U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d0
of the Securities Exchange Act of 1934
For Quarter Ended: SEPTEMBER 30, 2008
Commission File Number: 0-23100
HEALTHSPORT, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-2649848
(State of Incorporation) (IRS Employer ID No)
7633 EAST 63RD PLACE, SUITE 220, TULSA, OKLAHOMA 74133
(Address of principal executive office)
(818) 593-4880
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-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].
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of September 30, 2008, was 45,383,397.
HEALTHSPORT, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I FINANCIAL INFORMATION (Unaudited)
Item 1: Condensed Consolidated Balance Sheet as of September 30, 2008 and
December 31, 2007 3
Condensed Consolidated Statements of Operations for the three
months ended September 30, 2008 and 2007 4
Condensed Consolidated Statements of Operations for the nine months
ended September 30, 2008 and 2007 5
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2008 and 2007 6
Notes to Condensed Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 3: Quantitative and Qualitative Disclosures About Market Risk 24
Item 4T: Controls and Procedures 24
PART II OTHER INFORMATION 25
Exhibits
2
HEALTHSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
2008
UNAUDITED 2007
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 210,871 $ 167,323
Accounts receivable 40,841 107,312
Inventory 794,536 1,402,530
Prepaid expenses and other assets 356,859 734,245
------------ ------------
Total current assets 1,403,107 2,411,410
Property and equipment, net 743,352 636,370
Goodwill 10,326,948 10,326,948
Patent costs and other intangible assets, net 18,888,673 20,308,545
Other assets 77,318 21,524
------------ ------------
Total assets $ 31,439,398 $ 33,704,797
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,678,350 $ 1,037,172
Accrued expenses 830,898 114,903
Current portion of capital lease obligation 68,862 217,954
Senior secured convertible promissory notes 545,000 --
Deferred revenue 576,958 696,096
------------ ------------
Total current liabilities 3,700,068 2,066,125
------------ ------------
Notes payable 163,000
Capital lease obligation, less current portion 58,550 70,963
------------ ------------
Total liabilities 3,921,618 2,137,088
------------ ------------
Minority interest 901,158 --
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; 45,383,397 and 42,898,397 shares issued and outstanding
at September 30, 2008 and December 31, 2007, respectively 4,538 4,290
Additional paid-in capital 69,171,343 67,980,373
Intrinsic value of common stock options (1,414,375) (2,860,229)
Stock subscription receivable (500) --
Accumulated deficit (41,144,384) (33,556,725)
------------ ------------
Total stockholders' equity 26,616,622 31,567,709
------------ ------------
Total liabilities and stockholders' equity $ 31,439,398 $ 33,704,797
============ ============
See accompanying notes to condensed consolidated financial statements.
3
HEALTHSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
2008 2007
------------ ------------
Revenue
Product sales $ 580,224 $ 110,473
License fees, royalties and services 18,750 45,134
------------ ------------
Total revenues 598,974 155,607
------------ ------------
Costs and expenses
Cost of product sold 445,289 53,774
General and administrative expense 940,299 1,373,358
Marketing and selling expense 358,530 670,264
Non-cash compensation expense 351,747 600,789
Manufacturing costs 17,978 303,096
Research and development costs 30,106 130,614
------------ ------------
Total costs and expenses 2,143,949 3,131,895
------------ ------------
Net loss from operations (1,544,975) (2,976,288)
------------ ------------
Other income (expense):
Interest income 406 21,968
Interest expense (16,795) (6,618)
------------ ------------
Other income (expense) (16,389) 15,350
------------ ------------
Net loss before income taxes and minority interest (1,561,364) (2,960,938)
Provision for income taxes -- --
------------ ------------
Net loss before minority interest (1,561,364) (2,960,938)
Minority interest 36,416 --
------------ ------------
Net loss $ (1,524,948) $ (2,960,938)
============ ============
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.03) $ (0.07)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 45,318,180 41,766,897
============ ============
See accompanying notes to condensed consolidated financial statements.
4
HEALTHSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
2008 2007
------------ ------------
Revenue
Product sales $ 812,317 $ 135,058
License fees, royalties and services 56,250 109,156
------------ ------------
Total revenues 868,567 244,214
------------ ------------
Costs and expenses
Cost of product sold 562,389 83,542
General and administrative expense 3,235,131 2,472,484
Marketing and selling expense 1,056,087 1,652,489
Non-cash compensation expense 2,033,325 1,546,380
Asset impairment 648,600 --
Inventory obsolescence 274,840 --
Manufacturing costs 535,278 433,594
Research and development costs 169,217 1,020,672
------------ ------------
Total costs and expenses 8,514,867 7,209,161
------------ ------------
Net loss from operations (7,646,300) (6,964,947)
------------ ------------
Other income (expense):
Other income 5,584 --
Interest income 1,175 65,589
Interest expense (36,960) (11,725)
------------ ------------
Other income (expense) (30,201) 53,864
------------ ------------
Net loss before income taxes and minority interest (7,676,501) (6,911,083)
Provision for income taxes -- --
------------ ------------
Net loss before minority interest (7,676,501) (6,911,083)
Minority interest 88,842 --
------------ ------------
Net loss $ (7,587,659) $ (6,911,083)
============ ============
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.17) $ (0.22)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 44,531,864 31,964,819
============ ============
See accompanying notes to condensed consolidated financial statements.
