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EX-31.1 - CERTIFICATION - Zurvita Holdings, Inc.zurvita_10k-ex3101.htm
EX-32.1 - CERTIFICATION - Zurvita Holdings, Inc.zurvita_10k-ex3201.htm
EX-31.2 - CERTIFICATION - Zurvita Holdings, Inc.zurvita_10k-ex3102.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended July 31, 2011

[  ]  TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________
 
Commission file number 333-145898

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

Delaware
 
26-0531863
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
800 Gessner, Suite 110
Houston, Texas 77024
(Address of principal executive offices) (zip code)
 
(713) 464-5002
(Registrant’s telephone number, including area code)

Securities Registered Under Section 12(b) of the Exchange Act: None

Securities Registered Pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $0.0001 per share.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o    No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  o    No  x
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes o No x
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer   o
Accelerated filer  o
Non-accelerated filer    o (Do not check if a smaller reporting company)
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  o    No  x

The aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common stock was last sold as of July 31, 2011 was $0.04 * 4,958,366 = $198,355.

The number of shares outstanding of each of the issuer’s classes of common stock as of July 31, 2011:  61,498,713 shares of common stock, par value $0.0001.

DOCUMENTS INCORPORATED BY REFERENCE
None.


 
 

 



ZURVITA HOLDINGS HOLDINGS, INC.

FORM 10-K
For the Year Ended July 31, 2011

TABLE OF CONTENTS

PART I
 
PAGE NO.
     
ITEM 1. DESCRIPTION OF BUSINESS. 1
ITEM 1A. RISK FACTORS. 5
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
10
ITEM 2.
PROPERTIES.
10
ITEM 3.
LEGAL PROCEEDINGS.
10
ITEM 4.
RESERVED.
10
     
PART II
   
     
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. 11
ITEM 6.
SELECTED FINANCIAL DATA.
12
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 20
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
21
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
47
ITEM 9A.
CONTROLS AND PROCEDURES.
47
ITEM 9B.
OTHER INFORMATION.
48
     
PART III
   
     
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
49
ITEM 11.
EXECUTIVE COMPENSATION.
52
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
54
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
56
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
58
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
59
  SIGNATURES 60



 
 

 


 
PART I

 
Forward-Looking Statements
 
This Annual Report on Form 10-K may contain statements which constitute “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.  Generally,  words such as “may,” “will,” “should,” “could,” “would,”  “anticipate,” “expect,”  “believe,” “goal,” “plan,” “intend,” “estimate,” “continue” or the negative of or other variation on these and similar other expressions and variations thereof, if used, are intended to specifically identify forward-looking statements. Those statements appear in a number of places in this Form 10-K and in other places, and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, our future performance and operating results, our future operating plans, our liquidity and capital resources and our legal proceedings.We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
 
Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements.   Many factors, including those listed in “Item 1A. - Risk Factors” below, could cause our actual consolidated results to differ materially from those expressed in any of our forward-looking statements.

ITEM 1. DESCRIPTION OF BUSINESS

Overview

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

Business History

Red Sun was incorporated in the State of Delaware on June 28, 2007, as a development stage company to engage in the acquisition and exploration of mineral properties.  Red Sun was a shell company.

Zurvita was incorporated in the State of Delaware on January 25, 2008.   Prior to the consummation of a Share Exchange agreement, Zurvita was a wholly-owned subsidiary of The Amacore Group, Inc. (“Amacore”).

On July 30, 2009 (the “Closing Date”), Red Sun entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Zurvita and the holders of all of the issued and outstanding securities of Zurvita prior to the Closing Date (the “Zurvita Securities Holders”), pursuant to which, among other things, the Zurvita Securities Holders contributed all of their securities of Zurvita to Red Sun in exchange for Red Sun’s issuance of 9.3 million shares of common stock of Red Sun (the “Share Exchange”).

Prior to the consummation of the Share Exchange, Matthew Taylor was Red Sun’s President, Secretary, Treasurer, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and sole Director.  Mr. Taylor owned 66.7 percent of its issued and outstanding securities.

Pursuant to the terms of the repurchase agreement (the “Repurchase Agreement”), Red Sun repurchased all of Mr. Taylor’s shares of common stock for a total repurchase price of $210 thousand. Immediately after the repurchase of these shares: (1) the former shareholders of Zurvita received shares of common stock of Red Sun in exchange for all of their shares of Zurvita, (2) Mr. Taylor appointed the following individuals as directors and officers of the Company: Jay Shafer, Chief Executive Officer and Director; Jason Post, Chief Financial Officer; Richard Diamond, Director; Paul Morrison, Director; Christopher D. Phillips, Director; and Guy Norberg, Director and (3) Mr. Taylor resigned from his Red Sun officer positions and from the Red Sun board of directors.

Concurrent with the closing of the Share Exchange Transaction, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an accredited investor and closed a private placement offering pursuant to which it raised gross proceeds of $1.75 million and, among other things, issued and sold convertible preferred stock (the “Preferred Stock”) convertible into shares of the Company’s common stock (“Conversion Shares”) at an initial conversion price of $0.0625, subject to adjustment (the “Private Placement”).  The Company completed the Private Placement pursuant to which it raised gross proceeds of $1.75 million.
 
As a result of the Share Exchange Transaction and the consummation of the transactions pursuant to the Repurchase Agreement,  Red Sun experienced a change in control and ceased to be a shell company. Zurvita became the Company’s wholly-owned subsidiary and the former shareholders of Zurvita became the owners of approximately 66 percent of the Company’s issued and outstanding shares of common stock and 44 percent of the voting rights of total equity securities outstanding (after giving effect to subsequent issuances of common stock).  The combined entity elected to change its name from Red Sun Mining, Inc. to Zurvita Holdings, Inc. while maintaining Red Sun’s status as a SEC registrant and we are continuing the business plan of Zurvita only.

 
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Business Strategy

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

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

Recently, Zurvita entered into the growing Health & Wellness industry with its recent launch of “Zeal”, a nutritional drink, and will be entering the weight management market with the launch of Zurvita’s Zeal Weight Management Program in late October 2011.
 
Zurvita has developed business processes to dramatically increase performance success:

Strengthen Brand Recognition

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

Increase Product and Service Offerings

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

Marketing

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

Technology

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

Training and Support

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

Products and Services

Our products consist of membership products and services, non-membership products and services, and consumable health and wellness products. Our products are sold directly to consumers through our network of independent sales Consultants.

 
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Our principal products include the following:
 
Product
Description
Key Features
Zeal
All-in-one natural nutritional drink.  Synergistic blend of whole food concentrates providing an excellent source of nutrients, antioxidants & vitamins.  Zeal is a proprietary wellness formula that promotes long-term health and wellness.
Stabilized Rice Bran is the main ingredient and  contains  numerous vitamins and minerals as well as containing over 120 antioxidants.  Zeal  also contains a Super Green Food, Moringa Oleifera, which contains 60 separate nutritional elements as well as other whole food concentrates and essential minerals. This all-in-one powdered nutritional drink is  stable and light weight and comes in a grab-n-go single serving bottle.
Zeal Weight Management Program
Using Zeal as the foundation for long term health, Zeal Weight Management Program combines Zeal Protein Shakes, Zeal Burn and Zeal Cleanse to effectively assist the consumer in their efforts to lose weight or maintain a "healthier" weight.
The Zeal Weight Management Program is a complete system that contains an advanced thermogenic formula (Zeal Burn) containing Advantra-Z. It also contains an herbal and probiotic formula (Zeal Cleanse) designed to promote digestive health. A significant part of the program are meal replacement protein shakes with carbohydrate blocking ingredients that help reduce overall caloric intake.
 Zlinked
ZLinked provides turn-key advertising solutions for small- and medium-sized businesses to connect with consumers on the Internet, including professionally managed pay-per-click (PPC), search engine optimization (SEO), and organic search result ranking.  Its online search directory actively pushes ads to an internal local advertising network as well as popular 3rd party search engines.
Premiere placement on its own national search directory: zlinked.com. Organic results on high traffic websites. Strategic placement on internal Ad network. 3rd party placement on popular search engines; Google, Ask, Bing, Yahoo. A low cost option in Online Advertising.
Zurvita Protection
Services that protects members against common legal issues and security concerns.
Program offers legal assistance, tax preparation & counseling, distressed financial assistance, identity theft recovery services, credit repair services, roadside assistance and life event counseling.
Zurvita Health
A discount medical program that combines benefits and services to help mitigate the cost of everyday healthcare needs.
Program creates access to convenient and affordable discount medical programs. Services include access to a national network of board certified physicians providing telephone consultations to diagnose, recommend treatment and write short term non- narcotic prescriptions. Members further experience discounted medical services through network providers in vision, hearing, pharmacy, diagnostic, imaging and lab benefits.
Zurvita Tech
A membership plan that provides member discounted rates on computer and technology support needs.
Program includes discounted prices on 24/7 remote technical support; nationwide onsite technical support and remote data backup and access.
Zurvita Care Saver
A membership program offering members cell phone concierge service and various retail shopping, dining, travel and recreational discounts.
Program that includes restaurants, movie theatres, local retailers, daily services, personal care and pet care providers.
Zurvita Choice
The deregulation of electric and natural gas industries in certain states gives consumers the option to choose where they may purchase their energy.
Program offers utility services (electric & natural gas where available) in Texas, Georgia, New York, Ohio, Indiana and Michigan. Service provider is MXenergy who is the largest independent retail provider in North American and is available in 39 markets. Members can lock in annual rates and effectively eliminate the volatile prices that makes managing energy expenses difficult.
Zurvita Mobile
Zurvita gives customer choices and the ability to choose from all the major carriers for cellular service.
Zurvita Mobile, through association with our fulfillment partner, is a fully authorized dealer for all the major carriers including AT&T Alltel Wireless, Sprint-Nextel, T-Mobile and Verizon Wireless. Members have the flexibility to choose cell phones and providers from one convenient online location.
Zurvita Commercial Energy Solutions
Certain states have deregulated electric and natural gas industries permitting commercial enterprises the option to choose where they may purchase their energy.
Program offers competitive commercial utility services (electric & natural gas) in Texas and California. The program is offered in these deregulated energy markets by selling commercial energy via Zurvita’s energy technology portal platform.  The  portal provides Zurvita energy consultants a state-of-the-art web-based portal to manage business, track revenue and commissions,  and present competitive usage and rate data to potential energy customers.
 
