Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For
the quarterly period ended September 30, 2008
or
o
Transition Report Pursuant to Section 13
or 15 (d) of the Securities Exchange Act of 1934
Commission file No. 000-50875
XELR8 HOLDINGS, INC.
(Exact name of small
business issuer as specified in its charter)
Nevada
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84-1575085
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(State of incorporation)
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(I.R.S. Employer Identification Number)
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480 South
Holly Street
Denver, CO
80246
(Address of
principal executive offices)
(303)-316-8577
(Issuers telephone number)
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 proceeding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES
x
NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
|
Large
accelerated filer
o
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Accelerated
filer
o
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Non-accelerated
filer
o
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Smaller
reporting company
x
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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
As of November 10, 2008 the Company had 15,697,170 shares of its
$.001 par value common stock issued and outstanding.
Table of Contents
Part I FINANCIAL INFORMATION
Item
1 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
XELR8 HOLDINGS, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS (unaudited)
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September 30,
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December 31,
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2008
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2007
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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1,827,842
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$
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2,245,858
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Accounts receivable, net of allowance for
doubtful accounts of $2,376 and $12,231, respectively
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5,016
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7,460
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Inventory, net of allowance for
obsolescence of $187,619 and $189,403, respectively
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394,556
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370,843
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Prepaid expenses and other current assets
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417,220
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329,015
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Total current assets
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2,644,634
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2,953,176
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Intangible assets, net
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17,038
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17,959
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Property and equipment, net
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46,038
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81,405
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Total assets
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$
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2,707,710
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$
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3,052,540
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LIABILITIES AND SHAREHOLDERS EQUITY
(DEFICIT)
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Current liabilities:
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Accounts payable and accrued expenses
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$
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1,111,826
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$
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832,697
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Total Liabilities
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1,111,826
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832,697
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Commitments and Contingencies
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SHAREHOLDERS EQUITY (DEFICIT) (Note 2):
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Preferred stock, authorized 5,000,000
shares, $.001 par value, none issued or outstanding
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Common stock, authorized 50,000,000 shares,
$.001 par value, 15,697,170 and 15,197,170 shares issued and outstanding
respectively
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15,697
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15,197
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Additional paid in capital
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23,843,449
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22,696,657
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Accumulated (deficit)
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(22,263,262
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)
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(20,492,011
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)
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Total shareholders equity (deficit)
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1,595,884
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2,219,843
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Total liabilities and shareholders equity
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$
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2,707,710
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$
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3,052,540
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The accompanying notes are an integral part
of these condensed consolidated financial statements
2
XELR8 HOLDINGS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
Three and Nine Months Ended September 30,
2008 and 2007
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For the Three
Months Ended
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For the Nine
Months Ended
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September 30, 2008
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September 30, 2007
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September 30, 2008
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September 30, 2007
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Net sales
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$
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2,109,995
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$
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1,432,220
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$
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5,964,194
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$
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3,687,690
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Cost of goods sold
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486,068
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342,233
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1,369,128
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1,014,765
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Gross profit
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1,623,927
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1,089,987
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4,595,066
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2,672,925
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Operating expenses:
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Selling and marketing expenses
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1,355,045
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820,080
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4,059,998
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2,417,200
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General and administrative expenses
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674,712
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642,930
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2,295,770
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2,429,738
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Research and development expenses
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3,230
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3,214
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5,742
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8,342
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Depreciation and amortization
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11,470
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11,716
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35,158
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45,992
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Total operating expenses
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2,044,457
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1,477,940
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6,396,668
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4,901,272
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Net (loss) from operations
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(420,530
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)
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(387,953
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)
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(1,801,602
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)
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(2,228,347
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)
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Other income (expense)
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Interest income
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11,615
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32,674
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45,251
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67,716
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Other expenses
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(13,770
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)
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(Loss) on disposal of asset
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(1,130
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)
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Interest (expense)
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(439,537
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)
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Total other income (expense)
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11,615
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32,674
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30,351
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(371,821
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)
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Net (loss)
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$
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(408,915
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)
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$
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(355,279
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)
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$
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(1,771,251
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)
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$
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(2,600,168
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)
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Net (loss) per common share
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Basic and diluted net (loss) per share
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$
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(0.03
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)
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$
