UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
COMMISSION FILE NUMBER 0-23100
HEALTHSPORT, INC.
(Exact name of small business issuer in its charter)
DELAWARE 22-2649848
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
10130 MALLARD CREED ROAD, SUITE 331, CHARLOTTE, NC 28262
(Address of Principal Executive Office) (Zip Code)
7633 E 63RD PLACE, SUITE 220, TULSA, OK 74133
(Former Address of Principal Executive Office) (Zip Code)
ISSUER'S TELEPHONE NUMBER (704) 944-3574
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, $0.0001 PAR VALUE
(TITLE OF EACH CLASS)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act Yes [_]; No [X].
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. Yes [_]; No [X].
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes? [X]; No [_].
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [_].
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 definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [_] Non-accelerated filer [_]
Accelerated filer [_] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act). Yes [_]; No [X].
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and ask price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter. $9,229,997.
As of February 28, 2009, the registrant had outstanding 49,859,082 shares of its
common stock, par value of $0.0001, its only class of voting securities.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Report except those
Exhibits so incorporated as set forth in the Exhibit index.
HEALTHSPORT, INC.
TABLE OF CONTENTS
FORM 10-K
Part I
Page
PART I
Item 1 Business 4
Item 1A Risk Factors 11
Item 2 Properties 12
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a Vote of Security Holders 12
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities 13
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation 15
Item 7A Quantitative and Qualitative Disclosures about Market Risk 23
Item 8 Financial Statements and Supplementary Data 24
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 48
Item 9A(T) Controls and Procedures 48
Item 9B Other Information 50
PART III
Item 10 Directors, Executive Officers and Corporate Governance 51
Item 11 Executive Compensation 54
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 58
Item 13 Certain Relationships and Related Transactions, and Director Independence 60
Item 14 Principal Accountant Fees and Services 60
PART IV
Item 15 Exhibits and Financial Statement Schedules 61
3
From time to time, we may publish forward-looking statements relative to such
matters as anticipated financial results, business prospects, technological
developments and similar matters. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. The following
discussion and analysis should be read in conjunction with the report on the
Consolidated Financial Statements and the accompanying Notes to Consolidated
Financial Statements appearing later in this report. All statements other than
statements of historical fact included in this Annual Report on Form 10-K are,
or may be deemed to be, forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange
Act of 1934, as amended. Important factors that could cause actual results to
differ materially from those discussed in such forward-looking statements
include, but are not limited to, the following: our current liquidity needs, as
described in our periodic reports; changes in the economy; our inability to
raise additional capital; our involvement in potential litigation; volatility of
our stock price; the variability and timing of business opportunities; changes
in accounting policies and practices; the effect of internal organizational
changes; adverse state and federal regulation and legislation; and the
occurrence of extraordinary or catastrophic events and terrorist acts. These
factors and others involve certain risks and uncertainties that could cause
actual results or events to differ materially from management's views and
expectations. Inclusion of any information or statement in this report does not
necessarily imply that such information or statement is material. We do not
undertake any obligation to release publicly revised or updated forward-looking
information, and such information included in this report is based on
information currently available and may not be reliable after this date.
PART I
ITEM 1: BUSINESS
BUSINESS DEVELOPMENT
HealthSport, Inc. (together with its subsidiaries, hereinafter referred to as
the "Company", "HealthSport", "we" or "us"), is a holding company, originally
incorporated on July 25, 1985 in Delaware, and currently has the following
wholly-owned subsidiaries which were active during the past year:
o Enlyten, Inc. ("Enlyten"), a Nevada corporation, organized on November
28, 2006;
o Health Strip Solutions, LLC ("Health Strip"), a Nevada limited
liability corporation, organized on February 13, 2006; acquired 80% on
March 29, 2006, 10% on December 21, 2006 and the remaining 10% on
December 27, 2006;
o Healthsport Nutraceutical Products, Inc. ("Nutraceutical"), a Nevada
corporation organized on November 17, 2006; acquired on December 6,
2006; name changed from Cooley Nutraceuticals, Inc. on January 15,
2009; and
o InnoZen, Inc. ("InnoZen"), a Nevada corporation organized on May 30,
2002; acquired on May 4, 2007.
On April 24, 2006, we filed a Definitive Information Statement pursuant to
Section 14C which provided that effective May 15, 2006; 1) our name would be
changed to HealthSport, Inc.; 2) our issued and outstanding shares would be
reverse-split one share for each 200 shares; and 3) our Certificate of
Incorporation would be restated to reflect these amendments. These amendments
4
were approved by our Board of Directors and in writing by 52.33% of our
shareholders on March 31, 2006. Accordingly, effective May 15, 2006, our name
was changed to HealthSport, Inc., our shares were reverse-split one for 200, and
our Certificate of Incorporation was restated to reflect these amendments. We
have made the change in outstanding shares and all references to shares have
been retroactively restated for all periods included in this report on Form
10-K.
HealthSport, Inc. was originally incorporated in 1985 as Horizon Capital Corp.
We were known as Reconversion Technologies, Inc. until May 1, 2000, at which
time our name was changed to Logisoft Corp. On May 15, 2001, we changed our name
from Logisoft Corp. to Team Sports Entertainment, Inc., on November 8, 2004, we
changed our name to Idea Sports Entertainment Group, Inc. and on May 15, 2006,
we changed our name to HealthSport, Inc.
INNOZEN ACQUISITION
On May 4, 2007, the Company completed the acquisition of InnoZen through a
merger of InnoZen with InnoZen Acquisition Sub, Inc. ("Acquisition Sub"), the
Company's wholly owned subsidiary, all Delaware corporations, in exchange for
18,249,952 shares of the Company's common stock. In accordance with Delaware
General Corporate Law and pursuant to the terms and conditions of the Merger
Agreement, Acquisition Sub was merged with and into InnoZen, after which,
InnoZen became the Company's wholly-owned subsidiary and continues as the
surviving corporation and the separate existence of Acquisition Sub ceased.
InnoZen is a formulator, developer and manufacturer of edible thin film strips
that deliver drug actives and was the first company to deliver a drug active
ingredient in a thin film strip.
The acquisition was accounted for using the purchase method of accounting and,
accordingly, the consolidated statements of operations include the results of
InnoZen beginning May 4, 2007. The assets acquired and the liabilities assumed
were recorded at estimated fair values as determined by the Company's management
based on information currently available and on current assumptions as to future
operations.
BUSINESS OF THE COMPANY
HealthSport is publicly traded on the bulletin board market under the ticker
symbol HSPO.OB. HealthSport is focused exclusively on the development,
manufacturing, distribution and marketing of edible film strip products
containing nutritional supplements and over-the-counter drugs using certain
proprietary technology. This technology system provides rapid dissolution and
release of active ingredients when the strip comes in contact with saliva in the
mouth.
InnoZen was the first company to deliver a drug in an edible film strip and
maintains proprietary edible film strip technology pertaining to method of
manufacture, including administration of drug and nutritional supplements via
its unique bi-layer process. InnoZen has pending patents relating to use and
administration of Transmucosal delivery of nutritional supplements and the
Patent Cooperation Treaty suggests that we will maintain world-wide novelty of
all patents. InnoZen maintains additional trade secrets of product and flavor
formulation and manufacture of its film strip products.
5
Using InnoZen's in-house research, development and manufacturing capabilities,
HealthSport has the ability to rapidly formulate and develop new thin film
products and other products using various additional oral delivery systems such
as gels. As a result, HealthSport anticipates a steady stream of new products.
In 2008, InnoZen entered into a joint venture agreement with Migami, Inc.
("Migami") and was to be 52% owner of Pacific Manufacturing Group, LLC, ("PMG"),
a California limited liability corporation organized on December 7, 2007 and
activated effective February 1, 2008, which was formed to build a world-wide
regulatory compliant manufacturing facility with cutting edge innovation and
stringent quality control, which will be cGMP compliant. Current manufacturing
is completed at the InnoZen laboratory and pilot plant in Woodland Hills,
California. Migami was scheduled to contribute $3,000,000 for its 48% interest
in PMG. However, Migami was able to make only $990,000 of the required capital
contributions. This resulted in substantial delays in completing the
manufacturing facility which is located in Oxnard, California. Production
commenced in January 2009, although all operations have not yet been relocated
to this facility. As a result of the delays in funding from Migami, it forfeited
all rights under the joint venture agreement. After it was determined that PMG
could not obtain the necessary capital to complete the manufacturing facility
and fund the monthly losses, it was decided PMG should be closed. Subsequently,
InnoZen sold its interest on December 30, 2008 for nominal consideration.
Enlyten was formed to develop, brand, secure domestic and international
distribution, launch and market our various product lines through the execution
of targeted and strategic marketing plans.
HealthSport and InnoZen developed four new products that launched at the end of
2008, including ENLYTEN(TM) ENERGY STRIPS, ENLYTEN(TM) MELATONIN SLEEP STRIPS,
ENLYTEN(TM) ELECTROLYTE PLUS STRIPS and ENLYTEN(TM) ANTIOXIDANT STRIPS. These
products all use our bi-layer delivery system and have been specifically
formulated for distribution through the T. Lynn Mitchell Companies, LLC and are
to be marketed on a national basis beginning in January 2009.
PRODUCT OVERVIEW
Our mission is to be a leader in developing and manufacturing pharmaceutical
products in unique and convenient oral delivery formats using science and
innovation to improve people's lives. The main method of achieving this is by
use of "medicine in a strip"(R) that can be orally ingested. Flavor is an
important part of the film strip development process and our team has extensive
experience in developing flavors in film strips.
This goal can be achieved by creatively applying our unique, proprietary
knowledge and technology to create unique medicines in a strip that enable drug
developers to have an alternative and proprietary method of delivering their
existing products, as well as new products, and of extending and expanding their
respective market positions, brands, distribution networks and intellectual
property.
6
SPORTSTRIPS
Over the past year and half, InnoZen has been applying its film strip technology
formulation and manufacturing expertise to develop film strips containing
electrolytes. Electrolytes are chemicals that form electrically-charged
particles (ions) in body fluids. These ions carry the electrical energy
necessary for many functions, including nerve impulse transmission and muscle
contractions.
Many normal body functions depend on electrolytes, and optimal athletic
performance requires a consistent and adequate supply of these important
nutrients. Electrolytes such as those found in SPORTSTRIPS, along with water,
can be used in oral rehydration therapy to replenish the body's electrolyte
levels after dehydration caused by exercise, diarrhea or vomiting. Drinking
water alone is not the best way to restore fluid levels after extreme athletic
activity because it dilutes the salts inside the body's cells and interferes
with their chemical functions. This can lead to water intoxication. (This and
other side-effects can be a similar negative consequence of excess ingestion of
popular liquid electrolyte solutions.)
Our SPORTSTRIPS have been tested by Dr. David Berkoff of Duke Sports Medicine's
K-Lab and have so far provided positive results. With the patented film strip
technology developed by InnoZen and testing completed by Dr. Berkoff, we began
marketing SPORTSTRIPS in the summer of 2007.
PEDIASTRIPS
We have developed a new product customized to replenish electrolytes and aid in
faster and more efficient hydration for children with flu symptoms, vomiting or
diarrhea. PEDIASTRIPS are a cutting edge technology that delivers essential
electrolytes to children without sugar or other non-essential additives. We
began marketing PediaStrips in the fourth quarter of 2007.
FIX STRIPS(TM)
FIX STRIPS were developed to provide fast, effective and safe relief for those
individuals who incorporate social drinking into their lifestyle. FIX STRIPS are
a nutritional supplement that quickly and effectively provides caffeine,
electrolytes, antioxidants and other essential vitamins and minerals. We began
marketing FIX STRIPS in the fourth quarter of 2007. The product is currently
undergoing a change in formulation to improve the taste and should begin
shipping again in 2009.
SURVIVAL STRIPS
We are currently working with the United States Military to evaluate and test
the effectiveness of SURVIVAL Strips. SURVIVAL STRIPS are formulated with
antioxidants, non-cavity causing sweeteners, vitamins, herbal extracts,
electrolytes, caffeine and other proven beneficial compounds. SURVIVAL STRIPS
are being designed specifically for military personnel as a convenient, light
weight, heat stable, effective remedy to fatigue, drowsiness, dehydration and
diminished performance during routine and special operations. The strips are
being examined in military populations to evaluate their effectiveness in
providing energy, increasing alertness, combating dehydration and improving
performance in extended operations.
7
The following products all use our bi-layer delivery system and have been
specifically formulated for distribution through the T. Lynn Mitchell Companies,
LLC and are to be marketed on a national basis beginning in January 2009.
ENLYTEN(TM) MELATONIN PLUS STRIPS
ENLYTEN MELATONIN PLUS STRIPS are designed with a blend of melatonin and
theanine as a natural aid to help you sleep better. Melatonin has been shown to
relieve occasional sleeplessness. Theanine has been shown to reduce ordinary
mental and physical stress.
ENLYTEN(TM) ENERGY STRIPS
ENLYTEN ENERGY STRIPS are fast acting and easy to use. ENLYTEN ENERGY STRIPS
contain zero carbohydrates, zero fat, and zero sugar. Our scientific blend of B
vitamins, caffeine and herbs will leave you refreshed, rejuvenated and
re-energized.
ENLYTEN(TM) ANTIOXIDANT STRIPS
The ingredients in the ENLYTEN ANTIOXIDANT STRIPS, along with a healthy diet and
exercise, can help you with recovery and overall health. These strips are
formulated with components having the most scientifically proven antioxidant
properties.
ENLYTEN(TM) ELECTROLYTES PLUS STRIPS
ENLYTEN ELECTROLYTES PLUS STRIPS are designed to provide your body with much
needed electrolytes and antioxidants prior to and during exercise to promote
optimal physical performance. They help maintain proper electrolyte balance
which is essential for proper hydration as well as muscle and nerve function.
These strips provide a source of electrolytes and antioxidants available for
people with an active lifestyle.
PRODUCTS UNDER DEVELOPMENT
We are currently working on a number of additional products which can be
delivered using our bi-layer strip delivery system. These include pain
relievers, anti-diarrhea, weight-loss, sedatives, and vitamin products.
Pharmaceutical applications and veterinarian market products are also being
formulated for testing.
INDUSTRY OVERVIEW
We are a drug delivery company specializing in proprietary dissolving thin film
pharmaceutical products. Our thin film, which is similar in size, shape and
thickness to a postage stamp, dissolves rapidly and utilizes a novel process and
proprietary encapsulation compositions to mask the taste of the drug contained
within the film. We believe these qualities render our thin film easy to use
and, consequently, will improve patient compliance, providing a significant
benefit to patients, their prescribing physicians and healthcare institutions.
Our thin film drug delivery technology is currently used in the
over-the-counter, or OTC, marketplace, and we are developing thin film
containing prescription drugs. By incorporating approved drugs with
soon-to-expire or expired patents into our thin film, we believe we can extend
their patent lives and protect the drug revenues important to our existing and
8
future pharmaceutical partners. Furthermore, we are building the infrastructure
required to produce our thin film rapidly and at scale.