 
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Employees

As of July 31, 2011, Zurvita Holdings had 18 full-time employees.

Customers

Zurvita’s customers can either be consultants who purchase products or third party consultants.
 
Competition

The Company operates in the highly competitive business-to-business segment that consists of many different companies ranging from the small sole proprietors to large multi-national domestic and foreign corporations who sell competing products or who are vying for our membership’s consumer spending dollars.  We expect our competition to continually change with the advent of new products and services that contend for our current membership’s discretionary spending dollars or diminish the perceived value of our products and services. There are many competitors who are more established than we are and have greater financial and non-financial resources than we do.

Government Regulation

We are subject to federal, state and local laws, regulations, guidelines and determinations, common laws, codes of conduct and other similar parameters that directly and indirectly impact our business and methods of operation.

State Discount Health Program Regulation    Many states have enacted legislation concerning the operation and marketing of discount health programs.  With respect to scope, some state health program regulations apply to discounts on all health care products, while other states’ regulations apply only to certain types of discount programs or services.  For example, some regulations apply only to prescription discounts.  In addition, some states require licensing and registration of entities that provide discount health programs.  Additional states are expected to enact such regulations in the future.  States with such regulations currently in place may amend existing regulations or enact new regulations which may severely restrict or prohibit the sale of our products.  The Company monitors developments or changes in the regulations in the states in which we operate or plan to operate to allow compliance with the laws and regulations within those states.  We may decide not to sell our products in states with regulations we believe to be too burdensome or where compliance is too costly.  In addition, such regulations may limit the products and programs we may market and sell and the manner in which we market and sell our products and programs.  

The discount programs we market are not insurance products and do not subject us to insurance regulations.  However, some states have regulations that are specific to discount plans as discussed above.  We may also receive inquires from insurance regulators in various states in which we operate requesting that we supply them with information about our programs.  To date, these agencies have concurred with our view that our health programs are not a form of insurance.  We can provide no assurance that insurance commissioners in such states will continue to concur with our view that our products are not a form of insurance and therefore are not subject to insurance regulations.  In the future, states may adopt regulations or enact legislation pursuant to which our programs may be deemed a form of insurance, in which case we may become subject to insurance regulations in such states.  Legislation has been introduced from time to time in the U.S. Congress that could result in the federal government assuming a more direct role in regulating insurance companies.  Compliance with such regulations and laws may be costly and difficult.  Such regulations may also preclude us from marketing some or all of our products and programs.

Additional governmental regulation or future interpretation of existing regulations may increase the cost of compliance or materially and adversely affect the insurance and/or non-insurance products and services offered by us and, as a result, our results of operations.

Telemarketing Regulations - Our call center seats and relationships are, or may become, subject to federal and state “do not call” laws and requirements.  Generally, under these regulations, we are prohibited from calling any consumer whose telephone number is listed in the national “do not call” registry, subject to certain exceptions.  Violation of these regulations may result in fines of up to $11,000 per violation, plus other penalties.
 
Product Claims and Advertising Regulations - The Federal Trade Commission (FTC) and certain states regulate advertising, product claims, and other consumer matters.  The FTC and state regulators may institute enforcement actions against companies for false and misleading advertising of consumer products.  In addition, the FTC has increased its scrutiny of the use of testimonials, similar to those used by us and representatives marketing our membership programs. While we have not been the target of any FTC or state regulatory enforcement actions, we can provide no assurance that:

 
·
the FTC or state regulators will not question our advertising or other operations in the future;
 
·
a state will not interpret product claims presumptively valid under federal law as illegal under that state’s regulations; or


 
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·
future FTC or state regulations or decisions will not restrict the permissible scope of such claims.

We are also subject to the risk of claims by brokers and agents and their respective customers who may file actions on their own behalf, as a class or otherwise, and may file complaints with the FTC or state or local consumer affairs offices.  These agencies may take action on their own initiative against us for alleged advertising or product claim violations, or on a referral from brokers, agents, customers or others.  Remedies sought in these actions may include consent decrees and the refund of amounts paid by the complaining brokers, agents or consumer, refunds to an entire class of brokers, agents or customers, client refunds, or other damages, as well as changes in our methods of doing business.  A complaint based on the practice of one broker or agent, whether or not we authorized the practice, could result in an order affecting some or all of the brokers and agents that we use in a particular state.  Also, an order in one state could influence courts or government agencies in other states considering similar matters.  Proceedings resulting from these complaints could result in significant defense costs, settlement payments or judgments and could have a material adverse effect on us.
 
Our network marketing program is subject to a number of federal and state regulations administered by the FTC and various state agencies in the United States. Regulations applicable to network marketing organizations generally are directed at preventing fraudulent or deceptive schemes, often referred to as “pyramid” or “chain sales” schemes, by ensuring that product sales ultimately are made to consumers and that advancement within an organization is based on sales of the organization’s products rather than investments in the organization or other non-retail sales-related criteria.

Insurance
 
The Company significantly mitigates risk by contracting with other companies who ultimately provide the insurance benefits that are embedded within certain of the products we market.  The Company is not an insurance company, and we do not retain any insurance risk associated with any of the products we sell.
 
Corporate Information
 
Zurvita Holdings is a Delaware corporation formed on June 28, 2007.  Zurvita Holdings principal executive offices are located at 800 Gessner Suite 110, Houston, Texas 77024.
 
ITEM 1A. RISK FACTORS

Our business faces risks and uncertainties, including those discussed below and elsewhere in this report. These factors represent risks and uncertainties that could have a material adverse effect on our business, results of operations and financial condition. Additional risks and uncertainties not presently known to us or that we do not presently consider significant also may impair our business or the trading price of our securities. Whenever the terms “our,” “we” and the “Company” are used in this Risk Factors section, they refer to Zurvita Holdings or any of its subsidiaries.

Risks Related to Our Business

We have a history of significant losses and may not be profitable in the future and likely needs significant additional outside funding to continue operating. 

We have a history of net losses and have an accumulated deficit of approximately $19.8 million, from inception through July 31, 2011.  We have historically generated significant net operating losses and negative operating cash flows.  We believe that without significant equity and/or debt investment from outside sources, we will not be able to sustain our planned operations for the next 12 months.  Such additional capital may not be available to us on acceptable terms or may not be available at all.  You should not rely solely on the public market valuation of the Company and the views of securities analysts and investors for assessing the operational, business and financial success of the Company. Fluctuations in our quarterly operating results or our inability to achieve profitability may cause volatility in the price of our common stock in the public market.

Our business is difficult to evaluate because we have had a limited operating history and have experienced significant changes.  

We have a limited operating history, and the Company’s business has undergone significant transformation during the past several years as a result of changes in the Company’s ownership, the services and products offered, changes in market conditions, changes in our targeted membership, and are expected to continue to change for similar reasons. We cannot assure you that our current business strategy will be successful in the long term.  We have experienced significant losses since inception and, even if demand from members exists, we cannot assure you that our business will be successful.

The Company is majority owned by shareholders who are considered related parties and who will be able to make important decisions about our business and capital structure.

Related parties own approximately 92% of our outstanding common stock and approximately 96% of the voting power of all equity securities.  Of the related parties, a significant percentage of the Company’s outstanding securities are controlled by Amacore who owns approximately 61% of our outstanding common stock and 32% of the voting power of all equity securities.  As a result, Amacore’s interests will be significantly represented in certain corporate matters such as the election of the members of our board of directors, appointment of new management and approval of any action requiring stockholder approval.  Amacore’s interest in exercising control over us and our business may conflict with the interests of our other stockholders.  Amacore’s control may also discourage others from acquiring us or from making a significant investment in us.  Related parties collective interest in exercising control over us and our business may conflict with the interests of our other non-related party stockholders.  The significant related party control may also discourage others from acquiring us or from making a significant investment in us.

 
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General economic, financial market and political conditions may materially adversely affect our results of operations and financial conditions.
 
General economic, financial market and political conditions may have an adverse effect on demand for our services and programs and on our results of operations and financial condition.  Concerns over a double-dip recession, the availability and cost of credit, the declining global mortgage and real estate market, the loss of consumer confidence and reduction in consumer spending, inflation, and other macroeconomic factors could influence demand for our services and programs.  There could be a number of follow-on effects from the credit crisis on our business, including insolvency of key partners, inability of customers to obtain credit to finance purchases of our services and programs, and/or customer insolvencies each of which could adversely affect our results of operations and financial condition.
 
We currently generate significant revenue through our independent sales consultants.

We derive our revenue through product sales of our independent sales consultants.  In the event we are unable to attract, motivate and retain our independent sales consultants base our business, financial condition and results of operations could be materially and adversely affected as the Company’s revenue is directly tied to the activity levels of its sales consultant base.

We may be unable to fund future growth. 

Our business strategy calls for expansion through an increase in our independent sales consultant base and entry into the health and wellness and weight management markets.  We will require significant funding for additional personnel, capital expenditures as well as for working capital purposes. Financing may not be available to us on favorable terms, if at all. If adequate funds are not available on acceptable terms, then we may not be able to meet our business objectives for expansion and profitability which could consequently harm our business, results of operations and financial condition.

