ITEM 1A
RISK FACTORS
We are subject to various risks that could have a negative effect on
the Company and its financial condition. These risks could cause actual operating
results to differ from those expressed in certain forward looking statements
contained in this Form 10-KSB as well as in other communications.
We have a history of operating losses and a
significant accumulated deficit, and we may never achieve profitability.
We have not been profitable since inception in 2001.
We had net losses for the year ending December 31, 2007 and year ended December 31,
2006 of $3,241,730 and $4,669,449, respectively. At December 31, 2007, we
had an accumulated deficit of $20,492,011. We may never achieve or
maintain profitability. Our ability to achieve and maintain a profit is
dependent upon our attracting and retaining a large base of independent
distributors who generate our sales.
We may need to raise additional funds to fund
operations which cannot be assured and would result in dilution to the existing
shareholders.
To date, our operating funds have been provided
primarily from sales of our common stock ($14,913,421), and by loans from our
founder and by various stockholders ($3,989,209), through December 31,
2007, and to a lesser degree, cash flow provided by sales of our products. We
used $1,178,996 of cash for operations in the year ended December 31,
2007, and $2,992,028 of cash for operations in the year ended December 31,
2006. 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, and what dilution will be caused
to the existing shareholders.
Our limited operating history and recent change in
marketing strategy make it difficult to evaluate our prospects.
We have a limited operating history on which to
evaluate our business and prospects. Our current flagship product, Bazi was
formulated in 2006 and introduced to the public for sale in January 2007.
Our other, legacy products were formulated from 2000 through 2005, and we began
selling these products to the general public in early 2002 through 2005, with
limited market success. In late 2003, we began to refocus our sales and
marketing efforts on direct sales of products through our network of
independent distributors. In 2005, we rebranded the network marketing company
and launched new products. In February 2008, we decided to change our
sales focus from multiple products, to a single product focus on Bazi, our
liquid dietary supplement drink. There is no assurance that we will achieve
significant sales as a result of us focusing our sales efforts on this single
product.
We also may not be successful in addressing our
operating challenges such as establishing a viable network of independent
distributors, developing brand awareness and expanding our market presence. Our
prospects for profitability must be considered in light of our evolving business
model. These factors make it difficult to assess our prospects.
Our failure to recruit, maintain and motivate a large
base of productive independent distributors could limit our ability to generate
revenues.
To increase revenue, we must increase the sales and
recruiting productivity of our independent distributors. We cannot assure you
that we will be successful in recruiting and retaining productive independent
distributors, particularly since direct sales organizations usually experience
high turnover rates of independent distributors. Our independent distributors
can terminate their relationships with us at any time. The distributors also
typically work on a part-time basis and may engage in other business
activities, which may reduce their efforts for us.
In recruiting and keeping independent distributors,
we will be subject to significant competition from other direct sales
organizations, both inside and outside our industry. Our ability to attract and
retain independent distributors will be dependent on the attractiveness of our
compensation plan, our product mix, and the support we offer to our independent
distributors. Adverse publicity concerning direct sales marketing and public
perception of direct selling businesses generally could negatively affect our
ability to attract, motivate and retain independent distributors.
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Based on our knowledge of the direct selling
industry, we anticipate that our independent distributor organization will be
headed by a relatively small number of key independent distributors who
together with their downline network will be responsible for a disproportionate
amount of revenues. We believe this structure is typical in the direct selling
industry, as sales leaders emerge in these organizations, and it is the current
situation with us. The loss of a key independent distributor will adversely
affect our revenues and could adversely affect our ability to attract other
independent distributors, especially if an independent distributor takes other
independent distributors of ours to a competitor or to any other organization.
We are dependent on the level of effort that our independent
distributors make in selling our products and we do not have control over their
methods of marketing our products.
We are dependent on our non-employee, independent
distributors to market and sell our products. Our independent distributors
purchase products from us for their own personal use and to use in marketing
their business. Additionally, we have a large number independent distributors
in relation to the small number of corporate employees who are responsible for
providing motivational support and recognition to these independent
distributors. We also, typically have a high turnover in the number of
independent distributors who join our business each year, who require training
and motivation from both their enrollers, key independent distributor leaders
and corporate staff. We rely on this training and the policies and procedures
included in the independent distributor agreement to ensure that each
independent distributor is aware of laws concerning the making of certain
claims regarding the products or income potential from the distribution on our
products. We take what we believe to be reasonable efforts to monitor
distributor activities to prevent misrepresentations, illegal acts or unethical
behavior while they conduct their business activities. There can be no
assurance, however, that our efforts to train, motivate, educate and govern their
activities will be successful, and may result in lower recruiting and negative
publicity and legal actions against us.
A change in the amount of compensation paid to our
independent distributors could reduce our ability to recruit and retain them.
One of our significant expenses is the payment of
compensation to our independent distributors. This compensation includes
commissions, bonuses, awards and prizes. From the date we changed our sales
method to direct sales through independent distributors, August 1, 2003,
through December 31, 2007, compensation paid to our independent
distributors represented 50% of our total revenues. We may change our
independent distributor compensation plan in seeking to better manage these
incentives, to monitor the amount of independent distributor compensation paid
and to prevent independent distributor compensation from having a significant
adverse effect on our revenues. Changes to our independent distributor
compensation plan may make it difficult for us to recruit and retain
qualified and motivated independent distributors. We do not have any current
plans to change our distributor compensation plan. Further, as we expand into
foreign markets in the future, the laws of those countries may force us to
alter our compensation plan, which may cause a negative trend amongst our
distributors and consequently sales.
We are not in a position to exert the same level of
influence or control over our independent distributors as we could if they were
our employees, and we may be subject to significant costs and reputation
harm in the event our independent distributors violate any laws or regulations
applicable to our operations.
Our independent distributors are independent
contractors and, accordingly, we are not in a position to provide the same
level of control and oversight as we would if independent distributors were our
employees. While we have implemented independent distributor policies and
procedures designed to govern independent distributor conduct and to protect
our goodwill, there can be no assurance that our independent distributors will
comply with our policies and procedures. Violations by our independent
distributors of applicable law or of our policies and procedures dealing with
customers could reflect negatively on our products and operations and harm our
business reputation. To date, we have not experienced any significant problems
affecting our products, operations or business reputation caused by distributor
violations of our policies and procedures. Additionally, as we expand from our
present to future markets, our marketing system could be found not to comply
with these laws and regulations or may be prohibited. Failure to comply with
current or future markets laws could have a material adverse effect on our
business, financial condition, and results of operations.
In addition, extensive federal, state and local laws
regulate our direct selling program. The Federal Trade Commission (FTC) or a
court could hold us liable for the actions of our independent distributors. The
FTC could also find us liable civilly for deceptive advertising if health
benefit representations made by our independent
17
distributors
are not supported by competent and reliable scientific evidence. If any of
these representations made by our independent distributors were deemed
fraudulent, the FTC could refer the matter to the Department of Justice for
criminal fraud prosecution. Also, the Food and Drug Administration (FDA)
could seek to hold us civilly and criminally liable for misbranding, for
adulteration, or for sale of an unapproved new drug if an independent
distributor were to make false or misleading claims, sell a product past its
shelf life, or represent that any of our products were intended for use in the
cure, treatment, or prevention of a disease or health-related condition. While
we train our independent distributors and attempt to monitor our independent
distributors marketing claims and sales materials, we cannot ensure that all
of these materials comply with applicable law.
Our direct selling program through independent
distributors could be found not to be in compliance with current or newly
adopted laws or regulations, which could subject us to increased costs and reduced
distributor participation in sales efforts, and our revenues would decrease
significantly.
Our direct marketing program could be found to
violate laws or regulations applicable to direct selling marketing
organizations. These laws and regulations generally are directed at preventing
fraudulent or deceptive schemes, often referred to as pyramid or chain sales
schemes, by ensuring that product sales ultimately are made to consumers and
that advancement within an organization is based on sales of the organizations
products rather than investments in the organization or other non-retail
sales-related criteria. The regulations concerning these types of marketing
programs do not include bright line rules and are inherently fact-based.
Thus, even in jurisdictions where we believe that our direct selling program is
in full compliance with applicable laws or regulations governing direct selling
programs, we are subject to the risk that these laws or regulations or the
enforcement or interpretation of them by governmental agencies or courts can
change. The failure of our direct selling program to comply with current or
newly adopted laws or regulations could result in costs and fines to us and
make our independent distributors reluctant to continue their sales efforts,
which would reduce our revenues significantly.
We are also subject to the risk of private party
challenges to the legality of our direct selling program. Direct selling
programs of some other companies have been successfully challenged in the past.
The challenges centered on whether the marketing programs of direct selling
companies are investment contracts in violation of applicable securities laws
and pyramid schemes in violation of applicable FTC rules and regulations.
These challenges have caused direct selling companies to focus greater
attention on generating product sales to non-participants or non-distributors.
Direct selling companies have addressed these issues by promoting retail sales
incentives, tying sales commissions more directly to retail sales and
reclassifying those persons who enroll as distributors but do not make sales to
other persons as retail customers. An adverse judicial determination with
respect to our direct selling program, or in proceedings not involving us directly
but which challenge the legality of direct selling systems, could have a
material adverse effect on our sales efforts, leading to lower revenues. To
date, we have not been subject to any adverse judicial determination with
respect to our direct selling program.
On April 12, 2006, the Federal Trade Commission
(FTC) proposed a new Business Opportunity Rule. Under the current Business
Opportunity Rule (16 C.F.R. § 437), the Company does not meet the
definition of a Business Opportunity and therefore is not subject to the rule.
If the proposed Business Opportunity Rule is made final by the FTC as
proposed, the Company (as well as all other network marketing companies) will
fall within the definition of a Business Opportunity and will be required to
comply with the requirements of the rule.
Following publication of the proposed rule, the FTC
accepted comments from those who wished to make a submission. The comment and
rebuttal periods have since closed. In addition to receiving thousands of
comments in opposition to the proposed rule from direct selling companies
and individuals engaged in direct selling, several members of Congress advised
the FTC of their opposition to the proposed rule. It is unknown when the
FTC will issue a final version of the proposed rule. The rule, when made final,
by the FTC may differ significantly from the proposed rule. If made final as it
is currently proposed, the proposed rule would require, among other
things, that that all network marketing companies, including the Company, to
provide all prospective distributors with extensive disclosures at least seven
days prior to enrolling as a distributor.
The Company or the sponsor of the prospective
distributor will be required to disclose:
(a) Identifying
Information: This includes the name, address and telephone number of the
Company, the name of the sponsor of the prospective distributor, and the date
on which the Disclosure Document is provided to the prospect;
(b) Earnings
Claim Information: If the Company or the sponsor of the prospective distributor
makes earnings claims to the prospective distributor in association with the
opportunity, an Earnings Claim Statement must be provided. The Earnings Claim
Statement must disclose (i) the beginning and ending dates when the represented
earnings were achieved, (ii) the number and percentage of all distributors
who achieved that level of earnings within such time
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period,
(iii) any specific characteristics applicable to the person making the
earnings claim that differ from the characteristics of the prospect (e.g., a
different geographic location), and (iv) a statement that written
substantiation for the earnings claim will be made available to the prospective
distributor upon request;
(c) Legal
Claims: If the Company, or any affiliate or prior business of the Company, or
any of itss officers, directors, managers or similar individuals have been the
subject of any civil or criminal action involving misrepresentation, fraud,
securities law violations, or unfair or deceptive practices in the ten years
preceding the date of the Disclosure Document, the full caption of each such
action must be disclosed;
(d) Refund
Policy: The Company will be required to disclose the terms of its refund
policy;
(e) Cancellation
and Refund Requests: The Company will be required to disclose the total number
of purchasers who have cancelled their business within the preceding two years;
(f) Reference
List: The Company will be required to list the name, city, state, and telephone
numbers of ten people who have enrolled as distributors within the three year
period preceding the date of the Disclosure Document who are located nearest to
the prospective distributor. Alternatively, the Company may disclose such information
for all distributors. The Disclosure Document must also advise prospective
distributors that if they become distributors, their personal contact
information may be disclosed to future prospective distributors.
The impact of the proposed rule could be: (1) the
advance seven day disclosure will cause a reduction in enrollments; (2) providing
10 references closest to an applicant will require a significant investment in
advanced software systems; (3) the reference requirement creates a
confidentiality problem, as it completely ignores distributors right to have
their personal information maintained confidential; (4) the identity of
our distributors is currently protected as trade secret information and such
status will be compromised; and (5) the disclosure of legal claims within
the specified categories applies to even those claims that were settled without
admission of liability, and even applies to disclosure of claims in which the
company prevailed on the claims. All of these could cause a significant
decrease in the recruiting of independent distributors to the Company and
consequently affect our ability to sell our products.
We may be held responsible for taxes or
assessments relating to the activities of our independent distributors
resulting in greater costs to us.
We treat our independent distributors as independent
contractors and do not pay employment taxes, like social security, or similar
taxes in other countries with respect to compensation paid to them. In the
event that an local regulatory authority in which our distributors operate deem
the distributor to be an employee, we may be held responsible for a
variety of obligations imposed on employers relating to their employees,
including, but limited to, employment taxes (social security) and related
taxes, plus any related assessments and penalties, which could significantly
increase our operating costs.
We are affected by extensive laws, governmental
regulations, administrative determinations, court decisions and similar
constraints which can make compliance costly and subject us to enforcement
actions by governmental agencies.
