUR SUBSTANTIAL LIABILITIES AND COULD BE REQUIRED TO LIMIT THE
COMMERCIALIZATION OF OUR PRODUCTS.
We are exposed to the risk of product liability claims inherent in businesses
that test, manufacture, market and sell pharmaceutical and over-the-counter
("OTC") products. We may be subject to claims against us even if the injury is
due to the actions of others.
If we are involved in any product liability litigation, such litigation would
consume substantial amounts of our financial and managerial resources and may
result in adverse publicity regardless of the ultimate outcome of the
litigation, decreased demand for our products, significant litigation costs and
substantial monetary awards to, or costs of settlement with, patients, product
recalls and loss of revenues, and the inability to commercialize our products.
Although we believe we have appropriate insurance coverage, we may not be able
to maintain our product liability insurance at an acceptable cost or at all. In
any event, liability insurance is subject to deductibles and coverage
limitations and may not provide adequate coverage against potential claims or
losses. A successful product liability claim brought against us could cause us
to incur substantial liabilities.
IF WE OR OTHERS IDENTIFY SERIOUS ADVERSE EVENTS AFTER ANY OF OUR
PRODUCTS ARE ON THE MARKET, WE MAY BE REQUIRED TO WITHDRAW OUR PRODUCTS
FROM THE MARKET, WHICH WOULD HINDER OR PRECLUDE OUR ABILITY TO GENERATE
REVENUES.
If we or others identify serious, adverse events after any of our products are
on the market:
o regulatory authorities may withdraw their approvals;
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o we may be required to reformulate our products;
o we may have to recall the affected products from the market and may
not be able to reintroduce them onto the market;
o our reputation in the marketplace may suffer; and
o we may become the target of lawsuits, including class action suits.
Any of these events could harm or prevent sales of the affected
products or could substantially increase the costs and expenses of
commercializing or marketing these products.
OUR OPERATIONS INVOLVE HAZARDOUS MATERIALS THAT MAY CAUSE INJURY FOR
WHICH WE COULD BE LIABLE FOR DAMAGES.
Our manufacturing and research and development activities sometimes involve the
controlled use and disposal of potentially hazardous materials or controlled
substances and chemicals. As such, we are subject to various environmental,
health and safety laws and regulations, including those governing air emissions,
water and wastewater discharges, noise emissions, the use, management and
disposal of hazardous, radioactive and biological materials and wastes, and the
cleanup of contaminated sites. The cost of compliance with these laws and
regulations could be significant and accidental contamination or injury may
occur. Although we believe that our safety and control procedures for handling,
storing and disposing of such materials comply with the standards prescribed by
applicable regulations, we cannot completely eliminate the risk of contamination
or injury from use or mishandling of these materials. We also occasionally
contract with third parties for the disposal of some of these materials. In
addition, our collaborators and service providers may be working with these
types of materials in connection with our collaborations. In the event of an
accident or contamination, we could be held responsible for any injury caused to
persons or property by exposure to, or release of, these materials and could be
held liable for significant damages, civil penalties or fines, which may not be
covered by or may exceed our insurance coverage.
Additionally, we are subject on an ongoing basis to a variety of laws and
regulations governing the use, storage, handling and disposal of these materials
and specified waste products. The cost of continued compliance with current or
new laws and regulations may be significant and could negatively affect our
profitability, and current or future environmental regulation may impair our
ongoing research, development or manufacturing efforts.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
THE VALIDITY, ENFORCEABILITY AND COMMERCIAL VALUE OF OUR INTELLECTUAL
PROPERTY RIGHTS ARE HIGHLY UNCERTAIN.
Our success is dependent in part on obtaining, maintaining and enforcing patent
and other intellectual property rights. We seek to obtain and maintain patents
and other intellectual property rights to restrict the ability of others to
market products that compete with our products. We currently have five patent
applications pending in the U.S. of which three are currently undergoing active
14
examination. Two of these applications have received substantive actions from
the United States Patent and Trademark Office and appropriate responses have
been or will be filed. Because of the many complex legal and technical issues
involved, the patent position of edible film strip developers and manufacturers
is highly uncertain. The process for obtaining a patent in the U.S. involves a
number of varying factors, including the subjectivity inherent in the normal
examination process. Such factors may make it difficult to obtain the issuance
of a patent or a patent with scope that is competitively meaningful. Patent
applications we file or license from others may not result in the issuance of a
patent. The U.S. Supreme Court's recent decision in KSR International v.
Teleflex Inc. may make it more difficult to be granted certain patents.
Moreover, although issued patents in the U.S. enjoy the presumption of validity,
this may be challenged and potentially overturned as the result of litigation.
Patents, if issued, may be challenged and invalidated altogether, substantially
narrowed as to scope or determined to be unenforceable. Consequently, it is not
entirely certain how much protection, if any, patents will provide to us if we
attempt to enforce them.
Patent rights are territorial. Thus, the patent protection we do have will only
extend to those countries in which we have issued patents. Even so, the laws of
certain countries do not protect our intellectual property rights to the same
extent as do the laws of the United States and various European countries.
Competitors may successfully challenge our patents, produce similar products
that do not infringe our patents, or produce products in countries where we have
not applied for patent protection or that do not respect our patents.
Additionally, the nature of claims contained in unpublished patent filings
around the world is unknown to us and it is not possible to know which countries
patent holders may choose for the extension of their filings under the Patent
Cooperation Treaty, or other mechanisms. Furthermore, it is not possible to know
the scope of claims that will be allowed in published applications and it is
also not possible to know which claims of granted patents, if any, will be
deemed enforceable in a court of law.
Our patents, if issued, may not contain claims that are sufficiently broad to
prevent others from practicing our technologies or developing competing
products. Our competitors may create or use methods that reduce or eliminate any
competitive advantage we may have based on our thin film development
intellectual property portfolio. Additionally, technologies may exist that
perform substantially the same as our technologies and avoid infringing our
patent claims. Under such circumstances, our patents would be of little
commercial value to us.
We may not be able, alone or with our collaborators and licensors, to prevent
misappropriation of our proprietary rights, particularly in countries where the
laws may not protect such rights as fully as in the United States. Thus, any
patents that we own or license from third parties may not provide commercially
meaningful protection from competition.
IF WE ARE UNABLE TO PROTECT THE CONFIDENTIALITY OF OUR TRADE SECRETS OR
KNOW HOW, SUCH PROPRIETARY INFORMATION MAY BE USED BY OTHERS TO COMPETE
AGAINST US.
15
We have concluded that certain competitively sensitive information is either not
patentable or, for competitive reasons, it is not commercially advantageous to
seek patent protection. In these circumstances, we seek to protect this know how
and other proprietary information by maintaining it in confidence as a trade
secret. Trade secret information is closely guarded and areas involving trade
secrets have restricted access. To further maintain the confidentiality of our
trade secrets, we generally enter into confidentiality agreements with our
employees, consultants and collaborators upon the commencement of their
relationships with us. These agreements require that all confidential
information developed by the individual or made known to the individual by us
during the course of the individual's relationship with us be kept confidential
and not disclosed to third parties. Our agreements with employees also provide
that inventions conceived by the individual in the course of rendering services
to us shall be our exclusive property. However, we may not obtain these
agreements in all circumstances, and individuals with whom we have these
agreements may not comply with the terms of these agreements. The disclosure of
our trade secrets would impair our competitive position. Adequate remedies may
not exist in the event of unauthorized use or disclosure of our confidential
information. Further, to the extent that our employees, consultants or
contractors use trade secret technology or know how owned by others in their
work for us, disputes may arise as to the ownership of related inventions.
OUR COMMERCIAL SUCCESS DEPENDS SIGNIFICANTLY ON OUR ABILITY TO OPERATE
WITHOUT INFRINGING THE PATENTS AND OTHER PROPRIETARY RIGHTS OF THIRD
PARTIES.
In the event that our technologies infringe or violate the patent or other
proprietary rights of third parties, we may be prevented from pursuing product
development, manufacturing or commercialization of our products that utilize
such technologies. There may be patents held by others of which we are unaware
that contain claims that our products or operations infringe. In addition, given
the complexities and uncertainties of patent laws, there may be patents of which
we know that we may ultimately be held to infringe, particularly if the claims
of the patent are determined to be broader than we believe them to be. Adding to
this uncertainty, in the United States, patent applications filed in recent
years are confidential for 18 months, while older applications are not publicly
available until the patent issues. As a result, avoiding patent infringement may
be difficult.
If a third party claims that we infringe its patents, any of the following may
occur:
o we may become liable for substantial damages for past infringement
if a court decides that our technologies infringe upon a
competitor's patent;
o a court may prohibit us from selling or licensing our product
without a license from the patent holder, which may not be
available on commercially acceptable terms or at all, or which may
require us to pay substantial royalties or grant cross-licenses to
our patents; or
16
o we may have to redesign our product so that it does not infringe
upon others' patent rights, which may not be possible or could
require substantial funds or time.
In addition, employees, consultants, contractors and others may use the trade
secret information of others in their work for us or disclose our trade secret
information to others. Either of these events could lead to disputes over the
ownership of inventions derived from that information or expose us to potential
damages or other penalties. If any of these events occurs, our business will
suffer and the market price of our common stock will likely decline.
WE MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF LITIGATION OR OTHER
PROCEEDINGS RELATING TO PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS.
We may be forced to defend claims of infringement brought by our competitors and
others, and we may institute litigation against others who we believe are
infringing our intellectual property rights. The outcome of intellectual
property litigation is subject to substantial uncertainties and may, for
example, depend on the interpretation of claim language by the court, which may
not be to our advantage, or on the testimony of experts as to technical facts
upon which experts may reasonably disagree. Our involvement in intellectual
property litigation could result in significant expense to us. Some of our
competitors have considerable resources available to them and a strong economic
incentive to undertake substantial efforts to stop or delay us from
commercializing products. We, on the other hand, are a relatively small company
with comparatively few resources available to us to engage in costly and
protracted litigation. Moreover, regardless of the outcome, intellectual
property litigation against or by us could significantly disrupt our development
and commercialization efforts, divert our management's attention and quickly
consume our financial resources.
Furthermore, the validity and scope of our patents may also be challenged by
third parties in re-examination proceedings at the U.S. Patent and Trademark
Office, which may either strengthen a patent, or result in a reduced claim scope
or a loss of all rights to a patent.
In addition, if third parties file patent applications or issue patents claiming
technology that is also claimed by us in pending applications, we may be
required to participate in interference proceedings with the U.S. Patent and
Trademark Office or in other proceedings outside the United States, including
oppositions, to determine priority of invention or patentability. Even if we are
successful in these proceedings, we may incur substantial costs, and the time
and attention of our management and scientific personnel will be diverted in
pursuit of these proceedings.
As a result of patent infringement claims, or to avoid potential claims, we may
choose or be required to seek a license from a third party and would most likely
be required to pay license fees or royalties or both. These licenses may not be
available on acceptable terms, or at all. Even if we were able to obtain a
license, the rights may be non-exclusive, which could potentially limit our
competitive advantage. Ultimately, we could be prevented from commercializing a
product or be forced to cease some aspect of our business operations if, as a
result of actual or threatened patent infringement claims, we are unable to
enter into licenses on acceptable terms. This inability to enter into licenses
could harm our business significantly. At present, we have not received any
threats of infringement or written demands from third parties that we take a
license under their patents.
17
RISKS RELATED TO GOVERNMENT REGULATION
OUR PRODUCTS ARE SUBJECT TO REGULATION BY MANY FEDERAL, STATE, AND
LOCAL AGENCIES, AND OUR CUSTOMERS MAY REQUIRE THAT WE OBTAIN CERTAIN
REGULATORY APPROVALS BEFORE PURCHASING OUR PRODUCTS.
Many of our products are still under development, and we may not be able to
commercialize these products until we comply with the requirements of federal,
state and local regulatory authorities including the Federal Drug Administration
("FDA"), the Federal Trade Commission, ("FTC"), the Consumer Product Safety
Commission, the U.S. Environmental Protection Agency, and various state and
local agencies. In particular, the process of obtaining FDA approval for new
products, if necessary, can be costly and time-consuming, and the time required
for obtaining such approval is uncertain. In addition, while the FDA has not
made any definitive rulings on the regulatory status of film-based drug delivery
systems, the FDA and state and local agencies could impose significant
regulatory requirements on our products. Additionally, our customers may require
that we obtain such approvals prior to licensing or purchasing our products. If
the FDA or our customers require that we obtain regulatory approval of our
products, we must demonstrate to the satisfaction of the applicable regulatory
agency that such product is safe and effective for its intended uses. In
addition, we must show that the product can be consistently manufactured in
compliance with cGMP. In general, these requirements mandate that manufacturers
follow detailed design, testing, control, documentation and other quality
assurance procedures throughout the entire manufacturing process. We can give no
assurance that despite the time, expense, and resources invested by us in the
approval process, we may not be able to demonstrate that our product are safe
and effective, in which event we would not receive the regulatory approvals
required to market them, our current or future products will be approved by the
FDA or any other governmental body, or that FDA or other governmental reviews
will not involve delays caused by requests for further testing or other
information that could adversely affect the time to market for our products.
Moreover, we cannot predict the impact of new government regulations that may
adversely affect the discovery, development and production of our products and
the manufacturing and marketing of our products. We may be required to incur
significant costs to comply with future laws or regulations.
PRODUCT REQUIRING REGULATORY APPROVAL WILL REMAIN SUBJECT TO ONGOING
REGULATORY REQUIREMENTS IF THEY RECEIVE REGULATORY APPROVAL FOR
MARKETING, AND IF WE FAIL TO COMPLY WITH THESE REQUIREMENTS, WE COULD
LOSE THESE APPROVALS, AND THE SALES OF ANY APPROVED COMMERCIAL PRODUCTS
COULD BE SUSPENDED.
18
After receipt of initial regulatory approval, each of our products remains
subject to extensive regulatory requirements, including requirements relating to
manufacturing, labeling, packaging, adverse event reporting, storage,
advertising, promotion, distribution and record-keeping. Furthermore, if we
receive regulatory approval to market a particular product, the product will
also remain subject to the same extensive regulatory requirements. Even if
regulatory approval of a product is granted, the approval may be subject to
limitations on the uses for which the product may be marketed or other
conditions of approval, or contain requirements for costly post-marketing
testing and surveillance to monitor the safety or efficacy of the product, which
could reduce our revenues, increase our expenses or render the approved products
not commercially viable.
If we or our partners fail to comply with the regulatory requirements of the FDA
or other applicable regulatory authorities, or if previously unknown problems
with any approved commercial products, manufacturers or manufacturing process
are discovered, we could be subject to administrative or judicially imposed
sanctions or other setbacks, including:
o restrictions on the products, manufacturers or manufacturing
processes;
o warning letters and untitled letters;
o civil penalties and criminal prosecutions and penalties;
o fines;
o injunctions;
o product seizures or detentions;
o import or export bans or restrictions;
o voluntary or mandatory product recalls and related publicity
requirements;
o suspension or withdrawal of regulatory approvals;
o total or partial suspension of production; and
o refusal to approve pending applications for marketing approval of
new products or of supplements to approved applications.
IF WE AND OUR THIRD-PARTY SUPPLIERS DO NOT MAINTAIN HIGH STANDARDS OF
MANUFACTURING IN ACCORDANCE WITH CGMP AND OTHER MANUFACTURING
REGULATIONS, OUR DEVELOPMENT AND COMMERCIALIZATION ACTIVITIES COULD
SUFFER SIGNIFICANT INTERRUPTIONS OR DELAYS.
We and any third-party suppliers on which we may in the future rely will be
required to comply with cGMP. In complying with these regulations, we and our
third-party suppliers may be required to expend significant time, money and
effort in the areas of design and development, testing, production,
19
record-keeping and quality control to assure that our products meet applicable
specifications and other regulatory requirements. Failure to comply with these
or other regulatory requirements could result in an enforcement action against
us, including the seizure of products and shutting down of production. We and
any of these third-party suppliers may be subject to periodic inspections by the
FDA and other regulatory agencies. If we or any of our third-party suppliers
fail to comply with cGMP or other applicable manufacturing regulations, our
ability to develop and commercialize our products could suffer significant
interruptions.
WE MUST COMPLY WITH THE LAWS, REGULATIONS AND RULES OF MANY
JURISDICTIONS RELATING TO THE HEALTHCARE BUSINESS, AND IF WE ARE UNABLE
TO FULLY COMPLY WITH SUCH LAWS, REGULATIONS AND OTHER RULES, WE COULD
FACE SUBSTANTIAL PENALTIES.
We are or will be, directly or indirectly through our customers, subject to
extensive regulation by the various jurisdictions in which we may conduct our
business. The laws that directly or indirectly affect our ability to operate our
business include the following:
o the anti-kickback laws that prohibit persons from knowingly and
willfully soliciting, offering, receiving or providing
remuneration, directly or indirectly, in cash or in kind, to induce
either the referral of an individual, or the furnishing or
arranging for a good or service, for which payment may be made
under federal healthcare programs such as Medicare and Medicaid in
the United States;
o other healthcare laws, including Medicare laws in the United
States, regulations, rules, manual provisions and policies that
prescribe the requirements for coverage and payment for services
performed by our customers, including the amount of such payment;
o laws and regulations, including the U.S. False Claims Act, which
impose civil and criminal liability on individuals and entities who
submit, or cause to be submitted, false or fraudulent claims for
payment to the government;
o laws and regulations, including the U.S. False Statements Act,
which prohibit knowingly and willfully falsifying, concealing or
covering up a material fact or making any materially false
statement in connection with the delivery of or payment for
healthcare benefits, items or services; and
o state law equivalents and comparable laws in countries outside of
the United States, including laws regarding pharmaceutical company
marketing compliance, reporting and disclosure obligations.
If our operations are found to be in violation of any of the laws, regulations,
rules or policies described above or any other law or governmental regulation to
which we or our customers are or will be subject, or if the interpretation of
such laws, regulations, rules or policies change, we may be subject to civil and
20
criminal penalties, damages, fines, exclusion from the Medicare and Medicaid
programs and curtailment or restructuring of our operations. Similarly, if our
customers are found noncompliant with applicable laws, they may be subject to
sanctions, which could negatively impact us. Any penalties, damages, fines,
curtailment or restructuring of our operations would harm our ability to operate
our business and our financial results. The risk of our being found in violation
of these laws is increased by the fact that many such laws have not been fully
interpreted by the regulatory authorities or the courts, and their provisions
may be open to a variety of interpretations. Any action against us for violation
of these laws, even if we successfully defend against it, could cause us to
incur significant legal expenses, divert management resources from the operation
of our business and damage our reputation.
RISKS RELATED TO THIS OFFERING AND OUR COMMON STOCK
THE OWNERSHIP INTERESTS OF OUR OFFICERS, DIRECTORS AND LARGEST
STOCKHOLDERS COULD CONFLICT WITH THE INTERESTS OF OUR OTHER
STOCKHOLDERS.
Following the completion of this offering, our directors, executive officers and
holders of 5% or more of our outstanding common stock will beneficially own
approximately 36.57% of our common stock. As a result, our directors, executive
officers and holders of 5% or more of our outstanding common stock, acting
together, may be able to significantly influence all matters requiring approval
by our stockholders, including the election of directors and approval of mergers
or other significant corporate transactions. The interests of this group of
stockholders may not always coincide with our interests or the interests of
other stockholders. This concentration of ownership could also have the effect
of delaying, deferring or preventing a change in our control or impeding a
merger or consolidation, takeover or other business combination that could be
favorable to you.
WE HAVE NEVER PAID DIVIDENDS ON OUR COMMON STOCK, AND WE DO NOT
ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE.
We have paid no dividends to date, and we currently intend to retain our future
earnings, if any, to fund the development and growth of our business. As a
result, we do not expect to pay any dividends in the foreseeable future. Any
future payment of dividends, if any, will also depend on our financial
condition, results of operations, capital requirements and other factors and
will be at the discretion of our board of directors. Furthermore, we may in the
future become subject to contractual restrictions on, or prohibitions against,
the payment of dividends. Accordingly, the success of your investment in our
common stock will likely depend entirely upon any future appreciation. There is
no guarantee that our common stock will appreciate in value after the offering
or even maintain the price at which you purchased your shares, and you may not
realize a return on your investment in our common stock.
IF AN ACTIVE, LIQUID TRADING MARKET FOR OUR COMMON STOCK DOES NOT
DEVELOP, YOU MAY BE UNABLE TO SELL YOUR SHARES QUICKLY OR AT THE MARKET
PRICE.
21
At present an active trading market for our common stock does not currently
exist and one may not develop or be sustained after this offering. You may not
be able to sell your shares quickly or at the market price if trading in our
stock is not active.
CERTAIN PROVISIONS OF DELAWARE LAW AND OUR ORGANIZATIONAL DOCUMENTS
COULD DELAY OR DISCOURAGE TAKEOVER ATTEMPTS THAT STOCKHOLDERS MAY
CONSIDER FAVORABLE.
Certain provisions of our certificate of incorporation and bylaws and applicable
provisions of Delaware corporate law may make it more difficult for or prevent a
third party from acquiring control of us or changing our board of directors and
management. These provisions:
o allow our board of directors to designate the terms of and issue,
without stockholder approval, series of preferred stock with voting
or other rights or preferences that could operate to dilute the
stock ownership of a potential hostile acquirer to prevent an
acquisition that is not approved by our board of directors; and
o limit who may call meetings of our stockholders.
In addition, Section 203 of the Delaware General Corporation Law, or DGCL,
generally prohibits us from engaging in any business combination with certain
persons who own 15% or more of our outstanding voting stock without the approval
of our board of directors. These provisions could make it difficult for a third
party to acquire us, or for members of our board of directors to be replaced,
even if doing so would be beneficial to our stockholders. Any delay or
prevention of a change in control transaction or changes in our board of
directors or management could deter potential acquirers or prevent the
completion of a transaction in which our stockholders could receive a
substantial premium over the then-current market price for their shares.
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE THE MARKET PRICE OF OUR
COMMON STOCK TO FALL.
Sales of a substantial number of shares of our common stock in the public market
could occur at any time. These sales, or the perception in the market that the
holders of a large number of shares intend to sell their shares, could reduce
the market price of our common stock. After this offering, we will have
outstanding 41,731,897 shares of our common stock. The majority of our remaining
shares are currently free-trading and those that are restricted as a result of
securities laws will be able to be sold in the near future. We intend to
register all shares of common stock that we may issue under our 2006 Stock
Incentive Plan.
IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROL OVER FINANCIAL
REPORTING, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR
PREVENT FRAUD. AS A RESULT, STOCKHOLDERS COULD LOSE CONFIDENCE IN OUR FINANCIAL
AND OTHER PUBLIC REPORTING, WHICH WOULD HARM OUR BUSINESS AND THE TRADING PRICE
OF OUR COMMON STOCK.
22
Effective internal control over financial reporting is necessary for us to
provide reliable financial reports and, together with adequate disclosure
controls and procedures, are designed to prevent fraud. If we cannot provide
reliable financial reports or prevent fraud, our operating results could be
harmed. We continue to evaluate our internal control over financial reporting.
Given the status of our efforts, coupled with the fact that guidance from
regulatory authorities in the area of internal control continues to evolve,
uncertainty exists regarding our ability to comply by applicable deadlines. Any
failure to implement required new or improved controls, or difficulties
encountered in their implementation, could harm our operating results or cause
us to fail to meet our reporting obligations. Inferior internal controls could
also cause investors to lose confidence in our reported financial information,
which could have a negative effect on the trading price of our common stock.
SPECIAL NOTES REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are contained principally in, but not limited to, the sections
entitled "Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." Forward-looking
statements provide our current expectations or forecasts of future events.
Forward-looking statements include statements about our expectations, beliefs,
plans, objectives, intentions, assumptions and other statements that are not
historical facts. Words or phrases such as "anticipate," "believe," "continue,"
"ongoing," "estimate," "expect," "intend," "may," "will," "should," "could,"
"plan," "potential," "predict," "project" or similar words or phrases, or the
negatives of those words or phrases, may identify forward-looking statements,
but the absence of these words does not necessarily mean that a statement is not
forward-looking.
Forward-looking statements are subject to known and unknown risks and
uncertainties and are based on potentially inaccurate assumptions that could
cause actual results to differ materially from those expected or implied by the
forward-looking statements. Our actual results could differ materially from
those anticipated in forward-looking statements for many reasons, including the
factors described in the section entitled "Risk Factors" and elsewhere in this
prospectus. Accordingly, you should not unduly rely on these forward-looking
statements.
Factors that could cause our actual results to differ materially from those
expressed or implied in our forward-looking statements include, but are not
limited to:
o our ability to achieve and maintain profitability;
o our ability to successfully develop, market, commercialize and
achieve market acceptance for any of the product candidates that we
are developing or may develop in the future;
o the performance of third parties, whose actions we cannot control,
with which we contract for pre-clinical studies, clinical trials,
commercialization and marketing;
23
o the timing, costs and other limitations involved in obtaining
regulatory approval for any of our product candidates;
o delays in obtaining, or a failure to obtain and maintain,
regulatory approval for any of our product candidates;
o our reliance on suppliers to supply us with the raw materials and
other components we use in manufacturing our products;
o a disruption at our sole manufacturing site that could
significantly interrupt our production capacities;
o our plans to expand our manufacturing facility;
o our estimate of future performance, including achieving our
projected development goals;
o our ability to obtain additional capital needed for growth and
market penetration or to continue our operations;
o our ability to enter into agreements with new partners or to
maintain any existing partner agreements with respect to our
product candidates and products;
o our ability to effectively maintain existing business relationships
and establish new relationships;
o our ability to manage our growth;
o potential disputes involving contractual obligations of our
partners to purchase our products or pay royalties on the sale of
our products;
o the potential advantages of our products or product candidates over
other existing or potential products;
o our competitors' ability to develop and market products faster than
we do, or to develop and market products that are less expensive or
more effective than our products;
o potential product liability lawsuits against us;
o the loss of any of our key management or scientific personnel;
o potential serious adverse events requiring us to withdraw our
products from the market;
o potential liability arising from our operations, including injuries
caused by hazardous materials;
24
o our customers potentially requiring that we obtain certain
regulatory approvals before purchasing our products;
o the failure of us and our third party suppliers to maintain high
standards of manufacturing in accordance with cGMP and other
manufacturing regulations;
o our continued compliance with the laws, regulations and rules of
many jurisdictions relating to the healthcare business;
o the validity, enforceability and commercial value of our
intellectual property rights;
o our ability to protect our intellectual property and know how and
operate our business without infringing the intellectual property
rights or regulatory exclusivity of others; and
o potential costly litigation or other proceedings relating to our
patent or other intellectual property rights.
