SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2011
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to ________________
Commission File Number: 333-59114
(Exact name of small business issuer as specified in charter)
(Issuer's Telephone number, including area code)
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports,), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a larger accelerated filer, an accelerated filer , a non-accelerated filer, or a smaller reporting company. See the definitions of "larger accelerated filer" and "smaller or a smaller reporting company" in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No þ
Indicate the number of shares of the registrant's common stock outstanding of each of the insurer's common stock, as of the latest practicable date. As of February 8, 2012 - 66,354,771 shares.
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited financial statements of Healthient, Inc. (the "Company"), have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, these financial statements may not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. The interim financial statements should be read in conjunction with the annual financial statement for the year ended June 30, 2011 included in the an 10-K filed October 13, 2011. In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to fairly present the Company's financial position as of December 31, 2011 and its results of operations and its cash flows for the six months ended December 31, 2011 and 2010.
Consolidated Balance Sheets
The accompanying notes are an integral part of these financial statements
Statement of Operations
See accompanying notes to Financial Statements
Consolidated Statement of Stockholders' Equity (Deficit)
The accompanying notes are an integral part of these finanacial statements
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these financial statements
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months ended December 31, 2011
Note 1. Reorganization and Line of Business
On October 5, 2010 Time Associates, a Nevada corporation (" the Company") acquired all of the issued and outstanding common stock of Healthient, Inc., a Nevada corporation organized April 29, 2009 ("Healthient") in exchange for the issuance by the Company of a total of 43,618,356 newly issued restricted shares of common voting stock to the Healthient shareholders pursuant the Agreement and Plan of Reorganization dated as of September 23, 2010. Prior to the issuance of the shares, the Company had 160,078 shares of common stock issued and outstanding. Subsequent to the exchange there were 43,778,434 shares issued and outstanding. The shareholders of Healthient own 99.6% of the common stock outstanding of the Company after the issuance of the 43,618,356 shares. On November 15, 2010 Time Associates, Inc. name was changed to Healthient, Inc.
The acquisition of Healthient by the Company on October 5, 2010 has been accounted for as a purchase and treated as a reverse acquisition and re-capitalization since the former owners of Healthient controlled 99.6% of the total shares of Common Stock of the Company outstanding immediately following the acquisition. In November 2010 Healthient, Inc. changed its name to SnackHealthy, Inc.
On this basis, the historical financial statements prior to October 5, 2010 have been restated to be those of the accounting acquirer Healthient (now SnackHealthy, Inc.). The historical stockholders' equity prior to the reverse acquisition has been retroactively restated (a re-capitalization) for the equivalent number of shares received in the acquisition after giving effect to any difference in par value of the issuer's and acquirer's stock. The original 160,078 shares of common stock outstanding prior to the exchange reorganization have been reflected as an addition in the stockholders' equity account of the Company on October 5, 2010.
Healthient, Inc., and its wholly owned subsidiary, SnackHealthy, Inc., develop and market snacks and beverages with the objective of making healthy eating a fun experience for the entire family. The Company’s goal is to develop a portfolio of products and successfully position them as convenient, healthy solutions across several snacking occasions daily. The Company sells snacks through a network marketing distribution model.
The Company was in the Development Stage as defined in Accounting Standards Codified (ASC) No. 915, “Accounting and Reporting by Development Stage Enterprises”.through June 30, 2011. The Company had devoted substantially all of its efforts to the corporate formation. Activities during the Development Stage include developing the business plan and raising capital. The Company is now in operations.
Note 2 Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary SnackHealthy, Inc. All significant inter–company transactions and balances have been eliminated in consolidation.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents.
The carrying value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and due to related parties, as reported in the accompanying balance sheets, approximates fair value.
In accordance with ASC 350, the Company regularly reviews the carrying value of intangible and other long-lived assets for the existence of facts or circumstances, both internally and externally, that may suggest impairment. If impairment testing indicates a lack of recoverability, an impairment loss is recognized by the Company if the carrying amount of a long-lived asset exceeds its fair value.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
Revenue is recognized when products are shipped, which is when title and risk of loss pass to brand partners and preferred customers who are the Company’s customers. The Company requires credit card payment at the point of sale. The Company has determined that no allowance for doubtful accounts is necessary. Amounts received prior to shipment and title passage to brand partners are recorded as deferred revenue. The compensation plan for the Company’s brand partners generally does not provide rebates or selling discounts to brand partners who purchase its products and services. The Company classifies selling discounts and rebates, if any, as a reduction of revenue.
Inventory comprises packaged healthy snacks ready for final sale, and is stated at the lower of cost or market value. Cost is determined by the first-in, first out method.
Property and Equipment
Property and equipment are stated at cost and depreciated on the straight line method over the estimated life of the asset, which is 3-7 years.
Websites Development Cost
The Company has adopted the provisions of FASB Accounting Standards Codification No. 350 Intangible-Goodwill and Other. Costs incurred in the planning state of a websites are expensed, while costs incurred in the development stage are capitalized and amortized over the estimated three year life of the asset.
The Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”) Income Taxes. Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the 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 be recovered or settled. Under ASC 740-10-25, 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.
The financial statements have been prepared assuming that the Company will continue as a going concern. The Company had a net loss of $3,448,933 while in development and an additional loss of $1,921,465 during the six months ended December 31, 2011. Cash used in operations from inception of approximates $846,000. This raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement its business plan.
Management believes that the actions presently being taken and the success of future operations will be sufficient to enable the Company to continue as a going concern.
However, there can be no assurance that the raising of equity will be successful. Failure to achieve the needed equity funding could have a material adverse effect on the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In December 2004, the FASB issued FASB Accounting Standards Codification No. 718, Compensation – Stock Compensation. Under FASB Accounting Standards Codification No. 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As such, compensation cost is measured on the date of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant. The Company applies this statement prospectively.
Equity instruments (“instruments”) issued to other than employees are recorded on the basis of the fair value of the instruments, as required by FASB Accounting Standards Codification No. 718. FASB Accounting Standards Codification No. 505, Equity Based Payments to Non-Employees defines the measurement date and recognition period for such instruments. In general, the measurement date is when either a (a) performance commitment, as defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the FASB Accounting Standards Codification.
Basic and Diluted Net Loss per Common Share
Net Loss per Common Share is computed pursuant to FASB Accounting Standards Codification No. 260, Earnings per Share. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed in the same way as for Basic net loss.
Warrants outstanding as of December 31, 2011 and June 30, 2011 were 1,556,285 and 3,557,972. These warrants were not included in diluted earnings per share as the effect was anti-dilutive.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements of changes in accounting pronouncements that impacted the six months ended December 31, 2011 and June 30, 2011, or which are expected to impact future periods, that were not already adopted and disclosed in prior periods.