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(0.02
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)
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$
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(0.11
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)
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$
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(0.19
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)
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Weighted average common shares outstanding,
basic and diluted
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15,697,170
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15,197,170
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15,576,732
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13,544,596
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The accompanying notes are an integral part
of these condensed consolidated financial statements
3
XELR8 HOLDINGS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 2008 and
2007
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September 30,
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September 30,
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2008
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2007
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Cash flows from operating activities:
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Net income (loss)
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$
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(1,771,251
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)
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$
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(2,600,168
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)
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Adjustments to reconcile
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Depreciation and amortization
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35,158
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45,993
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Loss on disposal of asset
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1,130
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Stock and stock options issued for services
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694,319
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1,188,848
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Expense related to anti-dilution of
warrants
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13,770
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Interest expense and amortization related
to bridge loan financing
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428,889
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Change in allowance for doubtful accounts
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(9,855
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)
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9,121
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Change in allowance for inventory
obsolesence
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(1,784
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)
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53,760
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Change in allowance for product returns
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42,063
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30,866
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Changes in assets and liabilities:
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Accounts receivable
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12,299
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(11,998
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)
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Inventory
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(21,930
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)
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(255,530
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)
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Other current assets
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(88,204
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)
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(62,137
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)
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Accounts payable and accrued expenses
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237,066
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214,235
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Net cash (used) by operating activities
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(857,219
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)
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(958,121
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)
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Cash flows from investing activities:
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Capital expenditures
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(14,242
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)
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Net cash (used) by investing activities
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(14,242
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)
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Cash flows from financing activites:
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Proceeds from bridge loan financing
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250,000
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Repayments of bridge financing
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(500,000
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)
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Offering costs
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(60,797
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)
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(380,551
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)
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Issuance of common stock
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500,000
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4,000,000
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Net cash provided from financing activities
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439,203
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3,369,449
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NET INCREASE (DECREASE) IN CASH
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(418,016
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)
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2,397,086
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CASH AND CASH EQUIVALENTS, BEGINNING OF THE
PERIOD
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2,245,858
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76,147
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CASH AND CASH EQUIVALENTS, END OF THE
PERIOD
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$
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1,827,842
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$
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2,473,233
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SUPPLEMENTAL CASH FLOW DISCLOSURES
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Cash paid for interest
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$
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$
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13,425
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Stock issued for satisfaction of accrued
compensation expense
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$
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$
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540,000
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Deferred offering costs applied against
proceeds from offering
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$
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$
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25,000
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The accompanying notes are an integral part
of these condensed consolidated financial statements
4
Table of Contents
XELR8 HOLDINGS, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -
ORGANIZATION, OPERATIONS AND BASIS OF PRESENTATION
Organization and Business
The condensed
consolidated financial statements include those of XELR8 Holdings, Inc.
(formerly VitaCube Systems Holdings, Inc.), and its wholly owned
subsidiaries, VitaCube Systems, Inc., XELR8, Inc. (formerly VitaCube
Network, Inc.), XELR8 International, Inc. and XELR8 Canada, Corp.
Collectively, they are referred to herein as the the Company.
The
Company is in the business of selling, marketing and distributing nutritional
supplement products and functional foods. Our product lines consist of a
liquid dietary supplement, a sports hydration drink, a protein shake, a sports
energy drink, a meal replacement drink, a functional food snack and a full
product line of vitamins and minerals in the form of tablets, softgels or
capsules, all of which are manufactured using our proprietary product
formulations.
The
Company sells and markets the products through a direct selling channel, in
which independent distributors sell our products through a network of customers
and other distributors. These activities are conducted through XELR8, Inc.,
a wholly owned Colorado corporation, formed on July 9, 2003. In
addition, we sell our products directly to professional and Olympic athletes
and professional sports teams through VitaCube Systems, Inc. To date there
have been no activities in XELR8 International, Inc. and XELR8 Canada,
Corp.
Basis of Presentation
The
condensed interim financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures made are adequate to make the information presented not
misleading. The condensed interim financial statements and notes thereto should
be read in conjunction with the financial statements and the notes thereto,
included in the Companys Annual Report to the Securities and Exchange
Commission for the fiscal year ended December 31, 2007, filed on Form 10-KSB
on March 28, 2008.
The
accompanying condensed interim financial statements have been prepared, in all
material respects, in conformity with the standards of accounting measurements
set forth in Accounting Principles Board Opinion No. 28 and reflect, in
the opinion of management, all adjustments necessary to summarize fairly the
financial position and results of operations for such periods in accordance
with accounting principles generally accepted in the United States of
America. All adjustments are of a normal recurring nature. The results of
operations for the most recent interim period are not necessarily indicative of
the results to be expected for the full year.
Principles of Consolidation
The
accompanying financial statements include the accounts of the Company and its
wholly owned subsidiaries VitaCube Systems, Inc., XELR8, Inc., XELR8
International, Inc. and XELR8 Canada, Corp. All inter-company
accounts and transactions have been eliminated in the preparation of these
consolidated statements.
Use of Estimates
The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Management believes
that the estimates utilized in the preparation of financial statements are
prudent and reasonable. Actual results
could differ from these estimates.
5
Table of Contents
Revenue Recognition
The
Company ships its products by common carrier and receives payment in the form
of cash, credit card or approved credit terms. The Companys return
policy provides a 60-day money back guarantee on orders placed by first-time
customers and distributors. After 60 days and for all subsequent orders
placed by customers and distributors, the Company allows resalable products to
be returned within 12 months of the purchase date for a 100% sales price
refund, subject to a 10% restocking fee. Since August 2003, the
Company has experienced monthly returns ranging from 0.7% to 7.7% of net
sales. Sales revenue and estimated returns are recorded when the
merchandise is shipped since performance by the Company is considered met when
products are in the hands of the common carrier. Amounts received for unshipped
merchandise are recorded as customer deposits and are included in accrued
liabilities.
