Yes
|
X
|
No
|
Yes
|
|
No
|
X
|
Yes
|
|
No
|
X
|
Part
I Financial Information
|
3
|
Item
1. Financial Statements
|
3
|
Consolidated
Balance
Sheets
|
3
|
Consolidated
Statements of
Operations
|
4
|
Consolidated
Statements of Cash
Flows
|
5
|
Notes
to Consolidated Financial
Statements
|
6
|
Report
of Independent Registered
Public Accounting Firm
|
20
|
Item
2. Management’s Discussion and Analysis or Plan of
Operation
|
21
|
Item
3. Controls and Procedures
|
31
|
Part
II –Other Information
|
32
|
Item
1. Legal Proceedings
|
32
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
32
|
Item
3. Defaults Upon Senior Securities
|
32
|
Item
4. Submission of Matters to a Vote of Security Holders
|
32
|
Item
5. Other Information
|
32
|
Item
6. Exhibits
|
33
|
September
30,
|
December
31,
|
|||||||
ASSETS
|
2007
|
2006
|
||||||
(Unaudited)
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$ |
157,775
|
$ |
269,726
|
||||
Marketable
securities, available for sale, at fair value
|
-
|
793,183
|
||||||
Receivables
|
17,586
|
44,576
|
||||||
Inventory,
net
|
485,837
|
700,664
|
||||||
Other
assets
|
68,875
|
77,319
|
||||||
Current
assets of discontinued operations
|
2,139
|
110,521
|
||||||
Total
current assets
|
732,212
|
1,995,989
|
||||||
RESTRICTED
SECURITIES
|
81,513
|
78,723
|
||||||
RECEIVABLES
|
17,687
|
28,374
|
||||||
PROPERTY
AND EQUIPMENT, net
|
2,569,185
|
2,794,393
|
||||||
COVENANTS
NOT TO COMPETE and other intangibles, net
|
289,107
|
324,553
|
||||||
OTHER
ASSETS
|
320,015
|
457,344
|
||||||
NONCURRENT
ASSETS OF DISCONTINUED OPERATIONS
|
800,000
|
1,253,480
|
||||||
TOTAL
|
$ |
4,809,719
|
$ |
6,932,856
|
||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ |
211,188
|
$ |
559,920
|
||||
Accrued
commissions and bonuses
|
261,454
|
268,717
|
||||||
Accrued
other expenses
|
254,478
|
400,204
|
||||||
Accrued
sales tax liability
|
224,874
|
200,481
|
||||||
Deferred
compensation
|
98,657
|
96,378
|
||||||
Notes
payable
|
726,664
|
257,542
|
||||||
Capital
lease obligations
|
117,383
|
104,591
|
||||||
Current
liabilities of discontinued operations
|
315,875
|
360,582
|
||||||
Total
current liabilities
|
2,210,573
|
2,248,415
|
||||||
LONG-TERM
LIABILITIES:
|
||||||||
Notes
payable
|
388,555
|
625,220
|
||||||
Capital
lease obligations
|
134,887
|
95,527
|
||||||
Deferred
compensation
|
213,758
|
281,101
|
||||||
Lease
abandonment liability
|
-
|
55,123
|
||||||
Liabilities
of discontinued operations
|
1,338,576
|
1,570,359
|
||||||
Total
liabilities
|
4,286,349
|
4,875,745
|
||||||
COMMITMENT
AND CONTINGENCIES (Note 8)
|
||||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Common
stock - $.0001 par value; authorized 495,000,000 shares; issued 9,107,419
and 9,107,419 shares; outstanding 8,515,824 and 8,515,824 shares,
respectively
|
$ |
905
|
$ |
905
|
||||
Paid-in
capital
|
23,670,379
|
23,609,734
|
||||||
Notes
receivable for exercise of options
|
(31,000 | ) | (31,000 | ) | ||||
Accumulated
deficit
|
(20,484,135 | ) | (18,889,749 | ) | ||||
Total
capital and accumulated deficit
|
3,156,149
|
4,689,890
|
||||||
Less
cost of treasury stock (591,595 shares)
|
(2,632,779 | ) | (2,632,779 | ) | ||||
Total
stockholders' equity
|
523,370
|
2,057,111
|
||||||
TOTAL
|
$ |
4,809,719
|
$ |
6,932,856
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
Net
sales
|
$ |
1,706,402
|
$ |
2,410,251
|
$ |
6,121,032
|
$ |
7,316,600
|
||||||||
Cost
of sales:
|
||||||||||||||||
Cost
of product
|
602,431
|
629,218
|
1,863,837
|
2,121,459
|
||||||||||||
Associate
commissions
|
489,291
|
793,570
|
1,884,863
|
2,353,968
|
||||||||||||
Total
cost of sales
|
1,091,722
|
1,422,788
|
3,748,700
|
4,475,427
|
||||||||||||
Gross
profit
|
614,680
|
987,463
|
2,372,332
|
2,841,173
|
||||||||||||
Marketing
and administrative expenses:
|
||||||||||||||||
Marketing
|
106,587
|
211,127
|
489,114
|
454,122
|
||||||||||||
Administrative
|
881,924
|
1,134,913
|
2,695,829
|
2,589,997
|
||||||||||||
Total
marketing and administrative expenses
|
988,511
|
1,346,040
|
3,184,943
|
3,044,119
|
||||||||||||
Income
(loss) from operations
|
(373,831 | ) | (358,577 | ) | (812,611 | ) | (202,946 | ) | ||||||||
Other
income (expense):
|
||||||||||||||||
Interest
and dividends, net
|
(143,931 | ) | (145,095 | ) | (462,919 | ) | (136,007 | ) | ||||||||
Other
, net
|
4,659
|
7,041
|
43,851
|
51,000
|
||||||||||||
Total
other income (expense)
|
(139,272 | ) | (138,054 | ) | (419,068 | ) | (85,007 | ) | ||||||||
Income
