xlr810q_3312008.htm
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 March 31, 2009
or
[ ] 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)
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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
(Issuer’s
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
[ ]
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):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o (Do not check if
a smaller reporting company)
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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
[ ] NO
[X]
As of May
6, 2009 the Company had 15,697,170 shares of its $.001 par value common stock
issued and outstanding.
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15
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| Signatures |
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16 |
Part
I FINANCIAL
INFORMATION
Item
1 – CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
XELR8
HOLDINGS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
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March
31,
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December
31,
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2009
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2008
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$ |
958,285 |
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$ |
1,576,510 |
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Accounts
receivable, net of allowance for doubtful accounts of $3,097 and $3,071,
respectively
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8,857 |
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6,825 |
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Inventory,
net of allowance for obsolescence of $118,239 and $116,095,
respectively
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244,635 |
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176,236 |
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Prepaid
expenses and other current assets
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332,061 |
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509,377 |
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Total
current assets
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1,543,838 |
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2,268,948 |
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Intangible
assets, net
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21,026 |
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21,411 |
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Property
and equipment, net
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51,313 |
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35,832 |
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Total
assets
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$ |
1,616,177 |
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$ |
2,326,191 |
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$ |
508,545 |
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$ |
643,426 |
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Return
reserve
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134,836 |
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134,836 |
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Accrued
payroll and benefits
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100,651 |
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71,193 |
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Other
accrued expenses
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91,275 |
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104,662 |
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Total
Liabilities
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835,307 |
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954,117 |
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SHAREHOLDERS’
EQUITY (Note 2):
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Preferred
stock, authorized 5,000,000 shares, $.001 par value, none issued or
outstanding
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- |
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- |
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Common
stock, authorized 50,000,000 shares, $.001 par value, 15,697,170 shares
issued and outstanding
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15,697 |
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15,697 |
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Additional
paid in capital
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24,005,410 |
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23,958,422 |
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Accumulated
(deficit)
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(23,240,237 |
) |
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(22,602,045 |
) |
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Total
shareholders’ equity
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780,870 |
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1,372,074 |
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Total
liabilities and shareholders’ equity
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$ |
1,616,177 |
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$ |
2,326,191 |
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
* Derived
from audited Financial Statements
XELR8
HOLDINGS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three
Months Ended March 31, 2009 and 2008
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For the
Three
Months
Ended
March 31,
2009
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For the
Three
Months
Ended
March 31,
2008
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Net
sales
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$ |
1,316,423 |
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$ |
1,577,784 |
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Cost
of goods sold
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335,704 |
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359,578 |
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Gross
profit
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980,719 |
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1,218,206 |
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Operating
expenses:
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Selling
and marketing expenses
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1,001,541 |
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1,090,792 |
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General
and administrative expenses
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610,967 |
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868,886 |
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Research
and development expenses
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325 |
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424 |
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Depreciation
and amortization
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9,800 |
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11,844 |
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Total
operating expenses
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1,622,633 |
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1,971,946 |
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Net
(loss) from operations
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(641,914 |
) |
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(753,740 |
) |
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Other
income (expense)
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Interest
income
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3,722 |
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19,278 |
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Other
expense
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- |
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(13,770 |
) |
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(Loss)
on disposal of asset
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- |
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(1,130 |
) |
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Total
other income (expense)
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3,722 |
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4,378 |
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Net
(loss)
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$ |
(638,192 |
) |
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$ |
(749,362 |
) |
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Net
(loss) per common share
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Basic
and diluted net (loss) per share
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$ |
(0.04 |
) |
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$ |
(0.05 |
) |
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Weighted
average common shares