We believe our thin film delivery technology has several material benefits over
existing drug delivery forms and should enjoy strong physician, patient and
consumer acceptance. Our thin film improves convenience and ease of use through
discretion and portability and precludes the need for water or liquids. Our thin
film may also improve dosing accuracy relative to liquid formulations thereby
ensuring proper dosing for the pediatric, geriatric and mentally ill patients
where proper administration is often difficult. In addition, our thin film
provides ease of dosing for patients with conditions that make it difficult to
swallow other solid dosage forms such as tablets or capsules.
Our proprietary thin film drug delivery technology is supported by a significant
portfolio of intellectual property, which we believe differentiates us from our
competitors. We believe this technology will enable pharmaceutical companies to
better manage the life cycle of their products. By combining our thin film
delivery technology with existing drugs, we believe our thin film can
strategically differentiate existing or soon-to-be generic drugs from potential
generic competitors and can help protect branded prescription products against
existing or new generic entries by providing additional patent protection or
exclusivity in the marketplace. Additionally, we believe our thin film drug
delivery technology can also be used to create new drug products with improved
efficacy.
We believe we are the only company completely dedicated to thin film as a drug
delivery dosage form and have created a vertically integrated infrastructure to
ensure leadership capabilities in the critical activities of drug taste-masking,
analytical development, global formulation development, manufacturing and
packaging. We have invested significantly in this model of vertical integration
to develop an operational infrastructure that we believe will position us to
seamlessly commercialize products in concert with our partners' respective sales
forces.
We have pursued and plan to continue to pursue four different strategic revenue
paths to profitability. We plan to develop thin film versions of existing
prescription products under partner-funded agreements. We also expect to
self-fund the development of versions of existing prescription products which we
intend to ultimately partner. We also plan to partner with pharmaceutical
companies to develop and deliver new prescription products with improved
efficacy and to continue to commercialize products in the OTC marketplace.
SALES & DISTRIBUTION
To handle all of the sales, marketing, and distribution needs of our various
products, we formed Enlyten as a wholly-owned subsidiary. Enlyten began
marketing and distributing the film strips using all forms of traditional
outlets including grocery and drug stores, big box retailers and sporting goods
stores. We were unable to establish a market for our products of sufficient size
to support our business plan, and we were forced to abandon this approach for
marketing our products.
Accordingly, on March 11, 2008, we completed a five-year distribution agreement
with Unico Holdings, Inc. ("Unico"). Unico markets its products through numerous
sales channels, including large retail merchandisers, drug store chains, grocery
stores and pharmaceutical distributors. Unico's customers include most of the
largest retailers and distributors in the U.S. in each of these sales channels.
The agreement calls for a minimum of $22 million of product purchases over the
five-year term in order for Unico to maintain its exclusive distribution right.
9
On September 11, 2008, the Company entered into an exclusive distributor
agreement with T. Lynn Mitchell Companies, LLC ("T Lynn"). Pursuant to the
agreement, T Lynn, for a period of ten years, was granted the exclusive
worldwide rights for the four initial products which use the Company's patent
pending bi-layered strip technology. In addition, the agreement contemplates
that the Company can formulate other bi-layered products which T Lynn may market
in the future, subject to pricing or other constraints.
MANUFACTURING
InnoZen maintains a drug delivery research and development facility and a
manufacturing plant in Woodland Hills, California. The facility is registered
with the FDA and certified by the California department of Health. This
manufacturing facility provides new business opportunities through customized
product production and pilot scale runs of film strip products, and the ability
to then deliver final product quickly and at reasonable cost. Internal
manufacturing enables quicker and more responsive development of new and custom
formulations and provides the ability to then promptly fill orders for the new
products. The net result is our unique ability to develop and deliver new film
strip formulations and products to market faster and more economically. The
Company plans to consolidate this facility with the main manufacturing facility
in Oxnard, California by mid-year 2009.
CUSTOM CUTTING AND PACKAGING: Our cutting and packaging operation can be
optimized to meet the specific requirements, and budgets, of our clients. Using
high-tech labeling equipment, we offer a range of labeling options, including a
tamper resistant seal and full wrap-around application. Technologically advanced
blister card machinery enables us to offer retail ready packaging, blister card
single and multi-packs and flow-wrap individual products. We also offer a number
of innovative packaging solutions, including space saving packaging designs.
CAPACITY AND INVENTORY MANAGEMENT: With its own on-site manufacturing strip
facility, InnoZen is in position to manufacture all of the initial requirements
for the SPORTSTRIPS, PEDIASTRIPS, FIX STRIPS, ENLYTEN(TM) ENERGY STRIPS,
SURVIVAL STRIPS, ENLYTEN MELATONIN STRIPS, ENLYTEN ANTIOXIDANT STRIPS, ENLYTEN
ELECTROLYTES PLUS and products for itself and other third party distributors. To
meet increasing product demand, the Company leased a new manufacturing facility
which is located in Oxnard, California and began initial production in January
2009. We will produce all of our product as well as 3rd party and private label
film strip products at this facility. Our manufacturing process will be
customized to meet the unique specifications of each client.
INTELLECTUAL PROPERTY
Patents and pending patent applications seek to protect new technologies we have
developed in formulating, developing and manufacturing edible film strip
products containing drug actives. Other techniques are protected as trade
secrets. These new core technologies include novel methods of manufacturing film
strips to create additional stability and to increase the amount of drug actives
that can be delivered in a single film strip. We also seek to protect the
delivery of the specific drug active ingredients in our edible film strips.
10
We have filed U.S. and foreign trademark and patent applications to protect
product lines and general technology; they rely on a combination of intellectual
property laws, nondisclosure agreements and other measures to protect
proprietary rights. Currently, we have six United States patent applications
pending; and we expect to file several more as new products are developed. We
have also filed patent applications in several foreign countries and we also own
various trademarks, including SPORTSTRIPS, RESTORE, SURVIVAL STRIPS, InnoZen,
Suppress, and "Medicine in a Strip." Trademark registrations are available upon
request.
SEGMENT REPORTING
We currently operate in one reportable segment.
Substantially all of our sales are currently domestic. We anticipate
international growth opportunities commencing in 2010.
CUSTOMERS
During 2008, we had 3 customers which accounted for 60% of consolidated sales.
During 2007, we had one customer which accounted for 14% of consolidated sales.
BACKLOG
At December 31, 2008, the Company had a backlog of purchase orders of
$1,086,000. At December 31, 2007, the Company did not have a backlog.
RESEARCH AND DEVELOPMENT
We have an active and ongoing research effort to develop new products and to
make improvements to existing products. We also work with a number of customers
to develop strip delivery systems for their products, which is generally
reimbursed by the customer.
The research and development conducted by Dr. David Berkoff and Anthony Seaber,
medical doctors and experts in sports medicine at Duke University, and by other
clinical experts on several of our products will be communicated to other
medical experts, coaches and trainers in each field along with the benefits the
products have to offer, not only to professional athletes but to individuals as
well. Their participation is important to reinforce the scientific verification
data by offering their assessments and results with trainers, coaches, athletes,
military personnel and the general public.
EMPLOYEES
At December 31, 2008 and 2007, we had 43 and 42 full-time employees,
respectively.
Our employees are not represented by a labor union. We have experienced no work
stoppage and believe that our employee relationships are good.
ITEM 1A: RISK FACTORS
Not applicable.
11
ITEM 2: PROPERTIES
The corporate offices are currently located at 10130 Mallard Creek Road, Suite
331, Charlotte, NC 28262. The space consists of 400 square feet and is under
lease through September 2009.
Enlyten executed a three-year operating lease which commenced on February 1,
2007 for 2,182 square feet of office space for its staff in Amherst, New York.
This space is no longer being used, and we are attempting to sub-lease the
space.
InnoZen leases its facility in Woodland Hills, California pursuant to a lease
agreement which expires on January 1, 2010, at which time InnoZen has the option
to extend the term for an additional year. InnoZen believes it has found an
acceptable tenant to assume the balance of the lease and expects to consolidate
all of its operations at the facility in Oxnard by mid-year 2009.
The Company leases a facility in Oxnard, California which began initial
production in January 2009. The lease commenced December 1, 2007 for seven years
and two months until January 31, 2015. The Company had no cost for the lease
obligation in January and February 2008 while they began installation of the
manufacturing equipment and preparing the facility for use. All InnoZen
operations are intended to be located at this facility.
ITEM 3: LEGAL PROCEEDINGS
In the normal course of business, the Company may become a party in a legal
proceeding. The only significant matter of which the Company is aware is the
following.
On October 30, 2007, our wholly-owned subsidiary, Enlyten, Inc., filed a lawsuit
against The Gatorade Company and PepsiCo, Inc. (collectively referred to as
Gatorade) in the State of New York Supreme Court, County of Erie. The Complaint
alleges that Gatorade has tortiously interfered with Enlyten's contractual
agreement with the Buffalo Bills and with Enlyten's business relationships with
various third parties including other NFL teams, in an attempt to wrongfully
restrain trade. Enlyten is represented by Michael B. Powers of the law firm of
Phillips Lytle, LLP in Buffalo, New York. The alleged interference has severely
limited our ability to market and sell the SPORT STRIP. The case is still in the
early stages of discovery. On December 4, 2008, the Company was forced to bring
a motion to compel discovery from the defendants and, on February 24, 2009, the
Court ordered the defendant to produce discovery within 60 days.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 2008.
12
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our $0.0001 par value per share common stock is traded in the over-the-counter
market and is quoted on the National Association of Securities Dealers ("NASD")
Over-The-Counter Bulletin Board ("OTCBB") under the symbol "HSPO.OB." Previously
we were quoted on the OTCBB under the symbols "ISPO.OB," "TSPT.OB," "LGST," and
"RTTK."
The following table sets forth the quarterly high and low daily close for our
common stock as reported by the OTCBB for the two years ended December 31, 2008.
The bids reflect inter-dealer prices without adjustments for retail mark-ups,
mark-downs or commissions and may not represent actual transactions.
HIGH LOW
---- ---
2008
Fourth quarter $ 0.79 $ 0.08
Third quarter $ 0.25 $ 0.10
Second quarter $ 0.51 $ 0.175
First quarter $ 0.58 $ 0.31
2007
Fourth quarter $ 1.55 $ 0.52
Third quarter $ 2.09 $ 0.95
Second quarter $ 2.45 $ 1.48
First quarter $ 2.99 $ 2.20
The OTCBB is a quotation service sponsored by the NASD that displays real-time
quotes and volume information in over-the-counter ("OTC") equity securities. The
OTCBB does not impose listing standards or requirements, does not provide
automatic trade executions and does not maintain relationships with quoted
issuers. A company traded on the OTCBB may face loss of market makers and lack
of readily available bid and ask prices for its stock and may experience a
greater spread between the bid and ask price of its stock and a general loss of
liquidity with its stock. In addition, certain investors have policies against
purchasing or holding OTC securities. Both trading volume and the market value
of our securities have been, and will continue to be, materially affected by the
trading on the OTCBB.
HOLDERS
At February 28, 2009, there were approximately 863 holders of record of our
common stock with approximately 53% of our shares in the public float.
13
DIVIDENDS
We have never paid cash dividends on our common stock and intend to utilize
current and future resources to implement our plan of operations. It is not
anticipated that cash dividends will be paid on our common stock in the
foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes certain information as of December 31, 2008, with
respect to compensation plans (including individual compensation arrangements)
under which our common stock is authorized for issuance:
Number of securities to be
issued upon exercise of Weighted average exercise Number of securities
outstanding options, price of outstanding remaining available
PLAN CATEGORY WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS FOR FUTURE ISSUANCE
------------- ------------------- ---------------------------- -------------------
Equity compensation plans
approved by security holders:
2000 Plan - $ -- 15,000
2006 Plan 4,985,390 1.11 14,610
----------------------- ---------------------- ------------------
4,985,390 $ -- 29,610
======================= ====================== ==================
The Company has two Stock Option Plans; the Stock Option Plan dated in April
2000 and approved in April 2001 (the "2000 Plan") which authorizes the grant of
options to purchase an aggregate of 15,000 shares; and the Stock Option Plan
dated October 18, 2006 and approved in October 2006 (the "2006 Plan") which
authorizes the grant of options to purchase an aggregate of 5,000,000 shares. On
August 30, 2007, the Board of Directors authorized formation of a new plan with
4,000,000 shares. This plan has not been completed nor has it been approved by
the stockholders. (Collectively the "Plans")
The material features of the Plans, the data for which is summarized under the
equity compensation plans approved by security holders in the table above are
summarized in Note 9 to the consolidated financial statements that appear in
Item 8.
RECENT SALES OF UNREGISTERED SECURITIES
Sales during the first three quarters of the fiscal year were reported in Item 2
of Part II of the Form 10-QSB filed for each quarter.
During the fourth quarter:
o We issued 79,729 shares of our common stock pursuant to the
exercise of a cash-less warrant;
o We issued 750,000 shares of our common stock for consulting
services valued at $67,500;
o We issued 693,334 shares of our common stock for conversion of
notes payable in the amount of $100,000 and accrued interest
in the amount of $4,000;
o We issued 300,000 shares for of our common stock for
technology and trade secrets valued at $75,000;
14
o We issued 1,000,327 shares of our common stock for accounts
payable in the amount of $229,002;
o We issued 626,000 shares of our common stock in exchange for
cash in the amount of $156,500; and
o We issued 533,333 shares of our common stock for loan
origination fees in the amount of $80,000.
All of the shares issued were sold pursuant to an exemption from registration
under Section 4(2) promulgated under the Securities Act of 1933, as amended.
ITEM 6: SELECTED FINANCIAL DATA
Not applicable.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
HealthSport is publicly traded on the bulletin board market under the ticker
symbol HSPO.OB. HealthSport is focused exclusively on the development,
manufacturing, distribution and marketing of edible film strip technology. This
technology system provides rapid dissolution and release of active ingredients
when the strip comes in contact with saliva in the mouth.
On May 4, 2007, the Company completed the acquisition of InnoZen through a
merger of InnoZen with InnoZen Acquisition Sub, Inc. ("Acquisition Sub"), the
Company's wholly-owned subsidiary, all Delaware corporations, in exchange for
18,249,952 shares of the Company's common stock. In accordance with Delaware
General Corporate Law and pursuant to the terms and conditions of the Merger
Agreement, Acquisition Sub was merged with and into InnoZen, after which,
InnoZen became the Company's wholly-owned subsidiary and continues as the
surviving corporation and the separate existence of Acquisition Sub ceased.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2008 and 2007, we had current assets of $1,799,604 and
$2,411,410; current liabilities of $4,527,706 and $2,066,125; and a working
capital deficit of $2,728,102 and working capital of $345,285, respectively. We
incurred a loss of $8,953,121 during 2008, which included depreciation and
amortization of $1,366,451 and amortization of non-cash stock compensation of
$2,823,530.
We expect to require $500,000 in capital expenditures in 2009, primarily to make
the manufacturing facility in Oxnard FDA compliant, add any necessary additional
equipment and to add offices required to relocate our remaining personnel from
Woodland Hills.
In 2007, the Company projected sales to be as high as $10 million, based on
forecasts for SPORTSTRIPS, PediaStrips and FIX STRIPS. The alleged tortious
interference by Gatorade in our agreement with the Buffalo Bills, other NFL
teams and NFL players substantially hindered our ability to market and sell our
15
SPORTSTRIPS product, which was our first product to market. FIX STRIPS sales did
not commence until the fourth quarter of 2007 and were substantially below
initial forecasts from consultants. At the end of the fourth quarter of 2007,
the Company changed its sales direction and reduced staff with the goal of
selling product through distributors rather than making all sales directly to
our customers.
