10-Q 1 zurvita_10q-103111.htm FORM 10-Q zurvita_10q-103111.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q

(Mark One)                                                                                                                                                                 
x      Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended October 31, 2011

o      Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from _________ to _________
 
Commission file number 333-145898

ZURVITA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

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


800 Gessner Rd, Suite 110
Houston, Texas 77024
(Address of principal executive offices) (zip code)

 
(713) 464-5002
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x      No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o      No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of December 15, 2011:
65,098,713 shares of common stock, par value $0.0001
 
 

 


ZURVITA HOLDINGS, INC.

FORM 10-Q
 
PART I - FINANCIAL INFORMATION

 
Page No.
Item 1.   Financial Statements (Unaudited).
 
   
Condensed Consolidated Balance Sheets – October 31, 2011 and July 31, 2011
3
   
Condensed Consolidated Statements of Operations – For the Three Months Ended October 31, 2011 and 2010
4
   
Condensed Consolidated Statements of Cash Flows – For the Three Months Ended October 31, 2011 and 2010
5
   
Condensed Consolidated Statement of Stockholders’ Deficit – For the Three Months Ended October 31, 2011
6
   
Notes to Interim Condensed Consolidated Financial Statements
7
   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
22
   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk.
29
   
Item 4.   Controls and Procedures.
29

PART II - OTHER INFORMATION

 
Page No.
   
   
Item 1.   Legal Proceedings.
30
   
Item 1a. Risk Factors.
30
   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.
30
   
Item 3.   Defaults Upon Senior Securities.
30
   
Item 4.   Removed and Reserved.
30
   
Item 5.   Other Information.
30
   
Item 6.   Exhibits.
30
   
Signatures
31


 
2

 
 
PART I - FINANCIAL INFORMATION
Item 1.   Financial Statements
 
ZURVITA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
     (Unaudited)        
   
October 31, 2011
   
July 31, 2011
 
ASSETS
           
Current assets
           
Cash
  $ 92,516     $ 906  
Marketable securities (at fair value)
    4,000       36,800  
Accounts receivable
    275,343       202,710  
Deferred expenses
    174,666       90,369  
Total current assets
    546,525       330,785  
                 
Property, plant and equipment (net)
    67,113       73,551  
Total assets
  $ 613,638     $ 404,336  
                 
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
         
Current liabilities
               
Accounts payable
  $ 238,826     $ 236,809  
Accounts payable - related party
    178,848       319,816  
Advanced security proceeds
    1,500,000       -  
Notes payable - current
    178,317       158,127  
Notes payable - related party
    -       465,000  
Accrued expenses
    464,898       313,140  
Deferred revenue
    101,579       114,796  
Deferred compensation - related party
    30,000       97,546  
Income tax payable
    583       4,486  
Total current liabilities
    2,693,051       1,709,720  
                 
Notes payable - long term
    2,047,661       1,961,860  
Fair value of warrants
    71,200       299,600  
Total liabilities
    4,811,912       3,971,180  
                 
Redeemable preferred stock
    6,026,747       6,026,747  
                 
Stockholders' deficit
               
                 
                 
 
               
Common stock ($.0001 par value, 300,000,000 shares authorized; 73,098,713 and 69,498,713 shares issued and 65,098,713 and 61,498,713 shares outstanding as of October 31, 2011 and July 31, 2011, respectively)
    7,310       6,950  
Treasury stock
    (210,000 )     (210,000 )
Additional paid-in capital
    10,413,856       10,384,491  
Accumulated deficit
    (20,436,187 )     (19,775,032 )
Total stockholders' deficit
    (10,225,021 )     (9,593,591 )
                 
Total liabilities, redeemable preferred stock and stockholders' deficit
  $ 613,638     $ 404,336  
                 

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

 
3

 

ZURVITA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
For the Three Months Ended
 
   
October 31,
 
   
2011
   
2010
 
REVENUES
           
Administrative websites
  $ 128,323     $ 461,728  
Advertising sales
    59,030       241,273  
Commissions
    103,759       111,091  
Consumable products
    897,490       -  
Marketing fees and materials
    75,821       349,227  
Membership fees
    45,862       149,466  
Total revenues
    1,310,285       1,312,785  
                 
COST OF SALES
               
Benefit and service cost
    173,093       312,924  
Consumable products manufacturing cost
    269,670       -  
Sales commissions
    679,667       569,357  
Total cost of sales
    1,122,430       882,281  
                 
GROSS PROFIT
    187,855       430,504  
                 
OPERATING EXPENSES
               
Depreciation
    8,716       9,787  
Office related expenses
    132,009       126,699  
Payroll and employee benefits
    506,539       606,852  
Professional fees
    217,505       292,886  
Selling and marketing
    145,932       523,488  
Travel
    20,402       79,751  
Total operating expenses
    1,031,103       1,639,463  
                 
Loss from operations before other income
    (843,248 )     (1,208,959 )
                 
OTHER INCOME
               
Gain on change in fair value of share conversion feature
    -       323,249  
Gain on change in fair value of warrants
    228,400       3,124,000  
Gain on extinguishment of debt
    80,753       -  
Interest expense
    (93,677 )     (83,629 )
Interest income
    -       4,756  
Loss on change in fair value of marketable securities
    (32,800 )     (320,000 )
Total other income
    182,676       3,048,376  
                 
(Loss) income before income taxes
    (660,572 )     1,839,417  
                 
Income taxes
    583       1,302  
                 
Net (loss) income
  $ (661,155 )   $ 1,838,115  
                 
Basic (loss) earnings per share
  $ (0.01 )   $ 0.03  
                 
Diluted (loss) earnings per share
  $ (0.01 )   $ 0.02  
                 
Basic weighted average number of common shares outstanding
    61,537,843       61,498,713  
                 
Diluted weighted average number of common shares outstanding
    61,537,843       109,098,713  
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.