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outstanding,
basic and diluted
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15,697,170 |
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15,334,533 |
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
XELR8
HOLDINGS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three
Months Ended March 31, 2009 and 2008
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For the
Three
Months
Ended
March 31,
2009
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For the
Three
Months
Ended
March 31,
2008
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Cash
flows from operating activities:
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Net
loss
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$ |
(638,192 |
) |
|
$ |
(749,362 |
) |
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Adjustments
to reconcile
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Depreciation
and amortization
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9,800 |
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11,844 |
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Stock
and stock options issued for services
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46,988 |
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275,375 |
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Expense
related to anti-dilution of warrants
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- |
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13,770 |
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Loss
on asset disposal
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- |
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1,130 |
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Change
in allowance for doubtful accounts
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26 |
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1,848 |
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Change
in allowance for inventory obsolescence
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2,144 |
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(14,716 |
) |
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Change
in allowance for product returns
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- |
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10,092 |
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Changes
in assets and liabilities:
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Accounts
receivable
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(2,058 |
) |
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|
4,392 |
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Inventory
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(70,543 |
) |
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|
94,736 |
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Other
current assets
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177,316 |
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|
3,808 |
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Accounts
payable and accrued expenses
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(118,810 |
) |
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131,383 |
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Net
cash (used) by operating activities
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(593,329 |
) |
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(215,700 |
) |
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Cash
flows from investing activities:
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Capital
expenditures
|
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|
(24,896 |
) |
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- |
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Net
cash (used) by investing activities
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(24,896 |
) |
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- |
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Cash
flows from financing activities:
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Issuance
of common stock, net
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- |
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452,974 |
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Net
cash provided by financing activities
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|
- |
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452,974 |
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NET
INCREASE (DECREASE) IN CASH
|
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|
(618,225 |
) |
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237,274 |
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CASH
AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
|
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|
1,576,510 |
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|
2,245,858 |
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CASH
AND CASH EQUIVALENTS, END OF THE PERIOD
|
|
$ |
958,285 |
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$ |
2,483,132 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
XELR8
HOLDINGS, INC.
Note 1 -
ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and
Business
The
consolidated financial statements include those of XELR8 Holdings, Inc.,
(XELR) (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, Bazi; sports hydration drink, a protein shake, a
sports energy drink, a meal replacement drink, 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
Company’s Annual Report to the Securities and Exchange Commission for the fiscal
year ended December 31, 2008, filed on Form 10-K on March 31,
2009.
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.
Revenue
Recognition
The
Company ships its products by common carrier and receives payment in the form of
cash, credit card or approved credit terms. In May 2004, the Company
revised its product return policy to provide 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 and other vitamins and nutritional supplements, which it packages
in various forms and containers.
Inventory
is comprised of the following:
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March 31, 2009
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Raw
materials
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$ |
67,639 |
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$ |
71,930 |
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Finished
goods
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|
295,235 |
|
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|
220,401 |
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Provision
for obsolete inventory
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|
(118,239 |
) |
|
|
(116,095 |
) |
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|
$ |
244,635 |
|
|
$ |
176,236 |
|
A summary
of the reserve for obsolete and excess inventory is as follows:
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|
March 31, 2009
|
|
|
December 31,
2008
|
|
|
Balance
as of January 1
|
|
$ |
116,095 |
|
|
$ |
189,403 |
|
|
Addition
to provision
|
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|
2,144 |
|
|
|
22,610 |
|
|
Write-off
of obsolete inventory
|
|
|
- |
|
|
|
(95,918 |
) |
|
|
|
$ |
118,239 |
|
|
$ |
116,095 |
|
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 Company’s tax returns from 2006 through the current
period. The Company’s 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
Company has provided a full valuation allowance on all of its deferred tax
assets, the adoption of FIN 48 had no impact on the Company’s effective tax
rate.
Stock-Based
Compensation
Total
share-based compensation expense, for all of the Company’s share-based awards
recognized for the three months ended March 31, 2009, was $46,988 compared
with the $275,375 for the three months ended March 31, 2008.
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 Company’s 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 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:
|
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|
Three
months ended
|
|
|
Three
months ended
|
|
|
|
|
March
31, 2009
|
|
|
March
31, 2008
|
|
|
Stock
price volatility
|
|
|
103.0
– 107.1 |
% |
|
|
94.7
- 96.4 |
% |
|
Risk-free
rate of return
|
|
|
0.57
– 0.69 |
% |
|
|
1.55
– 3.09 |
% |
|
Annual
dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
Expected
life
|
|
1.5
to 2.5 Years
|
|
|
1.5
to 4.5 Years
|
|
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 March 31, 2009, 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 Company’s 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 Company’s 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 Company’s 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 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 – MANAGEMENT’S 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-K for
the fiscal year ended December 31, 2008. Readers are cautioned not to place
undue reliance on the forward-looking statements contained in this
report.
