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EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - Zurvita Holdings, Inc.zurvita_10q-ex3101.htm
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EX-32.1 - CERTIFICATIONS - Zurvita Holdings, Inc.zurvita_10q-ex3201.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)    
x Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934  
     
  For the quarterly period ended January 31, 2013  
     
o Transition report pursuant 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 Rd, Suite 110
Houston, Texas 77024
(Address of principal executive offices) (zip code)

 

 

(713) 464-5002
(Registrant’s telephone number, including area code)

 

 

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 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 Website, 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 x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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 Exchange Act).

Yes o      No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of December 28, 2012:

65,160,954 shares of common stock, par value $0.0001

 

 

1
 

 

ZURVITA HOLDINGS, INC.

 

FORM 10-Q

 

PART I - FINANCIAL INFORMATION

 

  Page No.
Item 1.   Financial Statements.  
   
Condensed Consolidated Balance Sheets – January 31, 2013 (Unaudited) and July 31, 2012 (Audited) 3
   
Condensed Consolidated Statements of Operations (Unaudited) – For the Three and Six Months Ended January 31, 2013 and 2012 4
   
Condensed Consolidated Statements of Cash Flows (Unaudited) – For the Six Months Ended January 31, 2013 and 2012 5
   
Notes to Interim Condensed Consolidated Financial Statements 6
   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations. 20
   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk. 27
   
Item 4.   Controls and Procedures. 27
   

 

 

PART II - OTHER INFORMATION

 

  Page No.
   
   
Item 1.   Legal Proceedings. 27
   
Item 1a. Risk Factors. 27
   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds. 27
   
Item 3.   Defaults Upon Senior Securities. 27
   
Item 4.   Mine and Safety Disclosures. 27
   
Item 5.   Other Information. 27
   
Item 6.   Exhibits. 28
   
Signatures 29

 

2
 

 

ZURVITA HOLDINGS, INC.

CONSOLIDATED BALANCE SHEET

 

   January 31, 2013  July 31, 2012
   (Unaudited)  (Audited)
ASSETS          
Current assets          
Cash  $384,222   $239,375 
Accounts receivable   691,182    347,535 
Prepaid expenses   286,118    37,328 
Inventory   342,504    53,978 
Total current assets   1,704,026    678,216 
           
Property, plant and equipment (net)   57,974    59,473 
           
Merchant account deposit   646,858    213,651 
Total assets  $2,408,858   $951,340 
           
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT 
Current liabilities          
Accounts payable  $425,136   $302,511 
Accounts payable - related party   77,778    125,997 
Notes payable - current   248,881    158,127 
Notes payable - related party   700,000    700,000 
Accrued expenses   1,498,669    837,244 
Deferred revenue   255,589    80,161 
Income tax payable       2,822 
Total current liabilities   3,206,053    2,206,862 
           
Fair value of warrants   298,360    262,800 
Total liabilities   3,504,413    2,469,662 
           
Redeemable preferred stock   8,825,291    8,825,291 
           
Stockholders' deficit          
Common stock ($.0001 par value, 300,000,000 shares authorized; 73,160,954 and 69,498,713 shares issued and 17,878,019 and 61,498,713 shares outstanding as of January 31, 2013 and July 31, 2011, respectively)   7,316    7,316 
Additional paid-in capital   11,438,920    10,469,335 
Accumulated deficit   (20,966,722)   (20,210,264)
Treasury stock   (400,360)   (610,000)
Total stockholders' deficit   (9,920,846)   (10,343,613)
           
Total liabilities, redeemable preferred stock and stockholders' deficit  $2,408,858   $951,340 

 

 

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

 

3
 

 

ZURVITA HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   For the Three Months Ended  For the Six Months Ended
   January 31,  January 31,
   2013  2012  2013  2012
REVENUES                    
Administrative websites  $523,124   $129,475   $885,144   $257,798 
Advertising sales       49,449        108,479 
Commissions   25,158    63,074    61,973    166,832 
Consumable products   6,651,105    856,839    12,279,803    1,754,329 
Marketing fees and materials   61,993    64,917    164,066    140,738 
Membership fees   12,735    18,328    29,829    64,190 
Total revenues   7,274,115    1,182,082    13,420,817    2,492,366 
                     
COST OF SALES                    
Benefit and service cost   171,473    162,893    350,807    335,986 
Consumable products manufacturing cost   1,816,184    202,325    3,385,404    471,995 
Sales commissions   3,804,205    657,046    7,021,661    1,336,714 
Total cost of sales   5,791,862    1,022,264    10,757,872    2,144,695 
                     
GROSS PROFIT   1,482,253    159,818    2,662,945    347,671 
                     
OPERATING EXPENSES                    
Depreciation   9,450    7,735    18,671    16,451 
Office related expenses   117,673    138,414    219,537    270,423 
Payroll and employee benefits   1,683,555    511,468    2,084,708    1,018,007 
Professional fees   147,998    175,454    250,901    392,959 
Selling and marketing   393,623    194,303    735,250    340,235 
Travel   43,024    23,462    77,572    43,864 
Total operating expenses   2,395,323    1,050,836    3,386,639    2,081,939 
                     
(Loss) from operations before other income (expenses)   (913,070)   (891,018)   (723,694)   (1,734,268)
                     
OTHER INCOME (EXPENSE)                    
Gain (loss) on change in fair value of warrants   101,388    45,220    (35,560)   273,620 
Gain (loss) on extinguishment of debt   53,279    (520)   53,279    80,233 
Interest expense   (25,483)   (99,759)   (50,483)   (193,435)
Interest income        1,307         1,307 
(Loss) on change in fair value of marketable securities       (2,400)       (35,200)
Total other income (expense)   129,184    (56,152)   (32,764)   126,525 
                     