The formulation, manufacturing, packaging, labeling,
holding, storage, distribution, advertising and sale of our products are
affected by extensive laws, governmental regulations and policies,
administrative determinations, court decisions and similar constraints at the
federal, state and local levels, both within the United States and any country
that we conduct business in. There can be no assurance that we or our
independent distributors will be in compliance with all of these regulations. A
failure by us or our distributors to comply with these laws and regulations
could lead to governmental investigations, civil and criminal prosecutions,
administrative hearings and court proceedings, civil and criminal penalties,
injunctions against product sales or advertising, civil and criminal liability
for the Company and/or its principals, bad publicity, and tort claims arising
out of governmental or judicial findings of fact or conclusions of law adverse
to the Company or its principals. In addition, the adoption of new regulations
and policies or changes in the interpretations of existing regulations and
policies may result in significant new compliance costs or discontinuation
of product sales and may adversely affect the marketing of our products,
resulting in decreases in revenues.
The U.S. Food and Drug Administration, the FDA, and
other similar government agencies in other countries, regulate our products and
our product labeling. Among other matters, the FDA and other foreign agencies
regulate nutrient content and ingredient information, claims of the effect of a
dietary supplement or dietary ingredient on a body structure or function, and
claims of the effect of a dietary supplement or dietary ingredient on disease
or risk of disease. The FDA and other foreign agencies can initiate civil and
criminal proceedings against persons who make false or misleading claims on
labels or in labeling, who engage in misbranding, who evidence an intent to
sell their
19
products
for a therapeutic use not approved by the agency, who sell misbranded products,
or who sell adulterated products. The FDA and other foreign agencies can also
require the recall of all products that are misbranded or adulterated.
The U.S. Federal Trade Commission, the FTC and their
counterpart agencies in other countries that we may operate in, have
jurisdiction over our product advertising. These agencies can initiate civil
proceedings for deceptive advertising and deceptive advertising practices. It
can seek for companies to make payments to consumers or disgorgement of profits
from the sale of any product held to have been deceptively advertised. These agencies
or a court of law can require a company found liable to give notice of the
availability of refunds in part or whole for the product purchase price
for all products sold through use of advertising deemed deceptive.
State and local authorities may likewise bring
enforcement actions for misbranding, adulteration, and deceptive advertising.
Those actions may be pursued simultaneously with federal actions.
On August 25, 2007 the FDA adopted the final
regulations for manufacturers of a standard originally proposed in March 2003
of the current Good Manufacturing Practices guidelines (cGMPs) for the
manufacturing, packing, holding and distributing dietary ingredients and
nutritional supplements. The new regulations will require nutritional
supplements to be prepared, packaged, and held in compliance with strict rules,
and will require quality control provisions that may mandate redundant testing
of product ingredients at each separate stage of manufacture and are intended
to ensure that products are accurately labeled and dont contain adulterants
and contaminants. While the rule allowed for medium and small
manufacturers to have until 2009 and 2010, respectively, to comply with the
cGMPs, most of our contract manufacturers did not qualify as small or medium.
As a result, many of our contract manufacturers began following the proposed
cGMPs or even pharmaceutical cGMPs well before the final rule was
published. We expect to see an increase in our manufacturing costs as a result
of the necessary increase in testing of raw ingredients and finished products
and compliance with higher quality standards, although we are not certain of
the amount of these costs. We expect that the cGMPs will increase our product
costs by requiring our various contract manufacturers to expend additional
capital and resources on quality control testing, new personnel, plant
redesign, new equipment, facilities placement, recordkeeping and ingredient and
product testing.
The FDA, other state and local regulatory
authorities, and the Direct Selling Association, invite the public to complain
if they experience any adverse effects from the consumption of nutritional
supplements. These complaints may be made public. Regardless of whether
complaints of this kind are substantiated or proven, public release of complaints
of this type may have an adverse effect upon public perception of us, the
quality of our products or the prudence of taking our products. Changes in
consumer attitudes based on adverse event reports could adversely affect the
potential market for and sales of our products and make it more difficult to
recruit and retain independent distributors and obtain endorsers.
Our ability to grow sales is dependent on growing in
our existing markets as well as expanding into new markets in other countries.
As we expand into foreign markets, we will become subject to different
political, cultural, exchange rate, economic, legal and operational risks. We
may invest significant amounts in these expansions with little success.
We currently are focusing our marketing efforts on
the United States and Canadian markets to grow the number of independent
distributors and consequently our sales. We believe that our future growth will
come from both the markets that we are currently operating in and other
international markets. We do not have any history of international expansion,
and there for have no assurance that any efforts will result in increased
revenue. Additionally, we may need to overcome significant regulatory and legal
barriers in order to sell our products and whether our distribution method will
be accepted. These markets may require that we reformulate our product to
comply with local customs and laws, however, there is no guarantee that the
reformulated product will be approved for sale by these regulatory agencies or
attract local distributors. These countries may not accept our current
compensation plan for distributors which may result in an inability to attract
and retain local distributors. International taxing laws may also prevent us
from operating or repatriating profits from operations in these countries, and
the complexity of transfer pricing laws could diminish the effective returns
from investments in foreign countries. Many of our competitors already have
significant international operations which could be an additional barrier for
entry into a foreign market as the local population may be established in other
compensation opportunities and similar products. We believe that success in
foreign markets will be dependent on the integration of these markets in a
seamless way into our current compensation plan and also the ability of our
existing distributors to assist in building downline sales organizations.
20
We are dependent on a limited number of
independent suppliers and manufacturers of our products, which may affect
our ability to deliver our products in a timely manner. If we are not able to
ensure timely product deliveries, potential distributors and customers
may not order our products, and our revenues may decrease.
We rely entirely on a limited number of third
parties to supply and manufacture our products. Our flagship product, Bazi, is
manufactured by Arizona Packaging and Production under the terms of a five year
exclusive manufacturing agreement, which stipulates certain prices, quantities
and delivery timelines. For our other legacy products, manufacturers produce
these products on a purchase order basis only and can terminate their
relationships with us at will. Our two other primary manufacturers are Valentine
Industries, Inc. and GMP Laboratories of America, Inc.
These third party manufacturing parties may be
unable to satisfy our supply requirements, manufacture our products on a timely
basis, fill and ship our orders promptly, provide services at competitive costs
or offer reliable products and services. The failure to meet of any of these
critical needs would delay or reduce product shipment and adversely affect our
revenues, as well as jeopardize our relationships with our independent
distributors and customers. In the event any of our third party manufacturers
were to become unable or unwilling to continue to provide us with products in
required volumes and at suitable quality levels, we would be required to
identify and obtain acceptable replacement manufacturing sources. There is no
assurance that we would be able to obtain alternative manufacturing sources on
a timely basis. Additionally, all our third party manufactures source the raw
materials for our products, and if we were to use alternative manufacturers we
may not be able to duplicate the exact taste and consistency profile of the
product from the original manufacturer. An extended interruption in the supply
of our products would result in decreased product sales and our revenues would
likely decline. We believe that we can meet our current supply and
manufacturing requirements with our current suppliers and manufacturers or with
available substitute suppliers and manufacturers. Historically, we have not
experienced any delays or disruptions to our business caused by difficulties in
obtaining supplies.
We are dependent on our third party manufacturers to
supply our products in the compositions we require, and we do not independently
analyze our products. Any errors in our product manufacturing could result in
product recalls, significant legal exposure, and reduced revenues and the loss
of distributors.
While we require that our manufacturers verify the
accuracy of the contents of our products, we do not have the expertise or
personnel to monitor the production of products by these third parties. We rely
exclusively, without independent verification, on certificates of analysis
regarding product content provided by our third party suppliers and limited
safety testing by them. We cannot be assured that these outside manufacturers
will continue to supply products to us reliably in the compositions we require.
Errors in the manufacture of our products could result in product recalls,
significant legal exposure, adverse publicity, decreased revenues, and loss of
distributors and endorsers.
We face significant competition from existing
suppliers of products similar to ours. If we are not able to compete with these
companies effectively, then we may not be profitable.
We face intense competition from numerous resellers,
manufacturers and wholesalers of liquid nutritional supplements, energy drinks,
protein shakes and nutritional supplements similar to ours, including other
network marketing channels, retail, online and mail order providers. We
consider the significant competing products in the U.S. market for our flagship
product Bazi to be FreeLife International®, Xango® and Monavie® for a liquid
nutrition drinks, and for our legacy products to be Myoplex® for protein
drinks, Gatorade®, Powerade®, Acclerade®, and All Sport® for energy drinks, and
that Natures Bounty, Inc. and General Nutrition Centers, Inc. are
the significant producers of vitamins. Most of our competitors have longer
operating histories, established brands in the marketplace, revenues significantly
greater than ours, more capital and better access to capital than us. We expect
that these competitors may use their resources to engage in various
business activities that could result in reduced sales of our products.
Companies with greater capital and research capabilities could re-formulate
existing products or formulate new products that could gain wide marketplace
acceptance, which could have a depressive effect on our future sales. In
addition, aggressive advertising and promotion by our competitors
may require us to compete by lowering prices because we do not have the
resources to engage in marketing campaigns against these competitors, and the
economic viability of our operations likely would be diminished.
21
Customers and distributors may not be able to
distinguish our products by name from competitors products.
Due to the similarity of our company name to those
of many of our competitors products may result in the loss of customers
and distributors as well as impair the recruiting efforts of our independent
distributors. This could result in the loss of repeat business as well as the
inability to generate increased revenue and attract future independent
distributors.
Adverse publicity associated with our products,
ingredients or direct selling program, or those of similar companies, could
adversely affect our sales and revenues.
Adverse publicity concerning any actual or purported
failure of our Company or our independent distributors to comply with
applicable laws and regulations regarding any aspect of our business could have
an adverse effect on the public perception of our Company. This, in turn, could
negatively affect our ability to obtain endorsers and attract, motivate and
retain independent distributors, which would have a material adverse effect on
our ability to generate sales and revenues.
Our independent distributors and customers
perception of the safety and quality of our products as well as similar
products distributed by others can be significantly influenced by national
media attention, publicized scientific research or findings, product liability
claims and other publicity concerning our products or similar products
distributed by others. Adverse publicity, whether or not accurate, that
associates consumption of our products or any similar products with illness or
other adverse effects, will likely diminish the publics perception of our
products. Claims that any products are ineffective, inappropriately labeled or
have inaccurate instructions as to their use, could have a material adverse
effect on the market demand for our products, including reducing our sales and
revenues.
The results of new nutritional dietary supplement
studies could be contrary to general industry knowledge on which the
formulation and marketing of our products are based and could materially and
adversely impact our product sales. The federal government, research
institutes, universities and others regularly conduct research into the use,
effectiveness and potential for adverse results from the use of nutritional
dietary supplements. Even if adverse studies are subject to substantial
criticism or not supported by accepted scientific methodology, publicity
surrounding the reports of these studies may result in flat or decreased
sales of our products. In the past few years, the effectiveness of, and
potential for harm from, some of the leading herbal supplements, which contain
ingredients not in our products, have come into question as a result of
research studies. These negative study results and other negative publicity
could adversely affect the potential market and sales of our products, as well
as increase our product returns, resulting in increased expenses to us.
While we have not received any direct negative
publicity, the publicized studies associating increased mortality rates with
high dosages of Vitamin E has increased awareness of our consumers relating to
the safety of the ingredients in our supplements. Additionally, in 2007 there
was a study published regarding increased mortality rates in higher doses of
antioxidants other than those from natural fruit, berry and vegetable sources
which again increased awareness among our consumers relating to the safety of
the ingredients in our products.
Nutritional supplement products may be supported
by only limited conclusive clinical studies resulting in less market acceptance
of these products and lower revenues or lower growth rates in revenues.
Our nutritional supplement products are made from
vitamins, minerals, amino acids, herbs, botanicals, fruits, berries and other
substances for which there is a long history of human consumption. However,
there is little long-term experience with human consumption of certain product
ingredients or combinations of ingredients in concentrated form. Although we
believe all of our products fall within the generally known safe limits for
daily doses of each ingredient contained within them, nutrition science is
imperfect. Moreover, some people have peculiar sensitivities or reactions to
nutrients commonly found in foods and may have similar sensitivities or
reactions to nutrients contained in our products. Furthermore, nutrition
science is subject to change based on new research. New scientific evidence
may disprove the efficacy of our products or prove our products to have
effects not previously known. We could be adversely affected in the event that
our products should prove to be or if they are asserted to be ineffective or
harmful to consumers, or if adverse effects are associated with a competitors
similar products.
Our products may have higher prices than the
products of most of our competitors, which may make it difficult for us to
achieve significant revenues.
We may have difficulty in achieving market
acceptance of our products because our products are among the highest priced in
their categories due to the ingredients that we require in our products. While
we believe that our products are superior to competing, lower priced products,
consumers must be educated about our products. If we
22
are
unable to achieve market acceptance, we will have difficulty in achieving
revenue growth, which would likely result in continuing operating losses.
The sale of our products involves product liability
and related risks that could expose us to significant insurance and loss
expenses.
We face an inherent risk of exposure to product
liability claims if the use of our products results in, or is believed to have
resulted in, illness or injury. Most of our products contain combinations of
ingredients, and there is little long-term experience with the effect of these
combinations. In addition, interactions of these products with other products,
prescription medicines and over-the-counter drugs have not been fully explored
or understood and may have unintended consequences. While our third party
manufacturers perform tests in connection with the formulations of our
products, these tests are not designed to evaluate the inherent safety of our
products.
Although we maintain product liability insurance, it
may not be sufficient to cover product liability claims and such claims
could have a material adverse effect on our business. The successful assertion
or settlement of an uninsured claim, a significant number of insured claims or
a claim exceeding the limits of our insurance coverage would harm us by adding
further costs to our business and by diverting the attention of our senior
management from the operation of our business. Even if we successfully defend a
liability claim, the uninsured litigation costs and adverse publicity
may be harmful to our business.