Forward-looking statements speak only as of the date on which they are made and,
except as required by law, we undertake no obligation to update or publicly
revise any forward-looking statement to reflect circumstances or events after
the date on which the statement is made or to reflect the occurrence of
unanticipated events. In addition, we cannot assess the impact of each factor on
our business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statement. You should, however, review the factors and risks we
describe in the reports we will file from time to time with the SEC after the
date of this prospectus.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2007. The
table should be read in conjunction with our consolidated financial statements
and related notes included elsewhere in this prospectus. All information below
excludes any outstanding warrants, options, stock sales and the acquisition of
InnoZen which occurred subsequent to March 31, 2007.
Common stock; $0.0001 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 capitalization $ 6,925,669
============
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ITEM 4: USE OF PROCEEDS
We will not receive any proceeds from the sale of our common stock by the
selling shareholders.
ITEM 5: DETERMINATION OF OFFERING PRICE
We have established the offering price of $2.20 per share on behalf of the
selling shareholders. This price was arbitrarily selected and does not have any
relationship to any established criteria such as book value or current earnings
per share. The offering price we set for our common stock was not based on past
earnings, nor is it indicative of potential market value of the assets that we
own.
ITEM 6: DILUTION
Not applicable. We are not offering any shares in this registration statement.
All shares are being registered on behalf of our selling shareholders.
ITEM 7: SELLING SECURITY HOLDERS
The selling shareholders named below are selling the securities. The table
assumes that all of the securities will be sold in this offering. However, any
or all of the securities listed below may be retained by any of the selling
shareholders, and therefore, no accurate forecast can be made as to the number
of securities that will be held by the selling shareholders upon termination of
this offering. These selling shareholders acquired their shares by purchases
exempt from registration under section 4(2) and Rule 506 of Regulation D of the
Securities Act of 1933. We believe that the selling shareholders listed in the
table have sole voting and investment power with respect to the securities
indicated. We will not receive any proceeds from the sale of the securities by
the selling shareholders. No selling shareholders are broker-dealers or
affiliates of broker-dealers.
Selling Shareholders Shares
-------------------------------------------------------------------------------------------------
Steven J. Pfrenzinger & Margaret A. Pfrenzinger Family Trust dated 3/25/83 490,311
Steven J Pfrenzinger & Christine A. Pfrenzinger-Julianel 46,978
George Green Family Trust 311,899
Hanson Family Trust 117,445
Roger Hance 117,445
Jeff and Karen Parmet 58,723
Tri-Strip Associates, LLC 2,298,266
Paul and Debra Solomon 23,492
Ribhi Ghosheh Trust 95,698
David J. Bochsler 95,698
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Wells Fargo Bank Custodian for Carolyn Glah IRA account # 39015047 47,848
Mohasseb Investments, LLC 8,699
Frank & Rona Singer Living Trust dated 1/25/85 47,848
Luis Villalobos 38,737
Graham-Dunitz Family Trust 19,139
Joyce Freedman 28,708
The Berkus Trust DTD 9/17/93 47,848
The Zanzax Group, LP 24,911
Lawrence Howorth 42,106
2004 Block Family Trust 85,408
Seraphim Fund I, LLC 248,809
The Fred and Marie Jo Selby Family Trust 19,141
Harbison Family Trust u/a 10/21/96 47,848
Daniel and Yolanda Hoeffin Trust 47,848
Massoud and Taraneh Shabahang 95,696
The Stanley Co., an IL General Partnership 21,053
James N. Adler 61,245
Daniel Seigel and Elaine Seigel Revocable Trust 76,557
Swets Family Trust dated July 10, 1999 47,848
Bill Rossi 47,848
Neil McCarthy 95,696
Uri Ram 16,842
Robert A. Brue Trust 95,696
The Frank and Barbara Peters Family Trust 47,848
Michael Edelstein, ttee, fbo, Michael M. Edelstein, MD, Inc., PSP,
udt dtd 5/1/91 47,848
Thomas and Michele Alper 1993 Trust 47,082
Thomas M. & Liza A. Dean 46,783
James H. Yahr, M.D. 47,848
Morgen Richmond 19,139
Thomas T. and Carol A. Schleck Family Trust dated 10/29/99 58,948
Alexander Ganelis 19,139
Lana and Kenneth I. Brody, Ph.D. 47,848
Philip W. Colburn, Trustee of the Philip W. Colburn Revocable Trust
Dated 7/25/97 95,696
Gerald J. Murphy and Cynthia L. Murphy 165,848
Florio Family Trust 21-May-02 42,106
William R. Zimmerman, Trustee of the William R. Zimmerman Living Trust
under Declaration of Trust Dated Sept. 20, 1976 47,848
Kosuke "Kirk" Inoue 38,278
Barbara L. Munro 19,139
Albert C. Schneider and Catherine L. Heron, Trustees of the Heron/Schneider
Family Trust 19,141
27
William H. Slattery, Kelli A. Slattery 19,139
Deines Family Trust dtd 5/31/90 19,141
Giese Family Trust 23,924
Thornburg & Co., Inc. Retirement Trust 19,139
H. Andrew Thornburg 1,913
The Bick Trust dated October 17, 1995 19,368
David J. Bochsler; Nathan J. Bochsler; Nicole L. Bochsler; Jeffery D.
Bochsler & Brett M. Bochsler 47,848
The Guthrie Family Trust 47,848
L. Ried Schott Trust dtd 8/13/97, L. Ried Schott Trustee 47,848
The Nielsen Living Trust, 11/20/98 23,579
Richard Morganstern 19,139
Guren Family Trust (dated 9/28/93) 394,233
Shapiro Living Trust U/A DTD 02/13/1992 28,708
Michael J. Napoli, Jr. 47,848
Kenneth M. Deemer and Candy K. Deemer Trustees of the Deemer Community
Property Trust UTD 4/6/99 47,848
Lee Weinberg 19,158
David D. Kwan 38,278
William Scott Griffiths 47,848
Sudek Family Trust 19,139
Dan A. Hanson, Alec Hanson, Kristin Hanson 28,708
Murray Living Trust 47,848
Hans Imhof 95,696
John P. Mayne & Mavis R. Mayne ttees for the Mayne Family Trust dated 3/12/81 58,948
William Izaac Rothbard, Trustee, William Rothbard Inter Vivos Trust 38,278
Paul Stevenson 55,120
Arlen Miller 18,373
Robert & Jo Ann Davidson 91,867
Simon Lorne 91,867
Zengen, Inc. 10,717,900
Daniel Ling 18,373
Elizabeth Lee Everett 8,421
William J.E. Schlueter 6,890
Barry Daoust 2,296
George Drucker 38,278
Harrison Clay 2,296
Monty Beisel 38,322
Marlene K. Baran Revocable Trust, dated July 30, 2002 38,278
Gary Kehoe 153,112
Jonathan Paul Rohde 7,655
David Reid 14,354
Teresa Salak 5,920
28
Trent E. Tucker 134,000
Trent E. Tucker, LLC 100,000
James E. Kelly 186,667
Doug Johnson 34,000
David M. Krieg Living Trust 23,333
Tim Dwight 16,667
Bryan Holcomb 70,000
Bruce Smith LLC 304,000
Ian Sinclair 10,000
Jennifer Hassan 17,000
Brikor, Inc. 20,000
K Sport LLC 333,333
James J Bell 50,000
Chris Mohr 20,000
HSPO Ohio LLC 225,000
Ryan Klesko 50,000
Progressive Capital Corp 28,000
Bubby Brister 10,000
Mike Fine 135,000
Thomas Mayberry 16,500
FWU, Inc. 68,000
Clark Family Trust 68,000
John Siracusa 16,664
Herbert Besaw 20,000
Mike Krimbill 1,400,000
John Gasilow 15,000
David Bolliger 50,000
David Janca 33,000
John Mendez 10,000
Derrick Burgess 15,000
Jill Martin 7,500
Radah Butler & Patricia Simpson 30,000
Steven Simon 7,500
Guren Family Trust 66,667
William & Barbara Rose 20,000
John Hutchins 33,333
Paul Mannion 100,000
Kevin Gavagan 40,000
Jonathan Losman 25,000
GAIA Holdings, Inc. 30,000
Avenel Oil & Gas, Inc. 120,169
---------------
Total 22,249,952
===============
29
All shareholders listed above, except for two shareholders own less than five
percent of our issued and outstanding common stock and are registering all of
their shares for resale under this registration statement. Tri-Strip Associates,
LLC owns 2,298,266 shares (5.5%) and Zengen, Inc. owns 10,717,900 shares
(25.7%). Zengen, Inc. is the former parent of InnoZen. Tri-Strip is not an
affiliate of us.
ITEM 8: PLAN OF DISTRIBUTION
The shares of common stock owned by the selling shareholders may be offered and
sold by means of this Prospectus from time to time as market conditions permit
in the over-the-counter market, or otherwise, at prices and terms then
prevailing or at prices related to the then current market price, or in
negotiated transactions. These shares may be sold by one or more of the
following methods, without limitation:
o a block trade in which a broker or dealer so engaged will attempt
to sell the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to the Prospectus;
o ordinary brokerage transaction and transactions in which the broker
solicits purchasers; and
o face-to-face transactions between sellers and purchasers without a
broker/dealer.
In effecting sales, brokers or dealers engaged by the selling shareholders may
arrange for other brokers or dealers to participate. Such brokers or dealers may
receive commissions or discounts from selling shareholders in amounts to be
negotiated.
The selling shareholders and any broker/dealers who act in connection with the
sale of the shares hereunder may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, and any commissions received by
them and profit on any resale of the shares as principal might be deemed to be
underwriting discounts and commissions under the Securities Act. We have agreed
to indemnify the selling shareholders, and any securities broker/dealers who may
be deemed to be underwriters against certain liabilities, including liabilities
under the Securities Act as underwriters or otherwise.
We have advised the selling shareholders that they and any securities
broker/dealers or others who may be deemed to be statutory underwriters will be
subject to the prospectus delivery requirements under the Securities Act. We
have also advised each selling shareholder that in the event of a "distribution"
of the shares owned by the selling shareholder, such selling shareholder, any
"affiliated purchasers", and any broker/dealer or other person who participates
in such distribution, may be subject to Rule 102 under the Securities Exchange
Act of 1934 (the "Exchange Act") until their participation in that distribution
is completed.
30
We do not intend to distribute or deliver the Prospectus by means other than by
hand or mail.
We have advised each selling shareholder that during the time as they may be
engaged in a distribution of the shares included in this prospectus they are
required to comply with Regulation M of the Exchange Act. During such time as
the selling shareholders may be engaged in a distribution of the securities
covered by this prospectus, the selling shareholders are required to comply with
Regulation M promulgated under the Exchange Act. With certain exceptions,
Regulation M precludes the selling shareholders, any affiliated purchasers, and
any broker-dealer or other person who participates in such distribution from
bidding for or purchasing, or attempting to introduce any person to bid for or
purchase any security which is the subject to the distribution until the entire
distribution is complete. Regulation M also restricts bids or purchases made in
order to stabilize the price of a security in connection with the distribution
of that security. All of the foregoing may affect the marketability of our
common stock.
ITEM 9: LEGAL PROCEEDINGS
There are no pending or threatened lawsuits against us.
31
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
(a) IDENTIFY DIRECTORS AND EXECUTIVE OFFICERS
The following section sets forth, as of May 24, 2007, the names, ages and
current positions with the Company held by the Directors, Executive Officers and
Significant Employees; together with the year such positions were assumed. There
is no immediate family relationship between or among any of the Directors,
Executive Officers or Significant Employees, and we are not aware of any
arrangement or understanding between any Director or Executive Officer and any
other person pursuant to which he was elected to his current position. Each
Executive Officer will serve until he or she resigns or is removed or otherwise
disqualified to serve, or until his or her successor is elected and qualified.
We currently have five Directors.
Name Age Position and Term
---- --- -----------------
R. Steven Davidson 40 Chairman of the Board since May 4, 2007
Daniel J. Kelly 45 CEO and President starting January 1, 2007
Matthew Burns 37 Chief Operating Officer and Director since
May 4, 2007
Jason Freeman 32 Director since March 25, 2006
Hank Durschlag 43 Director since September 11, 2006
Michael D. Pruitt 46 Director since May 2, 2007
ROBERT STEVEN DAVIDSON - Mr. Davidson has been the Company's Chairman of the
Board since May 4, 2007. Since May 2002, Mr. Davidson has also served as the
President, Chief Executive Officer and a director of InnoZen. From January 2002
through July 2005, Mr. Davidson was President and Chief Executive Officer of
Zengen, Inc. Mr. Davidson has over eight years of experience in the
biopharmaceutical industry. From September 1998 to December 2001, Mr. Davidson
was the chief executive officer of Gel Tech, L.L.C., where he raised capital for
the market launch and distribution of the Zicam product line. He led the
marketing team that took Zicam from an unknown entity to one of the top
medications in its class. He also implemented and launched line extensions to
strengthen the brand name and increase company value. From October 1994 to
August 1998, Mr. Davidson was the chief executive officer of Biotem
Cytotechnologies, Inc., a biopharmaceutical research and development company.
Mr. Davidson received his B.S. degree with a concentration in Biological Life
Sciences from The University of the State of New York, (Excelsior College). He
has a Masters Certificate in Applied Project Management from Villanova
University and received his Masters of Public Health (Homeland Security) from
American Military University, Virginia. Mr. Davidson is a certified Performance
Enhancement Specialist through the National Academy of Sports Medicine.
32
DANIEL J. KELLY - Mr. Kelly has served as the President and Chief Executive
Officer since January 1, 2007. Mr. Kelly began his business career approximately
20 years ago managing and advising Jim Kelly, his brother and Pro Football Hall
of Fame Quarterback. Mr. Kelly also owns and serves as the President of Jim
Kelly Enterprises, Inc., a company started over 15 years ago. In 1988 Mr. Kelly
negotiated the most lucrative player contract in NFL history (at that time) for
Jim. Mr. Kelly has 20 years experience in marketing, promotions and celebrity
endorsements and continues to work with such companies as Coors, Miller Lite, LA
Weightloss and Ameriquest. Mr. Kelly received his bachelor's degree from the
University of Houston and was a prominent member of the NFL Quarterback Club,
serving on the Sponsorship and Marketing Committees that negotiated
comprehensive, multi-year deals with major US companies such as McDonalds, VISA,
Footlocker and MBNA Bank. He is the vice chairman of the Kelly for Kids
Foundation.
MATTHEW BURNS - Mr. Burns has served as the Chief Operating Officer and a
Director of the Company since May 4, 2007. Mr. Burns has also been an officer
and director of InnoZen since April 2004. Prior to joining InnoZen and its
parent Zengen, from July 2001 to February 2002, Mr. Burns was an associate
attorney at Morgan Lewis & Bockius, LLP, where he worked in the firm's business
and finance practice group in the Los Angeles office. Prior to joining Morgan
Lewis, Mr. Burns worked as an associate attorney in the corporate finance group
at Morrison & Foerster's San Francisco office. Prior to joining Morrison &
Foerster, Mr. Burns worked as an associate attorney in the corporate practice at
Holland & Knight in Tampa, Florida. His law practice concentrated on mergers and
acquisitions and corporate finance for companies in a variety of industries,
including life sciences and technology. Mr. Burns has also provided counsel to
public and private companies on general corporate law, corporate governance and
securities matters. Mr. Burns received his J.D. from Stetson University of
College of Law in 1995 and his B.A. in Finance from the University of South
Florida in 1992.
JASON FREEMAN - Mr. Freeman was appointed as an outside Director of the Company
on March 25, 2006. Mr. Freeman is the owner and president of Routh Stock
Transfer, Inc. Mr. Freeman has been instrumental in assisting with investor
relations development, business plan/marketing plan development, and strategic
business planning for private and public companies. He also has 7 years
experience with marketing and management in the retail industry. Mr. Freeman has
also consulted with various companies, both public and private, on ways to be
more efficient in their use of capital and manpower, assisting management and
sales staff in mapping out plans and strategies for companies to reach specific
goals and thresholds. Mr. Freeman graduated from Texas A&M University at
Commerce in 1998 and is president and a director of Sagauro Holdings, Inc. and a
director of Interim Capital Corporation.
HANK DURSCHLAG - Mr. Durschlag was appointed a Director of the Company on
September 11, 2006. Mr. Durschlag is the co-developer of the Enlyten electrolyte
sports strips and co-authored the patent, "Edible Film for Transmucosal Delivery
of Nutritional Supplements". Mr. Durschlag has extensive experience in the
fields of healthcare and sports medicine, with specific emphasis on novel drug
33
delivery systems. In addition, Mr. Durschlag is a partner in Greenville, South
Carolina based GlucoTec, Inc., a developer and manufacturer of an FDA Class II
Medical Device designed to regulate blood glucose levels in an acute care
setting via both intravenous and subcutaneous delivery of insulin and other
fluids. Mr. Durschlag has also co-authored patents in this area. Previously, Mr.
Durschlag served as Vice President of Sales and Marketing for Diabetes
Management Services, Inc., a durable medical equipment distributor with specific
treatment modules in women's health and pregnancy. Mr. Durschlag holds a
bachelors degree from California University of Pennsylvania and an MBA from
Clemson University.
MICHAEL D. PRUITT - Michael Pruitt, 46, is a long-time entrepreneur with a
proven track record, possessing the expertise to evaluate potential investments,
form key relationships and recognize a strong management team. Mr. Pruitt
founded Avenel Financial Group, a boutique financial services firm concentrating
on emerging technology company investments. The business succeeded immediately,
and in order to grow Avenel Financial Group to its full potential and better
represent the company's ongoing business model, he formed Avenel Ventures, an
innovative technology investment and business development company. In the late
1980s, Mr. Pruitt owned Southern Cartridge, Inc., which he eventually sold to
MicroMagnetic, Inc., where he continued working as Executive Vice President and
a Board member until Southern Cartridge was sold to Carolina Ribbon in 1992.
From 1992 to 1996, Mr. Pruitt worked in a trucking firm where he was
instrumental in increasing revenues from $6 million to $30 million. The firm was
sold in 1996 to Priority Freight Systems. Between 1997 and 2000, Mr. Pruitt
assisted several public and private companies in raising capital, recruiting
management and preparing companies to go public or be sold. He was the CEO,
President and Chairman of the Board of Onetravel Holdings, Inc. (formerly RCG
Companies), a publicly traded holding company formerly listed on the AMEX. Mr.
Pruitt received a Bachelor of Arts degree from Coastal Carolina University in
Conway, South Carolina, where he sits on the Board of Visitors of the Wall
School of Business. He is also Managing Director of Cain Capital Advisors. Mr.
Pruitt is currently CEO and director of Chanticleer Holdings, Inc. (CEEH.OB), a
business development company under the Investment Company Act of 1940 and CEO
and director of Syzygy Entertainment, Ltd. (SYZG.OB), an entertainment company
with operations in the Turks and Caicos Islands.
(b) IDENTIFY SIGNIFICANT EMPLOYEES
Gary Thomas, Vice-President of Sales for Enlyten, joined the Company in January
2007 and serves as our national sales director. Mr. Thomas has 27 years
experience in the sales industry. For the past 10 years, Mr. Thomas has been
with Acosta, the world's largest food broker. Since 2000, he has held the
position of Director of HBC/GM Northeast Region. He has managed such accounts as
Wegman's, Tops, Kinney Drug and CVS, and handled sales for such high profile
product lines as Energizer, L'Oreal, Neutrogena and KAO Brands. Under Mr.
Thomas' supervision, Acosta recorded $200+ million in annual sales revenue.
(c) FAMILY RELATIONSHIPS
None.
34
(d) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None.
(e) AUDIT COMMITTEE FINANCIAL EXPERT
Mr. Pruitt is independent as specified in Item 7(d)(3)(iv) of Schedule 14A under
the Exchange Act and meets the requirements of a financial expert.
(f) IDENTIFICATION OF THE AUDIT COMMITTEE
The small business issuer has a separately designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Exchange Act, which is
currently made up of Mr. Pruitt as Chairman and Mr. Freeman.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below lists the beneficial ownership of the Company's voting
securities by each person known to be the beneficial owner of more than 5% of
such securities. As of May 21, 2007, there were 41,731,897 shares of the
Company's common stock issued and outstanding. To the best of our knowledge, the
persons named have sole voting and investment power with respect to such shares,
except as otherwise noted. There are not any pending or anticipated arrangements
that may cause a change in control.
The information presented below regarding beneficial ownership of our voting
securities has been presented in accordance with the rules of the Securities and
Exchange Commission and is not necessarily indicative of ownership for any other
purpose. Under these rules, a person is deemed to be a "beneficial owner" of a
security if that person has or shares the power to vote or direct the voting of
the security or the power to dispose or direct the disposition of the security.
A person is deemed to own beneficially any security as to which such person has
the right to acquire sole or shared voting or investment power within 60 days
through the conversion or exercise of any convertible security, warrant, option
or other right. More than one person may be deemed to be a beneficial owner of
the same securities. The percentage of beneficial ownership by any person as of
a particular date is calculated by dividing the number of shares beneficially
owned by such person, which includes the number of shares as to which such
person has the right to acquire voting or investment power within 60 days, by
the sum of the number of shares outstanding as of such date plus the number of
shares as to which such person has the right to acquire voting or investment
power within 60 days. Consequently, the denominator used for calculating such
percentage may be different for each beneficial owner. We believe that the
beneficial owners of our common stock listed below have sole voting and
investment power with respect to the shares shown.
35
The following table indicates all persons who, as of May 21, 2007, the most
recent practicable date, are known by us to own beneficially more than 5% of any
class of our outstanding voting securities. As of May 21, 2007, there were
41,731,897 shares of our common stock outstanding. Except as otherwise indicated
below, to the best of our knowledge, each person named in the table has sole
voting and investment power with respect to the securities beneficially owned by
them as set forth opposite their name.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
NAME AND ADDRESS OF AMOUNT AND NATURE OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNER % OF CLASS
-------------- ---------------- ---------------- ----------
Common Zengen, Inc. 10,717,900 25.7%
Common Tri-Strip Associates, LLC 2,298,266 5.5%
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table indicates the beneficial ownership of the Company's voting
securities of all Directors of the Company and all Executive Officers who are
not Directors of the Company, and all officers and directors as a group, as of
May 21, 2007, the most recent practicable date. As of May 21, 2007, there were
41,731,897 shares of the Company's common stock outstanding. Except as otherwise
indicated below, to the best of the Company's knowledge, each person named in
the table has sole voting and investment power with respect to the securities
beneficially owned by them as set forth opposite their name. All options are
currently exercisable, unless otherwise indicated.
36
Name and Address of Amount and Nature of % of
Title of Class Beneficial Owner Beneficial Owner Class
-------------- ---------------- ---------------- -----
Common Daniel J. Kelly a 615,000 1.47%
495 Commerce Drive, Suite 1
Amherst, New York
Common Hank Durschlag 575,000 1.38%
5403 McChesney Dr
Charlotte, NC 28269
Common Jason Freeman b 50,000 < 1%
5700 W. Plano Pkwy, Ste 1000
Plano, Texas 75093
Common R. Steven Davidson c,d 586,876 1.39%
6429 Independence Ave
Woodland Hills, CA 91367
Common Matthew Burns c,e 495,000 1.17%
6429 Independence Ave
Woodland Hills, CA 91367
Common Michael D. Pruitt - < 1%
4201 Congress Street, Suite 145
Charlotte, NC 28277
Common All current officers and directors as a
Group (6 persons) 2,321,876 5.37%
a. Includes three-year option granted in September 2006 for 100,000
shares exercisable at $1.10 per share and three-year option granted
January 1, 2007 for 400,000 shares exercisable at $2.25 per share.
b. Includes three-year option granted on November 2, 2006, for 50,000
shares, exercisable at $2.25 per share.
c. Includes three-year option for 495,000 shares each exercisable at
$1.36 which was granted on May 4, 2007, as a part of the
acquisition of InnoZen.
d. Does not include Mr. Davidson's 6.15% interest in Zengen, Inc.'s
10,717,900 shares (approximately 659,000 shares).
e. Does not include Mr. Burns' approximate 4.2% interest in Zengen,
Inc.'s 10,717,900 shares (approximately 454,000 shares).
37
EQUITY COMPENSATION PLAN INFORMATION
This table provides certain information as of December 31, 2006, with respect to
our equity compensation plans:
NUMBER OF
SECURITIES
AWARDED PLUS
NUMBER OF
SECURITIES
TO BE ISSUED NUMBER OF
UPON EXERCISE SECURITIES
NUMBER OF OF OPTIONS, TO BE ISSUED NUMBER OF
SECURITIES WARRANTS OR UPON EXERCISE SECURITIES
AUTHORIZED RIGHTS OF OUTSTANDING REMAINING
FOR ISSUANCE GRANTED OPTIONS, AVAILABLE
UNDER THE DURING LAST WARRANTS OR FOR FUTURE
NAME OF PLAN PLAN FISCAL YEAR RIGHTS ISSUANCE
------------ ---- ----------- ------ --------
Logisoft Corp. 2000
Stock Option Plan 15,000 - - 15,000
HealthSport 2006
Stock Option Plan 5,000,000 100,000 100,000 4,900,000
-------------- ------------- ------------- -------------
5,015,000 100,000 100,000 4,915,000
============== ============== ============== =============
In addition, at December 31, 2006, there were options outstanding for 325,000
shares at an average exercise price of $1.86 which expire in 2009. These options
were not granted pursuant to the Stock Option Plans. Also, at December 31, 2006,
there were warrants outstanding for 78,750 shares with an exercise price of
$20.00 per share. The warrants expire in 2007.
ITEM 12: DESCRIPTION OF SECURITIES
The following description as a summary of the material terms of the provisions
of our Certificate of Incorporation and Bylaws is qualified in its entirety. The
Certificate of Incorporation and Bylaws have been filed as exhibits to the
registration statement of which this prospectus is a part.
(a) COMMON STOCK
The Company is authorized to issue 500,000,000 shares of common stock, with a
par value of $.0001 per share. Each share of common stock has one vote. At May
21, 2007, there were 41,731,897 shares of the Company's common stock issued and
outstanding.
38
(b) DEBT SECURITIES
None.