(Loss) before income taxes   (783,886)   (947,170)   (756,458)   (1,607,743)
                     
Income taxes       759        1,342 
                     
Net (loss)  $(783,886)  $(947,929)  $(756,458)  $(1,609,085)
                     
Basic and diluted loss per share  $(0.02)  $(0.02)  $(0.02)  $(0.03)
                     
Basic and diluted weighted average number of common shares outstanding   17,878,019    61,574,376    38,955,954    63,336,544 

 

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

 

4
 

 

ZURVITA HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Six Months Ended
   January 31, 2013  January 31, 2012
Cash flows from operating activities          
Net (loss)  $(756,458)  $(1,609,085)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:     
Amortization of note payable discount       104,980 
Depreciation   12,766    16,451 
Share-based compensation   1,179,225    47,362 
Loss (gain) on change in fair value of warrants   35,560    (273,620)
Gain on extinguishment of debt       (80,233)
Loss on change in fair value of marketable securities       35,200 
Changes in operating assets and liabilities          
(Increase) decrease in accounts receivable   (343,650)   10,238 
Increase in prepaid expenses   (259,461)   (85,992)
Increase in inventory   (288,527)    
Increase in deposits   (422,533)     
Increase in accounts payable and accrued expenses   823,764    393,725 
Increase (decrease) in deferred revenue   175,428    (47,542)
Net cash provided by (used in) operating activities   156,114    (1,488,516)
           
Cash flows from investing activities:          
Purchase of promissory note       (210,000)
Purchase of property and equipment   (11,267)   (2,278)
Net cash (used in) investing activities   (11,267)   (212,278)
           
Cash flows from financing activities:          
Proceeds from borrowings       2,800,000 
Principal payments made on notes payable       (476,425)
Net cash provided by financing activities       2,323,575 
           
Net change in cash balance   144,847    622,781 
           
Beginning cash   239,375    906 
           
Ending cash  $384,222   $623,687 
           
Supplemental disclosure of cash flow information          
Cash paid for interest  $709   $6,270 
           
Cash paid for taxes  $2,551   $4,531 

 

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

 

5
 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

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 targeting individuals and families with a strong foothold in small town America and expanding into national urban centers. 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 January 31, 2013, the Company had negative working capital of approximately $1.5 million, an accumulated deficit of approximately $21 million and positive cash flows from operating activities of approximately $156 thousand for the six months then ended. Since the date of inception, the Company has used approximately $9.9 million in operations.

 

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.

 

NOTE 2 – SUMMARY OF SIGNIFICANT 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.  

 

6
 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

Consumable Products

 

The Company markets a line of nutritional drinks under the “Zeal” umbrella. Revenue from the sale of these consumable products is recognized upon shipment of the product.

 

Marketing Fees and Materials

 

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.  

 

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 $77 thousand and $23 thousand for the three months ended January 31, 2013 and 2012, respectively, and $116 thousand and $33 thousand for the six months ended January 31, 2013 and 2012, respectively, and were recorded as a reduction of revenue in the accompanying statements of operations.  Estimates for an allowance for refunds and chargebacks totaling approximately $30 thousand and $10 thousand is included in accrued expenses in the accompanying consolidated balance sheets as of January 31, 2013 and July 31, 2012, 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.

 

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 January 31, 2013 and July 31, 2012, no allowance was deemed necessary therefore none was recorded.

 

 

7
 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

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 fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to dividend yield, volatility, an appropriate risk-free interest rate and the expected life of the option. Many of these assumptions require management’s judgment. The Company’s stock volatility assumption is based upon its historical stock price fluctuations. The Company uses historical data to estimate option forfeiture rates and the expected term of options granted. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant.

 

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.

 

8
 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

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.

 

(Loss) Per Share

 

Basic (loss) per share is calculated by dividing net (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted (loss) per share is calculated by dividing the net (loss) by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect, if any, 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.

 

9
 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

NOTE 3 – NON CASH 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 six months ended January 31,

 

   2013  2012
           
Financed insurance agreement   90,755    48,439 
           
Interest converted to principal       68,683 

 

 

NOTE 4 – NOTES PAYABLE

 

Notes payable consist of the following:

 

   01/31/2013 (Unaudited)  7/31/2012 (Audited)
       
Financing agreement; bearing interest at 4.84% per annum; payable in monthly installments of approximately $2.7 thousand due through July 2013   16,627     
           
Financing agreement; bearing interest at 4.94% per annum; payable in monthly installments of approximately $1.9 thousand due through August 2013   13,113     
           
Financing agreement; bearing interest at 4.47% per annum; payable in monthly installments of approximately $7.6 thousand due through September 2013   61,014     
           
Related party promissory notes payable; bearing interest of 10% per annum; unsecured; due on December 31, 2013   100,000    100,000 
           
Related party promissory notes payable; bearing interest of 10% per annum; unsecured; due on December 31, 2013   600,000    600,000 
           
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    158,127 
           
Total notes payable   948,881    858,127 
           
Less current portion   948,881    158,127 
           
Total long-term debt  $   $700,000 


10
 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

On May 3, 2012, the Company issued to Mark Jarvis a promissory note for $100 thousand. The note accrues interest at 10% per annum and is due on December 31, 2013. As of January 31, 2013, the Company has not repaid the note plus accrued interest of $6.3 thousand.

 

On June 13, 2012, the Company issued to Vicis Capital Managment an on-demand promissory note for $600 thousand. The note accrues interest at 10% per annum and is due December 31, 2013. As of January 31, 2013, the Company has not repaid the note plus accrued interest of $44.9 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%.