Inventory
Inventory
is stated at the lower of cost or market on a FIFO (first-in first-out)
basis. Provision is made to reduce excess or obsolete inventory to the
estimated net realizable value. The Company purchases for resale a liquid
nutrition drink, a sports hydration drink, a sports energy drink, a protein
shake, an appetite suppressant chew and other vitamins and nutritional
supplements, which it packages in various forms and containers.
Inventory
is comprised of the following:
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September 30, 2008
|
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December 31, 2007
|
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Raw materials
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$
|
67,832
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$
|
58,746
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Finished goods
|
|
514,343
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|
501,500
|
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Provision for obsolete inventory
|
|
(187,619
|
)
|
(189,403
|
)
|
|
|
$
|
394,556
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|
$
|
370,843
|
|
A
summary of the reserve for obsolete and excess inventory is as follows:
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September 30, 2008
|
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December 31, 2007
|
|
Balance as of January 1
|
|
$
|
189,403
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|
$
|
41,655
|
|
Addition to provision
|
|
20,452
|
|
216,760
|
|
Write-off of obsolete inventory
|
|
(22,236
|
)
|
(69,012
|
)
|
|
|
$
|
187,619
|
|
$
|
189,403
|
|
Income Taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be recovered or
settled.
In
June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainties in Income Taxes, an
interpretation of SFAS No. 109, Accounting for Income Taxes (FIN 48).
FIN 48 prescribes a comprehensive model for how companies should recognize,
measure, present, and disclose in their financial statements uncertain tax
positions taken or expected to be taken on a tax return. Under FIN 48, tax
positions must initially be recognized in the financial statements when it is
more likely than not the position will be sustained upon examination by the tax
authorities. Such tax positions must initially and subsequently be measured as
the largest amount of tax benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement with the tax authority assuming full
knowledge of the position and relevant facts. FIN 48 is effective for fiscal
years beginning after December 15, 2006.
FIN
48 became effective for the Company on January 1, 2007. The cumulative
effect of adopting FIN 48 on January 1, 2007 has been recorded net in
deferred tax assets, which resulted in no FIN 48 liability on the balance
sheet. The total amount of unrecognized tax benefits as of the date of adoption
was zero. There are open statutes of limitations for taxing authorities in
federal and state jurisdictions to audit the Companys tax returns from 2006
through the current period. The Companys policy is to account for income tax
related interest and penalties in income tax expense in the statement of
operations. There have been no income tax related interest or penalties
assessed or recorded. Because the
6
Table of Contents
Company has provided a full valuation
allowance on all of its deferred tax assets, the adoption of FIN 48 had no
impact on the Companys effective tax rate.
Stock-Based Compensation
Total
share-based compensation expense, for all of the Companys share-based awards
recognized for the nine months ended September 30, 2008, was $694,319
compared with the $1,188,848 for the nine months ended September 30, 2007.
The
Company uses a Black-Scholes option-pricing model (Black-Scholes model) to
estimate the fair value of the stock option grant. The use of a valuation model
requires the Company to make certain assumptions with respect to selected model
inputs. Expected volatility was calculated based on the historical volatility
of the Companys stock price. In the future, the average expected life will be
based on the contractual term of the option and expected employee exercise and
post-vesting employment termination behavior. Currently it is based on the
simplified approach provided by Staff Accounting Bulletin No. 107 (SAB 107).
The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a
remaining term equal to the expected life assumed at the date of the grant. The
following were the factors used in the Black Sholes model in the quarters to
calculate the compensation cost:
|
|
Nine months ended
|
|
Nine months ended
|
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
Stock price volatility
|
|
94.2 - 96.4
|
%
|
97.6% - 98.7
|
%
|
Risk-free rate of return
|
|
1.55 3.09
|
%
|
4.05%- 4.95
|
%
|
Annual dividend yield
|
|
0
|
%
|
0
|
%
|
Expected life
|
|
1.5 to 4.5 Years
|
|
1.5 to 4.5 Years
|
|
Net
Loss Per Share
Earnings per share require presentation of both basic earnings per
common share and diluted earnings per common share. Since the Company has a net loss for all
periods presented since inception, common stock equivalents are not included in
the weighted average calculation since their effect would be anti-dilutive.
NOTE 2 -
SHAREHOLDERS EQUITY
The
authorized capital stock of the Company consists of 50,000,000 shares of common
stock at $.001 par value and 5,000,000 shares of preferred stock at $.001 par
value. The holders of the common stock are entitled to receive, when and
as declared by the Board of Directors, dividends payable either in cash, in
property or in shares of the common stock of the Company. Dividends have
no cumulative rights and dividends will not accumulate if the Board of Directors
does not declare such dividends. Through September 30, 2008, no
dividends have been declared or paid by the Company.