In addition, if we raise additional funds through the issuance of equity or convertible debt securities, or a combination of both, then the stockholders will suffer dilution, and any new securities may have rights, preferences and privileges senior to those of our common stockholders and other series of preferred stockholders. Furthermore, if we raise capital or acquire businesses by incurring indebtedness, we will become subject to the risks associated with indebtedness, including interest rate fluctuations and any financial or other covenants that our lender may require. Moreover, if our strategy to increase its sales and marketing resources in order to grow revenues does not produce the desired result, then the Company may incur significant, unrecoverable expenses.

Our growth may be limited if it is unable to attract and retain qualified personnel.  

Our business is largely dependent on the skills, experience and performance of key members of our senior management team. We plan to increase the Company’s operations and finance personnel. We believe that our success depends largely on its ability to attract and retain highly-skilled and qualified technical and managerial personnel. The market for highly skilled sales, marketing and support personnel is highly competitive as a result of the limited availability of technically-qualified personnel with the requisite understanding of the industry in which we operate. The inability to hire or retain qualified personnel may hinder our ability to implement its business strategy and may harm our business.

Our future growth could strain our personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

Our future success will depend in part upon the ability of our management to manage growth effectively. This may require us to hire and train additional personnel to manage our expanding operations. In addition, we will be required to continue to improve our operational, financial and management controls and our reporting systems and procedures. If we fail to successfully manage our growth, we may be unable to execute upon our business plan and our business and operations may be adversely impacted.

Our ability to anticipate and respond to market trends and changes in consumer preferences could affect our financial results.

Our success depends on our ability to anticipate, gauge and react in a timely and effective manner to changes in consumer spending patterns and preferences for products and services. We must continually work to develop new products, maintain and enhance the recognition of our branded products. Furthermore, material shifts or decreases in market demand for our products, including as a result of changes in consumer spending patterns and preferences, could result in lower revenue.
 
Any future acquisition may expose us to additional risks
 
Our business plan does not preclude growth through the acquisitions of qualified companies who complement our current product offerings or enhance our product distribution. The financing for any future acquisition could dilute the interests of our stockholders or result in an increase in our indebtedness or both. Acquisitions may entail numerous risks, including:
 

 
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·
difficulties in assimilating acquired operations or products, including the loss of key employees from acquired businesses and disruption to our direct selling channel;
 
·
diversion of management’s attention from our core business
 
·
adverse effects on existing business relationships with suppliers and customers; and
 
·
risks of entering markets in which we have limited or no prior experience.

Our failure to successfully complete the integration of any acquired business could have a material adverse effect on our business, financial condition and operating results. In addition, there can be no assurance that we will be able to identify suitable acquisition candidates or consummate acquisitions on favorable terms.

We face significant competition for our products and services.  

While our products and services are relatively new, the direct-to-consumer industry is intensely competitive, continually evolving and, in some cases, subject to rapid change. We expect the intensity of competition and the pace of change to be increased or at least be maintained in the future. Many of our potential competitors have greater financial, technical, product development, marketing and other resources than us. These organizations may be better known than we are and may have more customers or members than us. We cannot provide assurance that we will be able to compete successfully against these organizations or any alliances they have formed or may form.  Therefore, there can be no assurance that our competitors will not:

 
·
increase their emphasis on products and services similar to those we offer;
 
·
provide products and services comparable or superior to those we provide at lower consumer cost; and
 
·
adapt more quickly than we do to evolving industry trends or changing market requirements;

We must replace the customers lost in the ordinary course of business and if we fail to do so our revenue may decline and our customer base will decline.

We lose a substantial number of our customers each year in the ordinary course of business.  The loss of customers may occur due to numerous factors, including:

 
·
changing customer preferences;
 
·
competitive price pressures;
 
·
customer dissatisfaction;
 
·
discontinuance of third-party products and services

We depend on third-party vendors to supply certain of our products and services that we market.  The failure of these vendors to provide these products or services could result in customer dissatisfaction and harm our business and financial condition.

We depend on third-party vendors to supply certain products and services that we market.  Many of our third-party vendors are independent contractors.  As a result, the quality of service they provide is not entirely within our control.  If any third-party vendor were to cease operations, or terminate, breach or not renew its contract with us, or suffer interruptions, delays or quality problems, we may not be able to substitute a comparable third-party vendor on a timely basis or on terms favorable to us.  With respect to our products that contain an insurance benefit, we are dependent on the insurance carriers that underwrite the insurance to obtain appropriate regulatory approvals.  If we are required to use an alternative insurance carrier, it may materially increase the time required to bring an insurance related product to market.  As we are generally obligated to continue providing our products and services to our customers even if we lose a third-party vendor, any disruption in our product offerings could harm our reputation and result in customer dissatisfaction and liability or personal claims.  Replacing existing third-party vendors with more expensive or less quality third-party vendors could decrease our profitability and harm our reputation.
 
We may incur material product liability or personal injury claims, which could increase our costs and harm our financial condition and operating results.
 
Our health and wellness and weight management products consist of vitamins, minerals, proteins and other ingredients that are classified as foods or dietary supplements and are not subject to pre-market regulatory approval by the Food and Drug Administration (“FDA”) or other regulatory authorities in the United States or elsewhere.  As a marketer of nutritional and dietary supplements that are ingested by consumers, we may be subjected to various product liability or personal injury claims, including that the products contain contaminants, the products include inadequate instructions to their uses, or the products include inadequate warnings concerning side effects and interactions with other substances.  Some of our products contain ingredients that do not have long histories of human consumption.  Previously unknown adverse reactions resulting from human consumption of these ingredients could occur.  As a marketer of product manufactured by third parties, we may also be liable for product liability claims for products we did not manufacture.  While our agreements with manufacturers require the manufacturer to indemnify us, whether such indemnification is sufficient to cover any product liability claim will depend on the creditworthiness of such manufacturers and the terms of the indemnification.  We may be unable to recover fully from an indemnifying third party manufacturer with respect to a product liability claim.  There can be no assurance that our existing or future products liability insurance coverage will be sufficient to cover any possible product liability risks or that such insurance will continue to be available to us on economically feasible terms.  Any such product liability or personal injury claim could adversely affect our  reputation and consumer confidence in our products, and could have material negative impact on our revenues and expenses and ability to secure adequate insurance coverage. 

 
7

 



We are dependent on a single credit card processing and payment collection company.  
In the event our credit card processor ceases operations or terminates its agreement with us, there can be no assurance the Company could find and retain a replacement credit card processor on a timely basis, if at all.  This would severely restrict our ability to generate and collect sales.  Any service interruptions, delays or quality problems could result in delays in collecting payments, which could adversely affect our revenue and profitability.

We must comply with Federal and State telephone consumer protection laws.

Federal and State telephone consumer protection laws prohibit deceptive, unfair or abusive practices in telemarketing sales.  Any new legislation further regulating telemarketing practices could adversely affect or limit our operations.

Our network marketing program could be found to be not in compliance with current or newly adopted laws or regulations in one or more markets, which could prevent us from conducting our business in these markets and harm our financial condition and operating results.

Our network marketing program is subject to a number of federal and state regulations administered by the FTC and various state agencies in the United States.  We are subject to the risk that, in one or more markets, our network marketing program could be found not to be in compliance with applicable law or regulations.  Regulations applicable to network marketing organizations generally are directed at preventing fraudulent or deceptive schemes, often referred to as “pyramid” or “chain sales” schemes, by ensuring that product sales ultimately are made to consumers and that advancement within an organization is based on sales of the organization’s products rather than investments in the organization or other non-retail sales-related criteria.  The regulatory requirements concerning network marketing programs do not include “bright line” rules and are inherently fact-based, and thus, we are subject to the risk that these laws or regulations or the enforcement or interpretation of these laws and regulations by governmental agencies or courts can change.  The failure of our network marketing program to comply with current or newly adopted regulations could negatively impact our business in a particular market or in general.

We face potential liability related to the privacy and security of personal information it collects from consumers through its website and marketing operations. 

Internet user privacy has become a major issue both in the United States and abroad. We have privacy policies posted on its website that we believe comply with applicable laws requiring notice to users about our information collection, use and disclosure practices. However, whether and how existing privacy and consumer protection laws in various jurisdictions apply to the Internet is still uncertain and may take years to resolve. Any legislation or regulation in the area of privacy of personal information could affect the way we operate our website and could harm our business. Further, we cannot assure you that the privacy policies and other statements on our website or our practices will be found sufficient to protect us from liability or adverse publicity relating to the privacy and security of personal information.  Any unauthorized release or failure to adequately protect private information could cast a negative public perception of us which in turn could adversely affect our ability to attract and retain customers.

We may become involved in the future, in legal proceedings that, if adversely adjudicated or settled, could adversely affect our financial results.

We have in the past been a party to litigation and have incurred significant legal costs and settlement expense.  In general, litigation claims can be expensive and time consuming to bring or defend against and could result in settlements or damages that could significantly affect our financial results.

Healthcare reform measures could hinder or prevent our products’ commercial success.
 
The healthcare industry is undergoing fundamental changes resulting from political, economic and regulatory influences.  In the United States, comprehensive programs have been proposed that seek to increase access to healthcare for the uninsured, to control the escalation of healthcare expenditures within the economy and to use healthcare reimbursement policies to balance the federal budget.  On March 23, 2010, health reform legislation was approved by Congress and has been signed into law.  The reform legislation provides that most individuals must have health insurance, will establish new regulations on health plans, create insurance pooling mechanisms and other expanded public health care measures, and impose new taxes on sales of medical devices and pharmaceuticals.  Since this legislation is recently enacted and will require the adoption of implementing regulations, we cannot predict the effect, if any, that it will have on our business, but this legislation and similar federal and state initiatives may have the effect of reducing medical procedure volumes, increasing our taxes and otherwise adversely affect our business, possibly materially.
 

