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| HSPO.OB > SEC Filings for HSPO.OB > Form 10-Q on 18-Nov-2008 | All Recent SEC Filings |
18-Nov-2008
Quarterly Report
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.
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 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
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.
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.
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.
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.
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.
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.
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.
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