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 a liquid nutritional supplement, four powdered
beverages, and 12 individual supplements packaged in our VitaCube® or a box. 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. 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 it to our independent
distributors in February 2008.
During
the third quarter of 2003, we initiated a transition of our sales and marketing
efforts from sales to retail outlets and in-house telemarketing to direct
selling through independent distributors and we launched our direct sales
program in the second quarter of 2004. As of March 31, 2009 we had 6,657
independent distributors and 4,607 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 ensure that we can timely fill our
customer orders. During 2007 we entered into a five year manufacturing agreement
with Arizona Packaging and Production, who manufacture our flagship product,
Bazi™. The terms of the agreement provided that they would be the exclusive
manufacturer of this product and also stipulated certain prices, quantities and
delivery timelines. As a result the increased sales of Bazi and the
manufacturing agreement, the lead time on this product has been reduced to 4
weeks. Our inventory, net of our allowance for obsolescence, was $244,635 at
March 31, 2009, an increase from $176,236 at December 31,
2008.
The
increase of inventory was a result of the decision to add additional marketing
materials in the first quarter, which we launched at our National Distributor
event in February 2009, focused around the single product, Bazi™. We believe
that the current inventory level is adequate to meet our short-term projected
demand, and based on our sales for the quarter ended March 31, 2009, it is
appropriately classified as a current asset based on the 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 Bazi™. In
February 2008 we announced our decision to focus our sales and marketing
efforts around this single product. In September 2008 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 increased from $116,095 at December 31, 2008 to
$118,239 at March 31, 2009. 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 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.
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. We
do not know what industry growth was for 2008, or will be for 2009, nor do we
have enough experience in the direct sales channel to determine whether a slower
industry growth rate, which occurred for several years leading up to 2003 and
which has subsequently been slow, will adversely affect us. Additionally, we
believe that the deteriorating economic conditions in the United States that
started in the third quarter of 2008 and continue through into 2009 could have a
negative effect on our business and the ability of our independent distributors
to recruit other distributors.
Critical
Accounting Polices 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.
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 monthly 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
March 31, 2009, orders shipped that are subject to our 60-day money back
guarantee were approximately $166,079. 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 March 31, 2009 and
December 31, 2008 was $134,836. To date, product expiration dates have not
played any role in product returns, and we anticipate that they may in the
future because of the marketing focus on Bazi™, a product that has only a one
year shelf life and therefore it is possible for us to have expired product
returned to us. To date we have not have any significant returns of expired
product.
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 $118,239 for obsolete
inventory as of March 31, 2009 and $116,095 as of December 31,
2008.
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 SEC's 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
company's 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 March 31, 2009 compared to the three months ended March
31, 2008.
The discussion below first presents the
results of the quarter ended March 31, 2009 followed by the results of the
quarter ended March 31, 2008
Net sales. Net sales were
$1,316,423 a decrease of 17% compared to $1,577,784. The decrease in
net sales can be attributed to the general economic downturn in the economy and
the result of hosting the national event that the Company held in mid February
in Las Vegas, later than in the prior year, and we usually get increased sales
after the event.
The percentage that each product
category represented of our net sales is as follows:
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Product
Category
|
|
%
of Sales
|
|
|
%
of Sales
|
|
|
Bazi
|
|
|
90 |
% |
|
|
89 |
% |
|
Legacy
Products*
|
|
|
3 |
% |
|
|
6 |
% |
|
Other-educational
materials, apparel
|
|
|
7 |
% |
|
|
5 |
% |
* Legacy
Products include EAT, DRINK, HYDRATE, BUILD and Vitamins and minerals (including
SUPPORT).
Gross Profit. Gross profit
decreased to $980,719 compared to $1,218,206 a decrease of 19%. Gross
profit as a percentage of revenue (gross margin) decreased to 74% from 77%. The
decrease in the gross margins was a result of the launch of the new Bazi sales
materials, the Empower magazine and DVD. The Company took a lower of cost or
market at the time it acquired that magazine, as it is sold at a price below the
unit cost. In addition to this, the company was able to sell a
significant number of these magazines including the DVD, that have lower gross
margins as compared to the gross margin on products.