On March 11, 2008, we completed a five-year distribution deal with Unico
Holdings, Inc. ("Unico"), wherein they will market our PEDIASTRIPS product as
well as negotiate for our electrolyte strips to be manufactured for private
label usage. Unico markets its products through numerous sales channels,
including large retail merchandisers, drug store chains, grocery stores and
pharmaceutical distributors. Unico's customers include most of the larger
retailers and distributors in the U.S. in each of these sales channels. The
agreement calls for a minimum of $22 million of product purchases over the
five-year term in order for Unico to maintain its exclusive distribution right.
Current sales to Unico are approximately 30% of the level in the distribution
agreement, however, Unico expects the level of sales to increase as they add
additional customers.
The Unico distribution deal is initially for PEDIASTRIPS and commenced during
the third quarter of 2008. We are attempting to establish similar arrangements
for our SPORTSTRIPS and other products. The Company has established other film
strip products for products which were previously only delivered in a different
manner, such as liquids and pills. The Company expects this to develop into a
larger part of its business in the future.
On September 11, 2008, the Company entered into an exclusive distributor
agreement with T. Lynn Mitchell Companies, LLC ("T Lynn"). Pursuant to the
agreement, T Lynn, for a period of ten years, was granted the exclusive
worldwide rights for the four initial products which use the Company's patent
pending bi-layered strip technology. In addition, the agreement contemplates
that the Company can formulate other bi-layered products which T Lynn may market
in the future, subject to pricing or other constraints. The Company began sales
of Antioxidant Strips, Electrolytes Plus, Energy Strips and Melatonin & Theanine
Strips under the ENLYTEN(TM) trademaRk during the fourth quarter of 2008 which
will be nationally marketed beginning in the first quarter of 2009.
The Company will continue to require substantial working capital until sales
develop to the level required to support operations. The current level of
overhead is approximately $175,000 per month and manufacturing costs total
approximately $240,000 per month. The Company is continually analyzing its
current costs and is attempting to make additional cost reductions where
possible. Sales amounted to approximately $1,600,000 during the first quarter of
2009. This sales level represents a substantial improvement from prior periods
but will require additional increases to support the current level of
operations. We estimate that sales will develop to the level necessary to be at
or near cash flow break-even by the beginning of the third quarter of 2009.
Based on this time-frame, the Company would need from $500,000 to $1,500,000 in
capital to meet its minimum requirements, including operating cash short-falls
and completing a globally compliant manufacturing plant. The Company expects to
continue to make private placements of its common stock or to borrow additional
funds as needed to meet these requirements.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that may result from the outcome of these uncertainties.
16
RESULTS OF OPERATIONS
REVENUES
Revenues in 2008 and 2007 consist of the following:
2008 2007
---------- ----------
Product sales $1,419,210 $ 305,461
License fees, royalties and services 75,000 133,363
---------- ----------
$1,494,210 $ 438,824
========== ==========
In 2008, product sales increased to 465% of the 2007 amount. The majority of the
$1,113,749 increase is from pedia sales of $688,566 and $243,589 in sales of
other new products. The majority of the pedia sales did not commence until the
third quarter of 2008, and the other new product sales did not commence until
late December 2008. The Company expects continuing increases in sales of these
products as well as other new products which are expected to begin shipping in
2009.
COSTS AND EXPENSES
Costs and expenses during 2008 and 2007 were as follows:
2008 2007
----------- -----------
Cost of product sold and manufacturing costs $ 1,472,299 $ 791,752
General and administrative expenses 2,911,075 2,482,159
Marketing and selling expenses 1,586,966 2,417,308
Non-cash compensation 2,823,530 2,484,042
Depreciation and amortization 1,366,451 989,167
Research and development cost 119,496 1,175,450
Provision for inventory obsolesence 661,444 --
Asset impairments 698,600 --
----------- -----------
$11,639,861 $10,339,878
=========== ===========
COST OF PRODUCT SOLD AND MANUFACTURING COSTS
Cost of product sold and manufacturing costs amounted to $1,472,299 in 2008 and
$791,752 in 2007. The 2008 amount includes product cost of $945,985 and $526,314
in net unapplied manufacturing costs. The 2007 amount included product cost of
$228,933 and unapplied manufacturing costs of $562,819. Production volume
increased substantially at the end of 2008 and is expected to continue to
increase in 2009. The Company expects all manufacturing costs to be absorbed in
inventory through the increased production levels and for unit product cost to
decline from the 2008 level.
17
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses ("G&A") consisted of the following major
items during the two years ended December 31, 2008 and 2007:
2008 2007
---------- ----------
Payroll $1,337,528 $1,077,205
Professional fees 653,418 786,496
Insurance 303,217 205,638
Rent 233,291 93,816
Other 383,621 319,004
---------- ----------
$2,911,075 $2,482,159
========== ==========
In total, G&A increased $428,916 (17%) in 2008 from the 2007 level. In 2007,
InnoZen/PMG was included for only 8 months whereas they were included for 12
months in 2008. While InnoZen/PMG G&A costs increased $424,316 in 2008, the
average monthly rate was $157,479 in 2008 as compared to $183,179 in 2007, an
improvement of 14%. Other G&A costs declined slightly in 2008.
Payroll increased $260,323 in 2008 as compared to 2007 and is primarily the
result of InnoZen/PMG being included for 12 months in 2008 as compared to 8
months in 2007.
Professional fees declined 17% in 2008 from 2007, primarily due to additional
fees associated with the acquisition of InnoZen including the audit of InnoZen
for two years being included in the 2007 period and not repeated in 2008.
Insurance increased primarily due to InnoZen being included for 12 months in
2008 as compared to 8 months in 2007.
Rent expense increased in 2008 as compared to 2007 primarily due to adding the
Oxnard facility at the end of 2007.
MARKETING AND SELLING EXPENSE
Marketing and selling expenses declined from $2,417,308 in 2007 to $1,586,966 in
2008. During 2007 the Company was developing its marketing and sales department
in an attempt to market and sell its products directly to major retail
customers. By the end of 2007, we had determined that the cost of continuing to
expand this department would make it unlikely the Company could continue to
raise sufficient funding to stay in business long enough to reach a profitable
level of operations. Accordingly, the Company changed its direction from selling
directly to retail customers to selling through major wholesale distributors.
The marketing and selling expenses incurred in Enlyten declined from $2,072,256
in 2007 to $529,709 in 2008. The 2008 costs were primarily the completion of the
first quarter 2008 commitments and winding down the other operating costs. These
costs should be substantially eliminated in 2009. This decline was largely
offset by an increase at InnoZen from $161,223 in 2007 to $903,075 in 2008. The
majority of this increase relates to promotional costs associated with sales
agreements for InnoZen's Suppress product of $749,087. These sales agreements
expired in February 2009, and the Company is planning to discontinue sales
18
agreements of this nature in the future to focus on private label manufacturing
wherein the customer is responsible for costs of retail distribution.
NON-CASH COMPENSATION
Non-cash compensation increased $339,488 in 2008 to $2,823,530 and should
decline in 2009 as past agreements are completed. The increase in 2008 is
primarily the result of expensing terminated option agreements.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $1,366,451 in 2008 from $989,167 in
2007 primarily due to InnoZen/PMG being included for twelve months in 2008 as
compared to eight months in 2007.
PROVISION FOR INVENTORY OBSOLESCENCE
During 2008, the Company wrote-off $274,840 in Fix product and marketing and
packaging materials and discontinued the original product until a product with
improved taste could be developed. The Company also wrote-off an additional
$386,604 in product and packaging materials that had gone stale or was no longer
being sold.
ASSET IMPAIRMENTS
During 2008 the Company fully impaired the balance of its investment in Poker of
$50,000 when it was determined that it was unlikely we would pursue the project
in the near future. In addition, after determining that any net benefit from the
InnoZen customer list was unlikely, the Company impaired the unamortized balance
of $648,600.
OTHER INCOME (EXPENSE)
INTEREST EXPENSE
Interest expense increased substantially in 2008 as it became necessary to
borrow money to continue operations. The Company expects to issue stock to
convert a substantial portion of its existing convertible promissory notes and
related accrued interest.
GAIN ON SALE OF SUBSIDIARY
On February 1, 2008, HealthSport and InnoZen executed a Limited Liability
Company Operating Agreement ("LLC Agreement") with Migami for PMG. Among other
things, the LLC Agreement called for Migami to contribute $3,000,000 in cash to
PMG for its intended 48% ownership, and InnoZen licensed its technology to PMG
for its 52% ownership. The agreement provided that PMG was to manufacture all
strip and other products for each member at cost plus 25%. Migami made a total
contribution of $990,000 of its $3,000,000 commitment. Migami's default resulted
in its loss of rights under the agreement and any rights that were intended to
transfer from InnoZen to PMG were returned to InnoZen. InnoZen sold its interest
in PMG for nominal consideration on December 30, 2008, and recognized a book
gain of $869,453 on the transaction. The gain was a result of the Company's
19
share of losses incurred by PMG exceeding the Company's investment by this
amount.
GAIN ON SALE OF TRADEMARK
In 2008, the Company sold its trademark for Enlyten to an affiliate of T Lynn
for $300,000 which is to be paid at the rate of $0.015 per cassette sold
pursuant to the distributor agreement. At December 31, 2008, $75,000 of this
amount is included in current accounts receivable and $225,000 is included in
non-current accounts receivable.
NEW ACCOUNTING STANDARDS
There are several new accounting pronouncements issued by the Financial
Accounting Standards Board ("FASB") which are not yet effective. Each of these
pronouncements, as applicable, has been or will be adopted by the Company.
Management does not believe any of these accounting pronouncements has had or
will have a material impact on the Company's financial position or operating
results.
In May 2008, the FASB issued SFAS 163, "Accounting for Financial Guarantee
Insurance Contracts-an interpretation of SFAS 60". SFAS 163 clarifies how SFAS
60 applies to financial guarantee insurance contracts, including the recognition
and measurement of premium revenue and claims liabilities. This statement also
requires expanded disclosures about financial guarantee insurance contracts.
SFAS 163 is effective for fiscal years beginning on or after December 15, 2008,
and interim periods within those years. SFAS 163 has no effect on the Company's
financial position, statements of operations, or cash flows at this time.
In May 2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted
Accounting Principles". SFAS 162 sets forth the level of authority to a given
accounting pronouncement or document by category. Where there might be
conflicting guidance between two categories, the more authoritative category
will prevail. SFAS 162 will become effective 60 days after the SEC approves the
PCAOB's amendments to AU Section 411 of the AICPA Professional Standards. SFAS
162 has no effect on the Company's financial position, statements of operations,
or cash flows at this time.
In March 2008, the FASB issued SFAS 161, "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of SFAS 133." This standard
requires companies to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS 133 and its related interpretations,
and (c) how derivative instruments and related hedged items affect an entity's
financial position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The
Company has not yet adopted the provisions of SFAS 161, but does not expect it
to have a material impact on its financial position, results of operations or
cash flows.
In December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in
Consolidated Financial Statements--an amendment of ARB 51." This statement
amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. Before this statement was issued,
20
limited guidance existed for reporting noncontrolling interests. As a result,
considerable diversity in practice existed. So-called minority interests were
reported in the consolidated statement of financial position as liabilities or
in the mezzanine section between liabilities and equity. This statement improves
comparability by eliminating that diversity. This statement is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Earlier adoption is prohibited. The effective date of
this statement is the same as that of the related SFAS 141 (revised 2007). The
Company will adopt this statement beginning January 1, 2009. It is not believed
that this will have an impact on the Company's financial position, results of
operations or cash flows.
In December 2007, the FASB, issued SFAS 141 (revised 2007), "Business
Combinations." This Statement replaces SFAS 141, "Business Combinations," but
retains the fundamental requirements in SFAS 141. This Statement establishes
principles and requirements for how the acquirer: (a) recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree; (b) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and (c) determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. This statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. An entity
may not apply it before that date. The effective date of this statement is the
same as that of the related SFAS 160. The Company will adopt this statement
beginning January 1, 2009. This statement will not have an impact on the
Company's financial position, results of operations or cash flows.
CRITICAL ACCOUNTING POLICIES
The SEC issued Financial Reporting Release No. 60, "Cautionary Advice Regarding
Disclosure about Critical Accounting Policies" ("FRR 60"), suggesting companies
provide additional disclosure and commentary on their most critical accounting
policies. In FRR 60, the SEC defined the most critical accounting policies as
the ones that are most important to the portrayal of a company's financial
condition and operating results, and require management to make its most
difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition,
our most critical accounting policies include the valuation of intangibles,
which affects their amortization and impairment calculations and stock-based
compensation. The methods, estimates and judgments we use in applying these most
critical accounting policies have a significant impact on the results we report
in our consolidated financial statements.
INTANGIBLE ASSET VALUATION - The determination of the fair value of certain
acquired assets and liabilities is subjective in nature and often involves the
use of significant estimates and assumptions. Determining the fair values and
useful lives of intangible assets requires the exercise of judgment. We may use
our common stock to acquire assets and may use the Black-Scholes valuation
method or another acceptable method to determine a valuation for the stock. The
Black-Scholes valuation method calculates a volatility factor for the stock
price and extrapolates a valuation using these criteria. This valuation method
has generally proven effective for companies with established markets for their
common stock; however, due to the lack of an established trading market for our
common stock, in the opinion of management, this may result in an unduly high
valuation for the stock.
21
STOCK-BASED COMPENSATION - We record the fair value of stock-based compensation
to outside consultants as an operating expense. Historically, we have not
recorded expenses relating to stock options granted to employees with an
exercise price greater than or equal to market price at the time of grant. We
have reported pro-forma net loss and loss per share in accordance with the
requirements of SFAS 123 and SFAS 148. This disclosure shows net loss and loss
per share as if we had accounted for our employee stock options under the fair
value method of those statements. Pro-forma information is calculated using the
Black-Scholes pricing method on the date of grant. This option valuation model
requires input of highly subjective assumptions. Because our employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing model may
not necessarily provide a reliable single measure of fair value of our employee
stock options
In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment"
(SFAS 123(R)). Among other things, SFAS 123(R) requires expensing the fair value
of stock options, previously optional accounting. For transition, upon adoption
on January 1, 2006, SFAS 123(R) required expensing any unvested options and also
required us to change the classification of certain tax benefits from option
deductions to financing rather than operating cash flows.
OFF-BALANCE SHEET ARRANGEMENTS
The corporate offices are currently located at 10130 Mallard Creek Road, Suite
331, Charlotte, NC 28262. The space consists of 400 square feet and is under
lease through September 2009. The Company maintained its corporate office in the
office of its accountant at no cost to the Company for 2008 and 2007.
Enlyten has an operating lease for its office in Amherst, New York. The lease is
for a three-year term beginning on February 1, 2007, expiring January 31, 2010
and covers 2,182 square feet. The Company has closed this office and is
attempting to sub-lease the space for the remaining term.
InnoZen leases its office and current manufacturing facility in Woodland Hills,
California. The lease expires on January 1, 2010 and has a one-year renewal
option. InnoZen believes it has obtained a replacement tenant and plans to
consolidate all of its operations at the Oxnard location by mid-year 2009.