 
8

 


We expect that Congress and state legislatures will continue to review and assess healthcare proposals, and public debate of these issues will likely continue.  We cannot predict which, if any, of such reform proposals will be adopted and when they might be adopted.  Other countries also are considering healthcare reform.  Significant changes in healthcare systems could have a substantial impact on the manner in which we conduct our business and could require us to revise our strategies.
 
Risks Related to Our Stock

We do not intend to pay dividends on our capital stock.  

We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future, except as required by the terms of the preferred stock we have issued.
 
The Company may raise additional funds in the future through issuances of securities and such additional funding may be dilutive to stockholders or impose operational restrictions   

We may raise additional capital in the future to help fund acquisitions and our operations through sales of shares of our common stock or securities convertible into shares of our common stock, as well as issuances of debt.  Such additional financing may be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants which may limit our operating flexibility.  If additional capital is raised through the issuances of shares of our common stock or securities convertible into shares of our common stock, the percentage ownership of existing stockholders will be reduced.  These stockholders may experience additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.

We are not subject to certain of the corporate governance provisions of the Sarbanes-Oxley Act of 2002 and, without voluntary compliance with such provisions, neither you nor the Company will receive the benefits and protections they were enacted to provide. 

Since our common stock is not listed for trading on a national securities exchange, we are not subject to certain of the corporate governance rules established by the national securities exchanges pursuant to the Sarbanes-Oxley Act of 2002.  These rules relate to independent director standards, director nomination procedures, audit and compensation committees standards, the presence of an audit committee financial expert and the adoption of a code of ethics.

While we intend to file an application to have our securities listed for trading on a national securities exchange in the future which would require us to fully comply with those obligations, we cannot assure you that we will file such an application, that we will be able to satisfy applicable listing standards, or, if we do satisfy such standards, that we will be successful in receiving approval of our application by the governing body of the applicable national securities exchange.
 
Applicable SEC rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock which may affect the trading price of our common stock.  

Our common stock is a “penny stock” as defined under Rule 3a51-1 of the Exchange Act, and is accordingly subject to SEC rules and regulations that impose limitations upon the manner in which our common stock may be publicly traded.  These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks.  Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale.  These regulations may have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.
 
Our common share price may subject us to securities litigation.  

The market for our common stock is expected to be characterized by significant price volatility when compared to seasoned issuers, and we expect that our future share price will be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management's attention and resources.
 
Our stock price may be volatile, which may result in losses to our stockholders.  

The stock markets have experienced significant price and trading volume fluctuations, and the market prices of companies listed on the OTC Markets Group (OTCQX) and the OTC Bulletin Board® (OTCBB) have been volatile in the past and have experienced sharp share price and trading volume changes. The trading price of our common stock is likely to be volatile and could fluctuate widely in response to many of the following factors, some of which are beyond our control:

 
9

 



 
·
variations in our operating results;
 
·
changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;
 
·
changes in operating and stock price performance of other companies in our industry;
 
·
additions or departures of key personnel; and
 
·
future sales of our common stock.

Domestic and international stock markets often experience significant price and volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance, may adversely affect the price of our common stock.

We became public by means of a reverse merger, and, as a result, we are subject to the risks associated with the prior activities of the public company.

Additional risks may exist because Zurvita became public through a reverse merger with Red Sun, which did not have significant operations or assets prior to the time of the transaction. Red Sun was a development stage company from the time of its inception until the time of the Share Exchange. Prior to the Share Exchange, Red Sun had no significant business operations and generated no revenues. We may require the cooperation or assistance of persons or organizations, such as auditors, previously associated with Red Sun in connection with future matters that could be costly or difficult to secure. Although we performed a due diligence review of Red Sun, we still may be exposed to undisclosed liabilities resulting from its prior operations and we could incur losses, damages or other costs as a result. In connection with the Share Exchange, claims may not be brought against such shareholders after six months from the closing of the Share Exchange. Therefore, any liabilities associated with the prior operations, capitalization or ownership of securities of our company by the shareholders of Red Sun may be borne by the holders of securities issued in the Share Exchange or the Private Placement.

Our common stock may be affected by limited trading volume and price fluctuations, each of which could adversely impact the value of our common stock.

We believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our Common stock to fluctuate substantially. These fluctuations also may cause short sellers to enter the market from time to time in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our stock will be stable or appreciate over time.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Zurvita Holdings’s management offices are located at 800 Gessner Suite 110, Houston, TX 77024.  These facilities are leased and consist of approximately 4 thousand square feet.  The lease expires on July 31, 2012.

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business. We are not involved in any pending legal proceeding or litigation and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party, which would reasonably be likely to have a material adverse effect on the Company.
 
ITEM 4.  RESERVED

 
10

 



PART II
 
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

The common stock of the Company is quoted for trading on the OTC Markets Group (the “OTCQX”) under the symbol “ZRVT.PK” for the year ended July 31, 2011 and was quoted for trading on the OTC Bulletin Board (“OTCBB”) under the symbol “ZRVT.OB” for the year ended July 31, 2010.  Set forth below are the quarterly high and low bid prices for our common stock for the years ended July 31, 2011 and 2010.

2011
High
Low
October 31, 2010
0.40
0.10
January 30, 2011
0.19
0.03
April 30, 2011
0.08
0.02
July 31, 2011
0.05
0.03
2010
High
Low
October 31, 2009
1.49
0.10
January 30, 2010
1.49
0.51
April 30, 2010
1.08
0.11
July 31, 2010
2.00
0.11


Holders

As of July 31, 2011, 61,498,713 shares of our common stock are issued and outstanding and there were 96 stockholders of record.

Dividends

The Company has never paid any cash dividends on the common stock and does not anticipate paying cash dividends in the foreseeable future. Our current policy is to retain earnings, if any, to fund operations, and the development and growth of our business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon the Company’s financial condition, results from operations, capital requirements, applicable contractual restrictions, restrictions in the organizational documents and any other factors that the Board of Directors deems relevant.

Shares Authorized for Issuance Under Equity Compensation Plans

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

 
11

 



Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)
Weighted-average exercise price of outstanding options, warrants and rights (b)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders
                       5,175,000
$0.20
                                    825,000
Equity compensation plans not approved by security holders
                                     -
                                           -
                                               -
Total
                       5,175,000
$0.20
                                    825,000


ITEM 6. SELECT FINANCIAL DATA

Not applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 Introduction

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

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

 
·
Results of operations – This section provides an analysis of our results of operations comparing the year ended July 31, 2011 to 2010.

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

 
·
Critical accounting policies – This section discusses certain significant accounting policies considered to be important to our financial condition and results of operations and which require significant judgment and estimates on the part of management in their application.  In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 2 to our audited consolidated financial statements included within Item 8 of Part II of this 2011Annual Report on Form 10K.

Overview

Description of Business

Zurvita Holdings is a national network marketing company offering high-quality products and services targeting individuals, families and small businesses.  The Company’s differentiated services feature consumer products and small business solutions offered through a growing network of independent sales consultants.  Zurvita Holdings offers a unique business-to-business strategy with turnkey solutions for commercial and residential energy, advertising, telecommunications and healthcare services.  The Company also markets numerous low-cost ancillary products, such as legal assistance and restoration services for identity theft and consumer credit.

 
12

 

Results of Operations
 
   
For the Year Ended
 July 31, 2011
   
For the Year Ended
July 31, 2010
   
Increase
 (Decrease)
 
                   
Revenues
  $ 4,628,534     $ 6,306,020     $ (1,677,486 )
Cost of Sales
    3,207,153       4,620,780       (1,413,627 )
                         
Gross Profit
    1,421,381       1,685,240       (263,859 )
                         
Operating Expenses
    5,568,091       8,768,439       (3,200,348 )
Operating Loss
    (4,146,710 )     (7,083,199 )     2,936,489  
                         
Other Income (Loss)
    5,769,775       (4,448,345 )     10,218,120  
                         
Income (Loss) Before Income Taxes
    1,623,065       (11,531,544 )     13,154,609  
                         
Income Taxes
    4,486       (19,629 )     24,115  
                         
Net Income (Loss )
  $ 1,618,579     $ (11,511,915 )   $ 13,130,494  
                         
Basic and Diluted Earnings (Loss) Per Share
  $ 0.03     $ (0.20 )        
                         
 
Revenue:

For the year ended July 31, 2011, revenue was approximately $4.6 million, as compared to approximately $6.3 million for the year ended July 31, 2010, a decrease of approximately $1.7 million.  Significant decreases in Administrative websites, marketing fees and materials and membership fees contributed to the decrease in overall revenue.  The various components of total revenue are discussed below.

Administrative Websites
Administrative website sales were approximately $1.2 million for the year ended July 31, 2011, as compared to approximately $2.1 million for the year ended July 31, 2010.  The approximate $900 thousand decrease in administrative website sales was result of a reduction in sales consultants joining the Company and attrition of the existing sales consultant base during the year ended July 31, 2011, due to product issues and the lack of products that appealed to the general sales consultant base.

Advertising Sales
The Company’s advertising sales were approximately $703 thousand for the year ended July 31, 2011, as compared to approximately $936 thousand for the year ended July 31, 2010.  The approximate $233 thousand decrease is due to the advertising sales technology platform having technical shortcomings that led to adverse refund and persistency rates that made selling the product difficult.  The Company is addressing these issues by redesigning the ZLinked technology platform to lower operating cost, to allow for more competitive product pricing, and to provide enhanced functions and services that are expected to increase the product’s performance and market value.
 
