ZRVT Zurvita Holdings Inc (CE)

ITEM 8. FINANCIAL STATEMENTS.

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

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

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

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

ZURVITA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2012 and 2011

NOTE 1 – NATURE OF OPERATIONS

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

Management’s Assessment of Liquidity

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

At July 31, 2012, the Company had negative working capital of approximately $1.5 million, an accumulated deficit of approximately $20.2 million and negative cash flows from operating activities of approximately $2.4 million.

Additional cash resources may be required should the Company not meet its sales targets, exceed its projected operating costs, wish to accelerate sales or complete one or more acquisitions or if unanticipated expenses arise or are incurred.  

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

These issues raise substantial doubt about our ability to continue as a going concern for a reasonable period. Management is attempting to enhance the operations of the Company to achieve and maintain cash-positive operations. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Revenue Recognition

Administrative Websites

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

Advertising Sales

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

Commissions

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

C onsumable Products

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

Marketing Fees and Materials

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

Membership Fees

The Company recognizes revenues from membership fees as earned for the sales of other lifestyle discount benefit programs, such as household protection and personal financial services.  These arrangements are generally renewable monthly and revenue is recognized over the renewal period.  

Refunds and Chargebacks

The Company records a reduction in revenue for estimated refunds and chargebacks from credit card companies based upon actual history and management’s evaluation of current facts and circumstances.   Refunds and chargebacks totaled approximately $72 thousand and $129 thousand for the year ended July 31, 2012 and 2011, respectively, and were recorded as a reduction of revenue in the accompanying statements of operations.  Estimates for an allowance for refunds and chargebacks totaled approximately $10 thousand and is included in accrued expenses in the accompanying consolidated balance sheets as of July 31, 2012 and July 31, 2011.

Selling and Marketing Costs

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

Concentration of Credit Risk

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

Use of Estimates

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

Marketable Securities

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

Accounts Receivable

Accounts receivable are stated at estimated net realizable value. Accounts receivable are primarily comprised of balances due from memberships, net of estimated allowances for uncollectible accounts. In determining collectability, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances. At July 31, 2012 and July 31, 2011, no allowance was recorded.

Property, Plant and Equipment

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

Share-Based Compensation

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

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

Convertible Instruments

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

Derivative Financial Instruments

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

Income Taxes

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

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

Fair Value Measurements

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

Earnings (Loss) Per Share

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

Subsequent Events

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

Depreciation expense for the years ended July 31, 2012 and 2011 was approximately $33 thousand and approximately $37 thousand, respectively.

The convertible note’s principal balance was due three years from the date of issuance and convertible at any time at the option of the holder at a conversion price of $0.25 per share. The Company accounted for the conversion feature as an embedded derivative instrument requiring it to be separated from the note payable and reported at fair value. The fair value of the conversion feature at issuance date was approximately $593 thousand. The separation of the conversion feature from the note payable resulted in a discount on the note payable and a share conversion liability in the amount of approximately $593 thousand.

The share conversion liability is subject to recurring fair value adjustments each reporting period (see Note 12 - Assets and Liabilities Measured at Fair Value). The discount is amortized over the life of the note payable using the effective interest method and recorded as interest expense in the statement of operations. During the years ended July 31, 2012 and 2011, total interest expense related to the convertible note payable was approximately $263 and $323 thousand, respectively. Of the interest expense recognized for the years ended July 31, 2012 and 2011, approximately $103 thousand and $130 thousand, respectively, was elected by the Company to be deferred and added to the principal of the note.

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

Furthermore, in connection with the Infusion Purchase Agreement, Infusion forgave and surrendered for cancellation that certain promissory note in principal amount of $2,000,000 (the “Note”) along with accrued interest of $818 thousand and unrealized gain on the conversion feature of $593 thousand for the year ended July 31, 2012, were written off to gain from extinguishment of debt. The Note was issued by the Company to Infusion in connection with that certain License and Marketing Agreement, dated October 9, 2009, by and between the Company and Infusion. Lastly, Infusion terminated and released any and all of Infusion’s security interest arising out of that certain Security Agreement, dated December 2, 2010, by and between the Company and Infusion.