Note 3. Property and Equipment
The Company started the construction of several Websites, all of which have been completed and are being amortized over three years.
Property and equipment was as follows:
The Company leases its office space. The current facility lease runs from July 1, 2011 through June 30, 2016. Our lease payments will be $4,226 per month including operating expense and tax for the first year and then a three percent increase after each of the following four years. We maintain our executive and administrative offices in this facility. Our rental payments in fiscal 2011 were $6,516. Our rental payments for the six months ended December 31, 2011 were $31,671. Future minimum payments under the office lease are approximately as follows: Year ended June 2012 $21,000, 2013 $52,500, 2014 $54,000, 2015 $55,000, 2016 $56,000, Total $238,500.
Note 4 . Stockholders’ Deficit
The Company has authorized 200,000,000 shares of common stock with a par value of $.001 and 25,000,000 shares of preferred stock with a par value of $.001. The Company effected a 3 for 1 share exchange as part of its reverse acquisition in October 2010. All share amounts in the financial statements and footnotes reflect this action.
The Company authorized the issuance of 40,822,998 shares of common stock to the founders at the fair value of $13,480. The fair value of the shares of $13,480 was recorded as an expense.
During the year ended June 30, 2010, the Company sold to investors 2,030,358 units for cash of $672,500 (on a 3 for 1 post split basis), with each unit containing one share of common stock and one common stock purchase warrant. 1,695,000 Units were sold at $.33 per unit with warrants exercisable at $.33 per share. 292,500 Units were sold at $.33 per unit with warrants exercisable at $.42 per share and 42,858 Units were sold at $.23 per unit with warrants exercisable at $42 per share.
During the year ended June 30, 2011 the Company sold investors 2,321,285 units for cash of $594,485. The Company issued 5,556,712 shares for services for $1,555,357 ($0.28 per share) and 1,534,250 under the 2010 Equity Compensation Plan for $506,302 ($0.33 per share).
During the six months ended December 31, 2011 the Company issued 3,900,090 common shares for cash $439,239, 7,715,000 common shares for services $889,200, 9,000,000 common shares for salaries $720,000, 1,000,000 common shares for Directors’ fees payable and 50,000 common shares for a drink license $7,500.
Non-Employee Stock Options and Warrants
The Company accounts for non-employee stock options and warrants under ASC 718, whereby option and warrant costs are recorded based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Unless otherwise provided for, the Company covers option and warrant exercises by issuing new shares.
At June 30, 2010 the Company had 2,030,358 common stock purchase warrants outstanding. During the year ended June 30, 2011 the Company granted 3,557,972 common stock purchase warrants, sold as part of a unit with no separate value being allocated to the warrants, allowing the holder to purchase one share of common stock per warrant, exercisable at prices from $.33 - $.42 per warrant, with one year terms expiring from July 2011 – April 2012. No warrants were exercised, and 2,030,358 expired, leaving a June 30, 2011 balance of 3,557,972 warrants outstanding. During the six months ended December 31, 2011, 2,001,687 warrants expired leaving 1,556,285 warrants outstanding at December 31, 2011.
Note 5. Officer’s loans
Shareholder loans of $101,926 at December 31, 2011 are non interest bearing and due on demand.
Note 6. Income taxes
The components of the deferred tax asset are as follows:
The Company had available approximately $5,300,000 at December 31, 2011 and $3,445,000 at June 30, 2011 of unused Federal and California net operating loss carry-forwards that may be applied against future taxable income. These net operating loss carry-forwards expire through 2030. There is no assurance that the Company will realize the benefit of the net operating loss carry-forwards.
SFAS No. 109 requires a valuation allowance to be recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.
Reconciliation of the differences between the statutory tax rate and the effective income tax rate is as follows at December 31, 2011 and June 30, 2011 respectively:
Note 7. Other Matters
In 2011 Siesta Flow LLC filed a legal action against the Company in the Twelfth Circuit Court of Sarasota County, Florida, alleging breach of contract and seeking damages in the range of $100,000 plus costs. The Company has responded and denies all allegations under the action. The matter has not been set for trial and is currently ongoing.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR PLAN OF OPERATION
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS:
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. PROSPECTIVE SHAREHOLDERS SHOULD UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY FORWARD - LOOKING STATEMENT CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY ONE OF THOSE FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED HEREIN. THESE FORWARD-LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO THE PRODUCTS AND THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY. ASSUMPTIONS RELATING TO THE FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND THE TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS, ALL OF WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE, THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. BASED ON ACTUAL EXPERIENCE AND BUSINESS DEVELOPMENT, THE COMPANY MAY ALTER ITS MARKETING, CAPITAL EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN, THE INCLUSION OF ANY SUCH STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
The following Management’s Discussion and Analysis should be read in conjunction with Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the year ended June 30, 2011 filed with the Securities and Exchange Commission (“SEC”), and our other filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report.
We are a network marketing company that sells healthy snacks and beverage mixes. We pursue our mission of helping people achieve personal success by providing a financially rewarding business opportunity to brand partners and great tasting products to brand partners and customers who seek a healthy lifestyle.
We believe the direct-selling channel is ideally suited to marketing our products because sales of weight management and nutrition products are strengthened by ongoing personal contact between retail consumers and brand partners. This personal contact may enhance consumers’ nutritional and health education as well as motivate consumers to begin and maintain wellness and weight management programs. In addition, many of our brand partners use our products themselves, and can therefore provide first-hand testimonials of our products toconsumers, which often serve as a powerful sales tool.
We are focused on building and maintaining our brand partner network by offering financially rewarding and flexible career opportunities through sales of great tasting, “better for you” snacks to health conscious consumers. We believe the income opportunity provided by our network marketing program appeals to a broad cross-section of people throughout the world, particularly those seeking to supplement their family incomes, start a home business or pursue entrepreneurial, full and part-time, employment opportunities.
Our brand partners, who are independent contractors, can profit from selling our products and can also earn bonuses on sales made by the other brand partners whom they recruit to join their sales organizations. We enable our brand partners to maximize their potential by providing a broad array of motivational, educational and support services. We motivate our brand partners through our performance-based compensation plan, individual recognition, reward programs and promotions, and participation in local and national company- sponsored sales events. We are committed to providing professionally designed educational training materials that our brand partners can use to enhance recruitment and maximize their sales. We and our brand partner leadership conduct thousands of training sessions each year to educate and motivate our brand partners. These training events teach our brand partners not only how to develop invaluable business building and leadership skills, but also how to differentiate our products to consumers.