 
4

 
 
 
ZURVITA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
For the Three Months Ended
 
   
October 31, 2011
   
October 30, 2010
 
Cash flows from operating activities
           
Net (loss) income
  $ (661,155 )   $ 1,838,115  
Adjustments to reconcile net (loss) income to net cash used in operating activities:
               
Amortization of note payable discount
    51,721       46,000  
Depreciation
    8,716       9,787  
Share-based compensation
    29,725       155,312  
Gain on change in fair value of share conversion feature
    -       (323,249 )
Gain on change in fair value of warrants
    (228,400 )     (3,124,000 )
Gain on extinguishment of debt
    (80,753 )     -  
Loss on change in fair value of marketable securities
    32,800       320,000  
Changes in operating assets and liabilities
               
Increase in accounts receivable
    (72,633 )     (46,643 )
Decrease in agent advanced compensation
    -       273,810  
(Increase) decrease in deferred expenses
    (64,106 )     1,097  
Increase (decrease) in accounts payable and accrued expenses
    56,191       (238,535 )
Decrease in deferred revenue
    (13,218 )     (188,911 )
Decrease in deferred compensation related party
    -       (12,692 )
Net cash used in operating activities
    (941,112 )     (1,289,909 )
                 
Cash flows from investing activities:
               
Proceeds from promissory note receivable
    -       1,702,000  
Purchase of property and equipment
    (2,278 )     (4,979 )
Net cash (used in) provided by investing activities
    (2,278 )     1,697,021  
                 
Cash flows from financing activities:
               
Advanced security proceeds
    1,500,000       -  
Proceeds from exercise of warrants
    -       500  
Principal payments made on notes payable
    (465,000 )     (75,576 )
Net cash provided by (used in) financing activities
    1,035,000       (75,076 )
                 
Net change in cash balance
    91,610       332,036  
                 
Beginning cash
    906       289,442  
                 
Ending cash
  $ 92,516     $ 621,478  
                 
Supplemental disclosure of cash flow information
               
Cash paid for interest
  $ 5,903     $ 5,423  
                 
Cash paid for taxes
  $ -     $ -  
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
5

 

ZURVITA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(Unaudited)
 
                                     
   
Shares
Common
Stock
   
Common
 Stock
   
Treasury
 Stock
   
Additional
Paid-In
Capital
   
Accumulated Deficit
   
Total
Stockholder's Deficit
 
Balance, July 31, 2011
    61,498,713     $ 6,950     $ (210,000 )   $ 10,384,491     $ (19,775,032 )   $ (9,593,591 )
                                                 
Share-based compensation
    -       -       -       29,725       -       29,725  
                                                 
Issuance of common stock
    3,600,000       360       -       (360 )     -       -  
                                                 
Net loss available to common stockholders
    -       -       -       -       (661,155 )     (661,155 )
                                                 
Balance, October 31, 2011
    65,098,713     $ 7,310     $ (210,000 )   $ 10,413,856     $ (20,436,187 )   $ (10,225,021 )
                                                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
6

 
 
ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


NOTE 1 – NATURE OF OPERATIONS

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

Management’s Assessment of Liquidity

Since the Company’s inception, the Company has primarily met its operating cash requirements through equity contributions from The Amacore Group, Inc. (Amacore), who was the Company’s sole shareholder prior to July 30, 2009.  Subsequent to July 30, 2009, the Company has sold several series of preferred stock for gross proceeds of $6.8 million to another related party. We are using the proceeds from the sale of preferred stock to subsidize the Company’s operations as the Company’s revenues and operating cash flows are not currently sufficient to support the Company’s current operations.

At October 31, 2011, the Company had negative working capital of approximately $2.1 million, an accumulated deficit of approximately $20.4 million and negative cash flows from operating activities of approximately $941 thousand.  Since the date of inception, the Company has used approximately $11.1 million in operations.

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

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

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

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
In June 2009, the Financial Accounting Standards Board (“FASB”) approved FASB Accounting Standards Codification (“Codification”) as the single source of authoritative accounting guidance used in the preparation of financial statements in conformity with U.S. GAAP for all non-governmental entities. Codification, which changed the referencing and organization of accounting guidance without modification of existing U.S. GAAP, is effective for interim and annual periods ending after September 15, 2009.  Since it did not modify existing U.S. GAAP, Codification did not have any impact on the Company’s financial condition or results of operations.

Revenue Recognition

Administrative Websites

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

Advertising Sales

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

Commissions

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

 
7

 



ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)

Consumable Products

The company markets a nutritional drink called “Zeal”.  Revenue from the sale of this consumable product is recognized upon shipment of the product.

Marketing Fees and Materials

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

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

Membership Fees

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

Refunds and Chargebacks

The Company records a reduction in revenue for estimated refunds and chargebacks from credit card companies based upon actual history and management’s evaluation of current facts and circumstances.   Refunds and chargebacks totaled approximately $13 thousand and $51 thousand for the three months ended October 31, 2011 and 2010, respectively, and were recorded as a reduction of revenue in the accompanying statements of operations.  Estimates for an allowance for refunds and chargebacks totaled approximately $10 thousand and $10 thousand is included in accrued expenses in the accompanying consolidated balance sheets as of October 31, 2011 and July 31, 2011, respectively.

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

Concentration of Credit Risk

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

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

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

 
8

 


ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)

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

Property, Plant and Equipment

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

Share-Based Compensation

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

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

Convertible Instruments

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

Derivative Financial Instruments

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

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


 
9

 



ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)

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

Fair Value Measurements

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

Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities.

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

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

Earnings (Loss) Per Share

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

Subsequent Events

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


 
10

 




ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)

NOTE 3 – NON CASH INVESTING AND FINANCING ACTIVITIES

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

             
   
October 31, 2011
   
October 31, 2010
 
             
             
Financed insurance agreement
  $ 20,190     $ 19,627  
                 
Accrued interest converted to principal
    34,080       32,201  
                 
                 

NOTE 4 – DEFERRED EXPENSES

Deferred expenses increased to approximately $175 thousand at October 31, 2011 from approximately $90 thousand at July 31, 2011, an increase of approximately $85 thousand. The increase is a result of deposits paid on bulk packaging materials, on sales recognition retreat, and on various insurance renewals.