On August 9, 2011, the Company repaid the note payable to Amacore of $465 thousand plus accrued interest of $6 thousand.

On April 20, 2012, the Company issued to Amacore an on-demand promissory note for $200 thousand. The note accrued interest at 15% per annum. The Company repaid the note payable plus accrued interest of $1 thousand.

On May 3, 2012, the Company issued to Mark Jarvis a promissory note for $100 thousand. The note accrued interest at 10% per annum and is due on December 31, 2013. As of July 31, 2012, the Company has not repaid the note plus accrued interest of $1.3 thousand.

On June 13, 2012, the Company issued to Vicis Capital Managment an on-demand promissory note for $600 thousand. The note accrued interest at 10% per annum and is due December 31, 2012. As of July 31, 2012, the Company has not repaid the note plus accrued interest of $14.6 thousand.

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

NOTE 8 – DEFERRED COMPENSATION

Deferred compensation at July 31, 2012 was approximately $98 thousand and consisted of compensation due to Mark Jarvis, Co-Chief Executive Officer, and a consultant.  These individuals deferred their compensation in an effort to manage cash flow while the Company undertook several capital intensive initiatives.  Subsequent to July 31, 2011, the Company and Mark  Jarvis entered into an employment agreement amendment which eliminated the deferred compensation due Mark Jarvis, and the Company issued 62,241 shares of restricted common stock to satisfy the deferred compensation due consultant. No deferred compensation was due at July 31, 2012.

NOTE 9 – ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

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

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

July 31, 2012

Fair Value Measurements at Reporting Date Using 

July 31, 2011

Fair Value Measurements at Reporting Date Using

The Company has categorized its assets and liabilities measured at fair value into the three-level fair value hierarchy, as defined in Note 2, based upon the priority of inputs to respective valuation techniques. Assets included in the level 1 of the fair value hierarchy include marketable securities which are fair valued on a recurring basis using quoted market prices. Liabilities included within level 3 of the fair value hierarchy presented in the preceding table include a share conversion feature and noncompensatory warrants. The valuation methodology for liabilities within level 3 uses a combination of observable and unobservable inputs in calculating fair value.

The Company recorded an unrealized loss of $36 thousand and $443 thousand on its marketable securities for the years ended July 31, 2012 and 2011. These losses have been included in the Statement of Operations caption “Loss on change in fair value of marketable securities.”

The changes in level 3 liabilities measured at fair value on a recurring basis during the years ended July 31, 2012 and 2011 are summarized as follows:

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

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

Furthermore, in connection with the Infusion Purchase Agreement, Infusion forgave and surrendered for cancellation that certain promissory note in principal amount of $2,000,000 (the “Note”) along with accrued interest of $818 thousand and unrealized gain on the conversion feature of $593 thousand for the year ended July 31, 2012, were written off to gain from extinguishment of debt. The Note was issued by the Company to Infusion in connection with that certain License and Marketing Agreement, dated October 9, 2009, by and between the Company and Infusion. Lastly, Infusion terminated and released any and all of Infusion’s security interest arising out of that certain Security Agreement, dated December 2, 2010, by and between the Company and Infusion.

For the years ended July 31, 2012 and 2011, an unrealized gain of $37 thousand and an unrealized gain of $6.1 million, respectively, are included in earnings within the Statement of Operations caption “Gain (loss) on change in fair value of warrants.” The unrealized gains for the year ended July 31, 2011 from the change in the fair value of warrants is a result of a decrease in the Company’s share price from $0.24 to $0.04 which is used as an input in the share price used in valuing the warrants.

Fair Value of Financial Instruments

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

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

Significant rights of the Convertible Preferred Stock are discussed below:

Dividends

The Convertible Preferred Stock does not accrue dividends.