Our corporate sponsored training events provide a forum for brand partners, who otherwise operate independently, to share ideas with each other. In addition, we operate a web-based brand partner back-office, which delivers educational, motivational and inspirational content to our brand partners. We plan to further aid our brand partners by generating additional demand for our products through traditional marketing and public relations activities, such as radio and television ads, sporting event sponsorships and endorsements.
We believe that our success stems from our ability to motivate our brand partner network through our marketing plan and provide brand partners with a unique go to market strategy that supports sustainable daily consumption of our great tasting snacks and beverages that appeal to consumer preferences for healthy lifestyles. Our goal is to achieve sustained and profitable growth by capitalizing on the following competitive strengths:
Brand Partner Base
Our brand partners can be segmented into three general categories based on their product order patterns: discount buyers, small retailers and potential sales leaders. We define discount buyers as customers who have signed up as brand partners to enjoy a discount on their purchases; small retailers as product users and sales people who generate modest sales to friends and family; and potential sales leaders who are proactively developing a business with the intention of building full-time careers. The marketing plan encourages active participation in the business including building down-line sales organizations of their own, which can serve to increase their income and increase our product sales. Sales leaders, our top brand partners, contribute significantly to our sales.
We are committed to building brand partner, customer and brand loyalty by providing a diverse portfolio of healthy snacks and beverages. The breadth of our product offerings enables our brand partners to sell a comprehensive package of products designed to simplify weight management and nutrition. We plan to continue to introduce new products annually and rigorously review, and if necessary, improve our product formulations, based upon developments in nutritional science. We believe that the variety in our product portfolio significantly enhances our brand partners’ ability to build their businesses.
Scalable Business Model
Our business model enables us to grow our business with only moderate investment in our infrastructure and other fixed costs. We require no Company-employed sales force to market and sell our products. We incur no direct incremental cost to add a new brand partner in our existing markets, and our brand partner compensation varies directly with sales. In addition, our brand partners bear the majority of our consumer marketing expenses, and sales leaders sponsor and coordinate a large share of brand partner recruiting and training initiatives.
We have the ability to establish our network marketing organization in new markets. While sales within local markets may fluctuate due to economic, market and regulatory conditions, competitive pressures, political and social instability or for Company specific reasons, we believe that expanding our geographic diversity will mitigate our financial exposure to any particular market. We currently operate within the United States and plan to open two new markets during 2012 and our strategic plan includes a goal of opening four new markets during 2013.
Our Business Strategy
We believe that our network-marketing business model is the most effective way to sell our products. Our objective is to increase the recruitment, retention, retailing and productivity of our brand partner base by pursuing the following strategic initiatives:
We are committed to providing our brand partners with great tasting, healthy snacks and beverage mixes to help them increase sales and recruit new brand partners. Our product development is focused on two principal categories and that capitalize on the growing trends of obesity and anti-aging: weight management & energy and sports fitness. On an ongoing basis, we will augment our product portfolio with additional products and, as appropriate, will bundle products addressing similar health concerns into packages and programs.
To better support brand partners, we will expand our product packaging to provide both individual serving sizes for portion control and convenience and larger party or family sizes of our top selling products. Additionally, each year we plan to launch products and/or programs, coupled with our major events, to generate continued excitement among our brand partners. These product launches will generally target specific market segments deemed strategic to us that support our focus on driving daily consumption.
Brand Partner Strategy
We will continue to increase our investment in events and promotions, both in absolute dollars and as a percent of net sales, as a catalyst to help our brand partners improve the effectiveness and productivity of their businesses. We work with our brand partner leaders to globalize best-practice business methods which enable our brand partners to improve their penetration in existing markets. These business methods will include: Healthy Snack Clubs, Weight Loss Challenges, and Internet/Sampling.
We are implementing an enterprise-wide technology solution, with a scalable and stable open architecture platform, to enhance our efficiency and productivity as well as that of our brand partners. In addition, we are upgrading our Internet-based marketing and brand partner services platform.
Our products are designed to help brand partners and customers achieve and maintain their healthy weight, improve their health and experience life-changing results. Our snacks and beverages appeal to the growing base of consumers seeking differentiated products and desiring a healthier lifestyle.
We market and sell 21 products through our brand partners. Our products may often be sold as part of a program, and therefore our portfolio is comprised of a series of related products designed to simplify weight management and nutrition for our consumers and maximize our brand partners’ cross-selling opportunities. These programs target specific consumer market segments, such as women, men or children, as well as weight-management customers and individuals looking to enhance their overall well being.
The following information summarizes our products by product category.
Weight Management & Energy, Sports & Fitness
Smart Shake, CrispyFruit, LoliBars, RealFruit, Lite Natural Microwave Mini Popcorn, Multigrain Pretzel Nuggets, LoliCrunch, Low-Sodium Mini-Twist Pretzels, and Zing! Healthy Energy Drink Mix.
Literature, Promotional and Other Products
We sell promotional materials designed to support our brand partners’ marketing efforts, as well as a Premium Marketing Program that includes retail websites for our brand partners to enhance the online experience and improve their productivity.
We are committed to providing our brand partners with delicious healthy snacks and beverage mixes to help them increase recruitment, retention and retailing. We believe this can be best accomplished in part by introducing new products and by upgrading, reformulating and repackaging existing product lines.
Once a particular market opportunity has been identified, our marketing and sales teams work closely with brand partners to effect a successful development and launch of the product. Our research and development is performed by in-house staff and outside consultants. For all periods presented, research and development costs were expensed as incurred and were not material.
A new product development process was deployed to accelerate the introduction of new products and to improve the launch of products. The process consists of five stages: identification, feasibility assessment, development, launch and learn.
New product ideas are generated and narrowed down to high potential ideas that fill our business needs and conform to our overall strategy. We test the most promising ideas with brand partners and customers. This testing is followed by a feasibility assessment, which includes a review of product and package prototypes, product positioning and messaging, process design and analysis of manufacturing issues.
The next stage is the development phase in which we finalize the formula, process, manufacturing strategy, product positioning, pricing, labeling and other related matters. The fourth stage is the launch phase in which we prepare promotional and sales materials, complete the supply chain plan and complete other final preparations for launch.
After the product is launched, we closely track sales performance and the lessons learned so we can update and improve the product development process.
Network Marketing Program
Our products are distributed through a network marketing organization comprised independent brand partners in the United States. In addition to helping our brand partners achieve physical health and wellness through use of our products, we offer our brand partners, who are independent contractors, attractive income opportunities. Brand partners may earn income on their own sales and can also earn bonuses on sales made by the brand partners in their sales organizations.
We believe that our products are particularly well suited to the network marketing distribution channel because sales of weight management products are strengthened by ongoing personal contact and coaching between retail consumers and brand partners. We believe our continued commitment to developing great tasting snacks and beverage mixes will enhance our ability to attract new brand partners as well as increase the productivity and retention of existing brand partners.