 

 

NOTE 5 - ACCRUED EXPENSES

 

Accrued expenses consist of the following at January 31, 2013 and July 31, 2012:

 

   01/31/2013 (Unaudited)  7/31/2012
(Audited)
Commissions  $944,111   $461,295 
Interest   112,915    63,280 
Payroll   110,511    74,202 
Product       59,688 
Refund reserve   30,000    10,000 
Sales tax payable   163,113    93,544 
Services       30,000 
Unclaimed property   40,513    40,513 
Finance agreement   97,506    4,722 
Total  $1,498,669   $837,244 

 

 

NOTE 6 - DEFERRED REVENUE

 

Deferred revenue consists of the following at January 31, 2013 and July 31, 2012:

 

   01/31/2013 (Unaudited)  7/31/2012
(Audited)
Advertising  $592   $3,261 
Conferences   120,897     
Direct response media   24,939    24,939 
Member fees   2,591    4,932 
Website Fees   106,570    47,029 
Total  $255,589   $80,161 

 

11
 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

NOTE 7 – 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 non-compensatory warrants. The fair value of the 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:

 

January 31, 2013

Fair Value Measurements at Reporting Date Using

(Unaudited)


 

   Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Unobservable Inputs
(Level 3)
  Total Fair Value
Share conversion feature  $   $   $ 
Warrants       298,360    298,360 
Total liabilities  $   $298,360   $298,360 

 

 

July 31, 2012

Fair Value Measurements at Reporting Date Using

(Audited)


 

   Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Unobservable Inputs
(Level 3)
  Total Fair Value
Share conversion feature  $   $   $ 
Warrants       262,800    262,800 
Total liabilities  $   $262,800   $262,800 

 

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. 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 approximately $2 thousand and $35 thousand for the three and six months ended January 31, 2012, respectively. The (loss) has been included in the Statement of Operations caption “(Loss) on change in fair value of marketable securities.”

 

The changes in level 3 liabilities measured at fair value on a recurring basis during the three and six months ended January 31, 2013 and the year ended July 31,2012 are summarized as follows:

 

12
 

 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

   Balance Beginning of Period  Issuance  (Gain) Loss Recognized in Earnings from Change in Fair Value  Balance End of Period
For the Six Months Ended January 31, 2013                     
Share conversion feature   $   $   $   $ 
Warrants   $262,800   $   $35,560   $298,360 
                      
                      
    Balance Beginning of Period  Issuance  (Gain) Loss Recognized in Earnings from Change in Fair Value  Balance End of Period
For the Year Ended July 31, 2012                     
Share conversion feature   $   $   $   $ 
Warrants   $299,600   $   $(36,800)  $262,800 

 

For the six months ended January 31, 2013 , an unrealized loss of $36 thousand is included in earnings within the Statement of Operations caption “Gain on change in fair value of 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 8—REDEEMABLE PREFERRED STOCK

 

The Company is authorized to issue 11.35 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
Issuance
  Date of
Issuance
  January 31,
2013
  July 31,
2012
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 
Series C   June 3, 2010    2,300,000    2,300,000 
Series C   June 9, 2011    1,500,000    1,500,000 
Series C   December 28, 2011    2,800,000    2,800,000 
         11,350,000    11,350,000 

 

Series A, Series B and Series C Redeemable Preferred Stock is collectively referred to herein as “Redeemable Preferred Stock.”

 

Significant rights of the Redeemable Preferred Stock are discussed below:

 

13
 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

Dividends

 

The Redeemable Preferred Stock does not accrue dividends.

 

Voting Rights

 

Each holder of the shares of Convertible Preferred Stock shall have the right to the number of votes equal to the number of Conversion Shares then issuable upon conversion of the Redeemable Preferred Stock held by such holder in all matters as to which shareholders are required or permitted to vote, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled to vote, together with the holders of Common Stock as a single class, with respect to any question upon which holders of Common Stock have the right to vote; provided, however, as to any holder of Redeemable Preferred Stock, the right to vote such shares shall be limited to the number of shares issuable to such holder pursuant to certain beneficial ownership limitations (as listed below) as of the record date for such vote. To the extent permitted under applicable corporate law, but subject to certain limitations on corporate actions as disclosed below, the Corporation’s shareholders may take action by the affirmative vote of a majority of all shareholders of the Company entitled to vote on an action. Without limiting the generality of the foregoing, the Company may take any of the actions by the affirmative vote of the holders of a majority of the Redeemable Preferred Stock and the Common Stock and other voting common stock equivalents, voting together as one class.

 

As long as any shares of Redeemable Preferred Stock are outstanding, the Company shall not, without the written consent or affirmative vote of the holders of no-less than 51 percent of the then outstanding stated value of the Redeemable Preferred Stock consenting or voting as a separate class from the common stock, the Company shall not, either directly or by amendment, merger, consolidation or otherwise:

 

(i) amend its certificate or articles of incorporation in any manner that adversely affects the rights of the holders of Convertible Preferred Stock;

 

(ii) alter or change adversely the voting or other powers, preferences, rights, privileges, or restrictions of the Convertible Preferred Stock;

 

(iii) increase the authorized number of shares of preferred stock or  Convertible Preferred Stock or reinstate or issue any other series of preferred stock;

 

(iv)  redeem, purchase or otherwise acquire directly or indirectly any junior securities or any shares pari passu with the Convertible Preferred Stock;

 

(v) directly or indirectly pay or declare any dividend or make any distribution in respect of, any junior securities, or set aside any monies for the purchase or redemption (through a sinking fund or otherwise) of any junior securities or any shares pari passu with the Convertible Preferred Stock;

 

(vi) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to or otherwise pari passu with the Convertible Preferred Stock; or

 

(vii) enter into any agreement with respect to any of the foregoing.