(loss) from continuing operations before taxes
|
(513,103 | ) | (496,631 | ) | (1,231,679 | ) | (287,953 | ) | ||||||||
Income
tax expense (benefit)
|
-
|
-
|
-
|
-
|
||||||||||||
Income
(loss) from continuing operations
|
(513,103 | ) | (496,631 | ) | (1,231,679 | ) | (287,953 | ) | ||||||||
Discontinued
operations (Note 11)
|
||||||||||||||||
Loss
from discontinued operations, net of tax
|
(350,142 | ) | (52,475 | ) | (362,579 | ) | (573,707 | ) | ||||||||
Net
loss
|
$ | (863,245 | ) | $ | (549,106 | ) | $ | (1,594,258 | ) | $ | (861,660 | ) | ||||
Net
loss per share:
|
||||||||||||||||
Basic:
|
||||||||||||||||
Income
(loss) from continuing operations
|
$ | (0.06 | ) | $ | (0.06 | ) | $ | (0.15 | ) | $ | (0.04 | ) | ||||
Loss
from discontinued operations net of tax
|
(0.04 | ) | (0.01 | ) | (0.04 | ) | (0.07 | ) | ||||||||
Net
loss per share
|
$ | (0.10 | ) | $ | (0.07 | ) | $ | (0.19 | ) | $ | (0.11 | ) | ||||
Diluted:
|
||||||||||||||||
Income
(loss) from continuing operations
|
$ | (0.06 | ) | $ | (0.06 | ) | $ | (0.15 | ) | $ | (0.04 | ) | ||||
Loss
from discontinued operations net of tax
|
(0.04 | ) | (0.01 | ) | (0.04 | ) | (0.07 | ) | ||||||||
Net
loss per share
|
$ | (0.10 | ) | $ | (0.07 | ) | $ | (0.19 | ) | $ | (0.11 | ) | ||||
Shares
used in computing net loss per share:
|
||||||||||||||||
Basic
|
8,515,824
|
7,828,322
|
8,515,824
|
7,819,072
|
||||||||||||
Diluted
|
8,515,824
|
7,828,322
|
8,515,824
|
7,819,072
|
Nine
months ended
|
||||||||
September
30,
|
||||||||
2007
|
2006
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
||||||
Net
Loss
|
$ | (1,594,258 | ) | $ | (861,660 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Net
loss from discontinued operations
|
362,579
|
573,707
|
||||||
Depreciation
and amortization
|
555,213
|
533,110
|
||||||
Amortization
of note valuation discount
|
323,332
|
102,956
|
||||||
Bad
debt expense (recovery)
|
(9,301 | ) | (27,789 | ) | ||||
Stock
option compensation expense
|
60,645
|
14,682
|
||||||
Gain
on sale of assets
|
(2,492 | ) | (36,927 | ) | ||||
Gain
on lease cancellation
|
(120,755 | ) |
-
|
|||||
Realized
loss on sale of marketable securities
|
-
|
108
|
||||||
Changes
in operating assets and liabilities :
|
||||||||
Receivables
|
45,544
|
(17,738 | ) | |||||
Inventory
|
214,827
|
84,487
|
||||||
Other
assets
|
6,358
|
(27,776 | ) | |||||
Accounts
payable and accrued expenses
|
(384,082 | ) | (84,031 | ) | ||||
Lease
abandonment liability
|
(27,744 | ) | (56,156 | ) | ||||
Deferred
compensation
|
(65,064 | ) | (41,789 | ) | ||||
Net
operating activities of discontinued operations
|
146,076
|
(520,464 | ) | |||||
Net
cash used in operating activities
|
(489,122 | ) | (365,280 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchases
of property and equipment
|
(27,433 | ) | (149,097 | ) | ||||
Sales
of property and equipment
|
13,000
|
84,512
|
||||||
Receipts
on notes receivable
|
1,434
|
42,060
|
||||||
Purchase
of marketable securities, available for sale
|
-
|
(1,062,666 | ) | |||||
Sales
of marketable securities, available for sale
|
790,393
|
422,488
|
||||||
Net
investing activities of discontinued operations
|
9,102
|
43,926
|
||||||
Net
cash provided by (used in) investing activities
|
786,496
|
(618,777 | ) | |||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Bank
overdrafts
|
-
|
(203,500 | ) | |||||
Net
proceeds from issuance of notes
|
-
|
1,897,000
|
||||||
Principal
payment on capital lease obligations
|
(86,066 | ) | (62,480 | ) | ||||
Deferred financing fees paid |
-
|
(160,000 | ) | |||||
Note
payable principal payments
|
(90,875 | ) |
-
|
|||||
Net
financing activities of discontinued operations
|
(232,384 | ) | (151,438 | ) | ||||
Net
cash provided by (used in) financing activities
|
(409,325 | ) |
1,319,582
|
|||||
NET
DEC/INC IN CASH AND CASH EQUIVALENTS
|
(111,951 | ) |
335,525
|
|||||
CASH
AND CASH EQUIVALENTS, BEGINNING
|
269,726
|
118,805
|
||||||
CASH
AND CASH EQUIVALENTS, ENDING
|
157,775
|
454,330
|
||||||
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
||||||||
Fixed
assets acquired through capital lease financing
|
138,220
|
178,261
|
||||||
Value
of warrants issued to lenders recorded as debt discount
|
-
|
588,452
|
||||||
Value
of beneficial conversion feature of notes issued recorded as debt
discount
|
-
|
588,452
|
||||||
Value
of warrants issued to advisor recorded as deferred financing
costs
|
-
|
130,770
|
||||||
Issuance
of common stock recorded as deferred financing costs
|
-
|
127,500
|
|
1.