Voting Rights

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

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

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

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

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

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

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

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

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

Liquidation Preferences

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

The liquidation value of Series A, Series B and Series C Convertible Preferred Stock was $1.75 million, $2 million, $4.8 million and $2.8 million, respectively, as of July 31, 2012.

Conversion Rights

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

At July 31, 2012, Series A, Series B and Series C Convertible Preferred Stock is convertible into 28 million, 8 million, 19.2 million, and 11.2 million common shares, respectively. If the Convertible Preferred Stock had been converted as of July 31, 2012, the aggregate market price of the common shares for Series A, Series B and Series C would have been approximately $1.1 million, $320 thousand, $768 thousand, and $448 thousand respectively.

Beneficial Ownership Limitations

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

Redemption Rights of the Company

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

Redemption Rights of Holder

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

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

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

NOTE 11 - COMMON STOCK

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

On July 30, 2009, the Company granted Mr. Jarvis 1.8 million shares of common stock, to be held in escrow, in connection with the execution of an employment agreement. These shares will be issued to Mr. Jarvis is accordance with the vesting period or upon completion of certain performance measures. Due to the forward stock split, the amount of shares was increased to 7.2 million shares of common stock. The shares are subject to a vesting period in which 3.6 million shares vest on July 30, 2010 and July 30, 2011, respectively. The grant date fair value was approximately $306 thousand.

For the years ended July 31, 2012 and 2011, approximately $55 thousand and $405 thousand, respectively, of stock-based compensation expense was recognized, as a result of various share issuances.

On July 31, 2009, the Company entered into a stock repurchase agreement with a majority shareholder to purchase 8 million shares for $210 thousand or $0.26 per share. The treasury stock was recorded at cost. Management’s plan is to retain these shares.

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

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

NOTE 12 –WARRANTS

During 2009, Zurvita’s Board of Directors adopted the 2009 Incentive Stock Plan (the 2009 Plan), pursuant to which we reserved for issuance 6 million shares of Zurvita common stock to be used as awards to employees, directors, consultants, and other service providers. The purpose of the 2009 Plan is to provide an incentive to attract and retain officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons into Zurvita’s development and financial success. Under the 2009 Plan, Zurvita is authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long term incentive awards. The 2009 Plan is administered by the Board’s designated Compensation Committee. As of July 31, 2011, approximately 5.2 million total options were issued under the 2009 Plan.

During the year ended July 31, 2011, the Company issued approximately 6.45 million warrants to purchase common stock.

The following table summarizes the status of all warrants outstanding and exercisable at July 31, 2012.

Compensatory Equity Warrants

During the year ended July 31, 2012, the Company issued compensatory equity warrants to purchase an aggregate of approximately 433 thousand shares of common stock.

Assumptions used to determine the fair value of the compensatory warrants granted during the years ended July 31, 2012 and 2011 are as follows.

The following table summarizes the activity for compensatory warrants classified as equity for the year ended July 31, 2012.

The total fair value of warrants vested during the year ended July 31, 2012 was approximately $177 thousand. The weighted average grant date fair value of warrants granted during the year ended July 31, 2012 and 2011 was $0 and $0, respectively.

A summary of the status of the Company's non-vested compensatory equity warrants of July 31, 2012, and the changes during the year ended July 31, 2012, is presented below.

The weighted average period over which non-vested awards are expected to be recognized is 1 year.

Non-compensatory Liability Warrants

During the year ended July 31, 2011, Zurvita issued in conjunction with preferred stock non-compensatory warrants to purchase an aggregate of approximately 6 million shares of common stock. There were approximately 66.4 million non-compensatory warrants outstanding as of July 31, 2012, all of which were classified as liabilities. These warrants are classified as liability instruments as net share settlement is not considered within the Company’s control or certain exercise prices are not fixed which has the potential to cause a variable number of shares and/or value exchange upon exercise.

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

Assumptions used to determine the fair value of the non-compensatory warrants granted at and during the years ended July 31, 2012 and 2011 are as follows.

A summary of the activity of the Company's non-compensatory warrants classified as liabilities on the balance sheet during the year ended July 31, 2012 is presented below.