Structure of the Network Marketing Program
To become a brand partner, a person must be sponsored by an existing brand partner and must pay an annual brand partner fee.
Brand Partner Earnings
Brand partner earnings are derived from several sources. First, brand partners may earn profits by purchasing our products at wholesale prices, which are discounted 20% to 50% from suggested retail prices and selling our products to retail customers or to other brand partners. Second, brand partners who sponsor other brand partners and establish their own sales organizations may earn production bonuses.
Each brand partner’s success is dependent on two primary factors: 1) the time, effort and commitment a brand partner puts into his or her SnackHealthy business and 2) the product sales made by a brand partner and his or her sales organization.
Many of our brand partners join SnackHealthy to obtain a discount on our products and become a discount consumer or have a part-time retail income goal in mind. This retail income is not tracked by the Company.
Brand Partner Motivation and Training
We believe that motivation and training are key elements in brand partner success and that we, and our brand partner sales leaders have established a consistent schedule of events to support these needs. We, and our brand partner leadership will conduct thousands of training sessions annually on local, regional and national levels to educate and motivate our brand partners. Every month, there are training seminars held throughout the nation. As we grow in each major region, we plan to host events that focus on product and business development.
Additionally, once a year, we will host a national event at which our brand partners can attend to learn about new products, expand their skills and celebrate their success. In addition to these training sessions, we host weekly SnackHealthy Webinars that we use to provide brand partners continual training and the most current product and marketing information.
Manufacturing and Distribution
Our products are manufactured for us by third party manufacturing companies. We work closely with our vendors in an effort to achieve the highest quality standards and product availability. We continually strive to establish excellent relationships with our manufacturers and to obtain improvements in product quality and product delivery. Some of our key input materials such as whey proteins and packaging materials are subject to pricing fluctuations driven by commodities pricing. We are confident that we can offset potential cost increases of these materials with volume increases in our inventory purchases and, when necessary, by raising the prices of our products.
In order to coordinate and manage the manufacturing of our products, we will utilize a demand planning and forecasting process that is directly tied to our production planning and purchasing systems. Using a planning process allows us to balance our inventory levels to provide exceptional service to brand partners while minimizing working capital and inventory obsolescence.
Shipping and processing standards for orders placed are either same day or the following business day. Products are distributed in the United States market from our third party warehouse and distribution center in Salt Lake City.
Product Return and Buy-Back Policies
Our products include a customer satisfaction guarantee. Under this guarantee any customer who is not satisfied with a Snackhealthy product for any reason may return it unopened or any unopened unused portion of it within 30 days of purchase to the brand partner from whom it was purchased for a full refund from the brand partner or credit toward the purchase of another SnackHealthy product. If they return the products to us on a timely basis, the brand partner may obtain replacement product from us for such returned products. We believe this buy-back policy addresses a number of the regulatory compliance issues pertaining to network marketing.
Management Information, Internet and Telecommunication Systems
In order to facilitate our growth and support brand partner activities, we plan to continually upgrade our management information, Internet and telecommunication systems. These systems include: (1) Multiple centralized host computer systems managed by Exigo Office in Dallas, Texas and Solution X Global in Provo, Utah. These systems are linked together via a secure wide area network that provides on-line, real-time access to information, transitioning and reporting; (2) 24 hour order fulfillment center located in Salt Lake City, Utah linked in real time to our transitioning systems; (3) Local area networks of personal computers within our markets, serving our regional administrative staffs; (4) A state of the art international e-mail system through which our employees communicate; (5) A standardized Cisco telecommunication system in all of our markets; (6) Internet websites to provide a variety of online services for brand partners such as status of qualifications, meeting announcements, product information, application forms, educational materials and, in select markets including the United States, sales ordering capabilities.
These systems are designed to provide, among other things, financial and operating data for management, timely and accurate product ordering, payment processing, inventory management and detailed brand partner records. We intend to continue to invest in these systems in order to strengthen our operating platform.
On October 5, 2010, the Company, previously known as Time Associates, a Nevada corporation acquired all of the issued and outstanding common stock of Snack Healthy, Inc., previously known as Healthient, Inc., a Nevada corporation ("Healthient") in exchange for the issuance by the Company of a total of 43,618,356 newly issued restricted shares of common voting stock to the Healthient shareholders pursuant the Agreement an Plan of Reorganization dated as if September 23, 2010 (the "Acquisition"). Prior to the issuance of the shares, the Company had 160,078 shares of common stock issued and outstanding. Subsequent to the exchange there were 43,778,434 shares issued and outstanding. The shareholders of Healthient own 99.6% of the common stock outstanding of the Company after the issuance of the 43,618,356 shares. On November 15, 2010 Time Associates, Inc. name was changed to Healthient, Inc.
The acquisition of Healthient by the Company on October 5, 2010, has been accounted for as a purchase and treated as a reverse acquisition an re-capitalization since the former owners of Healthient controlled 99.6% of the total shares of Common Stock of the Company outstanding immediately following the acquisition. In November 2010, Healthient, Inc. changed its name to SnackHealthy, Inc.
On this basis, the historical financial statements prior to October 5, 2010, have been restated to be those of the accounting acquirer Healthient (now SnackHealthy, Inc.). The historical stockholders' equity prior to the reverse acquisition has been retroactively restated (a re-capitalization) for the equivalent number of shares received in the acquisition after giving effect to any difference in par value of the issuer's and acquirer's stock. The original 160,078 shares of common stock outstanding prior to the exchange reorganization have been reflected as an addition in the stockholders' equity account of the Company on October 5, 2010.
RESULTS OF OPERATIONS
Our results of operations for the periods below are not necessarily indicative of results of operations for future periods, which depend on numerous factors, including our ability to recruit new brand partners and retain existing brand partners, open new markets, further penetrate existing markets, introduce new products and programs that will help our brand partners increase their retail efforts and develop niche markets.
While in development stage, we commenced limited sales of two of our snack food products during the period ended March 31, 2011. Our revenue during the six months ended December 31, 2011 was $152,115 compared to a zero revenue for the six months ended December 31, 2010. We believe the fiscal year 2012 net sales should increase substantially year over year primarily as a result of the Company leaving development stage and transitioning to our brand partner business focus and daily consumption model, although no assurances can be made of such increases.
Cost of revenues
Costs of revenues were $59,162 or 39% of sales primarily due to higher shipping costs than usual.
Gross profit as a percentage of revenue was 61% for the six months ended December 31, 2011.
Selling expenses $34,433 as a percentage of net sales were 24% for the six months ended December 31, 2011.