(c) OTHER SECURITIES TO BE REGISTERED
None.
ITEM 13: INTEREST OF NAMED EXPERTS AND COUNSEL
The December 31, 2006 and 2005 financial statements incorporated by reference to
this prospectus have been audited by Creason & Associates, P.L.L.C. ("Creason"),
which is an independent registered public accounting firm, to the extent and for
the periods set forth in its report and are incorporated herein in reliance upon
such report given upon the authority of said firm as experts in auditing and
accounting.
We have not hired Creason or any other expert on a contingency basis.
ITEM 14: DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITES ACT
LIABILITIES
The Eighth Article of the Company's Certificate of Incorporation and Article XI
of the Company Bylaws limit the personal liability of the Company's directors to
the Company or its stockholders for monetary damages for breach of fiduciary
duty.
The Certificate of Incorporation provides that each person who serves or who has
served as a director shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that this provision shall not eliminate or limit the liability of a
director: (i) for any breach of loyalty to the corporation or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) for unlawful payment of dividend
or unlawful stock purchase or redemption as such liability is imposed under
Section 174 of the General Corporation Laws of Delaware; or (iv) for any
transaction from which the director derived an improper personal benefit.
ITEM 15: ORGANIZATION WITHIN LAST FIVE YEARS
HealthSport, Inc. is a holding company, originally incorporated on July 25, 1985
in Delaware, and currently has the following wholly owned subsidiaries:
o Enlyten, Inc. ("Enlyten"), a Nevada corporation organized on
November 28, 2006;
o InnoZen, Inc. ("InnoZen"), a Delaware corporation acquired on May
4, 2007;
39
o Health Strip Solutions, LLC ("Health Strip"), a Nevada limited
liability corporation organized on February 13, 2006; acquired 80%
on March 29, 2006, 10% on December 21, 2006 and the remaining 10%
on December 27, 2006;
o Cooley Nutraceuticals, Inc. ("Nutraceuticals"), a Nevada
corporation organized on November 17, 2006; acquired on December 6,
2006;
o Maxx Motorsports, Inc. ("Maxx"), a Delaware corporation acquired on
May 15, 2001 and currently inactive;
o World Championship Poker, Inc. ("Poker"), a Nevada corporation
acquired on June 28, 2005 and currently inactive; and
o Strategic Gaming Consultants, LLC, ("Gaming"), a Nevada limited
liability corporation organized on November 8, 2004, and never
activated.
On April 24, 2006, we filed a Definitive Information Statement pursuant to
Section 14C which provided that effective May 15, 2006:
o our name would be changed to HealthSport, Inc.;
o our issued and outstanding shares would be reverse-split one share
for each 200 shares; and
o our Certificate of Incorporation would be restated to reflect these
amendments.
These amendments were approved by our Board of Directors and in writing by
52.33% of our shareholders on March 31, 2006. Accordingly, effective May 15,
2006, our name was changed to HealthSport, Inc., our shares were reverse-split
one for 200 and our Certificate of Incorporation was restated to reflect these
amendments. We have made the change in outstanding shares and all references to
shares have been retroactively restated for all periods included in this report
on Form 10-KSB.
HealthSport, Inc. was originally incorporated in 1985 as Horizon Capital Corp.
We were known as Reconversion Technologies, Inc. until May 1, 2000, at which
time our name was changed to Logisoft Corp. On May 15, 2001, we changed our name
from Logisoft Corp. to Team Sports Entertainment, Inc., on November 8, 2004, we
changed our name to Idea Sports Entertainment Group, Inc. and on May 15, 2006,
we changed our name to HealthSport, Inc.
On December 20, 2006, we signed a non-binding Letter of Intent ("LOI") to
acquire InnoZen, Inc. ("InnoZen") through a merger with one of our wholly owned
subsidiaries. A condition of the LOI required us to fund a Bridge Loan for
$250,000 (which was made on December 26, 2006) and the investment by us of
$750,000 in working capital into InnoZen at closing. We initiated a private
placement on January 15, 2007, to sell up to 8,000,000 shares of our common
stock at $1.50 per share.
On January 31, 2007, we entered into a Merger Agreement with InnoZen and InnoZen
Acquisition Sub, Inc. ("Acquisition Sub"), our wholly owned subsidiary, all
Delaware corporations. The Merger Agreement provided that 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 our common
stock, Acquisition Sub would be merged with and into InnoZen, after which,
InnoZen was to become our wholly owned subsidiary and was to continue as the
surviving corporation and the separate existence of Acquisition Sub would cease.
The Merger was conditioned on the consummation of a 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.
40
On March 15, 2007, the Merger 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. The merger was completed on
May 4, 2007, and the Company issued 18,250,000 shares of its common stock to the
InnoZen shareholders.
CURRENT ACTIVE OPERATIONS
ELECTROLYTE STRIP
-----------------
HEALTH STRIP - On March 29, 2006, we 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 our $.0001 par value common stock. Health
Strip, in conjunction with InnoZen, holds certain proprietary technology for the
formulation of a thin film 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 the fourth quarter.
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, we have filed a provisional patent in
the US Patent & Trademark office and have 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. We commenced amortization of our total patent costs in July 2006 over
seventeen years, the life of the expected patent. We will periodically evaluate
the unamortized balance of the patent and technology costs and record an
impairment loss if warranted.
During December 2006, we issued 925,000 shares of our common stock to acquire
the remaining 20% of Health Strip, which was valued at $1,871,250, based upon
the trading price of our 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, we issued 375,000 shares of our 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,
41
caffeine, electrolytes, antioxidants and other essential vitamins and minerals.
In conjunction with InnoZen, we have 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. We recorded this transaction based upon the
trading price of our 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. We are in the process of filing a provisional
patent with the US Patent & Trademark office and will commence amortization of
the patent costs over seventeen years, the life of the expected patent, when the
application is filed.
RESEARCH AND DEVELOPMENT - On April 19, 2005, we entered into a joint
development agreement with 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 had the formula and the ability to assist in obtaining endorsements for the
electrolyte strips by well-known athletes and coaches. We contributed $115,500
in cash and 1,250 shares of our common stock, valued at $19,191 using the
Black-Scholes valuation model, for our 50% interest in the joint venture.
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 and orange. All joint venture funds were expended by
December 31, 2005.
INACTIVE OPERATIONS
POKER
-----
On June 28, 2005, we issued 19,250 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. While we may still pursue the
project for the 2007 season or later, our principal focus is on the electrolyte
strip products. We elected to impair our investment in the goodwill associated
with Poker to the $50,000 amount we determined to be the fair value of the
investment at December 31, 2005. We believe no additional impairment is required
at December 31, 2006.
IMGI
----
On September 9, 2004, we acquired all of the issued and outstanding common stock
of IMGI in exchange for warrants to acquire 75,000 shares of our common stock at
an exercise price of $20 per share. IMGI is a South Carolina corporation
organized on July 28, 2004 and had no prior operations. This transaction was
valued at $1,200, which was the amount the sellers of IMGI paid for IMGI's
common stock.
42
Effective August 29, 2006, we issued 65,000 shares of our common stock to a
former CEO of the Company and transferred the stock of IMGI, including
liabilities of $295,840 to the former CEO. The liabilities included $291,913
which the former CEO claimed was due to himself and affiliates for costs
advanced in the original formation of IMGI.
TELEVISION PROGRAMS
-------------------
On October 15, 2004, we acquired two television programs entitled "America's Top
Drivers" and "Women's Racing League" in exchange for warrants to acquire 8,750
shares of our common stock at an exercise price of $20 per share. The
transaction was valued at $65,458 using the Black-Scholes option pricing model.
As of December 31, 2005, we were unable to locate a venue to produce the shows.
Accordingly, we fully impaired our investment of $65,458.
On September 28, 2005, we completed the modification of our television program
purchase agreement in order to recognize the compensation element of the
agreement. The warrants to acquire 8,750 shares of our common stock at $20 per
share were cancelled and we issued 18,000 shares of our common stock to the
seller of the programs. The 18,000 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, we acquired all of the issued and outstanding memberships
of Gaming in exchange for warrants to acquire 3,750 shares of our common stock
at an exercise price of $20 per share. Gaming had no prior operations and had no
assets. Accordingly, the transaction was recorded with no value. Gaming has
never been activated.
MAXX
----
Maxx, through its wholly owned subsidiary, Team Racing Auto Circuit, LLC, a
Delaware limited liability company ("TRAC"), planned to develop, own, operate
and sanction an automotive racing league designed to provide content for
television and tracks while expanding the existing base of racing fans. We were
in the development stage since our inception on 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. Accordingly, on August 26, 2003, our Board of
Directors unanimously approved a plan to immediately discontinue our racing
operation.
ITEM 16. DESCRIPTION OF BUSINESS
HealthSport is publicly traded on the bulletin board market under the ticker
symbol HSPO. HealthSport is focused exclusively on the development,
manufacturing and marketing of edible film strip products containing nutritional
supplements and over-the-counter drugs using certain proprietary technology.
This technology system provides rapid dissolution and release of active
ingredients when the strip comes in contact with saliva in the mouth.
43
On December 20, 2006, we signed a non-binding LOI to acquire InnoZen. A
condition of the LOI required us to fund a Bridge Loan for $250,000 (which was
made on December 26, 2006) and the investment by us of $750,000 in working
capital into InnoZen at closing. We initiated a private placement on January 15,
2007, to sell up to 8,000,000 shares of our common stock at $1.50 per share.
On January 31, 2007, we entered into a Merger Agreement with InnoZen and InnoZen
Acquisition Sub, Inc., or "Acquisition Sub", our wholly owned subsidiary, all
Delaware corporations. The Merger Agreement provided that 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 our common
stock, Acquisition Sub would be merged with and into InnoZen, after which,
InnoZen was to become our wholly owned subsidiary and was to continue as the
surviving corporation and the separate existence of Acquisition Sub would cease.
The Merger was conditioned on the consummation of a 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 March 15, 2007, the Merger 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. The merger was completed on
May 4, 2007 and the Company issued 18,250,000 shares to InnoZen's stockholders.
InnoZen is a 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 Sore Throat Relief Strips(R) 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 the film
strip, InnoZen moved forward with its proprietary technology to develop two new
thin film strip products for coughs. InnoZen launched its two new film strip
products under its own Suppress(R) brand in September 2004.
Using InnoZen's in-house research, development and manufacturing capabilities,
HealthSport has the ability to more rapidly formulate and develop new thin film
products and other products using various additional oral delivery systems such
as gels. As a result, HealthSport anticipates a steady stream of new products to
expand the Enlyten brand it is creating. The implementation of HealthSport's
sales and marketing models for each product line will play an integral role in
creating brand awareness through the application of traditional and
non-traditional sales techniques.
44
HealthSport and InnoZen have already jointly developed three new products that
are ready to be launched in 2007, including but not limited to ENLYTEN(TM)
SPORTSTRIPS, ENLYTEN(TM) ENERGY FILM STRIPS and ENLYTEN(TM) SURVIVAL STRIPS.
PRODUCT OVERVIEW
ENLYTEN(TM) SPORTSTRIPS
-----------------------
Over the past year and half, InnoZen has been applying its film strip technology
formulation and manufacturing expertise to develop film strips containing
electrolytes. Electrolytes are chemicals that form electrically-charged
particles (ions) in body fluids. These ions carry the electrical energy
necessary for many functions, including nerve impulse transmission and muscle
contractions.
Many normal body functions depend on electrolytes, and optimal athletic
performance requires a consistent and adequate supply of these important
nutrients. Electrolytes such as those found in 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.
Drinking water alone is not the best way to restore fluid levels after extreme
athletic activity because it dilutes the salts inside the body's cells and
interferes with their chemical functions. This can lead to water intoxication.
(This and other side-effects can be a similar negative consequence of excess
ingestion of popular liquid electrolyte solutions.)
HealthSport's ENLYTEN(TM) SPORT STRIPS have been tested by Dr. David Berkoff of
Duke Sports Medicine's K-Lab and have so far provided positive results. With the
patented film strip technology developed by InnoZen and testing completed by Dr.
Berkoff, HealthSport is positioned to begin mass marketing ENLYTEN(TM)
SPORTSTRIPS in June 2007.
ENLYTEN(TM) ENERGY FILM STRIPS
------------------------------
HealthSport, in conjunction with InnoZen, has developed a revolutionary new
edible film strip. ENLYTEN(TM) ENERGY film strips are a nutritional supplement
that quickly and effectively provides natural energy enhancers, caffeine,
electrolytes, antioxidants, and other essential vitamins and minerals. Enlyten's
proprietary formulation is designed 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.
ENLYTEN(TM) SURVIVAL STRIPS
---------------------------
HealthSport and InnoZen are currently working with the United States Military to
evaluate and test the effectiveness of ENLYTEN(TM) SURVIVAL STRIPS. ENLYTEN(TM)
SURVIVAL STRIPS are formulated with antioxidants, non-cavity causing sweeteners,
vitamins, herbal extracts, electrolytes, caffeine and other proven beneficial
compounds. ENLYTEN(TM) SURVIVAL STRIPS were designed specifically for military
personnel as a convenient, light weight, heat stable, effective remedy to
fatigue, drowsiness, dehydration and loss of performance during routine and
special operations. The strips are being examined in military populations to
evaluate their effectiveness in providing energy, increasing alertness,
combating dehydration and improving performance in extended operations.
45
SUPPRESS STRIPS(R)
------------------
Consumers are perpetually looking for new, more effective remedies to treat
coughs, colds and sore throats. This trend continues to increase at a rapid
rate. Another innovation, which has implications for the future, is the
introduction of products that offer a "preventative" formulation (usually based
on zinc, Echinacea and similar ingredients). As consumers adopt a more proactive
approach to their healthcare, this trend may show greater potential as a
business opportunity.
When InnoZen launched Suppress Cough Strips in 2004, delivering medicine in a
film strip was a relatively new idea; it has taken a while to gain consumer
acceptance. With the launch of several OTC film strip products and continued
increases in sales of film strip products, this category is poised for
significant growth in the coming years.
Currently, Suppress Cough Strips are in two formulations: one with
Dextromethorphan, and one in an herbal formulation. Both are available for
purchase in approximately 10,000 retail outlets in the U.S. The product is
carried in numerous leading chain stores such as Rite Aid, Winn Dixie,
Drugstore.com, Eckerd, Ralph's and Longs Drugs. InnoZen has also arranged for
international distribution of these products.
CHLORASEPTIC STRIPS
-------------------
Less than one year after incorporating, InnoZen completed formulation and
development of its first film strip product, a Benzocaine film strip, and
licensed it to Prestige Brands to launch under Prestige's Chloraseptic(R) branD
in 2003. The Chloraseptic Sore Throat Relief Strips developed by InnoZen were
the first thin film strip containing a drug active and are currently being
marketed in the U.S. InnoZen currently receives a royalty for Chloraseptic's use
of its licensed technology.
INDUSTRY OVERVIEW
-----------------
Oral film strips supplement and can replace traditional capsules and tablets due
to their ease of use, discreteness, portability, fast oral delivery, and ability
to control dosage (and thus minimize overdosing and/or contraindications of the
active ingredients). Film strips have soothing effects in the mouth and throat
because of their method of dissolution. The huge success of Listerine(R) Breath
Strips, which achieved more than $500 million iN sales since its launch, has
demonstrated consumer acceptance and adoption of this new delivery system.
Edible film strips have become a popular alternative to lozenges and gum for
refreshing breath.
Both HealthSport and InnoZen's mission is to be a leader in developing and
manufacturing pharmaceutical products in unique and convenient oral delivery
formats using science and innovation to improve people's lives. The main method
of achieving this is by use of "medicine in a strip"(R) that can be orally
ingested. Flavor is an important part oF the film strip development process.
InnoZen's team has extensive experience in developing flavors in film strips and
has great relationships with numerous international flavor houses.
46
These goals can be achieved by creatively applying InnoZen's unique, proprietary
knowledge and technology to create unique medicines in a strip that enable drug
developers to have an alternative and proprietary method of delivering their
existing products, as well as new products, and of extending and expanding their
respective market positions, brands, distribution networks and intellectual
property.
The film strip industry is in its early growth stage and InnoZen is currently
one of the premier strip manufacturers in the country and has current and
prospective substantial market presence and alliances in place. Additional
products under development provide further upside opportunity for both
HealthSport and InnoZen. After the acquisition of InnoZen, the combined
Companies are well-positioned for rapid growth and enhanced profitability.
SALES & DISTRIBUTION
--------------------
To handle all of the sales, marketing, and distribution needs of our various
products, we have formed Enlyten as a wholly owned subsidiary. Led by the newly
appointed president of HealthSport, Dan Kelly, Enlyten will seek to market and
distribute the film strips using all forms of traditional outlets including
grocery and drug stores, big box retailers and sporting goods stores, some of
which already carry InnoZen products. Enlyten will also utilize non-traditional
avenues such as college bookstores, organizational events and nightclubs.
To further this effort, HealthSport has secured the services of a 27 year
veteran in sales, Gary Thomas, who will be guiding and directing the Sales
Division. His experience with Acosta, the largest food and medicine broker in
the U.S., will bring substantial expertise and experience in the sales and
distribution of HealthSport products. Under Mr. Thomas's supervision, Acosta's
North Eastern United States Division recorded $200+ million in annual sales
revenue.
PRODUCT POSITIONING & MARKETING
-------------------------------
PRODUCT ENDORSEMENT: In today's world, people respond to individuals they trust
and respect when it comes to purchasing products. One manner in which to reach
the masses is to launch ENLYTEN(TM) SPORTSTRIPS, ENLYTEN(TM) ENERGY strips and
ENLYTEN(TM) SURVIVAL STRIPS with respected experts in the field or industry of
that particular producT. Enlyten will have the exclusive marketing and sales
rights for all HealthSport products. HealthSport has already retained
individuals with these characteristics and has pending conversations with
others.
For example, with respect to ENLYTEN(TM) SPORTSTRIPS, HealthSport has engaged
sports celebrities who have a stroNG connection with their fans and who will use
their profile and experience in sports to effectively and professionally
represent and support ENLYTEN(TM) SPORTSTRIPS. In addition, a Sports Advisory
Council will be assembled to use a croSS section of sports professionals to
endorse the sport strips.
47
Similarly, it will take someone with influence and popularity to reach the
targeted sales and distribution for ENLYTEN(TM) ENERGY film strips. We are
exploring and researching the best representatives for the product in order TO
have an immediate impact on sales.
Finally, for ENLYTEN(TM) SURVIVAL STRIPS, the most effective endorsement will be
to enlist the support and endorsemeNT of a top-tiered former military person who
can use his or her experience and presence to introduce the product among
military services in the U.S. as well as internationally.
CLINICAL EXPERTS: The research and development conducted by Dr. David Berkoff
and Anthony Seaber, a medical doctor and a science expert, respectively, in
sports medicine and training at Duke University, and by other clinical experts
on the ENLYTEN products will be communicated to other medical experts, coaches
and trainers in each field along with the benefits the products have to offer,
not only to professional athletes but to individuals as well. Their
participation is important to reinforce the scientific verification data by
offering their assessments and results with trainers, coaches, athletes,
military personnel and the general public. Over the course of the next year and
beyond, the clinical experts will be incorporated into our marketing plans
through public relations and product testimonials in medical related materials
circulated at trade shows, in medical magazines and on talk shows.
TRADESHOWS / CONFERENCES / EVENTS: Various tradeshows, conferences and
opportunities exist where ENLYTEN(TM) SPORTSTRIPS, ENLYTEN(TM) ENERGY film
strips and ENLYTEN(TM) SURVIVAL STRIPS, as well as Suppress and other
HealthSPoRT products, can be introduced to the general public and to health,
fitness, and sports professionals. In fact, it will be important to identify the
events that will offer maximum exposure to achieve success and results of the
investment to participate in the event, tradeshow or conference.
The marketing department will determine the high visibility tradeshows or events
and oversee the logistics. The products will be sampled by direct placement in
the hands of attendees at the events, through public relations surrounding the
event and by using the endorsement of individuals at the events.
ADVERTISING: A multi-tiered program will be developed and executed to introduce
each product to the general public, sports professionals and military. Each
product will have a program and advertising schedule that will use new and
established avenues for product placement, targeted media outlets in print and
radio as well as using the Internet for education and direct sales.
Marketing and creative services will identify the target markets and
publications to promote HealthSport products through advertisements and product
story placements. High profile, nationally circulated newspapers, magazines and
product specific publications will be included in the print ad placement
schedule, such as (but not limited to) USA TODAY, NEWSWEEK, RUNNER'S WORLD and
other publications.
48
Direct mail will be sent out to conference participants, event sponsors and
tradeshow mailing lists. The marketing department will work with the Sports
Advisory Council and clinical experts to secure lists of contacts from them to
mail materials to individuals and businesses in their circle of influence.
Consumers and retail customers will be mailed information and products, based on
researched buying habits in specific markets and retail stores. The direct mail
program will support promotional programs, consumer rebate initiatives and other
opportunities coinciding with the retail-marketing plan for HealthSport brands.
Website advertising opportunities will be researched and developed to place
advertising on highly visible Internet sites to extend the branding of
HealthSport beyond print and direct mail.
Other developments will be specific to the needs of the product rollout, sales
department and direction as given by the corporate executives of HealthSport.
PUBLIC RELATIONS: An integrated public relations program will be developed to
launch HealthSport across the country as well as internationally. Working with a
public relations agency, the customary elements will be created such as press
releases, targeted pitch strategies and materials to be sent to the public.
The public relations plan will be flexible and calculated, depending on the
opportunities that arise from the endorsements, situations associated with the
celebrities and the clinical experts. For instance, there will be opportunities
for the celebrities to introduce ENLYTEN directly or indirectly when doing
interviews or appearances on behalf of other businesses or events.
At the conferences or tradeshows, members of the Sports Advisory Council may
participate as presenters or attend the conferences. Local media market
opportunities will be utilized for on and off-site interviews and related
opportunities that will capitalize on the visibility of the conferences or
tradeshows.
Additional product placement opportunities will be sought on lifestyle and
sports television shows, both locally and nationally, to provide support to
marketing and sales related plans as determined by the corporate leadership of
Enlyten.
MANUFACTURING
-------------
InnoZen maintains a drug research and development facility and a manufacturing
plant in Woodland Hills, California that meets FDA and California certification
requirements. This manufacturing facility provides new business opportunities
through customized product production and pilot scale runs of film strip
products, and the ability to then deliver final product quickly and at
reasonable cost. Internal manufacturing enables quicker and more responsive
development of new and custom formulations and provides the ability to then
promptly fill orders for the new products. The net result is InnoZen's unique
ability to develop and deliver new film strip formulations and products to
market faster and more economically.
49
BESPOKE CUTTING AND PACKAGING: InnoZen's high-tech cutting and packaging
facility can be optimized to meet the specific requirements, and budgets, of
HealthSport's clients. Using high-tech labeling equipment, InnoZen offers a
range of labeling options, including a tamper resistant seal and full
wrap-around application in addition to the packaging used for the Suppress Cough
Strips. Technologically advanced blister card machinery enables InnoZen to offer
retail ready packaging, blister card single and multi-packs and flow wrap
individual products. InnoZen also offers a number of innovative packaging
solutions, including space saving packaging designs.
CAPACITY AND INVENTORY MANAGEMENT: With its own on-site manufacturing strip
facility, InnoZen is now in a position to manufacture all of the initial
requirements for the ENLYTEN(TM) SPORTSTRIPS, ENLYTEN(TM) ENERGY film stripS aND
ENLYTEN(TM) SURVIVAL STRIPS and both Suppress Cough Strip products for itself
and other third party distributorS. InnoZen plans to build a second line to
accommodate the future product demand that is expected for the new products once
they are launched and from potential new manufacturing customers.
Using its own facility, InnoZen can use a just-in-time inventory policy to
manufacture only the minimum number of film strips necessary to meet retailers'
orders. This reduces the sales and production cycle by several months and
reduces cash requirements for inventory.
INTELLECTUAL PROPERTY
---------------------
Patents and pending patent applications seek to protect new technologies
developed by HealthSport and InnoZen in formulating, developing and
manufacturing edible film strip products containing drug actives. Other
techniques are protected as trade secrets. These new core technologies include
novel methods of manufacturing film strip to create additional stability and to
increase the amount of drug actives that can be delivered in a single film
strip. InnoZen also seeks to protect the delivery of the specific drug active
ingredients in its edible film strips.
HealthSport and InnoZen have filed U.S. and foreign trademark and patent
applications to protect product lines and general technology; they rely on a
combination of intellectual property laws, nondisclosure agreements and other
measures to protect proprietary rights. Currently, HealthSport has two and
InnoZen has six United States patent applications pending; they expect to file
several more before the end of 2007. InnoZen has also filed patent applications
in several foreign countries. HealthSport and InnoZen also own various
trademarks, including ENLYTEN, SPORTSTRIPS, RESTORE, SURVIVAL STRIPS, InnoZen,
Suppress, and "Medicine in a Strip." Trademark registrations are available upon
request.
COMPETITION
-----------
HealthSport is a formulator, developer and manufacturer of edible film strips
and is also building a branded consumer product under its Enlyten brand. As a
result, none of our competitors are in direct competition with us in all of
these markets. We are, however, in competition with consumer products, sports
nutrition, health product and drug delivery companies.
50
In building the Enlyten brand, we will compete with other companies that
delivery similar compounds and nutritional supplements, including electrolytes
and energy products. There are numerous competitors in these markets,
specifically sports and energy drinks. We believe that we are differentiated
from these products because of our delivery system in edible film strips but our
competitors may choose to enter this market as well. As a formulator, developer
and manufacturer of edible film strips, we compete with other edible film strip
companies and also with other drug delivery technologies involving oral,
injectable, patch-based, pulmonary and intranasal administration of nutritional
supplements and OTC drugs.
We differentiate ourselves through our vertically integrated business model
which we believe increases our speed to market, reduces third-party performance
risk and increases control from a regulatory perspective. We believe our
proprietary composition, taste-masking and manufacturing process provides us
with a competitive advantage in thin film.