|
UNAUDITED
INTERIM FINANCIAL
STATEMENTS
|
|
2.
|
SHARE-BASED
COMPENSATION
|
Three
Months Ended
|
Nine
Months Ended
|
|||
September
30,
|
September
30,
|
|||
2007
|
2006
|
2007
|
2006
|
|
Expected
volatility
|
87.88%
|
77.00%
|
87.88%
|
76.10%
|
Expected
term (in years)
|
5
|
5
|
5
|
5
|
Risk-free
interest rate
|
4.79%
|
4.52%
|
4.79%
|
4.68%
|
Expected
dividend yield
|
0%
|
0%
|
0%
|
0%
|
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (Years)
|
Aggregate
Intrinsic Value
|
|||||||||||||
Options
outstanding at December 31, 2006
|
2,715,009
|
$ |
2.42
|
|||||||||||||
Granted
|
300,000
|
$ |
0.65
|
$ |
1,000
|
|||||||||||
Exercised
|
-
|
-
|
-
|
|||||||||||||
Expired
|
(104,250 | ) | $ |
0.65
|
-
|
|||||||||||
Canceled
|
(50,000 | ) | $ |
1.78
|
-
|
|||||||||||
Options
outstanding at September 30, 2007
|
2,860,759
|
$ |
2.28
|
4.54
|
$ |
13,000
|
||||||||||
Option
exercisable at September 30, 2007
|
2,090,759
|
$ |
2.53
|
3.91
|
$ |
-
|
||||||||||
Options
vested and options expected to vest at September 30, 2007
|
2,860,759
|
$ |
2.28
|
4.54
|
$ |
-
|
|
3.
|
MARKETABLE
SECURITIES
|
|
4.
|
RESTRICTED
INVESTMENTS
|
|
5.
|
DEBT
|
|
The
secured financing consists of the following at September 30, 2007
and
December 31, 2006:
|
September
30,
|
December
31,
|
|||||||
2007
|
2006
|
|||||||
Laurus
term note
|
$ |
2,000,000
|
$ |
2,000,000
|
||||
Partial
conversion, issuance of 350,000 shares
|
(159,125 | ) | (159,125 | ) | ||||
Valuation
discount
|
(1,176,904 | ) | (1,176,904 | ) | ||||
Accretion
of discount to interest expense
|
451,248
|
218,791
|
||||||
Total
secured financing
|
$ |
1,115,219
|
$ |
882,762
|
||||
Current
|
$ |
726,664
|
$ |
257,542
|
||||
Long-term
|
$ |
388,555
|
$ |
625,220
|
|
6.
|
LOSS
PER SHARE
|
Income
(Loss)
|
Shares
|
Per
Share
|
||||||||||
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||
Weighted
average common shares outstanding:
|
||||||||||||
For
the three months ended September 30, 2007:
|
||||||||||||
Loss per
common share:
|
||||||||||||
Loss
available to common stockholders
|
$ | (863,245 | ) |
8,515,824
|
$ | (0.10 | ) | |||||
Loss
per common share – assuming dilution:
|
||||||||||||
Options
|
-
|
-
|
||||||||||
Loss
available to common stockholders plus assumed conversions
|
$ | (863,245 | ) |
8,515,824
|
$ | (0.10 | ) | |||||
For
the three months ended September 30, 2006:
|
||||||||||||
Loss per
common share:
|
||||||||||||
Loss
available to common stockholders
|
$ | (549,106 | ) |
7,828,322
|
$ | (0.07 | ) | |||||
Loss
per common share – assuming dilution:
|
||||||||||||
Options
|
-
|
-
|
||||||||||
Loss
available to common stockholders plus assumed conversions
|
$ | (549,106 | ) |
7,828,322
|
$ | (0.07 | ) | |||||
For
the nine months ended September 30, 2007:
|
||||||||||||
Loss per
common share:
|
||||||||||||
Loss
available to common stockholders
|
$ | (1,594,258 | ) |
8,515,824
|
$ | (0.19 | ) | |||||
Loss
per common share – assuming dilution:
|
||||||||||||
Options
|
-
|
-
|
||||||||||
Loss
available to common stockholders plus assumed conversions
|
$ | (1,594,258 | ) |
8,515,824
|
$ | (0.19 | ) | |||||
For
the nine months ended September 30, 2006:
|
||||||||||||
Loss per
common share:
|
||||||||||||
Loss
available to common stockholders
|
$ | (861,660 | ) |
7,819,072
|
$ | (0.11 | ) | |||||
Loss
per common share – assuming dilution:
|
||||||||||||
Options
|
-
|
-
|
||||||||||
Loss
available to common stockholders plus assumed conversions
|
$ | (861,660 | ) |
7,819,072
|
$ | (0.11 | ) |
|
7.
