UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC 20549





FORM 10-Q





(Mark One)


x      Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934





For the quarterly period ended January 31, 2011





o      Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934





For the transition period from _________ to _________





Commission file number 333-145898





ZURVITA HOLDINGS, INC.


(Exact name of registrant as specified in its charter)





Delaware

26-0531863(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)




800 GessnerHouston, Texas 77024(Address of principal executive offices) (zip code)





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




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x      No o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   No o





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





Large accelerated filer   o
Accelerated filer  oNon-accelerated filer    o(Do not check if a smaller reporting company)
Smaller reporting company  x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes o      No x





Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of March 17, 2011:


61,498,713 shares of common stock, par value $0.0001




















ZURVITA HOLDINGS, INC.





FORM 10-Q





PART I - FINANCIAL INFORMATION





Page No.Item 1.   Financial Statements (Unaudited).Condensed Consolidated Balance Sheets – January 31, 2011 and July 31, 2010
3Condensed Consolidated Statements of Operations – For the Three and Six Months Ended January 31, 2011 and 2010
4Condensed Consolidated Statements of Cash Flows – For the Six Months Ended January 31, 2011 and 2010
5Condensed Consolidated Statement of Stockholders’ Deficit – For the Six Months Ended January 31, 2011
6Notes to Interim Condensed Consolidated Financial Statements
7Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
21Item 3.   Quantitative and Qualitative Disclosures about Market Risk.
28Item 4.   Controls and Procedures.
28





PART II - OTHER INFORMATION





Page No.Item 1.   Legal Proceedings.
28Item 1a. Risk Factors.
28Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.
28Item 3.   Defaults Upon Senior Securities.
28Item 4.   Removed and Reserved.
28Item 5.   Other Information.
28Item 6.   Exhibits.
29Signatures
30











ZURVITA HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS




(Unaudited)January 31, 2011


July 31, 2010ASSETSCurrent assetsCash

$
16,305


$
289,442Marketable securities (at fair value)


320,000



480,000Note receivable - related party


-



1,702,000Accounts receivable


154,245



137,123Agent advanced compensation


-



448,553Deferred expenses


33,073



127,351Other assets


191,983



41,173Total current assets


715,606



3,225,642Property, plant and equipment (net)


80,455



94,965Merchant account deposit


115,333



115,333Total assets

$
911,394


$
3,435,940LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICITCurrent liabilitiesAccounts payable

$
346,973


$
249,762Accounts payable - related party


140,139



127,733Notes payable - current


181,305



284,967Accrued expenses


254,572



332,217Deferred revenue


375,123



808,957Deferred compensation - related party


97,546



110,238Income tax payable


5,300



2,628Total current liabilities


1,400,958



1,916,502Notes payable - long term


1,797,295



1,639,268Fair value of share conversion feature


-



462,013Fair value of warrants


462,000



6,370,000Total liabilities


3,660,253



10,387,783Redeemable preferred stock


4,550,747



4,550,747Stockholders' deficitCommon stock ($.0001 par value, 300,000,000 sharesauthorized; 69,498,713 and 69,497,713 shares issued and 61,498,713 and 61,497,713 shares outstanding as of January 31, 2011  and July 31, 2010, respectively)


6,950



6,950Treasury stock


(210,000
)


(210,000
)Additional paid-in capital


10,241,459



9,978,738Accumulated deficit


(17,338,015
)


(21,278,278
)Total stockholders' deficit


(7,299,606
)


(11,502,590
)Total liabilities, redeemable preferred stock and stockholders' deficit

$
911,394


$
3,435,940


The accompanying notes are an integral part of these condensed consolidated financial statements.
  3


ZURVITA HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


For the Three Months Ended


For the Six Months EndedJanuary 31,


January 31,2011


2010


2011


2010REVENUESAdministrative websites

$
389,633


$
513,770


$
851,362


$
998,135Advertising sales


212,882



251,819



454,156



255,591Commissions


165,535



95,521



276,626



156,841Marketing fees and materials


235,704



555,105



584,931



951,227Membership fees


131,912



236,696



281,378



539,751Total revenues


1,135,666



1,652,910



2,448,453



2,901,545COST OF SALESBenefit and service cost


309,477



352,952



622,401



630,246Sales commissions


420,869



719,028



990,226



1,630,876Total cost of sales


730,346



1,071,980



1,612,627



2,261,122GROSS PROFIT


405,320



580,930



835,826



640,423OPERATING EXPENSESDepreciation


9,531



8,824



19,317



17,276Office related expenses


134,825



85,575



261,524



168,888Payroll and employee benefits


507,091



442,390



1,113,943



762,970Professional fees


202,082



442,723



494,968



748,897Selling and marketing


424,444



838,693



932,830



1,490,807Travel


37,476



52,285



117,227



106,033Total operating expenses


1,315,449



1,870,490



2,939,809



3,294,871Loss from operations before other income (expense)


(910,129
)


(1,289,560
)


(2,103,983
)


(2,654,448
)OTHER INCOME (EXPENSE)Gain on change in fair value of share conversion feature


138,764



28,103



462,013



32,295Gain (loss) on change in fair value of marketable securities


160,000



(400,000
)


(160,000
)


(530,000
)Gain (loss) on change in fair value of warrants


2,784,000



2,162



5,908,000



(4,039,665
)Interest expense


(84,222
)


(79,667
)


(167,849
)


(108,096
)Interest income


-



-



4,756



-Total other income (expense)


2,998,542



(449,402
)


6,046,920



(4,645,466
)Income (loss) before income taxes


2,088,413



(1,738,962
)


3,942,937



(7,299,914
)Income taxes


1,371



10,357



2,673



20,142Net income (loss)

$
2,087,042


$
(1,749,319
)

$
3,940,264


$
(7,320,056
)Basic and diluted earnings (loss) per share

$
0.03


$
( 0.03
)

$
0.06


$
( 0.13
)Basic and diluted weighted average number of common shares outstanding


61,498,713



56,653,792



61,498,713



56,546,896


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






4


ZURVITA HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


For the Six Months EndedJanuary 31, 2011


January 31, 2010Cash flows from operating activitiesNet income (loss)

$
3,940,264


$
(7,320,056
)Adjustments to reconcile net income (loss) to net cash used in operating activities:Amortization of note payable discount


93,368



52,254Amortization of deferred marketing costs


-



328,700Depreciation


19,317



17,276Share-based compensation


262,220



243,583Gain on change in fair value of share conversion feature


(462,013
)


(32,295
)(Gain) loss on change in fair value of warrants


(5,908,000
)


4,039,665Loss on change in fair value of marketable securities


160,000



530,000Changes in operating assets and liabilitiesIncrease in accounts receivable


(17,122
)


(56,280
)Decrease in agent advanced compensation


448,553



252,729Decrease (increase) in deferred expenses


94,279



(294,620
)Increase in other assets


(131,180
)


(15,541
)Increase in accounts payable and accrued expenses


99,307



84,234(Decrease) increase in deferred revenue


(433,834
)


270,678Decrease in deferred compensation related party


(12,692
)


-Net cash used in operating activities


(1,847,533
)


(1,899,673
)Cash flows from investing activitiesNet proceeds from promissory note recievable


1,702,000



-Purchase of property and equipment


( 4,815
)


(6,698
)Purchase of marketable securities


-



(770,000
)Net cash provided by (used in) investing activities


1,697,185



(776,698
)Cash flows from financing activitiesProceeds from borrowings


10,000



-Proceeds from exercise of warrants


500



-Proceeds from sale of preferred stock


-



2,000,000Principal payments made on notes payable


(133,289
)


(647,967
)Net cash (used in) provided by financing activities


(122,789
)


1,352,033Net change in cash balance


(273,137
)


(1,324,338
)Beginning cash


289,442



1,390,953Ending cash

$
16,305


$
66,615Supplemental disclosure of cash flow informationCash paid for interest

$
8,410


$
17,727Cash paid for taxes

$
-


$
-


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








5


ZURVITA HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (Unaudited)