GOVERNMENTAL REGULATIONS, APPROVAL, COMPLIANCE
----------------------------------------------
Our operations are subject to regulation by the federal government, state
governments, and certain foreign governments. The Federal Food, Drug, and
Cosmetic Act, or FDCA, other federal statutes and regulations, various state
statutes and regulations, and laws and regulations of foreign governments govern
to varying degrees the testing, approval, production, labeling, distribution,
post-market surveillance, advertising, dissemination of information, and
promotion of our products. The lengthy process of laboratory, animal and
clinical testing, data analysis, manufacturing development, and regulatory
review necessary for required governmental approvals is costly and uncertain,
and can delay or prevent product introductions in a given market. Promotion,
marketing, manufacturing, and distribution of pharmaceutical products are
regulated in all major world markets.
The FDA's regulatory control of product approval directly affects our ability to
launch our products in the United States market even though some OTC
pharmaceutical products can be launched without the need for FDA product
approval. These products are a subset of OTC products, which may be marketed
without a specific FDA approval if they conform to a special published
regulation of the FDA referred to as an OTC monograph.
OTC PRODUCTS
OTC products are those that are available to consumers without a prescription.
They are available to consumers without a prescription because they can be
labeled for safe and effective use without the supervision of a physician or
other professional healthcare provider. In the United States, the FDA
establishes OTC drug monographs for particular product classes, such as cough
and cold products. The monographs specify permissible active ingredients,
labeling and indications. Products that conform to a monograph may be marketed
without a specific FDA approval. OTC products that do not conform to an OTC
monograph generally require review and approval through a new drug application,
or NDA, abbreviated new drug application, or ANDA, or 505(b)(2) application.
51
POST-MARKETING REQUIREMENTS
The FDA continues to review marketed products after approval or issuance of an
OTC monograph. If previously unknown problems are discovered or if there is a
failure to comply with applicable regulatory requirements, the FDA may restrict
the marketing of a product, cause the withdrawal of the product from the market,
or under certain circumstances seek recalls, seizures, injunctions or criminal
sanctions. For example, the FDA may require labeling changes or additional
studies for any marketed pharmaceutical product if new information reveals
questions about a drug's safety or effectiveness. In addition, in the case of a
product subject to an NDA, ANDA, or 505(b)(2) application, changes to the
product, the manufacturing methods or locations, or labeling are subject to
additional FDA approval, which may or may not be received, and which may be
subject to a lengthy FDA review process.
Whether marketed under an approved application or an OTC monograph, all drugs
must be manufactured in conformity with cGMP and other FDA regulations and
requirements, and pharmaceutical products subject to an approved application
must be manufactured, processed, packaged, labeled and promoted in accordance
with the approved application. Certain products must also be packaged with
child-resistant and senior friendly packaging under the Poison Prevention
Packaging Act and Consumer Product Safety Commission regulations. Products that
do not comply with these requirements can be considered misbranded and subject
to seizure, recall, monetary fines, and other penalties. We must comply with
cGMP and product specific regulations enforced by the FDA, and are continually
subject to inspection by the FDA and other governmental agencies. Manufacturing
operations could be interrupted or halted in any of those facilities if a
government or regulatory authority determines that our contract manufacturers do
not comply with applicable regulations or as a result of an unsatisfactory
inspection.
The distribution of prescription pharmaceutical products is also subject to the
Prescription Drug Marketing Act, or PDMA, which regulates the distribution of
drugs and drug samples at the federal level, and sets minimum standards for the
registration and regulation of drug distributors by the states. States require
the registration of manufacturers and distributors who provide pharmaceuticals,
including in certain states even if these manufacturers or distributors have no
place of business within the state but satisfy other nexus requirements, for
example, the shipment of products into such state. Both the PDMA and state laws
limit the distribution of prescription pharmaceutical product samples to
licensed practitioners and impose other requirements to ensure accountability in
the distribution of samples.
52
Other reporting and recordkeeping requirements also apply for marketed drugs,
including for most products requirements to review and report cases of adverse
events. Product advertising and promotion are subject to FDA and state
regulation, including requirements that promotional claims conform to any
applicable FDA approval, and be appropriately balanced and substantiated. OTC
drug advertising is also regulated by the Federal Trade Commission. Sales,
marketing and scientific/educational programs must comply with applicable
requirements of the anti-kickback provisions of the Social Security Act, the
False Claims Act, the Veterans Healthcare Act, and the implementing regulations
and policies of the United States Health and Human Services Office of Inspector
General and United States Department of Justice, as well as similar state laws.
Pricing and rebate programs must comply with applicable pricing and
reimbursement rules, including the Medicaid drug rebate requirements of the
Omnibus Budget Reconciliation Act of 1990. If products are made available to
authorized users of the Federal Supply Schedule of the General Services
Administration, additional laws and requirements apply. All of our activities
are potentially subject to federal and state consumer protection and unfair
competition laws.
OTHER REGULATORY REQUIREMENTS
In addition to the statutes and regulations described above, we are also subject
to regulation under the Occupational Safety and Health Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act and other federal, state
and local regulations. We believe that we have complied with these laws and
regulations in all material respects, and we have not been required to take any
action to correct any material noncompliance. We are unable to predict, however,
the impact on our business of any changes that may be made in these laws or of
any new laws or regulations that may be imposed in the future. We cannot be sure
that we will not be required to incur significant compliance costs or be held
liable for damages resulting from any violation of these laws and regulations.
EMPLOYEES
---------
At December 31, 2006 we had four full-time employees and at December 31, 2005,
we had one part-time employee and one full-time employee. During the first 45
days of 2007 we added three additional full-time employees to Enlyten's staff.
We acquired InnoZen on May 4, 2007, which increased our number of employees by
30 people.
Our employees are not represented by a labor union. We have experienced no work
stoppage and believe that our employee relationships are good.
ITEM 17: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This statement contains forward-looking statements within the meaning of the
Securities Act. Discussions containing such forward-looking statements may be
found throughout this statement. Actual events or results may differ materially
from those discussed in the forward-looking statements as a result of various
factors, including, without limitation, the risk factors set forth in Item 3 and
the matters set forth in this statement.
53
COMPARISON OF YEARS ENDED DECEMBER 31, 2006 AND 2005
HealthSport is publicly traded on the bulletin board market under the ticker
symbol HSPO. HealthSport is focused exclusively on the development,
manufacturing and marketing of edible film strip technology. This technology
system provides rapid dissolution and release of active ingredients when the
strip comes in contact with saliva in the mouth.
On December 20, 2006, we signed a non-binding LOI to acquire InnoZen through a
merger with one of our wholly owned subsidiaries. A condition of the LOI
required us to fund a Bridge Loan for $250,000 (which was made on December 26,
2006) and the investment by us of $750,000 in working capital into InnoZen at
closing. We initiated a private placement on January 15, 2007, to sell up to
8,000,000 shares of our common stock at $1.50 per share.
On January 31, 2007, we entered into a Merger Agreement with InnoZen and InnoZen
Acquisition Sub, Inc. ("Acquisition Sub"), our 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 our 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 we 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.
InnoZen is a 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 Sore Throat Relief Strips(R) 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 the film
strip, InnoZen moved forward with its proprietary technology to develop two new
thin film strip products for coughs. InnoZen launched its two new film strip
products under its own Suppress(R) brand in September 2004.
54
Using InnoZen's in-house research and development and manufacturing
capabilities, HealthSport has the ability to more rapidly formulate and develop
new thin film products and other products using various additional oral delivery
systems such as gels. As a result, HealthSport anticipates a steady stream of
new products to expand the Enlyten brand it is creating. The implementation of
HealthSport's innovative and creative sales and marketing models for each
product line will play an integral role in creating brand awareness through the
application of traditional and non-traditional sales techniques.
HealthSport and InnoZen have already jointly developed three new products that
are ready to be launched in 2007, including but not limited to ENLYTEN(TM)
SPORTSTRIPS, ENLYTEN(TM) ENERGY film strips and ENLYTEN(TM) SURVIVAL STRIPS.
We were 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 our 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 completed one development stage, which
had been included in discontinued operations, and commenced a new development
stage operation.
CURRENT ACTIVE OPERATIONS
ELECTROLYTE STRIP
-----------------
HEALTH STRIP - On March 29, 2006, we 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 our $.0001 par value common stock. Health
Strip in conjunction with InnoZen holds certain proprietary technology for the
formulation of a thin film 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 the fourth quarter.
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, we have filed a provisional patent in
the US Patent & Trademark office and have 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. We commenced amortization of our total patent costs in July 2006 over
seventeen years, the life of the expected patent. We will periodically evaluate
the unamortized balance of the patent and technology costs and record an
impairment loss if warranted.
55
During December 2006, we issued 925,000 shares of our common stock to acquire
the remaining 20% of Health Strip, which was valued at $1,871,250, based upon
the trading price of our 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, we issued 375,000 shares of our 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, we have 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. We recorded this transaction based upon the
trading price of our 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. We are in the process of filing a provisional
patent with the US Patent & Trademark office and will commence amortization of
the patent costs over seventeen years, the life of the expected patent, when the
application is filed.
RESEARCH AND DEVELOPMENT - On April 19, 2005, we entered into a joint
development agreement with 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 had the formula and the ability to assist in obtaining endorsements for the
electrolyte strips by well-known athletes and coaches. We contributed $115,500
in cash and 1,250 shares of our common stock, valued at $19,191 using the
Black-Scholes valuation model, for our 50% interest in the joint venture.
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 and orange. All joint venture funds were expended by
December 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2006, we had positive working capital of $909,788 as compared to
a working capital deficit of $4,900,145 at December 31, 2005. The working
capital improvement is primarily the result of converting convertible promissory
notes to common stock during 2006 ($5,523,355 including accrued interest); the
issuance of common stock for accounts payable and other liabilities of $447,299;
the issuance of common stock for cash in the amount of $550,000; and the
issuance of common stock for a stock subscription receivable which was collected
on January 8, 2007.
56
On December 20, 2006, we signed a non-binding LOI to acquire InnoZen through a
merger with one of our wholly owned subsidiaries. A condition of the LOI
required us to fund a Bridge Loan for $250,000 (which was made on December 26,
2006) and the investment by us of $750,000 in working capital into InnoZen at
closing. We initiated a private placement on January 15, 2007, to sell up to
8,000,000 shares of our common stock at $1.50 per share. A condition precedent
to our closing of the InnoZen acquisition is that we shall have raised and
closed on a minimum of $6 million in new cash equity through the sale of common
stock at an average price of not less than $1.50 per share.
On January 31, 2007, we entered into a Merger Agreement with InnoZen and InnoZen
Acquisition Sub, Inc. ("Acquisition Sub"), our 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 our 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 we 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.
We anticipate reaching our first goal of raising a minimum of $6,000,000 by the
end of April 2007. These funds should be sufficient to fund our operations for
the remainder of 2007. This funding is expected to be applied as follows: fees
to third parties and expenses of closing - $500,000; new InnoZen production line
and capital expenditures - $1,500,000; InnoZen working capital - $750,000;
HealthSport marketing - $2,500,000; and HealthSport operational costs and
working capital - $750,000.
On January 15, 2007, we began a private placement offering to sell up to
8,000,000 shares of our common stock at a price of $1.50 per share. The offering
is scheduled to terminate on the earlier of April 15, 2007 or the date when the
sale of up to 8,000,000 shares has been completed. As of March 31, 2007, we have
sold 1,612,667 shares for total proceeds of $2,419,001.
57
RESULTS OF OPERATIONS
We had a loss from operations in 2006 of $1,438,047 as compared to $1,906,425
($28,960 from discontinued operations) in 2005. The principal decreases were
reductions in selling, general and administrative expense of $440,258; a
reduction of $309,511 in asset impairments and abandonments; and a reduction of
$134,691 in equity in joint venture loss. The principal increases were an
increase in non-cash compensation expense of $119,625 and an increase in the
beneficial conversion feature of a convertible debenture of $400,000.
The selling, general and administrative expenses are expected to increase
substantially in 2007 from the 2006 level with the marketing and roll-out of
several electrolyte strip products commencing in June 2007. While limited sales
are ongoing, the third quarter should be the first full quarter of operations.
DISCONTINUED OPERATIONS
We were in the development stage from 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 $0 and $28,960 during the years ended December 31, 2006 and 2005,
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.
NEW ACCOUNTING STANDARDS
There are several new accounting pronouncements issued by the Financial
Accounting Standards Board ("FASB") which are not yet effective. Each of these
pronouncements, as applicable, has been or will be adopted by the Company.
Management does not believe any of these accounting pronouncements has had or
will have a material impact on the Company's financial position or operating
results.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140", to
simplify and make more consistent the accounting for certain financial
instruments. SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", to permit fair value re-measurement for any
hybrid financial instrument with an embedded derivative that otherwise would
require bifurcation, provided that the whole instrument is accounted for on a
fair value basis. SFAS No. 155 amends SFAS No. 140, "Accounting for the
Impairment or Disposal of Long-Lived Assets", to allow a qualifying
special-purpose entity to hold a derivative financial instrument that pertains
to beneficial interest other than another derivative financial instrument. SFAS
No. 155 applies to all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006,
with earlier application allowed. This standard is not expected to have a
significant effect on our future reported financial position or results of
operations.
58
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures". This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, expands disclosures about fair
value measurements, and applies under other accounting pronouncements that
require or permit fair value measurements. SFAS No. 157 does not require any new
fair value measurements. However, the FASB anticipates that for some entities,
the application of SFAS No. 157 will change current practice. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007, which for us would
be our fiscal year beginning January 1, 2008. We are currently evaluating the
impact of SFAS No. 157 but do not expect that it will have a material impact on
our financial statements.
CRITICAL ACCOUNTING POLICIES
The SEC issued Financial Reporting Release No. 60, "Cautionary Advice Regarding
Disclosure about Critical Accounting Policies" ("FRR 60"), suggesting companies
provide additional disclosure and commentary on their most critical accounting
policies. In FRR 60, the SEC defined the most critical accounting policies as
the ones that are most important to the portrayal of a company's financial
condition and operating results, and require management to make its most
difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition our
most critical accounting policies include the valuation of intangibles, which
affects their amortization and impairment calculations and stock-based
compensation. The methods, estimates and judgments we use in applying these most
critical accounting policies have a significant impact on the results we report
in our consolidated financial statements.
INTANGIBLE ASSET VALUATION - The determination of the fair value of certain
acquired assets and liabilities is subjective in nature and often involves the
use of significant estimates and assumptions. Determining the fair values and
useful lives of intangible assets requires the exercise of judgment. We may use
our common stock to acquire assets and may use the Black-Scholes valuation
method or another acceptable method to determine a valuation for the stock. The
Black-Scholes valuation method calculates a volatility factor for the stock
price and extrapolates a valuation using these criteria. This valuation method
has generally proven effective for companies with established markets for their
common stock; however, due to the lack of an established trading market for our
common stock, in the opinion of management, this may result in an unduly high
valuation for the stock.
STOCK-BASED COMPENSATION - We record the fair value of stock-based compensation
to outside consultants as an operating expense. Historically, we have not
recorded expenses relating to stock options granted to employees with an
exercise price greater than or equal to market price at the time of grant. We
have reported pro-forma net loss and loss per share in accordance with the
requirements of SFAS 123 and SFAS 148. This disclosure shows net loss and loss
per share as if we had accounted for our employee stock options under the fair
value method of those statements. Pro-forma information is calculated using the
Black-Scholes pricing method on the date of grant. This option valuation model
requires input of highly subjective assumptions. Because our employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing model may
not necessarily provide a reliable single measure of fair value of our employee
stock options. We did not have any stock-based compensation during 2005;
however, we did have stock-based compensation in 2006 and expect to have
stock-based compensation in the future.
59
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 us to change the classification of certain tax benefits from option
deductions to financing rather than operating cash flows.
OTHER - The Company expects revenue recognition and other financial estimates to
become critical accounting policies as business develops in the future.
OFF-BALANCE SHEET ARRANGEMENTS
The Company's only off-balance sheet arrangement is for its office lease in
Amherst, New York. The operating lease is for a three-year term beginning on
February 1, 2007, covers 2,182 square feet at an annual cost of $28,366 in year
one, $28,912 in year two and $29,457 in year three.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2007 AND 2006
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.
60
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.
ITEM 18: DESCRIPTION OF PROPERTY
The corporate offices are currently maintained in the office of the Company's
accountant at no cost to the Company.
Enlyten has executed a three-year lease which commences on February 1, 2007 for
2,182 square feet of office space for its staff in Amherst, New York.
ITEM 19: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
2007 TRANSACTIONS
-----------------
The Company's acting CFO was paid consulting fees of $4,500 during the three
months ended March 31, 2007 and none during 2006.
2006 TRANSACTIONS
-----------------
Effective August 20, 2006, we issued 65,000 shares of our common stock to a
former CEO and transferred the stock of IMGI, including liabilities of $295,840
to the former CEO. The liabilities included $291,913 which the former CEO
claimed was due to him and affiliates for costs advanced in the original
formation of IMGI.
During the year ended December 31, 2006, we had three different part-time CEOs.
In aggregate they were paid $16,000 during the year.
61
2005 TRANSACTIONS
-----------------
In September 2005, the courts approved the settlement of the litigation with our
former CEO, William G. Miller, as discussed in note 10 to the consolidated
financial statements. As a result of this settlement, we recognized a loss from
discontinued operations in 2005 of $28,960, which is net of $247,055 in accrued
amounts previously due related parties which were forgiven.
Our CEO until June 30, 2005, received compensation of $45,000 during 2005. In
addition, during 2005, Godley Morris Group LLC ("GMG"), a company 50% owned and
managed by this former CEO, received rent of $9,000 and $291,913 was recorded in
amounts due related parties for additional reimbursements claimed by GMG.
ITEM 20: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
Our $0.0001 par value per share common stock is traded in the over-the-counter
market and is quoted on the National Association of Securities Dealers ("NASD")
Over-The Counter Bulletin Board ("OTCBB") under the symbol "HSPO.OB." Previously
we were quoted on the OTCBB under the symbols "ISPO.OB," "TSPT.OB," "LGST," and
"RTTK."
The following table sets forth the quarterly high and low daily close for our
common stock as reported by the OTCBB for the two years ended December 31, 2006
and the quarter ended March 31, 2007. The bids reflect inter-dealer prices
without adjustments for retail mark-ups, mark-downs or commissions and may not
represent actual transactions.
High Low
---- ---
2007:
First quarter $ 2.99 $ 2.20
2006:
Fourth quarter $ 2.50 $ 1.50
Third quarter $ 1.50 $ .75
Second quarter $ 4.00 $ 1.05
First quarter $ 8.00 $ 1.60
2005:
Fourth quarter $ 14.00 $ 4.00
Third quarter $ 20.00 $ 6.00
Second quarter $ 32.00 $ 14.00
First quarter $ 58.00 $ 14.00
62
PENNY STOCK RULES
Trading of our common stock is covered by an SEC rule that imposes additional
sales practice requirements on broker-dealers who sell such securities to
persons other than established customers and accredited investors, which are
generally institutions with assets in excess of $5,000,000, or individuals with
net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouses. For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and transaction prior to the sale. Consequently, the rule may affect the ability
of broker-dealers to sell our securities, and also may affect the ability of
purchasers of our stock to sell their shares in the secondary market. It may
also cause less broker dealers to be willing to make a market in our common
stock, and it may affect the level of news coverage we receive.
SALES OF OUR COMMON STOCK UNDER RULE 144
During the three months ended March 31, 2007, we issued:
o 175,000 shares of our common stock pursuant to employment
agreements and endorsement contracts. The shares were valued at
$415,500 and the expense will be amortized over the terms of the
agreements of one to two years;
o 1,682,667 shares of our common stock were issued in exchange for
cash in the amount of $2,368,051; and
o 120,000 shares of our common stock which were issued in exchange
for a consulting contract valued at $236,250 in December 2006 were
cancelled in March 2007 when the contract was terminated.
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.
(b) HOLDERS
At May 21, 2007, there were approximately 2,300 holders of record of our common
stock.
(c) DIVIDENDS
We have never paid cash dividends on our common stock and intend to utilize
current and future resources to implement our new plan of operations. Therefore,
it is not anticipated that cash dividends will be paid on our common stock in
the foreseeable future.
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Information regarding securities authorized for issuance under equity
compensation plans is included in the December 31, 2006 Form 10-KSB and the
March 31, 2007 Form 10-QSB attached hereto.
63
ITEM 21: EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors deliberates executive
compensation matters to the extent they are not delegated to the Chief Executive
Officer.
The following table shows the compensation of the Company's Chief Executive
Officer and each executive officer whose total cash compensation exceeded
$100,000 for the three years ended December 31, 2006.
Summary Compensation Table
----------------------------------------------------------------------------------------------------------------
Stock Option All other
Name and principal Salary awards awards compensation Total
position Year ($) ($) ($) ($) ($)
----------------------------------------------------------------------------------------------------------------
Daniel J. Kelly (CEO 2006 N/A $ 5,500 $ 5,910 $ 32,500 $ 43,910
since January 1, 2007) (a) 2005 N/A N/A N/A N/A N/A
2004 N/A N/A N/A N/A N/A
Ross E. Silvey (CEO from 2006 $ 5,500 $ - $ - $ - $ 5,500
September 11, 2006 until 2005 N/A N/A N/A N/A N/A
January 1, 2007) 2004 N/A N/A N/A N/A N/A
Terry Washburn (CEO from 2006 $ 10,500 $ - $ - $ - $ 10,500
March 30, 2006 until 2005 N/A N/A N/A N/A N/A
September 11, 2006) 2004 N/A N/A N/A N/A N/A
Charles W. Clark (CEO from 2006 $ - $ - $ - $ - $ -
July 1, 2005 until 2005 $ - $ - $ - $ - $ -
March 30, 2006 2004 N/A N/A N/A N/A N/A
William C. Morris (CEO from 2006 N/A N/A N/A N/A N/A
August 2004 until 2005 $ 45,000 $ - $ - $ 291,913 $ 336,913
June 30, 2005) (b) 2004 $ 45,000 $ - $ - $ 49,000 $ 94,000
Terry Hanson (CEO from 2006 N/A N/A N/A N/A N/A
September 2003 until 2005 N/A N/A N/A N/A N/A
August 2004 and COO and 2004 $ 24,000 $ - $ - $ - $ 24,000
President from August 2002
until August 2004)
(a) The amount for the stock award represents the amortization of Mr.
Kelly's 10% share of the stock granted to Jim Kelly for his
appearance fees. The option award represents the amortization of
the option granted to Mr. Kelly. All other compensation represents
the amount paid to Jim Kelly Enterprises, Inc. Mr. Kelly is owner
and President of Jim Kelly Enterprises, Inc. and was acting as a
consultant to the Company during 2006.
64
(b) Godley Morris Group ("GMG") is 50% owned by Mr. Morris and he is
the managing general partner. In 2005, GMG claimed reimbursement
for expenses in the amount of $291,913, which was included in
amounts due related parties at December 31, 2005. This liability
was transferred to Mr. Morris in 2006 when we issued 65,000 shares
of our common stock to Mr. Morris. In addition, we transferred
ownership of IMGI to Mr. Morris as a part of the transaction. In
2004, GMG was paid $15,000 for reimbursement of office expenses and
$9,000 for office rent. In addition, $25,000 for additional office
expense reimbursement was included in accounts payable at December
31, 2004 and paid in 2005.
Columns for bonus, nonequity incentive plan compensation and nonqualified
deferred compensation earnings have been omitted from the table above as all
amounts are zero.
NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE
Mr. Kelly became President and Chief Executive Officer of the Company on January
1, 2007. Mr. Kelly's compensation for 2007 is $212,500 and he is to receive a
$1,000 per month insurance reimbursement until health insurance is available for
employees. Mr. Kelly's compensation is to increase to $262,500 in 2008. In
addition, Mr. Kelly was granted a stock option for 400,000 shares exercisable at
$2.25 per share in January 2007. Mr. Kelly will also be reimbursed for all
reasonable out of pocket expenses.
Outstanding equity awards at fiscal year-end table
----------------------------------------------------------------------------------------------
Number of securities
underlying unexercised
options (#) Option Option
---------------------------- exercise expiration
Name Exercisable Unexercisable price ($) date
----------------------------------------------------------------------------------------------
Daniel J. Kelly 100,000 - $ 1.10 September 12, 2009
William C. Morris 25,000 - $ 20.00 August 31, 2007
Ross E. Silvey 50,000 - $ 2.25 November 15, 2009
The columns for option awards - equity incentive plan awards: number of
securities underlying unexercised unearned options and all four stock award
columns are omitted from the table as there amounts were zero.
ADDITIONAL NARRATIVE DISCLOSURE
Mr. Kelly's option was granted while he was a consultant and before he became
CEO on January 1, 2007. Mr. Kelly, Dr. Silvey and Mr. Morris are the only named
individuals with an outstanding equity award at fiscal-year end.
65
Compensation of Directors Table
--------------------------------------------------------------------------------
Fees
earned
or paid Option
in cash awards Total
Name ($) ($) ($)
--------------------------------------------------------------------------------
Ross Silvey $ -- $ 4,426 $ 4,426
Jason Freeman -- 4,426 4,426
Hank Durschlag 72,000 -- 72,000
------- ------- -------
$72,000 $ 8,852 $80,852
======= ======= =======
Other columns for stock awards, non-entity incentive plan compensation,
nonqualified deferred compensation earnings and all other compensation are
omitted from the table as the amounts are all zero.
ADDITIONAL NARRATIVE DISCLOSURE
Directors do not currently receive cash compensation for the meetings they
attend. It is anticipated that a formal plan for compensation of Directors will
be instituted during 2007.
Mr. Durschlag's fees that were earned or paid in cash represent his compensation
as an employee for 10 months of 2006.
66
ITEM 22: FINANCIAL STATEMENTS
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].
67
HEALTHSPORT, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I FINANCIAL INFORMATION (Unaudited)
Item 1: Condensed Consolidated Balance Sheet as of March 31, 2007 69
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2007 and 2006 70
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2007 and 2006 71
Notes to Condensed Consolidated Financial Statements 72
Item 2: Management's Discussion and Analysis or Plan of Operation 80
Item 3: Controls and Procedures 82
PART II OTHER INFORMATION 83
Exhibits 84
68
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.
69
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.
70
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.
71
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.
72
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.
73
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.
74
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
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.
75
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.
76
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.
77
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:
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
===========
78
Identifiable patent costs:
Health Strip $ 1,129,216
Nutraceuticals 802,500
-----------
1,931,716
Accumulated amortization (61,616)
-----------
Net patent costs $ 1,870,100
===========
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.
79
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.
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.
80
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.
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.
81
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.