|
DEFERRED
TAXES
|
|
8.
|
COMMITMENTS,
CONTINGENCIES AND
GUARANTEES
|
|
9.
|
DEFERRED
COMPENSATION
|
|
10.
|
LEASE
ABANDONMENT
|
|
11.
|
DISCONTINUED
OPERATIONS
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
Revenues
|
-
|
$ |
335,774
|
$ |
1,931
|
$ |
1,056,990
|
|||||||||
Loss
from operations of discontinued operations
|
$ | (350,142 | ) | $ | (52,475 | ) | $ | (362,579 | ) | $ | (553,707 | ) | ||||
Estimated
cost to sell
|
-
|
-
|
-
|
(20,000 | ) | |||||||||||
Income
tax effect
|
-
|
-
|
-
|
-
|
||||||||||||
Loss
from operations of discontinued operations, net of tax
|
$ | (350,142 | ) | $ | (52,475 | ) | $ | (362,579 | ) | $ | (573,707 | ) |
September
30,
|
December
31,
|
|||||||
2007
|
2006
|
|||||||
Current
assets of discontinued operations:
|
||||||||
Cash
|
$ |
-
|
$ |
1,252
|
||||
Accounts
Receivable
|
(1,440 | ) |
70,245
|
|||||
Inventory
|
3,579
|
39,024
|
||||||
Total
|
$ |
2,139
|
$ |
110,521
|
||||
Noncurrent
assets of discontinued operations:
|
||||||||
Other
assets
|
$ |
-
|
$ |
15,431
|
||||
Property
and equipment, net
|
800,000
|
1,238,049
|
||||||
Total
|
$ |
800,000
|
$ |
1,253,480
|
||||
Current
liabilities of discontinued operations:
|
||||||||
Accounts
payable
|
$ |
-
|
$ |
41,105
|
||||
Current
portion of long-term debt
|
295,875
|
296,477
|
||||||
Other
current liabilities
|
20,000
|
23,000
|
||||||
Total
|
$ |
315,875
|
$ |
360,582
|
||||
Long-term
liabilities of discontinued operations:
|
||||||||
Long-term
debt
|
$ |
1,338,576
|
$ |
1,570,359
|
|
12.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
|
13.
|
CURRENT
FINANCIAL CONDITION
|
|
·
|
The
impact of several material non-recurring events, including the one-time
impairment of goodwill, the accrual of deferred compensation related
to
the employment contract of the Company’s founder and then CEO, the
implementation of a free trial program, the write off of the Company’s
deferred tax asset, and a lease abandonment charge related to the
abandonment of the executive
offices;
|
|
·
|
Excessive
expenses incurred in the Heartland operations;
and
|
|
·
|
Recurring
losses due to the FDA’s ban on ephedra
products.
|
|
·
|
Reductions
in force, encompassing all departments within the
Company;
|
|
·
|
The
termination of a discount sales program, designed to give customers
a cash
discount after purchasing a certain dollar amount of product;
and
|
|
·
|
The
termination of several extra employee benefits, including vehicle
allowances and social and country-club
privileges.
|
|
14.
|
CORRECTION
OF ERROR IN REPORTING NET
SALES
|
2006
Quarters Ended,
|
||||||||||||
March
31,
|
June
30,
|
September
30,
|
||||||||||
Net
Sales
|
$ |
2,351,713
|
$ |
2,397,975
|
$ |
2,323,583
|
||||||
Adjustment
|
73,761
|
82,900
|
86,668
|
|||||||||
Adjusted
net sales
|
$ |
2,425,474
|
$ |
2,480,875
|
$ |
2,410,251
|
||||||
Net
loss from operations as previously reported
|
$ | (316,314 | ) | $ | (152,900 | ) | $ | (635,774 | ) | |||
Adjusted
net loss from operations
|
$ | (242,553 | ) | $ | (70,000 | ) | $ | (549,106 | ) |
|
·
|
Sell
Heartland Cup.
|
|
·
|
Use
additional capital to build a foundation that will allow us to
grow.