5
HEALTHSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
2008 2007
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(7,587,659) $(6,911,084)
Adjustment to reconcile net loss to net cash used
in operating activities:
Minority interest (88,842) --
Amortization of non-cash stock compensation 1,811,575 1,546,380
Depreciation and amortization 1,053,313 616,928
Acquired research and development cost -- 847,336
Common stock issued for services 221,750 --
Asset impariment 648,600 --
Inventory obsolescence 274,840 --
Change in other assets and liabilities:
Accounts receivable 136,471 (103,594)
Inventory 333,153 (562,004)
Prepaid expenses and other assets 242,337 (368,354)
Accounts payable 804,179 584,630
Accrued expenses 526,857 85,826
----------- -----------
Net cash used in operating activities (1,623,426) (4,263,936)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received in excess of cash paid in acquisition of InnoZen -- 16,832
Legal fees associated with acquisition of Neutracuticals -- (15,811)
Loans to InnoZen prior to acquisition -- (500,000)
Acquisition of property and equipment (389,022) (187,477)
----------- -----------
Net cash used in investing activities (389,022) (686,456)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Collect stock subscription receivable 22,500 250,000
Capital contribution by joint venture partner 990,000 --
Loan proceeds 545,000 --
Loan repayment to shareholder -- (108,285)
Capital lease payments (161,504) (79,494)
Sale of common stock 660,000 5,446,974
----------- -----------
Net cash provided by financing activities 2,055,996 5,509,195
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 43,548 558,803
CASH AND CASH EQUIVALENTS, beginning of period 167,323 318,144
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 210,871 $ 876,947
=========== ===========
(Continued)
See accompanying notes to condensed consolidated financial statements.
6
HEALTHSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
2008 2007
------------ ------------
Supplemental cash flow information
Cash paid for interest and income taxes:
Interest $ 7,733 $ 11,725
Income taxes -- --
Non-cash investing and financing activities: Issuance of common stock for:
Investment in InnoZen, Inc.:
Current assets, excluding cash -- 584,993
Property and equipment -- 471,188
Goodwill and other intangible assets -- 27,643,918
Research and development -- 847,336
Other assets -- 10,583
------------
Total assets -- 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
============
Trade names and web site -- 74,000
Stock subscription receivable 500 172,754
Prepaid royalties -- 204,000
Accrued expense -- 15,000
Property and equipment acquired with a capital lease -- 99,172
See accompanying notes to condensed consolidated financial statements.
7
HEALTHSPORT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following notes to the condensed consolidated financial statements and
management's discussion and analysis or plan of operation contain
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements may include projections or
expectations of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for future operations. Words
such as "expects", "anticipates", "approximates", "believes", "estimates",
"hopes", "intends", "plans", and variations of such words and similar
expressions are intended to identify such forward-looking statements. No
assurance can be given that actual results or events will not differ materially
from those projected, estimated, assumed or anticipated in any such
forward-looking statements.
NOTE 1: ORGANIZATION AND NATURE OF BUSINESS
ORGANIZATION AND BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
HealthSport, Inc. ("HealthSport") and its wholly owned subsidiaries: Enlyten,
Inc. ("Enlyten"); InnoZen, Inc. ("InnoZen") and InnoZen's majority owned
subsidiary Pacific Manufacturing Group LLC ("PMG"); Health Strip Solutions, LLC
("Health Strip"); Cooley Nutraceuticals, Inc. ("Nutraceuticals"); and the
following inactive subsidiaries, World Championship Poker, Inc. ("Poker"),
Strategic Gaming Consultants, LLC ("Gaming") and Maxx Motorsports, Inc.
("Maxx"), and its wholly owned subsidiary, Team Racing Auto Circuit, LLC
("TRAC") (collectively, the "Company" or the "Companies"). All significant
intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements included in this report have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission for interim reporting and include all
adjustments (consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation. These condensed
consolidated financial statements have not been audited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations for interim reporting. The Company believes that the disclosures
contained herein are adequate to make the information presented not misleading.
However, these condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report for the year ended December 31, 2007,
which is included in the Company's Form 10-K for the year ended December 31,
2007. The financial data for the interim periods presented may not necessarily
reflect the results to be anticipated for the complete year.
8
Certain reclassifications of the amounts presented for the comparative period
have been made to conform to the current presentation.
NATURE OF BUSINESS
HealthSport is a holding company with the following active wholly owned
subsidiaries.
Enlyten was formed to market and sell the Company's ENLYTEN(TM) edible film
strip products.