On
February 19, 2008, the Company announced that it had completed the sale of
one-half million units in a private placement transaction for gross proceeds of
$500,000. The placement was sold to accredited individuals and institutional
investors. The units were sold under the exemption provided in Regulation D of Rule 506
and Section 415 of the Securities Act. The terms of the private placement
provided for a unit offering at $1.00 per unit. Each unit consists of one
share of common stock and six/tenths (6/10) of a Class G Warrant to
purchase common stock. In connection with the private placement, the Company
agreed to reduce the exercise price of certain of its Series E Warrants
and Series F Warrants previously purchased by the same investors in the May 8,
2007 private placement. The Class G Warrants have an exercise price of
$1.50 and are exerciseable for a five year period with a call provision by the
Company if the Companys share price closes above $2.50 for twenty consecutive
days. The Amended Series E Warrants have an exercise price of $1.50 and
are exerciseable for a five year period, with a call provision by the Company
if the Companys share price closes above $3.00 for twenty consecutive days.
The Amended Series F Warrants have an exercise price of $1.50 and are
exerciseable for a five year period, with a call provision by the Company if
the Companys share price closes above $4.50 for twenty consecutive days. The
shares of common stock have not been registered under the Securities Act of
1933, as amended. The Company has one year from the closing date to file a
registration statement for the shares underlying the Class G Warrants. If
the Company does not have an effective registration statement for the common
stock underlying the Amended Series E and F Warrants within one year, the
holder would receive cashless exercise rights. The Company incurred
$60,797 of offering expenses in connection with the offering, netting the
Company $439,203 in proceeds. Additionally, the Company engaged a number of
selling agents in connection with the sale of the private placement and paid
compensation of 25,000 warrants for their efforts. As a result of the offering,
and the lowering of the exercise price of the Original Series E and Series F
warrants, the Company
7
Table of Contents
recorded a dilution expense of $13,770 for
the Investors who participated in the May 8, 2007 offering, but not in the
February 19, 2008 placement. On March 6, 2008 the American Stock
Exchange approved the issue of the shares.
Item 2 MANAGEMENTS DISCUSSION AND ANAYLSIS OR PLAN OF
OPERATION
Cautionary Note Regarding Forward-Looking
Statements
This
report contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934 and is subject to the safe harbor created by those sections.
We intend to identify forward-looking statements in this report by using words
such as believes, intends, expects, may, will, should, plan, projected,
contemplates, anticipates, estimates, predicts, potential, continue,
or similar terminology. These statements are based on our beliefs as well as
assumptions we made using information currently available to us. We undertake
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events, or otherwise. Because
these statements reflect our current views concerning future events, these
statements involve risks, uncertainties, and assumptions. Actual future results
may differ significantly from the results discussed in the forward-looking
statements. These risks include changes in demand for our products, changes in
the level of operating expenses, our ability to expand our network of
distributors, changes in general economic conditions that impact consumer
behavior and spending, product supply, the availability, amount, and cost of
capital to us and our use of such capital, and other risks discussed in this
report. Additional risks that may affect our performance are discussed under Risk
Factors Associated with Our Business in our Form 10-KSB for the fiscal
year ended December 31, 2007. Readers are cautioned not to place undue
reliance on the forward-looking statements contained in this report
and in Registration Statements on Form S-8
declared effective on June 11, 2008 and June 17, 2008.
Overview
We
are in the business of developing, selling, marketing and distributing
nutritional supplement products and functional foods. We market our products primarily
through direct selling or network marketing, in which independent distributors
sell our products. In addition, we sell our products directly to professional
and Olympic athletes and professional sports teams.
Our
product lines consist of four powdered beverages, 12 individual supplements
packaged in our VitaCube® or a box, and a nutritional chew. Our VitaCube® is an
easy to use, compartmentalized box with instructions for which supplements to
take and the proper times to take them. We added a box of supplements with the
four daily vitamins conveniently packaged in pillow-packs for each serving. Our
EAT, DRINK and SNACK System is a packaged product that consists of functional
foods and energy drinks that can be purchased as a whole system or individually.
In January 2007 we launched our latest product offering Bazi, a liquid
nutrition drink. In late 2007 we decided to focus our sales efforts on this
product and publicly announced this to our independent distributors in February 2008.
As
of September 30, 2008 we had 6,817 independent distributors and 4,832
customers (excluding professional athletes and sports teams) who had purchased
our products within the prior twelve months.
We
maintain an inventory of our products to insure that we can timely fill our
customer orders. During 2007 we entered into a five year manufacturing
agreement with Arizona Packaging and Production, who manufactures our flagship
product, Bazi. The terms of the agreement provide that they be the exclusive
manufacturer of this product and also stipulate certain prices, quantities and
delivery timelines. As a result, the lead time on this product has been reduced
to 6 weeks. Our inventory, net of our allowance for obsolescence, was $394,556
at September 30, 2008, an increase from $370,843 at December 31,
2007.
The
increase in inventory was a result of the decision to focus our marketing
efforts around the single product, Bazi, and the resultant higher sales caused
by these focused marketing efforts. We believe that the current inventory level
is adequate to meet our short-term projected demand, and based on our sales for
the nine months ended September 30, 2008, it is appropriately classified
as a current asset based on the ongoing implementation of our new single
product marketing plan which is designed to increase our distributor base and
sales.