The Company leases its manufacturing facility in Oxnard, California which
contains approximately 25,000 square feet. The lease term is from December 1,
2007 through January 31, 2015. Manufacturing operations commenced in January
2009 and as noted above, all InnoZen operations are planned to be relocated here
by mid 2009.
22
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Payments due by Period (000's)
------------------------------------------------------------------------
TOTAL YEAR 1 YEAR 2-3 YEAR 4-5 OVER 5 YEARS
------ ------ ------ ------ ------
Operating lease obligations:
Enlyten office lease $ 32 $ 29 $ 3 $ -- $ --
Woodland Hills facility 159 159 --
Ventura facility 1,244 192 399 418 235
------ ------ ------ ------ ------
1,435 380 402 418 235
====== ====== ====== ====== ======
Capital lease obligations:
InnoZen equipment 330 64 127 139 --
InnoZen software 84 23 47 14 --
------ ------ ------ ------ ------
$ 414 $ 87 $ 174 $ 153 $ --
====== ====== ====== ====== ======
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
23
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of HealthSport, Inc. and Subsidiaries
together with the report thereon of Creason & Associates, P.L.L.C. as of
December 31, 2008 and 2007 and for the years ended December 31, 2008 and 2007,
is set forth as follows:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm 25
Consolidated Balance Sheets 26
Consolidated Statements of Operations 27
Consolidated Statements of Stockholders' Equity (Deficit) 28
Consolidated Statements of Cash Flows 29
Notes to Consolidated Financial Statements 31
24
CREASON & ASSOCIATES, P.L.L.C.
7170 S. BRADEN AVE., SUITE 100
TULSA, OK 74136-6333
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
HealthSport, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of HealthSport,
Inc. and Subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 2008 and 2007. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HealthSport, Inc.
and Subsidiaries at December 31, 2008 and 2007, and the results of their
operations and their cash flows for the years ended December 31, 2008 and 2007,
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying consolidated financial statements have been prepared assuming
that HealthSport, Inc. and Subsidiaries will continue as a going concern. As
discussed in Note 13 to the consolidated financial statements, HealthSport, Inc.
has incurred significant operating losses, negative cash flow from operations
and a working capital deficit. There can be no assurance that the Company can
obtain sufficient revenues and cash flows to fund its operations and
commitments. These conditions raise substantial doubt about HealthSport, Inc.'s
ability to continue as a going concern. Management's plans regarding these
matters are also described in Note 13. The consolidated financial statements do
not include any adjustments that may result from the outcome of these
uncertainties.
/s/ Creason & Associates, P.L.L.C.
Tulsa, Oklahoma
April 22, 2009
25
HEALTHSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
2008 2007
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 433,573 $ 167,323
Accounts receivable (less allowance of $2,000 in 2008 and 2007) 486,967 107,312
(Includes $75,000 from sale of trademark in 2008)
Stock subscription receivable -- 22,500
Inventory 585,746 1,402,530
Prepaid expenses and other assets 293,318 711,745
------------ ------------
Total current assets 1,799,604 2,411,410
------------ ------------
Property and equipment, net 756,086 636,370
Non-current accounts receivable 225,000 --
Patent costs and other intangible costs, net 18,621,760 20,308,545
Goodwill, net 10,276,948 10,326,948
Deposits 137,170 21,524
------------ ------------
Total assets $ 31,816,568 $ 33,704,797
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,462,148 $ 1,037,172
Accrued expenses 900,837 147,159
Current portion of convertible promissory notes 1,268,000 --
Current portion of capital lease obligations 64,465 217,954
Deferred revenue 832,256 663,840
------------ ------------
Total current liabilities 4,527,706 2,066,125
------------ ------------
Convertible promissory notes, less current portion 277,450 --
Capital lease obligations, less current portion 274,727 70,963
------------ ------------
Total non-current liabilities 552,177 70,963
------------ ------------
Total liabilities 5,079,883 2,137,088
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $2.75 par value; authorized 2,000,000 shares
no shares issued and outstanding -- --
Common stock: $.0001 par value; authorized 500,000,000 shares;
49,366,120 and 42,898,397 shares issued and outstanding
at December 31, 2008 and 2007, respectively 4,937 4,290
Additional paid-in capital 69,946,252 67,980,373
Intrinsic value of common stock options (733,089) (2,860,229)
Common stock warrants 28,681 --
Stock subscription receivable (250) --
Accumulated deficit (42,509,846) (33,556,725)
------------ ------------
Total stockholders' equity 26,736,685 31,567,709
------------ ------------
Total liabilities and stockholders' equity $ 31,816,568 $ 33,704,797
============ ============
26
HEALTHSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2008 AND 2007
2008 2007
------------ ------------
Revenue
Product sales $ 1,419,210 $ 305,461
License fees, royalties and services 75,000 133,363
------------ ------------
TOTAL REVENUES 1,494,210 438,824
------------ ------------
COSTS AND EXPENSES:
Cost of product sold and manufacturing costs 1,472,299 791,752
General and administrative expenses 2,911,075 2,482,159
Marketing and selling expense 1,586,966 2,417,308
Non-cash compensation 2,823,530 2,484,042
Depreciation and amortization 1,366,451 989,167
Research and development cost 119,496 1,175,450
Provision for inventory obsolescence 661,444 --
Asset impairments 698,600 --
------------ ------------
TOTAL COSTS AND EXPENSES 11,639,861 10,339,878
------------ ------------
LOSS FROM OPERATIONS (10,145,651) (9,901,054)
OTHER INCOME (EXPENSE):
Interest expense (199,826) (18,427)
Gain on sale of subsidiary 869,453 --
Gain on sale of trademark 300,000 --
Other income 55,950 --
Interest income 1,737 72,481
------------ ------------
Other income, net 1,027,314 54,054
------------ ------------
NET LOSS BEFORE MINORITY INTEREST (9,118,337) (9,847,000)
------------ ------------
MINORITY INTEREST 165,216 --
------------ ------------
NET LOSS $ (8,953,121) $ (9,847,000)
============ ============
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.20) $ (0.28)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 45,009,843 34,594,588
============ ============
See accompanying notes to consolidated financial statements.
27
HEALTHSPORT, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2008 and 2007
Common Stock Additional Common Stock
---------------------------- Paid-in Stock Subscription
Shares Par Capital Warrants Receivable
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2006 19,331,945 1,933 29,452,595 1,200 --
Common stock issued for:
Acquisition of InnoZen, Inc18,249,952 1,825 27,373,103 -- -- --
Cash proceeds 4,951,500 495 6,542,550 -- --
Stock subscription 15,000 2 22,498 -- --
Stock awards 115,000 11 316,989 -- --
Royalty agreements 136,000 14 203,986 -- --
Fix website and tradename 50,000 5 73,995 -- --
Accounts payable 49,000 5 53,995 -- --
Common stock warrants
expired -- -- 1,200 (1,200) --
Intrinsic value of common
stock options:
Granted -- -- 3,939,462 -- --
Amortization -- -- -- -- --
Reclassify unamortized
stock awards -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2007 42,898,397 4,290 67,980,373 -- --
------------ ------------ ------------ ------------ ------------
Common stock issued for:
Cash 2,276,000 228 816,272 -- --
Services 1,585,000 159 325,591 -- (500)
Accounts payable 1,000,327 100 243,598 -- --
Notes payable and accrued
interest 693,334 69 103,931 -- --
Acquisition of assets 300,000 30 74,970 -- --
Loan fees 533,333 53 79,947 -- --
Common stock options:
Options granted -- -- 307,238 -- --
Option amortization -- -- -- -- --
Common stock warrants:
Issued -- -- -- 43,021 --
Exercised 79,729 8 14,332 (14,340) --
Collection of stock subscription
receivable -- -- -- -- 250
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2008 49,366,120 $ 4,937 $ 69,946,252 $ 28,681 $ (250)
============ ============ ============ ============ ============
[table continued]
Intrinsic
Value of
Common
Stock Accumulated
Options Deficit Total
------------ ------------ ------------
Balance, December 31, 2006 (1,151,711) (23,709,725) 4,594,292
Common stock issued for:
Acquisition of InnoZen, Inc18,249,952 -- 27,374,928
Cash proceeds -- -- 6,543,045
Stock subscription -- -- 22,500
Stock awards -- -- 317,000
Royalty agreements -- -- 204,000
Fix website and tradename -- -- 74,000
Accounts payable -- -- 54,000
Common stock warrants
expired -- -- --
Intrinsic value of common
stock options:
Granted (3,939,462) -- --
Amortization 1,536,423 -- 1,536,423
Reclassify unamortized
stock awards 694,521 -- 694,521
Net loss -- (9,847,000) (9,847,000)
------------ ------------ ------------
Balance, December 31, 2007 (2,860,229) (33,556,725) 31,567,709
------------ ------------ ------------
Common stock issued for:
Cash -- -- 816,500
Services -- -- 325,250
Accounts payable -- -- 243,698
Notes payable and accrued
interest -- -- 104,000
Acquisition of assets -- -- 75,000
Loan fees -- -- 80,000
Common stock options:
Options granted (307,238) -- --
Option amortization 2,434,378 -- 2,434,378
Common stock warrants:
Issued -- -- 43,021
Exercised -- -- --
Collection of stock subscription
receivable -- -- 250
Net loss -- (8,953,121) (8,953,121)
------------ ------------ ------------
Balance, December 31, 2008 $ (733,089) $(42,509,846) $ 26,736,685
============ ============ ============
See accompanying notes to consolidated financial statements.
28
HEALTHSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2008 AND 2007
2008 2007
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(8,953,121) $(9,847,000)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,366,451 989,167
Amortization of non-cash stock compensation 2,434,378 2,484,042
Acquired research and development cost -- 847,336
Common stock issued for services 325,250 --
Warrants issued 43,021 --
Minority interest (165,216) --
Asset impairments 698,600 --
Inventory obsolesence 661,444 --
Gain on sale of trademark and other assets (305,584) --
Gain on sale of subsidiary (869,453) --
Change in assets and liabilities:
Accounts receivable (304,655) (90,654)
Inventory 155,340 (955,436)
Prepaid expenses and other assets 302,779 (300,075)
Accounts payable 793,338 694,573
Accrued expenses and deferred revenue 926,100 205,886
----------- -----------
Net cash used in operating activities (2,891,328) (5,972,161)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans to InnoZen, Inc. prior to acquisition -- (500,000)
Cash received in excess of cash paid in
acquisition of InnoZen, Inc. -- 16,832
Legal fees associated with acquisition of
Cooley Neutracuticals, Inc. -- (15,811)
Proceeds from sale of fixed assets 4,297 --
Purchase of other assets (31,161) --
Acquisition of property and equipment (265,533) (325,585)
----------- -----------
Net cash used in investing activities (292,397) (824,564)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds 1,770,450 --
Collect stock subscription receivable 22,750 250,000
Capital lease payments (24,725) (38,856)
Funding from other LLC member 990,000 --
Loan repayment (125,000) --
Loan repayment- related party -- (108,285)
Sale of common stock 816,500 6,543,045
----------- -----------
Net cash provided by financing activities 3,449,975 6,645,904
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 266,250 (150,821)
CASH AND CASH EQUIVALENTS, beginning of year 167,323 318,144
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 433,573 $ 167,323
=========== ===========
(Continued)
See accompanying notes to consolidated financial statements.
29
HEALTHSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 2008 AND 2007
2008 2007
------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ 32,349 $ 18,427
Income taxes -- --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for:
Prepaid royalty agreements $ -- $ 204,000
Fix website and tradename -- 74,000
Stock subscription 250 22,500
Notes payable and accrued interest 104,000 --
Loan fees 80,000 --
Equipment maintenance 75,000 --
Accounts payable 243,698 54,000
Value of common stock warrants granted 43,021 --
Value of common stock options granted 451,791 3,939,462
Cash-less exercise of common stock warrants 14,340 --
Cancellation of common stock warrants -- 1,200
Acquisition of InnoZen, Inc.
Total assets acquired -- 29,558,018
Liabilities assumed -- (1,449,922)
Liabilities to HealthSport, Inc. -- (750,000)
------------ ------------
Purchase price (net assets acquired) -- 27,358,096
Common stock issued -- (27,374,928)
------------ ------------
Cash acquired in excess of cash paid -- 16,832
============ ============
See accompanying notes to consolidated financial statements.
30
HEALTHSPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
HealthSport, Inc. ("HealthSport") and its wholly-owned active
subsidiaries, Enlyten, Inc. ("Enlyten"), InnoZen, Inc. ("InnoZen"),
InnoZen's majority owned subsidiary Pacific Manufacturing Group, LLC
("PMG"), Health Strip Solutions, LLC ("Health Strip") and HealthSport
Nutraceutical Products, Inc. ("Nutraceutical") and its wholly-owned
inactive subsidiaries, World Championship Poker, Inc. ("Poker"),
Strategic Gaming Consultants, LLC ("Gaming") and Maxx Motorsports, Inc.
("Maxx") and Maxx's wholly owned subsidiary, Team Racing Auto Circuit,
LLC ("TRAC"), collectively referred to as "the Company," "we," "us," or
"the Companies". All significant inter-company balances and
transactions have been eliminated in consolidation. The Company's film
strip products represents the principal continuing operations of the
Company.
ORGANIZATION
HealthSport was originally incorporated on July 25, 1985 in Delaware,
and currently has the following active wholly owned subsidiaries:
o Enlyten, a Nevada corporation organized on November 28, 2006;
o Health Strip, a Nevada limited liability corporation organized
on February 13, 2006; acquired 80% on March 29, 2006, 10% on
December 21, 2006 and the remaining 10% on December 27, 2006;
o Nutraceutical, a Nevada corporation organized on November 17,
2006; acquired on December 6, 2006; Cooley Nutraceuticals,
Inc. changed its name to HealthSport Nutraceutical Products,
Inc. on January 15, 2009; and
o InnoZen, a Nevada corporation organized on May 30, 2002;
acquired on May 4, 2007;
NATURE OF BUSINESS
HealthSport is a holding company with three operating subsidiaries.
Substantially all of the Company's sales are currently with two
wholesale customers.
InnoZen is the formulator, developer and manufacturer of edible thin
film strips that deliver drug actives and was the first company to
deliver a drug active ingredient in a thin film strip.
Health Strip in conjunction with InnoZen holds the proprietary
technology for the formulation of a thin film electrolyte strip and has
filed a provisional patent for this process. Electrolytes such as those
found in Health Strip's SPORTSTRIPS along with water, can be used in
oral rehydration therapy to replenish the body's electrolyte levels
after dehydration caused by exercise, diarrhea or vomiting. Health
Strip and InnoZen also hold the proprietary technology for SURVIVAL
STRIPS which are formulated with antioxidants, non-cavity causing
sweeteners, vitamins, herbal extracts, electrolytes, caffeine and other
proven beneficial compounds.
31
Nutraceutical holds the proprietary technology for the formulation of a
nutritional supplement that quickly and effectively provides natural
energy enhancers, caffeine, electrolytes, antioxidants and other
essential vitamins and minerals. In conjunction with InnoZen,
Nutraceutical has designed our formulation to supply the body with a
healthy boost in energy, while replenishing and maintaining the
essential vitamins and minerals lost during activity, after a long
flight, bad night of sleep or over indulgence of alcohol. Nutraceutical
has also designed a formulation which includes caffeine, electrolytes,
antioxidants and other essential vitamins and minerals which is
designed specifically for fast, effective and safe relief for those
individuals who incorporate social drinking in their lifestyle.
