U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: MARCH 31, 2009
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)
10130 MALLARD CREED ROAD, SUITE 331, CHARLOTTE, NC 28262
(Address of principal executive office)
(704) 944-3574
(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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes |_|
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 March 31, 2009, was 50,766,120.
HEALTHSPORT, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I CONDENSED CONSOLIDATED FINANCIAL INFORMATION (Unaudited)
Item 1: Balance Sheet as of March 31, 2009 and December 31, 2008 3
Statements of Operations for the three months ended March 31, 2009
and 2008 4
Statements of Cash Flows for the three months ended March 31, 2009
and 2008 5
Notes to Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk 14
Item 4T: Controls and Procedures 14
PART II OTHER INFORMATION 15
Exhibits
2
HEALTHSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2009 (UNAUDITED) AND DECEMBER 31, 2008
2009 2008
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 151,221 $ 433,573
Accounts receivable 423,529 486,967
Inventory 579,041 585,746
Prepaid expenses and other assets 422,616 293,318
------------ ------------
Total current assets 1,576,407 1,799,604
Property and equipment, net 814,567 756,086
Non-current accounts receivable 207,769 225,000
Goodwill 10,276,948 10,276,948
Patent costs and other intangible assets, net 18,364,689 18,621,760
Other assets 214,768 137,170
------------ ------------
Total assets $ 31,455,148 $ 31,816,568
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,462,860 $ 1,462,148
Accrued expenses 950,432 900,837
Current portion of capital lease obligation 66,385 64,465
Current portion of convertible promissory notes 1,368,000 1,268,000
Deferred revenue 652,059 832,256
------------ ------------
Total current liabilities 4,499,736 4,527,706
------------ ------------
Convertible promissory notes, less current portion 177,450 277,450
Capital lease obligation, less current portion 257,089 274,727
------------ ------------
Total liabilities 4,934,275 5,079,883
------------ ------------
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; 50,766,120 and 49,366,120 shares issued and outstanding
at March 31, 2009 and December 31, 2008, respectively 5,077 4,937
Additional paid-in capital 70,600,606 69,946,252
Intrinsic value of common stock options (817,085) (733,089)
Common stock warrants 28,681 28,681
Stock subscription receivable (250) (250)
Accumulated deficit (43,296,156) (42,509,846)
------------ ------------
Total stockholders' equity 26,520,873 26,736,685
------------ ------------
Total liabilities and stockholders' equity $ 31,455,148 $ 31,816,568
============ ============
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
2009 2008
------------ ------------
Revenue
Product sales $ 1,608,158 $ 97,441
License fees, royalties and services 58,750 18,750
------------ ------------
Total revenues 1,666,908 116,191
------------ ------------
Costs and expenses
Cost of product sold and manufacturing costs 1,249,411 429,718
General and administrative expense 439,821 815,843
Marketing and selling expense 157,502 471,865
Non-cash compensation expense 176,831 1,053,805
Depreciation and amortization expense 333,449 365,463
Research and development costs 36,127 71,579
------------ ------------
Total costs and expenses 2,393,141 3,208,273
------------ ------------
Net loss from operations (726,233) (3,092,082)
------------ ------------
Other income (expense):
Interest income 288 408
Miscellaneous income 8,905 5,584
Interest expense (69,270) (3,154)
------------ ------------
Other income (expense) (60,077) 2,838
------------ ------------
Net loss before income taxes and minority interest (786,310) (3,089,244)
Provision for income taxes -- --
------------ ------------
Net loss before minority interest (786,310) (3,089,244)
Minority interest -- 18,900
------------ ------------
Net loss $ (786,310) $ (3,070,344)
============ ============
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.02) $ (0.07)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 50,352,787 43,127,793
============ ============
See accompanying notes to condensed consolidated financial statements.