General and administrative expenses
General and administrative expenses consist primarily of compensation and benefits to our general management, finance and administrative staff, professional advisor fees, audit fees and other expenses incurred in connection with general operations. Our general and administrative expenses for the six months ended December 31, 2011 increased 319% as compared to the same period in 2010. The increase was primary due to an issuance of common stock for professional fees of $405,000, independent contractors $484,200 and salaries $720,000. Rent increased due to the Company moving into new offices. The Company started amortizing Websites that were completed at the end our year June 30, 2011.
Provision for income taxes
Net loss for the six months ended December 31, 2011 $1,934,495 as compared to $609,126 for the same period in 2010. Increase was due primarily to non-cash expenses as a result of stock based compensation.
Liquidity and Capital Resources
Generally, our principal uses of cash includes operating expenses, particularly selling expenses, and working capital (principally inventory purchases), as well as capital expenditures and the development of operations in new markets. The capital expenditures to date, have been primarily related to the following:
The Company anticipates it will need to raise additional funds during the next twelve months in order to sustain the growth of our business and has signed an investment banking agreement with a licensed broker dealer. Monies will be used primarily to build significant product inventory and cash reserves.
As the Company enters it first year of operations it will require funds to build and replenish inventory and increase sales. The Company plans to continue to raise funds through the sales of common stock and to obtain credit from vendors for the purchase of inventory. The Company had cash of $7,467 at December 31, 2011. The Company had a negative working capital ratio as follows:
Management believes that the actions presently being taken and the success of future operations will be sufficient to enable the Company to continue as a going concern.
However, there can be no assurance that the raising of equity will be successful. Failure to achieve the needed equity funding could have a material adverse effect on the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. As a Smaller Reporting Company, as defined by Rule 12b-2 of the Exchange Act and in Item 10 (f) (1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
ITEM 4 - Controls and Procedures. The Company has disclosure controls and procedures (as defined in Rules 13a-14and 15d-14 under the Securities Exchange Act of 1934, as amended) to ensure that material information contained in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely and accurate basis. Based on such evaluation, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective at ensuring that material information is recorded, processed, summarized and reported on a timely and accurate basis in the Company's filings with the Securities and Exchange Commission. Since such evaluation there have not been any significant changes in the Company's internal controls, or in other factors that could significantly affect these controls.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the six months ended December 31, 2011, there were no changes in our internal controls that have materially affected or are reasonably likely to have materially affected our internal control over financial reporting.
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system is met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
ITEM 1A - RISK FACTORS
The worldwide financial and economic “crisis” could negatively impact our access to capital and the sales of our products and could harm our financial condition and operating results.
The current worldwide financial and economic “crisis” could potentially have a negative impact on us, our liquidity, our access to capital, our operations and our overall financial condition. While we have historically met our funding needs, no assurances can be given that the current overall downturn in the world economy will not significantly adversely impact us, and our business operations. We note economic and financial markets are fluid and we cannot ensure that there will not be in the near future a material adverse deterioration in our sales or liquidity.
Our failure to establish and maintain brand partner relationships for any reason could negatively impact sales of our products and harm our financial condition and operating results.
We distribute our products exclusively through independent brand partners, and we depend upon them directly for substantially all of our sales. To increase our revenue, we must increase the number of, or the productivity of, our brand partners. Accordingly, our success depends in significant part upon our ability to recruit, retain and motivate a large base of brand partners. We expect a high rate of turnover among our brand partners, which is a characteristic of the network marketing business. The loss of a significant number of brand partners for any reason could negatively impact sales of our products and could impair our ability to attract new brand partners.
In our efforts to attract and retain brand partners, we compete with other network marketing organizations, including those in the weight management, dietary and nutritional product industries. Our operating results could be harmed if our existing and new business opportunities and products do not generate sufficient interest to retain existing brand partners and attract new brand partners. Brand partners who purchase our product for personal consumption or for short-term income goals may stay with us for several months to one year. Sales leaders who have committed time and effort to build a sales organization will generally stay for longer periods. Brand partners have highly variable levels of training, skills and capabilities. The turnover rate of our brand partners, and our operating results, can be adversely impacted if we, and our senior brand partner leadership, do not provide the necessary mentoring, training and business support tools for new brand partners to become successful sales people in a short period of time.
Our brand partners, including our sales leaders, may voluntarily terminate their brand partner agreements with us at any time. The loss of a group of leading sales leaders, together with their down-line sales organizations, or the loss of a significant number of brand partners for any reason, could negatively impact sales of our products, impair our ability to attract new brand partners and harm our financial condition and operating results.
Since we cannot exert the same level of influence or control over our independent brand partners as we could were they our own employees, our brand partners could fail to comply with our brand partner policies and procedures, which could result in claims against us that could harm our financial condition and operating results.
Our brand partners are independent contractors and, accordingly, we are not in a position to directly provide the same direction, motivation and oversight as we would if brand partners were our own employees. As a result, there can be no assurance that our brand partners will participate in our marketing strategies or plans, accept our introduction of new products, or comply with our brand partner policies and procedures.
Extensive federal, state and local laws regulate our business, products and network marketing program. While we have implemented brand partner policies and procedures designed to govern brand partner conduct and to protect the goodwill associated with Healthient and SnackHealthy trademarks and tradenames, it can be difficult to enforce these policies and procedures because of the large number of brand partners and their independent status.
Violations by our independent brand partners of applicable law or of our policies and procedures in dealing with customers could reflect negatively on our products and operations and harm our business reputation. In addition, it is possible that a court could hold us civilly or criminally accountable based on vicarious liability because of the actions of our independent brand partners.
Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies, could harm our financial condition and operating results.
The size of our distribution force and the results of our operations may be significantly affected by the public’s perception of the Company and similar companies. This perception is dependent upon opinions concerning:
Adverse publicity concerning any actual or purported failure of our Company or our independent brand partners to comply with applicable laws and regulations regarding product claims and advertising, good manufacturing practices, the regulation of our network marketing program, the licensing of our products for sale in our target markets or other aspects of our business, whether or not resulting in enforcement actions or the imposition of penalties, could have an adverse effect on the goodwill of our Company and could negatively affect our ability to attract, motivate and retain brand partners, which would negatively impact our ability to generate revenue. We cannot ensure that all brand partners will comply with applicable legal requirements relating to the advertising, labeling, licensing or distribution of our products.
In addition, our brand partners’ and consumers’ perception of the safety and quality of our products and ingredients as well as similar products and ingredients distributed by other companies can be significantly influenced by media attention, publicized scientific research or findings, widespread product liability claims and other publicity concerning our products or ingredients or similar products and ingredients distributed by other companies.