InnoZen is the preeminent formulator, developer and manufacturer of edible thin
film strips that deliver drug actives and was the first company to deliver a
drug active ingredient in a thin film strip. InnoZen completed the development
of Chloraseptic(R) Sore Throat Relief Strips in June 2003 and launched two new
film strip products under its own Suppress(R) brand (HTTP://WWW.SUPPRESS.COM) in
September 2004. All manufacturing operations will be performed by PMG commencing
during 2008 and InnoZen will primarily be involved in research and development
of new products.
All patent applications for the Companies are processed by InnoZen.
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. Along with water, electrolytes such as those found in
Health Strip's ENLYTEN(TM) SPORTSTRIPS, can be used in oral rehydration therapy
to replenish the body's electrolyte levels after dehydration caused by exercise,
diarrhea or vomiting. Health Strip and InnoZen also hold the proprietary
technology for ENLYTEN(TM) SURVIVAL STRIPS which are formulated with
antioxidants, non-cavity causing sweeteners, vitamins, herbal extracts,
electrolytes, caffeine and other proven beneficial compounds as a remedy to
fatigue, drowsiness and dehydration.
Nutraceuticals holds the proprietary technology for the formulation of a
nutritional supplement that quickly and effectively provides natural energy
enhancers, caffeine, electrolytes, antioxidants and other essential vitamins and
minerals. In conjunction with InnoZen, Nutraceuticals has designed the FIX
STRIPS(TM), as a 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.
NOTE 2: ACQUISITION
INNOZEN, INC.
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's business is described in Note 1.
9
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
============
Unaudited pro forma results of operations for the nine-month period ended
September 30, 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. The Company and InnoZen are combined in 2008 and for the
three months ending September 30, 2007. Accordingly pro forma results are not
necessary for 2008.
NINE MONTHS
ENDED
SEPTEMBER 30, 2007
Net revenues $ 654,509
Net loss 7,464,949
Net loss per share, basic and diluted $ (0.19)
On February 1, 2008 HealthSport and InnoZen executed a Limited Liability Company
Operating Agreement ("LLC Agreement") with Migami, Inc. ("Migami") for PMG.
Among other things, the LLC Agreement calls for Migami to contribute $3,000,000
in cash to PMG for its intended 48% ownership and InnoZen to license its
technology to PMG for its 52% ownership. In summary, the agreement provides that
PMG will manufacture all strip and other products for each member at cost plus
10
25%. PMG's cash balance of $21,268 is not available for use for obligations of
HealthSport and its other subsidiaries. At September 30, 2008, Migami had paid
$990,000 of the $3,000,000 commitment. It is unknown at this time if Migami will
honor its commitment.
NOTE 3: INVENTORY
Inventory at September 30, 2008 and December 31, 2007, consists of the
following:
2008 2007
---------- ----------
Raw materials $ 302,446 $ 395,239
Work in progress 285,393 169,016
Finished goods 206,697 838,275
---------- ----------
$ 794,536 $1,402,530
========== ==========
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2008 and December 31, 2007 consists of
the following:
2008 2007
--------- ---------
Office furniture and equipment $ 82,576 $ 83,393
Computer software 106,800 101,150
Manufacturing equipment 427,507 487,578
Leasehold improvements 39,561 39,561
Construction in progress 273,813 --
--------- ---------
930,257 711,682
Accumulated depreciation and amortization (186,905) (75,312)
--------- ---------
$ 743,352 $ 636,370
========= =========
NOTE 5: INTANGIBLE ASSETS
--------------------------
The Company accounts for goodwill and intangible assets in accordance with SFAS
142 and SFAS 144. Goodwill and other intangible assets are tested annually, at a
minimum, for impairment. Patent costs are amortized over their life of seventeen
years from the date the patent application is filed. Patent costs include the
costs allocated to the proprietary technology for the formulation of thin film
electrolyte strip products and associated legal costs. Trade secrets include
costs allocated to InnoZen's 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.
11
The Company's intangible assets consist of the following at September 30, 2008
and December 31, 2007:
2008 2007
------------ ------------
Goodwill $ 10,326,948 $ 10,326,948
============ ============
Patent costs and other intangible assets:
Patent and trade secret costs $ 19,319,876 $ 19,155,124
Trademarks 1,188,000 1,188,365
Client lists -- 846,000
Web site 65,675 65,675
------------ ------------
20,573,551 21,255,164
------------ ------------
Accumulated amortization
Patent and trade secret costs (1,669,383) (828,176)
Client lists -- (112,800)
Web site (15,495) (5,643)
------------ ------------
(1,684,878) (946,619)
------------ ------------
$ 18,888,673 $ 20,308,545
============ ============
The Company recorded an impairment loss of $648,600 at June 30, 2008, for the
carrying value of its client list.
NOTE 6: SHARE-BASED PAYMENTS
-----------------------------
In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment"
(SFAS 123R). Among other things, SFAS 123R requires expensing the fair value of
stock options, previously optional accounting. For transition, upon adoption on
January 1, 2006, SFAS 123R required expensing any unvested options and also
required the Company to change the classification of certain tax benefits from
option deductions to financing rather than operating cash flows.