Since
the launch of our liquid dietary supplement Bazi on January 12, 2007, we
have seen the demand for all of our legacy products (all products other than
Bazi) decrease as customers favored the convenience and simplicity of
8
Table of Contents
Bazi. In February 2008 we announced our
decision to focus our sales and marketing efforts around this single product.
Both of these factors resulted in taking a charge against operations for
obsolete inventory of $216,760 for the year ended December 31, 2007. In September we
announced the discontinuance of one of our legacy products, the XELR8 SNACK.
This did not result in any additional write-offs as the charge was taken in
2007. Our allowance for obsolete inventory decreased from $189,403 at December 31,
2007 to $187,619 at September 30, 2008 as we started to dispose of our
legacy products. We believe our reserve for obsolescence is reasonable because (i) substantially
all of our Bazi inventory has been recently purchased, and (ii) the shelf
life of our legacy products averages three years and the shelf life of Bazi is
a year.
Our
network marketing program is designed to provide an incentive for independent
distributors to build, maintain and motivate a sales organization of customers
and other independent distributors to enhance earning potential. Our
independent distributors are compensated with commissions and bonuses on sales
generated through their downline organization. Independent distributors advance
in distributor levels as they develop their sales organization and increase
their sales volume, which increases their compensation.
We
recognize revenue when products are shipped to our customers. Revenue is
reduced by product returns at the time we take the product either back into
inventory or dispose of it. In addition, we estimate a reserve total for future
returns. Cost of our sales consists of expenses directly related to the
production and distribution of the products and certain sales materials.
Included in the sales and marketing expenses are independent distributor
commissions, bonus and incentives along with other general selling expenses. We
expect our independent distributor expenses, as a percentage of net revenues,
to decrease as independent distributors receive less additional incentives and
rely on the incentives in our direct sales program. General and administrative
expenses include salaries and benefits, rent and building expenses, legal,
accounting, telephone and professional fees.
Our
revenue will depend on the number and productivity of our independent
distributors, who purchase products and sales materials from us for resale to
their customers or for personal use. Because we will distribute substantially
all of our products through our independent distributors, our failure to retain
our existing distributors and recruit additional distributors could have an
adverse effect on our revenue.
We
believe that the number of our distributors and customers are an important
indicator to monitor. In addition, we will monitor the sales generated per
independent distributor as well as the success of our independent distributors
in recruiting new independent distributors and customers.
Our
operating plan for 2008 is focused on the continued growth and market
penetration of Bazi, and increasing the number of independent distributors and
customers, growing revenues, and generating gross profits. With respect to
industry and market factors that may affect us directly, we believe that
industry credibility in both direct selling and nutritional supplements will be
critical elements in whether we can increase revenues and become profitable.
Any adverse developments in either of these two areas, to us or in our
industry, could lead to a lower number of our independent distributors and
reduced sales and recruiting efforts by existing distributors, as well as a
loss or no increase in the number of sports celebrity endorsers of our
products. Due to the recent change in marketing strategy from multiple products
to a single product, we cannot predict our revenue, gross profit, net income or
loss or use of cash and cash equivalents; however, we expect net losses will
continue for at least the next 6 months.
Critical Accounting Policies and Estimates
Discussion
and analysis of our financial condition and results of operations are based
upon financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates; including those related to collection of
receivables, inventory obsolescence, sales returns and non-monetary
transactions such as stock and stock options issued for services and beneficial
conversion features of notes payable. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and
estimates used in the preparation of our financial statements.
9
Table of Contents
Revenue Recognition.
In accordance with Staff Accounting Bulletin
104 Revenue Recognition in Financial Statements, revenue is recognized at the
point of shipment, at which time title is passed. Net sales include sales of
products, sales of marketing tools to independent distributors and freight and
handling charges. With the exception of approved professional sports teams, we
receive the net sales price from all of our orders in the form of cash or
credit card payment prior to shipment. Professional sports teams with approved
credit have been extended payment terms of net 30 days.
Allowances for Product Returns
.
Allowances for product returns are recorded
at the time product is shipped. These accruals are based upon the historical
return rate since the inception of our network marketing program in the third
quarter of 2003, and the specific historical return patterns by product. Our
return rate since the third quarter of 2003 has varied from 0.7% to 7.7% of our
net sales.
We
offer a 60-day, 100% money back unconditional guarantee to all customers and
independent distributors who have never before purchased products from us. As
of September 30, 2008, orders shipped that are subject to our 60-day money
back guarantee were approximately $276,781. All other product may be
returned to us by any customer or independent distributor if it is unopened and
undamaged for a 100% sales price refund, less a 10% restocking fee, provided
the product is returned within 12 months of purchase and is being sold by us at
the time of return. We are not able to estimate the amount of revenue we have recognized
that is held by these buyers of product and which is returnable, because it is
not possible to determine the amount of product that is unopened and undamaged.