On May 15, 2006, the Company changed its name to HealthSport, Inc. from
Idea Sports Entertainment Group, Inc.
CASH AND CASH EQUIVALENTS
The Company considers all cash on hand, cash in banks and all highly
liquid debt instruments purchased with a maturity of three months or
less to be cash and cash equivalents.
REVENUE RECOGNITION
Revenue from product sales is recognized when the related goods are
shipped and all significant obligations have been satisfied. Revenue
from services is recognized when the services are performed. At
December 31, 2008 and 2007, the Companies had $437,500 and $512,500 in
deferred license fee revenue and $394,756 and $151,340 received on
product orders which have not shipped. The deferred license fee revenue
will be recognized when earned and the product revenue will be
recognized when the product is shipped.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are recorded at the invoiced amount and do
not bear interest. The allowance for doubtful accounts is the Company's
best estimate of the amount of probable credit losses in the Company's
existing accounts receivable. The Company determines the allowance
based on historical write-off experience and reviews its allowance for
doubtful accounts quarterly. Account balances are charged off against
the allowance when the Company believes it is probable the receivable
will not be recovered.
INVENTORY
Inventories consist of finished electrolyte strip products and
work-in-process, and are stated at the lower of average standard cost,
which includes materials, labor and allocated overhead costs, and net
realizable value. Raw materials are stated at the lower of cost and net
realizable value.
CONCENTRATION OF CREDIT RISK
Cash is maintained at financial institutions. The Federal Deposit
Insurance Corporation ("FDIC") insures accounts at each institution.
However, at times, cash balances may exceed the FDIC insurance limit.
STOCK OPTION PLANS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS 123(R), "Share-Based Payment," ("SFAS 123(R)") which
requires that the compensation cost relating to share-based payment
transactions (including the cost of all employee stock options) be
32
recognized in the financial statements. That cost will be measured
based on the estimated fair value of the equity or liability
instruments issued. SFAS 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS 123(R) replaces SFAS 123,
"Accounting for Stock-Based Compensation," and supersedes APB 25,
"Accounting for Stock Issued to Employees." The Company adopted SFAS
123(R) in the 1st quarter of 2006. Thus, the Company's financial
statements reflected an expense for (a) all share-based compensation
arrangements granted on or after January 1, 2006 and for any such
arrangements that are modified, cancelled, or repurchased after that
date, and (b) the portion of previous share-based awards for which the
requisite service had not been rendered as of that date, based on the
grant-date estimated fair value.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because HealthSport's options have
characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing
models may not necessarily provide a reliable single measure of the
fair value of HealthSport's options. However, the Black-Scholes option
valuation model provides the best estimate for this purpose.
DEFERRED INCOME TAXES
Deferred income taxes are provided for temporary differences between
financial and tax reporting in accordance with the liability method
under the provisions of SFAS 109, "Accounting for Income Taxes." A
valuation allowance is recorded to reduce the carrying amounts of
deferred tax assets unless management believes it is more likely than
not that such assets will be realized.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share are calculated under the provisions of
SFAS 128, "Earnings per Share" requires the Company to report both
basic earnings per share, which is based on the weighted-average number
of common shares outstanding, and diluted earnings per share, which is
based on the weighted-average number of common shares outstanding plus
all potentially dilutive shares outstanding. At December 31, 2008 and
2007, all exercisable common stock equivalents were antidilutive and
are not included in the earnings (loss) per share calculations.
Accordingly, basic and diluted earnings per share are the same for all
periods presented.
ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
There are several new accounting pronouncements issued by the FASB
which are not yet effective. Each of these pronouncements, as
applicable, has been or will be adopted by the Company. Management does
not believe any of these accounting pronouncements has had or will have
a material impact on the Company's financial position or operating
results.
33
In May 2008, the FASB issued SFAS 163, "Accounting for Financial
Guarantee Insurance Contracts-an interpretation of SFAS 60". SFAS 163
clarifies how SFAS 60 applies to financial guarantee insurance
contracts, including the recognition and measurement of premium revenue
and claims liabilities. This statement also requires expanded
disclosures about financial guarantee insurance contracts. SFAS 163 is
effective for fiscal years beginning on or after December 15, 2008, and
interim periods within those years. SFAS 163 has no effect on the
Company's financial position, statements of operations, or cash flows
at this time.
In May 2008, the FASB issued SFAS 162, "The Hierarchy of Generally
Accepted Accounting Principles". SFAS 162 sets forth the level of
authority to a given accounting pronouncement or document by category.
Where there might be conflicting guidance between two categories, the
more authoritative category will prevail. SFAS 162 will become
effective 60 days after the SEC approves the PCAOB's amendments to AU
Section 411 of the AICPA Professional Standards. SFAS 162 has no effect
on the Company's financial position, statements of operations, or cash
flows at this time.
In March 2008, the FASB issued SFAS 161, "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of SFAS 133." This
standard requires companies to provide enhanced disclosures about (a)
how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS 133
and its related interpretations, and (c) how derivative instruments and
related hedged items affect an entity's financial position, financial
performance, and cash flows. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The Company has
not yet adopted the provisions of SFAS 161, but does not expect it to
have a material impact on its financial position, results of operations
or cash flows.
In December 2007, the FASB issued SFAS 160, "Noncontrolling Interests
in Consolidated Financial Statements--an amendment of ARB 51." This
statement amends ARB 51 to establish accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated
entity that should be reported as equity in the consolidated financial
statements. Before this statement was issued, limited guidance existed
for reporting noncontrolling interests. As a result, considerable
diversity in practice existed. So-called minority interests were
reported in the consolidated statement of financial position as
liabilities or in the mezzanine section between liabilities and equity.
This statement improves comparability by eliminating that diversity.
This statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008.
Earlier adoption is prohibited. The effective date of this statement is
the same as that of the related SFAS 141 (revised 2007). The Company
will adopt this Statement beginning January 1, 2009. It is not believed
that this will have an impact on the Company's financial position,
results of operations or cash flows.
34
In December 2007, the FASB, issued SFAS 141 (revised 2007), "Business
Combinations." This statement replaces SFAS 141, "Business
Combinations," but retains the fundamental requirements in SFAS 141.
This Statement establishes principles and requirements for how the
acquirer: (a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; (b) recognizes and measures
the goodwill acquired in the business combination or a gain from a
bargain purchase; and (c) determines what information to disclose to
enable users of the financial statements to evaluate the nature and
financial effects of the business combination. This statement applies
prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. An entity may not apply it
before that date. The effective date of this statement is the same as
that of the related SFAS 160. The Company will adopt this statement
beginning January 1, 2009. It is not believed that this will have an
impact on the Company's financial position, results of operations or
cash flows.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is recorded using the straight-line method
over the estimated useful lives of the respective assets (generally
three to seven years). Maintenance and repairs are charged to
operations when incurred. Betterments and renewals are capitalized.
When property and equipment are sold or otherwise disposed of, the
asset account and related accumulated depreciation account are
relieved, and any gain or loss is included in operations.
FAIR VALUE DETERMINATION
Financial instruments consist of cash, marketable securities, accounts
and notes receivable, accounts payable, accrued expenses and short-term
borrowings. The carrying amount of these financial instruments
approximates fair value due to their short-term nature or the current
rates at which the Company could borrow funds with similar remaining
maturities.
GOODWILL, PATENT COSTS AND OTHER INTANGIBLE COSTS
The Company records goodwill and intangible assets arising from
business combinations in accordance with SFAS 141 "Business
Combinations" which requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS
141 also specifies the criteria applicable to intangible assets
acquired in a purchase method business combination to be recognized and
reported apart from goodwill.
The Company accounts for goodwill and intangible assets in accordance
with SFAS 142. SFAS 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be
tested at least annually for impairment. SFAS 142 also requires that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values,
and be reviewed for impairment.
Patent costs are amortized over their life of seventeen years from the
date the patent application is filed. Patent costs include the costs
allocated to the proprietary technology for the formulation of thin
film electrolyte strip products and associated legal costs. Trade
35
secrets include costs allocated to our formulations and are being
amortized over seventeen years. Trademarks represent the cost of
acquired trademarks, which are not being amortized. Client lists
represents the cost of acquired client lists which were being amortized
over five years until their impairment in 2008.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are reported in selling and marketing costs
in the accompanying consolidated statements of operations. These costs
amounted to $122,835 and $28,017 in 2008 and 2007, respectively.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. The Company
recorded advertising costs of $883,727 and $740,985 for the years ended
December 31, 2008 and 2007, respectively.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
NOTE 2: ACQUISITIONS AND DISPOSITIONS
INNOZEN
-------
On May 4, 2007, the Company completed the acquisition of InnoZen through a
merger of InnoZen with Acquisition Sub, the Company's wholly-owned subsidiary,
in exchange for 18,249,952 shares of the Company's common stock.
The acquisition was accounted for using the purchase method of accounting and,
accordingly, the consolidated statements of operations include the results of
InnoZen beginning May 4, 2007. The assets acquired and the liabilities assumed
were recorded at estimated fair values as determined by the Company's management
based on information currently available and on current assumptions as to future
operations. A summary of the estimated fair value of assets acquired and
liabilities assumed in the acquisition follows:
Current assets, excluding cash and cash equivalents $ 584,993
Property and equipment 471,188
Other assets 10,583
Intangible assets 19,102,968
Goodwill 8,540,950
Research and development cost 847,336
------------
Total assets 29,558,018
Liabilities assumed (1,449,922)
Liabilities to HealthSport (750,000)
------------
Purchase price (net assets acquired) 27,358,096
Common stock issued (27,374,928)
------------
Cash acquired in excess of cash paid $ 16,832
============
36
Unaudited pro forma results of operations for the year ended December 31, 2007,
as if the Company and InnoZen had been combined as of the beginning of the
period, follows. The pro forma results include estimates and assumptions which
management believes are reasonable. However, pro forma results are not
necessarily indicative of the results that would have occurred if the business
combination had been in effect on the dates indicated, or which may result in
the future.
2007
------------
Net revenues $ 849,119
Net loss (12,515,697)
Net loss per share, basic and diluted $ (0.31)
The audited financial statements for InnoZen, Inc. for the two years ended
December 31, 2006 are included as an exhibit to Form 8-K/A dated May 4, 2007 and
filed on September 20, 2007.
PMG
---
On February 1, 2008 HealthSport and InnoZen executed a Limited Liability Company
Operating Agreement ("LLC Agreement") with Migami for PMG. Among other things,
the LLC Agreement called for Migami to contribute $3,000,000 in cash to PMG for
its intended 48% ownership and InnoZen licensed its technology to PMG for its
52% ownership. The agreement provided that PMG was to manufacture all strip and
other products for each member at cost plus 25%. Migami made a total
contribution of $990,000 of its $3,000,000 commitment. Migami's default resulted
in its loss of rights under the agreement and any rights that were intended to
transfer from InnoZen to PMG were returned to InnoZen. InnoZen sold its interest
in PMG for nominal consideration on December 30, 2008, and recognized a book
gain of $869,453 on the transaction. The gain is the difference between the
Company's share of the PMG loss which is included in the consolidated financial
statements and its investment.
NOTE 3: INVENTORY
Inventory at December 31, 2008 and 2007, consists of the following:
2008 2007
---------- ----------
Raw materials $ 173,980 $ 395,239
Work in progress 286,711 169,016
Finished goods 125,055 838,275
---------- ----------
$ 585,746 $1,402,530
========== ==========
Included in inventory is approximately $255,000 and $440,000 of allocated
overhead and labor cost at December 31, 2008 and 2007, respectively.
37
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2008 and 2007 consists of the following:
2008 2007
---------------------------- -----------------------------
Subject to Subject to
Capital Capital
Total Lease Total Lease
--------- --------- --------- ---------
Office furniture and equipment $ 75,343 $ -- $ 83,393 $ --
Computer software 106,800 99,172 101,150 99,172
Manufacturing equipment 734,220 419,695 487,578 416,695
Leasehold improvements 52,061 38,880 39,561 38,880
--------- --------- --------- ---------
968,424 557,747 711,682 554,747
Accumulated depreciation (212,338) (175,229) (75,312) (55,683)
--------- --------- --------- ---------
$ 756,086 $ 382,518 $ 636,370 $ 499,064
========= ========= ========= =========
NOTE 5: INTANGIBLE ASSETS
The Company's intangible assets consist of the following at December 31, 2008
and 2007:
2008 2007
----------- -----------
Patent costs and other intangible assets:
Patent and trade secret costs $19,524,728 $19,155,124
Trademarks 1,188,000 1,188,365
Client lists -- 846,000
Web site 65,675 65,675
----------- -----------
20,778,403 21,255,164
Accumulated amortization
Patent and trade secret costs 2,137,865 828,176
Client lists -- 112,800
Web site 18,778 5,643
----------- -----------
2,156,643 946,619
----------- -----------
Net $18,621,760 $20,308,545
=========== ===========
Goodwill $10,276,948 $10,326,948
=========== ===========
The Company recorded an impairment loss of $648,600 at June 30, 2008, for the
net carrying value of its client list and recorded an impairment of the
remaining goodwill associated with Poker at December 31, 2008.
38
In 2008, the Company sold its trademark for Enlyten to an affiliate of T. Lynn
Mitchell Companies, LLC ("T Lynn") for $300,000 which is to be paid at the rate
of $0.015 per cassette sold pursuant to the distributor agreement. At December
31, 2008, $75,000 of this amount is included in current accounts receivable and
$225,000 is included in non-current accounts receivable.
NOTE 6: CAPITAL LEASES
During the year ended December 31, 2005, InnoZen entered into a sale-leaseback
agreement, under which it sold certain manufacturing equipment and leased it
back for a period of three years. The leaseback was accounted for as a capital
lease, and no gain was recognized on the transaction. This agreement was amended
in 2008, additional assets were added to the lease and the term was revised to
be completed on January 2013. In 2007, the Company entered into a five year
lease agreement for manufacturing software. The following is a schedule by years
of future minimum lease payments under capital leases together with the present
value of the net minimum lease payments as of December 31, 2008.
Total minimum lease payments:
Year ended December 31, 2009 $ 87,016
Year ended December 31, 2010 87,016
Year ended December 31, 2011 87,016
Year ended December 31, 2012 77,286
Year ended December 31, 2013 75,448
---------
413,782
Amount representing interest (74,590)
---------
Present value of minimum lease payments 339,192
Less current obligations (64,465)
---------
Non-current obligations under capital lease $ 274,727
=========
The leases cover equipment, software and other assets with a cost of $557,747
and accumulated depreciation and amortization of $175,229 at December 31, 2008.