 

Liquidation Preferences

 

Upon any liquidation, dissolution or winding-down of the Company, whether voluntary or involuntary (a “Liquidation”), the holders of the shares of Convertible Preferred Stock shall be paid in cash, before any payment shall be paid to the holders of common stock, or any other junior stock, an amount for each share of Convertible Preferred Stock held by such holder equal to the sum of the Stated Value thereof (such applicable amount payable with respect to a share of Convertible Preferred Stock sometimes being referred to as the “Individual Preferred Liquidation Preference Payment” and with respect to all shares of Convertible Preferred Stock in the aggregate sometimes being referred to as the “Aggregate Liquidation Preference Payment”).  If, upon such liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the assets to be distributed among the holders of shares of Convertible Preferred Stock shall be insufficient to permit payment to the holders of Convertible Preferred Stock of an aggregate amount equal to the Aggregate Liquidation Preference Payment, then the entire assets of the Corporation to be so distributed shall be distributed ratably among the holders of Convertible Preferred Stock (based on the Individual Preferred Liquidation Preference Payments due to the respective holders of Convertible Preferred Stock).

 

The liquidation value of Series A, Series B and Series C Convertible Preferred Stock was $1.75 million, $2 million and $7.6 million, respectively, as of January 31, 2013.

14
 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

Conversion Rights

 

Each share of Redeemable Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the original issue date (subject to beneficial ownership limitations as listed below), and without the payment of additional consideration by the holder thereof, into such number of fully-paid and nonassessable shares of common stock as is determined by dividing the Stated Value per share, by the Conversion Price in effect at the time of conversion. The Conversion Price originally for Series A, B and C shall be $0.0625, $0.25 and $0.25, respectively; provided, however, that the Conversion Price, and the rate at which shares of Redeemable Preferred Stock may be converted into shares of common stock, shall be subject to adjustment as a result of stock dividends, stock splits, and subsequent equity sales at a price lower than the Redeemable Preferred Stock’s Conversion Price. Shares of Convertible Preferred Stock converted into common stock shall be canceled and shall not be reissued.

 

At January 31, 2013, Series A, Series B and Series C Redeemable Preferred Stock is convertible into 28 million, 8 million, 19.2 million, and 11.2 million common shares, respectively. If the Convertible Preferred Stock had been converted as of January 31, 2013, the aggregate market price of the common shares for Series A, Series B and Series C would have been approximately $1.3 million, $360 thousand, $864 thousand, and $504 thousand, respectively.

 

Beneficial Ownership Limitations

 

The Company shall not affect any conversion of the Redeemable Preferred Stock, and a holder shall not have the right to convert any portion of the Redeemable Preferred Stock, to the extent that, after giving effect to the conversion, such holder (together with such holder’s affiliates, and any other person or entity acting as a group together with such holder or any of such holder’s affiliates) would beneficially own in excess 4.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable upon conversion of Redeemable Preferred Stock held by the applicable holder.  The Beneficial Ownership Limitation provisions may be waived by such holder, at the election of such holder, upon not less than sixty one (61) days’ prior notice to the Company, to change the Beneficial Ownership Limitation to 9.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of Convertible Preferred Stock held by the applicable holder and the provisions of this section shall continue to apply.  Upon such a change by a holder of the Beneficial Ownership Limitation from such 4.99% limitation to such 9.99% limitation, the Beneficial Ownership Limitation shall not be further waived by such holder.

 

Redemption Rights of the Company

 

Shares of the Redeemable Preferred Stock shall be redeemable, in whole or in part, at the option of the Company, by resolution of its Board of Directors at any time after the original issue date and before the first (1st) anniversary of the original issue date at a price equal to one hundred and ten percent (110%) of the Stated Value.

 

Redemption Rights of Holder

 

The Redeemable Preferred Stock is redeemable for cash in an amount representing the Stated Value of outstanding Convertible Preferred Stock. The following events give rise to a redemption triggering event:

 

·The Company shall be party to a change of control transaction;
·The Company shall fail to have available a sufficient number of authorized and unreserved shares of common stock to issue to such holder upon a conversion;
·Unless specifically addressed elsewhere in the Convertible Preferred Stock’s Certificate of Designation as a Triggering Event, the Corporation shall fail to observe or perform any other covenant, agreement or warranty contained in the Certificate of Designation, and such failure or breach shall not, if subject to the possibility of a cure by the Company, have been cured within 20 calendar days after the date on which written notice of such failure or breach shall have been delivered;
·There shall have occurred a bankruptcy event or material monetary judgment;

 

If the Company fails to pay the redemption amount as a result of a triggering event on the date it is due, interest will accrue at a rate equal to the lesser of 18% per year, or the maximum rate permitted by applicable law, accruing daily from the date of the triggering event until the amount is paid in full.

 

Events that may result in the redemption for cash of preferred stock, and that are not within a company’s control may require the preferred stock to be classified outside of stockholders’ equity (in the mezzanine section). All of the above triggering events are presumed not to be within our control. Accordingly, these instruments are recorded in our balance sheet in the caption Redeemable Preferred Stock, which is outside of stockholders’ equity. Management estimates the probability of the triggering events to be remote due to the Company’s affiliation with stockholders that represent a majority of the outstanding common and preferred stock. Therefore, the carrying value of the preferred stock has not been increased to the full redemption value.