As of July 31, 2012, there was no unrecognized compensation cost related to non-compensatory liability warrants as all were immediately vested upon issuance. There were no warrants exercised during the year ended July 31, 2012 therefore no intrinsic value associated with them. The total fair value of vested warrants at July 31, 2012 was approximately $1.5 thousand. The weighted average grant date fair value of warrants granted during the year ended July 31, 2012 and 2011 was $0 and $0, respectively.

A summary of the status of the Company's non-vested non-compensatory liability warrants as of July 31, 2012, and the changes during the year ended July 31, 2012, is presented below.

Amacore Stock Warrants Issued

During 2008, The Amacore Group, Inc (“Amacore”) granted to Mr. Jarvis 800 thousand warrants to purchase common stock in connection with his employment agreement with the Company. In the event the warrants are exercised, Amacore will issue the corresponding authorized and available common stock to Mr. Jarvis. The contractual term of the warrants issued was five years.

Amacore had accelerated the vesting conditions of the original award prior to July 31, 2009 and, therefore, no compensation expense is recorded in fiscal 2010. As of July 31, 2011, there were 800 thousand warrants outstanding and exercisable. No warrants expired, nor were any warrants exercised or forfeited during the nine months ended April 30, 2011 and, therefore, no intrinsic value was realized. As of July 31, 2011, the weighted average exercise price of warrants granted was $0.60. The grant date fair value of the warrants granted was $0.43.

Stock-Based Compensation Expense

For the years ended July 31, 2012 and 2011, the Company recognized stock-based compensation expense, including both expense related to compensatory warrants and expense related to share awards, with the Statement of Operations as follows:

NOTE 13 - INCOME TAXES

Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

The components of the income tax provision (benefit) are as follows:

Temporary differences that give rise to deferred tax assets and liabilities are summarized as follows:

As of July 31, 2012, realization of the Company’s net deferred tax assets of approximately $7.4 million was not considered more likely than not, and, accordingly, a valuation allowance of an equal amount was provided. The net change in the total v aluation allowance during the year ended July 31, 2011, was approximately $324 thousand.

The Company has a total of $18.3 million of net operating losses available to be offset against future taxable income and that expire between 2028 and 2030.

The Company determined that there were no uncertain tax positions, and accordingly no associated interest and penalties were required to be accrued at July 31, 2011 and 2010, respectively. The Company does not believe that there are any tax positions for which a material change in unrecognized tax benefit or liability is reasonable possible in the next twelve months. The Company believes that there are no uncertain tax positions which, if recognized, would impact the effective tax rate.

Below is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended July 31, 2012 and 2011.

NOTE 14 - EARNINGS (LOSS) PER SHARE

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

The following is the computation of basic and diluted net earnings (loss) per common share for the year ended July 31, 2012 and 2011:

During the years ended July 31, 2012 and 2011, the effect of convertible debt, outstanding exercisable warrants and convertible preferred stock were not included within the Company’s earnings (loss) per share calculation as they were either out-of-the money or anti-dilutive.

Securities that could potentially dilute earnings per share in the future, but which were not included in the calculation of diluted earnings per share because they were either out-of-the money or to do so would have been anti-dilutive are as follows:

NOTE 15 - COMMITMENTS AND CONTINGENCIES

The Company is committed under a lease of office space through July 31, 2015. For the years ended July 31, 2012 and 2011, rent expense was approximately $108 thousand and $108 thousand, respectively. 

The following is a schedule of future minimum lease payments required under the said lease.