Any product liability claim may increase our
costs, and adversely affect our revenues and operating income. Moreover,
liability claims arising from a serious adverse event may increase our
costs through higher insurance premiums and deductibles, and may make it
more difficult to secure adequate insurance coverage in the future. In
addition, our product liability insurance may fail to cover future product
liability claims, which if adversely determined could subject us to substantial
monetary damages.
A slower growth rate in the nutritional supplement
industry could lessen our sales and make it more difficult for us to achieve
growth and become profitable.
According to the Nutrition Business Journal (NBJ)
(July/August 2007), the $85-billion U.S. nutrition industry grew 10% in
2006, its highest annual growth since 1998. The more mature supplement segment
topped $22.4 billion and 5% growth, and the other three major categories were
in double digits. Functional foods posted $31.4 billion in sales and its
highest growth since 2002 on a strong performance in beverages and niche
categories. There have continued to be negative impacts of Echinacea, Ephedra
on the supplement market and low-carb products affected minerals and liquid
meal replacements. The negative tide of media is no longer putting problematic
categories like ephedra or prohormones at stake, but foundation categories like
E, C and even multivitamins and in 2007 antioxidants were subject to the same
scrutiny. All these factors could have a negative impact on our sale growth.
New
products may render our products obsolete and our sales may suffer.
The nutritional supplement market historically has
been influenced by fad products that became popular due to changing consumer
tastes and media attention. Our products may be rendered obsolete by
changes in popular tastes as well as media attention on new products or adverse
media attention on nutritional supplements, which could reduce our sales. It
may be difficult for us to change our product line to adapt to changing
tastes. In addition, other fad food regimens, such as low carbohydrate diets,
may decrease the overall popularity and use of our products, as well as
result in higher returns of our products, thereby increasing our expenses.
We may from time to time write off obsolete
inventories resulting in higher expenses and consequently greater net losses.
Because we maintain high levels of inventories to
meet the product needs of our independent distributors and customers, a change
by us of our product mix could result in write downs of our inventories. During
2007 we decided to modify the sales efforts from multiple products to a single
product focus on our flagship product Bazi. As a consequence of this decision,
we deemed the inventory of certain of the legacy products to be obsolete due to
the low likelihood that we would sell these products before their expiration.
Likewise, in 2006 we discontinued certain other legacy products and sales
tools, and therefore we deemed the remaining inventory to be obsolete. As a
result we incurred a write-down against inventory for the year ended December 31,
2007 of $189,403 and a charge against obsolete inventory of $123,511 in 2006.
Write downs and charges of this type have historically increased our net
losses, and if experienced in the future, will make it more difficult for us to
achieve profitability.
23
Product returns in excess of our estimates could
require us to incur significant additional expenses, which would make it
difficult for us to achieve profitability.
We have established a reserve in our financial statements
for product returns which is based upon our historical experience.
Additionally, we only have limited sales experience with Bazi as the product
was only introduced to the market in January 2007. If this reserve were to
be inadequate, we may incur significant expenses for product returns. As
we gain more operating experience, we may need to revise our reserves for
product returns.
If we are not able to adequately protect our
intellectual property, then we may not be able to compete effectively and
we may not be profitable.
Our existing proprietary rights may not afford
remedies and protections necessary to prevent infringement, reformulation,
theft, misappropriation and other improper use of our products by competitors.
We own the formulations contained in some our products. We consider these
product formulations our critical proprietary property, which must be protected
from competitors. We do not have any patents because we do not believe they are
necessary to protect our proprietary rights. Although trade secret, trademark,
copyright and patent laws generally provide such protection and we attempt to
protect ourselves through contracts with manufacturers of our products, we
may not be successful in enforcing our rights. In addition, enforcement of
our proprietary rights may require lengthy and expensive litigation. We
have attempted to protect some of the trade names and trademarks used for our
products by registering them with the U.S. Patent and Trademark Office, but we
must rely on common law trademark rights to protect our unregistered
trademarks. Common law trademark rights do not provide the same remedies as are
granted to federally registered trademarks and the rights of a common law
trademark are limited to the geographic area in which the trademark is actually
used. Our inability to protect our intellectual property could have a material
adverse impact on our ability to compete and could make it difficult for us to
achieve a profit.
If we were to lose one of our significant independent
distributor leaders, there could be an adverse result on our sales.
Our current distribution model relies on the efforts
of our independent distributors in buying our products and recruiting and
retaining new independent distributors in their downline organization. Our
successful independent distributor leaders have significant downline
organizations that they personally train and communicate with, and consequently
develop business relationships. The loss of one of these leaders could result
in lower recruitment and the inability of us to retain the downline
organization, which could result in a significant decrease in revenue and an
increased cost for us to attract and retain new distributors for replace the
distributors that left our company. The loss of a leader may be a result of our
actions, like changes to the compensation plan or changing the products that we
sell or as a result of factors that we have no control over, like business and
economic conditions, public perception of network marketing, public perception
of nutritional products, other competing network marketing companies or the
results of ruling by regulatory bodies against us.
Interruptions to or failure of our information
processing systems may disrupt our business and our sales may suffer.
We are dependent on our information processing
systems to timely process customer orders, oversee and manage our distributor
network and control our inventory, and for our distributors to communicate with
their customers and distributors in their network. Since the initial purchase
of our technology system in 2001 through December 31, 2007, we had spent
$335,763 on technology system upgrades. We have experienced interruptions and
may in the future experience interruptions to or failure of our
information processing system; however, none of the interruptions to date have
materially disrupted our business. Interruptions to or failure of our
information processing systems may be costly to fix and may damage
our relationships with our customers and distributors, and cause us to lose
customers and distributors. If we are unable to fix problems with our
information processing systems in a timely manner our sales may suffer.
Loss of key
personnel could impair our ability to operate.
Our success also depends on hiring, retaining and
integrating senior management and skilled employees, including John Pougnet,
our Chief Executive Officer and Chief Financial Officer, Douglas Ridley, our
President, Timothy Transtrum, our Vice President of Operations, John
Hutchinson, Vice President of IT and Web, Sanjeev Javia, our Vice President of
Product Development and Endorser Relations and Sanford D. Greenberg, our
founder, in order to expand our business. Certain of our officers have
employment agreements that have stipulated service terms. As with all personal
service providers, our officers can terminate their relationship with us at
will. Our
24
inability
to retain these individuals may result in our reduced ability to operate
our business. We do not have key man life insurance on any of our executive
officers.
Provisions in our articles of incorporation and bylaws
may prevent a change in control of us which could limit the price that
investors may be willing to pay for our securities.
Provisions contained in our articles of
incorporation and bylaws could make it more difficult for a third party to
acquire us or for our shareholders to change our management. These provisions:
·
give our board of directors the right to set
the number of directors between one and nine directors;
·
permit the board of directors to fill
vacancies resulting from an increase in the number of directors or the death or
resignation of a board member;
·
prohibit cumulative voting in the election of
directors; and
·
authorize our board of directors to issue
shares of preferred stock in the future without shareholder approval and to
determine the rights, preferences, privileges and restrictions of such
preferred stock.
These provisions may limit the price that investors
are willing to pay in the future for our securities.
The price of our securities could be subject to wide
fluctuations and your investment could decline in value.
The market price of the securities of a company such
as ours with little name recognition in the financial community and without
significant revenues can be subject to wide price swings. For example, the bid
price of our common stock has ranged from a high $16.25 to a low of $0.19
during the twenty quarters ended December 31, 2007. The market price of
our securities may be subject to wide changes in response to quarterly
variations in operating results, announcements of new products by us or our
competitors, reports by securities analysts, volume trading, or other events or
factors. In addition, the financial markets have experienced significant price
and volume fluctuations for a number of reasons, including the failure of
certain companies to meet market expectations. These broad market price swings,
or any industry-specific market fluctuations, may adversely affect the market
price of our securities.
Speculative traders may anticipate a decline in the
market price of our securities and engage in short sales of our securities.
Such short sales could further negatively affect the market price of our
securities.
Companies that have experienced volatility in the
market price of their stock have been the subject of securities class action
litigation. If we were to become the subject of securities class action
litigation, it could result in substantial costs and a significant diversion of
our managements attention and resources.
We may
issue preferred stock with rights senior to the common stock.
Our articles of incorporation authorize the issuance
of up to 5,000,000 shares of preferred stock without shareholder approval and
on terms established by our directors. We have no existing plans to issue
shares of preferred stock. However, the rights and preferences of any such
class or series of preferred stock would be established by our board of
directors in its sole discretion and may have dividend, voting, liquidation and
other rights and preferences that are senior to the rights of the common stock.
You should
not rely on an investment in our common stock for the payment of cash dividends.
Because of our significant operating losses and
because we intend to retain future profits, if any, to expand our business, we
have never paid cash dividends on our stock and do not anticipate paying any
cash dividends in the foreseeable future. You should not make an investment in
our securities if you require dividend income. Any return on investment in our
common stock would only come from an increase in the market price of our stock,
which is uncertain and unpredictable.
ITEM 1B
UNRESOLVED STAFF COMMENTS
None.
25
ITEM 2. DESCRIPTION OF
PROPERTY
Facilities
We lease an office, located at 480 South
Holly Street, Denver, Colorado, from the father of Sanford D. Greenberg, our
founder, for $3,900 per month. The lease expired on March 31, 2006, with
an automatic monthly extension right and a two month notice period for the
Company to terminate the lease. Our annual office rent for 2007 and 2006 was
$42,780 and $40,680, respectively. We currently do not have any plans for
renovation, improvement or development of our corporate office.
In January 2006, we entered a twelve
month contract with GA Wright Marketing, Inc. (GAW) to manage and store
our products as well as perform the fulfillment functions for us. GAW stores
our products in a controlled-environment warehouse in Denver, Colorado, and
accepts bulk shipments on our behalf. We pay for these services on a per
transaction basis, and our costs have been approximately $9,600 per month. In July 2006
we contracted with Holden MSS, Inc. (Holden), to assume our warehouse
functions from GAW. Holden acquired the warehousing and fulfillment operation
from GAW and operates a facility in the vicinity of the GAW warehouse. Holden
continues to bill us on a per transaction basis plus a monthly inventory
storage fee. During August 2007 we contracted with Landmark Global
Distribution, Inc., a warehouse and fulfillment facility in Detroit,
Michigan, to perform fulfillment for orders to be shipped into Canada. This
agreement is a month by month arrangement and we pay for the space that our
inventory uses and on a transactional basis. To date, our Canadian operations
have not commenced and we maintain a minimal amount of inventory at this
location.
Insurance
We maintain commercial general liability,
including product liability coverage, and property insurance. Our policy
provides for a general liability limit of $2 million per occurrence, and $2
million annual aggregate umbrella coverage. We also have a casualty insurance
policy with a limit of $1.0 million on our main facility, including inventory,
and $600,000 on our products located at both the Holden and Landmark
facilities.
ITEM 3. LEGAL PROCEEDINGS
We are not currently involved in any legal
proceedings.
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 November 12, 2007:
1.
To elect seven directors of the Company.
2.
To increase the number of shares issuable
under our Stock Incentive Plan from 2,200,000 shares to 3,000,000 shares.
3.
To increase the number of shares issuable
under our Distributor Stock Option Plan from 500,000 shares to 1,500,000
shares.
Details
relating to the above matters were set forth in the Proxy Statement dated September 4,
2007. All of our shareholders of record as of the close of business on September 24,
2007 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, the increase of shares
issuable under its 2003 Stock Incentive Plan from 2,200,000 to 3,000,000
shares, and the increase of shares issuable under its Distributor Stock Option
Plan from 500,000 shares to 1,500,000. The members re-elected to the Board of
Directors, who will serve until the 2008 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.
26
PART II
ITEM 5. MARKET FOR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our common stock commenced trading on the OTC
Bulletin Board on December 26, 2001. Our trading symbol was VCUB.OB.
Since there is only a limited trading market for our stock, stockholders may
find it difficult to sell their shares. Until June 20, 2003, the common
stock trades reflected the business of Instanet prior to the share exchange
with V3S. On April 5, 2005, the Company moved to the American Stock
Exchange and started trading under the symbol PRH in conjunction with a
secondary offering of shares. On March 19, 2007, the Company changed its
name to XELR8 Holdings, Inc. and on March 19, 2007, started trading
under the symbol BZI.
The following table sets forth high and low
bid prices for our common stock for the calendar quarters indicated as reported
by the American Stock Exchange from April 5, 2005. These prices have been
stated after giving retroactive effect to a 1-for-5 reverse split of our common
stock consummated on December 8, 2004, and represent quotations between
dealers without adjustment for retail markup, markdown, or commission and may
not represent actual transactions.
|
|
High
|
|
Low
|
|
2006
|
|
|
|
|
|
First Quarter
|
|
$
|
1.52
|
|
$
|
1.22
|
|
Second Quarter
|
|
$
|
1.79
|
|
$
|
0.62
|
|
Third Quarter
|
|
$
|
0.65
|
|
$
|
0.39
|
|
Fourth Quarter
|
|
$
|
0.62
|
|
$
|
0.27
|
|
2007
|
|
|
|
|
|
First Quarter
|
|
$
|
1.80
|
|
$
|
0.58
|
|
Second Quarter
|
|
$
|
3.04
|
|
$
|
1.56
|
|
Third Quarter
|
|
$
|
1.94
|
|
$
|
0.85
|
|
Fourth Quarter
|
|
$
|
1.25
|
|
$
|
0.70
|
|
Holders
As of March 19, 2008, we had
approximately 833 holders of record of our common stock. A significant number
of our shares were held in street name and, as such, we believe that the actual
number of beneficial owners is significantly higher.