Because of our consecutive years of losses, we have not had the
funds to
develop marketing, training and support tools, and programs to
support our
independent associates’ efforts in the field. On June 28, 2006, we
raised $2,000,000 in additional financing. We used these
funds to start an aggressive sales and marketing campaign, which
we
believe will increase our top line revenues. We intend to
produce better product videos, business builder videos, printed
material
and other materials for use by our independent associates in their
marketing efforts. In addition we intend to upgrade our back office
to provide our independent associates with the most current management
tools available in network
marketing.
|
|
·
|
Establish
a new binary commission system and allow our independent associates
to
choose to use our existing commission system or the new binary
commission
system depending on their primary method of generating
revenues. This will allow our independent associates to tailor
their commission system to their operating
methods.
|
|
·
|
Enter
the international markets.
|
|
·
|
Commissions
and bonuses, consisting of commission payments to associates based
on
their current associate level within their organization, and other
one-time incentive cash bonuses to qualifying
associates;
|
|
·
|
Cost
of products, consisting of the prices we pay to our manufacturers
for
products, and royalty overrides earned by qualifying associates on
sales
within their associate organizations;
and
|
|
·
|
Cost
of shipping, consisting of costs related to shipments, duties and
tariffs,
freight expenses relating to shipment of products to associates and
similar expenses.
|
For
the Three Months Ended
|
For
the Nine Months Ended
|
|||||||||||||||||||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||||||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||||||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||||||||
Net
sales
|
$ |
1,706,402
|
100.0 | % | $ |
2,410,251
|
100.0 | % | $ |
6,121,032
|
100.0 | % | $ |
7,316,600
|
100.00 | % | ||||||||||||||||
Cost
of Sales:
|
||||||||||||||||||||||||||||||||
Commissions
and bonuses
|
489,291
|
28.7
|
793,570
|
32.9
|
1,884,863
|
30.8
|
2,353,968
|
32.2
|
||||||||||||||||||||||||
Cost
of products
|
412,655
|
24.2
|
298,023
|
12.4
|
1,205,007
|
19.7
|
1,219,027
|
16.7
|
||||||||||||||||||||||||
Cost
of shipping
|
189,776
|
11.1
|
331,195
|
13.7
|
658,830
|
10.8
|
902,432
|
12.3
|
||||||||||||||||||||||||
Total
cost of sales
|
1,091,722
|
64.0
|
1,422,788
|
59.0
|
3,748,700
|
61.3
|
4,475,427
|
61.2
|
||||||||||||||||||||||||
Gross
profit
|
614,680
|
36.0
|
987,463
|
41.0
|
2,372,332
|
38.7
|
2,841,173
|
38.8
|
||||||||||||||||||||||||
Marketing
and administrative expenses:
|
||||||||||||||||||||||||||||||||
Marketing
|
106,587
|
6.2
|
211,127
|
8.8
|
489,114
|
8.0
|
454,122
|
6.2
|
||||||||||||||||||||||||
Administrative
|
881,924
|
51.7
|
1,134,913
|
47.1
|
2,695,829
|
44.0
|
2,589,997
|
35.4
|
||||||||||||||||||||||||
Total
marketing and administrative expenses
|
988,511
|
57.9
|
1,346,040
|
55.9
|
3,184,943
|
52.0
|
3,044,119
|
41.6
|
||||||||||||||||||||||||
Loss
from operations
|
(373,831 | ) | (21.9 | ) | (358,577 | ) | (14.9 | ) | (812,611 | ) | (13.3 | ) | (202,946 | ) | (2.8 | ) | ||||||||||||||||
Other
income (expense):
|
||||||||||||||||||||||||||||||||
Interest
and dividends, net
|
(143,931 | ) | (8.4 | ) | (145,095 | ) | (6.0 | ) | (462,919 | ) | (7.5 | ) | (136,007 | ) | (1.9 | ) | ||||||||||||||||
Other
income (expense)
|
4,659
|
0.3
|
7,041
|
0.2
|
43,851
|
0.7
|
51,000
|
0.7
|
||||||||||||||||||||||||
Total
other income (expense)
|
(139,272 | ) | (8.1 | ) | (138,054 | ) | (5.8 | ) | (419,068 | ) | (6.8 | ) | (85,007 | ) | (1.2 | ) | ||||||||||||||||
Loss
from continuing operations before taxes
|
(513,103 | ) | (30.0 | ) | (496,631 | ) | (20.6 | ) | (1,231,679 | ) | (20.1 | ) | (287,953 | ) | (4.0 | ) | ||||||||||||||||
Income
tax
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Loss
from continuing operations
|
(513,103 | ) | (30.0 | ) | (496,631 | ) | (20.6 | ) | (1,231,679 | ) | (20.1 | ) | (287,953 | ) | (4.0 | ) | ||||||||||||||||
Discontinued
operations:
|
||||||||||||||||||||||||||||||||
Loss
from operations of Heartland Cup
|
(350,142 | ) | (20.5 | ) | (52,475 | ) | (2.2 | ) | (362,579 | ) | (5.9 | ) | (573,707 | ) | (7.8 | ) | ||||||||||||||||
Income
tax benefit
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Total
loss from discontinued operations
|
(350,142 | ) | (20.5 | ) | (52,475 | ) | (2.2 | ) | (362,579 | ) | (5.9 | ) | (573,707 | ) | (7.8 | ) | ||||||||||||||||
Net
loss
|
$ | (863,245 | ) | (50.5 | )% | $ | (549,106 | ) | (22.8 | )% | $ | (1,594,258 | ) | (26.0 | )% | $ | (861,660 | ) | (11.8 | )% |
|
·
|
A
decrease of approximately $304,000 in associate commissions and
bonuses;
|
|
·
|
An
increase of approximately $115,000 in cost of products due to inventory
adjustments related to obsolete products;
and
|
|
·
|
A
decrease of approximately $141,000 in the costs of
shipping.