4
HEALTHSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
2009 2008
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (786,310) $(3,070,344)
Adjustment to reconcile net loss to net cash used
in operating activities:
Minority interest -- (18,900)
Amortization of non-cash stock compensation 142,498 1,053,805
Depreciation and amortization 333,449 365,463
Common stock issued for services 9,000 --
Inventory obsolescence reserve 75,000 --
Change in other assets and liabilities:
Accounts receivable (131,660) 109,881
Inventory (68,295) 182,117
Prepaid expenses and other assets 111,419 121,698
Accounts payable 195,810 378,855
Accrued expenses 49,593 232,143
Deferred revenue (180,196) 4,302
----------- -----------
Net cash used in operating activities (249,692) (640,980)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Patent costs incurred (26,615) (52,881)
Acquisition of property and equipment (105,327) (186,163)
----------- -----------
Net cash used in investing activities (131,942) (239,044)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Collect stock subscription receivable -- 22,500
Funding from joint venture partner -- 505,000
Capital lease payments (15,718) (52,558)
Sale of common stock 115,000 500,000
----------- -----------
Net cash provided by financing activities 99,282 974,942
----------- -----------
NET INCREASE (DECREASE ) IN CASH AND CASH EQUIVALENTS (282,352) 94,918
CASH AND CASH EQUIVALENTS, beginning of period 433,573 167,323
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 151,221 $ 262,241
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes:
Interest $ 23,012 $ 3,154
Income taxes -- --
Non-cash investing and financing activities:
Common stock issued for consulting contracts 314,000 --
See accompanying notes to condensed consolidated financial statements.
5
HEALTHSPORT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following notes to the condensed consolidated financial statements and
management's discussion and analysis or plan of operation contain
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements may include projections or
expectations of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for future operations. Words
such as "expects", "anticipates", "approximates", "believes", "estimates",
"hopes", "intends", "plans", and variations of such words and similar
expressions are intended to identify such forward-looking statements. No
assurance can be given that actual results or events will not differ materially
from those projected, estimated, assumed or anticipated in any such
forward-looking statements.
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") until its sale on December
30, 2008; Health Strip Solutions, LLC ("Health Strip"); and HealthSport
Nutraceutical Products, Inc. ("Nutraceutical") (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, 2008,
which is included in the Company's Form 10-K for the year ended December 31,
2008. The financial data for the interim periods presented may not necessarily
reflect the results to be anticipated for the complete year.
Certain reclassifications of the amounts presented for the comparative period
have been made to conform to the current presentation.
6
NATURE OF BUSINESS
HealthSport is a holding company with three operating subsidiaries.
Substantially all of the Company's sales are to two customers.
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. All patent applications for the Company 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 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
SURVIVAL STRIPS which are formulated with antioxidants, non-cavity causing
sweeteners, vitamins, herbal extracts, electrolytes, caffeine and other proven
beneficial compounds as a remedy for fatigue, drowsiness and dehydration.
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.
NOTE 2: DISPOSITION
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 the difference between the
Company's share of the PMG loss which was included in the consolidated financial
statements and its investment. Subsequently these operations have continued in
InnoZen. Accordingly, no separate disclosure of PMG is included as the
operations would have been included in InnoZen if PMG had not been formed.
7
NOTE 3: INVENTORY
Inventory at March 31, 2009 and December 31, 2008, consists of the following:
2009 2008
--------- ---------
Raw materials $ 219,030 $ 173,980
Work in progress 315,815 286,711
Finished goods 119,196 125,055
--------- ---------
654,041 585,746
Reserve for obsolescence (75,000) --
--------- ---------
$ 579,041 $ 585,746
========= =========
NOTE 4: COMMITMENTS AND CONTINGENCIES
--------------------------------------
Since April 1, 2009, the Company has maintained its corporate office at 10130
Mallard Creek Road, Suite 331, Charlotte, NC 28262. Previously, the Company
maintained its corporate office in the office of its accountant at no cost to
the Company.
In January 2007, the Company executed a three-year lease agreement for 2,182
square feet of office space in Amherst, New York for the Enlyten office. 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 as soon as possible.
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 as soon as
possible.
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
8
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. National marketing of the products
began in the first quarter of 2009. These sales are subject to a 5% commission.
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
March 31, 2009.
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.
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.
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.
NOTE 5: GOING CONCERN
At March 31, 2009 and December 31, 2008, the Company had current assets of
$1,576,407 and $1,799,604; current liabilities of $4,499,736 and $4,527,706; and
a working capital deficit of $2,923,329 and $2,728,102, respectively. The
Company incurred a loss of $786,310 during the three months ended March 31,
2009, which included depreciation and amortization of $333,449 and amortization
of non-cash stock compensation of $176,831.
9
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. 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 in development which are expected to begin
shipping later 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 $170,000 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 of product amounted to $1,608,158 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 $375,000 to $1,375,000 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.