Dividends
We have never declared or paid any cash
dividends on our common stock. For the foreseeable future, we intend to retain
any earnings to finance the development and expansion of our business, and we
do not anticipate paying any cash dividends on our common stock. Any future
determination to pay dividends will be at the discretion of our board of
directors and will be dependent upon then existing conditions, including our
financial condition and results of operations, capital requirements,
contractual restrictions, business prospects, and other factors that our board
of directors considers relevant.
27
ITEM
6. MANGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should
read the following discussion and analysis in conjunction with our financial
statements, including the notes thereto contained in this report. This
discussion contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of a variety
of certain factors, including those set forth under Risk Factors Associated
with Our Business and elsewhere 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 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 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 February 29, 2008 we had 5,089 independent distributors and
3,327 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. We can have large increases
in inventory levels if we have multiple product reorders in the same period. In
addition, our manufacturers typically may take up to 12 weeks to deliver
products after we place an order, and they have minimum order requirements,
which also adds to higher inventory levels. 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
lead time on this product has been reduced to 10 weeks. Our inventory, net of
our allowance for obsolescence, was $370,843 at December 31, 2007, a
decrease from $411,364 at December 31, 2006.
The decrease of inventory was a result of the
decision to focus our marketing efforts around the single product, Bazi,
therefore we provided for obsolescence on a number of the legacy products that
we do not believe that we will sell before they expire. We believe that the
current inventory level is adequate to meet our short-term projected demand,
and based on our sales for the year ended December 31, 2007, 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.
During the year ended December 31, 2007,
we saw 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 a single product focus. Both of these factors resulted
in taking a charge against operations for obsolete inventory of $216,760. Our
allowance for obsolete inventory increased to $189,403 from $41,655 for the
years ended December 31, 2007 and 2006, respectively. 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.
28
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.
Due to the early stage of our direct sales program 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 2007 or will be for 2008 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.
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 relatively recent commencement of our direct
selling program through independent distributors and the 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 9 months.
In
March 2007, we completed a private sale of common stock of the Company for
gross proceeds of $2,000,000 and in May 2007 completed a second private
sale of common stock of the Company for additional gross proceeds of
$2,000,000.
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.
We base our estimates on historical experience and on various other assumptions
that are believed to be
29
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
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 December 31, 2007, orders shipped that are subject to our
60-day money back guarantee were approximately $140,465. 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 the year
ended December 31, 2007 and 2006 was $76,193 and $45,327, respectively. 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 $189,403 for
obsolete inventory as of December 31, 2007 and $41,655 as of December 31,
2006.
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 vary widely and are often
material to the financial statements.
Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS)
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
30
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
The discussion below first presents the
results of 2007 year followed by the results of 2006 year.
For year ended December 31, 2007,
compared to the year ended December 31, 2006.
Net Sales
.
Net
sales were $4,853,046 compared to $2,148,420, an increase of 126%. The increase
in sales was the result of the January 12,
2007 launch of the liquid nutritional supplement, Bazi. This product, along
with a introduction of new sales and marketing tools assisted our independent
distributors in executing our business plan. Independent distributors
purchase our products for resale to customers and for their own personal
consumption.
The percentage that each product category represented of our net sales
is as follows:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Product Category
|
|
% of Sales
|
|
% of Sales
|
|
BAZI
|
|
83
|
%
|
|
%
|
HYDRATE
|
|
2
|
%
|
11
|
%
|
BUILD
|
|
2
|
%
|
5
|
%
|
EAT
|
|
1
|
%
|
18
|
%
|
DRINK
|
|
3
|
%
|
28
|
%
|
SNACK
|
|
1
|
%
|
10
|
%
|
Vitamins and
minerals (including SUPPORT)
|
|
2
|
%
|
13
|
%
|
Other
educational materials, apparel
|
|
6
|
%
|
15
|
%
|
Gross Profit
.
Gross
profit increased to $3,472,383 from $1,372,658, an increase of 153%. Gross
profit as a percentage of revenue (gross margin) increased to 72% compared to
64%, a result of higher margin of the Bazi product compared to our legacy
products. This higher gross margins was offset by charges that we took against
inventory of $216,760. The overall increase in gross profit also reflects the
increase in net revenue.
Sales and Marketing
Expenses
.
Sales and marketing expenses
increased to $3,180,392 from $2,626,613, an increase of 21%. Sales and
marketing expenses include the commissions that we pay our independent
distributors as well as costs associated with producing marketing materials,
promotional activities and events for our distributors. The increases in the
expense is primarily due to the increased revenue compared to the prior year,
and therefore the commission that we pay these distributors who sell the
product. We incurred $2,006,167 during
the year ended December 31, 2007, compared to $1,311,158 in the year ended
December 31, 2006, in costs to attract experienced sales leaders to our
distributor network, commissions paid to our Independent Distributors, and
promotions and awards for our distributors. Our costs of hosting
Distributor events like the National Distributor Event and the Diamond Club
Weekend remained relatively constant from year to year, with the expense for
the year ended December 31, 2007, of $229,749 comparing favorability to
the 2006 expense of $222,126. The salary
expense of our sales and marketing group, which includes our customer service
center, increased to $282,924 for the year ended December 31, 2007
compared to $270,945 for the year ended December 31, 2006. We expect all
of these expense categories to continue to increase as our sales increase for
the next 12 months as we implement our marketing plan.
General and
Administrative Expenses
.
General and
administrative expenses were $3,107,469 compared to $3,275,689, or a decrease
of 5%. The decrease in this expense is a result of the decrease in salary and
severance expense from $1,829,709 in 2006 compared to $942,200 in 2007. This
decrease was primarily the result of the expense the Company recorded in 2006
of $540,000 for the amendment to Sanford Greenbergs employment contract.
Additionally, executive compensation decreased as a result of amendments to the
employment agreements with Earnest Mathis, Jr., our former Chief Executive
Officer and John D. Pougnet, our Chief Financial Officer effective May 28,
2006 and the subsequent departure of Mr. Mathis in October 2006 and
the assumption of his role of Chief Executive Officer by Mr. Pougnet. In
addition to the assumption of Chief Executive duties by Mr. Pougnet, all
the other executives of the Company reduced their salaries, with a
reinstatement based on the Company
31
achieving certain monthly sales milestones. During 2007 one of the
milestones was achieved, and these executives received a partial reinstatement
of prior salaries. The reduction in the salary and severance expense was offset
by the increase in stock based compensation expense, increasing to $1,212,409
for the year ended December 31, 2007 compared to $701,270 for the year
ended December 31, 2006. The increase is a result of the fee we
paid in stock to the referral agent in connection with the short term loan
financing and a one time grant of fully vested options to the executives that
took a pay reduction in 2006. The increase was also the result of $350,000 in
stock based compensation that the Company recorded in the second quarter for
the grant of stock by a principal shareholder, Mr. Sanford Greenberg, 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.
Research and
Development Expenses
. Research and development expenses decreased
to $17,828 from $73,921, a decrease of 76%. We are continuing to research and
develop ingredients and manufacturing technologies for our product line. In October 2006 we terminated the
strategic alliance agreement with UTEK Corporation, a technology transfer
company to assist us with introductions to university research ingredients and
processes. Additionally, during 2006 we engaged a number of authorities on the
Jujube fruit, the principal ingredient in the new product, Bazi, that the
Company launched in January 2007.
Interest Expense
. Interest expense was $439,537 compared with
$33,888, an increase of 1,197% due to the two short term bridge notes that the
Company entered into in November 2006
and January 2007. 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, the
date the Company closed the first private placement transaction, extinguishing
all debt financing that the Company had in place.
Net Loss
.
Our net loss was $3,241,730, compared to
$4,669,449, a decrease of 31%; while on a per share basis our loss was $(0.23)
per share for the year ended December 31, 2007, compared to $(0.48) per
share for the year ended December 31, 2006, a decrease of 52%. The
decrease in net loss is a result of increased sales and gross margin, and
offset by the increased Distributor commission expense, stock based compensation
expense and the interest expense from the bridge note loans. The per share
decrease was also a result of a higher number of outstanding shares as a result
of the two private placement transactions that tok place in the year ended December 31,
2007.
Liquidity and Capital Resources
To
date, our operating funds have been provided primarily from sales of our common
stock ($14,913,421), and by loans from our founder and by various stockholders
($3,989,209), through December 31, 2007, and to a lesser degree, cash flow
provided by sales of our products.
On
November 21, 2006, we obtained a $250,000 short-term loan from an
unrelated party. We were also able to obtain a commitment for an additional
$250,000 from an unrelated party that funded in January 2007. Each loan
provided for the issuance of 400,000 restricted shares and interest at 10% per
annum. The loans matured at the earlier of six months from funding or the final
closing of a private placement.
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.
We
used $1,178,996 of cash for operations in the year ended December 31,
2007, compared to $2,992,028 of cash for operations in the year ended December 31,
2006. The use of cash in our operations results from incurring
32
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 December 31,
2007, we had $2,245,858 in cash and cash equivalents available to fund future
operations. Net working capital increased from ($659,328) at December 31,
2006, to $2,120,479 at December 31, 2007.
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 24 months. 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 had no off-balance sheet items as of December 31,
2007.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are included in this annual report on Form 10-KSB
at page F-1.
Index to Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Item 8A(T). Controls and Procedures.
(a) Evaluation of Disclosure Controls and
Procedures.
Our
management, with the participation of our Chief Executive Officer (CEO),
evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report. Based on that evaluation, our CEO
concluded that our disclosure controls and procedures as of the end of the
period covered by this report were effective such that the information required
to be disclosed by us in reports filed under the Securities Exchange Act of
1934 is (i) recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and (ii) accumulated
and communicated to our management, including our CEO, as appropriate to allow
timely decisions regarding disclosure. A controls system cannot provide
absolute assurance, however, that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
Managements Annual Report on Internal Control over
Financial Reporting.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act). Our internal control over financial reporting is a process
designed to provide reasonable
33
assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes of accounting principles generally
accepted in the United States.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance of achieving their control
objectives.
Our
management, with the participation of the CEO, evaluated the effectiveness of
the Companys internal control over financial reporting as of December 31,
2007. In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated Framework. Based on this
evaluation, our management, with the participation of the President, concluded
that, as of December 31, 2007, our internal control over financial
reporting was effective.
(b)
Changes in Internal Control over Financial Reporting.
There
were no changes in the Companys internal controls over financial reporting,
known to the CEO or the chief financial officer, that occurred during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial
reporting.
ITEM 8B. OTHER INFORMATION
Sale of Unregistered Equity Securities
On February 19, 2008
XELR8 Holdings, Inc. (the Company) announced that it had sold 500,000
units of its securities at $1 per unit to a group of accredited investors.
Each unit consists of one share of common stock and six/tenths (6/10) of
a Class G Warrant to purchase common stock. As a part of the private
placement terms, the Company agreed to reduce the exercise price of its Series E
Warrants and Series F Warrants previously purchased by the same investors
in a prior 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 Class 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 Class 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 Companys placement
agent was Burnham Hill Partners, a division of Pali Capital, Inc. and John
Thomas Financial acted as a consultant to the Company. The placement is
contingent upon approval of the unit issuance by the American Stock
Exchange. The Company will have
15,697,170 shares outstanding after completion of the private placement sale.
The subscription and registration rights agreement do not require the Company
to file a resale registration statement covering the shares of common stock,
but do require the Company to file a resale registration statement covering the
shares of common stock underlying the warrants to be filed with the U.S.
Securities and Exchange Commission within one year of the closing date.
The Company will receive
approximately $440,000 in net proceeds after placement fees and other estimated
costs of the offering.
Issuance
on Press Release
On March 26, 2008, the Company issued a press
release in connection with its year end results and investor conference call,
a copy of which has been filed herewith.
34
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
The following sets forth certain information regarding each of our
directors and executive officers:
Name
|
|
Age
|
|
Position
|
|
Committee
|
|
John B.
McCandless
|
|
59
|
|
Chairman
|
|
|
|
John D.
Pougnet
|
|
36
|
|
Chief
Executive Officer, Chief Financial Officer and Director
|
|
|
|
Douglas
Ridley
|
|
51
|
|
President
and Director
|
|
|
|
Daniel
Rumsey
|
|
46
|
|
Director
|
|
Audit/Compensation/Nominating
|
|
Anthony
Petrelli
|
|
55
|
|
Director
|
|
Compensation/Nominating
|
|
AJ Robbins
|
|
61
|
|
Director
|
|
Audit/Compensation/Nominating
|
|
Anthony
DiGiandomenico
|
|
41
|
|
Director
|
|
Audit
|
|
Directors
hold office until the next annual meeting of stockholders following their
election unless they resign or are removed as provided in the bylaws. Our Board
of Directors has determined that our directors, other than Mr. McCandless,
Pougnet and Ridley, are independent directors under the American Stock
Exchange listing standards. Our officers serve at the discretion of our Board
of Directors.
The
following is a summary of our directors and executive officers business
experience.
John B. McCandless, Director.
Mr. McCandless was appointed as a
director on February 19, 2004. He is currently providing consulting
services to the Company as well as other nutrition and direct selling
companies. From October 2003 until December 2006 Mr. McCandless
served as the Vice President of Technical Services at Weider Nutrition
International. Mr. McCandless provided operations and product consulting
services to nutrition and direct selling companies as a consultant from November 2002
to October 2003, and from October 1995 to November 2002, he
served as Senior Vice President and Chief Operating Officer for USANA Health
Sciences, a health science company.
John D. Pougnet, Chief Executive Officer and Chief
Financial Officer.