82
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
----------------------------------------
Daniel J. Kelly, Chief Executive Officer
(Principal Executive Officer)
83
EXHIBIT 31.1
HEALTHSPORT, INC. FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 2007
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel J. Kelly, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of HealthSport, Inc.
(the registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have;
a. designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the
registrant, is made known to me by others, particularly during the
period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant's internal
controls over financial reporting that occurred during the
registrant's current fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions);
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditor any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 4, 2007 /s/ Daniel J. Kelly
------------------------------
Daniel J. Kelly
President and CEO
(Principal Executive Officer)
84
EXHIBIT 31.2
HEALTHSPORT, INC. FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 2007
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ross E. Silvey, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of HealthSport, Inc.
(the registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have;
a. designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the
registrant, is made known to me by others, particularly during the
period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant's internal
controls over financial reporting that occurred during the
registrant's current fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions);
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditor any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 4, 2007 /s/ Ross E. Silvey
------------------------------
Ross E. Silvey
Acting CFO
(Principal Financial Officer)
85
EXHIBIT 32.1
HEALTHSPORT, INC. FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 2007
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel J. Kelly, certify that
1. I am the President and Chief Executive Officer of HealthSport, Inc.
2. Attached to this certification is Form 10-QSB for the quarter ended March
31, 2007, a periodic report (the "periodic report") filed by the issuer
with the Securities Exchange Commission pursuant to Section 13(a) or 15(d)
of the Securities and Exchange Act of 1934 (the "Exchange Act"), which
contains consolidated financial statements.
3. I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that
o The periodic report containing the consolidated financial statements
fully complies with the requirements of Section 13(a) or 15(d) of the
Exchange Act, and
o The information in the periodic report fairly presents, in all
material respects, the consolidated financial condition and results of
operations of the issuer for the periods presented.
May 4, 2007 /s/ Daniel J. Kelly
------------------------------
Daniel J. Kelly
President and CEO
(Principal Executive Officer)
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by HealthSport, Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.
This certification will not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934 even if the document with which it is submitted to the Securities and
Exchange Commission is so incorporated by reference.
86
EXHIBIT 32.2
HEALTHSPORT, INC. FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 2007
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Ross E. Silvey, certify that
1. I am Acting Chief Financial Officer of HealthSport, Inc.
2. Attached to this certification is Form 10-QSB for the quarter ended March
31, 2007, a periodic report (the "periodic report") filed by the issuer
with the Securities Exchange Commission pursuant to Section 13(a) or 15(d)
of the Securities and Exchange Act of 1934 (the "Exchange Act"), which
contains consolidated financial statements.
3. I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that
a. The periodic report containing the consolidated financial statements
fully complies with the requirements of Section 13(a) or 15(d) of the
Exchange Act, and
b. The information in the periodic report fairly presents, in all
material respects, the consolidated financial condition and results of
operations of the issuer for the periods presented.
May 4, 2007 /s/ Ross E. Silvey
------------------------------
Ross E. Silvey
Acting CFO
(Principal Financial Officer)
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by HealthSport, Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.
This certification will not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934 even if the document with which it is submitted to the Securities and
Exchange Commission is so incorporated by reference.
87
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
COMMISSION FILE NUMBER 0-23100
HEALTHSPORT, INC.
(Exact name of small business issuer in its charter)
DELAWARE 22-2649848
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
7633 E 63RD PLACE, SUITE 220, TULSA, OK 74133
(Address of Principal Executive Office) (Zip Code)
ISSUER'S TELEPHONE NUMBER (877) 570-4776
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, $.0001 PAR VALUE
(TITLE OF EACH CLASS)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
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 [_].
88
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [_].
Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act). Yes [ ]; No [X].
State issuer's revenues for its most recent fiscal year. $1,137.
As of February 28, 2007, the registrant had outstanding 20,227,279 shares of its
common stock, par value of $.0001, its only class of voting securities. The
aggregate market value of the shares of common stock of the registrant held by
non-affiliates on February 28, 2007, was $45,268,950 based on the closing price
on the OTC Bulletin Board on that date. (See Item 5).
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Report except those
Exhibits so incorporated as set forth in the Exhibit index.
Transitional Small Business Disclosure Format (Check one): Yes __; No X.
89
HEALTHSPORT, INC.
TABLE OF CONTENTS
FORM 10-KSB
Part I
Page
PART I
Item 1 Description of Business 91
Item 2 Description of Property 102
Item 3 Legal Proceedings 102
Item 4 Submission of Matters to a Vote of Security Holders 103
PART II
Item 5 Market for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities 103
Item 6 Management's Discussion and Analysis or Plan of Operation 105
Item 7 Financial Statements 112
Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 137
Item 8A Controls and Procedures 137
Item 8B Other Information 137
PART III
Item 9 Directors, Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange Act 138
Item 10 Executive Compensation 141
Item 11 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 144
Item 12 Certain Relationships and Related Transactions, and Director Independence 146
Item 13 Exhibits 147
Item 14 Principal Accountant Fees and Services 147
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 report on the
Consolidated Financial Statements and the accompanying Notes to Consolidated
Financial Statements appearing later in this report. All statements other than
statements of historical fact included in this Annual Report on Form 10-KSB 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
90
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.
PART I
ITEM 1: DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
HealthSport, Inc. (together with its subsidiaries, hereinafter referred to as
the "Company", "HealthSport", "we" or "us"), is a holding company, originally
incorporated on July 25, 1985 in Delaware, and currently has the following
wholly owned subsidiaries:
o Enlyten, Inc. ("Enlyten"), a Nevada corporation organized on November
28, 2006;
o Health Strip Solutions, LLC ("Health Strip"), a Nevada limited
liability corporation organized on February 13, 2006; acquired 80% on
March 29, 2006, 10% on December 21, 2006 and the remaining 10% on
December 27, 2006;
o Cooley Nutraceuticals, Inc. ("Nutraceuticals"), a Nevada corporation
organized on November 17, 2006; acquired on December 6, 2006;
o Maxx Motorsports, Inc. ("Maxx"), a Delaware corporation acquired on
May 15, 2001 and currently inactive;
o World Championship Poker, Inc. ("Poker"), a Nevada corporation
acquired on June 28, 2005 and currently inactive; and
o Strategic Gaming Consultants, LLC, ("Gaming"), a Nevada limited
liability corporation organized on November 8, 2004, and never
activated.
On April 24, 2006, we filed a Definitive Information Statement pursuant to
Section 14C which provided that effective May 15, 2006; 1) our name would be
changed to HealthSport, Inc.; 2) our issued and outstanding shares would be
reverse-split one share for each 200 shares; and 3) our Certificate of
Incorporation would be restated to reflect these amendments. These amendments
were approved by our Board of Directors and in writing by 52.33% of our
shareholders on March 31, 2006. Accordingly, effective May 15, 2006, our name
was changed to HealthSport, Inc., our shares were reverse-split one for 200 and
our Certificate of Incorporation was restated to reflect these amendments. We
have made the change in outstanding shares and all references to shares have
been retroactively restated for all periods included in this report on Form
10-KSB.
91
HealthSport, Inc. was originally incorporated in 1985 as Horizon Capital Corp.
We were known as Reconversion Technologies, Inc. until May 1, 2000, at which
time our name was changed to Logisoft Corp. On May 15, 2001, we changed our name
from Logisoft Corp. to Team Sports Entertainment, Inc., on November 8, 2004, we
changed our name to Idea Sports Entertainment Group, Inc. and on May 15, 2006,
we changed our name to HealthSport, Inc.
On December 20, 2006, we signed a non-binding Letter of Intent ("LOI") to
acquire InnoZen, Inc. ("InnoZen") through a merger with one of our wholly owned
subsidiaries. A condition of the LOI required us to fund a Bridge Loan for
$250,000 (which was made on December 26, 2006) and the investment by us of
$750,000 in working capital into InnoZen at closing. We initiated a private
placement on January 15, 2007, to sell up to 8,000,000 shares of our common
stock at $1.50 per share.
On January 31, 2007, we entered into a Merger Agreement with InnoZen and InnoZen
Acquisition Sub, Inc. ("Acquisition Sub"), our 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 our 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 we 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.
CURRENT ACTIVE OPERATIONS
ELECTROLYTE STRIP
-----------------
HEALTH STRIP - On March 29, 2006, we 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 our $.0001 par value common stock. Health
Strip, in conjunction with InnoZen, holds certain proprietary technology for the
formulation of a thin film 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 the fourth quarter.
92
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, we have filed a provisional patent in
the US Patent & Trademark office and have 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. We commenced amortization of our total patent costs in July 2006 over
seventeen years, the life of the expected patent. We will periodically evaluate
the unamortized balance of the patent and technology costs and record an
impairment loss if warranted.
During December 2006, we issued 925,000 shares of our common stock to acquire
the remaining 20% of Health Strip, which was valued at $1,871,250, based upon
the trading price of our 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, we issued 375,000 shares of our 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, we have 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. We recorded this transaction based upon the
trading price of our 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. We are in the process of filing a provisional
patent with the US Patent & Trademark office and will commence amortization of
the patent costs over seventeen years, the life of the expected patent, when the
application is filed.
RESEARCH AND DEVELOPMENT - On April 19, 2005, we entered into a joint
development agreement with 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 had the formula and the ability to assist in obtaining endorsements for the
electrolyte strips by well-known athletes and coaches. We contributed $115,500
in cash and 1,250 shares of our common stock, valued at $19,191 using the
Black-Scholes valuation model, for our 50% interest in the joint venture.
93
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 and orange. All joint venture funds were expended by
December 31, 2005.
The products are discussed below under Business of the Company.
INACTIVE OPERATIONS
POKER
-----
On June 28, 2005, we issued 19,250 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. While we may still pursue the
project for the 2007 season or later, our principal focus is on the electrolyte
strip products. We elected to impair our investment in the goodwill associated
with Poker to the $50,000 amount we determined to be the fair value of the
investment at December 31, 2005. We believe no additional impairment is required
at December 31, 2006.
IMGI
----
On September 9, 2004, we acquired all of the issued and outstanding common stock
of IMGI in exchange for warrants to acquire 75,000 shares of our common stock at
an exercise price of $20 per share. IMGI is a South Carolina corporation
organized on July 28, 2004 and had no prior operations. This transaction was
valued at $1,200, which was the amount the sellers of IMGI paid for IMGI's
common stock.
Effective August 29, 2006, we issued 65,000 shares of our common stock to a
former CEO of the Company and transferred the stock of IMGI, including
liabilities of $295,840 to the former CEO. The liabilities included $291,913
which the former CEO claimed was due to himself and affiliates for costs
advanced in the original formation of IMGI.
TELEVISION PROGRAMS
-------------------
On October 15, 2004, we acquired two television programs entitled "America's Top
Drivers" and "Women's Racing League" in exchange for warrants to acquire 8,750
shares of our common stock at an exercise price of $20 per share. The
transaction was valued at $65,458 using the Black-Scholes option pricing model.
As of December 31, 2005, we were unable to locate a venue to produce the shows.
Accordingly, we fully impaired our investment of $65,458.
On September 28, 2005, we completed the modification of our television program
purchase agreement in order to recognize the compensation element of the
agreement. The warrants to acquire 8,750 shares of our common stock at $20 per
share were cancelled and we issued 18,000 shares of our common stock to the
seller of the programs. The 18,000 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.
94
GAMING
------
On October 27, 2004, we acquired all of the issued and outstanding memberships
of Gaming in exchange for warrants to acquire 3,750 shares of our common stock
at an exercise price of $20 per share. Gaming had no prior operations and had no
assets. Accordingly, the transaction was recorded with no value. Gaming has
never been activated.
MAXX
----
Maxx, through its wholly owned subsidiary, Team Racing Auto Circuit, LLC, a
Delaware limited liability company ("TRAC"), planned to develop, own, operate
and sanction an automotive racing league designed to provide content for
television and tracks while expanding the existing base of racing fans. We were
in the development stage since our inception on 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. Accordingly, on August 26, 2003, our Board of
Directors unanimously approved a plan to immediately discontinue our racing
operation.
BUSINESS OF THE COMPANY
HealthSport is publicly traded on the bulletin board market under the ticker
symbol HSPO. HealthSport is focused exclusively on the development,
manufacturing and marketing of edible film strip products containing nutritional
supplements and over-the-counter drugs using certain proprietary technology.
This technology system provides rapid dissolution and release of active
ingredients when the strip comes in contact with saliva in the mouth.
On December 20, 2006, we signed a non-binding LOI to acquire InnoZen. A
condition of the LOI required us to fund a Bridge Loan for $250,000 (which was
made on December 26, 2006) and the investment by us of $750,000 in working
capital into InnoZen at closing. We initiated a private placement on January 15,
2007, to sell up to 8,000,000 shares of our common stock at $1.50 per share.
On January 31, 2007, we entered into a Merger Agreement with InnoZen and InnoZen
Acquisition Sub, Inc. ("Acquisition Sub"), our 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 our 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.
95
Conditions precedent to effect the Merger include that we 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.
InnoZen is a 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 Sore Throat Relief Strips(R) 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 the film
strip, InnoZen moved forward with its proprietary technology to develop two new
thin film strip products for coughs. InnoZen launched its two new film strip
products under its own Suppress(R) brand in September 2004.
Using InnoZen's in-house research, development and manufacturing capabilities,
HealthSport has the ability to more rapidly formulate and develop new thin film
products and other products using various additional oral delivery systems such
as gels. As a result, HealthSport anticipates a steady stream of new products to
expand the Enlyten brand it is creating. The implementation of HealthSport's
sales and marketing models for each product line will play an integral role in
creating brand awareness through the application of traditional and
non-traditional sales techniques.
HealthSport and InnoZen have already jointly developed three new products that
are ready to be launched in 2007, including but not limited to ENLYTEN(TM)
SPORTSTRIPS, ENLYTEN(TM) ENERGY FILM STRIPS and ENLYTEN(TM) SURVIVAL STRIPS.
PRODUCT OVERVIEW
ENLYTEN(TM) SPORTSTRIPS
-----------------------
Over the past year and half, InnoZen has been applying its film strip technology
formulation and manufacturing expertise to develop film strips containing
electrolytes. Electrolytes are chemicals that form electrically-charged
particles (ions) in body fluids. These ions carry the electrical energy
necessary for many functions, including nerve impulse transmission and muscle
contractions.
Many normal body functions depend on electrolytes, and optimal athletic
performance requires a consistent and adequate supply of these important
nutrients. Electrolytes such as those found in 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.
Drinking water alone is not the best way to restore fluid levels after extreme
athletic activity because it dilutes the salts inside the body's cells and
interferes with their chemical functions. This can lead to water intoxication.
(This and other side-effects can be a similar negative consequence of excess
ingestion of popular liquid electrolyte solutions.)
96
HealthSport's ENLYTEN(TM) SPORT STRIPS have been tested by Dr. David Berkoff of
Duke Sports Medicine's K-Lab and have so far provided positive results. With the
patented film strip technology developed by InnoZen and testing completed by Dr.
Berkoff, HealthSport is positioned to begin mass marketing ENLYTEN(TM)
SPORTSTRIPS in June 2007.
ENLYTEN(TM) ENERGY FILM STRIPS
------------------------------
HealthSport, in conjunction with InnoZen, has developed a revolutionary new
edible film strip. ENLYTEN(TM) ENERGY film strips are a nutritional supplement
that quickly and effectively provides natural energy enhancers, caffeine,
electrolytes, antioxidants, and other essential vitamins and minerals. Enlyten's
proprietary formulation is designed 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.
ENLYTEN(TM) SURVIVAL STRIPS
---------------------------
HealthSport and InnoZen are currently working with the United States Military to
evaluate and test the effectiveness of ENLYTEN(TM) SURVIVAL STRIPS. ENLYTEN(TM)
SURVIVAL STRIPS are formulated with antioxidants, non-cavity causing sweeteners,
vitamins, herbal extracts, electrolytes, caffeine and other proven beneficial
COMPOUNDS. ENLYTEN(TM) SURVIVAL STRIPS were designed specifically for military
personnel as a convenient, light weight, heat stable, effective remedy to
fatigue, drowsiness, dehydration and loss of performance during routine and
special operations. The strips are being examined in military populations to
evaluate their effectiveness in providing energy, increasing alertness,
combating dehydration and improving performance in extended operations.
SUPPRESS STRIPS(R)
------------------
Consumers are perpetually looking for new, more effective remedies to treat
coughs, colds and sore throats. This trend continues to increase at a rapid
rate. Another innovation, which has implications for the future, is the
introduction of products that offer a "preventative" formulation (usually based
on zinc, Echinacea and similar ingredients). As consumers adopt a more proactive
approach to their healthcare, this trend may show greater potential as a
business opportunity.
When InnoZen launched Suppress Cough Strips in 2004, delivering medicine in a
film strip was a relatively new idea; it has taken a while to gain consumer
acceptance. With the launch of several OTC film strip products and continued
increases in sales of film strip products, this category is poised for
significant growth in the coming years.
97
Currently, Suppress Cough Strips are in two formulations: one with
Dextromethorphan, and one in an herbal formulation. Both are available for
purchase in approximately 10,000 retail outlets in the U.S. The product is
carried in numerous leading chain stores such as Rite Aid, Winn Dixie,
Drugstore.com, Eckerd, Ralph's and Longs Drugs. InnoZen has also arranged for
international distribution of these products.
CHLORASEPTIC STRIPS
-------------------
Less than one year after incorporating, InnoZen completed formulation and
development of its first film strip product, a Benzocaine film strip, and
licensed it to Prestige Brands to launch under Prestige's Chloraseptic(R) brand
in 2003. The Chloraseptic Sore Throat Relief Strips developed by InnoZen were
the first thin film strip containing a drug active and are currently being
marketed in the U.S. InnoZen currently receives a royalty for Chloraseptic's use
of its licensed technology.
INDUSTRY OVERVIEW
Oral film strips supplement and can replace traditional capsules and tablets due
to their ease of use, discreteness, portability, fast oral delivery, and ability
to control dosage (and thus minimize overdosing and/or contraindications of the
active ingredients). Film strips have soothing effects in the mouth and throat
because of their method of dissolution. The huge success of Listerine(R) Breath
Strips, which achieved more than $500 million in sales since its launch, has
demonstrated consumer acceptance and adoption of this new delivery system.
Edible film strips have become a popular alternative to lozenges and gum for
refreshing breath.
Both HealthSport and InnoZen's mission is to be a leader in developing and
manufacturing pharmaceutical products in unique and convenient oral delivery
formats using science and innovation to improve people's lives. The main method
of achieving this is by use of "medicine in a strip"(R) that can be orally
ingested. Flavor is an important part of the film strip development process.
InnoZen's team has extensive experience in developing flavors in film strips and
has great relationships with numerous international flavor houses.
These goals can be achieved by creatively applying InnoZen's unique, proprietary
knowledge and technology to create unique medicines in a strip that enable drug
developers to have an alternative and proprietary method of delivering their
existing products, as well as new products, and of extending and expanding their
respective market positions, brands, distribution networks and intellectual
property.
The film strip industry is in its early growth stage and InnoZen is currently
one of the premier strip manufacturers in the country and has current and
prospective substantial market presence and alliances in place. Additional
products under development provide further upside opportunity for both
HealthSport and InnoZen. After the acquisition of InnoZen, the combined
Companies are well-positioned for rapid growth and enhanced profitability.
98
SALES & DISTRIBUTION
To handle all of the sales, marketing, and distribution needs of our various
products, we have formed Enlyten as a wholly owned subsidiary. Led by the newly
appointed president of HealthSport, Dan Kelly, Enlyten will seek to market and
distribute the film strips using all forms of traditional outlets including
grocery and drug stores, big box retailers and sporting goods stores, some of
which already carry InnoZen products. Enlyten will also utilize non-traditional
avenues such as college bookstores, organizational events and nightclubs.
To further this effort, HealthSport has secured the services of a 27 year
veteran in sales, Gary Thomas, who will be guiding and directing the Sales
Division. His experience with Acosta, the largest food and medicine broker in
the U.S., will bring substantial expertise and experience in the sales and
distribution of HealthSport products. Under Mr. Thomas's supervision, Acosta's
North Eastern United States Division recorded $200+ million in annual sales
revenue.
PRODUCT POSITIONING & MARKETING
PRODUCT ENDORSEMENT: In today's world, people respond to individuals they trust
and respect when it comes to purchasing products. One manner in which to reach
the masses is to launch ENLYTEN(TM) SPORTSTRIPS, ENLYTEN(TM) ENERGY strips and
ENLYTEN(TM) SURVIVAL STRIPS with respected experts in the field or industry of
that particular producT. Enlyten will have the exclusive marketing and sales
rights for all HealthSport products. HealthSport has already retained
individuals with these characteristics and has pending conversations with
others.
For example, with respect to ENLYTEN(TM) SPORTSTRIPS, HealthSport has engaged
sports celebrities who have a stroNG connection with their fans and who will use
their profile and experience in sports to effectively and professionally
represent and support ENLYTEN(TM) SPORTSTRIPS. In addition, a Sports Advisory
Council will BE assembled to use a cross section of sports professionals to
endorse the sport strips.
Similarly, it will take someone with influence and popularity to reach the
targeted sales and distribution for ENLYTEN(TM) ENERGY film strips. We are
exploring and researching the best representatives for the product in ordER to
have an immediate impact on sales.
Finally, for ENLYTEN(TM) SURVIVAL STRIPS, the most effective endorsement will be
to enlist the support aND endorsement of a top-tiered former military person who
can use his or her experience and presence to introduce the product among
military services in the U.S. as well as internationally.
CLINICAL EXPERTS: The research and development conducted by Dr. David Berkoff
and Anthony Seaber, medical doctors and experts in sports medicine at Duke
University, and by other clinical experts on the ENLYTEN products will be
communicated to other medical experts, coaches and trainers in each field along
with the benefits the products have to offer, not only to professional athletes
but to individuals as well. Their participation is important to reinforce the
scientific verification data by offering their assessments and results with
trainers, coaches, athletes, military personnel and the general public. Over the
course of the next year and beyond, the clinical experts will be incorporated
into our marketing plans through public relations and product testimonials in
medical related materials circulated at trade shows, in medical magazines and on
talk shows.
99
TRADESHOWS / CONFERENCES / EVENTS: Various tradeshows, conferences and
opportunities exist where ENLYTEN(TM) SPORTSTRIPS, ENLYTEN(TM) ENERGY film
strips and ENLYTEN(TM) SURVIVAL STRIPS, as well as Suppress and other
HealthSPoRT products, can be introduced to the general public and to health,
fitness, and sports professionals. In fact, it will be important to identify the
events that will offer maximum exposure to achieve success and results of the
investment to participate in the event, tradeshow or conference.
The marketing department will determine the high visibility tradeshows or events
and oversee the logistics. The products will be sampled by direct placement in
the hands of attendees at the events, through public relations surrounding the
event and by using the endorsement of individuals at the events.
ADVERTISING: A multi-tiered program will be developed and executed to introduce
each product to the general public, sports professionals and military. Each
product will have a program and advertising schedule that will use new and
established avenues for product placement, targeted media outlets in print and
radio as well as using the Internet for education and direct sales.
Marketing and creative services will identify the target markets and
publications to promote HealthSport products through advertisements and product
story placements. High profile, nationally circulated newspapers, magazines and
product specific publications will be included in the print ad placement
schedule, such as (but not limited to) USA TODAY, NEWSWEEK, RUNNER'S WORLD and
other publications.
Direct mail will be sent out to conference participants, event sponsors and
tradeshow mailing lists. The marketing department will work with the Sports
Advisory Council and clinical experts to secure lists of contacts from them to
mail materials to individuals and businesses in their circle of influence.
Consumers and retail customers will be mailed information and products, based on
researched buying habits in specific markets and retail stores. The direct mail
program will support promotional programs, consumer rebate initiatives and other
opportunities coinciding with the retail-marketing plan for HealthSport brands.
Website advertising opportunities will be researched and developed to place
advertising on highly visible Internet sites to extend the branding of
HealthSport beyond print and direct mail.
Other developments will be specific to the needs of the product rollout, sales
department and direction as given by the corporate executives of HealthSport.
100
PUBLIC RELATIONS: An integrated public relations program will be developed to
launch HealthSport across the country as well as internationally. Working with a
public relations agency, the customary elements will be created such as press
releases, targeted pitch strategies and materials to be sent to the public.
The public relations plan will be flexible and calculated, depending on the
opportunities that arise from the endorsements, situations associated with the
celebrities and the clinical experts. For instance, there will be opportunities
for the celebrities to introduce ENLYTEN directly or indirectly when doing
interviews or appearances on behalf of other businesses or events.
At the conferences or tradeshows, members of the Sports Advisory Council may
participate as presenters or attend the conferences. Local media market
opportunities will be utilized for on and off-site interviews and related
opportunities that will capitalize on the visibility of the conferences or
tradeshows.
Additional product placement opportunities will be sought on lifestyle and
sports television shows, both locally and nationally, to provide support to
marketing and sales related plans as determined by the corporate leadership of
Enlyten.
MANUFACTURING
InnoZen maintains a drug research and development facility and a manufacturing
plant in Woodland Hills, California that meets FDA and California certification
requirements. This manufacturing facility provides new business opportunities
through customized product production and pilot scale runs of film strip
products, and the ability to then deliver final product quickly and at
reasonable cost. Internal manufacturing enables quicker and more responsive
development of new and custom formulations and provides the ability to then
promptly fill orders for the new products. The net result is InnoZen's unique
ability to develop and deliver new film strip formulations and products to
market faster and more economically.
BESPOKE CUTTING AND PACKAGING: InnoZen's high-tech cutting and packaging
facility can be optimized to meet the specific requirements, and budgets, of
HealthSport's clients. Using high-tech labeling equipment, InnoZen offers a
range of labeling options, including a tamper resistant seal and full
wrap-around application in addition to the packaging used for the Suppress Cough
Strips. Technologically advanced blister card machinery enables InnoZen to offer
retail ready packaging, blister card single and multi-packs and flow wrap
individual products. InnoZen also offers a number of innovative packaging
solutions, including space saving packaging designs.
CAPACITY AND INVENTORY MANAGEMENT: With its own on-site manufacturing strip
facility, InnoZen is now in a position to manufacture all of the initial
requirements for the ENLYTEN(TM) SPORTSTRIPS, ENLYTEN(TM) ENERGY film sTRiPS and
ENLYTEN(TM) SURVIVAL STRIPS and both Suppress Cough Strip products for itself
and other third parTY distributors. InnoZen plans to build a second line to
accommodate the future product demand that is expected for the new products once
they are launched and from potential new manufacturing customers.