|
|
·
|
A
decrease in employee costs of approximately $9,000 related to reductions
in staff;
|
|
·
|
A
decrease in promotional cost of approximately $56,000 related to
spending
for the AMS National Convention;
|
|
·
|
A
decrease in professional services of approximately $27,000 related
to less
consultant utilization; and
|
|
·
|
A
decrease in general and administrative expense of approximately
$6,000.
|
|
·
|
A
decrease in employee costs of approximately $35,000 related reductions
in
staff;
|
|
·
|
A
decrease in shareholder relations expense of approximately $37,000
primarily related to a change in investor relation
firms;
|
|
·
|
A
decrease in professional services of approximately $85,000 related
primarily to consulting services;
|
|
·
|
A
decrease in promotional expenses of approximately $29,000 primarily
related to the change in IT software
used;
|
|
·
|
A
decrease in rent and insurance expense of approximately $42,000 primarily
related to adjustments made to the lease abandonment accrual;
and
|
|
·
|
A
decrease in depreciation and amortization expense of approximately
$37,000
primarily related to a correction made for the depreciation of the
non-competes.
|
|
·
|
A
decrease in interest expense of approximately $13,000 related to
the
Laurus debt; and
|
|
·
|
An
increase in gain on sale of assets of approximately $6,000 related
to the
sale of an excess vehicle;
|
|
The
increase in interest expense was partially offset
by:
|
|
·
|
A
decrease in other income of approximately $7,000 related to the reduced
collection of notes receivable previously written off;
and
|
|
·
|
A
decrease in income of approximately $10,000 related to the collection
of
notes receivable interest;
|
|
·
|
The
decrease in gross profit to $614,680 during 2007 from $987,463 during
2006;
|
|
·
|
The
decrease in marketing and administrative expenses to $988,511 during
2007
from $1,346,040 during 2006; and
|
|
·
|
The
increase in other expense to $139,272 during 2007 from $138,054 during
2006.
|
|
·
|
A
decrease of approximately $469,000 in associate commissions and
bonuses;
|
|
·
|
A
decrease of approximately $14,000 in cost of products;
and
|
|
·
|
A
decrease of approximately $244,000 in shipping
costs.
|
|
·
|
An
increase in promotional cost of approximately $24,000, related primarily
to the 2007 national convention;
and
|
|
·
|
An
increase in professional services of approximately $110,000 related
to
consulting fees for the branding of the new SABA
division.
|
|
The
increase in
marketing expense was partially offset
by:
|
|
·
|
A
decrease in general and administrative expense of approximately $2,000
related to postage, supplies, telephone,
etc.;
|
|
·
|
A
decrease in employee costs of approximately $44,000 related to reductions
in staff; and
|
|
·
|
A
decrease in travel costs of approximately $6,000 related to outside
travel
of marketing.
|
|
·
|
An
increase in employee costs of approximately $78,000 related primarily
to
the option expense under FAS 123R and employee vacation liability
adjustment;
|
|
·
|
An
increase in shareholder relations expense of approximately $20,000
related
to AMEX fee;
|
|
·
|
An
increase in vehicle, equipment, and building expense of approximately
$8,000 related to repairs and maintenance
costs;
|
|
·
|
An
increase in general and administrative expense of approximately $56,000
related to postage, supplies, telephone, etc.;
and
|
|
·
|
An
increase in rent and insurance expenses of approximately $6,000 related
to
corrections of the lease abandonment accrual and the addition of
director
and officer liability insurance.
|
|
The
increase in
administrative expense was partially offset
by:
|
|
·
|
A
decrease in professional services of approximately $84,000 related
primarily to consulting services;
|
|
·
|
A
decrease in travel expense of approximately $13,000 related primarily
to
reduction in staff and outside travel;
and
|
|
·
|
A
decrease in promotional expenses of approximately $8,000 related
to
reduced website expenses.
|
|
·
|
A
decrease in gain on sale of assets of approximately $34,000 related
to the
sale of assets in 2006;
|
|
·
|
An
increase in interest expense of approximately $326,000 related to
the
Laurus debt executed in 2006; and
|
|
·
|
An
increase in Sales Tax Discount expense of approximately
$3,000.
|
|
The
increase in net other expense was partially offset
by:
|
|
·
|
An
increase in gain on sale of marketable securities of approximately
$14,000; and
|
|
·
|
An
increase in other income of approximately $17,000 related to the
collection of notes receivable previously written
off.