15
 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

The reason the carrying value is not equal to the redemption amount is due to the allocation of value to certain warrants issued in connection with the preferred stock. The following table summarizes for each preferred stock issuance the value allocated to the warrants and preferred stock:

 

Preferred Stock
Issuance
  Date of
Issuance
  Total
Proceeds Received
  Value
Allocated to Warrants
  Preferred
Stock Carrying Amount
Series A   July 30, 2009   $1,750,000   $539,000   $1,211,000 
Series B   October 6, 2009    2,000,000    930,838    1,069,162 
Series C   January 29, 2010    1,000,000    431,415    568,585 
Series C   June 3, 2010    2,300,000    598,000    1,702,000 
Series C   June 9, 2011    1,500,000    24,000    1,476,000 
Series C   December 28, 2011    2,800,000    1,456    2,798,544 
Total       $11,350,000   $2,524,709   $8,825,291 

 

 

NOTE 9 - COMMON STOCK

 

The Company has authorized 300 million common shares with a par value of $0.0001 per share. On all matters required by law to be submitted to a vote of the holders of common stock, each share of common stock is entitled to one vote per share.

 

For the three and six months ended January 31, 2013, approximately $0 thousand and $1.2 million, respectively, of stock-based compensation expense was recognized, as a result of shares issued to the members of the board for compensation of services. For the three and six months ended January 31, 2012, approximately $18 thousand and $47 thousand, respectively, of stock-based compensation expense was recognized, as a result of various share issuances..

 

On May 8, 2012, the Company and Amacore entered into a Stock Purchase Agreement (the “Amacore Purchase Agreement”) whereby the Company purchased 37.21 million shares of the Company’s common stock from Amacore. Pursuant to the Amacore Purchase Agreement, the Company paid to Amacore a purchase price equal to $300 thousand. The treasury stock was recorded at cost.

 

On May 8, 2012, the Company and Infusion entered into a Stock Purchase Agreement (the “Infusion Purchase Agreement”) whereby the Company purchased 15.2 million shares of the Company’s common stock from Infusion. Pursuant to the Infusion Purchase Agreement, the Company paid to Infusion a purchase price equal to $100 thousand. The treasury stock was recorded at cost.

 

On December 26, 2012, the Company issued $6.5 million shares from treasury to each of the four board members for compensation of services. The expense was recorded at the fair value of the Company’s common stock as of the issuance date.

 

16
 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

NOTE 10–COMPENSATORY WARRANTS

 

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 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’s designated Compensation Committee.

 

The following table summarizes the status of all warrants outstanding and exercisable at January 31, 2013.

 

Outstanding and Exercisable Warrants
Range of Exercise Prices  Number of Warrants  Weighted Average Exercise Price  Weighted Average Remaining Contractual Life in Years
 $0.06 to $0.49   71,908,000   $0.17    4.11 
 $0.50 to $0.99   100,000   $0.75    2.03 
    72,008,000   $0.17    4.11 

 

 

Assumptions used to determine the fair value of the compensatory warrants granted during the three months ended January 31, 2013 and during the year ended July 31, 2012 are as follows.

 

    January 31, 2013   July 31, 2012
Expected dividends   0%   0%
Expected volatility   66%   70%
Risk free interest rate   0.27% - 0.53%   0.25% - 0.94%
Expected life   5 years   5 years

 

17
 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

The following table summarizes the activity for compensatory warrants classified as equity for the three months ended January 31, 2013.

 

   Compensatory Equity Warrants  Weighted Average Exercise Price  Weighted Average Remaining Contractual Term  Aggregate Intrinsic Value
Outstanding at July 31, 2012   5,608,000   $0.22    3.00   $ 
Granted                
Exercised                
Cancelled or Expired                
Outstanding at January 31, 2013   5,608,000   $0.22    3.00   $ 
Exercisable at January 31, 2013   5,608,000   $0.22    3.00   $ 

 

 

A summary of the status of the Company's non-vested compensatory equity warrants as of January 31, 2013, and the changes during the six months ended January 31, 2013, is presented below.

 

   Compensatory Warrants  Weighted Average Grant-Date Fair Value
 Non-vested at July 31, 2012    37,500   $0.003 
 Issued         
 Vested    (37,500)    
 Exercised         
 Non-vested at January 31, 2013       $ 

 

Non-compensatory Liability Warrants

 

There were approximately 66.4 million non-compensatory warrants outstanding as of January 31, 2013, all of which were classified as liabilities. These warrants are classified as liability instruments as net share settlement is not considered within the Company’s control or certain exercise prices are not fixed which has the potential to cause a variable number of shares and/or value exchange upon exercise.

 

The fair value of each option award classified as a liability on the balance sheets is estimated on the date of the grant using the Black-Scholes Pricing Model and the assumptions noted in the following table. The stock price used approximates the market price less a marketability discount of 30%. Expected volatility was determined by independent valuation specialist. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury Strip yield curve in effect at the time of grant. The expected term of options granted represents the period of time that options granted are expected to be outstanding.

 

Assumptions used to determine the fair value of the non-compensatory warrants outstanding during the three months ended January 31, 2013 and granted at and during the year ended July 31, 2012 are as follows.

 

    January 31, 2013   July 31, 2012
Expected dividends   0%   0%
Expected volatility   66%   70%
Risk free interest rate   0.53% - 1.17%   0.69% - 1.28%
Expected life   7 years   7 years

 

 

There were no vested or non-vested compensatory liability issuances, exercises or expirations during the six months ended January 31, 2013.