Shares

Common Stock


Common

Stock


Treasury

Stock


Additional

Paid-In

Capital


Accumulated

Deficit


Total

Stockholder's

DeficitBalance, July 31, 2010


61,497,713


$
6,950


$
( 210,000
)

$
9,978,738


$
( 21,278,278
)

$
( 11,502,590
)Share-based compensation


-



-



-



262,220



-



262,220Exercise of comon stock warrants


1,000



-



-



500



-



500Net income available to common stockholders


-



-



-



-



3,940,264



3,940,264Balance, January 31, 2011


61,498,713


$
6,950


$
( 210,000
)

$
10,241,458


$
( 17,338,014
)

$
( 7,299,606
)




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














6




ZURVITA HOLDINGS, INC.
 NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 
 NOTE 1 – NATURE OF OPERATIONS
 
 Our condensed 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 direct sales marketing company offering high-quality products and services targeting individuals, families and small businesses.  The Company’s differentiated services feature consumer products and small business solutions offered through a growing network of independent sales consultants.  Zurvita Holdings offers a unique business-to-business strategy with turnkey solutions for commercial and residential energy, advertising, telecommunications and healthcare services.  The Company also markets numerous low-cost ancillary products,such as legal assistance and restoration services for identity theft and consumer credit.
 
 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 $5.3 million to another related party. We are using the proceeds from the sale of preferred stock to subsidize the Company’s operations as the Company’s revenues and operating cash flows are not currently sufficient to support the Company’s current operations.
 
 At January 31, 2011, the Company had negative working capital of approximately $685 thousand, an accumulated deficit of approximately $17.3 million and negative cash flows from operating activities of approximately $1.8 million. Since the date of inception, the Company has used approximately $8.2 million in operations.
 
 The Company believes that without the support of its related party stockholders its cash resources would be insufficient to sustain current planned operations for the next 12 months. The Company raised $7.05 million from the sale of preferred stock in four tranches completed in July 2009, October 2009, January 2010 and June 2010.   Additional cash resources may be required should the Company not meet its sales targets, exceed its projected operating costs, wish to accelerate sales or complete one or more acquisitions or if unanticipated expenses arise or are incurred.
 
 The Company does not currently maintain a line of credit or term loan with any commercial bank or other financial institution and has not made any other arrangements to obtain additional financing.  We can provide no assurance that we will not require additional financing.  Likewise, we can provide no assurance that if we need additional financing that it will be available in an amount or on terms acceptable to us, if at all.  If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we may be unable to execute our business plan or pay our costs and expenses as they are incurred, which could have a material, adverse effect on our business, financial condition and results of operations.
 
 These issues raise substantial doubt about our ability to continue as a going concern for a reasonable period.
 
 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 In June 2009, the Financial Accounting Standards Board (“FASB”) approved FASB Accounting Standards Codification (“Codification”) as the single source of authoritative accounting guidance used in the preparation of financial statements in conformity with U.S. GAAP for all non-governmental entities. Codification, which changed the referencing and organization of accounting guidance without modification of existing U.S. GAAP, is effective for interim and annual periods ending after September 15, 2009.  Since it did not modify existing U.S. GAAP, Codification did not have any impact on the Company’s financial condition or results of operations.
 
 Revenue Recognition
 
 Administrative Websites
 
 Company’s independent representatives pay a fee to the Company entitling them to use of websites that facilitate their business operations.  This 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.  This revenue is recognized ratably over the advertising subscription period.
 
 7
 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.
 
 Marketing Fees and Materials
 
 The Company markets certain of its products through a multi-level sales organization whereby independent distributors establish their own network of associates.  The independent distributors pay the Company an annual fee to become marketing representatives on behalf of the Company.  In exchange, the representatives receive access, on an annual basis, to various marketing and promotional materials and tools as well as access to a customized management reporting platform; accordingly, revenue from marketing fees is recognized over an annual period.  The Company also earns ancillary revenue from the sale of marketing materials to third parties.  Revenue is recognized when marketing materials are delivered.
 
 Membership Fees
 
 The Company recognizes revenues from membership fees as earned for the sales of other lifestyle discount benefit programs, such as household protection and personal financial services.  These arrangements are generally renewable monthly and revenue is recognized over the renewal period.  These products often include elements sold through contracts with third-party providers.  Based on consideration of each contractual arrangement, revenue is reported on a gross basis.
 
 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 $33 thousand and $143 thousand for the three months ended January 31, 2011 and 2010, respectively, and $83 thousand and $171 thousand for the six months ended January 31, 2011 and 2010, respectively, and were recorded as a reduction of revenue in the accompanying statements of operations.  Estimates for an allowance for refunds and chargebacks totaled approximately $10 thousand and $14 thousandis included in accrued expenses in the accompanying condensed consolidated balance sheets as of January 31, 2011 and July 31, 2010, respectively.
 
 Selling and Marketing Costs
 
 The Company classifies merchant account fees, fulfillment costs and lead cost not identifiable with specific product sales within selling and marketing costs within the Statement of Operations.
 
 Concentration of Credit Risk
 
 All of the Company’s credit card processing is with one merchant processor, as well as all marketing sales commission payments are calculated by a third-party service provider.
 
 Use of Estimates
 
 The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The accounting estimates requiring a high degree of management’s subjective judgments include 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.  Due to the uncertainty inherent in such estimates, actual results may differ from these estimates.
 
 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.
 
 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.
  8
 
 Accounts Receivable
 
 Accounts receivable are stated at estimated net realizable value.  Accounts receivable are primarily comprised of balances due from memberships, net of estimated allowances for uncollectible accounts.  In determining collectability, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances.  At January 31, 2011 and July 31, 2010, no allowance was recorded.
 
 Property, Plant and Equipment
 
 Property, plant and equipment are recorded at cost.  The cost of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred.  The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the property as follows: computer hardware, 3 years; furniture and fixtures, 7 years; equipment and machinery, 5 years; and leasehold improvements, the shorter of the term of the lease or the life of the asset.  When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in the results of operations.
 
 Share-Based Compensation
 
 The Company recognizes the cost resulting from all share-based payment transactions in the financial statements using a fair-value-based measurement method.  The Company uses the Black-Scholes Option Pricing Model in computing the fair value of warrant instrument issuances.
 
 The measurement date for valuing share-based payments made to non-employees is the earlier of the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or the date at which the counterparty’s performance is complete.
 
 Convertible Instruments
 
 The Company reviews the terms of convertible debt and preferred stock for indications requiring bifurcation, and separate accounting for the embedded conversion feature. Generally, embedded conversion features where the ability to physical or net-share settle the conversion option is not within the control of the Company or the number of shares is variable are bifurcated and accounted for as derivative financial instruments. (See Derivative Financial Instruments below). Bifurcation of the embedded derivative instrument requires allocation of the proceeds first to the fair value of the embedded derivative instrument with the residual allocated to the host instrument.  The resulting discount to the debt instrument or to the redemption value of convertible preferred securities is accreted through periodic charges to interest expense over the term of the note or to dividends over the period to earliest conversion date using the effective interest rate method, respectively.
 
 Derivative Financial Instruments
 
 The Company does not use derivative financial instruments to hedge exposures to cash-flow or market risks. However, certain other financial instruments, such as warrants to purchase the Company’s common stock and the embedded conversion features of debt and preferred instruments that are not considered indexed to the Company’s common stock are classified as liabilities when either (a) the holder possesses rights to net-cash settlement, (b) physical or net share settlement is not within the control of the Company, or (c) based on its anti-dilutive provisions.  In such instances, net-cash settlement is assumed for financial accounting and reporting. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period. Fair value for option-based derivative financial instruments is determined using the Black-Scholes Option Pricing Model.
 
 Income Taxes
 
 The Company accounts for income taxes using an asset and liability method pursuant to which deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided against deferred tax assets based on the weight of available evidence when it is more likely than not that some or all of the deferred tax assets will not be realized.
 