Commissions
The Company’s commission revenue for the year ended July 31, 2011, were approximately $450 thousand as compared to approximately $479 thousand for the year ended July 31, 2010.  The approximate $29 thousand decrease is due to run off of the Company’s residential energy block of business.  The Company did not market residential energy during the year ended July 31, 2011. The Company is currently marketing commercial energy in the State of Texas on a limited basis.
 
Consumable Products
The Company’s commission revenue for the year ended July 31, 2011, were approximately $450 thousand as compared to approximately $479 thousand for the year ended July 31, 2010.  The approximate $29 thousand decrease is due to run off of the Company’s residential energy block of business.  The Company did not market residential energy during the year ended July 31, 2011. The Company is currently marketing commercial energy in the State of Texas on a limited basis.
 
Marketing Fees and Materials
The Company’s marketing fees and materials revenue for the year ended July 31, 2011, were approximately $836 thousand as compared to approximately $1.9 million for the year ended July 31, 2010.  The approximate $1.1 million decrease is due to several factors: (1) in February 2011, the Company changed how sales consultants join the business by eliminating the marketing fee; and (2) the Company experienced attrition in its active sales consultant base prior to the launch of Zeal as a result of a lack of products that appealed to the general sales consultant base.


 
13

 


Membership Fees
The Company’s membership fees were approximately $446 thousand for the year ended July 31, 2011, as compared to $924 thousand for the year ended July 31, 2010.  The decrease in membership revenue is a result of the Company’s efforts to focus on the sale of advertising, energy, and consumable products as they are higher margin products.
 
Cost of Sales:

Total cost of sales for the year ended July 31, 2011, was approximately $3.2 million as compared to approximately $4.6 million for the year ended July 31, 2010.  The decrease in overall revenue resulted in less commissions paid to sales consultants as well as product benefit and service cost.  The various components of cost of sales are discussed below.
 
Benefit and Service Cost
 
Benefit and service cost represents the direct cost of the membership and subscription products sold such as administrative websites, advertising sales, marketing materials and membership fees.  Benefit and service cost was approximately $1.1 million as compared to approximately $1.6 million.  The decrease is due to less administrative website sales, advertising sales and membership fees.
 
Consumable Products Manufacturing Cost
 
Consumable products manufacturing cost represents Zeal’s manufactured cost and the cost of shipping the product to customers.  For the year ended July 31, 2011, this cost of sales component was $200 thousand.  Zeal was launched in February 2011; therefore, there is no such prior year cost.
 
Sales Commissions
 
The Company pays its independent sales agents on a commission basis.  Sales commissions for the year ended July 31, 2011, were approximately $1.9 million as compared to approximately $3 million for the year ended July 31, 2010.  The decrease of $1.1 million is a result of less administrative website sales, advertising subscriptions, marketing fees, and membership fees.
 
Gross Profit Percentage:

For the year ended July 31, 2011, gross profit was approximately $1.4 million or 31%, as compared to approximately $1.7 million or 27% for the year ended July 31, 2010.  Although revenues and gross profit for the year ended July 31, 2011, decreased, the Company was able to achieve an increase in gross profit percentage.  The following factors contributed to the increase in gross profit percentage: (1) The Company’s consumable product has a higher margin than the Company’s legacy products; and (2) the Company used less costly sales incentives.

Operating Expenses:

Our operating expenses for the year ended July 31, 2011 and for the year ended July 31, 2010, were approximately $5.6 million and $8.7 million, respectively.

The table below sets forth components of our operating expenses for year ended July 31, 2011, compared to the corresponding prior year period:

 
14

 


   
For the Year Ended
July 31, 2011
   
For the Year Ended
July 31, 2010
   
Increase
(Decrease)
 
                   
Depreciation
  $ 37,254     $ 35,555     $ 1,699  
Impairment loss on marketing agreement
    -       2,000,000       (2,000,000 )
Office related expenses
    543,713       412,587       131,126  
Payroll and benefits
    2,231,322       1,887,185       344,137  
Professional fees
    880,835       1,276,437       (395,602 )
Selling and marketing
    1,668,545       2,949,708       (1,281,163 )
Travel
    206,422       206,967       (545 )
                         
Total operating expenses
  $ 5,568,091     $ 8,768,439     $ (3,200,348 )
 
Depreciation expense for the year ended July 31, 2011, was approximately $37 thousand, an increase of approximately $1.7 thousand over the same prior year period.  The increase is related to the purchase of computer hardware and other office equipment needed to accommodate the Company’s personnel growth.

As of July 31, 2010, management had determined there were impairment indicators present with respect to the Company’s marketing agreement, an intangible asset, rendering it completely impaired.  Consequently, the Company recognized an impairment loss of $2 million for the year ended July 31, 2010.  The Company did not have intangible assets during the year ended July 31, 2011.

Office related costs include rent, insurance, utilities and office maintenance. For the year ended July 31, 2011 these costs were approximately $141 thousand, $33 thousand, $92 thousand, and $278 thousand, respectively, as compared to $111 thousand, $30 thousand, $56 thousand, and $216 thousand for the year ended July 31, 2010.  The overall increase of approximately $131 thousand is directly related to the additional IT services added related to maintaining the ZLinked Technology platform.

Payroll and related expenses for the year ended July 31, 2011 was approximately $2.2 million, an increase of approximately $344 thousand over the same prior year period.  The increase is attributable to the hiring of a Vice President of Marketing, as well as transitioning certain ZLinked consultants to full-time employees.

Professional fees consist of consulting, accounting fees, contract labor and legal costs. For the year ended July 31, 2011, these costs were approximately $204 thousand, $279 thousand, $231 thousand and $167 thousand, respectively, as compared to $719 thousand, $322 thousand, $35 thousand, and $200 thousand for the year ended July 31, 2010.  Significant reductions in consulting and legal expenses led to an overall professional fees decrease of approximately $396 thousand.  The increase in accounting fees was due to the Company changing its auditors and the predecessor auditor’s inability to provide consent to the use of their opinion on prior year financial statements which led to a re-audit of the prior year financial statements by the current auditor.  The contract labor costs increased as a result of contracting additional services to maintain and support the ZLinked technology.

Selling and marketing expenses for the year ended July 31, 2011, were $1.7 million as compared to $2.9 million for the year ended July 31, 2010, a decrease of approximately $1.3 million over the prior reporting period.  The significant decrease is due to less amortization of deferred costs such as agent advanced compensation and other prepaid marketing costs between the periods.

Business travel expenses for the year ended July 31, 2011, were approximately $206 thousand, a decrease of approximately $545 as compared to the year ended July 31, 2010.  Travel expenses remained comparable to prior year, although total sales decreased, as the company traveled to regional markets to launch Zeal as well as to recruit new sales consultants.

Other Income (Expense):

Gain on change in fair value of embedded share conversion feature

An embedded share conversion feature exists within the Company’s convertible note payable.  The Company has determined the conversion feature to be a derivative instrument and has estimated its fair value at the time of issuance and at each subsequent reporting period.  We recorded an unrealized gain on the conversion feature for the year ended July 31, 2011of approximately $462 thousand and an unrealized gain of approximately $131 thousand for the year ended July 31, 2010.  These unrealized gains are a non-cash item not impacting operating cash flows or results of operations before other income and expenses. See Note 12 – Assets and Liabilities Measured at Fair Value, to financial statements contained within Item 8 of Part II of this Form 10-K for additional information with respect to the estimation of the fair value of this conversion feature.

 
15

 

Gain (loss) on change in fair value of warrants

The Company’s liability warrants are recorded at fair value.  Their fair value is subject to remeasurement on a recurring basis.  For the year ended July 31, 2011, the change in fair value of these warrants was approximately a gain of $6.1 million, as compared to a loss of approximately $4.0 million for the year ended July 31, 2010.  The gain in fair value for the year ended July 31, 2011is a result of the significant decline in share price from $0.34 to $0.04 which is used as an input in fair valuing the warrants.  The loss in fair value for the year ended July 31, 2010 is (1) a result of the 4-to-1 forward share split that occurred on August 11, 2009 that had the effect of increasing the number of outstanding warrants by 21.42 million and (2) using a comparatively higher share price as an input in fair valuing the warrants.  These gains and losses are a non-cash item not impacting operating cash flows or results of operations before other income and expenses. See Note 12 – Assets and Liabilities Measured at Fair Value to financial statements contained within Item 8 of Part II of this Form 10-K, for additional information with respect to the estimation of the fair value of these warrants.

Gain on sale of non component entity

On July 26, 2011, the Company entered into a $10 purchase agreement with Mark Jarvis (Co-CEO) for the sale of ZurTel, a non-component entity of the Company.  At the time of disposition, ZurTel had assets of $73 and a $52 thousand intercompany liability payable to Zurvita Holdings. The sale resulted in a non-cash gain of $51,937.

Interest expense

Interest expense for the year ended July 31, 2011, was approximately $362 thousand, as compared to $271 thousand for the year ended July 31, 2010.  The increase in interest expense is a result of accreting the discount recognized on the Company’s $2 million interest bearing convertible note issued on October 9, 2009.  Accretion of $323 thousand is included within interest expense for the year ended July 31, 2011, as compared to $233 thousand of accretion included within interest expense for the year ended July 31, 2010.

Loss on change in fair value of marketable securities

The Company’s marketable securities consist of non-registered common stock. The Company fair values these securities on a recurring basis.  The Company recorded an unrealized loss of $443 thousand for the year ended July 31, 2011 as compared to the unrealized loss of $290 thousand recorded for the year ended July 31, 2010.  These losses are a non-cash item not impacting operating cash flows or results of operations before other income and expenses. See Note 12 – Assets and Liabilities Measured at Fair Value, to financial statements contained within Item 8 of Part II of this Form 10-K for additional information with respect to the determination of fair value for the Company’s marketable securities.