NOTE 5 – NOTES PAYABLE

Notes payable consist of the following:

   
October 31, 2011
   
July 31, 2011
 
             
             
Related party convertible note payable; face amount $2 million; bearing interest of 6% per annum; secured; principal payment due on October 9, 2012
  $ 2,047,661     $ 1,961,860  
                 
Financing agreement; bearing interest at 5.75% per annum; payable in monthly installments of approximately $2.2 thousand due through July 2012
    20,190       -  
                 
Related party Promissory note payable; bearing interest of 15% per annum; unsecured; due on demand
    -       465,000  
                 
Promissory note payable; bearing interest of 7.5% per annum; unsecured; principal payments due monthly approximately $27 thousand through July 2011; currently in default
    158,127       158,127  
                 
                 
Total notes payable
    2,225,978       2,584,987  
                 
Less current portion
    178,317       623,127  
                 
Total long-term debt
  $ 2,047,661     $ 1,961,860  

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

 
11

 



ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)

The share conversion liability is subject to recurring fair value adjustments each reporting period (see Note 9 - Assets and Liabilities Measured at Fair Value).  The discount is amortized over the life of the note payable using the effective interest method and recorded as interest expense in the statement of operations.  During the three months ended October 31, 2011 and 2010, total interest expense related to the convertible note payable was approximately $86 thousand and $78 thousand, respectively.   Of the interest expense recognized for the three months ended October 31,  2011 and 2010, approximately $34 thousand and $32 thousand, respectively, was elected by the Company to be deferred and added to the principal of the note.

At October 31, 2011, the said note was convertible into approximately 9.1 million shares of common stock with a market value of approximately $181 thousand.

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

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

As of October 31, 2011
     
       
Current
  $ 178,317  
2012
    2,256,687  
      2,435,004  
Net of discount on convertible note payable
    (209,026 )
    $ 2,225,978  
 
Of the notes payable, approximately $178 thousand is classified as a current liability as of October 31, 2011.

NOTE 6 - ACCRUED EXPENSES

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

   
October 31, 2011
   
July 31, 2011
 
Commissions
  $ 237,168     $ 130,705  
Interest
    34,474       32,286  
Marketing materials
    1,040       1,284  
Payroll
    84,453       58,252  
Refund reserve
    10,000       10,000  
Rent
    3,574       4,757  
Sales tax payble
    53,634       34,601  
Unclaimed property
    40,555       41,255  
Total
  $ 464,898     $ 313,140  
 
NOTE 7 - DEFERRED REVENUE

Deferred revenue consists of the following at October 31, 2011 and July 31, 2011:

   
October 31, 2011
   
July 31, 2011
 
Advertising
  $ 23,935     $ 20,574  
Consumable products
    15,441       6,806.00  
Direct response media
    45,437       45,854  
Marketing fees
    1,832       15,875  
Member fees
    14,934       25,687  
Total
  $ 101,579     $ 114,796  


 
12

 



ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)

NOTE 8 – DEFERRED COMPENSATION

Deferred compensation is made up of compensation due to a consultant.  This individual deferred his compensation in an effort to manage cash flow while the Company undertook several capital intensive initiatives.  As of October 31, 2011 and July 31, 2011, the balance of deferred compensation was approximately $30 thousand and $98 thousand, respectively.


NOTE 9 – ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

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

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

October 31, 2011
Fair Value Measurements at Reporting Date Using
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
 
                       
Marketable securities
  $ 4,000     $ -     $ 4,000  
Total Assets
 
$
4,000
   
$
-
   
$
4,000
 
                         
Share conversion feature
 
$
-
   
$
-
   
$
-
 
Warrants
 
$
-
   
$
71,200
   
$
71,200
 
Total liabilities
 
$
-
   
$
71,200
   
$
71,200
 

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

 
The Company has categorized its assets and liabilities measured at fair value into the three-level fair value hierarchy, as defined in Note 2, based upon the priority of inputs to respective valuation techniques.  Assets included in the level 1 of the fair value hierarchy include marketable securities which are fair valued on a recurring basis using quoted market prices.  Liabilities included within level 3 of the fair value hierarchy presented in the preceding table include a share conversion feature and noncompensatory warrants.  The valuation methodology for liabilities within level 3 uses a combination of observable and unobservable inputs in calculating fair value.

 
13

 




ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)

The Company recorded an unrealized loss of $33 thousand and $320 thousand on its marketable securities for the three months ended October 31, 2011 and 2010, respectively.  These losses have been included in the Statement of Operations caption “Loss on change in fair value of marketable securities.”

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

   
Balance
Beginning of
 Period
 
Issuance
   
(Gain) or Loss Recognized in
Earnings from
 Change in
Fair Value
   
Balance End
of Period
 
For the three months ended October 31, 2011
       
Share conversion feature
  $ -     $ -     $ -     $ -  
Warrants
  $ 299,600     $ -     $ (228,400 )   $ 71,200  
                                 
For the Year Ended July 31, 2011
                 
Share conversion feature
  $ 462,013     $ -     $ (462,013 )   $ -  
Warrants
  $ 6,370,000     $ 24,000     $ (6,094,400 )   $ 299,600  

For the three months ended October 31, 2011 and 2010, an unrealized gain of approximately zero and $323 thousand, respectively, are included in earnings within the Statement of Operations caption “Gain on change in fair value of share conversion feature.”