39
NOTE 7: CONVERTIBLE PROMISSORY NOTES
Convertible promissory notes consist of the following at December 31, 2008 (none
at December 31, 2007):
Senior secured convertible promissory notes due September 30, 2009; interest
payable quarterly at 12%; secured by technology and patent rights; principal and
accrued interest convertible into common stock at $0.15 per share (subject to
adjustment if the Company sells stock or grants conversion rates at a lower price);
accrued interest due on January 1, 2009 not paid (26 holders) $1,100,000
Convertible loan from Migami due September 22, 2009 with interest at 10% payable
quarterly; unsecured; convertible into common stock at $0.10 per share; interest due
December 22, 2008 and March 22, 2009 not paid 100,000
Convertible promissory note to an individual due December 1, 2009 including
interest at 8% per annum; unsecured; convertible into common stock at
$0.15 per share; interest due February 1, 2009 not paid 63,000
Convertible promissory note to the Company's counsel due January 1, 2010
including interest at 8% per annum; unsecured; convertible into common stock at $0.15 per share;
accrued interest due March 29, 2009 not paid 100,000
Convertible promissory note to a company due November 1, 2010 including interest
at 12% per annum; unsecured; convertible into common stock at $0.15 per share;
accrued interest due monthly commencing December 1, 2008 not paid 126,000
Convertible promissory note to a company due November 15, 2010 including
interest at 12% per annum; unsecured; convertible into common stock at $0.15 per
share; accrued interest due monthly commencing December 1, 2008 not paid 51,450
Convertible promissory note to an individual dated October 21, 2008 and due
October 21, 2009 including interest at 12% per annum; unsecured; convertible into
common stock at $0.15 per share 5,000
----------
1,545,450
Current portion of convertible promissory notes 1,268,000
----------
Convertible promissory notes, less current portion $ 277,450
==========
Substantially all promissory notes are with shareholders.
40
NOTE 8: INCOME TAXES
HealthSport has not recorded a deferred tax benefit or expense for the years
ended December 31, 2008 and 2007, as all net deferred tax assets have a full
valuation allowance.
Actual income tax benefit applicable to net loss before income taxes is
reconciled with the "normally expected" federal income tax as follows:
2008 2007
----------- -----------
Normally expected income tax benefit $ 3,044,100 $ 3,348,000
Increase (decrease) in taxes resulting from:
State income taxes net of federal benefit 295,500 325,000
Non-deductible meals and entertainment (2,200) (8,400)
Valuation allowance (3,337,400) (3,664,600)
----------- -----------
$ -- $ --
=========== ===========
The net deferred taxes at December 31, 2008 and 2007 are comprised of the
following:
2008 2007
----------- -----------
Net operating loss carryforward $17,659,300 $14,321,900
Start-up cost carryforward 827,600 827,600
----------- -----------
18,486,900 15,149,500
Valuation allowance (18,486,900) (15,149,500)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
HealthSport has available unused net operating loss carryforwards and
capitalized start-up costs of approximately $45,950,000 which will expire in
various periods from 2009 to 2028, some of which may be limited as to the amount
available on an annual basis.
NOTE 9: COMMON STOCK OPTIONS AND WARRANTS
In April 2000, HealthSport adopted its 2000 Stock Option Plan (the "2000 Plan"),
and the Company's Board of Directors approved the same. HealthSport shareholders
approved the 2000 Plan in April 2001. The 2000 Plan was established to advance
the interests of HealthSport and its stockholders by attracting, retaining and
motivating key personnel. The Board of Directors, or a committee that it
appoints, is authorized to grant options to purchase the common stock of
HealthSport, not to exceed an aggregate of 15,000 shares. The Board of
Directors, or a committee that it appoints, is also authorized to establish the
exercise price and vesting terms of individual grants under the 2000 Plan. The
2000 Plan terminates in April 2010.
41
On October 18, 2006, HealthSport adopted its 2006 Stock Option Plan (the "2006
Plan"), and the Company's Board of Directors and shareholders approved the 2006
Plan. The 2006 Plan was also established to advance the interests of HealthSport
and its stockholders by attracting, retaining and motivating key personnel. The
Board of Directors, or a committee that it appoints, is authorized to grant
options to purchase the common stock of HealthSport, not to exceed an aggregate
of 5,000,000 shares. The Board of Directors, or a committee that it appoints, is
also authorized to establish the exercise price and vesting terms of individual
grants under the 2006 Plan. The 2006 Plan terminates on October 18, 2011.
Options granted under the 2000 Plan or the 2006 Plan (collectively the "Plans")
may be either "incentive stock options" intended to qualify as such under the
Internal Revenue Code, or "non-qualified stock options." HealthSport expects
that most options granted pursuant to the Plans will be subject to vesting over
a three or four-year period, such as 25% increments on each annual grant date
anniversary, during which the optionee must continue to be an employee of
HealthSport. The Board or the committee, if applicable, may choose to impose
different vesting requirements or none at all. Options outstanding under the
Plans have a maximum term of up to ten years.
The Plans also provide that all options that are not vested will become vested
upon a change in control, unless the options are either assumed or substituted
with equivalent options. In addition, unvested options become vested, after a
change in control, if an optionee is subject to involuntary termination other
than for cause during that optionee's remaining vesting period after a change in
control. The Plan further provides that all options will be forfeited 30 days
after employment terminates or six months in the case of death or disability.
A summary of stock option activity during the years ended December 31, 2008 and
2007 is as follows.
2008 2007
------------------------------------ ------------------------------------
Weighted Weighted
average Initial average Initial
exercise Intrinsic exercise Intrinsic
Shares price Value Shares price Value
---------- ---------- ---------- ---------- ---------- ----------
Outstanding, beginning of year 4,115,390 $ 1.60 $4,442,298 425,000 $ 1.95 $ 502,836
Granted 5,226,700 0.66 451,791 3,690,390 1.56 3,939,462
Exercised -- -- -- -- --
Forfeited/expired (2,995,000) 1.29 (1,010,695) -- -- --
---------- ---------- ---------- ----------
Outstanding, end of year 6,347,090 $ 0.97 $3,883,394 4,115,390 $ 1.60 $4,442,298
========== ========== ========== ==========
Options exercisable at year end 5,873,761 $ 1.03 4,095,390 $ 1.59
Plan shares available for grant 14,610 1,409,610
The table above includes options for 4,985,390 shares and 3,605,390 shares from
the Plans discussed above at December 31, 2008 and 2007, respectively. The
outstanding options have a weighted-average remaining contract term of 2.29
years.
42
A summary of unvested stock option activity during the years ended December 31,
2008 and 2007 is as follows:
2008 2007
------------------------------------------ ------------------------------------------
Weighted Weighted
average Initial average Initial
exercise Intrinsic exercise Intrinsic
Shares price Value Shares price Value
------------ ------------ ------------ ------------ ------------ ------------
Outstanding, beginning of year 20,000 $ 2.70 $ 42,035 -- $ -- $ --
Granted 473,329 0.23 240,799 20,000 2.70 42,035
Vested (5,000) 2.70 (10,509) -- -- --
Forfeited/expired (15,000) 2.70 (31,526) -- -- --
------------ ------------ ------------ ------------
Outstanding, end of year 473,329 $ 0.23 $ 240,799 20,000 $ 2.70 $ 42,035
============ ============ ============ ============
As of December 31, 2008, there are warrants outstanding for 1,000,000 shares
with an average exercise price of $0.35 which have vested. These options and
warrants were granted to consultants and former employees and are not issued
pursuant to the Plans.
Data concerning all stock options at December 31, 2008 and 2007 follows:
Options and Warrants Outstanding
--------------------------------
Weighted-
Average Number
Number Remaining of
of Contractual Options
Exercise Price Options Life (years) Exercisable
-------------- -------------- -------------- --------------
Year ended December 31, 2008
----------------------------------------------------------------
$0-1.10 2,896,700 3.52 2,423,371
$1.20-1.50 2,825,390 1.34 2,825,390
$1.60-2.41 625,000 0.87 625,000
Year ended December 31, 2007
----------------------------------------------------------------
$0-1.10 100,000 1.70 100,000
$1.36-1.50 2,980,390 2.37 2,980,390
$2.20-2.41 975,000 1.91 975,000
$2.50-2.70 60,000 3.33 40,000
43
The fair value of each option on the date of grant is estimated using the Black
Scholes option valuation model. The following weighted-average assumptions were
used for options granted during the year ended December 31, 2008 and 2007:
2008 2007
---- ----
Expected term 3-5 years 1-5 years
Expected average volatility 98.61% 103.77%
Expected dividend yield 0% 0%
Risk-free interest rate 4.75% 4.75%
Expected annual forfeiture rate 0% 0%
NOTE 10: STOCKHOLDERS' EQUITY
PREFERRED STOCK - The Company is authorized to issue up to 2,000,000 shares of
Series A non-voting, cumulative preferred stock with a par value of $2.75. At
December 31, 2008 and 2007, no preferred stock was issued or outstanding.
A 6% cumulative dividend would be payable quarterly to stockholders of record on
the last day of the month prior to the dividend date. The Series A preferred
stock has a liquidation preference over HealthSport's common stock as well as
any other classes of stock established by HealthSport.
COMMON STOCK - The Company is authorized to issue up to 500,000,000 shares of
common stock with a par value of $.0001. At December 31, 2008 and 2007,
49,366,120 and 42,898,397 shares were issued and outstanding, respectively.
INTRINSIC VALUE OF COMMON STOCK OPTIONS - Intrinsic value of common stock
options includes the computed fair value of the compensation element of common
stock options for employees, consultants and directors. This cost is being
amortized over the average expected exercise period.
WARRANTS - The Company issued warrants to acquire 300,000 shares at $0.40 as a
part of a convertible secured promissory note transaction. The exercise price
was later converted to $0.15 pursuant to subsequent financing. The warrants were
valued using Black Scholes and have a cash-less exercise provision. Warrants to
acquire 100,000 shares were exercised, and 79,729 net shares were issued in
2008.
COMMON STOCK TRANSACTIONS - 2008
o 2,276,000 shares of common stock were issued for net cash proceeds
of $816,500;
o 1,585,000 shares of common stock were issued for services rendered
in the amount of $325,250;
o 1,000,327 shares of common stock were issued for accounts payable in
the amount of $243,698;
o 693,334 shares of common stock were issued for a convertible note
payable in the amount of $100,000 and accrued interest of $4,000;
44
o 300,000 shares of common stock were issued for preparation of
operational guidelines and procedures for certain of the Company's
equipment which was valued at $75,000;
o 533,333 shares of common stock were issued for loan fees in the
amount of $80,000; and
o 79,729 shares were issued for a cash-less warrant exercise.
COMMON STOCK TRANSACTIONS - 2007
o 18,249,952 shares of common stock were issued to acquire 100% of
InnoZen, which was valued at $27,374,928;
o 4,951,500 shares of common stock were issued for net cash proceeds
of $6,543,045;
o 15,000 shares of common stock were issued for a stock subscription
receivable of $22,500 which was collected in January 2008;
o 115,000 shares of common stock were issued to employees and
consultants as stock awards valued at $317,000;
o 136,000 shares of common stock were issued for royalty agreements
valued at $204,000;
o 50,000 shares of common stock were issued for the Fix website and
tradenames, valued at $74,000;
o 49,000 shares of common stock were issued for accounts payable in
the amount of $54,000.
NOTE 11: RELATED PARTY TRANSACTIONS
At December 31, 2008, the Company's total convertible promissory notes payable
of $1,545,450 were primarily owed to non-affiliated stockholders.
InnoZen repaid a loan in 2007 to a principal shareholder and affiliate in the
amount of $108,285 after the acquisition of InnoZen was completed.
NOTE 12: COMMITMENTS AND CONTINGENCIES
The Company maintains its corporate office at 10130 Mallard Creek Road, Suite
331, Charlotte, NC 28262. The Company maintained its corporate office in the
office of its accountant at no cost to the Company in 2008 and 2007.
In January 2007, the Company executed a three-year lease agreement for 2,182
square feet of office space in Amherst, New York for the Enlyten office. The
Company closed this office during 2008 and is attempting to sub-lease the space
for the remainder of the lease term.
InnoZen leases its office and current manufacturing facility in Woodland Hills,
California. The lease expires on January 1, 2010 and has a one-year renewal
option. InnoZen believes it has found a qualified party to assume the lease and
plans to consolidate all operations in the Oxnard location.
The Company leased a manufacturing facility in Oxnard, California which contains
approximately 25,000 square feet. The lease term is from December 1, 2007
through January 31, 2015. The Company began manufacturing at this location in
January 2009 and plans to consolidate all of InnoZen's operations by mid-year
2009.
45
Total rent expense was $338,912 and $163,300 in 2008 and 2007, respectively.
Future minimum lease payments for operating leases are: 2009 - $381,000; 2010 -
$199,000; 2011 - $202,000; 2012 - $206,000; 2013 - $212,000; and thereafter -
$235,000.
The Company has the following royalty agreements:
1. Royalty agreement for an indefinite period covering all strip
products except FIX STRIPS and ENLYTEN(TM) ENERGY STRIPS of 1.0% of
the first $100,000,000 in sales and 0.5% of the next $150,000,000 in
sales.
2. Royalty agreement for an indefinite period of 1.0% of the first
$20,000,000 in sales of the FIX STRIPS and ENLYTEN(TM) ENERGY strips
and 0.5% of the next $80,000,000 in sales of the FIX STRIPS and
ENLYTEN(TM) ENERGY strips.
On March 11, 2008, we entered into a five-year distribution agreement with Unico
Holdings, Inc. ("Unico"). Unico markets its products through numerous sales
channels, including large retail merchandisers, drug store chains, grocery
stores and pharmaceutical distributors. Unico's customers include most of the
largest retailers and distributors in the U.S. in each of these sales channels.
The agreement calls for a minimum of $22 million of product purchases over a
five-year term in order for Unico to maintain its exclusive distribution right.
On September 11, 2008, the Company entered into an exclusive distributor
agreement with T. Lynn Mitchell Companies, LLC ("T Lynn"). Pursuant to the
agreement, T Lynn, for a period of ten years, was granted the exclusive
worldwide rights for the four initial products which use the Company's patent
pending bi-layered strip technology. In addition, the agreement contemplates
that the Company can formulate other bi-layered products which T Lynn may market
in the future, subject to pricing or other constraints. The Company began sales
of Antioxidant Strips, Electrolytes Plus, Energy Strips and Melatonin & Theanine
Strips during the fourth quarter of 2008 which will be nationally marketed
beginning in the first quarter of 2009.
The Company has a license agreement and two distribution agreements which cover
the majority of Asia and South and Central America. The agreements cover the
Company's cough products, provide for minimum purchases and require the
distributor to obtain product approval in each country before sales can commence
in those countries. No sales have been made pursuant to these agreements as of
December 31, 2008.
In the normal course of business, the Company may become a party in a legal
proceeding. The only significant matter of which the Company is aware is the
Gatorade case discussed below.
The Company has settled several contracts through verbal agreements and the
Company believes all of these contracts have been terminated without any
remaining liability to the Company.
46
NOTE 13: GOING CONCERN
At December 31, 2008 and 2007, the Company had current assets of $1,799,604 and
$2,411,410; current liabilities of $4,527,706 and $2,066,125; and a working
capital deficit of $2,728,102 and working capital of $345,285, respectively. The
Company incurred a loss of $8,953,121 during 2008, which included depreciation
and amortization of $1,366,451 and amortization of non-cash stock compensation
of $2,823,530.