Adverse publicity, whether or not accurate or resulting from consumers’ use or misuse of our products, that associates consumption of our products or ingredients or any similar products or ingredients with illness or other adverse effects, questions the benefits of our or similar products or claims that any such products are ineffective, inappropriately labeled or have inaccurate instructions as to their use, could lead to lawsuits or other legal challenges and could negatively impact our reputation, the market demand for our products, or our general business.
We expect, from time to time, we will receive inquiries from government agencies and third parties requesting information concerning our products. We will fully cooperate with these inquiries including, when requested, by the submission of detailed technical dossiers addressing product composition, manufacturing, process control, quality assurance, and contaminant testing. We are confident in the safety of our products when used as directed. However, there can be no assurance that regulators in these or other markets will not take actions that might delay or prevent the introduction of new products, or require the reformulation or the temporary or permanent withdrawal of certain of our existing products from the market.
Adverse publicity relating to us, our products or our operations, including our network marketing program or the attractiveness or viability of the financial opportunities provided thereby could have a negative effect on our ability to attract, motivate and retain brand partners. We expect that negative publicity will, from time to time, negatively impact our business in particular markets.
Our failure to appropriately respond to changing consumer preferences and demand for new products or product enhancements could significantly harm our brand partner and customer relationships and product sales and harm our financial condition and operating results.
Our business is subject to changing consumer trends and preferences, especially with respect to weight management products. Our continued success depends in part on our ability to anticipate and respond to these changes, and we may not respond in a timely or commercially appropriate manner to such changes. Furthermore, the healthy snack food and nutritional supplement industries are characterized by rapid and frequent changes in demand for products and new product introductions and enhancements.
Our failure to accurately predict these trends could negatively impact consumer opinion of our products, which in turn could harm our customer and brand partner relationships and cause the loss of sales. The success of our new product offerings and enhancements depends upon a number of factors, including our ability to:
If we do not introduce new products or make enhancements to meet the changing needs of our customers in a timely manner, some of our products could be rendered obsolete, which could negatively impact our revenues, financial condition and operating results.
Due to the high level of competition in our industry, we might fail to retain our customers and brand partners, which would harm our financial condition and operating results.
The business of marketing snack foods, and nutrition products is highly competitive and sensitive to the introduction of new products or weight management plans, including various prescription drugs, which may rapidly capture a significant share of the market. These market segments include numerous manufacturers, brand partners, marketers, retailers and physicians that actively compete for the business of consumers both in the United States and abroad.
In addition, we anticipate that we will be subject to increasing competition in the future from sellers that utilize electronic commerce. Some of these competitors have longer operating histories, significantly greater financial, technical, product development, marketing and sales resources, greater name recognition, larger established customer bases and better-developed distribution channels than we do.
Our present or future competitors may be able to develop products that are comparable or superior to those we offer, adapt more quickly than we do to new technologies, evolving industry trends and standards or customer requirements, or devote greater resources to the development, promotion and sale of their products than we do. Accordingly, we may not be able to compete effectively in our markets and competition may intensify.
We are also subject to significant competition for the recruitment of brand partners from other network marketing organizations, including those that market weight management products, dietary and nutritional supplements, as well as other types of products. We compete for customers and brand partners with regard to weight management and nutritional supplement products.
Our competitors include both direct selling companies such as Herbalife, NuSkin, Alticor/Amway, Melaleuca, Avon Products and Mary Kay, as well snack food manufactures and retail health food and grocery stores.
In addition, because the industry in which we operate is not particularly capital intensive or otherwise subject to high barriers to entry, it is relatively easy for new competitors to emerge who will compete with us for our brand partners and customers. In addition, the fact that our brand partners may easily enter and exit our network-marketing program contributes to the level of competition that we face.
For example, a brand partner can enter or exit our network marketing system with relative ease at any time without facing a significant investment or loss of capital because (1) we have a low upfront financial cost to become a SnackHealthy brand partner, (2) we do not require any specific amount of time to work as a brand partner, (3) we do not insist on any special training to be a brand partner and (4) we do not prohibit a new brand partner from working with another company. Our ability to remain competitive therefore depends, in significant part, on our success in recruiting and retaining brand partners through an attractive compensation plan, the maintenance of an attractive product portfolio and other incentives. We cannot ensure that our programs for recruitment and retention of brand partners will be successful and if they are not, our financial condition and operating results would be harmed.
We are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints, and our failure or our brand partners’ failure to comply with these constraints could lead to the imposition of significant penalties or claims, which could harm our financial condition and operating results.
The formulation, manufacturing, packaging, labeling, distribution, importation, exportation, licensing, sale and storage of our products are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints. Such laws, regulations and other constraints may exist at the federal, state or local levels in the United States and at all levels of government in foreign jurisdictions.
There can be no assurance that we, or our brand partners are in compliance with all of these regulations. Our failure or our brand partners’ failure to comply with these regulations or new regulations could lead to the imposition of significant penalties or claims and could negatively impact our business.
In addition, the adoption of new regulations or changes in the interpretations of existing regulations may result in significant compliance costs or discontinuation of product sales and may negatively impact the marketing of our products, resulting in significant loss of sales revenues.
In April 2006, the FTC issued a notice of proposed rulemaking which, if implemented in its originally proposed form, would have regulated all sellers of “business opportunities” in the United States. As originally proposed this rule would have applied to us and, if adopted in its originally proposed form, could have adversely impacted our U.S. business. On March 18, 2008, the FTC issued a revised proposed rule and, as indicated in the announcement accompanying the proposed rule, the revised proposal does not attempt to cover multilevel marketing companies such as SnackHealthy. The FTC has approved revisions to its Guides Concerning the Use of Endorsements and Testimonials in Advertising, or Guides, which became effective on December 1, 2009. Although the Guides are not binding, they explain how the FTC interprets Section 5 of the FTC Act’s prohibition on unfair or deceptive acts or practices. Consequently, the FTC could bring a Section 5 enforcement action based on practices that are inconsistent with the Guides. Under the revised Guides, advertisements that feature a consumer and convey his or her atypical experience with a product or service will be required to clearly disclose the results that consumers can generally expect. The revised Guides also add new examples to illustrate the long-standing principle that “material connections” between advertisers and endorsers (such as payments or free products), connections that consumers might not expect, must be disclosed.
Governmental regulations in countries where we plan to commence operations may prevent or delay entry into those markets. In addition, our ability to sustain satisfactory levels of sales in our markets is dependent in significant part on our ability to introduce additional products into such markets. However, governmental regulations, both domestic and international, can delay or prevent the introduction, or require the reformulation or withdrawal, of certain of our products.
Any such regulatory action, whether or not it results in a final determination adverse to us, could create negative publicity, with detrimental effects on the motivation and recruitment of brand partners and, consequently, on sales.