Product damaged during shipment is replaced wholly at our cost, which
historically has been negligible.
We
monitor our return estimate on an ongoing basis and may revise allowances
to reflect our experience. Our reserve for product returns at September 30,
2008 and December 31, 2007 was $118,256 and $76,193, respectively. To
date, product expiration dates have not played any role in product returns, and
we do not expect they will in the future because it is unlikely that we will
ship product with an expiration date earlier than the latest allowable product
return date.
Inventory Valuation
.
Inventories are stated at the lower of cost
or market on a first-in first-out basis. A reserve for inventory obsolescence
is maintained and is based upon assumptions about current and future product
demand, inventory whose shelf life has expired and market conditions. A change
in any of these variables may require additional reserves to be taken. We
reserved $187,619 for obsolete inventory as of September 30, 2008 and
$189,403 as of December 31, 2007.
Stock Based Compensation.
Many equity instrument transactions are
valued based on pricing models such as Black-Scholes-Merton, which require
judgments by us. Values for such transactions can very widely and are often
material to the financial statements.
Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS 123R), which requires
compensation costs related to share-based transactions, including employee
stock options, to be recognized in the financial statements based on fair
value. SFAS 123R revises SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) and supersedes Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees. In March 2005,
the Securities and Exchange Commission (the SEC) issued Staff Accounting
Bulletin No. 107 (SAB 107) regarding the SECs interpretation of
SFAS 123R and the valuation of share-based payments for public companies.
We have applied the provisions of SAB 107 in its adoption of
SFAS 123R. We adopted the provisions of SFAS 123R using the modified
prospective transition method. In accordance with this transition method, the
companys consolidated financial statements for prior periods have not been
restated to reflect the impact of SFAS 123R. Under the modified prospective
transition method, share-based compensation expense for the first quarter of
2006 includes compensation expense for all share-based compensation awards
granted prior to, but for which the requisite service has not yet been
performed as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS 123.
Share-based compensation expense for all share-based compensation awards
granted after January 1, 2006 is based on the grant date fair value
estimated in accordance with the provisions of SFAS 123R.
Results of Operations
For
the three months ended September 30, 2008 compared to the three months September 30,
2007.
10
Table of Contents
The discussion below first presents the
results of the quarter ended September 30, 2008 followed by the results of
the quarter ended September 30, 2007
Net sales.
Net sales
were $2,109,995, an increase of 47% compared to $1,432,220. The increase in net sales can be attributed to
continued success of the Bazi product, the sales promotions, XELR8 to $1
Million, conducted in the first seven months of 2008, along with the
promotions for Diamond Club that were held in the quarter and the resulting
increase in the number of independent distributors and customers.
The percentage that each product category represented of our net sales
is as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Product Category
|
|
% of Sales
|
|
% of Sales
|
|
Bazi
|
|
93
|
%
|
86
|
%
|
EAT
|
|
0
|
%*
|
1
|
%
|
DRINK
|
|
1
|
%
|
3
|
%
|
SNACK
|
|
0
|
%*
|
0
|
%*
|
HYDRATE
|
|
1
|
%
|
2
|
%
|
Vitamins and minerals, including SUPPORT
|
|
1
|
%
|
2
|
%
|
BUILD
|
|
0
|
%*
|
1
|
%
|
Other-educational materials, apparel
|
|
4
|
%
|
5
|
%
|
* - less than 1%
Gross Profit.
Gross
profit increased to $1,623,927 compared to $1,089,987, an increase of 49%. Gross profit as a percentage of revenue
(gross margin) increased to 77% from 76%.
The increase in the gross
margins was a result of the increased sales of the new Bazi product that has a
higher gross margin as compared to the legacy products.
Sales and marketing expenses.
Sales and marketing expenses increased to $1,355,045 from $820,080, an increase
of 65%. The increase in sales and marketing expenses is a result of the
increased payments to our independent distributors as a result of increased
sales. The independent distributor earnings increased to 42% of net sales
for the current period compared to 36% for the comparable
period. Additionally, the sales and marketing increase was primarily due to
the payment to distributors as a bonus for the partial achievement of the XELR8
to $1 Million promotion of approximately $140,000.
General and administrative expenses.
General
and administrative expenses were $674,712, an increase of 5% compared to $642,930. The
increase is a result of higher administrative and executive salary expenses and
insurance costs, which was offset by the decreased stock based compensation
that the Company recorded.
Depreciation and Amortization Expense.
The expense was $11,470
compared to $11,716, a decrease of 2%. As a result of the continued success of
the Bazi product we evaluated the carrying value of the trademarks associated
with the legacy products that the Company had and fully amortized these
intangible balances.
Net Loss.
Our net loss was $408,915, or ($0.03) per
share, compared to $355,279, or ($0.02) per share, an increased loss of
15%. The increased net loss is
associated with the increases in payments to distributors in commissions and
contest awards, which was partially offset by the increased gross margin.
For
the nine months ended September 30, 2008 compared to the nine months ended
September 30, 2007.