For the three months ended October 31, 2011 and 2010, an unrealized gain of $228 thousand and $3.1 million, respectively, are included in earnings within the Statement of Operations caption “Gain on change in fair value of warrants.”  The unrealized gains from the change in the fair value of warrants is a result of a decrease in the Company’s  share price from $0.20 to $0.02 which is used as an input  in the share price used in valuing the warrants.

Fair Value of Financial Instruments

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

NOTE 10—REDEEMABLE PREFERRED STOCK

The Company is authorized to issue 10 million shares of preferred stock with a par value of $0.0001 per share.  The following table summarizes the Preferred Stock issuances and number of Preferred Shares outstanding:
 
       
Shares Outstanding at
Preferred Stock
 
Date of
       
Issuance
 
Issuance
 
October 31, 2011
 
July 31, 2011
Series A
 
July 30, 2009
 
                   1,750,000
 
               1,750,000
Series B
 
October 6, 2009
 
                   2,000,000
 
               2,000,000
Series C
 
January 29, 2010
 
                   1,000,000
 
               1,000,000
Series C
 
June 3, 2010
 
                   2,300,000
 
               2,300,000
Series C
 
June 9, 2011
 
                   1,500,000
 
               1,500,000
       
                   8,550,000
 
               8,550,000

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

Significant rights of the Convertible Preferred Stock are discussed below:

 
14

 

ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)

Dividends

The Convertible Preferred Stock does not accrue dividends.

Voting Rights

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

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

(i) amend its certificate or articles of incorporation in any manner that adversely affects the rights of the holders of Convertible Preferred Stock;
 
(ii) alter or change adversely the voting or other powers, preferences, rights, privileges, or restrictions of the  Convertible Preferred Stock;
 
(iii) increase the authorized number of shares of preferred stock or  Convertible Preferred Stock or reinstate or issue any other series of preferred stock;
 
(iv)  redeem, purchase or otherwise acquire directly or indirectly any junior securities or any shares pari passu with the Convertible Preferred Stock;
 
(v) directly or indirectly pay or declare any dividend or make any distribution in respect of, any junior securities, or set aside any monies for the purchase or redemption (through a sinking fund or otherwise) of any junior securities or any shares pari passu with the Convertible Preferred Stock;
 
(vi) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to or otherwise pari passu with the Convertible Preferred Stock; or
 
(vii) enter into any agreement with respect to any of the foregoing.

Liquidation Preferences

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

The liquidation value of Series A, Series B and Series C Convertible Preferred Stock was $1.75 million, $2 million and $4.8 million, respectively, as of October 31, 2011.

 
15

 

ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)

Conversion Rights

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

At October 31, 2011, Series A, Series B and Series C Convertible Preferred Stock is convertible into 28 million, 8 million and 19.2 million common shares, respectively.  If the Convertible Preferred Stock had been converted as of October 31, 2011, the aggregate market price of the common shares for Series A, Series B and Series C would have been approximately $560 thousand, $160 thousand, and $384 thousand, respectively.

Beneficial Ownership Limitations

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

Redemption Rights of the Company

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

Redemption Rights of Holder

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

·  
The Company shall be party to a change of control transaction;
·  
The Company shall fail to have available a sufficient number of authorized and unreserved shares of common stock to issue to such  holder upon a conversion;
·  
Unless specifically addressed elsewhere in the Convertible Preferred Stock’s Certificate of Designation as a Triggering Event, the Corporation shall fail to observe or perform any other covenant, agreement or warranty contained in the Certificate of Designation, and such failure or breach shall not, if subject to the possibility of a cure by the Company, have been cured within 20 calendar days after the date on which written notice of such failure or breach shall have been delivered;
·  
There shall have occurred a bankruptcy event or material monetary judgment;


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

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

 
16

 


ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)


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

 
On August 8, 2011, the Company entered into an oral agreement with a related party, subject to further negotiations, to sell to the related party certain securities, including, but not limited to, convertible preferred stock and warrants to purchase common stock of the Company.  The purchase price of the common stock is expected to be $1.5 million, which funds were received from related party on August 8, 2011. However, a preferred stock purchase agreement and other related transaction documents are in the process of being negotiated with related party and, accordingly, have not been executed at this time.   Consequently, the Company has recorded the proceeds as a liability on the Balance Sheet caption “Advanced Security Proceeds.”   Upon finalization of terms, the Company will fair value the financial instruments and reclass as necessary.

NOTE 11 - COMMON STOCK

The Company has authorized 300 million common shares with a par value of $0.0001 per share.   On all matters required by law to be submitted to a vote of the holders of common stock, each share of common stock is entitled to one vote per share.

On July 30, 2009, the Company granted Mr. Jarvis 1.8 million shares of common stock, to be held in escrow, in connection with the execution of an employment agreement.  These shares will be issued to Mr. Jarvis in accordance with the vesting period or upon completion of certain performance measures.  Due to the forward stock split, the amount of shares was increased to 7.2 million shares of common stock.  The shares were subject to a vesting period in which 3.6 million shares vested on July 30, 2010 and July 30, 2011, respectively.  The grant date fair value was approximately $306 thousand.  As of October 31, 2011, all shares were vested and issued.

For the three months ended October 31, 2011 and 2010, approximately $29 thousand and $155 thousand, respectively, of stock-based compensation expense was recognized, as a result of various share issuances.

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

NOTE 12–WARRANTS

During 2009,  Zurvita’s Board of Directors adopted the 2009 Incentive Stock Plan (the 2009 Plan), pursuant to which we reserved for issuance 6 million shares of Zurvita common stock to be used as awards to employees, directors, consultants, and other service providers. The purpose of the 2009 Plan is to provide an incentive to attract and retain officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons into Zurvita’s development and financial success.  Under the 2009 Plan, Zurvita is authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long term incentive awards. The 2009 Plan is administered by the Board’s designated Compensation Committee.  As of October 31, 2011, approximately 5.4 million total options were issued under the 2009 Plan.




 
17

 

ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)

The following table summarizes the status of all warrants outstanding and exercisable at October 31, 2011.