101
Using its own facility, InnoZen can use a just-in-time inventory policy to
manufacture only the minimum number of film strips necessary to meet retailers'
orders. This reduces the sales and production cycle by several months and
reduces cash requirements for inventory.
INTELLECTUAL PROPERTY
Patents and pending patent applications seek to protect new technologies
developed by HealthSport and InnoZen in formulating, developing and
manufacturing edible film strip products containing drug actives. Other
techniques are protected as trade secrets. These new core technologies include
novel methods of manufacturing film strip to create additional stability and to
increase the amount of drug actives that can be delivered in a single film
strip. InnoZen also seeks to protect the delivery of the specific drug active
ingredients in its edible film strips.
HealthSport and InnoZen have filed U.S. and foreign trademark and patent
applications to protect product lines and general technology; they rely on a
combination of intellectual property laws, nondisclosure agreements and other
measures to protect proprietary rights. Currently, HealthSport has two and
InnoZen has six United States patent applications pending; they expect to file
several more before the end of 2007. InnoZen has also filed patent applications
in several foreign countries. HealthSport and InnoZen also own various
trademarks, including ENLYTEN, SPORTSTRIPS, RESTORE, SURVIVAL STRIPS, InnoZen,
Suppress, and "Medicine in a Strip." Trademark registrations are available upon
request.
EMPLOYEES
At December 31, 2006 we had four full-time employees and at December 31, 2005,
we had one part-time employee and one full-time employee. During the first 45
days of 2007 we added three additional full-time employees to Enlyten's staff.
Our employees are not represented by a labor union. We have experienced no work
stoppage and believe that our employee relationships are good.
ITEM 2: DESCRIPTION OF PROPERTY
The corporate offices are currently maintained in the office of the Company's
accountant at no cost to the Company.
Enlyten has executed a three-year lease which commences on February 1, 2007 for
2,182 square feet of office space for its staff in Amherst, New York.
ITEM 3: LEGAL PROCEEDINGS
We are not currently subject to any legal proceedings, nor, to our knowledge, is
any legal proceeding threatened against us.
102
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Shareholders approved the 2006 Stock Option Plan during the fourth quarter of
2006.
PART II
ITEM 5: MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
Our $0.0001 par value per share common stock is traded in the over-the-counter
market and is quoted on the National Association of Securities Dealers ("NASD")
Over-The Counter Bulletin Board ("OTCBB") under the symbol "HSPO.OB." Previously
we were quoted on the OTCBB under the symbols "ISPO.OB," "TSPT.OB," "LGST," and
"RTTK."
The following table sets forth the quarterly high and low daily bids for our
common stock as reported by the OTCBB for the two years ended December 31, 2006.
The bids reflect inter-dealer prices without adjustments for retail mark-ups,
mark-downs or commissions and may not represent actual transactions.
High Low
---- ---
2006:
Fourth quarter $ 2.50 $ 1.50
Third quarter $ 1.50 $ .75
Second quarter $ 4.00 $ 1.05
First quarter $ 8.00 $ 1.60
2005:
Fourth quarter $ 14.00 $ 4.00
Third quarter $ 20.00 $ 6.00
Second quarter $ 32.00 $ 14.00
First quarter $ 58.00 $ 14.00
The OTCBB is a quotation service sponsored by the NASD that displays real-time
quotes and volume information in over-the-counter ("OTC") equity securities. The
OTCBB does not impose listing standards or requirements, does not provide
automatic trade executions and does not maintain relationships with quoted
issuers. A company traded on the OTCBB may face loss of market makers and lack
of readily available bid and ask prices for its stock and may experience a
greater spread between the bid and ask price of its stock and a general loss of
liquidity with its stock. In addition, certain investors have policies against
purchasing or holding OTC securities. Both trading volume and the market value
of our securities have been, and will continue to be, materially affected by the
trading on the OTCBB.
103
HOLDERS
At February 28, 2007, there were 514 holders of record of our common stock, an
undetermined number of which represent more than one individual participant in
securities positions with us.
DIVIDENDS
We have never paid cash dividends on our common stock and intend to utilize
current and future resources to implement our new plan of operations. Therefore,
it is not anticipated that cash dividends will be paid on our common stock in
the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes certain information as of December 31, 2006, with
respect to compensation plans (including individual compensation arrangements)
under which our common stock is authorized for issuance:
Number of securities to be
issued upon exercise of Weighted average exercise Number of securities
outstanding options, price of outstanding remaining available
Plan category warrants and rights options, warrants and rights for future issuance
------------- ------------------- ---------------------------- -------------------
Equity compensation plans approved
by security holders:
2000 Plan - $ - 15,000
2006 Plan 100,000 2.25 4,900,000
----------------------------- -------------------
100,000 $ - 4,915,000
============================= ===================
The Company has two Stock Option Plans; the Stock Option Plan dated in April
2000 and approved in April 2001 (the "2000 Plan") which authorizes the grant of
options to purchase an aggregate of 15,000 shares; and the Stock Option Plan
dated October 18, 2006 and approved in October 2006 (the "2006 Plan") which
authorizes the grant of options to purchase an aggregate of 5,000,000 shares.
(Collectively the "Plans")
The material features of the Plans, the data for which is summarized under the
equity compensation plans approved by security holders in the table above are
summarized in Note 8 to the consolidated financial statements that appear in
Item 7.
RECENT SALES OF UNREGISTERED SECURITIES
During the three months ended December 31, 2006, we issued:
o 925,000 shares of our common stock to acquire the remaining 20% of
Health Strip Solutions, LLC that we did not already own. The shares
were valued at $1,871,250;
o 375,000 shares of our common stock to acquire 100% of the issued and
outstanding common stock of Cooley Nutraceuticals, Inc., which was
valued at $806,250;
104
o 517,074 shares of our common stock in exchange for a convertible
debenture with a principal balance of $500,000 and accrued interest of
$17,074;
o 332,500 shares of our common stock as part of the compensation related
to four consulting agreements. The shares were valued at $710,000 and
the expense will be amortized over the terms of the agreements of one
to two years;
o 550,000 shares of our common stock were issued in exchange for cash in
the amount of $550,000; and
o 250,000 shares of our common stock were issued in exchange for a stock
subscription receivable in the amount of $250,000, which was collected
on January 8, 2007.
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: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
HealthSport is publicly traded on the bulletin board market under the ticker
symbol HSPO. HealthSport is focused exclusively on the development,
manufacturing and marketing of edible film strip technology. This technology
system provides rapid dissolution and release of active ingredients when the
strip comes in contact with saliva in the mouth.
On December 20, 2006, we signed a non-binding LOI to acquire InnoZen through a
merger with one of our wholly owned subsidiaries. A condition of the LOI
required us to fund a Bridge Loan for $250,000 (which was made on December 26,
2006) and the investment by us of $750,000 in working capital into InnoZen at
closing. We initiated a private placement on January 15, 2007, to sell up to
8,000,000 shares of our common stock at $1.50 per share.
On January 31, 2007, we entered into a Merger Agreement with InnoZen and InnoZen
Acquisition Sub, Inc. ("Acquisition Sub"), our 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 our 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 we 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.
105
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.
InnoZen is a 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 Sore Throat Relief Strips(R) 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 the film
strip, InnoZen moved forward with its proprietary technology to develop two new
thin film strip products for coughs. InnoZen launched its two new film strip
products under its own Suppress(R) brand in September 2004.
Using InnoZen's in-house research and development and manufacturing
capabilities, HealthSport has the ability to more rapidly formulate and develop
new thin film products and other products using various additional oral delivery
systems such as gels. As a result, HealthSport anticipates a steady stream of
new products to expand the Enlyten brand it is creating. The implementation of
HealthSport's innovative and creative sales and marketing models for each
product line will play an integral role in creating brand awareness through the
application of traditional and non-traditional sales techniques.
HealthSport and InnoZen have already jointly developed three new products that
are ready to be launched in 2007, including but not limited to ENLYTEN(TM)
SPORTSTRIPS, ENLYTEN(TM) ENERGY film strips and ENLYTEN(TM) SURVIVAL STRIPS.
We were 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 our 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 completed one development stage, which
had been included in discontinued operations, and commenced a new development
stage operation.
CURRENT ACTIVE OPERATIONS
ELECTROLYTE STRIP
-----------------
HEALTH STRIP - On March 29, 2006, we 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 our $.0001 par value common stock. Health
Strip in conjunction with InnoZen holds certain proprietary technology for the
formulation of a thin film 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 the fourth quarter.
106
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, we have filed a provisional patent in
the US Patent & Trademark office and have 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. We commenced amortization of our total patent costs in July 2006 over
seventeen years, the life of the expected patent. We will periodically evaluate
the unamortized balance of the patent and technology costs and record an
impairment loss if warranted.
During December 2006, we issued 925,000 shares of our common stock to acquire
the remaining 20% of Health Strip, which was valued at $1,871,250, based upon
the trading price of our 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, we issued 375,000 shares of our 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, we have 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. We recorded this transaction based upon the
trading price of our 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. We are in the process of filing a provisional
patent with the US Patent & Trademark office and will commence amortization of
the patent costs over seventeen years, the life of the expected patent, when the
application is filed.
RESEARCH AND DEVELOPMENT - On April 19, 2005, we entered into a joint
development agreement with 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 had the formula and the ability to assist in obtaining endorsements for the
electrolyte strips by well-known athletes and coaches. We contributed $115,500
in cash and 1,250 shares of our common stock, valued at $19,191 using the
Black-Scholes valuation model, for our 50% interest in the joint venture.
107
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 and orange. All joint venture funds were expended by
December 31, 2005.
The products are discussed under Business of the Company in Item 1.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2006, we had positive working capital of $909,788 as compared to
a working capital deficit of $4,900,145 at December 31, 2005. The working
capital improvement is primarily the result of converting convertible promissory
notes to common stock during 2006 ($5,523,355 including accrued interest); the
issuance of common stock for accounts payable and other liabilities of $447,299;
the issuance of common stock for cash in the amount of $550,000; and the
issuance of common stock for a stock subscription receivable which was collected
on January 8, 2007.
On December 20, 2006, we signed a non-binding LOI to acquire InnoZen through a
merger with one of our wholly owned subsidiaries. A condition of the LOI
required us to fund a Bridge Loan for $250,000 (which was made on December 26,
2006) and the investment by us of $750,000 in working capital into InnoZen at
closing. We initiated a private placement on January 15, 2007, to sell up to
8,000,000 shares of our common stock at $1.50 per share. A condition precedent
to our closing of the InnoZen acquisition is that we shall have raised and
closed on a minimum of $6 million in new cash equity through the sale of common
stock at an average price of not less than $1.50 per share.
On January 31, 2007, we entered into a Merger Agreement with InnoZen and InnoZen
Acquisition Sub, Inc. ("Acquisition Sub"), our 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 our 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 we 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.
108
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.
We anticipate reaching our first goal of raising a minimum of $6,000,000 by the
end of April 2007. These funds should be sufficient to fund our operations for
the remainder of 2007. This funding is expected to be applied as follows: fees
to third parties and expenses of closing - $500,000; new InnoZen production line
and capital expenditures - $1,500,000; InnoZen working capital - $750,000;
HealthSport marketing - $2,500,000; and HealthSport operational costs and
working capital - $750,000.
On January 15, 2007, we began a private placement offering to sell up to
8,000,000 shares of our common stock at a price of $1.50 per share. The offering
is scheduled to terminate on the earlier of April 15, 2007 or the date when the
sale of up to 8,000,000 shares has been completed. As of March 31, 2007, we have
sold 1,612,667 shares for total proceeds of $2,419,001.
RESULTS OF OPERATIONS
We had a loss from operations in 2006 of $1,438,047 as compared to $1,906,425
($28,960 from discontinued operations) in 2005. The principal decreases were
reductions in selling, general and administrative expense of $440,258; a
reduction of $309,511 in asset impairments and abandonments; and a reduction of
$134,691 in equity in joint venture loss. The principal increases were an
increase in non-cash compensation expense of $119,625 and an increase in the
beneficial conversion feature of a convertible debenture of $400,000.
The selling, general and administrative expenses are expected to increase
substantially in 2007 from the 2006 level with the marketing and roll-out of
several electrolyte strip products commencing in June 2007. While limited sales
are ongoing, the third quarter should be the first full quarter of operations.
DISCONTINUED OPERATIONS
We were in the development stage from 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 $0 and $28,960 during the years ended December 31, 2006 and 2005,
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.
109
NEW ACCOUNTING STANDARDS
There are several new accounting pronouncements issued by the Financial
Accounting Standards Board ("FASB") which are not yet effective. Each of these
pronouncements, as applicable, has been or will be adopted by the Company.
Management does not believe any of these accounting pronouncements has had or
will have a material impact on the Company's financial position or operating
results.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140", to
simplify and make more consistent the accounting for certain financial
instruments. SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", to permit fair value re-measurement for any
hybrid financial instrument with an embedded derivative that otherwise would
require bifurcation, provided that the whole instrument is accounted for on a
fair value basis. SFAS No. 155 amends SFAS No. 140, "Accounting for the
Impairment or Disposal of Long-Lived Assets", to allow a qualifying
special-purpose entity to hold a derivative financial instrument that pertains
to beneficial interest other than another derivative financial instrument. SFAS
No. 155 applies to all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006,
with earlier application allowed. This standard is not expected to have a
significant effect on our future reported financial position or results of
operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures". This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, expands disclosures about fair
value measurements, and applies under other accounting pronouncements that
require or permit fair value measurements. SFAS No. 157 does not require any new
fair value measurements. However, the FASB anticipates that for some entities,
the application of SFAS No. 157 will change current practice. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007, which for us would
be our fiscal year beginning January 1, 2008. We are currently evaluating the
impact of SFAS No. 157 but do not expect that it will have a material impact on
our financial statements.
CRITICAL ACCOUNTING POLICIES
The SEC issued Financial Reporting Release No. 60, "Cautionary Advice Regarding
Disclosure about Critical Accounting Policies" ("FRR 60"), suggesting companies
provide additional disclosure and commentary on their most critical accounting
policies. In FRR 60, the SEC defined the most critical accounting policies as
the ones that are most important to the portrayal of a company's financial
condition and operating results, and require management to make its most
difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition our
most critical accounting policies include the valuation of intangibles, which
affects their amortization and impairment calculations and stock-based
compensation. The methods, estimates and judgments we use in applying these most
critical accounting policies have a significant impact on the results we report
in our consolidated financial statements.
110
INTANGIBLE ASSET VALUATION - The determination of the fair value of certain
acquired assets and liabilities is subjective in nature and often involves the
use of significant estimates and assumptions. Determining the fair values and
useful lives of intangible assets requires the exercise of judgment. We may use
our common stock to acquire assets and may use the Black-Scholes valuation
method or another acceptable method to determine a valuation for the stock. The
Black-Scholes valuation method calculates a volatility factor for the stock
price and extrapolates a valuation using these criteria. This valuation method
has generally proven effective for companies with established markets for their
common stock; however, due to the lack of an established trading market for our
common stock, in the opinion of management, this may result in an unduly high
valuation for the stock.
STOCK-BASED COMPENSATION - We record the fair value of stock-based compensation
to outside consultants as an operating expense. Historically, we have not
recorded expenses relating to stock options granted to employees with an
exercise price greater than or equal to market price at the time of grant. We
have reported pro-forma net loss and loss per share in accordance with the
requirements of SFAS 123 and SFAS 148. This disclosure shows net loss and loss
per share as if we had accounted for our employee stock options under the fair
value method of those statements. Pro-forma information is calculated using the
Black-Scholes pricing method on the date of grant. This option valuation model
requires input of highly subjective assumptions. Because our employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing model may
not necessarily provide a reliable single measure of fair value of our employee
stock options. We did not have any stock-based compensation during 2005;
however, we did have stock-based compensation in 2006 and expect to have
stock-based compensation in the future.
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 us to change the classification of certain tax benefits from option
deductions to financing rather than operating cash flows.
OTHER - The Company expects revenue recognition and other financial estimates to
become critical accounting policies as business develops in the future.
OFF-BALANCE SHEET ARRANGEMENTS
The Company's only off-balance sheet arrangement is for its office lease in
Amherst, New York. The operating lease is for a three-year term beginning on
February 1, 2007, covers 2,182 square feet at an annual cost of $28,366 in year
one, $28,912 in year two and $29,457 in year three.
111
ITEM 7: FINANCIAL STATEMENTS
The Consolidated Financial Statements of HealthSport, Inc. and Subsidiaries
together with the report thereon of Creason & Associates, P.L.L.C. for the years
ended December 31, 2006 and 2005, is set forth as follows:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm 113
Consolidated Balance Sheet 114
Consolidated Statements of Operations 115
Consolidated Statements of Stockholders' Equity (Deficit) 116
Consolidated Statements of Cash Flows 117
Notes to Consolidated Financial Statements 119
112
CREASON & ASSOCIATES, P.L.L.C.
7170 S. Braden Ave., Suite 100
Tulsa, OK 74136-6333
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors and Stockholders
HealthSport, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of HealthSport, Inc.
and Subsidiaries as of December 31, 2006, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended December 31, 2006 and 2005. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HealthSport, Inc.
and Subsidiaries at December 31, 2006, and the results of their operations and
their cash flows for the years ended December 31, 2006 and 2005, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Creason & Associates, P.L.L.C.
Tulsa, Oklahoma
April 12, 2007
113
HEALTHSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2006
ASSETS
Current assets:
Cash and cash equivalents $ 318,144
Accounts receivable - other 3,750
Stock subscription receivable 250,000
Inventory 145,742
Note receivable 250,000
------------
Total current assets 967,636
------------
Patent costs, net 1,898,506
Goodwill, net 1,785,998
------------
Total assets $ 4,652,140
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 47,189
Accrued expenses 10,659
------------
Total liabilities 57,848
------------
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; 19,331,945 shares issued and outstanding 1,933
Additional paid-in capital 29,452,595
Common stock warrants 1,200
Deferred expenses (1,151,711)
Accumulated deficit (23,709,725)
------------
Total stockholders' equity 4,594,292
------------
Total liabilities and stockholders' equity $ 4,652,140
============
See accompanying notes to consolidated financial statements.
114
HEALTHSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
------------ ------------
REVENUE $ 1,137 $ -
COST OF SALES 548 -
------------ ------------
GROSS PROFIT 589 -
------------ ------------
COSTS AND EXPENSES:
Selling, general and administrative expenses 590,603 1,030,861
Non-cash compensation 119,625 -
Asset impairments and abandonments 1,491 311,002
Equity in joint venture loss - 134,691
------------ ------------
TOTAL COSTS AND EXPENSES 711,719 1,476,554
------------ ------------
LOSS FROM CONTINUING OPERATIONS (711,130) (1,476,554)
OTHER (INCOME) EXPENSE:
Interest expense 424,802 400,911
Beneficial conversion feature of convertible debenture 400,000 -
Interest income (8,137) -
------------ ------------
Other expense, net 816,665 400,911
------------ ------------
NET LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (1,527,795) (1,877,465)
------------ ------------
MINORITY INTEREST 89,748 -
------------ ------------
LOSS FROM CONTINUING OPERATIONS (1,438,047) (1,877,465)
------------ ------------
DISCONTINUED OPERATIONS
Loss from discontinued operations - (28,960)
Income tax benefit - -
------------ ------------
LOSS FROM DISCONTINUED OPERATIONS - (28,960)
------------ ------------
NET LOSS $ (1,438,047) $ (1,906,425)
============ ============
NET LOSS PER SHARE, BASIC AND DILUTED
Continuing operations $ (0.29) $ (3.20)
Discontinued operations - (0.05)
------------ ------------
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.29) $ (3.25)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 4,989,225 585,945
============ ============
See accompanying notes to consolidated financial statements.
115
HEALTHSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2006 AND 2005
Common Stock Additional Common
--------------------------- Paid-in Stock Deferred Accumulated
Shares Par Value Capital Warrants Expenses Deficit
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 423,455 42 16,102,954 66,658 - (20,020,637)
Issuance of common stock for:
Convertible notes payable 180,333 18 617,435 - - -
Acquisition of joint venture investment 1,250 - 19,191 - - -
Acquisition of World Championship
Poker 19,250 2 295,542 - - -
Cash proceeds 15,000 2 134,998 - - -
Services 18,000 2 186,180 - - -
Cancellation of warrants - - 65,458 (65,458) - -
Net loss - - - - (28,960)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 657,288 66 17,421,758 1,200 - (20,049,597)
------------ ------------ ------------ ------------ ------------ ------------
Common stock issued for:
Acquisition of Health Strip Solutions 1,425,000 143 2,771,107 - - -
Acquisition of Cooley Nutraceuticals 375,000 37 806,213 - - -
Settlement and sale of Idea Mgmt 65,000 6 295,834 - - -
Convertible debentures 14,879,574 1,488 5,521,867 - - -
Accounts payable 741,000 74 151,385 - - -
Services 389,083 39 781,675 - (768,500) -
Cash proceeds 550,000 55 549,945 - - -
Stock subscription 250,000 25 249,975 - - -
Beneficial conversion feature of
Convertible note payable - - 400,000 - - -
Common stock options - - 502,836 - (502,836) -
Amortize deferred expense - - - - 119,625 -
Loss incurred during development stage - - - - - (2,222,081)
Net loss - - - - - (1,438,047)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2006 19,331,945 $ 1,933 $ 29,452,595 $ 1,200 $ (1,151,711) $(23,709,725)
============ ============ ============ ============ ============ ============
Deficit
Accumulated
During the
Development
Stage Total
------------ ------------
Balance at December 31, 2004 (344,616) (4,195,599)
Issuance of common stock for:
Convertible notes payable - 617,453
Acquisition of joint venture investment - 19,191
Acquisition of World Championship
Poker - 295,544
Cash proceeds - 135,000
Services - 186,182
Cancellation of warrants - -
Net loss (1,877,465) (1,906,425)
------------ ------------
Balance at December 31, 2005 (2,222,081) (4,848,654)
------------ ------------
Common stock issued for:
Acquisition of Health Strip Solutions - 2,771,250
Acquisition of Cooley Nutraceuticals - 806,250
Settlement and sale of Idea Mgmt - 295,840
Convertible debentures - 5,523,355
Accounts payable - 151,459
Services - 13,214
Cash proceeds - 550,000
Stock subscription - 250,000
Beneficial conversion feature of
Convertible note payable - 400,000
Common stock options - -
Amortize deferred expense - 119,625
Loss incurred during development stage 2,222,081 -
Net loss - (1,438,047)
------------ ------------
Balance at December 31, 2006 $ - $ 4,594,292
============ ============
See accompanying notes to consolidated financial statements.
116
HEALTHSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,438,047) $ (1,906,425)
Loss from discontinued operations - (28,960)
------------ ------------
Loss from continuing operations (1,438,047) (1,877,465)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation 16,605 372
Asset impairments 1,491 311,002
Equity in joint venture loss - 134,691
Common stock issued for services 13,214 186,182
Amortize deferred stock compensation 119,625 -
Beneficial conversion feature of convertible promissory note 400,000 -
Minority interest (89,748) -
Change in assets and liabilities:
Inventory (145,742) -
Prepaid expenses 12,389 -
Accounts payable 193,039 (24,419)
Advances from related parties - 341,250
Accrued expenses 433,970 433,690
------------ ------------
Net cash from continuing operations (483,204) (494,697)
------------ ------------
Net cash used in discontinued operations - (163,002)
------------ ------------
Net cash used in operations (483,204) (657,699)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan to InnoZen, Inc. (250,000) -
Investment in joint venture - (115,500)
------------ ------------
Net cash used in investing activities (250,000) (115,500)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds 500,000 644,356
Loan repayment - (7,500)
Sale of common stock 550,000 135,000
------------ ------------
Net cash provided by financing activities 1,050,000 771,856
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 316,796 (1,343)
CASH AND CASH EQUIVALENTS, beginning of year 1,348 2,691
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 318,144 $ 1,348
============ ============
See accompanying notes to consolidated financial statements.
117
HEALTHSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
----------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ - $ 270
Income taxes - -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for:
Investment in Health Strip Solutions, LLC $ 2,771,250 $ -
Investment in Cooley Nutraceuticals, Inc. 806,250 -
Investment in World Championship Poker - 295,544
Investment in joint venture - 19,191
Convertible notes and accrued interest 5,523,355 569,516
Accounts payable 151,459 47,937
Accounts payable and Idea Management Group, Inc. 295,840 -
Value of common stock options granted 502,836 -
Cancellation of common stock warrants - 65,458
Issuance of convertible notes for accrued interest - 590,279
Issuance of convertible notes for accounts payable
and accrued expenses - 503,800
See accompanying notes to consolidated financial statements.
118
HEALTHSPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The 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"), World Championship Poker, Inc.
("Poker"), Strategic Gaming Consultants, LLC ("Gaming") and Maxx
Motorsports, Inc. ("Maxx") and Maxx's wholly owned subsidiary, Team Racing
Auto Circuit, LLC ("TRAC"), collectively referred to as "the Company" or
"the Companies". All significant inter-company balances and transactions
have been eliminated in consolidation. Development of the Company's film
strip product containing electrolytes represents the principal continuing
operations of the Company.
On April 24, 2006, the Company filed a Definitive Information Statement
pursuant to Section 14C which provided that effective May 15, 2006; 1) the
Company's name 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 Company's shares were
reverse-split one for 200 and the Company's Certificate of Incorporation
was restated to reflect these amendments. The change in outstanding shares
and all references to shares have been retroactively restated for all
periods included in this financial statement.
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.
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.
119
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.
ORGANIZATION
HealthSport was originally incorporated on July 25, 1985 in Delaware, and
currently has the following wholly owned subsidiaries:
o Enlyten, a Nevada corporation organized on November 28, 2006;
o Health Strip, a Nevada limited liability corporation organized on
February 13, 2006; acquired 80% on March 29, 2006, 10% on
December 21, 2006 and the remaining 10% on December 27, 2006;
o Nutraceuticals, a Nevada corporation organized on November 17,
2006; acquired on December 6, 2006;
o Maxx, a Delaware corporation acquired on May 15, 2001 and
currently inactive;
o Poker, a Nevada corporation acquired on June 28, 2005 and
currently inactive; and
o Gaming, a Nevada limited liability corporation organized on
November 8, 2004, and never activated.