On June 25, 2007, the FDA published its final rule for cGMPs affecting the manufacture, packing, and holding of dietary supplements. The final rule requires identity testing on all incoming dietary ingredients, but permits the use of certificates of analysis or other documentation to verify the reliability of the ingredient suppliers. On the same date the FDA also published an interim final rule that outlined a petition process for manufacturers to request an exemption to the cGMP requirement for 100 percent identity testing of specific dietary ingredients used in the processing of dietary supplements. Under the interim final rule the manufacturer may be exempted from the dietary ingredient testing requirement if it can provide sufficient documentation that the reduced frequency of testing requested would still ensure the identity of the dietary ingredient. The final rule includes a phased-in effective date based on the size of the manufacturer. These rules apply only to manufacturers and holders of finished products and not to ingredient suppliers unless the ingredient supplier is manufacturing a final dietary supplement.
Our network marketing program could be found to be not in compliance with current or newly adopted laws or regulations in one or more markets, which could prevent us from conducting our business in these markets and harm our financial condition and operating results.
Our network marketing program is subject to a number of federal and state regulations administered by the FTC and various state agencies in the United States. We are subject to the risk that, in one or more markets, our network-marketing program could be found not to be in compliance with applicable law or regulations.
Regulations applicable to network marketing organizations generally are directed at preventing fraudulent or deceptive schemes, often referred to as “pyramid” or “chain sales” schemes, by ensuring that product sales ultimately are made to consumers and that advancement within an organization is based on sales of the organization’s products rather than investments in the organization or other non-retail sales-related criteria.
The regulatory requirements concerning network marketing programs do not include “bright line” rules and are inherently fact-based, and thus, even in jurisdictions where we believe that our network marketing program is in full compliance with applicable laws or regulations governing network marketing systems, we are subject to the risk that these laws or regulations or the enforcement or interpretation of these laws and regulations by governmental agencies or courts can change.
The failure of our network marketing program to comply with current or newly adopted regulations could negatively impact our business in a particular market or in general. We are also subject to the risk of private party challenges to the legality of our network- marketing program.
If we fail to further penetrate existing markets or successfully expand our business into new markets, then the growth in sales of our products, along with our operating results, could be negatively impacted.
The success of our business is to a large extent contingent on our ability to continue to grow by entering new markets and further penetrating existing markets. Our ability to successfully expand our business into additional countries, to the extent we believe that we have identified attractive geographic expansion opportunities in the future, is subject to numerous factors, many of which are out of our control.
In addition, government regulations in both our domestic and international markets can delay or prevent the introduction, or require the reformulation or withdrawal, of some of our products, which could negatively impact our business, financial condition and results of operations. Moreover, our growth will depend upon improved training and other activities that enhance brand partner retention in our markets. While we anticipate significant growth in certain of our markets, we cannot assure you that such growth levels will continue in the immediate or long term future.
Furthermore, our efforts to support growth in such international markets could be hampered to the extent that our infrastructure in such markets is deficient when compared to our more developed markets, such as the U.S. Therefore, we cannot assure you that our general efforts to increase our market penetration and brand partner retention in international markets will be successful. If we are unable to continue to expand into new markets or further penetrate existing markets, our operating results could suffer.
We depend on the integrity and reliability of our information technology infrastructure, and any related inadequacies may result in substantial interruptions to our business.
Our ability to provide products and services to our brand partners depends on the performance and availability of our core transactional systems, which is supported by a robust hardware and network infrastructure. We believe the enterprise suite is a scalable and stable solution that provides a solid foundation upon which we are building our next generation brand partner facing Internet back-office.
While we continue to invest in our information technology infrastructure, there can be no assurance that there will not be any significant interruptions to such systems or that the systems will be adequate to meet all of our future business needs.
The most important aspect of our information technology infrastructure is the system through which we record and track brand partner sales, volume points, bonuses and other incentives. We have encountered, and may encounter in the future, errors in our software or our enterprise network, or inadequacies in the software and services supplied by our vendors, although to date none of these errors or inadequacies has had a meaningful adverse impact on our business.
Any such errors or inadequacies that we may encounter in the future may result in substantial interruptions to our services and may damage our relationships with, or cause us to lose, our brand partners if the errors or inadequacies impair our ability to track sales and pay bonuses and other incentives, which would harm our financial condition and operating results.
Such errors may be expensive or difficult to correct in a timely manner, and we may have little or no control over whether any inadequacies in software or services supplied to us by third parties are corrected, if at all.
Since we rely on independent third parties for the manufacture and supply of certain of our products, if these third parties fail to reliably supply products to us at required levels of quality, then our financial condition and operating results would be harmed.
Our products are manufactured at third party contract manufacturers. We cannot assure that our outside manufacturers will continue to reliably supply products to us at the levels of quality, or the quantities, we require, especially under the FDA’s cGMP regulations. While we are not presently aware of any current liquidity issues with our suppliers, we cannot assure you that they will not experience financial hardship as a result of the current global financial crisis.
In the event any of our third-party manufacturers were to become unable or unwilling to continue to provide us with products in required volumes and at suitable quality levels, we would be required to identify and obtain acceptable replacement manufacturing sources. There is no assurance that we would be able to obtain alternative manufacturing sources on a timely basis.
An extended interruption in the supply of products would result in the loss of sales. In addition, any actual or perceived degradation of product quality as a result of reliance on third party manufacturers may have an adverse effect on sales or result in increased product returns and buybacks.
Also, as we experience ingredient and product price pressure in the areas of whey products, plastics, and transportation reflecting global economic trends, we believe that we will have the ability to mitigate some of these cost increases through improved optimization of our supply chain coupled with select increases in the retail prices of our products.
If we fail to protect our trademarks and trade names, then our ability to compete could be negatively affected, which would harm our financial condition and operating results.
The market for our products depends to a significant extent upon the goodwill associated with our trademark and trade names. We own the material trademark and trade name rights used in connection with the packaging, marketing and distribution of our products. Therefore, trademark and trade name protection is important to our business.
The loss or infringement of our trademarks or trade names could impair the goodwill associated with our brands and harm our reputation, which would harm our financial condition and operating results.
If our brand partners fail to comply with labeling laws, then our financial condition and operating results would be harmed.
Although the physical labeling of our products is not within the control of our independent brand partners, our brand partners must nevertheless advertise our products in compliance with the extensive regulations that exist in certain jurisdictions, such as the United States, which considers product advertising to be labeling for regulatory purposes.
Our products are sold principally as foods and dietary supplements, and are subject to rigorous FDA and related legal regimens limiting the types of therapeutic claims that can be made for our products. The treatment or cure of disease, for example, is not a permitted claim for these products.