 
Outstanding Warrants  
Range of Exercise Prices
   
Number of Warrants
   
Weighted
Average
Exercise Price
   
Weighted
Average
Remaining
Contractual
Life in Years
 
$0.01 to $0.49       60,475,000     $ 0.16       5.03  
$0.50 to $0.99       100,000     $ 0.75       3.28  
          60,575,000     $ 0.16       5.02  
                             
 
 
Exercisable Warrants
Range of
Exercise Prices
   
Number of
 Warrants
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life in Years
 
$0.01 to $0.49       59,514,696     $ 0.16       5.05  
$0.50 to $0.99       100,000     $ 0.75       3.28  
          59,614,696     $ 0.16       5.04  

 
Compensatory Equity Warrants

During the three months ended October 31, 2011, the Company issued compensatory equity warrants to purchase an aggregate of approximately 200 thousand shares of common stock.

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

 
October 31, 2011
July 31, 2011
     
Expected dividends
0%
0%
Expected volatility
65%
65%
Risk free interest rate
0.45% - 0.94%
0.70% - 1.30%
Expected life
5 years
5 years


The following table summarizes the activity for compensatory warrants classified as equity for the three months ended October 31, 2011.
 
   
Compensatory
Equity
 Warrants
   
Weighted
Average
 Exercise
 Price
   
Weighted
 Average
 Remaining
Contractual
Term
   
Aggregate
Intrinsic
Value
 
Outstanding at July 31, 2011
    5,175,000     $ 0.22       3.89     $ -  
Granted
    200,000       0.20       -       -  
Exercised
    -       -       -       -  
Cancelled or Expired
    -       -       -       -  
Outstanding at October 31, 2011
    5,375,000     $ 0.22       3.69     $ -  
Exercisable at October 31, 2011
    4,414,696     $ 0.22       3.65     $ -  

 
18

 



ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)

There were no warrants exercised during the three months ended October 31, 2011 and therefore no intrinsic value realized.  The total fair value of warrants vested during the three months ended October 31, 2011 was approximately $11 thousand.  The weighted average grant date fair value of warrants granted during the three months ended October 31, 2011 and 2010 was $0 and $0, respectively.

A summary of the status of the Company's non-vested compensatory equity warrants as of October 31, 2011, and the changes during the three months ended October 31, 2011, is presented below.

   
Compensatory
Equity
Warrants
   
Weighted
Average
Grant-Date
Fair Value
 
Non-vested at July 31, 2011
    1,316,503     $ 0.14  
Issued
    200,000       0.20  
Exercised
    -       -  
Expired
    -       -  
Vested
    (556,199 )     0.93  
Non-vested at October 31, 2011
    960,304     $ 0.13  
 
Total compensation cost related to non-vested awards not yet recognized is approximately $25 thousand and the weighted average period over which it is expected to be recognized is 1 year.

Non-compensatory Liability Warrants

During the three months ended October 31, 2011, Zurvita issued in conjunction with preferred stock non-compensatory warrants to purchase an aggregate of approximately 6 million shares of common stock.  There were approximately 55.2 million non-compensatory warrants outstanding as of October 31, 2011, all of which were classified as liabilities.  These warrants are classified as liability instruments as net share settlement is not considered within the Company’s control or certain exercise prices are not fixed which has the potential to cause a variable number of shares and/or value exchange upon exercise.

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

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

 
October 31, 2011
 
July 31, 2011
       
Expected dividends
0%
 
0%
Expected volatility
65%
 
65%
Risk free interest rate
0.94% - 1.47%
 
1.41% - 2.50%
Expected life
7 years
 
7 years


There were no vested or non-vested compensatory liability issuances, exercises or expirations during the three months ended October 31, 2011.

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

 
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ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)
 
Amacore had accelerated the vesting conditions of the original award prior to July 31, 2009 and, therefore, no compensation expense is recorded in fiscal 2010.  As of October 31, 2011, there were 800 thousand warrants outstanding and exercisable.  No warrants expired, nor were any warrants exercised or forfeited during the three months ended October 31, 2011 and, therefore, no intrinsic value has been realized.  As of October 31, 2011, the weighted average exercise price of warrants granted was $0.60.  The grant date fair value of the warrants granted was $0.43.
 
Stock-Based Compensation Expense
 
For the three months ended October 31, 2011 and 2010, the Company recognized stock-based compensation expense, including both expense related to compensatory warrants and expense related to share awards, with the Statement of Operations as follows:
 
   
For the Three Months Ended
 
   
October 31
 
   
2011
   
2010
 
Stock-based compensation:
 
Payroll and employee benefits
  $ 29,725     $ 155,312  
Total
  $ 29,725     $ 155,312  
 
NOTE 13 - RELATED PARTY TRANSACTIONS

Commissions Paid

There are immediate family members of Mr. Jarvis, who operate as independent sales consultants who were paid agent advances and commission compensation which approximated $0 thousand and $27 thousand, respectively, for the three months ended  October  31, 2011, and approximately $5 thousand and $14 thousand, respectively, for the three months ended October 31, 2010.   These payments were for work they performed on behalf of the Company.

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

The Company recognized interest expense with respect to the note payable due to Infusion Brands, who is a significant shareholder of the company.  For the three months ended October 31, 2011 and 2010, interest expense was approximately $86 thousand and $78 thousand, respectively.  Of the interest expense recognized, approximately $51 thousand and $46 thousand relates to the amortization of the discount and approximately $34 thousand and $32 was added to the principal of the note for the three months ended October 31, 2011 and 2010, respectively.

Agreement with Amacore

The Company entered into a Marketing and Sales Agreement on July 31, 2009, pursuant to which Amacore agreed to provide certain services to Zurvita.  In addition, pursuant to the Agreement, Zurvita shall continue to have the right to benefit from certain agreements which Amacore maintains with product and service providers.  For the three months ended October 31, 2011, Zurvita paid Amacore $262 thousand, for these services, as compared to $189 thousand for the same period in the prior year.