Loss on note receivable

On July 26, 2011, the Company sold to Mark Jarvis (Co-CEO) ZurTel, LLC (“ZurTel”), a non-component entity.  Prior to the sale, ZurTel was indebted to Zurvita Holdings in the amount of $52 thousand and evidenced by a promissory note.  Subsequent to the sale, management assessed the collectibility of the note as low and, consequently, recorded a $52 thousand loss for the year ended July 31, 2011.  ZurTel’s shell status and credit history, as well as its proposed business plan were the main reasons for recognizing the credit loss.

Income Taxes:

For the year ended July 31, 2011, the Company estimated approximately $4 thousand in tax expense as compared to $23 thousand for the year ended July 31, 2010.  The decrease between the periods is a result of the Company changing its method for estimating its Texas gross margin tax accrual as a result of access to improved data inputs used in estimating the tax accrual.

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

Net Income (Loss):

The Company had net income of approximately $1.6 million for the year ended July 31, 2011, as compared to a net loss of $11.6 million for the year ended July 31, 2010.  The main reason the Company went from a loss to earnings is due to the $6.1 million unrealized gain on the change in fair value of the Company’s liability warrants.

Earnings (Loss) per Common Share:

Earnings per common share amounted to $0.03 for the year ended July 31, 2011, as compared to a loss per common share of $0.20 for the year ended July 31, 2010.  The aforementioned factors contributing to the increase in net income also contribute to the increase in earnings per share.

 
16

 



Off Balance Sheet Arrangements

As of July 31, 2011, the Company did not have any off balance sheet arrangements.

Liquidity and Capital Resources

The following table compares our cash flows for the year ended July 31, 2011 to the corresponding prior period:
 
   
For the Year Ended
 July 31, 2011
   
For the Year Ended
July 31, 2010
 
             
Net cash used in operating activities
  $ (3,793,665 )   $ (3,132,041 )
Net cash used in investing activities
    1,686,097       (2,490,484 )
Net cash provided by financing activities
    1,819,032       4,521,014  
                 
Net (decrease) increase in cash
  $ (288,536 )   $ (1,101,511 )
 
Since its inception, the Company has met its capital needs principally through sale of its equity securities and the issuance of debt.  The proceeds from the sale of these securities have been used for the Company’s operating expenses, such as salary expenses, professional fees, rent expenses and other general and administrative expenses discussed above.  At July 31, 2011, the Company had negative working capital of approximately $1.4 million, an accumulated deficit of approximately $19.8 million and negative cash flows from operating activities of approximately $3.8 million. Since its inception, the Company has used approximately $10.1 million in operations.

We believe that without significant equity and debt investment from outside sources, the Company will not be able to sustain its current planned operations for the next 12 months.  During fiscal 2010, the Company raised from a shareholder $5.3 million of equity funding.  During fiscal 2011, the Company raised from a shareholder $1.5 million of equity funding.  In order to raise capital, the Company may sell additional equity or issued additional convertible debt securities which would result in additional dilution to our stockholders. The issuance of additional debt would result in increased expenses and could subject us to covenants that may have the effect of restricting our operations. We can provide no assurance that additional financing will be available in an amount or on terms acceptable to us, if at all. If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we may be unable to execute upon our business plan or pay our costs and expenses as they are incurred, which could have a material, adverse effect on our business, financial condition and results of operations. Currently, the Company does not maintain a line of credit or term loan with any commercial bank or other financial institution. The Company has approximately $2.6 million of outstanding notes payable as of July 31, 2011.  These issues raise substantial doubt about our ability to continue as a going concern for a reasonable period.

Critical Accounting Policies

Revenue Recognition

Administrative Websites

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

Advertising Sales

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

Commissions

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

 
17

 

Consumable Products

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

Marketing Fees and Materials

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

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

Membership Fees

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

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

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

Share-Based Compensation

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

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

Convertible Instruments

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

 
18

 


Derivative Financial Instruments

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

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

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

Fair Value Measurements

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

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

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

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

 
19

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
20

 

ITEM 8. FINANCIAL STATEMENTS.
 
Report of Independent Registered Public Accounting Firm
 

 
To the Board of Directors and Stockholders
 
Zurvita Holdings, Inc.
Houston, Texas
 

 
We have audited the accompanying consolidated balance sheets of Zurvita Holdings, Inc. as of July 31, 2011 and July 31, 2010, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zurvita Holdings, Inc. as of July 31, 2011 and July 31, 2010, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
 
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has not generated sufficient cash flows from operations to meet its needs.  This raises substantial doubt about the Company's ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 

 

 
/s/ Meeks International, LLC
 
Tampa, Florida
 
October 28, 2011
 
 
21

 

ZURVITA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
 
   
July 31, 2011
   
July 31, 2010
 
         
As Adjusted
 
         
(Note 3)
 
ASSETS
           
Current assets
           
Cash
  $ 906     $ 289,442  
Marketable securities (at fair value)
    36,800       480,000  
Note receivable - related party
    -       1,702,000  
Accounts receivable
    202,710       137,123  
Agent advanced compensation
    -       448,553  
Deferred expenses
    50,315       127,351  
Prepaid expenses
    40,054       41,173  
Total current assets
    330,785       3,225,642  
                 
Property, plant and equipment (net)
    73,551       94,965  
                 
Merchant account deposit
    -       115,333  
Total assets
  $ 404,336     $ 3,435,940  
                 
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
         
Current liabilities
               
Accounts payable
  $ 236,809     $ 249,762  
Accounts payable - related party
    319,816       243,066  
Notes payable - current
    158,127       284,967  
Notes payable - related party
    465,000       -  
Accrued expenses
    313,140       332,217  
Deferred revenue
    114,796       808,957  
Deferred compensation - related party
    97,546       110,238  
Income tax payable
    4,486       2,628  
Total current liabilities
    1,709,720       2,031,835  
                 
Notes payable - long term
    1,961,860       1,639,268  
Fair value of share conversion feature
    -       462,013  
Fair value of warrants
    299,600       6,370,000  
Total liabilities
    3,971,180       10,503,116  
                 
Redeemable preferred stock
    6,026,747       4,550,747  
                 
Stockholders' deficit
               
Common stock ($.0001 par value, 300,000,000 shares authorized; 69,498,713 and 69,497,713 shares issued and 61,498,713 and 61,497,713 shares outstanding as of July 31, 2011 and July 31, 2010, respectively)
    6,950       6,950  
Treasury stock
    (210,000 )     (210,000 )
Additional paid-in capital
    10,384,491       9,978,738  
Accumulated deficit
    (19,775,032 )     (21,393,611 )
Total stockholders' deficit
    (9,593,591 )     (11,617,923 )
                 
Total liabilities, redeemable preferred stock and stockholders' deficit
  $ 404,336     $ 3,435,940  


The accompanying notes are an integral part of these consolidated financial statements.
 
22

 
 
ZURVITA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
For the Year Ended
 
   
July 31,
 
   
2011
   
2010
 
REVENUES
           
Administrative websites
  $ 1,233,233     $ 2,055,060  
Advertising sales
    703,032       936,230  
Commissions
    450,149       479,225  
Consumable products
    958,655       -  
Marketing fees and materials
    836,972       1,911,851  
Membership fees
    446,493       923,654  
Total revenues
    4,628,534       6,306,020  
                 
COST OF SALES
               
Benefit and service cost
    1,143,321       1,577,858  
Consumable products manufacturing cost
    200,142       -  
Sales commissions
    1,863,690       3,042,922  
Total cost of sales
    3,207,153       4,620,780  
                 
GROSS PROFIT
    1,421,381       1,685,240  
                 
OPERATING EXPENSES
               
Depreciation
    37,254       35,555  
Impairment loss on marketing agreement
    -       2,000,000  
Office related expenses
    543,713       412,587  
Payroll and employee benefits
    2,231,322       1,887,185  
Professional fees
    880,835       1,276,437  
Selling and marketing
    1,668,545       2,949,708  
Travel
    206,422       206,967  
Total operating expenses
    5,568,091       8,768,439  
                 
Loss from operations before other income (expenses)
    (4,146,710 )     (7,083,199 )
                 
OTHER INCOME (EXPENSE)
               
Gain on change in fair value of share conversion feature
    462,013       131,413  
Gain (loss) on change in fair value of warrants
    6,094,400       (3,980,580 )
Gain (loss) on extinguishment of debt
    14,000       (50,000 )
Gain on sale of non-component entity
    51,937       -  
Interest expense
    (362,141 )     (270,919 )
Interest income
    4,766       11,741  
Loss on change in fair value of marketable securities
    (443,200 )     (290,000 )
Loss on note receivable
    (52,000 )     -  
Total other income (expense)
    5,769,775       (4,448,345 )
                 
Income (loss) before income taxes
    1,623,065       (11,531,544 )
                 
Income tax (benefit)
    4,486       (19,629 )
                 
Net income (loss)
  $ 1,618,579     $ (11,511,915 )
                 
Basic and diluted earnings (loss) per share
  $ 0.03     $ ( 0.20 )
                 
Basic and diluted weighted average number of common shares outstanding
    61,498,713       56,711,644  

 
The accompanying notes are an integral part of these consolidated financial statements.
 