Prior to January 1, 2006, the Company accounted for options granted under its
employee compensation plan using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related interpretations including Financial
Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25." Under APB 25, compensation expense was recognized for the
difference between the market price of the Company's common stock on the date of
grant and the exercise price. As permitted by Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), stock-based compensation was included as a pro forma disclosure in the
notes to the consolidated financial statements.
12
Effective January 1, 2006, the Company adopted the provisions of SFAS 123R using
the modified prospective transition method for all stock options issued. SFAS
123R required measurement of compensation cost for all options granted based on
fair value on the date of grant and recognition of compensation over the service
period for those options expected to vest. The Company had no unvested options
outstanding prior to July 1, 2006. Stock-based compensation expense recorded for
the nine months ended September 30, 2007, includes the estimated expense for
stock options granted on or subsequent to January 1, 2006, based on the grant
date fair value estimated in accordance with the provisions of SFAS 123R. The
Company recorded the cost of stock options by increasing additional paid-in
capital and increasing intrinsic value of common stock options. The deferred
intrinsic value of common stock options is being amortized over the period which
the awards are expected to be exercised. As prescribed under the modified
prospective and prospective transition methods, results for the prior period
have not been restated.
The Company currently fully reserves all of its tax benefits. Accordingly, the
adoption of SFAS 123R, which requires the benefits of tax deduction in excess of
the compensation cost recognized for those options to be classified as financing
cash inflows rather than operating cash inflows, on a prospective basis, will
have no current impact on the Company.
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 nine months ended September 30, 2008 and
2007:
2008 2007
---- ----
Expected term 1-3 years 2 years
Expected volatility 79.21% 102.91%
Expected dividend yield 0% 0%
Risk-free interest rate 4.75% 4.75%
Expected annual forfeiture rate 0% 0%
13
A summary of option activity as of September 30, 2008, and changes during the
nine months then ended is presented below:
WEIGHTED
WEIGHTED AVERAGE AGGREGATE
AVERAGE REMAINING INTRINSIC
EXERCISE CONTRACTUAL VALUE
OPTIONS SHARES PRICE TERM (YRS) ($000)
------- ------ ----- ---------- ------
Outstanding, December 31, 2007 4,115,390
Granted 2,250,000
Exercised --
Forfeited or expired (285,000)
-------------
Outstanding, September 30, 2008 6,080,390 $ 1.40 2.36 $ 4,283
============= ====== ==== ========
Exercisable at September 30, 2008 3,975,390 $ 1.43 1.63 $ 4,082
============= ====== ==== ========
Options which are not a part of the Plans and are included in the option table
above, include fully vested options to acquire 325,000 shares of the Company's
common stock at an average exercise price of $1.86, an option to acquire
1,000,000 shares of the Company's common stock at an exercise price of $1.00
which vests in March 2009 and an option to acquire 1,000,000 shares of the
Company's common stock at an exercise price of $1.50 which vests in March 2010.
The weighted-average grant date fair value of options granted during the nine
months ended September 30, 2008 and 2007 was $0.12 and $1.08, respectively. No
options have been exercised.
As of September 30, 2008, there was $1,414,375 of total unrecognized
compensation cost related to share-based option compensation arrangements.
As of September 30, 2008, there were 500,000 warrants with an exercise price of
$0.80 per share which expire in the first quarter of 2011.
NOTE 7: CAPITAL LEASE OBLIGATION
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. During 2007, InnoZen
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
September 30, 2008.
14
Total minimum lease payments:
Three months ended December 31, 2008 59,193
Year ended December 31, 2009 23,352
Year ended December 31, 2010 23,352
Year ended December 31, 2011 23,352
Year ended December 31, 2012 13,622
---------
142,871
Amount representing interest (15,458)
---------
Present value of minimum lease payments 127,413
Less current obligations (68,863)
---------
Non-current obligations under capital lease $ 58,550
=========
The lease covers equipment and software with a cost of $518,866 and accumulated
depreciation of $125,110 at September 30, 2008. At September 30, 2008 the
Company had $142,280 in accounts payable for lease payments that had not been
made.
NOTE 8: NOTES PAYABLE
SENIOR SECURED CONVERTIBLE PROMISSORY NOTES
The Company issued three secured convertible debentures in the total amount of
$300,000, dated May 15, 2008, which mature on November 14, 2008 with interest at
8%. The debentures are secured by substantially all assets of the Company and
are convertible, at the option of the holder for three years, into the Company's
common stock at the rate of $0.40 per share. These debentures were converted on
September 30, 2008 into Senior Secured Convertible Promissory Notes that are due
on September 30, 2009. These notes bear interest at 12% and are convertible, at
the option of the holder into the Company's common stock at the rate of $0.15
per share. The Company received another $245,000 from lenders in August and
September, 2008 that are part of the Senior Secured Convertible Promissory
Notes.