|
|
·
|
The
decrease in gross profit to $2,372,332 during 2007 from $2,841,173
during
2006;
|
|
·
|
The
increase in marketing and administrative expense to $3,184,943 during
2007
from $3,044,119 during 2006; and
|
|
·
|
The
increase in other expense to $419,068 during 2007 from $85,007 during
2006.
|
|
·
|
Excessive
expenses incurred in the Heartland operations. We estimate that
we have incurred approximately $1.5 million in additional expenses
related
to the operations of Heartland Cup that we did not anticipate at
the time
of the acquisition. Additionally, we suffered a loss of
approximately $574,000 in 2006 in connection with the Heartland
Cup
operations.
|
|
·
|
Recurring
losses due to the FDA’s ban on ephedra products. Because of the
ban, the Company was forced to cease sales of AM-300, its primary
revenue-generating product containing ephedra. In 2003, our
revenue from ephedra-based products was approximately $6.5 million,
only
$728,000 in 2004, and $0 after that. While we have introduced a
replacement product line, known as SABA, revenues from sales of
the
replacement product line have not yet reached the levels of AM-300
sales
prior to the ephedra ban.
|
|
·
|
Reductions
in force, encompassing all departments within the
Company;
|
|
·
|
The
termination of a discount sales program, designed to give customers
a cash
discount after purchasing a certain dollar amount of product;
and
|
|
·
|
The
termination of several extra employee benefits, including vehicle
allowances and social and country-club
privileges
|
|
(a)
|
Exhibits
|
|
3.1
|
The
Registrant's Certificate of Incorporation, incorporated by reference
to
the Registration Statement on Form SB-2 (Registration No. 333-47801)
filed
with the Commission on March 11,
1998.
|
3.2
|
The
Registrant's Bylaws, incorporated by reference to the Registration
Statement on Form SB-2 (Registration No. 333-47801) filed with
the Commission on March 11, 1998.
|
10.1
|
Stock
Option Agreement of Advantage Marketing Systems dated January 3,
2001,
incorporated by reference to Form 8-K filed with the Commission on
January
8, 2001.
|
10.2*
|
The
Advantage Marketing Systems, Inc. 1995 Stock Option Plan, incorporated
by
reference to Form SB-2 Registration Statement (No. 33-80629), filed
with
the Commission on November 20,
1996.
|
10.3*
|
Employment
Agreement by and between Steven G. Kochen and Registrant dated effective
as of
|
|
August
9, 2005, incorporated by reference to Form 8-K filed with the Commission
on August 12,
|
10.4*
|
Employment
Agreement by and between Jerry W. Grizzle and Registrant dated effective
as of
|
10.5*
|
Employment
Agreement by and between Robin L. Jacob and Registrant dated effective
as
of February 12, 2006, incorporated by reference to Form 8-K filed
with the
Commission on April 12, 2006.
|
10.6
|
Consulting
Agreement by and between TVC Consulting and Registrant dated effective
as
of March 1, 2006, incorporated by reference to Form 10-QSB filed
with the
Commission on May 15, 2006
|
10.7
|
Securities
Purchase Agreement dated June 28, 2006 by and between the Company
and
Laurus Master Fund, Ltd., incorporated by reference to the Form 10-QSB
filed with the Commission on August 14,
2006.
|
10.8
|
Secured
Convertible Term Note dated June 28, 2006 by the Company in favor
of
Laurus Master Fund, Ltd., incorporated by reference to the Form 10-QSB
filed with the Commission on August 14,
2006.
|
10.9
|
Common
Stock Purchase Warrant dated June 29, 2006 by the Company in favor
of
Laurus Master Fund, Ltd., incorporated by reference to the Form 10-QSB
filed with the Commission on August 14,
2006.
|
10.10
|
Registration
Rights Agreement dated June 28, 2006 by and between the Company and
Laurus
Master Fund, Ltd., incorporated by reference to the Form 10-QSB filed
with
the Commission on August 14, 2006.
|
10.11
|
Stock
Pledge Agreement dated June 28, 2006 by and among the Company, AMS
Manufacturing, Inc. and Laurus Master Fund, Ltd., incorporated by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.12
|
Master
Security Agreement dated June 28, 2006 by and among the Company,
AMS
Manufacturing, Inc. and Laurus Master Fund, Ltd., incorporated by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.13
|
Mortgage
dated June 28, 2006 by and between the Company and Laurus Master
Fund,
Ltd., incorporated by reference to the Form 10-QSB filed with the
Commission on August 14, 2006.
|
10.14
|
Grant
of Security Interest in Patents and Trademarks dated June 28, 2006
by and
between the Company and Laurus Master Fund, Ltd., incorporated by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.15
|
Common
Stock Purchase Warrant dated June 28, 2006 by the Company in favor
of
Ascendiant Securities, LLC, incorporated by reference to the Form
10-QSB
filed with the Commission on August 14,
2006.