Mr. Pougnet was appointed a Director on July 11, 2007 and
Chief Executive Officer on October 11, 2006. Prior to that Mr. Pougnet
was appointed as Chief Financial Officer in September 2005. Immediately
prior to joining the Company, Mr. Pougnet was Assurance Senior Manager at
KPMG, LLP, a global network of professional services firms providing Audit, Tax
and Advisory services to both public and private companies from January 2003
to September 2005. Prior to this Mr. Pougnet operated an independent
consulting business from August 2002 to June 2003. He also served as
Vice President of Finance and Corporate Secretary at Future Beef Operations,
LLC, from May 2001 to August 2002, where he was responsible for the
strategic planning, development and leadership of the Corporate Finance
department for this multi-state meat packing company. Prior to this, Mr. Pougnet
was senior auditor with Deloitte & Touché from September 1996 to May 2001.
Douglas Ridley,
President and Director.
Mr. Ridley was
appointed as a Director on January 1, 2004, and in June 2005 Mr. Ridley
joined the Company as President. Mr. Ridley was an independent consultant
to us from April 2003 until December 31, 2003. Prior to joining the
Company Mr. Ridley was President of Simply Because, a gift products
network marketing company, from 2003 until 2005 and from 1997 until May 2005,
was President of Chad Management Co., LLC, a nutritional products network
marketing company.
AJ Robbins, Director.
Mr. Robbins was appointed as a director
on July 10, 2006, and serves on our Audit and Compensation Committees. Mr. Robbins
is currently the Managing Partner of AJ Robbins PC, which he founded in 1986. Mr. Robbins
practice focuses on accounting and auditing for
corporate and securities work for both private and public companies. Mr. Robbins
is a Certified Public Accountant registered in Colorado, New York and
35
California as well as a member of the American Institute
of Certified Public Accountants and his firm is registered with Public Company
Accounting Oversight Board.
Daniel Rumsey, Director.
Mr. Rumsey was appointed as a director
on August 17, 2007, and serves on our Audit and Compensation Committees. Mr. Rumsey
is active in advising boards, private equity and hedge funds and banks in
connection with public and private financings, restructurings, turnarounds,
mergers and acquisitions and crisis management. He currently serves as
Chairman of the Board and Interim Chief Financial Officer of Prescient Applied
Intelligence, a leading provider of supply chain and advanced commerce
solutions for retailers and suppliers, as well as Chief Executive Officer and
Chairman of the Board of Azzurra Holding Corporation (formerly P-Com, Inc.),
a public company that recently emerged from protection under Chapter 11 of the
U.S. Bankruptcy Code. Prior to joining Azzurra, Mr. Rumsey
was Vice President and General Counsel of Knowledge Kids Network, Inc., a
multi-media education company. Prior to joining Knowledge Kids Network, Inc.,
Mr. Rumsey was the President and General Counsel of Aspen Learning Systems
and NextSchool, Inc. Mr. Rumsey sold Aspen Learning
Systems and NextSchool to Knowledge Kids Network in 1999. Mr. Rumsey
also served as an attorney at the U.S. Securities & Exchange
Commissions Division of Corporation Finance. Mr. Rumsey currently
serves on the Board of Directors of Prescient Applied Intelligence, Inc.,
World Racing Group, Inc., and Azzurra Holding Corporation. Mr. Rumsey
is a graduate of the University of Denver and the University of Denver College
of Law.
Anthony
Petrelli, Director.
Mr. Petrelli was
appointed as a director on August 17, 2007, and serves on our Compensation
Committee. Mr. Petrelli has been engaged in the areas of corporate
finance, investment banking underwriting, sales management and securities
trading for more than 30 years. Mr. Petrelli joined Neidiger, Tucker,
Bruner, Inc. in May of 1987 and currently serves as Senior Vice
President and a member of the Board of Directors. He is also its Managing
Director of Corporate Finance/Investment Banking and oversees public and
private offerings for micro-, small- and mid-cap market companies. In addition,
he has served on the National Association of Securities Dealers, Inc.
(NASD) Statutory Disqualification Committee; been a member and Vice Chairman of
the NASD National Adjudicatory Council; member and Chairman of the NASD
District Business Surveillance Committee; a member of the Task Force on Future
of Shared State and Federal Securities Regulation for the North American
Securities Administrators Association, Inc.; and is a current board member
and past Chairman of the National Investment Banking Association. Mr. Petrelli
currently serves on the Board of Arena Resources, Inc., a publicly traded
company traded on the New York Stock Exchange.
Anthony DiGiandomenico, Director.
Mr. DiGiandomenico was appointed as a
director on May 25, 2004, and serves on our Audit Committee. Mr. DiGiandomenico
co-founded MDB Capital Group LLC, a NASD member broker-dealer, in 1997 and
serves as a managing director of the firm. From 1990 to 1995, he served as
President and Chief Executive Officer of the Digian Company, a real estate
development company. He currently serves on the Board of Directors of Orion
Acquisition Corp. II, a corporation which files reports pursuant to the
Securities Exchange Act of 1934, which was formed in 1995 to acquire an
operating business by purchase, merger or otherwise.
There
are no family relationships between or among our executive officers and
directors.
BOARD OF DIRECTORS
Board
Committees
The
standing committees of the Board of Directors are comprised of the Audit
Committee, Compensation Committee and the Corporate Governance &
Nominating Committee.
The
Audit Committee is comprised of Messrs. Rumsey, DiGiandomenico and Robbins
and oversees our financial reporting processes, including (i) reviewing
with management and the outside auditors the audited financial statements
included in our Annual Report, (ii) reviewing with the outside auditors
the interim financial results included in our quarterly reports filed with the
SEC, (iii) discussing with management and the outside auditors the quality
and adequacy of internal controls, and (iv) reviewing the independence of
the outside auditors. During 2007 the Audit Committee met four times
telephonically.
The
Compensation Committee is comprised of Messrs. Petrelli, Robbins and
Rumsey. At the direction of the full Board, the Compensation Committee reviews
and makes recommendations with respect to compensation of our directors,
executive officers and senior management. The Compensation Committee
administers our Stock Incentive
36
Plan.
The Compensation Committee met four times during 2007 and approved various
other matters by unanimous written consent.
The
Corporate Governance & Nominating Committee is comprised of Messrs. Rumsey,
Robbins and McCandless. At the direction of the full Board, the Committee
review, investigate qualified nominees for election to the Board when vacancies
occur and makes recommendations with respect to the nomination of directors.
The Committee met once in 2007.
The
Corporate Governance & Nominating Committee strives to identify and
attract director nominees with a variety of experience who have the business
background and personal integrity to represent the interests of all
shareholders. Although the Board has not established any specific minimum
qualifications that must be met by a director nominee, factors considered in
evaluating potential candidates include educational achievement, managerial
experience, business acumen, financial sophistication, direct selling industry
expertise and strategic planning and policy-making skills. Depending upon the
current needs of the Board, some factors may be weighed more or less heavily
than others in the Boards deliberations. The Board evaluates the suitability
of a potential director nominee on the basis of written information concerning
the candidate, discussions with persons familiar with the background and
character of the candidate and personal interviews with the candidate. The
Corporate Governance & Nominating Committee also assists the Board in
developing and monitoring the Companys corporate governance guidelines.
Attendance
at Meetings
The
Board held four meetings during 2007. Various matters were also approved by the
unanimous written consent of the directors during the last fiscal year. Each
director attended at least 75% of the aggregate of (i) the total number of
meetings of the Board and (ii) the total number of meetings held by all
committees of the Board on which such director served. We have no formal policy
with respect to the attendance of Board members at the annual meeting of
shareholders but encourage all incumbent directors and director nominees to
attend each annual meeting of shareholders.
Board
Charters
The
Board has adopted a charter with respect to its governance which includes
consideration of director nominees. Additionally, the Compensation, Audit and
Corporate Governance & Nominating Committees have adopted Charters
with respect to their governance and operation.
Code of Ethics
We have adopted a Code of Ethics that applies to all of our directors,
officers and employees. We publicize the Code of Ethics through posting the
policy on our website, http://www.XELR8.com. We will disclose on our website
any waivers of, or amendments to, our Code of Ethics.
ITEM 10. EXECUTIVE COMPENSATION
Compensation
Discussion and Analysis
The
objective of the Companys compensation program is to attract, retain and
reward management who demonstrates the required skill to develop the Company
into a leader in the nutrition and network marketing field. Through the
development of the Companys business plan, the compensation program is
designed to incentivize management in the creation of shareholder value. The
compensation program has been designed to reward executives for establishing the
Company in the network marketing field, developing products that can be
successfully sold in that channel and creating shareholder wealth.
Currently
the Company has used two elements of compensation for management, current
compensation, in the form of cash, and long-term equity compensation in the
form of grants of stock option awards. The Company has also used the award of
options to replace cash compensation for employees and the issuance of stock as
a method of fulfilling its obligations under employment contracts. As the
Company has not been profitable since its inception, the Company has not had a
cash bonus program, but rather relied on the potential of the long-term awards
as incentives to compensate its executives. The Company has identified and disclosed
to its executives what levels of
37
profitability
would be required in order to create a cash bonus plan. Typically the current
compensation is set at a base level, with variances based on the achievement of
certain benchmarks with regards to monthly net sales targets.
The
cash compensation enables the Company to attract management with the required
skills and experience while the awards of stock options are used as a method of
retaining executives for long term growth. Additionally, the Company has used
the awards of stock and options as a method of reducing cash outflow.
The
Company has determined the amount of short and long term compensation based on
a number of factors: level of experience of the employee in his or her
respective field, prevailing market rates for individuals performing similar
functions at competing companies in a similar industry and stage of development
of the Company. The Company has attempted to evenly balance the compensation
between current and long-term for its executives, with the long-term award
requiring some form of vesting, typically over a two or four year period.
During the current year, the executives were granted what is typically a
long-term compensation award, stock options, in lieu of short term cash
compensation, and were vested into their options over a shorter period of time.
The Company has also used options on a performance basis for certain
individuals, with the achievement of certain goals resulting in the vesting in
the options. Going forward the Company intends to base awards to management
based on the achievement of certain predetermined sales goals. When evaluating
the compensation of executives on an annual basis, the Company has reviewed
past compensation received by the executive in both current and long-term
awards when determining any additional awards, as well as the achievement of
certain sales and profitability targets for selected executives.
Each
element of the compensation program is designed to further the Companys goals
of attracting and retaining high caliber individuals with the experience to
grow the Company and ultimately create and increase shareholder wealth. The
incentive based awards were directly tied to the achievement of an objective,
whereas the other awards that were based on the vesting period were used as a
mechanism to retain skilled executives. In the performance based awards, where
either long-term awards are vested or there is an increase in current cash
compensation, it is the practice of the Company to link the overall objectives
of the Company with the respective objectives for that executive and his or her
ability to exercise influence over the outcome.
The
following table sets forth information with respect to compensation earned by
the executive officers of the Company for 2007 and 2006.
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
Deferred
|
|
All
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
Plan
|
|
Compensation
|
|
Other
|
|
|
|
Name and
|
|
|
|
|
|
Bonus
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Earnings
|
|
Compensation
|
|
Total
|
|
Principal Position
|
|
Year
|
|
Salary ($)
|
|
($)
|
|
($)
|
|
($)(5)
|
|
($)
|
|
($)
|
|
($)(1)
|
|
($)
|
|
John D. Pougnet,
|
|
2007
|
|
158,886
|
|
|
|
38,500
|
(3)
|
103,378
|
|
|
|
|
|
|
|
300,761
|
|
Chief Executive
Officer and
|
|
2006
|
|
116,891
|
|
|
|
|
|
138,878
|
|
|
|
|
|
|
|
255,769
|
|
Chief Financial
Officer (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanford D.
Greenberg,
|
|
2007
|
|
50,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,927
|
|
Founder (4)
|
|
2006
|
|
95,192
|
|
|
|
540,000
|
(4)
|
59,988
|
|
|
|
|
|
15,231
|
|
710,407
|
|
Douglas Ridley,
|
|
2007
|
|
143,886
|
|
|
|
35,000
|
(3)
|
78,656
|
|
|
|
|
|
|
|
257,539
|
|
President
|
|
2006
|
|
163,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,814
|
|
(1)
|
Includes
auto allowance.
|
(2)
|
Mr. Pougnet
joined the Company in September 2005 as Chief Financial Officer. On
October 11, 2006 he replaced Mr. Earnest Mathis as Chief Executive
Officer.
|
(3)
|
On
March 27, 2007 a principal shareholder, Mr. Sanford Greenberg,
granted shares of his own stock to certain 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.
|
(4)
|
On
November 17, 2006 the Company agreed to issue to
Mr. Greenberg 1,500,000 shares of its common stock in return for
an amendment to his current employment agreement pursuant to which he will
forfeit all future base salary amounting to $396,923
due under the agreement and 250,000 vested
options in exchange for the issuance of the shares and payment of a sales
commission equal to 1% of the net sales until 2019.
|
(5)
|
The
company uses a Black-Scholes option-pricing model (Black-Scholes model) to
estimate the fair value of the stock option grant. The use of a valuation
model requires the company to make certain assumptions with respect to selected
model inputs. Expected volatility was calculated based on the historical
volatility of the companys stock price. In the future the average expected
life will be based on the
|
38
contractual term of the option and expected
employee exercise and post-vesting employment termination behavior. Currently
it is based on the simplified approach provided by SAB 107. The risk-free
interest rate is based on U.S. Treasury zero-coupon issues with a remaining term
equal to the expected life assumed at the date of the grant. The following were
the factors used in the Black Sholes model to calculate the compensation
expense:
|
|
For the year ended December 31, 2007
|
|
Stock price
volatility
|
|
96.7 to 98.7
|
%
|
Risk-free
rate of return
|
|
3.34 to 4.95
|
%
|
Annual
dividend yield
|
|
0
|
%
|
Expected
life
|
|
1.5 to 4.5 Years
|
|
Grants
of Plan-Based Awards
In
2007, we issued the options listed below. There were no stock options exercised
in 2007. The following table sets forth the options granted in 2007:
|
|
|
|
Number of
Non-Equity
Incentive Plan
Units
|
|
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
|
|
Estimated Future Payouts Under
Equity Incentive Plan Awards
|
|
All Other
Stock Awards:
Number of
Shares of
Stock or
|
|
All Other
Option Awards:
Number of
Securities
Underlying
|
|
Exercise or
Base Price
of Option
|
|
|
|
Grant
|
|
Granted
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Units
|
|
Options
|
|
Awards
|
|
Name
|
|
Date(1)
|
|
(#)
|
|
($)
|
|
($)
|
|
($)
|
|
(#)
|
|
(#)
|
|
(#)
|
|
(#)
|
|
(#)
|
|
($ / Sh)(1)
|
|
John Pougnet,
|
|
3/26/2007
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
100,000
|
(3)
|
$
|
1.55
|
|
Chief Executive Officer
and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Ridley,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President(6)
|
|
3/27/2007
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
70,000
|
(2)
|
$
|
1.00
|
|
(1)
|
The Company
uses the same date for the Grant Date and the Approval Date. The Companys
closing market price for the Grant Date is used to determine the exercise
price of the options.
|
(2)
|
The award
was granted under the Companys 2003 Stock Incentive Plan. The closing price
of the Companys private placement transaction that occurred on the same day
was used as the market value of the stock. The employee has five years from
the date of issue to exercise the option, and the award was fully vested on
the date of the award. The terms of the award are determined by the 2003
Stock Incentive Plan.
|
(3)
|
The award
was granted under the Companys 2003 Stock Incentive Plan. The employee has
five years from the date of issue to exercise the option, and the award will
vest over a twenty-two month period. The terms of the award are determined by
the 2003 Stock Incentive Plan
|
Employment
Contracts
During
2006 the Company entered amended employment contracts with Mr. Mathis, Mr. Greenberg
and Mr. Pougnet.