CONVERTIBLE PROMISSORY NOTES
The Company issued a convertible promissory note on August 1, 2008 in the amount
of $63,000 to a lender for payments made to a vendor. The note bears interest at
8%, is due on 12/1/09 and is convertible into common stock of the Company at
$0.15 per share. On September 30, 2008 the Company issued a convertible
promissory note to a vendor in the amount of $100,000 in exchange for $100,000
of trade debt to the vendor. The note bears interest at 8%, is due on January 1,
2010 and is convertible into common stock of the Company at $0.15 per share.
NOTE 9: COMMITMENTS AND CONTINGENCIES
--------------------------------------
The Company maintains its corporate office in the office of its accountant at no
cost to the Company.
In January 2007, the Company executed a three-year non-cancelable lease
agreement for the Enlyten office in Amherst, New York. The lease requires
15
monthly payments of $2,364 for the year ending January 31, 2008, $2,409 for the
year ending January 31, 2009 and $2,455 for the year ending January 31, 2010.
The Company has closed the office in Amherst, New York and at September 30,
2008, has $10,023 in accounts payable for rental payments not made.
InnoZen leases its facility in Woodland Hills, California pursuant to a
non-cancelable agreement which expires on January 1, 2010. InnoZen has the
option to extend the term for one additional year.
The Company leases a manufacturing facility in Ventura, California which
contains approximately 25,000 square feet. The lease term is from December 1,
2007 through January 31, 2015. No rent was due for January and February 2008
while the Company was working on equipment installation. This is the facility
which PMG planned to occupy. At September 30, 2008 PMG has $31,381 in accounts
payable for rent payments not made.
Future minimum lease payments for operating leases are: 2008 (3 months) -
$85,400; 2009 - $381,000; 2010 - $199,000; 2011 - $202,000; 2012 - $206,000; and
thereafter - $447,000.
The Company has the following royalty obligations:
1. Royalty agreement expiring in October 2008 of .5% of sales of the
ENLYTEN(TM) SPORTSTRIPS. Annual minimum royalty of $18,000 and maximum
of $75,000;
2. Royalty agreement expiring in October 2008 of .5% of sales of the
ENLYTEN(TM) SPORTSTRIPS. Annual minimum royalty of $15,000 and maximum
of $50,000;
3. Royalty agreement for an indefinite period of .5% of sales of the
ENLYTEN(TM) SPORTSTRIPS. Annual minimum royalty of $36,000 and maximum
of $100,000;
4. Royalty agreement for an indefinite period of 1.0% of the first
$100,000,000 in sales of the ENLYTEN(TM) SPORTSTRIPS and .5% of the
next $150,000,000 in sales;
5. Royalty agreement for an indefinite period of 1.0% of the first
$20,000,000 in sales of the FIX STRIPS(TM) and ENLYTEN(TM) Energy
strips and .5% of the next $80,000,000 in sales; and
6. Royalty agreement for 2 years of 1.5% of sales of the ENLYTEN(TM)
SURVIVAL STRIP with annual minimUM royalty payments of $4,200.
During 2006, InnoZen entered into a distribution contract with Schering-Plough
PTY Limited ("Schering") whereby InnoZen granted to Schering an exclusive,
royalty-free license to distribute, market, offer to sell and import InnoZen's
film strip products in Australia, New Zealand, Singapore, Indonesia, Pakistan,
Hong Kong, Taiwan, Vietnam, Malaysia, Thailand, Korea, Philippines, India and
China ("territories"). Schering appointed InnoZen as the exclusive supplier of
film strip products in the cough and cold market to Schering for distribution in
the territories. With respect to all purchase orders submitted by Schering to
InnoZen, Schering shall pay InnoZen 50% of the invoice amount upon submitting
the purchase order and the remaining 50% of the invoice amount when Schering
receives shipping notification of the order. The contract expires in May 2011.
At September 30, 2008 no products had been approved for sale under the
agreement.
On October 30, 2007, our wholly-owned subsidiary, Enlyten, Inc., filed a lawsuit
against The Gatorade Company and PepsiCo, Inc. (collectively referred to as
16
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 ENLYTEN(TM) SPORT STRIP. The case is
currently in the early discovery phase with no hearing scheduled untIL discovery
is substantially complete.
NOTE 10: GOING CONCERN
At September 30, 2008 and December 31, 2007 we had current assets of $1,403,107
and $2,411,410; current liabilities of $3,700,068 and $2,066,125; and negative
working capital of $2,296,961 and working capital of $345,285, respectively. We
incurred a loss of $3,070,344 during the first quarter of 2008, which included
depreciation and amortization of $365,463 and amortization of non-cash stock
compensation of $1,053,805. We incurred a loss of $2,992,368 during the second
quarter of 2008, which included depreciation and amortization of $392,868;
amortization of non-cash stock compensation of $627,773; an asset impairment
loss of $648,600; and inventory obsolescence loss of $274,840. We incurred a
loss of $1,524,948 during the third quarter of 2008, which included depreciation
and amortization of $294,982 and amortization of non-cash compensation of
$351,747.