23

 
 
ZURVITA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
 
   
Shares Common Stock
   
Common Stock
   
Treasury Stock
   
Additional Paid-In Capital
   
Accumulated Deficit
   
Total Stockholder's Deficit
 
Balance, July 31, 2009 (As Adjusted See Note 3)
    56,440,000     $ 6,444     $ (210,000 )   $ 9,094,182     $ (9,881,696 )   $ (991,070 )
                                                 
Share-based compensation
    4,203,447       421       -       618,006       -       618,427  
                                                 
Exercise of comon stock warrants
    60,565       6       -       30,276       -       30,282  
                                                 
Reclassification of liability warrants to equity
    593,701       59       -       186,294       -       186,353  
                                                 
Issuance of common stock in connection with debt restructure
    200,000       20       -       49,980       -       50,000  
                                                 
Net loss available to common stockholders
    -       -       -       -       ( 11,511,915 )     (11,511,915 )
                                                 
Balance, July 31, 2010
    61,497,713     $ 6,950     $ ( 210,000 )   $ 9,978,738     $ ( 21,393,611 )   $ ( 11,617,923 )
                                                 
Share-based compensation
    -       -       -       405,253       -       405,253  
                                                 
Exercise of comon stock warrants
    1,000       -       -       500       -       500  
                                                 
Net income available to common stockholders
    -       -       -       -       1,618,579       1,618,579  
                                                 
Balance, July 31, 2011
    61,498,713     $ 6,950     $ ( 210,000 )   $ 10,384,491     $ ( 19,775,032 )   $ ( 9,593,591 )


The accompanying notes are an integral part of these consolidated financial statements.
 
24

 

ZURVITA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
   
For the Year Ended
 
   
July 31, 2011
   
July 31, 2010
 
Cash flows from operating activities
           
Net income (loss)
  $ 1,618,579     $ (11,511,915 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:
         
Amortization of note payable discount
    192,372       140,307  
Amortization of deferred marketing costs
    -       657,400  
Depreciation
    37,255       35,555  
Share-based compensation
    405,253       682,138  
Gain on change in fair value of share conversion feature
    (462,013 )     (131,413 )
Gain on sale of noncomponent entity
    (51,937 )     -  
(Gain) loss on change in fair value of warrants
    (6,094,400 )     3,980,580  
Gain on extinguishment of debt
    (14,000 )     -  
Loss on change in fair value of marketable securities
    443,200       290,000  
Loss on debt restructure
    -       50,000  
Loss on impairment on marketing agreement
    -       2,000,000  
Loss on note receivable
    52,000       -  
Changes in operating assets and liabilities
               
Increase in accounts receivable
    (65,586 )     (89,391 )
Decrease in agent advanced compensation
    448,553       749,793  
Decrease (increase) in deferred expenses
    77,037       (127,351 )
Decrease (increase) in prepaid expenses
    20,745       (17,047 )
Increase in accounts payable and accrued expenses
    306,130       174,429  
Decrease in deferred revenue
    (694,161 )     (125,364 )
Decrease (increase) in deferred compensation related party
    (12,692 )     110,238  
Net cash (used in) operating activities
    (3,793,665 )     (3,132,041 )
                 
Cash flows from investing activities:
               
Net identifiable assets sold
    (63 )     -  
Net proceeds from promissory note recievable
    1,702,000       -  
Purchase of promissory note
    -       (1,702,000 )
Purchase of property and equipment
    ( 15,840 )     (18,484 )
Purchase of marketable securities
    -       (770,000 )
Net cash provided by (used in) investing activities
    1,686,097       (2,490,484 )
                 
Cash flows from financing activities:
               
Advanced security proceeds
    -       -  
Proceeds from borrowings
    465,000       -  
Proceeds from exercise of warrants
    500       30,282  
Proceeds from sale of preferred stock
    1,500,000       5,300,000  
Principal payments made on notes payable
    (146,468 )     (809,268 )
Net cash provided by financing activities
    1,819,032       4,521,014  
                 
Net change in cash balance
    (288,536 )     (1,101,511 )
                 
Beginning cash
    289,442       1,390,953  
                 
Ending cash
  $ 906     $ 289,442  
                 
Supplemental disclosure of cash flow information
               
Cash paid for interest
  $ 13,750     $ 33,435  
                 
Cash paid for taxes
  $ 2,627     $ -  


The accompanying notes are an integral part of these consolidated financial statements.
 
 
25

 
 
ZURVITA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2011 and 2010
 

 
 
NOTE 1 – NATURE OF OPERATIONS

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

Management’s Assessment of Liquidity

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

At July 31, 2011, the Company had negative working capital of approximately $1.3 million, an accumulated deficit of approximately $19.8 million and negative cash flows from operating activities of approximately $3.8 million. Since the date of inception, the Company has used approximately $10.1 million in operations.

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

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

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

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

Revenue Recognition

Administrative Websites

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

Advertising Sales

The Company markets subscriptions to a service that facilitates the ability of customers, typically small business owners, to display commercial advertising via an on-line search directory.  Revenue is recognized ratably over the advertising subscription period.
 
 
26

 

 
Commissions

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

Consumable Products

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

Marketing Fees and Materials

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

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

Membership Fees

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

Refunds and Chargebacks

The Company records a reduction in revenue for estimated refunds and chargebacks from credit card companies based upon actual history and management’s evaluation of current facts and circumstances.   Refunds and chargebacks totaled approximately $129 thousand and $390 thousand for the year ended July 31, 2011 and 2010, respectively, and were recorded as a reduction of revenue in the accompanying statements of operations.  Estimates for an allowance for refunds and chargebacks totaled approximately $10 thousand and $14 thousand is included in accrued expenses in the accompanying  consolidated balance sheets as of July 31, 2011 and July 31, 2010, respectively.

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

Concentration of Credit Risk

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

Use of Estimates
 
The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for sales refunds and chargebacks, capitalization of certain assets, depreciable/amortizable lives, impairment of long-lived assets, determination of amount of allowance for doubtful accounts, the fair value of marketable securities, the expected volatility of common stock, and the fair value of common stock and warrants as well as the allocation of proceeds from the issuance of debt and equity instruments.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
 
 
27

 

Marketable Securities

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

Accounts Receivable
 
Accounts receivable are stated at estimated net realizable value.  Accounts receivable are primarily comprised of balances due from memberships, net of estimated allowances for uncollectible accounts.  In determining collectability, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances.  At July 31, 2011 and July 31, 2010, no allowance was recorded.

Property, Plant and Equipment

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

Share-Based Compensation

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

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

Convertible Instruments

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

Derivative Financial Instruments

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

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

 
28

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

Fair Value Measurements

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

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

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

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

Earnings (Loss) Per Share

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

Subsequent Events

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


 
29

 

NOTE 3 - RESTATEMENT

On July 30, 2009, the Company entered into a marketing and sales agreement with Amacore, pursuant to which the Company agreed to remit its merchant account deposit of $115,333 to Amacore upon its merchant processor’s release of such deposit.  The effect of this obligation was inadvertently not included within the Company’s consolidated balance sheet and consolidated statement of operations for the year ended July 31, 2009. The Company has corrected this error within its comparative financial statements for the year ended July 31, 2011 by retrospectively adjusting the Company’s consolidated balance sheet as of July 31, 2010 and the beginning deficit balance as of July 31, 2009 within the Company’s consolidated statement of stockholders’ deficit.

The effects of this correction on the Company’s financial statements are presented as follows:
 
ZURVITA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS

   
July 31, 2010
         
July 31, 2010
 
   
As Originally Filed
   
Adjustments
   
As Restated
 
ASSETS
                 
Current assets
                 
Cash
  $ 289,442   $       $ 289,442  
Marketable securities (at fair value)
    480,000             480,000  
Note recievable - related party
    1,702,000             1,702,000  
Accounts receivable
    137,123             137,123  
Agent advanced compensation
    448,553             448,553  
Deferred expenses
    127,351             127,351  
Deferred marketing costs
    -             -  
Other assets
    41,173             41,173  
Total current assets
    3,225,642       -       3,225,642  
                         
Property, plant and equipment (net)
    94,965               94,965  
                         
Merchant account deposit
    115,333               115,333  
Total assets
  $ 3,435,940     $ -     $ 3,435,940  
                         
LIABILITIES AND STOCKHOLDERS' DEFICIT
                       
Current liabilities
                       
Accounts payable
  $ 249,762     $       $ 249,762  
Accounts payable - related party
    127,733       115,333       243,066  
Notes payable - current
    284,967               284,967  
Accrued expenses
    332,217               332,217  
Deferred revenue
    808,957               808,957  
Deferred compensation - related party
    110,238               110,238  
Income tax payable
    2,628               2,628  
Total current liabilities
    1,916,502       115,333       2,031,835  
                         
Notes payable - long term
    1,639,268               1,639,268  
Fair value of share conversion feature
    462,013               462,013  
Fair value of warrants
    6,370,000               6,370,000  
Total liabilities
    10,387,783       115,333       10,503,116  
                         
Redeemable preferred stock
    4,550,747               4,550,747  
                         
Stockholders' deficit
                       
Common stock ($.0001 par value, 300,000,000 shares authorized; 69,497,713 shares issued and 61,497,713 shares outstanding as of July 31, 2010)
    6,950               6,950  
Treasury stock
    (210,000 )             (210,000 )
Additional paid-in capital
    9,978,738               9,978,738  
Accumulated deficit
    (21,278,278 )     (115,333 )     (21,393,611 )
Total stockholders' deficit
    (11,502,590 )     (115,333 )     (11,617,923 )
                         
Total liabilities and stockholders' deficit
  $ 3,435,940     $ -     $ 3,435,940  
 
 
30

 
 
NOTE 4 – NONCASH INVESTING AND FINANCING ACTIVITIES

The following table presents a summary of the various noncash investing and financing transactions that the Company entered into during the years ended July 31, 2011 and 2010.
 