NOTE 6: SUBSEQUENT EVENT
The Company entered into an agreement to develop four initial nutraceutical
products using its proprietary concentrated liquid drops. Initial laboratory
samples are due for delivery by May 14, 2009.
10
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 March 31, 2009 and December 31, 2008, the Company had current assets of
$1,576,407 and $1,799,604; current liabilities of $4,499,736 and $4,527,706; and
a working capital deficit of $2,923,329 and $2,728,102, respectively. The
Company incurred a loss of $786,310 during the three months ended March 31,
2009, which included depreciation and amortization of $333,449 and amortization
of non-cash stock compensation of $176,831.
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 $170,000 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 of product amounted to $1,608,158 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 $375,000 to $1,375,000 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.
11
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. Also see
Note 5 to the condensed consolidated financial statements.
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 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.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2009 AND 2008
REVENUES
During the three months ended March 31, 2009, we had product sales of $1,608,158
and revenues from license fees, royalties and services of $58,750, a total of
$1,666,908. There were product sales of $97,441 and revenue from license fees,
royalties and services of $18,750, a total of $116,191 in the corresponding 2008
period. Revenues have increased substantially from the prior year as a result of
the actions discussed in the Notes to the condensed consolidated financial
statements.
COSTS AND EXPENSES
Costs and expenses are as follows for the three months ended March 31, 2009 and
2008:
2009 2008
---------- ----------
Cost of product sold and manufacturing costs $1,249,411 $ 429,718
General and administrative expense 439,821 815,843
Marketing and selling expense 157,502 471,865
Non-cash compensation expense 176,831 1,053,805
Depreciation and amortization expense 333,449 365,463
Research and development expense 36,127 71,579
---------- ----------
$2,393,141 $3,208,273
========== ==========
12
Cost of product sold and manufacturing costs amounted to 78% of product sales in
2009 and 441% of product sales in 2008. The Company had under-absorbed
manufacturing costs of approximately $401,000 at March 31, 2008 based on
projected levels of operations. Sales will need to continue to increase to
absorb all of the manufacturing costs at the current size of operation.
General and administrative expenses ("G&A") decreased to $439,821 in the three
months ended March 31, 2009, from $815,843 in the 2009 period. The decrease of
$376,022 (46%) 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,
which were reduced $311,955.
Selling and marketing costs ("SMC") are $157,502 in the three months ended March
31, 2009, as compared to $471,865 in the 2008 period. SMC decreased $314,363 in
the 2009 period as compared to the 2008 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 and elimination of the New York office.
The 2009 amount includes $89,701 in commissions and royalties, which vary with
sales, that were only nominal amounts in 2008. Accordingly, the decrease in
previous costs was actually $404,064.
Non-cash compensation expense was $176,831 in 2009 and $1,053,805 in 2008 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 in the 2008 period.
Depreciation and amortization expense decreased from $365,463 in 2008 to
$333,449 in 2009, primarily due to the impairment of the client list in June of
2008. The client list amortization was included in the 2008 period, but not in
the 2009 period.
Research and development ("R&D") costs amounted to $36,127 in 2009 and $71,579
in 2008. These include contract services, supplies, materials and analytical
testing costs incurred for new products to be developed by the Company.
OTHER INCOME (EXPENSE)
Interest expense increased from $3,154 in 2008 to $69,270 in 2009 as a result of
the increase in debt after the end of the March 2008 quarter.
13
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 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 March 31, 2009. Based on that
review and evaluation, which included inquiries made to certain other employees
of the Company, the 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 CEO and Acting CFO, as appropriate to allow timely
decisions regarding required disclosure.
(b) Changes in Internal Controls
The Company continued to implement its perpetual inventory system at its
manufacturing operations. There have been no other significant changes in
internal controls or in other factors that could significantly affect these
controls during the quarter ended March 31, 2009, including any corrective
actions with regard to significant deficiencies and material weaknesses.
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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
The Company sold 500,000 shares of its common stock for $115,000 (net of selling
costs of $10,000) in cash during the three months ended March 31, 2009. In
addition, the Company issued 900,000 shares of its common stock for consulting
services valued at $314,000.
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 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
15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTHSPORT, INC.
May 12, 2009 BY: /s/ M.E. "Hank" Durschlag
-----------------------------------------
M.E. "Hank" Durschlag, Chief Executive
Officer
(Principal Executive Officer)
16