|
10.16
|
Engagement
Letter between the Company and Ascendiant Securities, LLC, incorporated
by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.17*
|
Employment
Agreement by and between Dennis P. Loney and Registrant dated effective
as
of September 19, 2006, incorporated by reference to Form 8-K
filed with the Commission on September 25,
2006.
|
15
|
Letter
of independent accountants as to unaudited interim financial information,
filed herewith.
|
31.1
|
Chief
Executive Officer Certification, filed
herewith.
|
31.2
|
Chief
Financial Officer Certification, filed
herewith.
|
32.1
|
Section
1350 Certification of our Chief Executive Officer, filed
herewith.
|
32.2
|
Section
1350 Certification of our Chief Financial Officer, filed
herewith.
|
REGISTRANT:
|
|
AMS
HEALTH SCIENCES, INC.
|
|
By:
/S/ ROBIN L. JACOB
|
|
Dated: November
19, 2007
|
Robin
L. Jacob, Vice President and Chief
Financial
Officer
|
(Duly
Authorized Officer of Registrant and
Principal
Financial Officer)
|
|
3.1
|
The
Registrant's Certificate of Incorporation, incorporated by reference
to
the Registration Statement on Form SB-2 (Registration No. 333-47801)
filed
with the Commission on March 11,
1998.
|
3.2
|
The
Registrant's Bylaws, incorporated by reference to the Registration
Statement on Form SB-2 (Registration No. 333-47801) filed with
the Commission on March 11, 1998.
|
10.1
|
Stock
Option Agreement of Advantage Marketing Systems dated January 3,
2001,
incorporated by reference to Form 8-K filed with the Commission on
January
8, 2001.
|
10.2*
|
The
Advantage Marketing Systems, Inc. 1995 Stock Option Plan, incorporated
by
reference to Form SB-2 Registration Statement (No. 33-80629), filed
with
the Commission on November 20,
1996.
|
|
August
9, 2005, incorporated by reference to Form 8-K filed with the Commission
on August 12,
|
10.4*
|
Employment
Agreement by and between Jerry W. Grizzle and Registrant dated effective
as of
|
10.5*
|
Employment
Agreement by and between Robin L. Jacob and Registrant dated effective
as
of February 12, 2006, incorporated by reference to Form 8-K filed
with the
Commission on April 12, 2006.
|
10.6
|
Consulting
Agreement by and between TVC Consulting and Registrant dated effective
as
of March 1, 2006, incorporated by reference to Form 10-QSB filed
with the
Commission on May 15, 2006.
|
10.7
|
Securities
Purchase Agreement dated June 28, 2006 by and between the Company
and
Laurus Master Fund, Ltd., incorporated by reference to the Form 10-QSB
filed with the Commission on August 14,
2006.
|
10.8
|
Secured
Convertible Term Note dated June 28, 2006 by the Company in favor
of
Laurus Master Fund, Ltd., incorporated by reference to the Form 10-QSB
filed with the Commission on August 14,
2006.
|
10.9
|
Common
Stock Purchase Warrant dated June 29, 2006 by the Company in favor
of
Laurus Master Fund, Ltd., incorporated by reference to the Form 10-QSB
filed with the Commission on August 14,
2006.
|
10.10
|
Registration
Rights Agreement dated June 28, 2006 by and between the Company and
Laurus
Master Fund, Ltd., incorporated by reference to the Form 10-QSB filed
with
the Commission on August 14, 2006.
|
10.11
|
Stock
Pledge Agreement dated June 28, 2006 by and among the Company, AMS
Manufacturing, Inc. and Laurus Master Fund, Ltd., incorporated by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.12
|
Master
Security Agreement dated June 28, 2006 by and among the Company,
AMS
Manufacturing, Inc. and Laurus Master Fund, Ltd., incorporated by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.13
|
Mortgage
dated June 28, 2006 by and between the Company and Laurus Master
Fund,
Ltd., incorporated by reference to the Form 10-QSB filed with the
Commission on August 14, 2006.
|
10.14
|
Grant
of Security Interest in Patents and Trademarks dated June 28, 2006
by and
between the Company and Laurus Master Fund, Ltd., incorporated by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.15
|
Common
Stock Purchase Warrant dated June 28, 2006 by the Company in favor
of
Ascendiant Securities, LLC, incorporated by reference to the Form
10-QSB
filed with the Commission on August 14,
2006.
|
10.16
|
Engagement
Letter between the Company and Ascendiant Securities, LLC, incorporated
by
reference to the Form 10-QSB filed with the Commission on August
14,
2006.
|
10.17*
|
Employment
Agreement by and between Dennis P. Loney and Registrant dated effective
as
of September 19, 2006, incorporated by reference to Form 8-K filed
with
the Commission on September 25,
2006.
|
15
|
Letter
of independent accountants as to unaudited interim financial information,
filed herewith.
|
31.1
|
Chief
Executive Officer Certification, filed
herewith.
|
31.2
|
Chief
Financial Officer Certification, filed
herewith.
|
32.1
|
Section
1350 Certification of our Chief Executive Officer, filed
herewith.
|
32.2
|
Section
1350 Certification of our Chief Financial Officer, filed
herewith.
|