 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.
  9
 
 Fair Value Measurements
 
 U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability to a third party with the same credit standing (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In many cases, the exit price and the transaction (or entry) price will be the same at initial recognition. However, in certain cases, the transaction price may not represent fair value. Fair value is a market-based measurement determined based on a hypothetical transaction at the measurement date, considered from the perspective of a market participant, not based solely upon the perspective of the reporting entity. When quoted prices are not used to determine fair value, consideration is given to three broad valuation techniques: (i) the market approach, (ii) the income approach, and (iii) the cost approach. Entities are required to determine the most appropriate valuation technique to use, given what is being measured and the availability of sufficient inputs. Inputs to fair valuation techniques are prioritized, allowing for the use of unobservable inputs to the extent that observable inputs are not available. The applicable guidance establishes a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. The input levels are defined as follows:
 
 Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities.
 
 Level 2
Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1, quoted prices in markets that are not active, or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 Level 3
Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.  Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.  Level 3 assets and liabilities include those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as those for which the determination of fair value requires significant management judgment or estimation.
 
 Earnings 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.  For the three and six months ended January 31, 2011, securities that could potentially dilute earnings per share in the future were not included within the Company’s earnings (loss) per share calculation as their effect would be anti-dilutive.
 
 Subsequent Events
 
 Management has evaluated subsequent events through the date the financial statements were issued.
  10
 
 NOTE 3 – NON CASH INVESTING AND FINANCING ACTIVITIES
 
 The following table presents a summary of the various noncash investing and financing transactions that the Company entered into during the three months ended:




January 31, 2011


January 31, 2010Embedded conversion feature on note payable issued

$
-


$
593,426Financed insurance agreement


19,627



22,031Accrued interest converted to principal


64,658



30,667Note payable issued in exchange for marketing services agreement


-



1,406,574Securities sale proceeds held in escrow


-



1,000,000




NOTE 4 – AGENT ADVANCED COMPENSATION


The Company entered into loan agreements with certain of its independent sales agents which represent advanced compensation.  The agreements have an approximately 2 year term; however, if an agent is still selling for the Company at the maturity date then the note is forgiven.  Therefore, the Company is expensing them over the term of the loan.  The expense is recognized in selling and marketing expenses on the statement of operations as it is not directly related to sales of product or services.  Approximately $259 thousand and $615 thousand of expense was recognized for three and six months ended January 31, 2011, respectively, as compared to $304 thousand and $611 thousand was recognized for three and six months ended January 31, 2010, respectively.  As of January 31, 2011, all notes had matured and were forgiven.  At July 31, 2010, the balance of the loans was approximately $449 thousand.
  NOTE 5 – DEFERRED EXPENSES
 
 For sales of subscriptions for which the terms cross reporting periods, the associated commissions paid to the Company’s sales representatives are deferred and amortized over the subscription period.  As of January 31, 2011 and July 31, 2010, the balances of the deferred commissions were approximately $33 thousand and $127 thousand, respectively, and are classified as a current asset.
 
 NOTE 6 – NOTES PAYABLE
 
 Notes payable consist of the following:




January 31, 2011


July 31, 2010Related party convertible note payable; face amount $2 million; bearing interest of 6% per annum; secured; principal payment due on October 9, 2012

$
1,797,295


$
1,639,268Financing agreement; bearing interest at 5.25% per annum; payable in monthly installments of approximately $2.5 thousand; due through July 2010


13,179



-Related party Promissory note payable; bearing interest of 15% per annum; unsecured; due on demand


10,000



-Promissory note payable; bearing interest of 7.5% per annum; unsecured; principal payments due monthly approximately $27 thousand through July 2011


158,126



284,967Total notes payable


1,978,600



1,924,235Less current portion


181,305



284,967Total long-term debt

$
1,797,295


$
1,639,268




11
 
 The convertible note’s principal balance is due three years from the date of issuance and convertible at any time at the option the holder at a conversion price of $0.25 per share.  The Company has accounted for the conversion feature as an embedded derivative instrument requiring it to be separated from the note payable and reported at fair value.  The fair value of the conversion feature at issuance date was approximately $593 thousand.  The separation of the conversion feature from the note payable resulted in a discount on the note payable and a share conversion liability in the amount of approximately $593 thousand.  The share conversion liability is subject to recurring fair value adjustments each reporting period (see Note 10 - 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 three and six months ended January 31, 2011, total interest expense related to the convertible note payable was approximately $80 thousand and $158 thousand, respectively.   For the three and six months ended January 31, 2010, total interest expense was approximately $65 thousand and $90 thousand, respectively.  Of the interest expense recognized for the six months ended January 31, 2011 and 2010, approximately $65 thousand and $31 thousand, respectively, was elected by the Company to be deferred and added to the principal of the note.
 
 At January 31, 2011, the said note was convertible into approximately 8.7 million shares of common stock worth approximately $433 thousand as of January 31, 2011.
 
 Of the notes payable presented in the preceding table, approximately $181 thousand is classified as current maturities as of January 31, 2011.
 
 The following is a schedule of the future maturity payments required under the Company’s promissory notes payable.




Current

$
181,3052012


2,157,0462,338,350Net of discount on convertible note payable


(359,750
)$
1,978,600








NOTE 7 - ACCRUED EXPENSES
 
 Accrued expenses consist of the following at January 31, 2011 and July 31, 2010:




January 31, 2011


July 31, 2010Commissions

$
91,479


$
173,314Interest


9,079



7,672Marketing materials


2,520



37,830Payroll


60,221



41,549Professional fees


7,000



2,500Refund reserve


10,000



14,192Rent


7,149



8,340Sales tax payble


25,869



19,004Unclaimed property


41,255



27,816Total

$
254,572


$
332,217




NOTE 8 - DEFERRED REVENUE
 
 Deferred revenue consists of the following at January 31, 2011and July 31, 2010:
 
 January 31, 2011


July 31, 2010Advertising sales

$
40,029


$
80,563Conferences mad training


26,910


$
-Direct response media


26,439



29,674Marketing fees


209,764



582,955Member fees


71,981



115,765Total

$
375,123


$
808,957






12




NOTE 9 – DEFERRED COMPENSATION
 
 Deferred compensation is made up of compensation due to Mark Jarvis, Co-Chief Executive Officer, and a consultant.  These two individuals deferred their compensation in an effort to manage cash flow while the Company undertook several capital intensive initiatives.  As of January 31, 2011 and July 31, 2010, the balance of deferred compensation was approximately $98 thousand and $110 thousand, respectively.
 
 NOTE 10 – 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, non-compensatory warrants and an embedded share conversion feature.  The fair value of the marketable securities was determined by the market price as quoted on the OTC.  The fair value of these warrants and share conversion feature was determined by an independent expert valuation specialist using the Black-Scholes Option Pricing Model.
 
 Assets and liabilities measured at estimated fair value and their corresponding fair value hierarchy is summarized as follows:


January 31, 2011 Fair Value Measurements at Reporting Date Using


Quoted Prices in

Active Markets for

Identical Assets


Significant

Unobservable

Inputs


Total(Level 1)


(Level 3)


Fair ValueMarketable securities

$
320,000


$
-


$
320,000Total Assets

$
320,000


$
-


$
320,000Share conversion feature

$
-


$
-


$
-Warrants

$
-


$
462,000


$
462,000Total liabilities

$
-


$
462,000


$
462,000






July 31, 2010 Fair Value Measurements at Reporting Date Using
 Quoted Prices in

Active Markets for

Identical Assets


Significant

Unobservable

Inputs


Total(Level 1)


(Level 3)


Fair ValueMarketable securities

$
480,000


$
-


$
480,000Total Assets

$
480,000


$
-


$
480,000Share conversion feature

$
-


$
462,013


$
462,013Warrants

$
-


$
6,370,000


$
6,370,000Total liabilities

$
-


$
6,832,013


$
6,832,013






The Company has categorized its assets and liabilities measured at fair value into the three-level fair value hierarchy, as defined in Note 2, based upon the priority of inputs to respective valuation techniques.  Assets included in the level 1 of the fair value hierarchy include marketable securities which are fair valued on a recurring basis using quoted market prices.  Liabilities included within level 3 of the fair value hierarchy presented in the preceding table include certain warrants and a share conversion feature.  The valuation methodology for liabilities within level 3 uses a combination of observable and unobservable inputs in calculating fair value.
 