On February 1, 2008 HealthSport and InnoZen executed a Limited Liability Company
Operating Agreement ("LLC Agreement") with Migami, Inc. ("Migami") for Pacific
Manufacturing Group, LLC ("PMG"). Among other things, the LLC Agreement calls
for Migami to contribute $3,000,000 in cash to PMG for its intended 48%
ownership and InnoZen to license its technology to PMG for its 52% ownership. In
summary, the agreement provides that PMG will manufacture all strip and other
products for each member at cost plus 25%. As of September 30, 2008, $990,000 of
Migami's contribution had been received by PMG. InnoZen owned 92% of PMG at
March 31, 2008 and 84.64% at June 30, 2008. We received $30,000 from Migami in
July 2008, which increased its ownership to 15.84%. It is unknown at this time
if Migami will honor its commitment.
Our only capital equipment requirements were planned to be in PMG for which the
agreed $3 million capital to be contributed by Migami would have been adequate
to fund PMG's requirements. However, with the uncertain status of Migami's
investment, additional capital equipment purchases have been delayed.
In 2007, the Company projected sales to be as high as $10 million, based on
forecasts for SPORTSTRIPS, PediaStrips and FIX STRIPS. The alleged tortuous
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. PEDIASTRIPS and 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
17
the goal of selling product through distributors rather than making all sales
directly to its 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.
The Unico distribution deal is initially for PEDIASTRIPS and commenced in the
third quarter of 2008. We are attempting to establish similar arrangements for
our SPORTSTRIPS and FIX STRIPS. In addition, we expect to begin sales of our
ENERGY FILM STRIPS and SURVIVAL STRIPS before the end of 2008. The Company is
also seeking opportunities to establish film strip products for a number of
products which are currently 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.
In October 2008 the Company received another order from Unico in the amount of
$235,000. Also, in October 2008 the Company received an order from another
customer in the amount of $95,000. Both orders are expected to be fulfilled and
shipped in November 2008. On October 20, 2008 the Company borrowed $125,000 from
a bank that is due to be repaid on December 20, 2008. The note has interest due
at prime and is collateralized by various assets of the Company.
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 $197,000 per month, which includes the PMG
manufacturing operation of approximately $58,000 per month. The PMG amount
should be funded separately by PMG, assuming its funding is completed and the
Company would be responsible for approximately $139,000 per month. This is a
decrease of $195,000 per month from the overhead level at June 30, 2008. The
Company is analyzing its current costs and is attempting to make additional cost
reductions where possible. Current sales will not be adequate to support this
level of operating costs. We estimate that sales will develop to the level
necessary to be at or near cash flow break-even before the end of the first
quarter of 2009. Based on this time-frame, the Company would need from $2 to $3
million to meet its minimum requirements, including PMG. The Company has made
private placements of its common stock and as of September 30, 2008 had received
$660,000 in net proceeds from the sale of its common stock and had borrowed
$545,000 pursuant to convertible debentures. 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.
18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
From time to time, we may publish forward-looking statements relative to such
matters as anticipated financial results, business prospects, technological
developments and similar matters. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. The following
discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and the accompanying Notes to Consolidated Financial
Statements appearing earlier in this report. All statements other than
statements of historical fact included in this report are, or may be deemed to
be, forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934,
as amended. Important factors that could cause actual results to differ
materially from those discussed in such forward-looking statements include, but
are not limited to, the following: our current liquidity needs, as described in
our periodic reports; changes in the economy; our inability to raise additional
capital; our involvement in potential litigation; volatility of our stock price;
the variability and timing of business opportunities; changes in accounting
policies and practices; the effect of internal organizational changes; adverse
state and federal regulation and legislation; and the occurrence of
extraordinary or catastrophic events and terrorist acts. These factors and
others involve certain risks and uncertainties that could cause actual results
or events to differ materially from management's views and expectations.
Inclusion of any information or statement in this report does not necessarily
imply that such information or statement is material. We do not undertake any
obligation to release publicly revised or updated forward-looking information,
and such information included in this report is based on information currently
available and may not be reliable after this date.
PLAN OF OPERATION AND GOING CONCERN
At September 30, 2008 and December 31, 2007 we had current assets of $1,403,107
and $2,411,410; current liabilities of $3,700,068 and $2,066,125; and negative
working capital of $2,296,961 and working capital of $345,285, respectively. We
incurred a loss of $3,070,344 during the first quarter of 2008, which included
depreciation and amortization of $365,463 and amortization of non-cash stock
compensation of $1,053,805. We incurred a loss of $2,992,368 during the second
quarter of 2008, which included depreciation and amortization of $392,868;
amortization of non-cash stock compensation of $627,773; an asset impairment
loss of $648,600; and inventory obsolescence loss of $274,840. We incurred a
loss of $1,524,948 during the third quarter of 2008, which included depreciation
and amortization of $294,982 and amortization of non-cash compensation of
$351,747.