The discussion below first presents the
results of the nine months ended September 30, 2008 followed by the
results of the nine months ended September 30, 2007
Net sales.
Net sales
were $5,964,194, an increase of 62% compared to $3,687,690. The increase in net sales can be attributed to
the continued success of Bazi, the sales promotion, XELR8 to $1 Million,
conducted in the first seven months of 2008, the other promotions for Diamond
Club and the resultant increase in the number of independent distributors and
customers.
The percentage that each product category represented of our net sales
is as follows:
11
Table of Contents
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Product Category
|
|
% of Sales
|
|
% of Sales
|
|
Bazi
|
|
92
|
%
|
80
|
%
|
EAT
|
|
0
|
%*
|
1
|
%
|
DRINK
|
|
1
|
%
|
4
|
%
|
SNACK
|
|
0
|
%*
|
1
|
%
|
HYDRATE
|
|
1
|
%
|
2
|
%
|
Vitamins and minerals, including SUPPORT
|
|
1
|
%
|
3
|
%
|
BUILD
|
|
1
|
%
|
2
|
%
|
Other-educational materials, apparel
|
|
4
|
%
|
7
|
%
|
* - less than 1%
Gross Profit.
Gross
profit increased to $4,595,066 compared to $2,672,925, an increase of 72%. Gross profit as a percentage of revenue
(gross margin) increased to 77% from 72%.
The increase in the gross margin
was a result of the increased sales of Bazi which has a higher gross margin as
compared to the legacy products. The increase was partially offset as a result
of the scrap and obsolescence charges from the discontinuance legacy products.
Sales and marketing expenses.
Sales and marketing expenses increased to $4,059,998 from $2,417,200, an
increase of 68%. Sales and marketing expenses consist primarily of distributor
commissions, costs associated with attracting experienced field leaders for our
distributor network, events and training for the distributors. The increase in sales and marketing expenses
is a result of the increased payments to our independent distributors as a
result of increased sales. The independent distributor
compensation as a percentage of net sales increased for the current period to
43% compared to the prior period of 40%. The
expense increase due to the payment to distributors as a bonus for the partial
achievement of the XELR8 to $1 Million promotion of approximately $140,000.
The increase was also due to the payment for the termination of a marketing
consulting services agreement that the Company entered into in 2003 with
Mineral Deposits during the second quarter. The original agreement had required
Mineral Deposits to provide consulting services in exchange for a monthly
payment based on the Companys sales, as long as the Company continued to sell
products through a multi-level marketing system of independent distributors. In
exchange for a termination of the consulting services agreement, which provided
for monthly payments equal to ½% of the Companys net revenue, the Company paid
Mineral Deposits in April, $62,500 cash and 100,000 options with an exercise
price of $1.18 per share.
General and administrative expenses.
General
and administrative expenses were $2,295,770, a decrease of 6% compared to
$2,429,738. The decrease is a result of $661,132 in stock based compensation that
we paid to the referral agent in connection with the short term loan financing
in the prior period and a charge of $350,000 in stock based compensation that
the Company recorded for the grant of stock by a principal shareholder to the
employees of the Company. Under the guidance issued by the Securities and
Exchange Commission in Staff Accounting Bulletin 107 (SAB 107), share-based
payments issued to an employee of a reporting entity by a related party or
other holder of economic interest in the entity as compensation for services
provided to the entity are to be recorded as a compensation expense by the
entity. These decreases were partially offset by higher compensation as a
result of the variable employment agreements with our executives and additional
employees, and additional expenses incurred for filings and compliance as a
public company.
Depreciation and Amortization Expense.
The expense was
$35,158 compared to $45,992, a decrease of 24%. As a result of the continued
success of the Bazi product we evaluated the carrying value of the trademarks
associated with the legacy products that the Company had and fully amortized
these intangible balances.
Interest Expense.
Interest expense
was $0 compared to $439,537. In November 2006 and January 2007, the
Company entered into two short term debt financing agreements. Both provided
for a 10% interest rate and an origination fee of 400,000 shares of common
stock of the Company which was valued using the share price of the Company on
the dates the loans were funded and amortized over the term of the loan. Both
loans were repaid on March 27, 2007.
Net Loss.
Our net loss was $1,771,251, or ($0.11) per
share, compared to $2,600,168, or ($0.19) per share. Our net loss decreased by 31% as the result
of higher sales and associated gross margin contribution, decrease in General
and Administrative expenses, which was offset by increased expenses for Sales and
Marketing.
12
Table of Contents
Liquidity and Capital Resources
To
date, our operating funds have been provided primarily from sales of our common
stock ($15,413,421), and by loans from our founder and by various stockholders
($3,989,209), through June 30, 2008, and to a lesser degree, cash flow
provided by sales of our products.
On
March 5, 2007, we announced that the Company had raised $2,000,000 in
gross proceeds in a private placement transaction, which would close subject to
shareholder and American Stock Exchange approval. On March 7, 2007, the
shareholders approved the private placement transaction, and on March 27,
we closed the transaction. At the time of closing, we paid in full the
short-term loans of $500,000 plus accrued interest of $13,425 leaving us with
no short-term or long-term debt at this time, other than trade accounts payable
and other accrued liabilities.