On March 2,
2005, in connection with Mr. Greenbergs resignation as Chairman, Chief
Executive Officer, and President, Mr. Greenbergs employment agreement was
amended and restated to provide that his primary duties involve training,
motivating, and recruiting independent distributors. Mr. Greenberg
received a salary of $150,000 per year and may receive bonuses in such amounts
as determined by our Board of Directors. On July 10, 2006, Mr. Greenbergs
contract was amended to reduce his base salary for a period of one year to
$75,000 and Mr. Greenberg was granted 150,000 options to purchase the
Companys common stock. Mr. Greenberg will also be eligible to participate
in bonuses on the same basis as our executives under any executive bonus plan
adopted by us. Either party may terminate the agreement upon 30 days prior
written notice. Additionally, Mr. Greenberg may be terminated for just
cause as defined in the employment agreement upon one business days prior
written notice. Mr. Greenberg may terminate his employment for good
reason as defined in employment agreement. If we terminate Mr. Greenberg
without just cause or he terminates his employment for good reason, he is
entitled to three years salary payable over the 36 month period commencing October 1,
2006 regardless of when terminated. Mr. Greenbergs employment agreement
also includes a non-competition provision for a period of two years after his
termination of employment or, if later, one year after final payment of any
pay-out provision upon termination. On March 2, 2005, in connection with Mr. Mathis
employment as Chief Executive Office, Mr. Greenberg forfeited options to
purchase 275,000 shares. In addition, Mr. Greenberg has agreed to forfeit
options to purchase 50,000 shares when the April 2005 public offering was
completed. On November 17, 2006 the Company agreed to issue to Mr. Greenberg
1,500,000 shares of its common stock in return for an amendment to his current
employment agreement pursuant to which he will forfeit all future base salary
amounting to $396,923 due under the agreement and 250,000 vested options in
exchange for the issuance of the shares and payment of a sales commission equal
to 1% of the net sales until 2019.
On September 12,
2005, John D. Pougnet joined us as our Chief Financial Officer and effective October 1,
2006 was appointed also as our Chief Executive Officer. On Mr. Pougnets
employment agreement is for a two-year
39
term and he
will receive a base salary of $140,000, and may receive bonuses in such amounts
as determined by our Compensation Committee. Additionally, Mr. Pougnet
will have an option to purchase 50,000 shares of our common stock, with an
exercise price of $1.80. The options will vest in equal amounts over a four-year
period on December 31 starting on December 31, 2005. On March 3,
2006 Mr. Pougnet was granted additional options to purchase 100,000 shares
of our common stock. On July 10, 2006 Mr. Pougnets contract was
amended to reduce his base salary to $90,000 for a year and Mr. Pougnet
was granted options to purchase 100,000 shares of our common stock. Mr. Pougnet
will also be eligible to participate in bonuses on the same basis as other
executives under any executive bonus plan adopted by us. If Mr. Pougnets
employment were terminated other than for cause, disability or without good
reason by Mr. Pougnet, he would be provided severance pay equal to twelve
months, payable in equal monthly installments. On March 26, 2007,
the Company entered into an Amendment to the Employment Agreement with Mr. Pougnet,
the companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
The Amendment provides that Mr. Pougnet will serve as in both capacities
of Chief Executive Officer and Chief Financial Officer, the term of Employees
employment as Chief Executive Officer pursuant to this Second Amendment shall
commence effective as of October 11, 2006 and shall continue to February 1,
2008 (CEO Amended Term) and the term of Employees employment as Chief
Financial Officer pursuant to this Amendment shall commence effective as of October 11,
2006 and terminate on December 31, 2008. Employee will receive as
compensation for all responsibilities a base salary (Base Salary) of $127,000
per year. So long as the Employee is employed as the Companys CEO and CFO, the
Base Salary shall increase: (i) to $150,000 per year upon the completion
of the Private Placement, (ii) to $14,583/month (1/12 of $175,000) for
each month the company is at or above breakeven (defined as when net monthly
sales meet or exceed net monthly expenses on a cash basis) and $12,500/month
(1/12 of $150,000) for each month the company is below breakeven, and (iii) to
$205,000 per year commencing October 1, 2007. Employees salary as CFO
shall be $150,000 per year as long as net revenues are above financial
breakeven and $175,000 per year after the first month that monthly net sales
exceed $900,000. In addition the Employee shall receive options to purchase an
aggregate of an additional 100,000 shares of Employers common stock pursuant
to the Incentive Stock Option Plan and shall vest on a pro-rata basis at the
end of each month of Employees employment beginning March 2007 and ending
December 31, 2008. The Agreement provides for compensation to be paid in
the event the Employee is terminated for cause or if the Company chooses to
appoint a new Chief Executive Officer during the term of this agreement.
40
Outstanding Equity Awards as of December 31, 2007
|
|
Option
Awards
|
|
Stock
Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Equity Incentive
|
|
Plan Awards:
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
Plan Awards:
|
|
Market or
|
|
|
|
|
|
|
|
Plan Awards:
|
|
|
|
|
|
|
|
Market
|
|
Number of
|
|
Payout Value
|
|
|
|
Number of
|
|
Number of
|
|
Number of
|
|
|
|
|
|
Number of
|
|
Value of
|
|
Unearned
|
|
of Unearned
|
|
|
|
Securities
|
|
Securities
|
|
Securities
|
|
|
|
|
|
Shares or
|
|
Shares or
|
|
Shares, Units
|
|
Shares, Units
|
|
|
|
Underlying
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
Units of
|
|
Units of
|
|
or Other
|
|
or Other
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
|
|
Stock That
|
|
Stock That
|
|
Rights That
|
|
Rights That
|
|
|
|
Options
|
|
Options
|
|
Unearned
|
|
Exercise
|
|
Option
|
|
Have Not
|
|
Have Not
|
|
Have Not
|
|
Have Not
|
|
|
|
(#)
|
|
(#)
|
|
Options
|
|
Price
|
|
Expiration
|
|
Vested
|
|
Vested
|
|
Vested
|
|
Vested
|
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
(#)
|
|
($)
|
|
Date
|
|
(#)
|
|
($)
|
|
(#)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Pougnet,
|
|
37,500
|
|
12,500
|
|
|
|
$
|
1.80
|
|
9/11/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Executive Officer
|
|
45,833
|
|
54,167
|
|
|
|
$
|
1.39
|
|
3/9/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Chief Financial Officer
|
|
100,000
|
|
0
|
|
|
|
$
|
0.65
|
|
5/27/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,455
|
|
54,545
|
|
|
|
$
|
1.55
|
|
3/25/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanford
D. Greenberg
|
|
225,000
|
|
0
|
|
|
|
$
|
3.00
|
|
1/1/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Founder
|
|
150,000
|
|
0
|
|
|
|
$
|
0.65
|
|
5/27/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas
Ridley,
|
|
10,000
|
|
0
|
|
|
|
$
|
5.00
|
|
12/2/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
|
|
20,000
|
|
0
|
|
|
|
$
|
3.20
|
|
5/12/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
50,000
|
|
|
|
$
|
1.58
|
|
5/30/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,000
|
|
0
|
|
|
|
$
|
1.00
|
|
3/26/2012
|
|
|
|
|
|
|
|
|
|
Stock
Option Exercises and Stock Vested
There were no options exercised by the named executive
officers during the year ended December 31, 2007.
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
Number of Shares
|
|
Value Realized
|
|
Number of Shares
|
|
Value Realized
|
|
|
|
Acquired on Exercise
|
|
on Exercise
|
|
Acquired on Vesting
|
|
on Vesting
|
|
Name
|
|
(#)
|
|
($)
|
|
(#)
|
|
($)
|
|
John Pougnet,
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Chief Executive Officer and
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanford D. Greenberg,
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Founder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Ridley,
|
|
0
|
|
0
|
|
0
|
|
0
|
|
President
|
|
|
|
|
|
|
|
|
|
Post-Employment Compensation, Pension Benefits, Nonqualified
Deferred Compensation
There were no post-employment compensation, pension or
nonqualified deferred compensation benefits earned by the executive officers
during the year ended December 31, 2007.
Director Compensation
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
Deferred
|
|
|
|
|
|
|
|
Fees Earned or
|
|
Stock
|
|
Option
|
|
Incentive Plan
|
|
Compensation
|
|
All Other
|
|
|
|
|
|
Paid in Cash
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Earnings
|
|
Compensation
|
|
Total
|
|
Name
|
|
($)
|
|
($)
|
|
($)(1)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AJ
Robbins
|
|
17,250
|
|
0
|
|
111,392
|
|
0
|
|
0
|
|
0
|
|
128,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony
Petrelli
|
|
5,000
|
|
0
|
|
38,119
|
|
0
|
|
0
|
|
0
|
|
43,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel
Rumsey
|
|
6,500
|
|
0
|
|
50,826
|
|
0
|
|
0
|
|
0
|
|
57,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
McCandless
|
|
28,100
|
|
0
|
|
111,392
|
|
0
|
|
0
|
|
0
|
|
139,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony
DiGiandomenico
|
|
6,500
|
|
0
|
|
111,392
|
|
0
|
|
0
|
|
0
|
|
117,892
|
|
41
(1)
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 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 to calculate the compensation
expense:
|
|
For the year ended
December 31, 2007
|
|
Stock price volatility
|
|
96.7 to 98.7
|
%
|
Risk-free rate of return
|
|
3.34 to 4.95
|
%
|
Annual dividend yield
|
|
0
|
%
|
Expected life
|
|
1.5 to 4.5 Years
|
|
During 2007 the Company compensated all Board members
for their participation at Board meetings, and Audit and Compensation Committee
meetings. Additionally, the Company paid Mr. Robbins an additional $15,000
as Chairman of the Audit Committee. Additionally, Messrs. McCandless,
Robbins, Rumsey and DiGiandomenico were granted 80,000 options to purchase
common stock for their services, while Mr. Petrelli received 60,000
options to purchase common stock for his services. Finally, the Company engaged
Mr. McCandless on a monthly basis as a consultant to the Company.
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDERS MATTERS
Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information
with respect to the ownership of our Common Stock as of the record date, by (i) each
person who is known by us to own of record or beneficially more than 5% of our
Common Stock, (ii) each of our directors and officers. Unless otherwise
indicated, the stockholders listed in the table have sole voting and investment
powers with respect to the shares of Common Stock. Shareholdings include shares
held by family members. The addresses of the individuals listed below are in
the Companys care at 480 South Holly Street, Denver, Colorado 80246 unless
otherwise noted.
|
|
Number of
|
|
Percent of
|
|
Name and Address
|
|
Shares(1)
|
|
Class(2)
|
|
John D. Pougnet
Chief Executive Officer, Chief Financial Officer and Director
|
|
289,112
|
(3)
|
1.8
|
%
|
|
|
|
|
|
|
John B.