 13
 The Company recorded anunrealized gain of $160 thousand and unrealized loss of $160 thousand on its marketable securities for the three and six months ended January 31, 2011, respectively, and  an unrealized loss of $400 thousand and $530 thousand  for the three and six months ended January 31, 2010, respectively.  The gain (loss) has been included in the Statement of Operations caption “Gain (loss) on change in fair value of marketable securities.”
 
 The changes in level 3 liabilities measured at fair value on a recurring basis during the three and six months ended January 31, 2011 and for the year ended July 31, 2010 are summarized as follows:


Fair Value Measurements
 Using Significant Unobservable Inputs (Level 3)




Balance Beginning of Period

Reclassification of Liability Warrants to Equity

Issuance


(Gain) or Loss Recognized in Earnings from Change in Fair Value


Balance End of PeriodFor the three months ended January 31, 2011Share conversion feature

$
138,764


$
-


$
-


$
(138,764
)

$
-Warrants

$
3,246,000


$
-


$
-


$
(2,784,000
)

$
462,000For the six months ended January 31, 2011Share conversion feature

$
462,013


$
-


$
-


$
(462,013
)

$
-Warrants

$
6,370,000


$
-


$
-


$
(5,908,000
)

$
462,000For the Year Ended July 31, 2010Share conversion feature

$
-


$
-


$
593,426


$
(131,413
)

$
462,013Warrants

$
549,780


$
(186,353
)

$
2,025,993


$
3,980,580


$
6,370,000






For the three and six months ended January 31, 2011, total unrealized gain of approximately $139 thousand and $462 thousand, respectively are included in earnings in the Statement of Operations caption “Gain on change in fair value of share conversion feature.”  For the three and six months ended January 31, 2011, unrealized gain of $2.8 million and $5.9 million, respectively, are included in earnings in the Statement of Operations caption “Gain (loss) on change in fair value of warrants.”  The $2.8 million and $5.9 million unrealized gains for the three and six months ended January 31, 2011 is a result of a decrease in the share price used in valuing the warrants from $0.24 to $0.05.
 
 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.
 
 14
 
 NOTE 11—REDEEMABLE PREFERRED STOCK
 
 The Company is authorized to issue 10 million shares of preferred stock with a par value of $0.0001 per share.  The following table summarizes the Preferred Stock issuances and number of Preferred Shares outstanding:




Shares Outstanding atPreferred Stock

Date ofIssuance

Issuance


January 31, 2011


July 31, 2010Series A

July 30, 2009



1,750,000



1,750,000Series B

October 6, 2009



2,000,000



2,000,000Series C

January 29, 2010



1,000,000



1,000,000Series C

June 3, 2010



2,300,000



2,300,0007,050,000



7,050,000






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, the Company shall not, either directly or by amendment, merger, consolidation or otherwise:
 
 (i)amend its certificate or articles of incorporation in any manner that adversely affects the rights of the holders of Convertible Preferred Stock;
 
 (ii)alter or change adversely the voting or other powers, preferences, rights, privileges, or restrictions of the  Convertible Preferred Stock;
 
 (iii)increase the authorized number of shares of preferred stock or  Convertible Preferred Stock or reinstate or issue any other series of preferred stock;
 
 (iv) redeem, purchase or otherwise acquire directly or indirectly any junior securities or any shares pari passu with the Convertible Preferred Stock;
 
 (v)directly or indirectly pay or declare any dividend or make any distribution in respect of, any junior securities, or set aside any monies for the purchase or redemption (through a sinking fund or otherwise) of any junior securities or any shares pari passu with the Convertible Preferred Stock;
 
 (vi)authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to or otherwise pari passu with the Convertible Preferred Stock; or
 
 (vii)enter into any agreement with respect to any of the foregoing.
  15
 
 Liquidation Preferences
 
 Upon any liquidation, dissolution or winding-down of the Company, whether voluntary or involuntary (a “Liquidation”), the holders of the shares of Convertible Preferred Stock shall be paid in cash, before any payment shall be paid to the holders of common stock, or any other junior stock, an amount for each share of Convertible Preferred Stock held by such holder equal to the sum of the Stated Value thereof (such applicable amount payable with respect to a share of Convertible Preferred Stock sometimes being referred to as the “Individual Preferred Liquidation Preference Payment” and with respect to all shares of Convertible Preferred Stock in the aggregate sometimes being referred to as the “Aggregate Liquidation Preference Payment”).  If, upon such liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the assets to be distributed among the holders of shares of Convertible Preferred Stock shall be insufficient to permit payment to the holders of Convertible Preferred Stock of an aggregate amount equal to the Aggregate Liquidation Preference Payment, then the entire assets of the Corporation to be so distributed shall be distributed ratably among the holders of Convertible Preferred Stock (based on the Individual Preferred Liquidation Preference Payments due to the respective holders of Convertible Preferred Stock).
 
 The liquidation value of Series A, Series B and Series C Convertible Preferred Stock was $1.75 million, $2 million and $3.3 million, respectively, as of January 31, 2011.
 
 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 originallyfor 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 January 31, 2011, Series A, Series B and Series C Convertible Preferred Stock is convertible into 28 million, 8 million and 13.2 million common shares, respectively.  If the Convertible Preferred Stock had been converted as of January 31, 2011, the aggregate market price of the common shares for Series A, Series B and Series C would have been approximately $1.4 million, $400 thousand, and $660 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:
 
 ·
The Company shall be party to a change of control transaction;
 ·
The Company shall fail to have available a sufficient number of authorized and unreserved shares of common stock to issue to such  holder upon a conversion;
 ·
Unless specifically addressed elsewhere in the Convertible Preferred Stock’s Certificate of Designation as a Triggering Event, the Corporation shall fail to observe or perform any other covenant, agreement or warranty contained in the Certificate of Designation, and such failure or breach shall not, if subject to the possibility of a cure by the Company, have been cured within 20 calendar days after the date on which written notice of such failure or breach shall have been delivered;
 ·
There shall have occurred a bankruptcy event or material monetary judgment;
 
 16
 
 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:




Total


Value


Preferred StockPreferred Stock

Date of

Proceeds


Allocated to


CarryingIssuance

Issuance

Received


Warrants


AmountSeries A

July 30, 2009

$
1,750,000


$
539,000


$
1,211,000Series B

October 6, 2009

$
2,000,000


$
930,838


$
1,069,162Series C

January 29, 2010

$
1,000,000


$
431,415


$
568,585Series C

June 3, 2010

$
2,300,000


$
598,000


$
1,702,000






NOTE 12 - 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 three and six months ended January 31, 2011, approximately $19 thousand and $38 thousand, respectively, of stock-based compensation expense was recognized, as a result of these share issuances. For the three and six months ended January 31, 2010 approximately $57 thousand and $115 thousand, respectively, of stock-based compensation was recognized.
 
 NOTE 13–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 January 31, 2011, approximately 5 million total options were issued under the 2009 Plan.
  17
 
 The following table summarizes the status of all warrants outstanding and exercisable at January 31, 2011.


Outstanding Warrants


Range of Exercise Prices


Number of

Warrants


Weighted Average

Exercise Price


Weighted Average

Remaining Contractual

Life in Years$0.01 to $0.49



54,125,000


$
0.15



5.61$0.50 to $0.99



100,000


$
0.75



4.0354,225,000


$
0.15



5.60
  Exercisable Warrants
 Range of

Exercise Prices


Number of

Warrants


Weighted Average

Exercise Price


Weighted Average

Remaining Contractual

Life in Years$0.01 to $0.49



52,058,599


$
0.15



5.65$0.50 to $0.99



100,000


$
0.75



4.0352,158,599


$
0.15



5.65






Compensatory Equity Warrants
 
 The following table summarizes the activity for compensatory warrants classified as equity for the six months ended January 31, 2011.