On
May 8, 2007, the Company announced that it had completed the sale of one
million units in a private placement transaction resulting in gross proceeds of
$2,000,000, which would close subject to American Stock Exchange approval. On May 24,
2007, we closed the transaction.
On
February 19, 2008, the Company announced that it had completed the sale of
one-half million units in a private placement transaction for gross proceeds of
$500,000. On March 6, 2008, the American Stock Exchange approved the issue
of the shares.
We
used $857,219 of cash for operations in the nine months ended September 30,
2008, compared to $958,122 of cash for operations in the nine months ended September 30,
2007. The use of cash in our operations results from incurring and accruing
expenses to suppliers necessary to generate business and service our customers
at a time when revenues did not keep pace with expenses. As of September 30,
2008, we had $1,827,842 in cash and cash equivalents available to fund future
operations. Net working capital decreased from $2,120,479 at December 31,
2007, to $1,532,808 at September 30, 2008.
In
the event that we are successful in completing our business plan of increasing
the number of distributors, sales levels and consequently increased
profitability, we believe that our cash resources will be sufficient to fund
our operations for the next year. If our business operations do not result in
increased product sales, our business viability, financial position, results of
operations and cash flows will likely be adversely affected. Further, if we are
not successful in achieving profitability, additional capital will be required
to conduct ongoing operations. We cannot predict the terms upon which we could
raise such capital or if any capital would be available at all.
Customer Concentrations
We had no single customer that accounted for any substantial portion of
our revenues.
Off-Balance Sheet Items
We have no off-balance sheet items as of September 30, 2008, or December 31,
2007.
Item 4T CONTROLS AND PROCEDURES
Prior
to the filing of this report, the Companys management carried out an
evaluation, under the supervision and with the participation of its Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of the Companys
disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Companys controls and procedures
were effective to ensure that information required to be disclosed by the
Company in the reports filed by it under the Securities and Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms, and include controls
and procedures designed to ensure that information required to be disclosed by
the Company in such reports is accumulated and communicated to the Companys
management, including the Chief Executive Officer and the Chief Financial
Officer of the Company, as appropriate to allow timely decisions regarding
required disclosure.
There
has been no change in the Companys internal control over financial reporting
that occurred during the Companys most recent fiscal quarter that has
materially affected or is reasonably likely to materially affect its internal
control over financial reporting.
13
Table
of Contents
Part II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On
May 27, 2008, Bleu Ridge Consultants, Inc., filed a lawsuit against
XELR8 in the District Court for the City and County of Denver, Colorado,
alleging that XELR8 breached a funding agreement by failing to make payments to
Bleu Ridge. On July 11, 2008, Bleu Ridge and XELR8 entered into a
standstill agreement, pursuant to which the parties agreed to certain terms to
govern the parties relationship while they negotiated a settlement. On October 16,
2008 Bleu Ridge dismissed the lawsuit without prejudice.
Item 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
The
following matters were submitted to a vote by the shareholders at the meeting
held on August 18, 2008:
1.
To elect seven directors of the Company.
2.
To ratify of appointment of Gordon Hughes and
Banks LLP as the Companys Independent Registered Public Accounting Firm.
Details
relating to the above matters were set forth in the Proxy Statement dated June 6,
2008. All of our shareholders of record as of the close of business on June 20,
2008 were entitled to notice of and to vote at such meeting. At the meeting the
shareholders approved all matters set forth in the Companys proxy statement,
which included the re-election of Board members, and the ratification of Gordon
Hughes and Banks LLP as the Companys Independent Registered Public Accounting
Firm. The members re-elected to the Board of Directors, who will serve until
the 2009 Annual Meeting of Stockholders, include Chairman, John B. McCandless;
Chief Executive Officer and Chief Financial Officer, John Pougnet; Company
President, Douglas Ridley; Anthony DiGiandomenico; AJ Robbins; Daniel Rumsey
and Anthony Petrelli.
Item 6. EXHIBITS
Exhibit No
|
|
Description
|
31.1
|
|
Certification of CEO as Required by Rule 13a-14(a)/15d-14
|
31.2
|
|
Certification of CFO as Required by Rule 13a-14(a)/15d-14
|
32.1
|
|
Certification of CEO as Required by Rule 13a-14(a) and
Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of
Chapter 63 of Title 18 of the United States Code
|
32.2
|
|
Certification of CFO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code
|
99.1
|
|
Press release announcing 3rd Quarter 2008 Results
|
14
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City and County of Denver, State
of Colorado, on November 10, 2008.
XELR8
HOLDINGS, INC.
|
|
|
|
|
|
|
|
By
|
/s/ John D. Pougnet
.
|
|
John D.
Pougnet
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
By
|
/s/ John D. Pougnet
.
|
|
John D.
Pougnet
|
|
Chief
Financial Officer (Principal Accounting Officer)
|
|
15
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