 

18
 

 

ZURVITA HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED

(UNAUDITED)

 

 

Stock-Based Compensation Expense

 

For the six months ended January 31, 2013 and 2012, the Company recognized stock-based compensation expense, including both expense related to compensatory warrants and expense related to share awards, with the Statement of Operations as follows:

 

   For the Six Months Ended
January 31, 2013
  For the Six Months Ended
January 31, 2012
Payroll and employee benefits  $1,179,225   $47,362 
Total  $1,179,225   $47,362 

 

On December 26, 2012, the Company issued 6.5 million shares from treasury to each of the four board members for compensation of services. The expense was recorded at the fair value of the Company’s common stock as of the issuance date.

 

 

NOTE 11 - RELATED PARTY TRANSACTIONS

 

Commissions Paid

 

There are immediate family members of Mr. Jarvis, who operate as independent sales consultants who were paid commission compensation which approximated $48 and $104 thousand, respectively, for the three and six months ended January 31, 2013, and approximately $36 and $63 thousand, respectively, for the three and six months ended January 31, 2012. These payments were for work they performed on behalf of the Company.

 

Note Payable to Mark Jarvis

 

On June 13, 2012, the Company issued to Mark Jarvis an on-demand promissory note for $100 thousand. The note accrued interest at 10% per annum. As of January 31, 2013, the Company had not repaid the note plus accrued interest of $6.1 thousand.

 

Note Payable to Vicis Capital Management

 

On May 3, 2012, the Company issued to Vicis Capital Management an on-demand promissory note for $600 thousand. The note accrued interest at 10% per annum. As of January 31, 2013 the Company had not repaid the note plus accrued interest of $44.9 thousand.

 

19
 

 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Information contained in this discussion, other than historical information, is considered “forward-looking statements” that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives including, without limitation, statements about the Company’s ability to continue operations through January 31, 2013, the liability of the Company for claims made in pending litigation, plans for future products, strengthening our relationship with our various sales organizations, our marketing intentions, our anticipated products, efforts to expand distribution channels, Zurvita Holdings Inc. (“Zurvita”) anticipated growth in sales and margins, and our ability to achieve profitability. In some cases, you may identify forward-looking statements by words such as “may,” “should,” “plan,” “intend,” “potential,” “continue,” “believe,” “expect,” “predict,” “anticipate” and “estimate,” the negative of these words or other comparable words.  These statements are only predictions.  One should not place undue reliance on these forward-looking statements.  The forward-looking statements are qualified by their terms and/or important factors, many of which are outside the Company’s control, involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made. The forward-looking statements are based on the Company’s beliefs, assumptions and expectations of our future performance, taking into account information currently available to the Company.  These beliefs, assumptions and expectations can change as a result of many possible events or factors, including those events and factors described in “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended July 31, 2012 filed with the Securities and Exchange Commission on November 14, 2012 (the “2011 Annual Report”), not all of which are known to the Company.  If a change occurs, the Company’s business, financial condition, liquidity and results of operations may vary materially from those expressed in the aforementioned forward-looking statements. The Company will update this forward-looking information only to the extent required under applicable securities laws.  Neither the Company nor any other person assumes responsibility for the accuracy or completeness of these forward-looking statements.

 

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto, and other financial information included elsewhere in this Form 10-Q.

 

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 unaudited condensed 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.

 

  · Results of operations – This section provides an analysis of our results of operations comparing the three months ended October 31, 2012 and 2011.  This analysis is provided on a consolidated basis.

 

  · Liquidity and capital resources – This section provides an analysis of our cash flows for the three months ended October 31, 2012 and 2011 as well as a discussion of our liquidity and capital resources.

 

Overview

 

Description of Business

 

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 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.

 

20
 

 

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 earn money on a part-time basis or make a living on a full-time basis and to obtain long-term financial security through creating long-term residual income.

 

In February 2011 Zurvita entered into the growing Health & Wellness industry with its launch of “Zeal”, a nutritional drink, and entered the weight management market with the launch of Zurvita’s Zeal Weight Management Program in 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. Zurvita added to its Zeal for Life program, renowned fitness expert and motivational speak Peter Neilson whose partnership with Zurvita is training and consulting on wellness and fitness programs. Mr. Neilson’s dedication to health, fitness and lifestyle have propelled him to the top of the world of body building, earning Nielsen titles like Mr. International Universe, Mr. World and well over 50 others.

 

 

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 health and wellness products. 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.

 

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RESULTS OF OPERATIONS

 

   For the Three Months Ended January 31,  For the Six Months Ended January 31,
   2013  2012  Increase (Decrease)  2013  2012  Increase (Decrease)
                   
Revenues  $7,274,115   $1,182,082   $6,092,033   $13,420,817   $2,492,366   $10,928,451 
Cost of Sales   5,791,862    1,022,264    4,769,598    10,757,872    2,144,695    8,613,177 
                               
Gross Profit   1,482,253    159,818    1,322,435    2,662,945    347,671    2,315,274 
                               
Operating Expenses   2,395,323    1,050,836    1,344,487    3,386,639    2,081,939    1,304,700 
Operating Income (Loss)   (913,070)   (891,018)   (22,052)   (723,694)   (1,734,268)   1,010,574 
                               
Other (Loss) Income   129,184    (56,152)   185,336    (32,764)   126,525    (159,289)
                               
Income (Loss) Before Income Taxes   (783,886)   (947,170)   163,284    (756,458)   (1,607,743)   851,285 
                               
Income Taxes       759    (759)       1,342    (1,342)
                               
Net Income (Loss )  $(783,886)  $(947,929)  $164,043   $(756,458)  $(1,609,085)  $852,627 
                               
Basic and Diluted Earnings (Loss) Per Share   (0.04)  $(0.02)       $(0.02)  $(0.03)     

 

 

Revenue:

 

For the three and six months ended January 31, 2013, total revenue was $7.2 million and $13.4 million respectively. Due to the Company’s new, consumable product that launched subsequent to October 31, 2011, Zurvita has realized a $10.9 million increase over the six months ended January 31, 2012. The various components of total revenue are discussed below.