Employment Agreement with Mark Jarvis

On July 30, 2009, the Company entered into an employment agreement with Mark Jarvis (the “Jarvis Agreement”), pursuant to which Mr. Jarvis agreed to serve as Co-CEO of the Company for a term of two years.  Pursuant to the Jarvis Agreement, Mr. Jarvis shall receive annual compensation of $480 thousand (the “Base Salary”).  Mr. Jarvis shall also be entitled certain other benefits, including health insurance, as may be provided to other comparable executives of Zurvita Holdings.  In addition, within 30 days of the execution of the Jarvis Agreement, the Company shall place 7.2 million shares of the Company’s common stock in escrow on behalf of Mr. Jarvis (the “Initial Jarvis Shares”). The Initial Jarvis Shares are subject to a vesting period pursuant to which (i) 3.6 million shares shall vest on July 30, 2010, and (ii) 3.6 million shares shall vest on July 30, 2011.  In addition, in the event that for the first quarter ending six months after July 30, 2009 Zurvita Holdings is cash flow positive, the Company shall, within 30 days of the Company filing its Form 10-Q, issue to Mr. Jarvis 7.2 million shares. Alternatively, for the two quarters ending six (6) months after Start-Up Period, (“Extended Measuring Quarters”), should the average Zurvita Holdings monthly cash flow during the Extended Measuring Quarters, as documented on the monthly cash flow statements, and verified in the Quarterly Report(s), be operationally cash flow positive, the Performance Shares shall be issued to Executive subject to a one year vesting period from the time of initial grant.  However, these shares were not issued at either of these aforementioned periods, as the requirements for issuance were not met. In addition to his Base Salary, Mr. Jarvis shall also be eligible to receive certain incentive bonus compensation (the “Incentive Bonus”) based upon the revenue generated by Zurvita Holdings.  Mr. Jarvis’ Incentive Bonus shall be calculated as 10% of Zurvita Holdings net income.  If Mr. Jarvis’ employment is terminated by the Company as a result of his disability (as such term is defined in the Jarvis Agreement), Mr. Jarvis shall be entitled to receive a lump sum payment equal to his (i) accrued but unpaid Base Salary, (ii) any outstanding expense reimbursements, (iii) any accrued but unpaid Incentive Bonus, (iv) a monthly amount, which when added to any amounts received by Mr. Jarvis from any disability policy in effect at the time of his disability, will equal Mr. Jarvis’ Base Salary for the 12 month period following the date of disability termination.

Subsequent to July 31, 2011, the Company and Mark  Jarvis entered into an employment agreement amendment which eliminated the deferred compensation due Mark Jarvis, and the Company issued 62,241 shares of restricted common stock to satisfy the deferred compensation due consultant. No deferred compensation was due at July 31, 2012.

NOTE 16 - LEGAL PROCEEDINGS

As of July 31, 2011, the Company was involved in various additional claims or disputes arising in the normal course of business. The outcome of such claims cannot be determined at this time. Management does not believe that the ultimate outcome of these matters will have a material impact on the Company’s operations or cash flows.

NOTE 17 - RELATED PARTY TRANSACTIONS

Commissions Paid

There are immediate family members of Mr. Jarvis, who operate as independent sales consultants who were paid commission compensation which approximated $199 thousand for the year ended July 31, 2012, and approximately $92 thousand for the year ended July 31, 2011. These payments were for work they performed on behalf of the Company.

Interest on Note Payable to Infusion Brands International, Inc. f/k/a OmniReliant Holdings, Inc.

The Company recognized interest expense with respect to the note payable due to Infusion Brands, who is a significant shareholder of the company. For the year ended July 31, 2012 and 2011, interest expense was approximately $263 thousand and $323 thousand, respectively. Of the interest expense recognized, approximately $159 thousand and $192 thousand relates to the amortization of the discount.

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

Furthermore, in connection with the Infusion Purchase Agreement, Infusion forgave and surrendered for cancellation that certain promissory note in principal amount of $2,000,000 (the “Note”) along with accrued interest of $818 thousand and unrealized gain on the conversion feature of $593 thousand for the year ended July 31, 2012, were written off to gain from extinguishment of debt. The Note was issued by the Company to Infusion in connection with that certain License and Marketing Agreement, dated October 9, 2009, by and between the Company and Infusion. Lastly, Infusion terminated and released any and all of Infusion’s security interest arising out of that certain Security Agreement, dated December 2, 2010, by and between the Company and Infusion.