NATURE OF BUSINESS
HealthSport is a holding company with six wholly owned subsidiaries.
Enlyten was formed to market and sell the Companies edible file 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.
120
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 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 June 28, 2005, the Company acquired Poker. The Company initiated sales
of a proprietary fantasy football format during September 2005 and believed
it had completed the development stage on that date. However, as a result
of the late start in marketing the program, the Company returned all fees
collected and cancelled the season. The Company re-instituted the
development stage for its businesses from the original inception date of
September 9, 2004. While the Company may elect to operate the fantasy
football program for the 2007 or later season, the principal focus of the
Company will be on development of the electrolyte strip. The Company
impaired the goodwill associated with Poker to the $50,000 amount which was
determined to be the fair value of the investment at December 31, 2005.
The Company acquired two television programs during 2004. As of December
31, 2005, the Company was unable to locate a venue to produce the shows.
Accordingly, the Company fully impaired its investment.
Gaming was assigned no value when acquired and is currently inactive.
Idea Management Group, Inc. ("IMGI") was a concept development company that
internally created projects in the fields of professional sports, motion
pictures, publishing, licensed merchandise and other entertainment products
for distribution into the global marketplace. IMGI was sold to a former CEO
during 2006.
Maxx, a South Carolina corporation, through its wholly owned subsidiary,
TRAC, planned to develop, own, operate, and sanction an automotive racing
league designed to provide content for television and tracks while
expanding the existing base of racing fans. This operation was discontinued
on August 26, 2003.
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.
CASH AND CASH EQUIVALENTS
The Company considers all cash on hand, cash in banks and all highly liquid
debt instruments purchased with a maturity of three months or less to be
cash and cash equivalents.
121
REVENUE RECOGNITION
Revenue from product sales is recognized when the related goods are shipped
and all significant obligations have been satisfied. Revenue from services
is recognized when the services are performed.
INVENTORY
Inventory consists of finished electrolyte strip products, manufactured and
warehoused by InnoZen, and is stated at the lower of average cost or
market.
CONCENTRATION OF CREDIT RISK
Cash is maintained at financial institutions. The Federal Deposit Insurance
Corporation ("FDIC") insures accounts at each institution for up to
$100,000. At times, cash balances may exceed the FDIC insurance limit of
$100,000.
STOCK OPTION PLANS
Until December 31, 2005, the Company accounted for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and complied with the disclosure provisions of SFAS No.123,
"Accounting for Stock-Based Compensation." Under APB No. 25, employee
compensation cost was recognized over the vesting period based on the
excess, if any, on the date of grant of the fair value of the Company's
shares over the employee's exercise price. When the exercise price of the
employee share options was less than the fair value price of the underlying
shares on the grant date, deferred stock compensation was recognized and
amortized to expense in accordance with Financial Accounting Standards
Board ("FASB") Interpretation No. 44 over the vesting period of the
individual options. Accordingly, if the exercise price of the Company's
employee options equaled or exceeded the market price of the underlying
shares on the date of grant, no compensation expense was recognized.
Options or shares awards issued to non-employees are valued using the fair
value method and expensed over the period services are provided.
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment," which
requires that the compensation cost relating to share-based payment
transactions (including the cost of all employee stock options) be
recognized in the financial statements. That cost will be measured based on
the estimated fair value of the equity or liability instruments issued.
SFAS 123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards,
share appreciation rights, and employee share purchase plans. SFAS 123(R)
replaces SFAS 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
As originally issued, SFAS 123 established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, that pronouncement permitted entities to continue applying the
intrinsic-value model of APB Opinion 25, provided that the financial
statements disclosed the pro forma net income or loss based on the
preferable fair-value method. This statement is effective as of the first
reporting period that begins after December 15, 2005. Accordingly, the
Company adopted SFAS 123(R) in the 1st quarter of 2006. Thus, the Company's
financial statements will reflect an expense for (a) all share-based
compensation arrangements granted on or after January 1, 2006 and for any
such arrangements that are modified, cancelled, or repurchased after that
date, and (b) the portion of previous share-based awards for which the
requisite service has not been rendered as of that date, based on the
grant-date estimated fair value. The Company had no unvested options
outstanding on January 1, 2006, and the option and stock awards granted
during 2006 have been included in the financial statements as required by
SFAS 123(R).
122
There were no option grants to employees during the year ended December 31,
2005 and pro forma disclosure is not required. Options granted in 2006 are
included in operations.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because HealthSport's options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion the existing models may
not necessarily provide a reliable single measure of the fair value of
HealthSport's options.
DEFERRED INCOME TAXES
Deferred income taxes are provided for temporary differences between
financial and tax reporting in accordance with the liability method under
the provisions of SFAS No. 109, "Accounting for Income Taxes." A valuation
allowance is recorded to reduce the carrying amounts of deferred tax assets
unless management believes it is more likely than not that such assets will
be realized.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share are calculated under the provisions of
SFAS No. 128, "Earnings per Share" ("SFAS No. 128"), which established new
standards for computing and presenting earnings per share. SFAS No. 128
requires HealthSport to report both basic earnings per share, which is
based on the weighted-average number of common shares outstanding, and
diluted earnings per share, which is based on the weighted-average number
of common shares outstanding plus all potential dilutive shares
outstanding. At December 31, 2006 and 2005, all exercisable common stock
equivalents were antidilutive and are not included in the earnings (loss)
per share calculations. Accordingly, basic and diluted earnings per share
are the same for all periods presented.
ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
123
RECENT ACCOUNTING PRONOUNCEMENTS
There are several new accounting pronouncements issued by the Financial
Accounting Standards Board ("FASB") which are not yet effective. Each of
these pronouncements, as applicable, has been or will be adopted by the
Company. Management does not believe any of these accounting pronouncements
has had or will have a material impact on the Company's financial position
or operating results.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and
140", to simplify and make more consistent the accounting for certain
financial instruments. SFAS No. 155 amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", to permit fair value
re-measurement for any hybrid financial instrument with an embedded
derivative that otherwise would require bifurcation, provided that the
whole instrument is accounted for on a fair value basis. SFAS No. 155
amends SFAS No. 140, "Accounting for the Impairment or Disposal of
Long-Lived Assets", to allow a qualifying special-purpose entity to hold a
derivative financial instrument that pertains to beneficial interest other
than another derivative financial instrument. SFAS No. 155 applies to all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006, with earlier
application allowed. This standard is not expected to have a significant
effect on the Company's future reported financial position or results of
operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures".
This Statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, expands disclosures
about fair value measurements, and applies under other accounting
pronouncements that require or permit fair value measurements. SFAS No. 157
does not require any new fair value measurements. However, the FASB
anticipates that for some entities, the application of SFAS No. 157 will
change current practice. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007, which for us would be our fiscal year
beginning January 1, 2008. The Company is currently evaluating the impact
of SFAS No. 157 but does not expect that it will have a material impact on
its financial statements.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the respective assets (generally two to five years).
Maintenance and repairs are charged to operations when incurred.
Betterments and renewals are capitalized. When property and equipment are
sold or otherwise disposed of, the asset account and related accumulated
depreciation account are relieved, and any gain or loss is included in
operations.
124
FAIR VALUE DETERMINATION
Financial instruments consist of cash, marketable securities, accounts and
notes receivable, accounts payable, accrued expenses and short-term
borrowings. The carrying amount of these financial instruments approximates
fair value due to their short-term nature or the current rates at which the
Company could borrow funds with similar remaining maturities.
GOODWILL AND PATENT COSTS
The Company records goodwill and intangible assets arising from business
combinations in accordance with SFAS No. 141 "Business Combinations" ("SFAS
141") which requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS 141 also
specifies the criteria applicable to intangible assets acquired in a
purchase method business combination to be recognized and reported apart
from goodwill.
The Company accounts for goodwill and intangible assets in accordance with
SFAS 142. In accordance with SFAS 142, the Company no longer amortizes
goodwill. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested at
least annually for impairment. SFAS 142 also requires that intangible
assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and be reviewed
for impairment.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. HealthSport recorded
advertising costs of $26,721 and $32,282 for the years ended December 31,
2006 and 2005, respectively.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
NOTE 2: ACQUISITIONS
CURRENT ACTIVE OPERATIONS
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
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 the fourth
quarter.
125
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, Neutraceuticals 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 is in the process of filing a provisional patent with the US Patent &
Trademark office and will commence amortization of the patent costs over
seventeen years, the life of the expected patent, when the application is filed.
The Company will periodically evaluate the unamortized balance of the patent and
technology costs and record an impairment loss if warranted.
RESEARCH AND DEVELOPMENT - On April 19, 2005, the Company entered into a joint
development agreement with InnoZen to jointly develop the electrolyte strip.
InnoZen had experience in the formulation, development, manufacturing and sale
of edible thin strips containing drug active ingredients. The Company had the
formula and 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 1,250 shares of its common stock, valued at $19,191 using the
Black-Scholes valuation model, for its 50% interest in the joint venture.
126
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 and orange. All joint venture funds were expended by
December 31, 2005.
INACTIVE OPERATIONS
POKER
-----
On June 28, 2005, the Company issued 19,250 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"). Poker recorded thE investment of $295,544 as goodwill. While the
Company may still pursue the project for the 2007 season or later, its principal
focus is on the electrolyte strip products. The Company elected to impair its
investment in the goodwill associated with Poker to the $50,000 amount
determined to be the fair value of the investment at December 31, 2005. The
Company believes no additional impairment is required at December 31, 2006.
IMGI
----
On September 9, 2004, the Company acquired all of the issued and outstanding
common stock of IMGI in exchange for warrants to acquire 75,000 shares of its
common stock at an exercise price of $20 per share. IMGI is a South Carolina
corporation organized on July 28, 2004 and had no prior operations. This
transaction was valued at $1,200, which was the amount the sellers of IMGI paid
for IMGI's common stock.
Effective August 29, 2006, the Company issued 65,000 shares of its common stock
to a former CEO of the Company and transferred the stock of IMGI, including
liabilities of $295,840 to the former CEO. The liabilities included $291,913
which the former CEO claimed was due to him and affiliates for costs advanced in
the original formation of IMGI.
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 8,750 shares of its common stock at an exercise price of $20 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.
127
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 8,750 shares of common stock at $20 per share
were cancelled and the Company issued 18,000 shares of its common stock to the
seller of the programs. The 18,000 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 in exchange for warrants to acquire 3,750 shares of its
common stock at an exercise price of $20 per share. Gaming had no prior
operations and had no assets. Accordingly, the transaction was recorded with no
value. Gaming has never been activated.
NOTE 3: DISCONTINUED OPERATIONS
-----------------------
Maxx, a South Carolina corporation, through its wholly owned subsidiary, TRAC,
planned to develop, own, operate, and sanction an automotive racing league
designed to provide content for television and tracks while expanding the
existing base of racing fans.
The Company, which had 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.
The Company realized losses from its discontinued operations of $0 and $28,960
in 2006 and 2005, respectively. The loss in 2005 related to the legal costs
associated with settlement of litigation, net of related payables discharged in
the settlement.
NOTE 4: NOTE 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.
NOTE 5: 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.
128
The Company's intangible assets consist of the following at December 31, 2006:
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
-----------
1,937,716
Accumulated amortization (33,210)
-----------
Net patent costs $ 1,898,506
===========
The Company recorded goodwill impairment of $245,544 associated with its
investment in Poker in 2005.
NOTE 6: INCOME TAXES
------------
HealthSport has not recorded a deferred tax benefit or expense for the years
ended December 31, 2006 and 2005, as all net deferred tax assets have a full
valuation allowance.
Actual income tax benefit applicable to net loss before income taxes is
reconciled with the "normally expected" federal income tax as follows:
2006 2005
---------- ----------
"Normally expected" income tax benefit $ 488,900 $ 648,200
Increase (decrease) in taxes resulting from:
State income taxes net of federal income
tax benefit 47,500 62,900
Nondeductible meals and entertainment (200) (1,200)
Valuation allowance (536,200) (709,900)
---------- ----------
Actual income tax expense $ - $ -
========== ==========
The net deferred taxes at December 31, 2006, are comprised of the following:
Net operating loss carryforward $10,590,400
Start-up cost carryforward 827,600
-----------
11,418,000
Valuation allowance (11,418,000)
-----------
Net deferred tax asset $ -
===========
129
HealthSport has available unused net operating loss carryforwards and
capitalized start-up costs of $30,611,000 which will expire in various periods
from 2007 to 2026, some of which may be limited as to the amount available on an
annual basis.
NOTE 7: CONVERTIBLE PROMISSORY NOTES
----------------------------
Activity in convertible promissory notes for the year ended December 31, 2006 is
as follows:
Accrued
Principal Interest
Balance, January 1, 2006 $ 4,530,309 $ 68,244
Loan proceeds 500,000 -
Accrued interest - 424,802
Converted to common stock (5,030,309) (493,046)
----------- -----------
Balance, December 31, 2006 $ - $ -
=========== ===========
In June 2006, the Company issued a 12%, one-year convertible promissory note
payable for $500,000 and received advances on this loan in the amount of
$448,600 in June 2006 and $51,400 in October 2006. The note is convertible into
restricted common shares at the rate of $1.00 per share. Management has
determined that this note qualifies as conventional convertible debt pursuant to
APB No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants" and EITF 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios" and
accordingly the embedded conversion option is not a derivative. The Company
computed a beneficial conversion value of $400,000 based on the quoted stock
price on the grant date of $1.80 per share. The $400,000 was credited to
additional paid-in capital and charged to interest expense when the agreement
was funded since the convertible promissory note could be converted upon
issuance.
At the end of September 2006, the Company issued 14,362,500 shares of its common
stock for convertible promissory notes in the principal amount of $4,530,309
plus accrued interest of $475,972. These convertible promissory notes included a
provision which reduced the conversion price per share to the lowest price the
Company received from the sale of its common stock while the notes were
outstanding. Prior to the notes being converted to common stock, the Company
sold common stock at a price below the price at which all of these notes were
converted. Accordingly, SFAS No. 84 "Induced Conversions of Convertible Debt,"
does not apply to the conversion of these notes. At the end of December 2006,
the Company issued 517,074 shares of its common stock for the remaining
convertible debenture of $500,000 principal and accrued interest of $17,074.
130
NOTE 8: COMMON STOCK OPTIONS AND WARRANTS
---------------------------------
In April 2000, HealthSport adopted its 2000 Stock Option Plan (the "2000 Plan")
and the Company's Board of Directors approved the same. HealthSport shareholders
approved the 2000 Plan in April 2001. The 2000 Plan was established to advance
the interests of HealthSport and its stockholders by attracting, retaining and
motivating key personnel. The Board of Directors, or a committee that it
appoints, is authorized to grant options to purchase the common stock of
HealthSport, not to exceed an aggregate of 15,000 shares. The Board of
Directors, or a committee that it appoints, is also authorized to establish the
exercise price and vesting terms of individual grants under the 2000 Plan. In
2001, the Board of Directors approved a proposal to increase the number of
authorized shares available under the 2000 Plan not to exceed an aggregate of
37,500 shares. In April 2003, the Board of Directors approved a proposal to
increase the number of shares available under the 2000 Plan to 76,000 shares and
in January 2005, the Board of Directors approved a proposal to increase the
number of shares available under the 2000 Plan to 115,000. None of these
proposals were approved by the shareholders. The 2000 Plan terminates in April
2010.
On October 18, 2006, HealthSport adopted its 2006 Stock Option Plan (the "2006
Plan") and the Company's Board of Directors and shareholders approved the 2006
Plan. The 2006 Plan was established to advance the interests of HealthSport and
its stockholders by attracting, retaining and motivating key personnel. The
Board of Directors, or a committee that it appoints, is authorized to grant
options to purchase the common stock of HealthSport, not to exceed an aggregate
of 5,000,000 shares. The Board of Directors, or a committee that it appoints, is
also authorized to establish the exercise price and vesting terms of individual
grants under the 2006 Plan. The 2006 Plan terminates on October 18, 2011.
Options granted under the 2000 Plan or the 2006 Plan (collectively the "Plans")
may be either "incentive stock options" intended to qualify as such under the
Internal Revenue Code, or "non-qualified stock options." HealthSport expects
that most options granted pursuant to the Plans will be subject to vesting over
a three or four-year period, such as 25% increments on each annual grant date
anniversary, during which the optionee must continue to be an employee of
HealthSport. The Board or the committee, if applicable, may choose to impose
different vesting requirements or none at all. Options outstanding under the
Plans have a maximum term of up to ten years.
The Plans also provide that all options that are not vested will become vested
upon a change in control, unless the options are either assumed or substituted
with equivalent options. In addition, unvested options become vested, after a
change in control, if an optionee is subject to involuntary termination other
than for cause during that optionee's remaining vesting period after a change in
control. The Plan further provides that all options will be forfeited 30 days
after employment terminates or six months in the case of death or disability.
A summary of stock option activity under the Plans during the years ended
December 31, 2006 and 2005 is as follows.
131
2006 2005
------------------------------- -------------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
------ ----- ------ -----
Outstanding, beginning of year 7,500 $ 200.00 7,500 $ 200.00
Granted 100,000 2.25 - -
Exercised - - - -
Forfeited/expired (7,500) 200.00 - -
-------------- --------------
Outstanding, end of year 100,000 $ 2.25 7,500 $ 200.00
============== ==============
Options exercisable at year end 100,000 $ 2.25 7,500 $ 200.00
Shares available for grant 4,915,000 7,500
In addition, as of December 31, 2006, fully-vested options to acquire 325,000
shares of the Company's common stock were outstanding at an average exercise
price of $1.86. These options were granted to consultants and are not issued
pursuant to the Plans.
At December 31, 2006, there are warrants outstanding to acquire 78,750 shares of
HealthSport's common stock for $20 per share, all of which expire during 2007.
On September 9, 2004, the Company issued 75,000 warrants to acquire its common
stock at $20, which expire on August 31, 2007, to acquire IMGI.
On October 15, 2004, the Company issued 8,750 warrants to acquire its common
stock at $20, which were to expire on November 15, 2007, to acquire two
television programs. These warrants were cancelled as a part of a share issuance
for compensation during 2005.
On November 15, 2004, the Company issued 3,750 warrants to acquire its common
stock at $20, which expire on November 15, 2007, to acquire Gaming.
On January 20, 2005, the Company issued 25,000 warrants to acquire its common
stock at $20 per share, which were to expire on January 20, 2008, for services.
This agreement was rescinded and the warrant was cancelled.
As a part of its issue of 144,885 shares of its common stock on May 15, 2001 for
$7,244,250 in cash, HealthSport also issued warrants to purchase 72,443 shares
of its common stock at a purchase price of $200 per share. These warrants have
all expired.
132
Data concerning stock options at December 31, 2006 follows:
Options Outstanding
--------------------------
Weighted-
Average Number
Number Remaining of
of Contractual Options
Exercise Price Options Life (years) Exercisable
-------------- ------- ------------ -----------
$ 1.10 100,000 2.75 100,000
2.20 225,000 2.65 225,000
2.25 100,000 2.83 100,000
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 year ended December 31, 2006:
Expected term 2-3 years
Expected volatility 146.12%
Expected dividend yield 0%
Risk-free interest rate 4.75%
Expected annual forfeiture rate 0%
NOTE 9: STOCKHOLDERS' EQUITY
--------------------
PREFERRED STOCK--The Company is authorized to issue up to 2,000,000 shares of
Series A non-voting, cumulative preferred stock with a par value of $2.75. At
December 31, 2006, no preferred stock was issued or outstanding.
A 6% cumulative dividend would be payable quarterly to stockholders of record on
the last day of the month prior to the dividend date. The Series A preferred
stock has a liquidation preference over HealthSport's common stock as well as
any other classes of stock established by HealthSport.
COMMON STOCK - The Company is authorized to issue up to 500,000,000 shares of
common stock with a par value of $.0001. At December 31, 2006, 19,331,945 shares
were issued and outstanding.
REVERSE-SPLIT OF COMMON STOCK - Effective May 15, 2006, pursuant to shareholder
approval the Company's shares were reverse-split one share for each 200 shares
outstanding.
DEFERRED EXPENSES - Deferred expenses include the computed fair value of the
compensation element of options and stock grants for consultants and directors.
These deferred expenses are being amortized over the appropriate period.
133
COMMON STOCK TRANSACTIONS - 2006
--------------------------------
o 1,425,000 shares of common stock were issued to acquire 100% of Health
Strip which was valued at $2,771,250;
o 375,000 shares of common stock were issued to acquire Nutraceuticals
which was valued at $806,250;
o 65,000 shares of common stock were issued to a former CEO and director
to settle a claim for reimbursement of $291,913 in costs which were
claimed to have been advanced in the formation of IMGI, in addition,
IMGI was also transferred to the former CEO with a total valuation of
$295,840;
o 14,879,574 shares of common stock issued for convertible notes payable
and accrued interest of $5,523,355;
o 741,000 shares of common stock issued for accounts payable of
$151,459;
o 389,083 shares of common stock issued for $13,214 in current services
and $768,500 in services to be performed over the next two years;
o 550,000 shares of common stock issued for $550,000 in cash; and
o 250,000 shares of common stock issued for a stock subscription
receivable in the amount of $250,000, which was collected on January
8, 2007.
COMMON STOCK TRANSACTIONS - 2005
--------------------------------
o 180,333 shares of common stock issued for convertible notes payable
and accrued interest of $617,453;
o 1,250 shares of common stock issued for a portion of the acquisition
of a joint venture investment which was valued at $19,191;
o 19,250 shares of common stock issued to acquire Poker which was valued
at $295,544;
o 15,000 shares of common stock issued for cash in the amount of
$135,000; and
o 18,000 shares of common stock issued for services in the amount of
$186,182.
NOTE 10: RELATED PARTY TRANSACTIONS
--------------------------
2006 TRANSACTIONS
-----------------
Effective August 20, 2006, the Company issued 65,000 shares of its common stock
to a former CEO of the Company and transferred the stock of IMGI, including
liabilities of $295,840 to the former CEO. The liabilities included $291,913
which the former CEO claimed was due to him and affiliates for costs advanced in
the original formation of IMGI.
During the year ended December 31, 2006, the Company had three different
part-time CEOs. In aggregate they were paid $16,000 during the year.
134
2005 TRANSACTIONS
-----------------
In September 2005, the courts approved the settlement of the litigation with the
Company's former CEO, William G. Miller. As a result of this settlement, the
Company recognized a loss from discontinued operations in 2005 of $28,960, which
is net of $247,055 in accrued amounts previously due related parties which were
forgiven.
The Company's CEO until June 30, 2005, received compensation of $45,000 during
2005. In addition, during 2005, Godley Morris Group LLC ("GMG"), a company 50%
owned and managed by this former CEO, received rent of $9,000 and $291,913 was
recorded in amounts due related parties at December 31, 2005, for additional
reimbursements claimed by GMG.
NOTE 11: COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company had agreements in place for racing car design and construction, team
sales brokerage and broadcasting which were not formally terminated when the
Company discontinued these operations. The Company does not expect any
additional liability from these agreements.
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 2,182
square feet of office space in Amherst, New York for the Enlyten office. Minimum
lease payments are 2007 - $26,002; 2008 - $28,866; 2009 - $29,411; and 2010 -
$2,455.
The Company has the following royalty agreements:
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.
135
NOTE 12: SUBSEQUENT EVENTS
-----------------
PRIVATE PLACEMENT
-----------------
On January 15, 2007, the Company began a private placement offering to sell up
to 8,000,000 shares of its common stock at a price of $1.50 per share. The
offering is scheduled to terminate on the earlier of April 15, 2007 or the date
when the sale of up to 8,000,000 shares has been completed. As of March 31,
2007, the Company has sold 1,612,667 shares for total proceeds of $2,419,001.
INNOZEN, INC.
-------------
On January 31, 2007, HealthSport 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 we 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.
136
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures 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
and principal financial officer, the Company has evaluated the effectiveness of
the design and operation of its disclosure controls and procedures as of
December 31, 2006, and, based on its evaluation, our principal executive officer
and our 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.
ITEM 8B: OTHER INFORMATION
Pursuant to General Instruction B of Form 8-K, any reports previously or in the
future submitted under Item 2.02 (Results of Operations and Financial Condition)
are not deemed to be "filed" for the purpose of Section 18 of the Securities
Exchange Act of 1934 and the Company is not subject to the liabilities of that
section, unless the Company specifically states that the information is to be
considered "filed" under the Exchange Act or incorporates it by reference into a
filing under the Securities Act or Exchange Act. If a report on Form 8-K
contains disclosures under Item 2.02, whether or not the report contains
disclosures regarding other items, all exhibits to such report relating to Item
2.02 will be deemed furnished, and not filed, unless the registrant specifies,
under Item 9.01 (Financial Statements and Exhibits), which exhibits, or portions
of exhibits, are intended to be deemed filed rather than furnished pursuant to
this instruction. The Company is not incorporating, and will not incorporate, by
reference these reports into a filing under the Securities Act of 1933, as
amended, or the Exchange Act of 1934, as amended.
137
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
The following section sets forth the names, ages and current positions with the
Company held by the Directors, Executive Officers and Significant Employees;
together with the year such positions were assumed. There is no immediate family
relationship between or among any of the Directors, Executive Officers or
Significant Employees, and we are not aware of any arrangement or understanding
between any Director or Executive Officer and any other person pursuant to which
he was elected to his current position. Each Executive Officer will serve until
he or she resigns or is removed or otherwise disqualified to serve, or until his
or her successor is elected and qualified. We currently have three Directors.
NAME AGE POSITION AND TERM
---- --- -----------------
Daniel J. Kelly 45 CEO and President starting January 1, 2007
Ross E. Silvey 78 Director since March 25, 2006; CEO and President
from September 11, 2006 to January 1, 2007;
Acting CFO since September 11, 2006
Terry Washburn 54 Director from May 15, 2001 to September 11, 2006;
CEO and President from March 30, 2006 to
September 11, 2006
Charles W. Clark 58 CEO and President from July 1, 2005 until
March 30, 2006
Jason Freeman 32 Director since March 25, 2006
Hank Durschlag 43 Director since September 11, 2006
DANIEL J. KELLY - Became CEO and President on January 1, 2007. Mr. Kelly began
his business career approximately 20 years ago managing and advising Jim Kelly,
his brother and Pro Football Hall of Fame Quarterback. Mr. Kelly also owns and
serves as the President of Jim Kelly Enterprises, Inc., a company started over
15 years ago. In 1988 Mr. Kelly negotiated the most lucrative player contract in
NFL history (at that time) for Jim. Mr. Kelly has 20 years experience in
marketing, promotions and celebrity endorsements and continues to work with such
companies as Coors, Miller Lite, LA Weightloss and Ameriquest. Mr. Kelly
received his bachelor's degree from the University of Houston and was a
prominent member of the NFL Quarterback Club, serving on the Sponsorship and
Marketing Committees that negotiated comprehensive, multi-year deals with major
US companies such as McDonalds, VISA, Footlocker and MBNA Bank. He is the vice
chairman of the Kelly for Kids Foundation.