 

Administrative Websites

Administrative website sales were approximately $523 and $885 thousand for the three and six months, respectively, ended January 31, 2013, as compared to approximately $129 and $258 thousand for the three and six months, respectively, ended January 31, 2012. Since the Company’s launch of Zeal, the Company has experienced a significant increase in new consultants joining the business resulting in increased administrative websites.

 

Advertising Sales

The Company’s advertising sales were $0 thousand for both the three and six months ended January 31, 2013, as compared to approximately $50 and $108 thousand for the three and six months, respectively, ended January 31, 2012. The Company divested itself of Zlinked due to the technical shortcomings of the sales technology platform.

 

Commissions

The Company’s commission revenue for the three and six months ended January 31, 2013, was approximately $25 and $62 thousand, respectively, as compared to approximately $63 and $167 thousand for the three and six months ended January 31, 2012, respectively. The approximate $100 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, 2012.

 

Consumable Products

The Company’s consumable products revenue represents Zeal product sales. For the three and six months ended January 31, 2013, consumable products revenue was approximately $6.7 and $12.3 million, respectively. For the three and six months ended January 31, 2012, the revenue was approximately $857 thousand and $1.8 million, respectively. The Company has experienced significant growth percentages month over month resulting in the $10.5 million increase in a 12 month period.

 

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Marketing Fees and Materials

The Company’s marketing fees and materials revenue for the three and six months ended January 31, 2013, was approximately $62 and $164 thousand, respectively, as compared to approximately $65 and $141 thousand, respectively, for the three and six months ended January 31, 2012. The company continues to provide marketing materials to the consultants for purchase.

 

Membership Fees

The Company’s membership fees were approximately $13 and $30 thousand, respectively, for the three and six months ended January 31, 2013, as compared to $18 and $64 thousand, respectively, for the three and six months ended January 31, 2012. The decrease in membership revenue is a result of the Company’s efforts to focus on the sale of consumable products.

 

Cost of Sales:

 

Total cost of sales for the three and six months ended January 31, 2013, was approximately $5.8 and $10.8 million, respectively, as compared to approximately $1.1 and $2.1 million for the three and six months ended January 31, 2012. The increase is a direct result of the increased revenue from the sale of consumable products.

 

Benefit and Service Cost
Benefit and service cost represents the direct cost of the membership and subscription products sold such as administrative websites, marketing materials and membership fees. Benefit and service cost for the three and six months ended January 31, 2013, was approximately $171 and $351 thousand, respectively, as compared to approximately $162 and $336 thousand for the three and six months ended January 31, 2012.

 

Consumable Products Manufacturing Cost
Consumable products manufacturing cost represents Zeal’s manufactured cost and the cost of shipping the product to customers. For the three and six months ended January 31, 2013, the cost was approximately $1.8 and $3.4 million, respectively, as compared to approximately $202 and $472 thousand for the three and six months ended January 31, 2012. The increase is a direct result of the increased revenue from the sale of consumable products.

 

Sales Commissions
The Company pays its independent sales agents on a commission basis. Sales commissions for the three and six months ended January 31, 2013, the cost was approximately $3.8 and $7 million, respectively, as compared to approximately $657 and $1.3 million for the three and six months ended January 31, 2012. The increase is the direct result of the increased revenue from the sale of consumable products.

 

Gross Profit:

 

For the three and six months ended January 31, 2013, gross profit was approximately $1.5 and $2.7 million, respectively, as compared to approximately $150 and $348 thousand for the three and six months ended January 31, 2012. The Company started the year with a very aggressive compensation plan on the consumable products that was later scaled back to increase margins and increase gross profit. The increase is a reflection of the changes.

 

Operating Expenses:

 

Our operating expenses for the three and six months ended January 31, 2013, was approximately $2.4 and $3.4 million, respectively, as compared to approximately $1.1 and $2.1 million for the three and six months ended January 31, 2012. The Company has continued to bring the operating expenses under control and operating on a tight budget.

 

The table below sets forth components of our operating expenses for the three and six months ended January 31, 2013, compared to the corresponding prior year period:

 

   For the Three Months Ended January 31,  For the Six Months Ended January 31,
   2013  2012  Increase (Decrease)  2013  2012  Increase (Decrease)
Depreciation  $9,450   $7,735   $1,715   $18,671   $16,451   $2,220 
Office related expenses   117,673    138,414    (20,741)   219,537    270,423    (50,886)
Payroll and benefits   1,683,555    511,468    1,172,087    2,084,708    1,018,007    1,066,701 
Professional fees   147,998    175,454    (27,456)   250,901    392,959    (142,060)
Selling and marketing   393,623    194,303    199,320    735,250    340,235    395,015 
Travel   43,024    23,462    19,562    77,572    43,864    33,708 
                               
Total operating expenses  $2,395,323   $1,050,836   $1,344,487   $3,386,639   $2,081,939   $1,304,700 

 

 

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Depreciation expense for the three and six months ended January 31, 2013, was approximately $9 and $19 thousand, respectively, as compared to approximately $8 and $16 million for the three and six months ended January 31, 2012.

 

Office related costs include rent, insurance, utilities and office maintenance. For the three and six months ended January 31, 2013, was approximately $118 and $220 thousand, respectively, as compared to approximately $138 and $270thousand for the three and six months ended January 31, 2012.

 

Payroll and related expenses for the three and six months ended January 31, 2013, was approximately $1.7 and $2.1 million, respectively, as compared to approximately $511 thousand and $1 million for the three and six months ended January 31, 2012.