   
For the Year Ended
July 31, 2011
   
For the Year Ended
July 31, 2010
 
             
Cashless exercise of warrants
  $ -     $ 122,580  
                 
Common stock issuance for consulting services
    -       134,790  
                 
Common stock issuance for debt restructure
    -       50,000  
                 
Embedded conversion feature on note payable issued
    -       593,426  
                 
Financed insurance agreement
    19,726       22,031  
                 
Interest converted to principal
    130,220       92,387  
                 
Note payable issued for marketing agreement
    -       1,406,574  
                 
Reclassification of warrants liability to equity
    -       186,353  


NOTE 5 – AGENT ADVANCED COMPENSATION

The Company entered into loan agreements with certain of its independent sales agents which represent advanced compensation.  The agreements have an approximately 2 year term; however, if an agent is still selling for the Company at the maturity date then the note is forgiven.  Therefore, the Company is expensing them over the term of the loan.  The expense is recognized in selling and marketing expenses on the statement of operations as it is not directly related to sales of product or services.  Approximately $735 thousand and $1.2 million of expense was recognized for year ended July 31, 2011 and 2010, respectively.  As of July 31, 2011, all notes had matured and were forgiven.  At July 31, 2010, the balance of the loans was approximately $449 thousand.
 
NOTE 6 – DEFERRED EXPENSES

For sales of subscriptions for which the service periods crosses reporting periods, the associated commissions paid to the Company’s sales representatives are deferred and amortized over the subscription period.  As of July 31, 2011 and July 31, 2010, the balances of the deferred commissions were approximately $2 thousand and $127 thousand, respectively, and are classified as a current asset.  The decrease in deferred commissions is due to the decrease in overall revenue.  The remaining approximately $48 thousand of deferred expense at July 31, 2011 is attributable to an advertising agreement where the Company paid in advance for a magazine advertisement, as well as a lead management system.  This agreement did not exist for the year ended July 31, 2010.
 
 
31

 

 
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, Plant and Equipment, net of accumulated depreciation, consist of the following at July 31, 2011 and 2010:

   
July 31, 2011
   
July 31, 2010
 
             
Computer hardware
  $ 36,368     $ 26,558  
Furniture and fixtures
    55,217       54,838  
Equipment and machinery
    30,818       25,168  
Leasehold improvements
    55,560       55,560  
      177,963       162,124  
Less accumulated depreciation
    (104,412 )     (67,159 )
                 
Total
  $ 73,551     $ 94,965  

Depreciation expense for the years ended July 31, 2011 and 2010 was approximately $37 thousand and approximately $36 thousand, respectively.

NOTE 8 – NOTES PAYABLE

Notes payable consist of the following:

   
July 31, 2011
   
July 31, 2010
 
             
             
Related party convertible note payable; face amount $2 million; bearing interest of 6% per annum; secured; principal payment due on October 9, 2012
  $ 1,961,860     $ 1,639,268  
                 
Related party Promissory note payable; bearing interest of 15% per annum; unsecured; due on demand
    465,000       -  
                 
Promissory note payable; bearing interest of 7.5% per annum; unsecured; principal payments due monthly approximately $27 thousand through July 2011; currently in default
    158,127       284,967  
                 
                 
Total notes payable
    2,584,987       1,924,235  
                 
Less current portion
    623,127       284,967  
                 
Total long-term debt
  $ 1,961,860     $ 1,639,268  
 
The convertible note’s principal balance is due three years from the date of issuance and convertible at any time at the option of the holder at a conversion price of $0.25 per share.  The Company has accounted for the conversion feature as an embedded derivative instrument requiring it to be separated from the note payable and reported at fair value.  The fair value of the conversion feature at issuance date was approximately $593 thousand.  The separation of the conversion feature from the note payable resulted in a discount on the note payable and a share conversion liability in the amount of approximately $593 thousand.

The share conversion liability is subject to recurring fair value adjustments each reporting period (see Note 12 - Assets and Liabilities Measured at Fair Value).  The discount is amortized over the life of the note payable using the effective interest method and recorded as interest expense in the statement of operations.  During the years ended July 31, 2011 and 2010, total interest expense related to the convertible note payable was approximately $323 and $241 thousand, respectively.   Of the interest expense recognized for the years ended July 31,  2011 and 2010, approximately $130 thousand and $92 thousand, respectively, was elected by the Company to be deferred and added to the principal of the note.

 
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At July 31, 2011, the said note was convertible into approximately 8.89 million shares of common stock with a market value of approximately $357 thousand.

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

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

As of July 31, 2011
     
       
Current
  $ 623,127  
2012
    2,361,319  
      2,984,446  
Net of discount on convertible note payable
    (399,459 )
    $ 2,584,987  
 
Of the notes payable, approximately $623 thousand is classified as a current liability as of July 30, 2011.

NOTE 9 – ACCRUED EXPENSES
 
Accrued expenses consist of the following at July 31, 2011 and 2010:

   
July 31, 2011
   
July 31, 2010
 
Commissions
  $ 130,705     $ 173,314  
Interest
    32,286       7,672  
Marketing materials
    1,284       37,830  
Payroll
    58,252       41,549  
Professional fees
    -       2,500  
Refund reserve
    10,000       14,192  
Rent
    4,757       8,340  
Sales tax payble
    34,601       19,004  
Unclaimed property
    41,255       27,816  
Total
  $ 313,140     $ 332,217  

NOTE 10- DEFERRED REVENUE

Deferred revenue consists of the following at July 31, 2011 and July 31, 2010:

   
July 31, 2011
   
July 31, 2010
 
Advertising
  $ 20,574     $ 80,563  
Consumable products
    6,806       -  
Direct response media
    45,854       29,674  
Marketing fees
    15,875       582,955  
Member fees
    25,687       115,765  
Total
  $ 114,796     $ 808,957  

NOTE 11 – DEFERRED COMPENSATION

Deferred compensation is made up of compensation due to Mark Jarvis, Co-Chief Executive Officer, and a consultant.  These two individuals deferred their compensation in an effort to manage cash flow while the Company undertook several capital intensive initiatives.  As of July 31, 2011 and July 31, 2010, the balance of deferred compensation was approximately $98 thousand and $110 thousand, respectively.
 
 
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NOTE 12 – ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

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

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

July 31, 2011
Fair Value Measurements at Reporting Date Using
 
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Unobservable Inputs
(Level 3)
   
Total
Fair Value
 
Marketable securities
  $ 36,800     $ -     $ 36,800  
Total assets
  $ 36,800     $ -     $ 36,800  
                         
                         
Share conversion feature
  $ -     $ -     $ -  
Warrants
    -       299,600       299,600  
Total liabilities
  $ -     $ 299,600     $ 299,600  
 
 
July 31, 2010
Fair Value Measurements at Reporting Date Using
 
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Unobservable Inputs
(Level 3)
   
Total
Fair Value
 
Marketable securities
  $ 480,000     $ -     $ 480,000  
Total assets
  $ 480,000     $ -     $ 480,000  
                         
                         
Share conversion feature
  $ -     $ 462,013     $ 462,013  
Warrants
    -       6,370,000       6,370,000  
Total liabilities
  $ -     $ 6,832,013     $ 6,832,013  
 
The Company has categorized its assets and liabilities measured at fair value into the three-level fair value hierarchy, as defined in Note 2, based upon the priority of inputs to respective valuation techniques. Assets included in the level 1 of the fair value hierarchy include marketable securities which are fair valued on a recurring basis using quoted market prices.  Liabilities included within level 3 of the fair value hierarchy presented in the preceding table include a share conversion feature and noncompensatory warrants.  The valuation methodology for liabilities within level 3 uses a combination of observable and unobservable inputs in calculating fair value.

The Company recorded an unrealized loss of $443 thousand and $290 thousand on its marketable securities for the years ended July 31, 2011 and 2010.  These losses have been included in the Statement of Operations caption “Loss on change in fair value of marketable securities.”
 
 
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The changes in level 3 liabilities measured at fair value on a recurring basis during the years ended July 31, 2011 and 2010 are summarized as follows:
 
Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)
Warrants

   
Balance Beginning of Period
   
Reclassification of Liability Warrants to Equity
   
Issuance
   
(Gain) Loss Recognized in Earnings from Change in Fair Value
   
Balance End of Period
 
For the Year Ended July 31, 2011                              
Share conversion feature
  $ 462,013     $ -     $ -     $ (462,013 )   $ -  
Warrants
  $ 6,370,000     $ -     $ 24,000     $ (6,094,400 )   $ 299,600  
 
 
   
Balance Beginning of Period
   
Reclassification of Liability Warrants to Equity
   
Issuance
   
(Gain) Loss Recognized in Earnings from Change in Fair Value
   
Balance End of Period
 
For the Year Ended July 31, 2010                              
Share conversion feature
  $ -     $ -     $ 593,426     $ (131,413 )   $ 462,013  
Warrants
  $ 549,780     $ (186,353 )   $ 2,025,993     $ 3,980,580     $ 6,370,000  

For the years ended July 31, 2011 and 2010, an unrealized gain of approximately $462 thousand and $131 thousand, respectively, are included in earnings within the Statement of Operations caption “Gain on change in fair value of share conversion feature.”

For the years ended July 31, 2011 and 2010, an unrealized gain of $6.1 million and an unrealized loss of $4.0 million, respectively, are included in earnings within the Statement of Operations caption “Gain (loss) on change in fair value of warrants.”  The unrealized gains from the change in the fair value of warrants is a result of a decrease in the Company’s  share price from $0.24 to $0.04 which is used as an input  in the share price used in valuing the warrants.

Fair Value of Financial Instruments

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

NOTE 13—REDEEMABLE PREFERRED STOCK

The Company is authorized to issue 10 million shares of preferred stock with a par value of $0.0001 per share.  The following table summarizes the Preferred Stock issuances and number of Preferred Shares outstanding:

       
 Shares Outstanding at
 Preferred Stock
 
 Date of
       
 Issuance
 
 Issuance
 
 July 31, 2011
 
 July 31, 2010
 Series A
 
 July 30, 2009
 
                  1,750,000
 
                1,750,000
 Series B
 
 October 6, 2009
 
                  2,000,000
 
                2,000,000
 Series C
 
 January 29, 2010
 
                  1,000,000
 
                1,000,000