On February 1, 2008 HealthSport and InnoZen executed a Limited Liability Company
Operating Agreement ("LLC Agreement") with Migami, Inc. ("Migami") for Pacific
Manufacturing Group, LLC ("PMG"). Among other things, the LLC Agreement calls
for Migami to contribute $3,000,000 in cash to PMG for its intended 48%
ownership and InnoZen to license its technology to PMG for its 52% ownership. In
summary, the agreement provides that PMG will manufacture all strip and other
products for each member at cost plus 25%. As of September 30, 2008, $990,000 of
Migami's contribution had been received by PMG. InnoZen owned 92% of PMG at
March 31, 2008 and 84.64% at June 30, 2008. We received $30,000 from Migami in
19
July 2008, which increased its ownership to 15.84%. It is unknown at this time
if Migami will honor its commitment.
Our only capital equipment requirements were planned to be in PMG for which the
agreed $3 million capital to be contributed by Migami would have been adequate
to fund PMG's requirements. However, with the uncertain status of Migami's
investment, additional capital equipment purchases have been delayed.
In 2007, the Company projected sales to be as high as $10 million, based on
forecasts for SPORTSTRIPS, PediaStrips and FIX STRIPS. The alleged tortuous
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. PEDIASTRIPS and 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 its 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.
The Unico distribution deal is initially for PEDIASTRIPS and commenced in the
third quarter of 2008. We are attempting to establish similar arrangements for
our SPORTSTRIPS and FIX STRIPS. In addition, we expect to begin sales of our
ENERGY FILM STRIPS and SURVIVAL STRIPS before the end of 2008. The Company is
also seeking opportunities to establish film strip products for a number of
products which are currently 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.
In October 2008 the Company received another order from Unico in the amount of
$235,000. Also, in October 2008 the Company received an order from another
customer in the amount of $95,000. Both orders are expected to be fulfilled and
shipped in November 2008. In November 2008 the Company received an order for
$171,500 from another customer that is scheduled to ship in December 2008. On
October 20, 2008 the Company borrowed $125,000 from a bank that is due to be
repaid on December 20, 2008. The note has interest due at prime and is
collateralized by various assets of the Company.
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 $197,000 per month, which includes the PMG
manufacturing operation of approximately $58,000 per month. The PMG amount
should be funded separately by PMG, assuming its funding is completed and the
Company would be responsible for approximately $139,000 per month. This is a
20
decrease of $195,000 per month from the overhead level at June 30, 2008. The
Company is analyzing its current costs and is attempting to make additional cost
reductions where possible. Current sales will not be adequate to support this
level of operating costs. We estimate that sales will develop to the level
necessary to be at or near cash flow break-even before the end of the first
quarter of 2009. Based on this time-frame, the Company would need from $2 to $3
million to meet its minimum requirements, including PMG. The Company has made
private placements of its common stock and as of September 30, 2008 had received
$660,000 in net proceeds from the sale of its common stock and had borrowed
$545,000 pursuant to convertible debentures. The Company expects to continue to
make private placements of its common stock or to borrow additional funds as
needed. On October 20, 2008 the Company borrowed $125,000 from a bank that is
due to be repaid on December 20, 2008. The note has interest due at prime and is
collateralized by various assets of the Company.
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.
ACQUISITION OF INNOZEN AND FORMATION OF PMG
On May 4, 2007, we issued 18,249,952 shares of our common stock to the
shareholders of InnoZen and completed the acquisition of InnoZen through a
merger of InnoZen with our wholly owned subsidiary, Acquisition Sub.
On February 1, 2008 HealthSport and InnoZen executed a Limited Liability Company
Operating Agreement ("LLC Agreement") with Migami, Inc. ("Migami") for Pacific
Manufacturing Group, LLC ("PMG"). Among other things, the LLC Agreement calls
for Migami to contribute $3,000,000 in cash to PMG for its intended 48%
ownership and InnoZen to license its technology to PMG for its 52% ownership. In
summary, the agreement provides that PMG will manufacture all strip and other
products for each member at cost plus 25%. At June 30, 2008, Migami had made a
total of $960,000 of its contribution and at September 30, 2008, had made a
total of $990,000 of its required contribution. It is unknown at this time if
Migami will honor its commitment.
LAWSUIT
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 ENLYTEN(TM) SPORT STRIP. The case is
currently in the early discovery phase with no hearing planned untIL substantial
completion of discovery.
21
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
REVENUES
During the three months ended September 30, 2008, we had product sales of
$580,224 and revenues from license fees, royalties and services of $18,750, a
total of $598,974. There were product sales of $110,473 and revenue from license
fees, royalties and services of $45,134, a total of $155,607 in the
corresponding 2007 period.
COSTS AND EXPENSES
Cost of product sold includes the direct cost of product sold plus freight.
General and administrative expenses ("G&A") decreased to $940,299 in the three
months ended September 30, 2008, from $1,373,357 in the 2007 period. The
decrease of $433,058 (31.5%) in G&A is the result of decreases at all levels of
the Company, including corporate overhead and the G&A costs at the manufacturing
operation. The Companies have made additional cost reductions which will be more
evident in the fourth quarter.