In 2007, the Company projected sales to be as high as $10 million, based on
forecasts for SPORTSTRIPS, PediaStrips and FIX STRIPS. The alleged tortious
interference by Gatorade in our agreement with the Buffalo Bills, other NFL
teams and NFL players substantially hindered our ability to market and sell our
SPORTSTRIPS product, which was our first product to market. FIX STRIPS sales did
not commence until the fourth quarter and were substantially below initial
forecasts from consultants. At the end of the fourth quarter of 2007, the
Company changed its sales direction and reduced staff with the goal of selling
product through distributors rather than making all sales directly to our
customers.
On March 11, 2008, we entered into a five-year distribution agreement with
Unico. Unico markets its products through numerous sales channels, including
large retail merchandisers, drug store chains, grocery stores and pharmaceutical
distributors. Unico's customers include most of the largest retailers and
distributors in the U.S. in each of these sales channels. The agreement calls
for a minimum of $22 million of product purchases over a five-year term in order
for Unico to maintain its exclusive distribution right. The Unico distribution
agreement is initially for PEDIASTRIPS and commenced during the third quarter of
2008.
We are attempting to establish similar arrangements for our SPORTSTRIPS and
other products. The Company has established other film strip products for a
number of products which were previously only delivered in a different manner,
such as liquids and pills. The Company expects this to develop into a large part
of its business in the future.
On September 11, 2008, the Company entered into an exclusive distributor
agreement with T. Lynn Mitchell Companies, LLC ("T Lynn"). Pursuant to the
agreement, T Lynn, for a period of ten years, was granted the exclusive
worldwide rights for the four initial products which use the Company's patent
pending bi-layered strip technology. In addition, the agreement contemplates
that the Company can formulate other bi-layered products which T Lynn may market
in the future, subject to pricing or other constraints. The Company began sales
of Energy Strips, Antioxidant Strips, Electrolytes Plus and Melatonin & Theanine
Strips during the fourth quarter of 2008 and has several other products which
are expected to begin shipping in 2009.
The Company will continue to require substantial working capital until sales
develop to the level required to support operations. The current level of
overhead is approximately $175,000 per month and manufacturing costs total
approximately $240,000 per month. The Company is continually analyzing its
current costs and is attempting to make additional cost reductions where
possible. Sales amounted to approximately $1,600,000 during the first quarter of
2009. This sales level represents a substantial improvement from prior periods
but will require additional increases to support the current level of
operations. We estimate that sales will develop to the level necessary to be at
or near cash flow break-even by the beginning of the third quarter of 2009.
Based on this time-frame, the Company would need from $500,000 to $1,500,000 to
meet its minimum requirements, including operating cash short-falls and
completing a globally compliant manufacturing plant. The Company expects to
continue to make private placements of its common stock or to borrow additional
funds as needed.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that may result from the outcome of these uncertainties.
47
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A(T): CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
------------------------------------------------
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are
designed to provide reasonable assurance that the information required to be
disclosed by us in reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission.
We carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer of the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this Annual Report. Based on that evaluation, our Chief Executive Officer
concluded that our disclosure controls and procedures as of December 31, 2008
were effective.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
-----------------------------------------------------------------------
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting and for the assessment of the
effectiveness of internal control over financial reporting. Internal control
over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated
under the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the Company's principal executive and principal financial
officers and effected by the Company's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. The
Company's internal control over financial reporting is supported by written
policies and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company's assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of the Company's management and directors; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements.
The Company's internal control system was designed to provide reasonable
assurance to the Company's management and board of directors regarding the
preparation and fair presentation of published financial statements. All
internal control systems, no matter how well designed, have inherent limitations
which may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
48
Management conducted an evaluation of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2008. In making
this assessment, management used the framework set forth in the report entitled
"Internal Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or ("COSO"). The COSO framework
summarizes each of the components of a company's internal control system,
including (i) the control environment, (ii) risk assessment, (iii) control
activities, (iv) information and communication, and (v) monitoring.
The matters involving internal controls and procedures that our management
considered to be material weaknesses under the standards of the Public Company
Accounting Oversight Board were: (1) lack of a functioning audit committee due
to a lack of a majority of independent members and a lack of a majority of
outside directors on our board of directors, resulting in ineffective oversight
in the establishment and monitoring of required internal controls and
procedures; (2) the Company has not maintained perpetual inventory records at
its subsidiary location in California and has not maintained adequate control of
inventory stored off-site at a third-party warehouse and (3) inadequate
segregation of duties consistent with control objectives. The aforementioned
material weaknesses were identified by our Chief Executive Officer in connection
with the review of our financial statements as of December 31, 2008.
Management believes the second material weakness did not have more than a
nominal effect on our financial results due to the complete count of the
inventory on hand at December 31, 2008 and the pricing of the extended
inventory. These are the procedures normally used to test perpetual inventory
records. Accordingly, the inventory is accurate at December 31, 2008, although
there exists a degree of risk that interim inventory results may have been
inaccurate. In addition, the aforementioned procedure, while accurate causes
delays in obtaining the current information. Management believes that the third
material weakness did not have an effect on our financial results due primarily
to using a third-party to review its financial information and prepare its
financial statements in addition to the audit performed by the auditor. However,
management believes that the lack of a functioning audit committee and the lack
of a majority of outside directors on our board of directors results in
ineffective oversight in the establishment and monitoring of required internal
controls and procedures, which could result in a material misstatement in our
financial statements in future periods.
This annual report does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permits us to provide only management's report in this annual
report.
MANAGEMENT'S REMEDIATION INITIATIVES
------------------------------------
In an effort to remediate the identified material weaknesses and other
deficiencies and enhance our internal controls, we have initiated, or plan to
initiate, the following measures:
We are implementing a fully functioning perpetual inventory system for our
inventory in California, which is expected to be operating in the second quarter
of 2009.
49
Management believes that the appointment of two or more outside directors, who
shall be appointed to the audit committee, will remedy the lack of a functioning
audit committee and a lack of a majority of outside directors on our Board. We
expect to expand our board of directors during 2009.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
----------------------------------------------------
There was no change in our internal controls over financial reporting that
occurred during the period covered by this report, that has materially affected,
or is reasonable likely to materially affect, our internal controls over
financial reporting.
ITEM 9B: OTHER INFORMATION
Pursuant to General Instruction B of Form 8-K, any reports previously or in the
future submitted under Item 2.02 (Results of Operations and Financial Condition)
are not deemed to be "filed" for the purpose of Section 18 of the Securities
Exchange Act of 1934 and the Company is not subject to the liabilities of that
section, unless the Company specifically states that the information is to be
considered "filed" under the Exchange Act or incorporates it by reference into a
filing under the Securities Act or Exchange Act. If a report on Form 8-K
contains disclosures under Item 2.02, whether or not the report contains
disclosures regarding other items, all exhibits to such report relating to Item
2.02 will be deemed furnished, and not filed, unless the registrant specifies,
under Item 9.01 (Financial Statements and Exhibits), which exhibits, or portions
of exhibits, are intended to be deemed filed rather than furnished pursuant to
this instruction. The Company is not incorporating, and will not incorporate, by
reference these reports into a filing under the Securities Act of 1933, as
amended, or the Exchange Act of 1934, as amended.
50
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
EXECUTIVE OFFICERS AND DIRECTORS
The following section sets forth as of December 31, 2008, the names, ages and
current positions with the Company held by the Directors, Executive Officers and
Significant Employees; together with the year such positions were assumed. There
is no immediate family relationship between or among any of the Directors,
Executive Officers or Significant Employees, and we are not aware of any
arrangement or understanding between any Director or Executive Officer and any
other person pursuant to which he was elected to his current position. Each
Executive Officer will serve until he or she resigns or is removed or otherwise
disqualified to serve, or until his or her successor is elected and qualified.
We currently have four Directors.
Name Age Position and Term
---- --- -----------------
Hank Durschlag 45 Director since September 11, 2006; acting CEO
from December 11, 2007 until March 1, 2008;
CEO and President since August 15, 2008;
Acting CFO since December 11, 2007
Daniel J. Kelly 47 CEO and President starting January 1, 2007;
became a Director on May 2, 2007; resigned
as CEO on December 11, 2007 and as
President on March 1, 2008
Robert S. Davidson 42 Director since May 4, 2007; CEO of InnoZen,
Inc.
Matthew Burns 39 Director since May 4, 2007; COO of HealthSport
from May 4, 2007 until May 2008
Thomas A. Beckett 41 Chief Operating Officer of InnoZen, Inc. since
May 2008 and manufacturing manager from
January 2007 until May 2008
Mark Udell 32 Controller of InnoZen, Inc. since October 16,
2007
51
HANK DURSCHLAG - Was appointed a Director of the Company on September 11, 2006;
was acting CEO from December 11, 2007 until March 1, 2008; became CEO and
President on August 15, 2008; and has been Acting CFO since December 11, 2007.
Mr. Durschlag is the co-developer of the electrolyte sports strips and
co-authored the patent, "Edible Film for Transmucosal Delivery of Nutritional
Supplements". Mr. Durschlag has extensive experience in the fields of healthcare
and sports medicine, with specific emphasis on novel drug delivery systems. In
addition, Mr. Durschlag is a partner in Greenville, South Carolina based
GlucoTec, Inc., a developer and manufacturer of an FDA Class II Medical Device
designed to regulate blood glucose levels in an acute care setting via both
intravenous and subcutaneous delivery of insulin and other fluids. Mr. Durschlag
has also co-authored patents in this area. Previously, Mr. Durschlag served as
Vice President of Sales and Marketing for Diabetes Management Services, Inc., a
durable medical equipment distributor with specific treatment modules in women's
health and pregnancy. Mr. Durschlag holds a bachelors degree from California
University of Pennsylvania and an MBA from Clemson University. Mr. Durschlag is
also CEO and a director of Double Eagle Holdings, Ltd. (DEGH.OB).
DANIEL J. KELLY - Became CEO and President on January 1, 2007. Mr. Kelly
resigned as Acting CEO on December 11, 2007 and resigned as President on March
1, 2008. Mr. Kelly began his business career approximately 20 years ago managing
and advising Jim Kelly, his brother and Pro Football Hall of Fame Quarterback.
Mr. Kelly also owns and serves as the President of Jim Kelly Enterprises, Inc.,
a company started over 15 years ago. In 1988, Mr. Kelly negotiated the most
lucrative player contract in NFL history (at that time) for Jim. Mr. Kelly has
20 years experience in marketing, promotions and celebrity endorsements and
continues to work with such companies as Coors, Miller Lite, LA Weightloss and
Ameriquest. Mr. Kelly received his bachelor's degree from the University of
Houston and was a prominent member of the NFL Quarterback Club, serving on the
Sponsorship and Marketing Committees that negotiated comprehensive, multi-year
deals with major US companies such as McDonalds, VISA, Footlocker and MBNA Bank.
He is the vice chairman of the Kelly for Kids Foundation.
ROBERT STEVEN DAVIDSON - Mr. Davidson has been the Company's Chairman of the
Board since May 4, 2007. Since May 2002, Mr. Davidson has also served as the
President, Chief Executive Officer and a director of InnoZen. From January 2002
through July 2005, Mr. Davidson was President and Chief Executive Officer of
Zengen, Inc. Mr. Davidson has approximately ten years of experience in the
biopharmaceutical industry. From September 1998 to December 2001, Mr. Davidson
was the chief executive officer of Gel Tech, L.L.C., where he raised capital for
the market launch and distribution of the Zicam product line. He led the
marketing team that took Zicam from an unknown entity to one of the top
medications in its class. He also implemented and launched line extensions to
strengthen the brand name and increase company value. From October 1994 to
August 1998, Mr. Davidson was the chief executive officer of Biotem
Cytotechnologies, Inc., a biopharmaceutical research and development company.
Mr. Davidson received his B.S. degree with a concentration in Biological Life
Sciences from The University of the State of New York, (Excelsior College). He
has a Masters Certificate in Applied Project Management from Villanova
University and received his Masters of Public Health (Homeland Security) from
American Military University, Virginia. Mr. Davidson is a certified Performance
Enhancement Specialist through the National Academy of Sports Medicine.
52
MATTHEW BURNS - Mr. Burns has served as the Chief Operating Officer and a
Director of the Company since May 4, 2007 and was Chief Operating Officer of the
Company until he left on April 30, 2008 to pursue other business interests. Mr.
Burns has also been an officer and director of InnoZen since April 2004. Prior
to joining InnoZen and its parent Zengen, from July 2001 to February 2002, Mr.
Burns was an associate attorney at Morgan Lewis & Bockius, LLP, where he worked
in the firm's business and finance practice group in the Los Angeles office.
Prior to joining Morgan Lewis, Mr. Burns worked as an associate attorney in the
corporate finance group at Morrison & Foerster's San Francisco office. Prior to
joining Morrison & Foerster, Mr. Burns worked as an associate attorney in the
corporate practice at Holland & Knight in Tampa, Florida. His law practice
concentrated on mergers and acquisitions and corporate finance for companies in
a variety of industries, including life sciences and technology. Mr. Burns has
also provided counsel to public and private companies on general corporate law,
corporate governance and securities matters. Mr. Burns received his J.D. from
Stetson University of College of Law in 1995 and his B.A. in Finance from the
University of South Florida in 1992.
THOMAS A. BECKETT - Mr. Beckett is the Chief Operating Officer of InnoZen which
includes the Company's R&D and manufacturing operations. He has been with
InnoZen since 2003, as a consultant until January 1, 2007, and has served in a
variety of operational roles. Prior to his work at InnoZen, Mr. Beckett had
careers in both law and business. He was an attorney for the Atlanta based law
firm of King & Spalding, and before this, practiced at Holland & Knight in
Tampa, Florida. Mr. Beckett also worked in the Los Angeles area as a producer
and actor, working on a variety of projects in film and TV. Mr. Beckett began
his career in business as a commercial banking officer with First Union National
Bank. Mr. Beckett received a B.A. degree from the University of Virginia and a
law degree (J.D.) from the University of Florida College of Law.
MARK UDELL - is a Certified Public Accountant who has served as InnoZen's
controller since October 2007. Prior to joining InnoZen, Mr. Udell was an
accounting manager at Green Hasson & Jenks, LLP in Los Angeles, California,
where he worked in the firm's auditing practice group for over six years. Mr.
Udell became a CPA in 2001 and received his B.A. in Business Economics with
concentration in accounting from the University of California, Santa Barbara in
1999.
AUDIT COMMITTEE
The Board of Directors currently serves as the audit committee since there are
currently no independent directors.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers, directors and persons who own more than ten
percent of the Company's common stock to file initial reports of ownership and
changes in ownership with the SEC. Additionally, SEC regulations require that
the Company identify any individuals for whom one of the referenced reports was
not filed on a timely basis during the most recent fiscal year or prior fiscal
years. To the Company's knowledge, based solely on a review of reports furnished
to it, the Directors all timely filed Form 5s in February 2009 to report Form 4
obligations which were not timely filed in 2008.
53
CODE OF ETHICS
The Company expects to include the adoption of a code of ethics on its agenda
during 2009 upon expanding its board of directors.
NOMINATING COMMITTEE
The Company does not currently have a standing nominating committee or committee
performing similar functions. The full Board of Directors participates in the
consideration of director nominees.
ITEM 11: EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors deliberates executive
compensation matters to the extent they are not delegated to the Chief Executive
Officer.
The following table shows the compensation of the Company's Chief Executive
Officer and each executive officer whose total cash compensation exceeded
$100,000 for the three years ended December 31, 2008.