Compensatory

Equity Warrants


Weighted Average

Exercise Price


Weighted Average

Remaining Contractua

l Term


Aggregate

Intrinsic ValueOutstanding at July 31, 2010


5,795,526


$
0.28



3.94


$
595,250Issued


300,000



0.25



-



-Exercised


(1,000
)


0.50



-



-Cancelled or Expired


(1,069,526
)


-



-



-Outstanding at January 31, 2011


5,025,000


$
0.22



4.37


$
-Exercisable at January 31, 2011


2,958,599


$
0.23



4.27


$
-






There were approximately 1 thousand warrants exercised during the six months ended January 31, 2011 with no associated intrinsic value at the date of exercise.  The total fair value of warrants vested during the six months ended January 31, 2011 was approximately $43 thousand.  The weighted average grant date fair value of warrants granted during the six months ended January 31, 2011 and 2010 was $0 and $0.09, respectively.
 
 A summary of the status of the Company's non-vested compensatory equity warrants as of January 31, 2011, and of the changes during the six months ended January 31, 2011, is presented below.




Compensatory

Warrants


Weighted Average

Grant-Date

Fair ValueNon-vested at July 31, 2010


2,620,467


$
0.16Issued


300,000



0.25Exercised


-



-Expired


-



-Vested


(854,066
)


0.85Non-vested at January 31, 2011


2,066,401


$
0.14






18




Non-compensatory Liability Warrants
 
 There were approximately 49.2 million non-compensatory warrants outstanding as of January 31, 2011, all of which were classified as liabilities.  These warrants are classified as liability instruments as net share settlement is not considered within the Company’s control or certain exercise prices are not fixed which has the potential to cause a variable number of shares and/or value exchange upon exercise.
 
 The fair value of each option award classified as a liability on the balance sheets is estimated on the date of the grant using the Black-Scholes Pricing Model and the assumptions noted in the following table.  The stock price used approximates the market price less a marketability discount of 30%.  Expected volatility was determined by independent valuation specialist.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury Strip yield curve in effect at the time of grant.  The expected term of options granted represents the period of time that options granted are expected to be outstanding.
 
 Assumptions used to determine the fair value of the non-compensatory warrants outstanding at and during the six months ended January 31, 2011 and granted at and during the year ended July 31, 2010 are as follows.




January 31, 2011


July 31, 2010Expected dividends


0%



0%Expected volatility


65%



65%Risk free interest rate


2.17% - 2.46%



2.01% - 2.29%Expected life

7 years


5 - 7 years






There were no non-compensatory liability issuances, exercises or expirations during the six months ended January 31, 2011.
  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 January 31, 2011there were 800 thousand warrants outstanding and exercisable.  No warrants expired, nor were any warrants exercised or forfeited during the six months ended January 31, 2011 and, therefore, no intrinsic value was realized.  As of January 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 three and six months ended January 31, 2011 and 2010, the Company recognized stock-based compensation expense, including both expense related to compensatory warrants and expense related to share awards, with the Statement of Operations as follows:


For the Three Months Ended


For the Six Months EndedJanuary 31,


January 31,2011


2010


2011


2010Stock-based compensation:Payroll and employee benefits

$
106,888


$
123,141


$
262,200


$
243,583Total

$
106,888


$
123,141


$
262,200


$
243,583








19


NOTE 14 - RELATED PARTY TRANSACTIONS
  Commissions Paid
 
 There are immediate family members of Mr. Jarvis who operate as Independent Business Owners (“IBO”) who receive leader subsidies and commission compensation which amounted to approximately $5 thousand and $14 thousand, respectively, and approximately $9 thousand and $31 thousand, respectively, for the three and six months ended January 31, 2011, for work in which they performed on behalf of the Company.
 
 Leader subsidies and commission compensation for work performed for the three and six months ended January 31, 2010, were approximately $11 and $24 thousand, respectively, and approximately $21thousand and $73 thousand, respectively.
 
 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 three and six months ended January 31, 2011 interest expense was approximately $80 thousand and $158 thousand, respectively, and approximately $65 thousand and $90 thousand for the three and six months ended January 31, 2010, respectively.  Of the interest expense recognized, approximately $94 thousand and $52 relates to the amortization of the discount and approximately $65 thousand and $31 was added to the principal of the note for the six months ended January 31, 2011 and 2010, respectively.
 
 Agreement with Amacore
 
 The Company entered into a Marketing and Sales Agreement on July 31, 2009, pursuant to which Amacore agreed to provide certain services to Zurvita Holdings.  In addition, pursuant to the Agreement, Zurvita shall continue to have the right to benefit from certain agreements which Amacore maintains with product and service providers.  For the six months ended January 31, 2011 and 2010, Zurvita paid Amacore $257 thousand and $176 thousand, respectively, for these services.
 
 The Company entered into an on-demand promissory note issued on August 11, 2010 between the Company and Amacore.  Amacore paid the promissory note in full plus accumulated 6% per annum interest, of approximately $16 thousand, on August 17, 2010.
 
 The Company entered into an on-demand promissory note issued on January 14, 2011 between the Company and Amacore for bridge financing up to $450 thousand plus accumulated 15% per annum interest.  As of January 31, 2011, the Company has received $10 thousand.
 
 NOTE 15- SUBSEQUENT EVENTS
 
 On March 1, 2011, the Company granted and issued a Consultant 100 thousand five-year contractual life options to purchase common stock.  Of the 100 thousand options, 37,500 vest immediately, with the remaining 62,500 vesting quarterly over a two year period and are exercisable at an exercise price of $0.20.




On March 15, 2011, the Company entered into an oral agreement with Vicis Capital Master Fund (“Vicis”) to sell Vicis 1 million shares of its Series C Preferred Stock and Series C Warrants to purchase an aggregate of 4 million shares of the company’s common stock (“Private Placement Securities”). The purchase price of the Private Placement Securities is $1 million, and the funds were received from Vicis on March 16, 2011. However, a Preferred Stock purchase agreement and other related transaction documents (the “Transaction Documents”) are in the process of being negotiated with Vicis and, accordingly, have not been executed at this time.  The Private Placement Securities will be issued to Vicis upon the execution of the Transaction Documents.  The Series C Warrants are exercisable for a term of seven years at an exercise price of $0.25 per share.


20




Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
 Information contained in this discussion, other than historical information, is considered “forward-looking statements” that are subject to risks and uncertainties.  These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives including, without limitation, statements about the Company’s ability to continue operations through January 31, 2012, the liability of the Company for claims made in pending litigation, plans for future products, strengthening our relationship with our various sales organizations, our marketing intentions, our anticipated products, efforts to expand distribution channels, Zurvita Holding’s anticipated growth in sales and margins, and our ability to achieve profitability. In some cases, you may identify forward-looking statements by words such as “may,” “should,” “plan,” “intend,” “potential,” “continue,” “believe,” “expect,” “predict,” “anticipate” and “estimate,” the negative of these words or other comparable words.  These statements are only predictions.  One should not place undue reliance on these forward-looking statements.  The forward-looking statements are qualified by their terms and/or important factors, many of which are outside the Company’s control, involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made.  The forward-looking statements are based on the Company’s beliefs, assumptions and expectations of our future performance, taking into account information currently available to the Company.  These beliefs, assumptions and expectations can change as a result of many possible events or factors, including those events and factors described in “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended July 31, 2010 filed with the Securities and Exchange Commission on December 7, 2010 (the “2010 Annual Report”), not all of which are known to the Company.  If a change occurs, the Company’s business, financial condition, liquidity and results of operations may vary materially from those expressed in the aforementioned forward-looking statements. The Company will update this forward-looking information only to the extent required under applicable securities laws.  Neither the Company nor any other person assumes responsibility for the accuracy or completeness of these forward-looking statements.
 
 The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto, and other financial information included elsewhere in this Form 10-Q.
 
 Introduction
 
 Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is provided as a supplement to and should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere herein to help provide an understanding of our financial condition and results of our operations.  The MD&A is organized as follows:
 
 ·
Overview– This section provides a general description of our business.
 