The increase is due to the recognition of stock based compensation to the board member for compensation of services.

 

Professional fees consist of consulting, accounting fees, contract labor and legal costs. For the three and six months ended January 31, 2013, was approximately $148 and $251 thousand, respectively, as compared to approximately $175 and $393 thousand for the three and six months ended January 31, 2012.

 

Selling and marketing expenses for the three and six months ended January 31, 2013, was approximately $393 and $735 thousand, respectively, as compared to approximately $194 and $340 thousand for the three and six months ended January 31, 2012. The significant increase is due to marketing efforts towards the sale of consumable products.

 

Business travel expenses for the three and six months ended January 31, 2013, was approximately $43 and $78 thousand, respectively, as compared to approximately $23 and $43 thousand for the three and six months ended January 31, 2012.

 

Other Income (Expense):

 

Gain 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 three and six months ended January 31, 2013, the change in fair value of these warrants was approximately a gain of $101 thousand and a loss of $36 thousand, respectively. For the three and six months ended January 31, 2012, the change in fair value of these warrants was approximately a gain of $45 and $274 thousand, respectively. The loss in fair value for the six months ended January 31, 2013 is a result of the decline in share price from $0.05 to $0.45 which is used as an input in fair valuing the warrants. These losses and gains are non-cash items not impacting operating cash flows or results of operations before other income and expenses. See Note 7 – Assets and Liabilities Measured at Fair Value, to financial statements contained within Item 1 of Part 1 of this Form 10Q for additional information with respect to the estimation of the fair value of these warrants.

 

Interest expense

 

Interest expense for the three and six months ended January 31, 2013, was approximately $25 and $50 thousand, respectively, as compared to approximately $100 and $193 thousand for the three and six months ended January 31, 2012. The decrease is a result of the prior period extinguishment of a $2 million interest bearing convertible note originally issued on October 9, 2009 and extinguished on May 8, 2012.

 

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 $0 for the three and six months ended January 31, 2013, as compared to the unrealized loss of $2 and $35 thousand recorded for the three and six months ended January 31, 2012, respectively. These losses are a non-cash item not impacting operating cash flows or results of operations before other income and expenses. See Note 7– Assets and Liabilities Measured at Fair Value, to financial statements contained within Item 1 of Part 1 of this Form 10Q for additional information with respect to the determination of fair value for the Company’s marketable securities.

 

Income Taxes:

 

For the three and six months ended January 31, 2013, the Company estimated approximately $0 in tax expense as compared to $759 and $1342 for the three and six months ended January 31, 2012, repectively.

 

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.

 

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Net (Loss):

 

The Company had net loss of approximately $784 and $756 thousand for the three and six months ended January 31, 2013, as compared to a net loss of approximately $947 thousand and $1.6 million for the three and six months ended January 31, 2012.

 

BALANCE SHEET ARRANGEMENTS

 

We do not have any off balance sheet arrangements as of January 31, 2013.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The following table compares our cash flows for the six month period ended January 31, 2013 to the corresponding prior period:

 

   January 31, 2013  January 31, 2012
           
Net cash provided by (used in) operating activities  $156,114   $(1,488,516)
Net cash (used in) investing activities   (11,267)   (212,278)
Net cash provided by financing activities       2,323,575 
           
Net increase in cash  $144,847   $622,781 

 

Future minimum rental payments required under the Company’s operating leases that have initial or remaining non-cancelable lease terms in excess of one year on a fiscal year basis are as follows:

 

As of January 31, 2013:
        
 2013   $103,556 
 2014    112,970 
 2015    112,970 
     $329,496 

 

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 January 31, 2013, the Company had negative working capital of approximately $802 thousand, an accumulated deficit of approximately $21 million and positive cash flows from operating activities of approximately $156 thousand.

 

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 $949 thousand and $858 thousand of outstanding notes payable as of January 31, 2013 and July 31, 2012, respectively.

 

CRITICAL ACCOUNTING POLICIES

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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.

 

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While all of our accounting policies impact the consolidated financial statements, certain policies are viewed to be critical. Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and that require management’s most subjective or complex judgments and estimates. Management believes the policies that fall within this category are the policies on revenue recognition and accounts receivable and other intangible assets, investments, financial and derivative instruments.

 

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.

 

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

 

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.

 

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.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on this evaluation, our principal executive and principal financial officer concluded that our disclosure controls and procedures are ineffective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Presently, our disclosure controls and procedures are not designed adequately to provide reasonable assurance that such information is accumulated and communicated to our management. This conclusion was based on the material weaknesses identified with regard to internal controls over financial reporting, as described in the Company’s Annual Report for the year ended July 31, 2012.

 

There was no change in our internal control over financial reporting that occurred during the quarter covered by this Quarterly Report on Form 10-Q that materially affected, or is reasonably likely to materially affect, our control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

As of January 31, 2013, there was no material changes in the Company’s legal proceedings as previously disclosed in the Company’s 2012 Annual Report.

 

Item 1a. Risk Factors

 

Not applicable.

 

Item 2. Unregistered Sales of Equity and Use of Proceeds

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures Not Applicable

 

Item 5. Other Information.

 

None

 

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Item 6. Exhibits

 

(a) Exhibits:

 

 

   
31.2 Certification of the Co-Chief Executive Officer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1 Certification pursuant to Section 906 Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

 

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: April 8, 2013 /s/ Jay Shafer
  Jay Shafer
  Co-Chief Executive Officer

 

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EXHIBIT INDEX

 

   
31.2 Certification of the Co-Chief Executive Officer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1 Certification pursuant to Section 906 Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

 

 

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