Sales and marketing expenses.
Sales and marketing expenses decreased to $1,001,541 from $1,090,792, a decrease
of 8%. The decrease in sales and marketing expenses is a result of the decrease
in commissions paid to our independent distributors for the sales of our
products. The independent distributor earnings (as a percentage of
net sales) remained the same for the current period compared to the comparable
period in the prior year. This decrease was offset by increases we
incurred of approximately $80,000 in additional event costs associated with the
national distributor event in Las Vegas as compared with the prior year. We also
introduced new marketing materials, a magazine and DVD, that was launched at the
national event in Las Vegas to our independent distributors, the development of
which cost us approximately $105,000.
General and administrative expenses.
General and administrative expenses were $610,967 a decrease of 30%
compared to $868,886. The decrease was the result of lower stock
based compensation expense, which decreased to $46,988 for the quarter ended
March 31, 2009 compared to $275,375 for the comparable period in 2008, which was
the result of the payment in the prior year to a public and investor relations
company.
Net Loss. Our net
loss was $638,192 compared to $749,362, a decrease of 15%. Our net loss of
($0.04) per share was compared to ($0.05) per share, a decrease of
20%. The decrease in net loss is a result of a decrease in selling
and marketing and general and administrative expenses. These were offset by the
decrease in net sales and related gross profit.
Liquidity
and Capital Resources
To date,
our operating funds have been provided primarily from sales of our common stock
$15,352,624, through December 31, 2008, and to a lesser degree, cash flow
provided by sales of our products.
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
$593,330 of cash for operations in the three months ended March 31, 2009,
compared to $215,700 of cash for operations in the three months ended March 31,
2008. 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 March 31,
2009, we had $958,285 in cash and cash equivalents available to fund future
operations. Net working capital decreased from $1,314,831 at December 31,
2008, to $708,531 at March 31, 2009.
In the
event that we are not successful in completing our business plan of increasing
the number of distributors and revenue, and are therefore unable to achieve
profitability, our cash resources will be insufficient to fund our operations
for the next 12 months. As a result, additional capital will be required
to continue operations. No assurances can be given that we will be able to
raise additional capital, and if so, whether such capital will be available on
terms and conditions beneficial to the Company.
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 March 31, 2009.
Item 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
A smaller
reporting company is not required to provide the information required by this
item.
Item
4T – CONTROLS AND PROCEDURES
Prior to
the filing of this report, the Company’s 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 Company’s 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 Company’s
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 SEC’s 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 Company’s 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 Company’s internal control over financial reporting that
occurred during the Company’s most recent fiscal quarter that has materially
affected or is reasonably likely to materially affect its internal control over
financial reporting.
Part II OTHER
INFORMATION
Item 1. – LEGAL
PROCEEDINGS
None.
In
addition to the other information set forth in this report, you should carefully
consider the risk factors disclosed in Item 1A, “Risk Factors”, of the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2008.
Item 2. – CHANGES IN
SECURITIES AND USE OF PROCEEDS
None.
Item 3. – DEFAULTS UPON
SENIOR SECURITIES
None.
Item 4. – SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. – OTHER
INFORMATION
On
May 2, 2009 the Company entered into an amended employment agreement with
its Chief Executive Officer & Chief Financial Officer, Mr. John
Pougnet. Mr. Pougnet has served as the Company’s Chief Executive Officer
since October 1, 2006, and as Chief Financial Officer since
September 12, 2005. The amendment provides for an adjustment of Mr.
Pougnet’s base annual salary from $205,000 (or approximately $17,000 per month)
to $169,000 (or approximately $14,000 per month) payable for each
subsequent month (commencing May 1, 2009) that the company fails to achieve
certain monthly revenue goals for the remainder of 2009. There will be no
accruals of the salary difference in months where the revenue goals have not
been met.
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 May 6,
2009.
XELR8
HOLDINGS, INC.
By /s/
John D Pougnet .
John D.
Pougnet
Chief
Executive Officer
Chief
Financial Officer (Principal Accounting Officer)