On June 30, 2011, the Company issued to Amacore an on-demand promissory note for $150 thousand.  The note accrued interest at 15% per annum.  As of October 31, 2011, the Company repaid the note plus accrued interest of $3 thousand.

On June 30, 2011, the Company issued to Amacore an on-demand promissory note for $295 thousand.  The note accrued interest at 15% per annum.  As of October 31, 2011 the Company repaid the note plus accrued interest of $2.9 thousand.

Note Payable to Mark Jarvis

On July 19, 2011, the Company issued to Mark Jarvis an on-demand promissory note for $20 thousand.  The note accrued interest at 15% per annum.  As of October 31, 2011, the Company repaid the note plus accrued interest of $213.


 
20

 



ZURVITA HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)

NOTE 14- SUBSEQUENT EVENTS

On December 6, 2011, the Company entered into an oral agreement with a related party, subject to further negotiations, to sell to the said related party certain securities, including, but not limited to, convertible preferred stock and warrants to purchase common stock of the Company.  The purchase price of the common stock is expected to be $1.3 million, which funds were received from related party on December 6, 2011. However, a preferred stock purchase agreement and other related transaction documents are in the process of being negotiated with related party and, accordingly, have not been executed at this time.
 
Effective November 30, 2011, Guy P. Norberg resigned from his position as a member of the board of directors of the Company. There were no disagreements or dispute between Mr. Norberg and the Company which led to his resignation. His resignation was effective immediately.
  



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 


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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Introduction

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

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

 
·
Results of operations – This section provides an analysis of our results of operations comparing the three months ended October 31, 2011 and 2010.  This analysis is provided on a consolidated basis.

 
·
Liquidity and capital resources – This section provides an analysis of our cash flows for the three months ended October 31, 2011 and 2010 as well as a discussion of our liquidity and capital resources.

Overview

Description of Business

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

Business Strategy

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

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

 
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Recently, Zurvita entered into the growing Health & Wellness industry with its recent launch of “Zeal”, a nutritional drink, and the weight management market with the launch of Zurvita’s Zeal Weight Management Program.
 
Zurvita has developed business processes to dramatically increase performance success:

Strengthen Brand Recognition

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

Increase Product and Service Offerings

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

Marketing

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

Technology

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

Training and Support

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

 
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RESULTS OF OPERATIONS

Results of Operations
 
   
For the Three Months Ended October 31,
 
               
Increase
 
   
2011
   
2010
   
(Decrease)
 
                   
Revenues
  $ 1,310,285     $ 1,312,785     $ (2,500 )
Cost of Sales
    1,122,430       882,281       240,149  
                         
Gross Profit
    187,855       430,504       (242,649 )
                         
Operating Expenses
    1,031,103       1,639,463       (608,360 )
Operating Loss
    (843,248 )     (1,208,959 )     (365,711 )
                         
Other Income
    182,676       3,048,376       (2,865,700 )
                         
(Loss) income before income taxes
    (660,572 )     1,839,417       (2,499,989 )
                         
Income Taxes
    583       1,302       (719 )
                         
Net (Loss) Income
  $ (661,155 )   $ 1,838,115     $ (2,499,270 )
                         
Basic (Loss) Earnings  Per Share
  $ (0.01 )   $ 0.03          
                         
Diluted (Loss) Earnings Per Share
  $ (0.01 )   $ 0.02          
 
Revenue:

For the three months ended October 31, 2011 and October 31, 2010, total revenue was constant at $1.3 million. Despite material decreases in the administrative websites, marketing fees and materials and membership fees revenue components, the Company was able to achieve consistent total revenue due to the Company’s new, consumable product that launched subsequent to October 31, 2010.  The various components of total revenue are discussed below.

Administrative Websites
Administrative website sales were approximately $128 thousand for the three months ended October 31, 2011, as compared to approximately $462 thousand for the three months ended October 31, 2010.  Prior to the Company’s lunch of Zeal, the Company experienced various product issues that resulted in significant attrition of the Company’s active consultant base who subscribe for such websites, resulting in an approximate $334 thousand decrease in administrative website revenue.
 
 Advertising Sales
The Company’s advertising sales were approximately $59 thousand for the three months ended October 31, 2011, as compared to approximately $241 thousand for the three months ended October 31, 2010.  The Company has reduced its marketing of Zlinked due to its technology platform having technical shortcomings that led to adverse refund and persistency rates, which caused an approximate $182 thousand decrease in advertising sales.  The Company is addressing these issues by redesigning the ZLinked technology platform to lower operating cost, to allow for more competitive product pricing, and to provide enhanced functions and services that are expected to increase the product’s performance and market value.
 
Commissions
The Company’s commission revenue for the three months ended October 31, 2011, was approximately $104 thousand as compared to approximately $111 thousand for the three months ended October 31, 2010.  The approximate $7 thousand decrease is due to run off of the Company’s residential energy block of business as well as lower commercial energy sales.  The Company did not market residential energy during the three months ended October 31, 2011. The Company is currently marketing only commercial energy in the State of Texas on a limited basis.
 
Consumable Products
The Company’s consumable products revenue represents Zeal product sales. For the three months ended October 31, 2011, consumable products revenue was approximately $898 thousand.  Zeal was launched in February 2011; therefore, there is no prior period revenue.
 
Marketing Fees and Materials
The Company’s marketing fees and materials revenue for the three months ended October 31, 2011, was approximately $75 thousand as compared to approximately $349 thousand for the three months ended October 31, 2010.  The aforementioned attrition of the Company’s active consultant base was the significant factor resulting in an approximate $274 thousand decrease in marketing fees and materials revenue.