Selling and marketing costs ("SMC") are $358,530 in the three months ended
September 30, 2008, as compared to $670,264 in the 2007 period. SMC decreased
$311,734 in the 2008 period as compared to the 2007 period. SMC costs are down
from the year earlier period, primarily due to the elimination of endorsements
and sponsorship fees as a result of re-directing our marketing efforts toward
distributors rather than direct sales to customers.
Non-cash compensation expense was $351,747 in 2008 and $600,789 in 2007 and
includes the amortization of stock grants and amortization of the intrinsic
value of stock options to employees, consultants and spokespersons over the
relevant service periods to both employees and as a part of endorsement
contracts. The decline is primarily the result of expensing the balance on
expired options.
Manufacturing costs represent the costs incurred during the manufacturing
process that are not capitalized into inventory based on current production
volume. The Company had only nominal production in 2007 and in 2008 it initially
began preparing the new manufacturing facility for operation. However, due to a
lack of sales and available funds, manufacturing has continued at the original
facility.
Research and development ("R&D") costs amounted to $30,106 in 2008 and $130,614
in 2007. These include contract services, supplies, materials and analytical
testing costs incurred for new products to be developed by the Company.
22
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
REVENUES
During the nine months ended September 30, 2008, we had product sales of
$812,317 and revenues from license fees, royalties and services of $56,250, a
total of $868,567. There were product sales of $135,058 in the corresponding
2007 period and revenues from license fees, royalties and services of $109,156,
a total of $244,214. While revenues have increased over 200%, the volume is
inadequate to support the Company operations. The Company recorded its first
revenues in July 2008 from the Unico contract discussed above and expects
substantial sales growth in the future.
COSTS AND EXPENSES
Cost of product sold includes the direct cost of product sold plus freight.
G&A increased to $3,235,131 in the nine months ended September 30, 2008, from
$2,472,484 in the 2007 period. The increase of $762,647 in G&A is the result of
the G&A of InnoZen being included for only five months in 2007. Had InnoZen been
included for all of 2007, the 2007 G&A would have been approximately $1.2
million higher. Accordingly, G&A actually decreased from the 2007 level by
approximately 14%. The Companies have made additional cost reductions which will
be more evident in the fourth quarter.
SMC are $1,056,087 in the nine months ended September 30, 2008, as compared to
$1,652,489 in the 2007 period. SMC decreased $596,402 in the 2008 period as
compared to the 2007 period. SMC costs are down from the year earlier period,
primarily due to the elimination of endorsements and sponsorship fees as a
result of re-directing our marketing efforts toward distributors rather than
direct sales to customers.
Non-cash compensation expense was $2,033,325 in 2008 and $1,546,380 in 2007 and
includes the amortization of stock grants and amortization of the intrinsic
value of stock options to employees, consultants and spokespersons over the
relevant service periods to both employees and as a part of endorsement
contracts. The 2008 amount also includes $221,750 as the cost of stock granted
for consulting fees in the second quarter. Exclusive of this grant, the
amortization cost for the period would have been $265,195 more than the 2007
period, which is principally the result of contract terminations in the first
quarter.
The Company determined to fully impair the client list acquired in the InnoZen
acquisition in the net amount of $648,600. In addition, the Company recorded a
charge in the amount of $274,840 for inventory obsolescence. Both of the above
were recorded in the second quarter.
Manufacturing costs represent the costs incurred during the manufacturing
process that are not capitalized into inventory based on current production
volume. The Company had only nominal production in 2007 and in 2008 it began
preparing the new manufacturing facility for operation.
Research and development ("R&D") costs amounted to $169,217 in 2008 and include
contract services, supplies, materials and analytical testing costs incurred for
new products to be developed by the Company. The 2007 amount included expensing
of R&D purchased from InnoZen in the amount of $847,336.
23
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4T: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's Acting Chief Executive Officer and Acting Chief Financial Officer
has reviewed and evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934) as of September 30, 2008.
Based on that review and evaluation, which included inquiries made to certain
other employees of the Company, the Acting CEO and Acting CFO concluded that the
Company's current disclosure controls and procedures, as designed and
implemented, are effective in ensuring that information relating to the Company
required to be disclosed in the reports the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, including insuring that such information is accumulated and
communicated to the Company's management, including the Acting CEO and Acting
CFO, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls during the quarter ended
September 30, 2008, including any corrective actions with regard to significant
deficiencies and material weaknesses.
24
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not applicable.
ITEM 1A: RISK FACTORS
Not applicable.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no stock sales in the third quarter of 2008.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS
The following exhibits are filed with this report on Form 10-Q.
Exhibit 31 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002
25
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTHSPORT, INC.
November 18, 2008 BY: /s/ M.E. "Hank" Durschlag
----------------------------------
M.E. "Hank" Durschlag,
Acting Chief Executive Officer
(Principal Executive Officer)
26