McCandless Chairman
|
|
190,000
|
(4)
|
1.2
|
%
|
|
|
|
|
|
|
Douglas Ridley
President and Director
|
|
288,750
|
(5)
|
1.8
|
%
|
|
|
|
|
|
|
Daniel Rumsey
Director
|
|
70,000
|
(6)
|
|
*
|
|
|
|
|
|
|
Anthony B. Petrelli
Director
|
|
97,750
|
(7)
|
|
*
|
|
|
|
|
|
|
AJ Robbins
Director
|
|
106,667
|
(8)
|
|
*
|
|
|
|
|
|
|
Anthony DiGiandomenico
Director
|
|
567,018
|
(9)
|
3.5
|
%
|
|
|
|
|
|
|
Total officer and director
|
|
1,529,297
|
|
8.9
|
%
|
|
|
|
|
|
|
Sanford D Greenberg
|
|
3,764,406
|
(10)
|
23.4
|
%
|
|
|
|
|
|
|
Warren Cohen
595 South Broadway Suite 200
Denver, CO 80209
|
|
1,338,800
|
(11)
|
8.5
|
%
|
|
|
|
|
|
|
Total beneficial ownership
|
|
6,632,503
|
|
38.0
|
%
|
42
*
|
Less
than 1%
|
|
|
(1)
|
All
entries exclude beneficial ownership of shares issuable pursuant to options
that have not vested or that are not otherwise exercisable as of the date
hereof and which will not become vested or exercisable within 60 days of
March 19, 2008.
|
|
|
(2)
|
Percentages
are rounded to nearest one-tenth of one percent. Percentages are based on
15,697,170 shares of common stock outstanding. Options that are
presently exercisable or exercisable within 60 days are deemed to be
beneficially owned by the person holding the options for the purpose of
computing the percentage ownership of that person, but are not treated as
outstanding for the purpose of computing the percentage of any other person.
|
|
|
(3)
|
Comprised
of 29,500 shares held of record and 259,612 shares issuable pursuant to
options which are presently exercisable or which become exercisable within 60
days of March 19, 2008.
|
|
|
(4)
|
Comprised
of 190,000 shares issuable pursuant to options which are presently
exercisable or which become exercisable within 60 days of March 19,
2008.
|
|
|
(5)
|
Comprised
of 20,000 shares held of record and 268,750 shares issuable pursuant to
options which are presently exercisable or which become exercisable within 60
days of March 19, 2008.
|
|
|
(6)
|
Comprised
of 20,000 shares held of record and 50,000 shares issuable pursuant to
options which are presently exercisable or which become exercisable within 60
days of March 19, 2008.
|
|
|
(7)
|
Comprised
of 77,500 shares pursuant to options which are presently exercisable or which
become exercisable within 60 days of March 19, 2008, and 10,125
Class A warrants and 10,125 Class B warrants.
|
|
|
(8)
|
Comprised
of 106,667 shares issuable pursuant to options which are presently
exercisable or which become exercisable within 60 days of March 19,
2008.
|
|
|
(9)
|
Comprised
of 323,493 shares issuable pursuant to public warrants and 156,667 shares
pursuant to options which are presently exercisable or which become
exercisable within 60 days of March 19, 2008, and 66,800 shares held of
record and 10,029 Class A warrants and 10,029 Class B warrants.
|
|
|
(10)
|
Comprised
of 3,389,406 shares held of record either held directly or as custodian for a
minor child and 375,000 shares issuable pursuant to options which are
presently exercisable or which become exercisable within 60 days of
March 19, 2008.
|
|
|
(11)
|
Comprised
of 1,338,800 shares held of record.
|
43
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We lease an office, located at 480 South
Holly Street, Denver, Colorado, from the father of Sanford D. Greenberg, our
founder, for $3,900 per month. The lease expired on March 31, 2006, with
an automatic monthly extension right and a two month notice period for the
Company to terminate the lease. Our annual office rent for 2007 and 2006 was
$42,780 and $40,680, respectively.
44
ITEM
13. EXHIBITS
(a)
Exhibits
|
|
|
|
|
|
Exhibit No
|
|
Description
|
3.1
|
|
Articles of Incorporation incorporated by
reference to Exhibit 3.01 filed with Form SB-2 filed
February 27, 2001
|
3.1.1
|
|
Certification of Amendment to the Articles
of Incorporation incorporated by reference to Exhibit 3.1.1 filed with
Form 10-QSB filed November 14, 2003
|
3.2
|
|
Amended and Restated By-laws filed with Form 10-KSB on March 3, 2005, as Exhibit 3.2, and incorporated herein by reference.
|
4.1
|
|
Warrant MDB Capital Group filed with
Form SB-2 on June 29, 2004, and incorporated herein by reference
|
4.2
|
|
Sample Stock Purchase Agreement with
Registration Rights filed with Form SB-2 on June 29, 2004, and
incorporated herein by reference
|
4.3
|
|
Warrant Anthony DiGiandomenico filed with
Form SB-2 on June 29, 2004, and incorporated herein by reference
|
4.4
|
|
Warrant Christopher A. Marlett filed with
Form SB-2 on June 29, 2004, and incorporated herein by reference
|
10.1
|
|
VitaCube Systems Holdings, Inc. 2003
Stock Incentive Plan incorporated by reference to Exhibit 10.1 filed
with Form 10-QSB filed November 14, 2003
|
10.1.1
|
|
Form of Incentive Stock Option Agreement under the 2003 Stock Incentive Plan filed with Form 10-KSB on March 3, 2005, as Exhibit 10.1.1, and incorporated herein by reference.
|
10.1.2
|
|
Form of Nonqualified Stock Option Agreement under the 2003 Stock Incentive Plan filed with Form 10-KSB on March 3, 2005, as Exhibit 10.1.2, and incorporated herein by reference.
|
10.2
|
|
Agreement Concerning the Exchange of Securities by and between the Company and VitaCube Systems, Inc. and the Security Holders of VitaCube Systems, Inc. incorporated by reference to Exhibit 2 filed with Form 8-K filed July 1, 2003
|
10.3
|
|
Employment Agreement Sanford D. Greenberg filed with Form 8-K on April 2, 2004, as Exhibit 10.1, and incorporated herein by reference
|
10.4
|
|
Option Agreement Sanford D. Greenberg filed with Form 8-K on April 2, 2004, as Exhibit 10.2, and incorporated herein by reference
|
10.5
|
|
Lockup Agreements Sanford D. Greenberg and Warren Cohen filed with Form SB-2 on June 29, 2004, and incorporated herein by reference
|
10.6
|
|
Employment Agreement Timothy Transtrum filed with Form SB-2 on June 29, 2004, and incorporated herein by reference
|
10.7
|
|
MDB Capital Group, LLC Engagement Letter filed with Form SB-2 on June 29, 2004, and incorporated herein by reference
|
10.8
|
|
Employment Agreement David Litt filed with Form 8-K on November 5, 2004, and incorporated herein by reference
|
10.9
|
|
Incentive Stock Option Agreement David Litt . filed with Form 10-KSB on March 3, 2005, as Exhibit 10.10, and incorporated herein by reference.
|
10.10
|
|
Office Lease and Addendums A.L. Greenberg filed with Form SB-2 on January 18, 2005, and incorporated herein by reference
|
10.11
|
|
Consulting Agreement Dr. William Wheeler filed with Form SB-2 on January 18, 2005, and incorporated herein by reference
|
10.12
|
|
Restated Employment Agreement Sanford D. Greenberg filed with Form 10-KSB on , March 4, 2005 as Exhibit 10.3, and incorporated herein by reference.
|
10.13
|
|
Employment Agreement Earnest Mathis, Jr. filed with Form 10-KSB on March 3, 2005, as Exhibit 10.10, and incorporated herein by reference.
|
10.14
|
|
Stock Option Agreement Earnest Mathis, Jr. filed with Form 10-KSB on March 3, 2005, as Exhibit 10.11, and incorporated herein by reference.
|
10.15
|
|
Strategic alliance agreement with UTEK Corporation filed on Form 8-K on May 23, 2005, as Exhibit 10.1 and 10.2, and incorporated herein by reference.
|
10.16
|
|
Employment Agreement Douglas Ridley filed with Form 8-K on June 2, 2005, as Exhibit 10.1, and incorporated herein by reference.
|
10.17
|
|
Service Agreement with Elite Financial Communications Group, LLC file on Form 8-K on September 6, 2005, , as Exhibit 10.11, and incorporated herein by reference.
|
10.18
|
|
Employment Agreement John D. Pougnet filed with Form 8-K on September 14, 2005, as Exhibit 10.1, and incorporated herein by reference.
|
45
10.19
|
|
Consulting Agreement with Eastgate Associates Ltd filed with Form 10-KSB on March 31, 2006 and incorporated herein by reference.
|
10.20.1
|
|
Endorser Agreement with Carnell Williams filed with Form 10-KSB on March 31, 2006 and incorporated herein by reference..
|
10.21
|
|
Consent Agreement with PouchTec Industries, L.L.C., filed with Form 8-K on July 6, 2006, as Exhibit 99.1, and incorporate herein by reference.
|
10.22
|
|
Amended Earnest Mathis, Jr. Employment Agreement, filed with Form 8-K on July 14, 2006, as Exhibit 10.1, and incorporate herein by reference.
|
10.23
|
|
Amended Sanford Greenberg Employment Agreement, filed with Form 8-K on July 14, 2006, as Exhibit 10.2, and incorporate herein by reference.
|
10.24
|
|
Amended John Pougnet Employment Agreement, filed with Form 8-K on July 14, 2006, as Exhibit 10.3, and incorporate herein by reference.
|
10.25
|
|
Bridge Financing Agreement with Asset Protection Fund filed with Form 8-K on November 28, 2006, as Exhibit 10.1, and incorporate herein by reference.
|
10.26
|
|
Bridge Financing Agreement with Global Project Finance AG filed with Form 8-K on December 19, 2006, as Exhibit 10.1, and incorporate herein by reference.
|
10.27
|
|
Referral Agreement with Lighthouse Capital filed with Form 8-K on December 19, 2006, as Exhibit 10.2, and incorporate herein by reference.
|
10.28
|
|
Amended Sanford Greenberg Employment Agreement filed with Form 10-KSB on March 30, 2007 and incorporated herein by reference.
|
10.29
|
|
Amended John Pougnet Employment Agreement filed with Form 10-KSB on March 30, 2007 and incorporated herein by reference.
|
10.30
|
|
Exclusive Manufacturing Agreement with Arizona Production and Packaging, L.L.C. filed on August 2, 3007 and incorporated herein by reference.
|
10.31
|
|
Acceleration Sports Institute Agreement filed with Form 8-K on November 14, 2007 and incorporated herein by reference.
|
14.1
|
|
Code of Ethics filed herewith
|
14.2
|
|
Board Charter filed herewith
|
14.3
|
|
Audit Committee Charter filed herewith
|
14.4
|
|
Compensation Committee Charter filed
herewith
|
14.5
|
|
Nominating & Corporate Governance
Committee charter filed herewith
|
21.1
|
|
Subsidiaries of XELR8 Holdings, Inc.
filed herewith
|
31.1
|
|
Certification of CEO as Required by
Rule 13a-14(a)/15d-14 filed herewith
|
31.2
|
|
Certification of CFO as Required by
Rule 13a-14(a)/15d-14 filed herewith
|
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
filed herewith
|
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 filed herewith
|
99.1
|
|
Press Release issued on March 26, 2008 filed herewith.
|
46
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Set forth below are fees paid to the Companys
independent accountants for the past two years for the professional services
performed for the Company.
Audit Fees and Audit Related
We paid Gordon, Hughes & Banks, LLP
a total of $9,292 for professional services rendered in review of the March 31,
June 30 and September 30, 2007 Form 10-QSB and $25,457 for the
audit of our financials for the year ended December 31, 2006.
We
paid Gordon, Hughes & Banks, LLP a total of $4,918 for professional
services rendered in review of our filings of two Registration Statements filed
on Form SB-3 in the year ended December 31, 2007.
We paid Gordon, Hughes & Banks, LLP
a total of $25,966 for professional services rendered in review of the March 31,
June 30 and September 30, 2006 Form 10-QSB and audit of our
financials for the year ended December 31, 2005.
We paid Gordon, Hughes & Banks, LLP
a total of $250 for professional services rendered in review of our private
placement transaction in 2006.
Tax Fees
We paid Gordon, Hughes & Banks, LLP
a total of $4,350 professional services rendered in connection with the
preparation of our federal and state income tax returns for the year ended December 31,
2006.
We paid Gordon, Hughes & Banks, LLP
a total of $4,000 professional services rendered in connection with the
preparation of our federal and state income tax returns for the year ended December 31,
2005.
All Other Fees
None.
47
SIGNATURES
In accordance with Section 13 or 15(d) of
Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, on March 28, 2008.
|
XELR8 HOLDINGS, INC.
|
|
|
|
|
By
|
|
/s/ John D. Pougnet.
|
|
|
John D. Pougnet
|
|
|
Chief Executive Officer,
|
|
|
Chief Financial Officer, and
|
|
|
Director
|
|
|
|
|
|
|
By
|
|
/s/ John B. McCandless
|
|
|
John B. McCandless.
|
|
|
Chairman
|
|
|
|
By
|
|
/s/ Douglas Ridley
|
|
|
Douglas Ridley
|
|
|
President and Director
|
|
|
|
By
|
|
/s/ Anthony DiGiandomenico
|
|
|
Anthony DiGiandomenico
|
|
|
Director
|
|
|
|
By
|
|
/s/ Anthony B. Petrelli
|
|
|
Anthony B. Petrelli
|
|
|
Director
|
|
|
|
By
|
|
/s/ Daniel Rumsey
|
|
|
Daniel Rumsey
|
|
|
Director
|
|
|
|
By
|
|
/s/ AJ Robbins
|
|
|
AJ Robbins
|
|
|
Director
|
|
|
|
|
|
48
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
XELR8
Holdings, Inc.