 
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Membership Fees
The Company’s membership fees were approximately $46 thousand for the three months ended October 31, 2011, as compared to $150 thousand for the three months ended October 31, 2010.  The decrease in membership revenue is a result of the Company’s efforts to focus on the sale of advertising, energy, and consumable products as they are higher margin products.
 
Cost of Sales:

Total cost of sales for the three months ended October 31, 2011, was approximately $1.1 million as compared to approximately $882 thousand for the three months ended October 31, 2010.  The increase in cost of sales is related to the commissions paid to sales consultants as well as consumable product costs related to the Zeal product.  The various components of cost of sales are discussed below.
 
Benefit and Service Cost
 
Benefit and service cost represents the direct cost of the membership and subscription products sold such as administrative websites, advertising sales, marketing materials and membership fees.  Benefit and service cost was approximately $173 thousand as compared to approximately $313 thousand.  The decrease is due to less administrative website sales, advertising sales and membership fees.
 
Consumable Products Manufacturing Cost
 
Consumable products manufacturing cost represents Zeal’s manufactured cost and the cost of shipping the product to customers.  For the three months ended October 31, 2011, the Company recognized $270 thousand of such cost.  Zeal was launched in February 2011; therefore, there is no such prior quarter cost.
 
Sales Commissions
 
The Company pays its independent sales agents on a commission basis.  Sales commissions for the three months ended October 31, 2011, were approximately $680 thousand as compared to approximately $569 thousand for the three months ended October 31, 2010.  The increase of $111 thousand is a result of various promotions implemented to stimulate consumable product sales growth.
 
Gross Profit:

For the three months ended October 31, 2011, gross profit was approximately $188 thousand or 14%, as compared to approximately $431 thousand or 33% for the three months ended October 31, 2010.  Although total revenues were consistent between the periods, the gross profit amount and percentage decreased due to the significant increase in sales commissions.

Operating Expenses:

Our operating expenses for the three months ended October 31, 2011 and for the three months ended October 31, 2010, were approximately $1.0 million and $1.6 million, respectively.

The table below sets forth components of our operating expenses for the three months ended October 31, 2011, compared to the corresponding prior year period:
 
   
Three Months Ended October 31,
 
   
2011
   
2010
   
Increase (Decrease)
 
                   
Depreciation
  $ 8,716     $ 9,787     $ (1,071 )
Office Related Expenses
    132,009       126,699       5,310  
Payroll and Benefits
    506,539       606,852       (100,313 )
Professional Fees
    217,505       292,886       (75,381 )
Selling and Marketing
    145,932       523,488       (377,556 )
Travel
    20,402       79,751       (59,349 )
                         
Total operating expenses
  $ 1,031,103     $ 1,639,463     $ (608,360 )
 
 
Depreciation expense for the three months ended October 31, 2011, was approximately $9 thousand, a decrease of approximately $1 thousand from the same prior year period.  The decrease is due to lower carrying values of depreciable assets during the three months ended October 31, 2011 as compared to the same prior year period.

Office related costs include rent, insurance, utilities and office maintenance. For the three months ended October 31, 2011 these costs were approximately $29 thousand, $13 thousand, $11 thousand, and $79 thousand, respectively, as compared to $49 thousand, $12 thousand, $12 thousand, and $54 thousand for the three months ended October 31, 2010, an overall increase of approximately $5 thousand. 

 
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Payroll and related expenses for the three months ended October 31, 2011 was approximately $507 thousand, a decrease of approximately $100 thousand over the same prior year period.  The decrease is due to certain employee salary reductions and less recognition of stock based compensation.

Professional fees consist of consulting, accounting fees, contract labor and legal costs. For the three months ended October 31, 2011, these costs were approximately $53 thousand, $88 thousand, $45 thousand and $32 thousand, respectively, as compared to $64 thousand, $101 thousand, $88 thousand, and $40 thousand for the three months ended October 31, 2010.  Significant reductions in accounting fees and contract labor led to an overall professional fees decrease of approximately $75 thousand.  The higher accounting fees in the prior period was due to the Company changing its auditors and the predecessor auditor’s inability to provide consent to the use of their opinion on prior year financial statements which led to a re-audit of the prior year financial statements by the current auditor.  The decrease in contract labor is a result of the Company reducing its dependency on contract labor for its Zlinked operations.

Selling and marketing expenses for the three months ended October 31, 2011, were $146 thousand as compared to $523 thousand for the three months ended October 31, 2010, a decrease of approximately $377 thousand over the prior reporting period.  The significant decrease is due to less amortization of deferred costs such as agent advanced compensation and other prepaid marketing costs between the periods.

Business travel expenses for the three months ended October 31, 2011, were approximately $20 thousand, a decrease of approximately $59 thousand as compared to the three months ended October 31, 2010.  Travel expenses decreased as the Company limited its business travel to reduce expenses.

Other Income (Expense):

Gain on change in fair value of embedded share conversion feature

An embedded share conversion feature exists within the Company’s convertible note payable.  The Company has determined the conversion feature to be a derivative instrument and has estimated its at fair value at the time of issuance and at each subsequent reporting period.  We recorded an unrealized gain on the conversion feature for the three months ended October 31, 2011 of approximately $0 as compared to the unrealized gain for the three months ended October 31, 2010 of approximately $323 thousand.  These unrealized gains are a non-cash item not impacting operating cash flows or results of operations before other income and expenses. See Note 9 – Assets and Liabilities Measured at Fair Value, to financial statements contained within Item 1 of Part 1 of this Form 10Q for additional information with respect to the estimation of the fair value of this conversion feature.

Gain on change in fair value of warrants

The Company’s liability warrants are recorded at fair value.  Their fair value is subject to remeasurement on a recurring basis.  For the three months ended October 31, 2011 and 2010, the change in fair value of these warrants was approximately a gain of $228 thousand and a gain of $3.1 million, respectively.  The gain in fair value for the three months end October 31, 2011 is a result of the significant decline in share price from $0.04 to $0.02 which is used as an input in fair valuing the warrants. The gain in fair value for the three months ended October 31, 2010 is a result of the significant decline in share price from $0.32 to $0.14.  These gains are a non-cash item not impacting operating cash flows or results of operations before other income and expenses. See Note 9 – Assets and Liabilities Measured at Fair Value, to financial statements contained within Item 1 of Part 1 of this Form 10Q for additional information with respect to the estimation of the fair value of these warrants.