54
SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------------------------------------------
Stock Option All other
Name and principal Salary awards awards compensation Total
position Year ($) ($) ($)(a) ($) ($)
------------------------------------------------------------------------------------------------------------------------
M.E. "Hank" Durschlag (d) 2008 $100,000 $ - $ 648 $ 1,168 $ 101,816
(Interim CEO from 12/11/07 to 2007 $100,000 $ - $ - $ 2,810 $ 102,810
3/1/08; Acting CFO since 2006 72,000 - - - 72,000
12/11/07; CEO since 8/15/08)
Daniel J. Kelly (CEO 2008 $115,625 $ - $289,449 $ - $ 405,074
from January 1, 2007 until 2007 $203,646 $ 27,500 $289,200 $ - $ 520,346
December 11, 2007)(b) 2006 N/A $ 5,500 $ 5,910 $ 32,500 $ 43,910
Robert S. Davidson (CEO of 2008 $203,000 $ - $166,623 $ - $ 369,623
InnoZen from May 4, 2007) (c) 2007 $120,250 $ - $110,650 $ - $ 230,900
2006 N/A N/A N/A N/A N/A
Matthew Burns (COO of 2008 $ 49,333 $ - $165,975 $ - $ 215,308
HealthSport from May 4 2007 $120,250 $ - $110,650 $ - $ 230,900
2007 until April 30, 2008) (c) 2006 N/A N/A N/A N/A N/A
Robert Kusher (CEO from 2008 $ 30,000 $ - $201,155 $ - $ 231,155
March 1, 2008 until August 31, 2007 N/A N/A N/A N/A N/A
2008) (e) 2006 N/A N/A N/A N/A N/A
Thomas A. Beckett (COO of 2008 $134,417 $ - $ 30,648 $ - $ 165,065
InnoZen since May 2008) 2007 $ 90,790 $ - $ 20,000 $ - $ 110,790
2006 N/A N/A N/A N/A N/A
Mark Udell (Controller of InnoZen 2008 $100,000 $ - $ 42,990 $ - $ 142,990
since October 2007) 2007 $ 25,833 N/A $ 8,534 N/A $ 34,367
2006 N/A N/A N/A N/A N/A
(a) The option award represents the amortization of the options granted to the named individuals.
(b) In 2007 and 2006, the amount for the stock award represents the amortization of Mr. Kelly's 10% share of the stock
granted to Jim Kelly for his appearance fees. All other compensation in 2006 represents the amount paid to Jim
Kelly Enterprises, Inc. Mr. Kelly is owner and President of Jim Kelly Enterprises, Inc. and was acting as a
consultant to the Company during 2006. At December 31, 2008 and 2007, Mr. Kelly had $10,000 and $8,854,
respectively, in accrued salary not included in the table above.
(c) At December 31, 2007, Mr. Davidson and Mr. Burns each had $3,083 in accrued salary not included in the table above.
(d) Mr. Durschlag earned $1,168 and $2,810 in royalties on sales of the Enlyten products in 2008 and 2007,
respectively.
(e) At December 31, 2008, Mr. Kusher had $86,120 in accrued salary not included in the table above.
55
Columns for bonus, non-equity incentive plan compensation and nonqualified
deferred compensation earnings have been omitted from the table above as all
amounts are zero.
NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE
Compensation levels and amounts are determined by the Board of Directors based
on amounts paid to executives in similar sized companies with similar
responsibilities. Stock options are valued utilizing the Black-Scholes valuation
method.
M.E. "Hank" Durschlag became Interim CEO and Acting CFO on December 11, 2007.
Mr. Durschlag was Interim CEO until March 1, 2008, when Mr. Kusher assumed the
duty and then became CEO and President on August 15, 2008, when Mr. Kusher left
the Company. Mr. Durschlag's compensation of $100,000 per annum did not change
when he assumed the temporary positions, while he assisted the Company in
finding a full-time CEO. On November 4, 2008, Mr. Durschlag received an option
which is currently exercisable for 250,000 shares of the Company's common stock,
exercisable at $0.23.
Mr. Kelly became President and Chief Executive Officer of the Company on January
1, 2007. Mr. Kelly's compensation for 2007 was $212,500 and he received $1,000
per month insurance reimbursement until health insurance was available for
employees. Mr. Kelly's compensation increased to $262,500 in 2008. In addition,
Mr. Kelly was granted a stock option for 400,000 shares exercisable at $2.25 per
share in January 2007, which expires in three years. On November 4, 2008, Mr.
Kelly received an option which is currently exercisable for 100,000 shares of
the Company's common stock, exercisable at $0.23.
Mr. Kusher became Chief Executive Officer of the Company on March 1, 2008. Mr.
Kusher's compensation was scheduled to be $240,000 per year for two years with
benefits to include health insurance, four weeks vacation and reimbursement of
all reasonable out-of-pocket expenses. Mr. Kusher was to be awarded 500,000
shares of our common stock that would vest when we obtained $750,000 in debt or
equity financing for the Company. Mr. Kusher was granted an option to purchase
1,000,000 shares of our common stock at an exercise price of $1.00 per share
which was exercisable on March 1, 2009 and an option to purchase 1,000,000
shares of our common stock at an exercise price of $1.50 per share which was
exercisable on March 1, 2010. The options did not vest since Mr. Kusher left the
Company on August 15, 2008, when it was determined he would be unable to secure
the new equity or debt financing needed by the Company to continue its
operations.
Mr. Beckett has an agreement which provides for annual compensation of $138,000
and other normal benefits. Mr. Udell's annual compensation is $100,000.
56
GRANTS OF PLAN BASED AWARDS TABLE AS OF DECEMBER 31, 2008
-------------------------------------------------------------------------------------------------------------------------------
All other stock awards: All other option awards: Exercise or Grant date fair
number of shares number of securities Base price of value of stock and
Name/Date of stock or units (#) underlying options (#) Option awards option awards
-------------------------------------------------------------------------------------------------------------------------------
M.E. Durschlag -- 250,000 $ 0.23 $ 19,425
November 4, 2008
Robert S. Davidson -- 250,000 $ 0.23 $ 19,425
November 4, 2008
Robert S. Davidson's wife -- 50,000 $ 0.23 $ 3,885
November 4, 2008
Dan Kelly -- 100,000 $ 0.23 $ 7,770
November 4, 2008
Thomas A. Beckett -- 250,000 $ 0.23 $ 19,425
November 4, 2008
Mark Udell -- 150,000 $ 0.23 $ 11,655
Other required columns: estimated future payouts under non-equity incentive plan
awards and estimated future payouts under equity incentive plan awards are
omitted from the table as they are all zero.
NARRATIVE DISCLOSURE TO GRANTS OF PLAN BASED AWARDS TABLE
The Board of Directors awarded options to the active board members and to the
majority of the Company's employees.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
-------------------------------------------------------------------------------------------------------------
Number of securities
underlying unexercised
options (#) Option Option
------------------------------- exercise expiration
Name Exercisable Unexercisable price ($) date
-------------------------------------------------------------------------------------------------------------
Daniel J. Kelly 100,000 -- $ 1.10 September 12, 2009
Daniel J. Kelly 400,000 -- $ 2.25 January 1, 2010
Daniel J. Kelly 100,000 -- $ 0.23 November 4, 2013
Robert S. Davidson 495,000 -- $ 1.36 May 4, 2010
Robert S. Davidson 250,000 -- $ 0.23 November 4, 2013
Robert S. Davidson's wife 50,000 -- $ 1.36 May 4, 2010
Robert S. Davidson's wife 16,666 33,334 $ 0.23 November 4, 2013
M.E. Durschlag 250,000 -- $ 0.23 November 4, 2013
Matthew Burns 495,000 -- $ 1.36 May 4, 2010
Thomas A. Beckett 90,000 -- $ 1.36 May 4, 2010
Thomas A. Beckett 250,000 -- $ 0.23 November 4, 2013
Mark Udell 50,000 100,000 $ 0.23 November 4, 2013
The columns for option awards - equity incentive plan awards: number of
securities underlying unexercised unearned options and all four stock award
columns are omitted from the table as these amounts were zero.
57
ADDITIONAL NARRATIVE DISCLOSURE
Mr. Kelly's option for 100,000 shares was granted while he was a consultant and
before he became President and CEO on January 1, 2007. Mr. Kelly's second option
for 400,000 shares was granted when he became President and CEO. Mr. Davidson
and Mr. Burns received options on May 4, 2007 to replace options they had at
InnoZen.
On November 4, 2008, the Board of Directors granted options to themselves and
the majority of the employees of the Company as detailed above.
Options exercised and stock vested table, pension benefits table and
nonqualified deferred compensation table and all omitted as there would have
been no information to include.
COMPENSATION OF DIRECTORS TABLE - ADDITIONAL NARRATIVE DISCLOSURE
Directors did not receive any additional compensation for the meetings they
attended in 2008. It is anticipated that a formal plan for compensation of
Directors will be instituted when outside Directors are added.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
There are no known persons who, as of February 28, 2009, the most recent
practicable date, are known by us to own beneficially more than 5% of any class
of our outstanding voting securities.
SECURITY OWNERSHIP OF MANAGEMENT
The following table indicates the beneficial ownership of the Company's voting
securities of all Directors of the Company and all Executive Officers who are
not Directors of the Company, and all officers and directors as a group, as of
February 28, 2009, the most recent practicable date. As of February 28, 2009,
there were 49,859,082 shares of the Company's common stock outstanding. Except
as otherwise indicated below, to the best of the Company's knowledge, each
person named in the table has sole voting and investment power with respect to
the securities beneficially owned by them as set forth opposite their name. All
options are currently exercisable, unless otherwise indicated.
58
Name and Address of Amount and Nature of % of
Title of Class Beneficial Owner Beneficial Owner Class
-------------- ---------------- ---------------- -----
Common M.E. "Hank" Durschlag a 825,000 1.65%
5403 McChesney Dr.
Charlotte, NC 28269
Common Robert S. Davidson b 1,422,142 2.81%
6429 Independence Ave
Woodland Hills, CA 91367
Common Daniel J. Kelly c 732,050 1.45%
495 Commerce Drive, Suite 1
Amherst, New York
Common Matthew Burns d 841,711 1.67%
6429 Independence Ave
Woodland Hills, CA 91367
Common Thomas A. Beckett e 347,960 0.69%
6429 Independence Ave
Woodland Hills, CA 91367
Common Mark Udell f 50,000 0.10%
6429 Independence Ave
Woodland Hills, CA 91367
Common All current officers and directors
as a Group (6 persons) 4,218,863 8.05%
a. Includes option granted November 4, 2008 for 250,000 shares exercisable at
$0.23 per share for five years.
b. Includes 461,831 shares owned jointly by Mr. Davidson and his wife;
includes 9,456 shares owned by Mr. Davidson's wife; includes three-year
option granted May 4, 2007, to replace InnoZen option, to acquire 495,000
shares at $1.36 per share held by Mr. Davidson; includes five-year option
granted November 4, 2008 for 250,000 shares exercisable at $0.23 per share
held by Mr. Davidson; includes three-year option granted May 4, 2007, to
replace InnoZen option, to acquire 50,000 shares at $1.36 per share held
by Mr. Davidson's wife; and includes five-year option granted November 4,
2008 to acquire 16,666 shares exercisable at $0.23 per share held by Mr.
Davidson's wife. Does not include options granted November 4, 2008 to Mr.
Davidson's wife for 16,667 shares exercisable November 4, 2009 and 16,667
shares exercisable November 4, 2010.
c. Includes option granted in September 2006 for 100,000 shares exercisable
at $1.10 per share; option granted January 1, 2007 for 400,000 shares
exercisable at $2.25 per share; and option granted November 4, 2008 for
100,000 shares exercisable at $0.23 for five years.
d. Includes three-year option for 495,000 shares, exercisable at $1.36 per
share; granted May 4, 2007 to replace InnoZen options.
e. Includes three-year option granted May 4, 2007, to replace InnoZen option,
to acquire 90,000 shares at $1.36 per share held by Mr. Beckett; and
includes five-year option granted November 4, 2008 for 250,000 shares
exercisable at $0.23 per share.
f. Includes five-year option granted November 4, 2008 for 150,000 shares
exercisable at $0.23 per share. At December 31, 2008, 50,000 shares are
exercisable, 50,000 shares become exercisable November 4, 2009 and the
remaining 50,000 shares become exercisable on November 4, 2010.
59
EQUITY COMPENSATION PLANS
Approved by Not approved by
Security Holders Security Holders Total
---------------- ---------------- -----
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights 4,985,390 -- 4,985,390
Weighted-average exercise price of
outstanding options, warrants and
rights $ 1.11 $ -- $ 1.11
Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities above) 14,610 -- 14,610
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
At December 31, 2008, the Company's total convertible promissory notes payable
of $1,545,450 was primarily owed to non-affiliated stockholders.
InnoZen repaid a loan to a principal shareholder and affiliate in the amount of
$108,285 after it was acquired by HealthSport in 2007.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees - The aggregate fees billed as of April 3, 2009 for professional
services rendered by the Company's accountant was $52,200 and $81,950 for the
audit of the Company's annual financial statements and quarterly reviews for the
fiscal years ended December 31, 2008 and 2007, respectively.
Audit-Related Fees - None.
Tax Fees - None for 2008 or 2007.
All Other Fees - Other than the services described above, no other fees were
billed for services rendered by the principal accountant during fiscal 2008 or
fiscal 2007.
Audit Committee Policies and Procedures - The Board of Directors pre-approves
audit and review services.
If greater than 50 percent, disclose the percentage of hours expended on the
principal accountant's engagement to audit the registrant's financial statements
for the most recent fiscal year that were attributed to work performed by
persons other than the principal accountant's full-time, permanent employees -
Not applicable.
60
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial Statements - The following consolidated financial
statements of HealthSport, Inc. and Subsidiaries are contained
in Item 8 of this Form 10-K:
o Report of Independent Registered Public Accountant
o Consolidated Balance Sheets at December 31, 2008 and
2007
o Consolidated Statements of Operations - For the years
ended December 31, 2008 and 2007
o Consolidated Statements of Stockholders' Equity - For
the years ended December 31, 2008 and 2007
o Statements of Cash Flows - For the years ended December
31, 2008 and 2007
o Notes to the Consolidated Financial Statements
2. Financial Statement Schedules were omitted, as they are not
required or are not applicable, or the required information is
included in the Financial Statements.
3. Exhibits - The following exhibits are filed with this report
or are incorporated herein by reference to a prior filing, in
accordance with Rule 12b-32 under the Securities Exchange Act
of 1934.
EXHIBIT DESCRIPTION
------- -----------
31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
61
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HEALTHSPORT, INC.
April 22, 2009 /S/ M.E. "HANK" DURSCHLAG
--------------------------------------------
M.E. "Hank" Durschlag, President, CEO and Acting CFO
(Principal executive and accounting officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
April 22, 2009 /S/ ROBERT S. DAVIDSON
--------------------------------------
Robert S. Davidson, Director
April 22, 2009 /S/ M.E. "HANK" DURSCHLAG
--------------------------------------
M.E. "Hank" Durschlag,
Director, President, CEO
and Acting CFO
April 22, 2009 /S/ DANIEL J. KELLY
--------------------------------------
Daniel J. Kelly, Director
April 22, 2009
--------------------------------------
Matthew Burns, Director
62