 ·
Results of operations –This section provides an analysis of our results of operations comparing the three and six months ended January 31, 2011 and 2010.  This analysis is provided on a consolidated basis.
 
 ·
Liquidity and capital resources– This section provides an analysis of our cash flows for the six months ended January 31, 2011 and 2010 as well as a discussion of our liquidity and capital resources.
  
 21
 Overview
 
 Description of Business
 
 Zurvita Holdings Inc. (“Zurvita”) is a direct sales marketing company offering high-quality products and services targeting individuals, families and small businesses.  The Company’s differentiated services feature consumer products and small business solutions offered through a growing network of independent sales consultants.  Zurvita offers a unique business-to-business strategy with turnkey solutions for commercial and residential energy, advertising, telecommunications and healthcare services.  Zurvita also markets numerous low-cost ancillary products,such as legal assistance and restoration services for identity theft and consumer credit.
 
 Business Strategy
 
 Zurvita’s business model embraces a direct sales approach that utilizes the power of network marketing.  The business strategy relies on a marketing sales force that compensates independent business owners (“Consultants”) not only for sales of Company products and services they personally generate, but also for the sales of other Consultants whom they introduced to the business, creating a sales organization of Consultants and a hierarchy of multiple levels of compensation.  The products, services and business opportunity are typically marketed directly to potential business partners, consumers and small businesses by means of referrals, national advertising, video promotions, conferences, the Internet, and word-of-mouth marketing.
 
 Consultants become associated with the Company through an independent contractor relationship and receive remuneration for selling products and services and for expanding their network of people doing the same by promoting Zurvita’s business opportunity.
 
 Strategically, Zurvita utilizes service and technology platforms whereby Consultants market high demand products and services that target consumers and small businesses at many levels.  This creates a Consultant sales organization that in turn sponsors other motivated Consultants.  Under the Company’s business model, each independent sales Consultant has an opportunity to make a living on a full-time basis and to obtain long-term financial security by marketing products that have growing demand in the market place and create long-term residual income.
 
 Zurvita has developed business processes to dramatically increase performance success:
 
 Create Leads
 
 Zurvita entered into an Advertising and Marketing Agreement with Infusion Brands International, Inc. f/k/a OmniReliant Holdings, Inc., (“Infusion Brands”), pursuant to which Zurvita agreed to provide placement of advertising for Infusion Brands on its website and Infusion Brands agreed to provide the Company with certain marketing services.  The marketing services to be provided by Infusion Brands include the production of infomercials, video production services, management of call centers, and buying and fulfillment services.
 
 Strengthen Brand Recognition
 
 National and regional marketing efforts are administrated to support corporate and “personal” branding initiatives.  Inherent to the network marketing industry is the axiom that people don’t follow products or features, but rather the people with whom they relate to on a personal level.  Zurvita not only invests resources to promote its corporate brand, but has developed a technological platform allowing Consultants to build web-based personal branded sites enhancing their position as affiliate marketers of Zurvita programs and services.
 
 Increase Product and Service Offerings
 
 Zurvita continues to explore the marketplace for new products and services that are anticipated by consumers. These are essential, best-in-class consumer and business solutions in large and growing markets. The network marketing industry mandates a state of continuous improvement by offering its Consultants and customers products and services that offer time, value and conveniences at cost competitive prices.
 
 The Company entered into the growing online advertising market with the launch of a proprietary local advertising search directory service called ZLinked.  This is a proprietary local search and advertising software program owned by Zurvita.  The platform connects consumers who visit high-volume websites with thousands of national and local advertisers, thereby increasing brand identity and exposure, and ultimately customer revenue, by geo-targeting advertising placements in local markets, where they make the most impact.  Additionally,a customer can perform additional searches for local businesses and services across a complete selection of categories and get the information they require.
 
  22
  When a business owner purchases one of the three advertising programs, the local business receives a suite of easy-to-use tools that allows it to fully manage its business listing and advertisements on its own website.  Depending on the service level selected, a business owner can add and manage all of the information it wishes to display, including contact information, such as name, address, phone number and directions. The advertising program also provides business owners with the ability to easily create discount coupons and add multiple photos to an image gallery and upload videos.  All of the management tools have been designed to be intuitive, enabling business owners with little or no technology experience to effectively manage their business listings.
  Marketing
 
 Zurvita’s marketing strategies open new, innovative marketing and sales avenues for Consultants to build income through expansion of their sales organization and the residual benefits offered through the sale of products and services.  The marketing strategy features unique components beyond the traditional approach indicative of most network marketing companies.
 
 Media
 
 The agreement with Infusion Brands brings strength and uniqueness to Zurvita’s overall marketing strategy.  The synergistic relationship brings the strength of television production and national media placement to drive prospects to Zurvita and to fuel interest in Zurvita programs that are distributed as leads to thousands of Consultants.  Infusion Brands offers a host of products that create additional product options for Zurvita.
 
 Technology
 
 Zurvita recognizes the Internet is a powerful platform for the network marketer.  The highly social aspect of the Internet lends itself as a natural marketing vehicle and continuously opens a new population of prospects.  Zurvita offers Consultants robust “back office” support complimented with sales and marketing tools.
 
 Training and Support
 
 The success of an external marketing program is only as effective as the internal marketing strategies to keep Consultants informed and engaged.  Zurvita is committed to a variety of communication initiatives that promote leadership and business effectiveness.  Weekly telephone/webinar meetings as well as informational seminars create opportunities to develop leaders and to promote Zurvita’s business opportunity.  National conferences and regional events further support Zurvita’s efforts to train and develop its national sales force.
 
 23
 RESULTS OF OPERATIONS
 
 Results of Operations




For the Three Months Ended January 31


For the Six Months Ended January 31,Increase








Increase2011


2010


(Decrease)


2011


2010


(Decrease)Revenues

$
1,135,666


$
1,652,910


$
(517,244
)

$
2,448,453


$
2,901,545


$
(453,092
)Cost of Sales


730,346



1,071,980



(341,634
)


1,612,627



2,261,122



(648,495
)Gross Profit


405,320



580,930



(175,610
)


835,826



640,423



195,403Operating Expenses


1,315,449



1,870,490



(555,041
)


2,939,809



3,294,871



(355,062
)Operating Loss


(910,129
)


(1,289,560
)


(379,431
)


(2,103,983
)


(2,654,448
)


(550,465
)Other Income (Loss)


2,998,542



(449,402
)


3,447,944



6,046,920



(4,645,466
)


10,692,386Income (Loss) Before Income Taxes


2,088,413



(1,738,962
)


3,827,375



3,942,937



(7,299,914
)


11,242,851Income Taxes


1,371



10,357



(8,986
)


2,673



20,142



(17,469
)Net Income (Loss)

$
2,087,042


$
(1,749,319
)

$
3,836,361


$
3,940,264


$
(7,320,056
)

$
11,260,320Basic Earnings (Loss) Per Share

$
0.03


$
(0.03
)





$
0.06


$
(0.13
)Diluted Earnings (Loss) Per Share

$
0.03


$
(0.03
)





$
0.06


$
(0.13
)






Revenue:


For the three and six months ended January 31, 2011, revenue was approximately $1.1 million and $2.4 million, respectively, as compared to approximately $1.7 million and $2.9 million for the three and six months ended January 31, 2010, respectively, an decrease of approximately $517 thousand and $453 thousand, respectively.
  Administrative websites sales and marketing fees were approximately $390 thousand and $236 thousand for the three months ended January 31, 2011, respectively, as compared to approximately $514 thousand and $555 thousand, respectively, for the three months ended January 31, 2010.  For the six months ended January 31, 2010, administrative websites and marketing fees were approximately $851 thousand and $585 thousand, respectively, as compared to $998 thousand and $951 thousand, respectively, for the six months ended January 31, 2010.  The aggregate decrease in administrative website sales and marketing fees was approximately $444 thousand and $513 thousand for the three and six months ended January 31, 2011. The Company’s decline in administrative website revenue and marketing fee revenue for the three and six month periods is due to a decline in recruitment, the number of active consultants, and consultant enrollment fee.  The decline in recruiting and active consultant base was a result of a complicated sales system along with a variety of different product offerings.  During the second quarter, the Company undertook corrective measures by creating a Health & Wellness division that will provide the consultants a singular focus and will create a more streamlined sales process.  The Company is also transitioning its business-to-business products, such as online advertising and commercial energy, to a separate division that will solely focus on a business-to-business direct selling model.
 The Company’s advertising sales and commissions relating to energy sales were approximately $378 thousand and $713 thousand for the three and six months, respectively, ended January 31, 2011 as compared to $347 thousand and $412 thousand for the three and six months, respectively, in 2010 comparable periods.  The Company is focusing its efforts and resources on these products and is recruiting consultants based upon the availability these products.  The Company’s membership fees were approximately $132 thousand and approximately $281 for the three and six months ended January 31, 2011, respectively, as compared to approximately $237 thousand and approximately $540 thousand for three and six months ended January 31, 2010, respectively.  However, the decrease in membership revenue is a result of the Company’s efforts focusing on recruiting, advertising and energy sales.
 24
  Cost of Sales:
 
 For the three and six months ended January 31, 2011, cost of sales was approximately $730 thousand and $1.6 million, a decrease of approximately $342 thousand and $648 thousand, respectively, from the respective period in 2010.  Cost of sales includes the benefit and service costs associated with the products and services sold and sales commissions paid to consultants.  The decrease in cost of sales is mainly a result of lower revenue and less non-traditional sales incentives used to attract and retain consultants because the Company’s had a greater product offering with increased margins.
  As a result, the Company’s cost of sales as a percentage of revenue decreased to 64% and 66% for the three and six months ended January 31, 2011 from 65% and 78% for the three and six months ended January 31, 2010.
  Gross Profit:
 
 For the three and six months ended January 31, 2011, gross profit was approximately $405 thousand and $836, respectively, as compared to a gross profit of approximately $581 thousand and $640 thousand for the three and six months ended January 31, 2010, respectively.  For the six months ended January 31, 2011 and 2010, the gross profit percentage increased to 34% from 22%.  The increase in gross profit is due to the focus on selling higher margin products and reducing nontraditional sales compensation practices.
 
 Operating Expenses:
 
 Our operating expenses for the three and six months ended January 31, 2011 were $1.3 million and 2.9 million, respectively, as compared to $1.9 million and $3.3 million for the three and six months ended January 31, 2010.
 
 The table below sets forth components of our operating expenses for the three and six months ended January 31, 2011 compared to the corresponding prior year period:




Three Months Ended January 31,


Six Months Ended January 31,2011


2010


Increase (Decrease)


2011


2010


Increase (Decrease)Depreciation

$
9,531


$
8,824


$
707


$
19,317


$
17,276


$
2,041Office Related Expenses


134,825



85,575



49,250



261,524



168,888



92,636Payroll and Benefits


507,091



442,390



64,701



1,113,943



762,970



350,973Professional Fees


202,082



442,723



(240,641
)


494,968



748,897



(253,929
)Selling and Marketing


424,444



838,693



(414,249
)


932,830



1,490,807



(557,977
)Travel


37,476



52,285



(14,809
)


117,227



106,033



11,194Total operating expenses

$
1,315,449


$
1,870,490


$
(555,042
)

$
2,939,809


$
3,294,871


$
(355,063
)




Depreciation expense for the three and six months ended January 31, 2011, was approximately $10 thousand and $19 thousand, respectively, an increase of approximately $707 and $2 thousand over the same prior year periods.  The increaseis related to the purchase of computer hardware and other office equipment needed to accommodate the Company’s personnel growth.


Office related costs include rent, insurance, utilities and office maintenance. For the three month period ended January 31, 2011 these costs were approximately $33 thousand, $9 thousand, $14 thousand, and $79 thousand, respectively.   For the six months ended January 31, 2011 these costs were approximately $82 thousand, $21 thousand, $25 thousand and $134 thousand, respectively.  The overall increase of approximately $49 thousand and $93 thousand is due to the increased operations of the Company.
 
 Payroll and related expenses for the three and six months ended January 31, 2011 were approximately $202 thousand and $495 thousand, respectively, an increase of approximately $64 thousand and $351 thousand over the same prior year periods.  For the three months ended January 31, 2011, the increase was as a result of additional customer support.  The six month increase of approximately $351 thousand is related to approximately $82 thousand of share-based compensation, approximately $77 thousand of additional personnel supporting and operating the Company’s ZLinked product and approximately $192 thousand of additional operational personnel.
   25
 
 Professional fees consist of consulting, accounting fees, contract labor and legal costs. For the three month period ended January 31, 2011, these costs were approximately $50 thousand, $78 thousand, $48 thousand and $26 thousand, respectively.  For the six month period ended January 31, 2011, these costs were approximately $114 thousand, $179 thousand, $135 thousand and $66 thousand, respectively.  Significant reductions in consulting and legal expenses were achieved through cost containment efforts despite the increase in accounting fees and contract labor costs, which led to an overall professional fees decrease of approximately $254 thousand.  The increase in accounting fees was due to the Company changing its auditors and the predecessor auditor’s inability to provide consent to the use of their opinion on prior year financial statements which led to a re-audit of the prior year financial statements by the current auditor.  Contract labor costs increased as a result of having to contract certain services to maintain the Zlinked technology.
 
 Selling and marketing expenses for the three and six months ended January 31, 2011 were $424 thousand and $933 thousand, respectively, as compared to $839 thousand and $1.5 million for the three and six months ended January 31, 2010, a decrease of approximately $414 thousand and $558 thousand over the prior reporting period.  The decrease is related to the marketing agreement betweenthe Company and Infusion Brands, a related party, being fully amortized as of July 31, 2010, as well as the full amortization of capitalized agent advanced compensation.
 
 Business travel expenses for the three and six months ended January 31, 2011 were approximately $75 thousand and $117 thousand, respectively, a decrease of $15 thousand and an increase of $11 thousand, as compared to the three and six months ended January 31, 2010.
 
 Other Income (Expense):
 
 Gain on change in fair value of embedded share conversion feature
 
 An embedded share conversion feature exists within a convertible note payable.  The Company has determined the conversion feature to be a derivative instrument and has valued it at fair value at the time of issuance and at each subsequent reporting period.  We recorded an unrealized gain on the conversion feature for the three and six months ended January 31, 2011 of approximately $139 thousand and $462 thousand, respectively, as compared to the unrealized gain for the three and six months ended January 31, 2010 of approximately $28 thousand and $32 thousand, respectively.  These unrealized gains and losses are a non-cash item not impacting operating cash flows or results of operations before other income and expenses. See Note 10 – Assets and Liabilities Measured at Fair Value, to financial statements contained within Item 1 of Part 1 of this Form 10Q for additional information with respect to the calculation of change in fair value of this conversion feature.
 
 Gain (loss) on change in fair value of marketable securities
 
 The Company’s marketable securities consist of non-registered common stock. The Company fair values these securities on a recurring basis.  The Company recorded an unrealized gain of $160 thousand and an unrealized loss of $400 thousand for the three months ended January 31, 2011 and 2010, respectively. The Company recorded an unrealized loss of $160 thousand and $530 thousand for the six months ended January 31, 2011 and 2010, respectively.  These unrealized gains and losses are a non-cash item not impacting operating cash flows or results of operations before other income and expenses. SeeNote 10– Assets and Liabilities Measured at Fair Value,to financial statements contained within Item 1 of Part 1 of this Form 10Q for additional information with respect to the determination of fair value.
 