Interest expense

Interest expense for the three months ended October 31, 2011 was approximately $94 thousand, as compared to $84 thousand for the three months ended October 31, 2010.  The increase in interest expense is a result of accreting the discount recognized on the Company’s $2 million interest bearing convertible note issued on October 9, 2009.  Accretion of $86 thousand is included within interest expense for the three months ended October 31, 2011, as compared to $78 thousand of accretion included within interest expense for the three months ended October 31, 2010.

Loss on change in fair value of marketable securities

The Company’s marketable securities consist of non-registered common stock. The Company fair values these securities on a recurring basis.  The Company recorded an unrealized loss of $33 thousand for the three months ended October 31, 2011, as compared to the unrealized loss of $320 thousand recorded for the three months ended October 31, 2010.   These losses are a non-cash item not impacting operating cash flows or results of operations before other income and expenses. See Note 9– Assets and Liabilities Measured at Fair Value, to financial statements contained within Item 1 of Part 1 of this Form 10Q for additional information with respect to the determination of fair value for the Company’s marketable securities.


 
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Income Taxes:

For the three months ended October 31, 2011, the Company estimated approximately $583 in tax expense as compared to $1 thousand for the three months ended October 31, 2010.  The decrease between the periods is a result of the Company’s gross margin is the basis for estimating Texas gross margin tax.

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

Net (Loss) Income:

The Company had net loss of approximately $661 thousand for the three months ended October 31, 2011, as compared to a net income of approximately $1.8 million for the three months ended October 31, 2010.  The main reason the Company went from earnings to a loss is due to the Company recognizing less of an unrealized gain on the change in fair value of the Company’s liability warrants between the periods.

OFF BALANCE SHEET ARRANGEMENTS

We do not have any off balance sheet arrangements as of October 31, 2011.

LIQUIDITY AND CAPITAL RESOURCES

The following table compares our cash flows for the three month period ended October 31, 2011 to the corresponding prior period:
 
   
October 31, 2011
   
October 31, 2010
 
             
Net cash used in operating activities
  $ (941,112 )   $ (1,289,909 )
Net cash provided by (used in) investing activities
    (2,278 )     1,697,021  
Net cash (used in) provided by financing activities
    1,035,000       (75,076 )
                 
Net decrease in cash
  $ 91,610     $ 332,036  

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

As of October 31, 2011:
 
       
Current
  $ 80,106  
Thereafter
    -  
    $ 80,106  
         
 
Since its inception, the Company has met its capital needs principally through sale of its equity securities and the issuance of debt.  The proceeds from the sale of these securities have been used for the Company’s operating expenses, such as salary expenses, professional fees, rent expenses and other general and administrative expenses discussed above.  At October 31, 2011, the Company had negative working capital of approximately $2.1 million, an accumulated deficit of approximately $20.4 million and negative cash flows from operating activities of approximately $941 thousand. Since its inception, the Company has used approximately $11.1 million in operations.

We believe that without significant equity and debt investment from outside sources, the Company will not be able to sustain its current planned operations for the next 12 months.  During fiscal 2010, the Company has raised from a shareholder $5.3 million of equity funding.  During fiscal 2011, the Company has raised from a shareholder $1.5 million of equity funding.  In order to raise capital, the Company may sell additional equity or issued additional convertible debt securities which would result in additional dilution to our stockholders. The issuance of additional debt would result in increased expenses and could subject us to covenants that may have the effect of restricting our operations.  We can provide no assurance that additional financing will be available in an amount or on terms acceptable to us, if at all. If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we may be unable to execute upon our business plan or pay our costs and expenses as they are incurred, which could have a material, adverse effect on our business, financial condition and results of operations.   Currently, the Company does not maintain a line of credit or term loan with any commercial bank or other financial institution.  The Company has approximately $2.2 million of outstanding notes payable as of October 31, 2011.  These issues raise substantial doubt about our ability to continue as a going concern for a reasonable period.

 
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CRITICAL ACCOUNTING POLICIES

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

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

Revenue Recognition

Administrative Websites

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

Advertising Sales

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

Commissions

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

Consumable Products

The company markets a nutritional drink called “Zeal”.  Revenue from the sale of this consumable product is recognized upon shipment of the product.

Marketing Fees and Materials

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

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

Membership Fees

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

 
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Fair Value Measurements

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

Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities.

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

 
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PART II - OTHER INFORMATION


Item 1. Legal Proceedings

As of October 31, 2011, there was no material changes in the Company’s legal proceedings as previously disclosed in the Company’s 2011 Annual Report.

Item 1a. Risk Factors

Not applicable.

Item 2. Unregistered Sales of Equity and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Removed and Reserved

Item 5. Other Information.

None

Item 6. Exhibits
 
(a) Exhibits:
 
 
   
31.2
Certification of the Co-Chief Executive Officer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1
Certification pursuant to Section 906 Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
 
101.INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document



 
30

 


SIGNATURES

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

Dated: December 15, 2011
 /s/ Jay Shafer
 
Jay Shafer
 
Co-Chief Executive Officer
   
   
Dated: December 15, 2011
/s/ Jason Post
 
Jason Post
 
Chief Financial Officer
 
 
 
 
 
 
 
 
 
 

 
 
31

 



EXHIBIT INDEX

 
 
 
 
   
31.2
Certification of the Co-Chief Executive Officer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1
Certification pursuant to Section 906 Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
 
101.INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document

 
 
 
 
 
 
 
 
 
 
 
 
 
32