While we train our brand partners and attempt to monitor our brand partners’ marketing materials, we cannot ensure that all such materials comply with applicable regulations, including bans on therapeutic claims. If our brand partners fail to comply with these restrictions, then we, and our brand partners could be subjected to claims, financial penalties, mandatory product recalls or relabeling requirements, which could harm our financial condition and operating results.
Although we expect that our responsibility for the actions of our independent brand partners in such an instance would be dependent on a determination that we either controlled or condoned a noncompliant advertising practice, there can be no assurance that we could not be held vicariously liable for the actions of our independent brand partners.
If our intellectual property is not adequate to provide us with a competitive advantage or to prevent competitors from replicating our products, or if we infringe the intellectual property rights of others, then our financial condition and operating results would be harmed.
Our future success and ability to compete depend upon our ability to timely produce innovative products and product enhancements that motivate our brand partners and customers, some of which we will attempt to protect under a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions.
However, our products are generally not patented and the legal protections afforded by common law and contractual proprietary rights in our products provide only limited protection and may be time- consuming and expensive to enforce and/or maintain.
Further, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our proprietary rights or from independently developing non- infringing products that are competitive with, equivalent to and/or superior to our products.
Monitoring infringement and/or misappropriation of intellectual property can be difficult and expensive, and we may not be able to detect any infringement or misappropriation of our proprietary rights. Even if we do detect infringement or misappropriation of our proprietary rights, litigation to enforce these rights could cause us to divert financial and other resources away from our business operations.
Additionally, third parties may claim that products we have independently developed infringe upon their intellectual property rights. There can be no assurance that one or more of our products will not be found to infringe upon other third party intellectual property rights in the future.
If any one of our products constituted a significant portion of our sales, significant decreases in consumer demand for this product or our failure to produce a suitable replacement should we cease offering it would harm our financial condition and operating results.
If consumer demand for this primary product decreased significantly or we ceased offering this product without a suitable replacement, then our financial condition and operating results would be harmed.
If we lose the services of members of our senior management team, then our financial condition and operating results could be harmed.
We depend on the continued services of senior management team including our Chairman and Executive Officer, William M. Alverson and our Chief Executive Officer, Katherine West as they work closely with the senior brand partner leadership to create an environment of inspiration, motivation and entrepreneurial business success. Although we do not believe that any of the management team is planning to leave in the near term, we cannot assure you that they will remain with us. The loss or departure of any member of our senior management team could adversely impact our brand partner relations and operating results.
If any of the senior management team does not remain with us, our business could suffer and could negatively impact our ability to implement our business strategy. Our continued success will be dependent on our ability to retain existing, and attract additional, qualified personnel to meet our needs. We currently do not maintain “key person” life insurance with respect to our senior management team.
We may be held responsible for certain taxes or assessments relating to the activities of our brand partners, which could harm our financial condition and operating results.
Our brand partners are subject to taxation, and in some instances, legislation or governmental agencies impose an obligation on us to collect taxes, such as value added taxes, and to maintain appropriate records. In addition, we are subject to the risk in some jurisdictions of being responsible for social security and similar taxes with respect to our brand partners.
In the event that local laws and regulations or the interpretation of local laws and regulations change to require us to treat our independent brand partners as employees, or that our brand partners are deemed by local regulatory authorities in one or more of the jurisdictions in which we operate to be our employees rather than independent contractors under existing laws and interpretations, we may be held responsible for social security and related taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financial condition and operating results.
We may incur material product liability claims, which could increase our costs and harm our financial condition and operating results.
Our products are classified as foods or dietary supplements and not subject to pre-market regulatory approval in the United States. Our products could contain contaminated substances, and some of our products contain some ingredients that do not have long histories of human consumption. Previously unknown adverse reactions resulting from human consumption of these ingredients could occur.
As a marketer of foods and dietary supplements that are ingested by consumers may be subjected to various product liability claims, including that the products contain contaminants, the products include inadequate instructions as to their uses, or the products include inadequate warnings concerning side effects and interactions with other substances.
It is possible that widespread product liability claims could increase our costs, and adversely affect our revenues and operating income. Moreover, liability claims arising from a serious adverse event may increase our costs through higher insurance premiums and deductibles, and may make it more difficult to secure adequate insurance coverage in the future. In addition, product liability insurance may fail to cover future product liability claims, thereby requiring us to pay substantial monetary damages and adversely affecting our business.
We are subject to, among other things, requirements regarding the effectiveness of internal controls over financial reporting. In connection with these requirements, we conduct regular audits of our business and operations. Our failure to identify or correct deficiencies and areas of weakness in the course of these audits could adversely affect our financial condition and operating results.
We are required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as new rules and regulations adopted by the SEC, and the Public Company Accounting Oversight Board. In particular, we are required to include management and auditor reports on the effectiveness of internal controls over financial reporting as part of our annual reports on Form 10-K, pursuant to Section 404 of the Sarbanes-Oxley Act.
We expect to spend significant amounts of time and money on compliance with these rules. Our failure to correct any noted weaknesses in internal controls over financial reporting could result in the disclosure of material weaknesses which could have a material adverse effect upon the market value of our stock.
On a regular and on-going basis, we will conduct audits of various aspects of our business and operations. These internal audits are conducted to insure compliance with our policies and to strengthen our operations and related internal controls. The Audit Committee of our Board of Directors regularly reviews the results of these internal audits and, if appropriate, will suggest remedial measures and actions to correct noted deficiencies or strengthen areas of weakness.
There can be no assurance that these internal audits will uncover all material deficiencies or areas of weakness in our operations or internal controls. If left undetected and uncorrected, such deficiencies and weaknesses could have a material adverse effect on our financial condition and results of operations.
From time to time, the results of these internal audits may necessitate that we conduct further investigations into aspects of our business or operations. In addition, our business practices and operations may periodically be investigated by one or more of the governmental authorities with jurisdiction over our operations. In the event that these investigations produce unfavorable results, we may be subjected to fines, penalties or loss of licenses or permits needed to operate in certain jurisdictions, any one of which could have a material adverse effect on our financial condition or operating results.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In the six months ended December 31, 2011, the Company issued 3,900,090 shares of common stock through its private placement of shares of common stock for a total amount of $439,239, to an "accredited investor", as that term is defined in Regulation D of the Securities Act of 1933. The proceeds of the sale were used for the working capital.
The shares of the Company's common stock were issued and sold in reliance upon the exemption provided by Section 4(2) and Regulation D of the Securities Act of 1933. Appropriate investment representations were obtained and the securities were issued with restrictive legends.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
ITEM 4 - [RESERVED]
ITEM 5 - OTHER INFORMATION
ITEM 6 - EXHIBITS
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.