 Gain (loss) on change in fair value of warrants
 
 The Company’s liability warrants are recorded at fair value.  Their fair value is subject to remeasurement on a recurring basis.  For the three months ended January 31, 2011 and 2010, the change in fair value of these warrants was approximately a gain of $2.8 million and a gain of $2 thousand, respectively.  For the six months ended January 31, 2011 and 2010, the change in fair value of these warrants was approximately a gain of $5.9 million and a loss of $4.0 million, respectively.The gain in fair value for the three and six months end January 31, 2011 is a result of the significant decline in share price from $0.24 to $0.05 which is used as an input in fair valuing the warrants.  The loss in fair value for the three and six months ended January 31, 2010 is (1) a result of the 4-to-1 forward share split that occurred on August 11, 2009 that had the effect of increasing the number of outstanding warrants by 21.42 million and (2) using a comparatively higher share price as an input in fair valuing the warrants.  This gain and loss is a non-cash item not impacting operating cash flows or results of operations before other income and expenses. SeeNote 10 – Assets and Liabilities Measured at Fair Value,to financial statements contained within Item 1 of Part 1 of this Form 10Q for additional information with respect to the determination of fair value.
 
 Interest expense
 
 Interest expense for the three and six months ended January 31, 2011 were approximately $84 thousand and $168 thousand, as compared to $80 thousand and $108 thousand for the three and six months ended January 31, 2010.  The increase in interest expense is a result of accreting the discount recognized on the Company’s $2 million interest bearing convertible note issued on October 9, 2009.  Accretion of $80 thousand and $158 thousand is included within interest expense for the three and six months ended January 31, 2011 respectively. As compared to $73 thousand and $83 thousand included in interest expense for the three and six months ended January 31, 2010, respectively.
  26
 
 Income Taxes:
 
 For the three and six months ended January 31, 2011, the Company estimated approximately $1 thousand  and $3 thousand, respectively, in tax expense as compared to $10 thousand and $20 thousand for the three and six months ended January 31, 2010, respectively.  The decrease is a result of the Company changing its method for estimating its Texas gross margin tax accrual as a result of access to improved data inputs used in estimating the tax accrual.  The Company realized no federal tax benefit from the deferred tax asset resulting from net operating losses carryforward as the deferred tax asset is fully reserved.
 
 Net Income (Loss):
 
 The Company had net income of approximately $2.1 million and $3.9 million for the three and six months ended January 31, 2011, respectively, as compared to a net loss of approximately $1.8 million and $7.3 million for the three and six months ended January 31, 2010, respectively.  The increase in net income is attributable non-cash unrealized gains recognized on fair valuing the Company’s outstanding liability warrants.
 
 Earnings (Loss) per Common Share:
 
 Basic and diluted earnings (loss) per common share amounted to $0.03 and ($0.03) for the three months ended January 31, 2011 and 2010, respectively.    For the six months ended January 31, 2011 and 2010, basic and diluted earnings (loss) per common share amounted to $0.06 and ($0.13), respectively.  The aforementioned factors contributed to the increased net income and earnings per share for the three and six months ended January 31, 2011.
 
 OFF BALANCE SHEET ARRANGEMENTS
 
 We do not have any off balance sheet arrangements as of January 31, 2011.
 
 LIQUIDITY AND CAPITAL RESOURCES
 
 The following table compares our cash flows for the six month period ended January 31, 2011 to the corresponding prior period:




January 31, 2011


January 31, 2010Net cash used in operating activities

$
(1,847,533
)

$
(1,899,673
)Net cash provided by (used in) investing activities


1,697,185



(776,698
)Net cash (used in) provided by financing activities


(122,789
)


1,352,033Net decrease in cash

$
(273,137
)

$
(1,324,338
)




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


As of January 31, 2011:Current

$
53,4042012


106,808Thereafter


-$
160,212
 Since its inception, the Company has met its capital needs principally through sale of its equity securities and the issuance of debt.  The proceeds from the sale of these securities have been used for the Company’s operating expenses, such as salary expenses, professional fees, rent expenses and other general and administrative expenses discussed above.  At January 31, 2011, the Company had negative working capital of approximately $685 thousand, an accumulated deficit of approximately $17.3 million and negative cash flows from operating activities of approximately $1.8 million. Since its inception, the Company has used approximately $8.2 million in operations.
  27
 
 We believe that without significant equity and debt investment from outside sources, the Company will not be able to sustain its current planned operations for the next 12 months.  During fiscal 2010, the Company has raised from a shareholder $5.3 million of equity funding.  In order to raise capital, the Company may sell additional equity or issued additional convertible debt securities which would result in additional dilution to our stockholders. The issuance of additional debt would result in increased expenses and could subject us to covenants that may have the effect of restricting our operations.  We can provide no assurance that additional financing will be available in an amount or on terms acceptable to us, if at all. If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we may be unable to execute upon our business plan or pay our costs and expenses as they are incurred, which could have a material, adverse effect on our business, financial condition and results of operations.   Currently, the Company does not maintain a line of credit or term loan with any commercial bank or other financial institution.  The Company has approximately $2.0 million of outstanding notes payable as of January 31, 2011.  These issues raise substantial doubt about our ability to continue as a going concern for a reasonable period.
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 Not applicable
 
 Item 4.  Controls and Procedures
 
 Evaluation of Disclosure Controls and Procedures
 
 Our management, with the participation of our principal executive and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on this evaluation, our principal executive and principal financial officer concluded that our disclosure controls and procedures are ineffective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Presently, our disclosure controls and procedures are not designed adequately to provide reasonable assurance that such information is accumulated and communicated to our management.  This conclusion was based on the material weaknesses identified with regard to internal controls over financial reporting, as described in the Company’s Annual Report for the year ended July 31, 2010.
 
 There was no change in our internal control over financial reporting that occurred during the quarter covered by this Quarterly Report on Form 10-Q that materially affected, or is reasonably likely to materially affect, our control over financial reporting.
 
 
 PART II - OTHER INFORMATION
 
 Item 1. Legal Proceedings
 
 From time to time we may be a defendant or plaintiff in various legal proceedings arising in the normal course of our business. We are currently not a party to any material pending legal proceedings or government actions, including any bankruptcy, receivership, or similar proceedings. In addition, management is not aware of any known litigation or liabilities involving the operators of our properties that could affect our operations. Should any liabilities incurred in the future, they will be accrued based on management’s best estimate of the potential loss. As such, there is no adverse effect on our consolidated financial position, results of operations or cash flow at this time. Furthermore, Management of the Company does not believe that there are any proceedings to which any director, officer, or affiliate of the Company, any owner of record of the beneficially or more than five percent of the common stock of the Company, or any associate of any such director, officer, affiliate of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company.
 Item 1a. Risk Factors
 
 Not applicable.
 
 Item 2. Unregistered Sales of Equity and Use of Proceeds
 
 Not applicable
 
 Item 3. Defaults Upon Senior Securities
 
 Not applicable.
 
 Item 4. Removed and Reserved
 
 Item 5. Other Information.
 
 None
 
 
 28
 
 Item 6. Exhibits
 
 (a) Exhibits:
 
 
 10.1
Agreement of Conveyance, Transfer and Assignment of Assets and Assumptions of Obligations by and between the Company and OmniReliant Holdings, Inc., dated December 2, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 8, 2010).10.2
Security Agreement between the Company and OmniReliant Holdings, Inc. dated December 2, 2010 (incorporated by reference to Exhibit10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 8, 2010).31.1
Certification of the Co-Chief Executive Officer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
Certification of Chief Financial Officer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
Certification pursuant to Section 906 Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
 
 
 
 29
 
 SIGNATURES
 
 In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 Dated:March 17, 2011
/s/ Jay ShaferJay ShaferCo-Chief Executive OfficerDated:March 17, 2011
/s/ Jason PostJason PostChief Financial Officer
 
   30
 
 EXHIBIT INDEX
 
 10.1
Agreement of Conveyance, Transfer and Assignment of Assets and Assumptions of Obligations by and between the Company and OmniReliant Holdings, Inc., dated December 2, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 8, 2010).10.2
Security Agreement between the Company and OmniReliant Holdings, Inc. dated December 2, 2010 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 8, 2010).31.1
Certification of the Co-Chief Executive Officer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
Certification of Chief Financial Officer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
Certification pursuant to Section 906 Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).