138
ROSS E. SILVEY - was appointed as an outside Director of the Company on March
25, 2006. Upon the resignation of Dr. Washburn on September 11, 2006, Dr. Silvey
assumed the additional roles of President and CEO on an interim basis until
January 1, 2007, when Mr. Kelly assumed those duties. In addition, Dr. Silvey
assumed the role of acting CFO on September 11, 2006, and continues to hold that
position. Dr. Silvey has owned and operated franchised automobile businesses,
finance companies and insurance companies for over thirty years. Dr. Silvey has
taught as an adjunct or full-time professor most of the courses in the upper
division and MBA programs at the University of Tulsa, Oral Roberts University,
Langston University and Southern Nazarene University. His formal education is an
MBA from the Harvard Business School. He has also been awarded the Ph.D. degree
from the Walden Institute of Advance Studies. Dr. Silvey serves as a Director
for Global Beverage Solutions, Inc. Additionally, Dr. Silvey was Chairman of our
Audit Committee until he became interim President and CEO on September 11, 2006.
TERRY WASHBURN - Director from May 2001 until September 11, 2006; Chief
Executive Officer from April 2001 to August 2001 and from March 30, 2006 until
September 11, 2006. Dr. Washburn is the President of Eurovest, Inc., a private
venture capital firm, which specializes in private placement of capital as well
as providing consulting services in strategic planning, business development and
organizational management. Dr. Washburn earned a Bachelor of Business
Administration from the University of Oklahoma, a Master of Divinity from the
Southwestern Baptist Theological Seminary in Ft. Worth, Texas and a Doctor of
Ministry from the Fuller Theological Seminary in Pasadena, California.
CHARLES W. CLARK - was appointed Chief Executive Officer of the Company
effective July 1, 2005, and resigned on March 30, 2006. Mr. Clark owns and
manages Exit 98 Properties whose holdings include several lodging facilities,
Santee National Golf Club, and various other real estate properties. Mr. Clark
created and operates Golf Santee, LLC, which in ten years became the largest
golf packager in South Carolina outside the Myrtle Beach area. Mr. Clark is a
director of South Carolina Bank and Trust, the third largest bank in South
Carolina.
JASON FREEMAN - was appointed as an outside Director of the Company on March 25,
2006. Mr. Freeman is the owner and president of Routh Stock Transfer, Inc. Mr.
Freeman has been instrumental in assisting with investor relations development,
business plan/marketing plan development, and strategic business planning for
private and public companies. He also has 7 years experience with marketing and
management in the retail industry. Mr. Freeman has also consulted with various
companies, both public and private, on ways to be more efficient in their use of
capital and manpower, assisting management and sales staff in mapping out plans
and strategies for companies to reach specific goals and thresholds. Mr. Freeman
graduated from Texas A&M University at Commerce in 1998 and is president and a
director of Sagauro Holdings, Inc. and a director of Interim Capital
Corporation.
139
HANK DURSCHLAG - was appointed a Director of the Company on September 11, 2006.
Mr. Durschlag is the co-developer of the Enlyten electrolyte sports strips and
co-authored the patent, "Edible Film for Transmucosal Delivery of Nutritional
Supplements". Mr. Durschlag has extensive experience in the fields of healthcare
and sports medicine, with specific emphasis on novel drug delivery systems. In
addition, Mr. Durschlag is a partner in Greenville, South Carolina based
GlucoTec, Inc., a developer and manufacturer of an FDA Class II Medical Device
designed to regulate blood glucose levels in an acute care setting via both
intravenous and subcutaneous delivery of insulin and other fluids. Mr. Durschlag
has also co-authored patents in this area. Previously, Mr. Durschlag served as
Vice President of Sales and Marketing for Diabetes Management Services, Inc., a
durable medical equipment distributor with specific treatment modules in women's
health and pregnancy. Mr. Durschlag holds a bachelors degree from California
University of Pennsylvania and an MBA from Clemson University.
AUDIT COMMITTEE
The Board of Directors had determined that Terry Washburn met the requirements
of a financial expert and served as Chairman of the Audit Committee until his
appointment as CEO on March 30, 2006. Ross Silvey was appointed to the Board of
Directors on March 25, 2006, and became Chairman of the Audit Committee on March
30, 2006. On September 11, 2006, Dr. Silvey replaced Dr. Washburn as interim CEO
and President and simultaneously resigned his position as Chairman of the Audit
Committee. Mr. Freeman assumed the duties as Audit Committee Chairman on
September 11, 2006. Mr. Freeman is independent as specified in Item 7(d)(3)(iv)
of Schedule 14A under the Exchange Act and meets the requirements of a financial
expert.
The small business issuer has a separately designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Exchange Act, which
was made up of Dr. Washburn until March 30, 2006; by Dr. Silvey from March 30,
2006 to September 11, 2006; and by Mr. Freeman since September 11, 2006.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers, directors and persons who own more than ten
percent of the Company's common stock to file initial reports of ownership and
changes in ownership with the SEC. Additionally, SEC regulations require that
the Company identify any individuals for whom one of the referenced reports was
not filed on a timely basis during the most recent fiscal year or prior fiscal
years. To the Company's knowledge, based solely on a review of reports furnished
to it, the Directors were late filing their Form 5's to report their Form 3
obligations.
CODE OF ETHICS
The Company had intended to adopt a code of ethics to apply to its principal
executive officer, principal financial officer, principal accounting officer and
controller, or persons performing similar functions; however, the Company
discontinued its race operations in August 2003 and has determined it should
wait until it made an acquisition before adopting a code of ethics. The Company
has completed a number of acquisitions since September 2004, and expects to
include the adoption of a code of ethics on its agenda during 2007.
140
NOMINATING COMMITTEE
The Company does not currently have a standing nominating committee or committee
performing similar functions. The full Board of Directors participates in the
consideration of director nominees.
ITEM 10: EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors deliberates executive
compensation matters to the extent they are not delegated to the Chief Executive
Officer.
The following table shows the compensation of the Company's Chief Executive
Officer and each executive officer whose total cash compensation exceeded
$100,000 for the three years ended December 31, 2006.
141
SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------------------------------
Stock Option All other
Name and principal Salary awards awards compensation Total
position Year ($) ($) ($) ($) ($)
------------------------------------------------------------------------------------------------------------
Daniel J. Kelly (CEO 2006 N/A $ 5,500 $ 5,910 $ 32,500 $ 43,910
since January 1, 2007) (a) 2005 N/A N/A N/A N/A N/A
2004 N/A N/A N/A N/A N/A
Ross E. Silvey (CEO from 2006 $ 5,500 $ - $ - $ - $ 5,500
September 11, 2006 until 2005 N/A N/A N/A N/A N/A
January 1, 2007) 2004 N/A N/A N/A N/A N/A
Terry Washburn (CEO from 2006 $ 10,500 $ - $ - $ - $ 10,500
March 30, 2006 until 2005 N/A N/A N/A N/A N/A
September 11, 2006) 2004 N/A N/A N/A N/A N/A
Charles W. Clark (CEO from 2006 $ - $ - $ - $ - $ -
July 1, 2005 until 2005 $ - $ - $ - $ - $ -
March 30, 2006 2004 N/A N/A N/A N/A N/A
William C. Morris (CEO from 2006 N/A N/A N/A N/A N/A
August 2004 until 2005 $ 45,000 $ - $ - $291,913 $336,913
June 30, 2005) (b) 2004 $ 45,000 $ - $ - $ 49,000 $ 94,000
Terry Hanson (CEO from 2006 N/A N/A N/A N/A N/A
September 2003 until 2005 N/A N/A N/A N/A N/A
August 2004 and COO and 2004 $ 24,000 $ - $ - $ - $ 24,000
President from August 2002
until August 2004)
(a) The amount for the stock award represents the amortization of Mr.
Kelly's 10% share of the stock granted to Jim Kelly for his appearance
fees. The option award represents the amortization of the option
granted to Mr. Kelly. All other compensation represents the amount
paid to Jim Kelly Enterprises, Inc. Mr. Kelly is owner and President
of Jim Kelly Enterprises, Inc. and was acting as a consultant to the
Company during 2006.
(b) Godley Morris Group ("GMG") is 50% owned by Mr. Morris and he is the
managing general partner. In 2005, GMG claimed reimbursement for
expenses in the amount of $291,913, which was included in amounts due
related parties at December 31, 2005. This liability was transferred
to Mr. Morris in 2006 when we issued 65,000 shares of our common stock
to Mr. Morris. In addition, we transferred ownership of IMGI to Mr.
Morris as a part of the transaction. In 2004, GMG was paid $15,000 for
reimbursement of office expenses and $9,000 for office rent. In
addition, $25,000 for additional office expense reimbursement was
included in accounts payable at December 31, 2004 and paid in 2005.
142
Columns for bonus, nonequity incentive plan compensation and nonqualified
deferred compensation earnings have been omitted from the table above as all
amounts are zero.
NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE
Mr. Kelly became President and Chief Executive Officer of the Company on January
1, 2007. Mr. Kelly's compensation for 2007 is $212,500 and he is to receive a
$1,000 per month insurance reimbursement until health insurance is available for
employees. Mr. Kelly's compensation is to increase to $262,500 in 2008. In
addition, Mr. Kelly was granted a stock option for 400,000 shares exercisable at
$2.25 per share in January 2007. Mr. Kelly will also be reimbursed for all
reasonable out of pocket expenses.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
------------------------------------------------------------------------------------------
Number of securities
underlying unexercised
options (#) Option Option
----------------------------- exercise expiration
Name Exercisable Unexercisable price ($) date
------------------------------------------------------------------------------------------
Daniel J. Kelly 100,000 - $ 1.10 September 12, 2009
William C. Morris 25,000 - $ 20.00 August 31, 2007
Ross E. Silvey 50,000 - $ 2.25 November 15, 2009
The columns for option awards - equity incentive plan awards: number of
securities underlying unexercised unearned options and all four stock award
columns are omitted from the table as there amounts were zero.
ADDITIONAL NARRATIVE DISCLOSURE
Mr. Kelly's option was granted while he was a consultant and before he became
CEO on January 1, 2007. Mr. Kelly, Dr. Silvey and Mr. Morris are the only named
individuals with an outstanding equity award at fiscal-year end.
COMPENSATION OF DIRECTORS TABLE
------------------------------------------------------------------------------
Fees
earned
or paid Option
in cash awards Total
Name ($) ($) ($)
------------------------------------------------------------------------------
Ross Silvey $ - $ 4,426 $ 4,426
Jason Freeman - 4,426 4,426
Hank Durschlag 72,000 - 72,000
--------------------------------------------
$ 72,000 $ 8,852 $ 80,852
============================================
143
Other columns for stock awards, non-entity incentive plan compensation,
nonqualified deferred compensation earnings and all other compensation are
omitted from the table as the amounts are all zero.
ADDITIONAL NARRATIVE DISCLOSURE
Directors do not currently receive cash compensation for the meetings they
attend. It is anticipated that a formal plan for compensation of Directors will
be instituted during 2007.
Mr. Durschlag's fees earned or paid in cash represents his compensation as an
employee for 10 months of 2006.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table indicates all persons who, as of February 28, 2007, the most
recent practicable date, are known by us to own beneficially more than 5% of any
class of our outstanding voting securities. As of February 28, 2007, there were
20,227,279 shares of our common stock outstanding. Except as otherwise indicated
below, to the best of our knowledge, each person named in the table has sole
voting and investment power with respect to the securities beneficially owned by
them as set forth opposite their name.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
NAME AND ADDRESS OF AMOUNT AND NATURE OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNER % OF CLASS
-------------- ---------------- ---------------- ----------
Common Clay Cooley, Trustee 1,307,550 6.46%
HSPO Trust
7633 E 63rd Place, Suite 220
Tulsa, OK 74133
144
SECURITY OWNERSHIP OF MANAGEMENT
The following table indicates the beneficial ownership of the Company's voting
securities of all Directors of the Company and all Executive Officers who are
not Directors of the Company, and all officers and directors as a group, as of
February 28, 2007, the most recent practicable date. As of February 28, 2007,
there were 20,227,279 shares of the Company's common stock outstanding. Except
as otherwise indicated below, to the best of the Company's knowledge, each
person named in the table has sole voting and investment power with respect to
the securities beneficially owned by them as set forth opposite their name. All
options are currently exercisable, unless otherwise indicated.
Name and Address of Amount and Nature of % Of
Title of Class Beneficial Owner Beneficial Owner Class
-------------- ---------------- ---------------- -----
Common Daniel J. Kelly a 615,000 2.97%
495 Commerce Drive, Suite 1
Amherst, New York
Common Ross E. Silvey c 50,004 < 1%
11005 Anderson Mill Road
Austin, Texas 78750
Common Terry Washburn b - < 1%
3407 Langley Hill
Colleyville, Texas 76034
Common Charles W. Clark b 885,300 4.38%
P.O. Box 26
Santee, SC 29142
Common Hank Durschlag 575,000 2.84%
5403 McChesney Dr
Charlotte, NC 28269
Common Jason Freeman c 50,000 < 1%
5700 W. Plano Pkwy, Ste 1000
Plano, Texas 75093
Common All current officers and directors as a
Group (4 persons) 1,290,004 6.19%
145
a. Includes option granted in September 2006 for 100,000 shares
exercisable at $1.10 per share and option granted January 1, 2007 for
400,000 shares exercisable at $2.25 per share.
b. Former officers, not included in total.
c. Includes option granted on November 2, 2006, for 50,000 shares each,
exercisable at $2.25 per share.
EQUITY COMPENSATION PLAN INFORMATION
This table provides certain information as of December 31, 2006, with respect to
our equity compensation plans:
NUMBER OF
SECURITIES
AWARDED PLUS
NUMBER OF
SECURITIES
TO BE ISSUED NUMBER OF
UPON EXERCISE SECURITIES
NUMBER OF OF OPTIONS, TO BE ISSUED NUMBER OF
SECURITIES WARRANTS OR UPON EXERCISE SECURITIES
AUTHORIZED RIGHTS OF OUTSTANDING REMAINING
FOR ISSUANCE GRANTED OPTIONS, AVAILABLE
UNDER THE DURING LAST WARRANTS OR FOR FUTURE
NAME OF PLAN PLAN FISCAL YEAR RIGHTS ISSUANCE
------------ ---- ----------- ------ --------
Logisoft Corp. 2000
Stock Option Plan 15,000 - - 15,000
HealthSport 2006
Stock Option Plan 5,000,000 100,000 100,000 4,900,000
-------------- ------------- ------------- -------------
5,015,000 100,000 100,000 4,915,000
============== ============== ============== =============
In addition, at December 31, 2006, there are options outstanding for 325,000
shares at an average exercise price of $1.86 which expire in 2009. These options
were not granted pursuant to the Stock Option Plans. Also, at December 31, 2006,
there are warrants outstanding for 78,750 shares with an exercise price of
$20.00 per share. The warrants expire in 2007.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
2006 TRANSACTIONS
-----------------
Effective August 20, 2006, we issued 65,000 shares of our common stock to a
former CEO and transferred the stock of IMGI, including liabilities of $295,840
to the former CEO. The liabilities included $291,913 which the former CEO
claimed was due to him and affiliates for costs advanced in the original
formation of IMGI.
146
During the year ended December 31, 2006, we had three different part-time CEOs.
In aggregate they were paid $16,000 during the year.
2005 TRANSACTIONS
-----------------
In September 2005, the courts approved the settlement of the litigation with our
former CEO, William G. Miller, as discussed in note 10 to the consolidated
financial statements. As a result of this settlement, we recognized a loss from
discontinued operations in 2005 of $28,960, which is net of $247,055 in accrued
amounts previously due related parties which were forgiven.
Our CEO until June 30, 2005, received compensation of $45,000 during 2005. In
addition, during 2005, Godley Morris Group LLC ("GMG"), a company 50% owned and
managed by this former CEO, received rent of $9,000 and $291,913 was recorded in
amounts due related parties for additional reimbursements claimed by GMG.
ITEM 13. EXHIBITS
See Exhibit Index on Page 58.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees - The aggregate fees billed as of March 31, 2007 for professional
services rendered by the Company's accountant was $39,000 and $30,035 for the
audit of the Company's annual financial statements and quarterly reviews for the
fiscal years ended December 31, 2006 and 2005, respectively.
Audit-Related Fees - None.
Tax Fees - None for 2006 or 2005.
All Other Fees - Other than the services described above, no other fees were
billed for services rendered by the principal accountant during fiscal 2006 or
fiscal 2005.
Audit Committee Policies and Procedures - The audit committee pre-approves audit
and review services.
If greater than 50 percent, disclose the percentage of hours expended on the
principal accountant's engagement to audit the registrant's financial statements
for the most recent fiscal year that were attributed to work performed by
persons other than the principal accountant's full-time, permanent employees -
Not applicable.
147
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HEALTHSPORT, INC.
April 12, 2007 /s/ Daniel J. Kelly
------------------------------------------
Daniel J. Kelly, President and CEO
(Principal executive officer)
April 12, 2007 /s/ Ross E. Silvey
------------------------------------------
Ross E. Silvey, Director and Acting CFO
(Principal accounting officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
April 12, 2007 /s/ Daniel J. Kelly
-----------------------------------------
Daniel J. Kelly, President and CEO
April 12, 2007 /s/ Ross E. Silvey
-----------------------------------------
Ross E. Silvey, Director and Acting CFO
April 12, 2007 /s/ Jason Freeman
-----------------------------------------
Jason Freeman, Director
April 12, 2007 /s/ Hank Durschlag
-----------------------------------------
Hank Durschlag, Director
148
EXHIBITS HAVE BEEN OMITTED FROM THIS COPY. COPIES OF EXHIBITS MAY BE OBTAINED
FROM HEALTHSPORT, INC. (THE "COMPANY") UPON REQUEST AND PAYMENT OF THE COMPANY'S
COSTS IN FURNISHING SUCH COPIES. COPIES MAY ALSO BE OBTAINED FROM THE SECURITIES
AND EXCHANGE COMMISSION FOR A SLIGHT CHARGE. (The foregoing is not applicable to
the original(s) hereof.)
EXHIBIT INDEX
Securities and
Exchange
Commission Page
Exhibit No. Type of Exhibit Number
2 Plan of acquisition, reorganization, arrangement, N/A
liquidation, or succession
3(i) Articles of incorporation N/A
3(ii) By-laws N/A
4 Instruments defining the rights of holders, incl. Indentures N/A
9 Voting trust agreement N/A
10 Material contracts N/A
11 Statement re: computation of per share earnings Item 7
16 Letter on change in certifying accountant N/A
18 Letter on change in accounting principles N/A
21 Subsidiaries of the Registrant Item 1
22 Published report regarding matters submitted to vote N/A
23 Consent of experts and counsel N/A
24 Power of Attorney N/A
31 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002 60-61
32 Certification pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002 62-63
149
EXHIBIT 31.1
HEALTHSPORT, INC. FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel J. Kelly, certify that:
1. I have reviewed this annual report on Form 10-KSB of HealthSport, Inc. (the
registrant);
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have;
a. designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the
registrant, is made known to me by others, particularly during the
period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles;
c. evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report my
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
d. disclosed in this report any change in the registrant's internal
controls over financial reporting that occurred during the
registrant's current fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions);
a All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditor any material weaknesses in
internal controls; and
b Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
April 12, 2007 /s/ Daniel J. Kelly
--------------------------------
Daniel J. Kelly
President and CEO
(principal executive officer)
150
EXHIBIT 31.2
HEALTHSPORT, INC. FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ross E. Silvey, certify that:
1. I have reviewed this annual report on Form 10-KSB of HealthSport, Inc. (the
registrant);
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have;
a. designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the
registrant, is made known to me by others, particularly during
the period in which this report is being prepared;
b. designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and preparation
of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report my
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. disclosed in this report any change in the registrant's internal
controls over financial reporting that occurred during the
registrant's current fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions);
a All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditor any material
weaknesses in internal controls; and
b Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
April 12, 2007 /s/ Ross E. Silvey
-------------------------------
Ross E. Silvey
Acting CFO
(principal financial officer)
151
EXHIBIT 32.1
HEALTHSPORT, INC. FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel J. Kelly, certify that
1. I am the President and Chief Executive Officer of HealthSport, Inc.
2. Attached to this certification is Form 10-KSB for the fiscal year ended
December 31, 2006, a periodic report (the "periodic report") filed by
the issuer with the Securities Exchange Commission pursuant to Section
13(a) or 15(d) of the Securities and Exchange Act of 1934 (the
"Exchange Act"), which contains consolidated financial statements.
3. I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
o The periodic report containing the consolidated financial
statements fully complies with the requirements of Section
13(a) or 15(d) of the Exchange Act, and
o The information in the periodic report fairly presents, in all
material respects, the consolidated financial condition and
results of operations of the issuer for the periods presented.
April 12, 2007 /s/ Daniel J. Kelly
--------------------------
Daniel J. Kelly
President and CEO
(principal executive officer)
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by HealthSport, Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.
This certification will not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934 even if the document with which it is submitted to the Securities and
Exchange Commission is so incorporated by reference.
152
EXHIBIT 32.2
HEALTHSPORT, INC. FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Ross E. Silvey, certify that
1. I am Acting Chief Financial Officer of HealthSport, Inc.
2. Attached to this certification is Form 10-KSB for the fiscal year ended
December 31, 2006, a periodic report (the "periodic report") filed by
the issuer with the Securities Exchange Commission pursuant to Section
13(a) or 15(d) of the Securities and Exchange Act of 1934 (the
"Exchange Act"), which contains consolidated financial statements.
3. I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
o The periodic report containing the consolidated financial
statements fully complies with the requirements of Section
13(a) or 15(d) of the Exchange Act, and
o The information in the periodic report fairly presents, in all
material respects, the consolidated financial condition and
results of operations of the issuer for the periods presented.
April 12, 2007 /s/ Ross E. Silvey
--------------------------
Ross E. Silvey
Acting CFO
(principal financial officer)
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by HealthSport, Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.
This certification will not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934 even if the document with which it is submitted to the Securities and
Exchange Commission is so incorporated by reference.
153
ITEM 23: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Creason & Associates, P.L.L.C. has been the only accounting firm engaged by the
Company and there are no disagreements with the findings of said accountants.
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24: INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Eighth Article of the Company's Certificate of Incorporation and Article XI
of the Company By-laws limit the personal liability of the Company's directors
to the Company or its stockholders for monetary damages for breach of fiduciary
duty.
The Certificate of Incorporation provides that each person who serves or who has
served as a director shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that this provision shall not eliminate or limit the liability of a
director: (i) for any breach of loyalty to the corporation or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) for unlawful payment of dividend
or unlawful stock purchase or redemption as such liability is imposed under
Section 174 of the General Corporation Laws of Delaware; or (iv) for any
transaction from which the director derived an improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling an issuer
pursuant to the foregoing provisions, the opinion of the Commission is that such
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable.
154
ITEM 25: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table is an itemization of all expenses, without consideration to
future contingencies, incurred or expected to be incurred by us in connection
with the issuance and distribution of the securities being offered by this
prospectus. Items marked with an asterisk (*) represent estimated expenses. We
have agreed to pay all costs and expenses of this offering. Selling security
holders pay no offering expenses.
Item Amount
SEC Registration fee * $ 1,503
Legal fees and expenses* 30,000
Accounting fees and expenses * 5,000
Miscellaneous * 5,000
-------------------
Total * $ 41,503
===================
* Estimated figure
ITEM 26: RECENT SALES OF UNREGISTERED SECURITIES
The Company recently completed a $6,000,000 private placement of its common
stock in May 2007 with the sale of 4,000,000 shares for $6,000,000 in cash.
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 27: EXHIBITS
Item No. Description Page No.
3.1 Articles of Incorporation of HealthSport, Inc. 159
3.2 Bylaws of HealthSport, Inc. 164
5.1 Legal Opinion of G. David Gordon & Associates. 188
10.1 Acquisition of InnoZen, Inc. by merger with
wholly-owned subsidiary **
23.1 Consent of Creason & Associates, P.L.L.C. 190
23.2 Consent of G. David Gordon & Associates (included in 5.1)
** Previously filed
155
ITEM 28: UNDERTAKINGS
Information pertaining to our common stock is contained in our Articles of
Incorporation and Bylaws. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities, other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by us is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of a
prospectus filed with the Commission pursuant to Rule 424(b)
under the Securities Act if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information of the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time
to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
156
(4) For determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial
distribution of the securities, the undersigned small business
issuer pursuant to this registration statement, regardless of the
underwriting method used to sell the securities to the purchaser, if
the securities are offered or sold to such purchaser by means of any
of the following communications, the undersigned small business
issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned
small business issuer relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared
by or on behalf of the undersigned small business issuer or
used or referred to by the undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to
the offering containing material information about the
undersigned small business issuer or its securities provided
by or on behalf of the undersigned small business issuer; and
(iv) Any other communication that is an offer in the offering made
by the undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
that the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer of controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
157
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Tulsa,
State of Oklahoma, on May 31, 2007.
HEALTHSPORT, INC.
By: /s/ Daniel J Kelly
-------------------------------
Daniel J. Kelly, Principal Executive
Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
May 31, 2007 By: /s/ Daniel J Kelly
------------------------------------
Daniel J. Kelly, Principal Executive
Officer
May 31, 2007 By: /s/ Michael D. Pruitt
------------------------------------
Michael D. Pruitt, Director
May 31, 2007 By: /s/ M.E. Durschlag
------------------------------------
M.E. Durschlag, Director
May 31, 2007 By: /s/ Jason Freeman
------------------------------------
Jason Freeman, Director
May 31, 2007 By: /s/ R. Steven Davidson
------------------------------------
R. Steven Davidson, Director
May 31, 2007 By: /s/ Matthew Burns
------------------------------------
Matthew Burns, Director
158