Denver,
Colorado
We
have audited the accompanying consolidated balance sheets of XELR8 Holdings, Inc.
as of December 31, 2007 and
2006 and the related consolidated statements of operations, changes in
shareholders equity (deficit) and cash flows for each of the two years then
ended. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of XELR8
Holdings, Inc. as of December 31,
2007 and 2006, and the results of its operations and its cash flows for
each of years then ended, in conformity with accounting principles generally
accepted in the United States of America.
|
Gordon, Hughes &
Banks, LLP
|
|
|
Greenwood
Village, Colorado
|
|
March 10,
2008
|
|
F-1
XELR8 HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
For the Years Ended December 31,
2007 and 2006
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,245,858
|
|
$
|
76,147
|
|
Accounts receivable, net of allowance for
doubtful accounts of $ 12,231 and $10,706, respectively
|
|
7,460
|
|
4,785
|
|
Inventory, net of allowance for
obsolescence of $ 189,403 and $41,655, respectively
|
|
370,843
|
|
411,364
|
|
Prepaid expenses and other current assets
|
|
329,015
|
|
259,292
|
|
Total current assets
|
|
2,953,176
|
|
751,588
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
17,959
|
|
11,212
|
|
Property and equipment, net
|
|
81,405
|
|
123,943
|
|
Deferred offering and loan costs
|
|
|
|
133,889
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,052,540
|
|
$
|
1,020,632
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
(DEFICIT)
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
832,697
|
|
$
|
1,160,916
|
|
Short-term note payable
|
|
|
|
250,000
|
|
|
|
|
|
|
|
Total Liabilities
|
|
832,697
|
|
1,410,916
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY (DEFICIT) (Note 2):
|
|
|
|
|
|
Preferred stock, authorized 5,000,000
shares, $.001 par value, none issued or outstanding
|
|
|
|
|
|
Common stock, authorized 50,000,000 shares,
$.001 par value, 15,197,170 and 10,097,170 shares issued and outstanding,
respectively
|
|
15,197
|
|
10,097
|
|
Additional paid in capital
|
|
22,696,657
|
|
16,849,900
|
|
Accumulated (deficit)
|
|
(20,492,011
|
)
|
(17,250,281
|
)
|
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
2,219,843
|
|
(390,284
|
)
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,052,540
|
|
$
|
1,020,632
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
XELR8 HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2007
and 2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
4,853,046
|
|
$
|
2,148,420
|
|
Cost of goods sold
|
|
1,380,663
|
|
775,762
|
|
Gross profit
|
|
3,472,383
|
|
1,372,658
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling and marketing expenses
|
|
3,180,392
|
|
2,626,613
|
|
General and administrative expenses
|
|
3,107,469
|
|
3,275,689
|
|
Research and development expenses
|
|
17,828
|
|
73,921
|
|
Depreciation and amortization
|
|
58,033
|
|
66,333
|
|
Total operating expenses
|
|
6,363,722
|
|
6,042,556
|
|
|
|
|
|
|
|
Net (loss) from operations
|
|
(2,891,339
|
)
|
(4,669,898
|
)
|
Other income (expense)
|
|
|
|
|
|
Interest income
|
|
87,646
|
|
34,337
|
|
Gain on disposial of asset
|
|
1,500
|
|
|
|
Interest (expense)
|
|
(439,537
|
)
|
(33,888
|
)
|
|
|
|
|
|
|
Total other income (expense)
|
|
(350,391
|
)
|
449
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(3,241,730
|
)
|
$
|
(4,669,449
|
)
|
|
|
|
|
|
|
Net (loss) per common share
|
|
|
|
|
|
Basic and diluted net (loss) per share
|
|
$
|
(0.23
|
)
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
Weighted average common shares outstanding,
basic and diluted
|
|
13,951,691
|
|
9,714,021
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
XELR8 HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY (DEFICIT)
For the Years Ended December 31, 2007
and 2006
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Additional
|
|
|
|
shareholders
|
|
|
|
Common Stock
|
|
paid in
|
|
Accumulated
|
|
equity
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
(deficit)
|
|
(deficit)
|
|
Balances, January 1, 2006
|
|
9,618,900
|
|
9,619
|
|
15,990,889
|
|
(12,580,832
|
)
|
3,419,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants
|
|
|
|
|
|
72,936
|
|
|
|
72,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for services
|
|
478,270
|
|
478
|
|
222,522
|
|
|
|
223,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
563,553
|
|
|
|
563,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
(4,669,449
|
)
|
(4,669,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006
|
|
10,097,170
|
|
$
|
10,097
|
|
$
|
16,849,900
|
|
$
|
(17,250,281
|
)
|
$
|
(390,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for services
|
|
2,100,000
|
|
2,100
|
|
1,017,900
|
|
|
|
1,020,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in private
offerings, net of offering costs of $380,552
|
|
3,000,000
|
|
3,000
|
|
3,616,448
|
|
|
|
3,619,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock transferred by shareholder for
services
|
|
|
|
|
|
350,000
|
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
862,409
|
|
|
|
862,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
(3,241,730
|
)
|
(3,241,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007
|
|
15,197,170
|
|
$
|
15,197
|
|
$
|
22,696,657
|
|
$
|
(20,492,011
|
)
|
$
|
2,219,843
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
XELR8 HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2007
and 2006
|
|
2007
|
|
2006
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,241,730
|
)
|
$
|
(4,669,449
|
)
|
Adjustments to reconcile
|
|
|
|
|
|
Depreciation and amortization
|
|
58,033
|
|
66,333
|
|
(Gain) on sale of equipment
|
|
(1,500
|
)
|
|
|
Stock and stock options issued for services
|
|
1,372,408
|
|
859,489
|
|
Interest expense and amortization related
to bridge loan financing
|
|
428,889
|
|
|
|
Change in allowance for doubtful accounts
|
|
1,525
|
|
5,243
|
|
Change in allowance for inventory
obsolescence
|
|
147,748
|
|
24,776
|
|
Change in allowance for product returns
|
|
30,866
|
|
25,013
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(4,200
|
)
|
(1,270
|
)
|
Inventory
|
|
(107,227
|
)
|
106,609
|
|
Other current assets
|
|
(69,723
|
)
|
(88,679
|
)
|
Accounts payable and accrued expenses
|
|
205,915
|
|
679,907
|
|
Net cash (used) by operating activities
|
|
(1,178,996
|
)
|
(2,992,028
|
)
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Proceeds from maturity of investments
|
|
|
|
110,000
|
|
Proceeds from sale of equipment
|
|
1,500
|
|
|
|
Capital expenditures
|
|
(22,242
|
)
|
(71,846
|
)
|
Net cash (used) provided by investing
activities
|
|
(20,742
|
)
|
38,154
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
Proceeds from bridge loan financing
|
|
250,000
|
|
250,000
|
|
Repayments of bridge financing
|
|
(500,000
|
)
|
|
|
Issuance of common stock, net of offering
costs
|
|
3,619,449
|
|
|
|
Deferred offering costs
|
|
|
|
(25,000
|
)
|
Net cash provided by financing activities
|
|
3,369,449
|
|
225,000
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
2,169,711
|
|
(2,728,874
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF THE
PERIOD
|
|
76,147
|
|
2,805,021
|
|
CASH AND CASH EQUIVALENTS, END OF THE
PERIOD
|
|
$
|
2,245,858
|
|
$
|
76,147
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURE
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
13,425
|
|
$
|
|
|
Stock issued for satisfaction of accrued
compensation expense
|
|
$
|
540,000
|
|
$
|
|
|
Deferred offering costs applied against
proceeds from offering
|
|
$
|
25,000
|
|
$
|
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
F-5
XELR8 HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The consolidated financial statements include those of XELR8 Holdings, Inc.,
(BZI) (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.
Liquidity and Basis
of Presentation
The accompanying financial statements have
been prepared in conformity with accounting principles generally accepted in
the United States of America, which contemplates continuation of the Company as
a going concern. The Company incurred a
net loss of $3,241,730 for the year ended December 31, 2007 and has
incurred significant net losses since inception.
The Company has been developing awareness of its products through its
marketing plan and product innovation.
Within time, management believes that demand for its products will
develop to allow the Company to become profitable, through the development of
its independent distributor and customer base. Management believes that the
cash resources will be sufficient to fund its operations for the next
twenty-four months. If the business operations do not result in increased
product sales, our business viability, financial position, results of
operations and cash flow will likely be adversely affected. Consequently,
management may elect to raise money during the year ended December 31,
2008 to meet any shortfalls from operations (see Note 9 Subsequent Events
regarding the Companys placement transaction completed in February 2008). However a realization of significant portion
of the assets in the accompanying balance sheet is dependent on the continued
operations of the Company, which in turn is dependent on the increase in
independent distributors and customer base or the additional capital raised
through a placement of its securities.
Principles of
Consolidation
The accompanying financial statements include the accounts of XELR8
Holdings, Inc. and its wholly-owned subsidiaries VitaCube Systems, Inc.,
XELR8, Inc., XELR8 International, Inc. and XELR8 Canada, Corp. All intercompany 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.
F-6
Management
believes that the estimates utilized in the preparation of the 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.
Cash and Cash
Equivalents
For the purposes of reporting cash flows, the Company considers all
cash and highly liquid investments with an original maturity of three months or
less to be cash equivalents. The Company considers deposits in banks and
investments purchased with original maturities of more than three months and
less than a year to be short term investments.
Concentrations
The Company has no significant off-balance sheet
concentrations of credit risk such as foreign exchange contracts, options
contracts or other foreign hedging arrangements. The Company maintains the majority of its
cash balances with two financial institutions in the form of demand deposits
and money market funds. Funds in excess
of the federally insured amount of $100,000 are subject to credit risk, and the
Company believes that the financial institutions are financially sound and the
risk of loss is minimal.
During 2007, the Company relied significantly on
three suppliers for 77% of its purchases of raw materials for supplements,
drinks and marketing materials held for sale.
The Company does have reliance on a single supplier, which supplied 64%
of inventory purchases. The Company entered into an Exclusive Manufacturing
Agreement with this supplier to produce the Bazi product. Management believes
that its purchasing requirements can be readily met from alternative sources.
Fair Value of
Financial Instruments
Substantially all of the Companys assets and liabilities are carried
at fair value or contracted amounts that approximate fair value. Estimates of fair value are made at a
specific point in time, based on relative market information and information
about each financial instrument, specifically, the value of the underlying
financial instrument. Assets that are
recorded at fair value consist largely of cash, short term investments and
accounts receivable, which are carried at contracted amounts that approximate
fair value. Similarly, the Companys
liabilities consist primarily of short term liabilities recorded at contracted
amounts that approximate fair value.
F-7
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
dietary supplement, sports energy drink, a sports hydration drink, a protein
shake, meal replacement drink, a functional food snack and other vitamins and
nutritional supplements, which it packages in various forms and containers.
Inventory is comprised of the following:
|
|
December 31, 2007
|
|
December 31, 2006
|
|
Purchased materials
|
|
$
|
58,746
|
|
$
|
245,447
|
|
Finished goods
|
|
501,500
|
|
207,572
|
|
Reserve for obsolete inventory
|
|
(189,403
|
)
|
(41,655
|
)
|
|
|
$
|
370,843
|
|
$
|
411,364
|
|
A summary of the reserve for obsolete and
excess inventory was as follows as of December 31, 2007 and 2006:
|
|
2007
|
|
2006
|
|
Balance as of January 1
|
|
$
|
41,655
|
|
$
|
16,879
|
|
Addition to provision
|
|
216,760
|
|
123,511
|
|
Write-off of obsolete inventory
|
|
(69,012
|
)
|
(98,735
|
)
|
Balance as of December 31
|
|
$
|
189,403
|
|
$
|
41,655
|
|
Property and
Equipment
The Company provides for depreciation of property and
equipment using the straight-line method based on estimated useful lives of
between three and ten years.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows estimated to be generated by the
asset. An impairment was not deemed necessary in either 2007 or 2006.
Intangible Assets
The Companys intangible assets, consisting of trademarks and patent costs,
are being amortized over their estimated life of 15 years. The Company
evaluates the useful lives of its intangible assets annually and adjusts the
lives according to the expected useful life. During 2006 the Company recorded
an impairment of intangible assets related to products no longer sold.
Advertising Costs
Advertising and marketing costs were $494,883 and
$612,819 for the years ended December 31, 2007 and 2006, respectively, and
are expensed as incurred or the first time the advertising takes place.
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
F-8
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 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
Effective January 1,
2006, the Company adopted SFAS 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. The Company has applied the provisions of SAB 107 in its
adoption of SFAS 123R.
The
Company 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. The Company recognizes compensation costs net of an assumed
forfeiture rate and recognizes the compensation costs for nonqualified stock
options expected to vest on a straight-line basis over the requisite service
period of the award. The Company estimates the forfeiture rate based on its
historical experience.
Total
share-based compensation expense, for all of the Companys share-based awards
recognized for the year ended December 31, 2007, was $1,372,409 or $0.10
per share basic and diluted compared with the $859,489 or $0.09 per share for
the year ended December 31, 2006.
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 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:
F-9
|
|
Year ended December 31, 2007
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
Stock price volatility
|
|
96.7 to 98.7
|
%
|
92.9 to 97.1
|
%
|
Risk-free rate of return
|
|
3.34 to 4.95
|
%
|
4.76 to 5.27
|
%
|
Annual dividend yield
|
|
0
|
%
|
0
|
%
|
Expected life
|
|
1.5 to 4.5 Years
|
|
2.5 to 5 Years
|
|
Net
Loss Per Share
Earnings per share requires 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, any common stock equivalents would not be included in the
weighted average calculation since their effect would be anti-dilutive.
Recent Accounting
Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with accounting principles
generally accepted in the United States, and expands disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007, with earlier application encouraged.
Any amounts recognized upon adoption as a cumulative effect adjustment will be
recorded to the opening balance of retained earnings in the year of adoption.
The Company is currently evaluating the impact of adopting SFAS No. 157 on
its consolidated financial statements.
In
June 2006, the FASB ratified the consensuses of Emerging Issues Task Force
(EITF) Issue No. 06-3, How Taxes Collected from Customers and Remitted
to Governmental Authorities Should Be Presented in the Income Statement (That
Is, Gross versus Net Presentation). EITF 06-3 clarifies that the
scope of this Issue includes any tax assessed by a governmental authority that
is imposed concurrently with or subsequent to a revenue-producing transaction
between a seller and a customer and indicates that the income statement
presentation on either a gross basis or a net basis of the taxes within the
scope of the Issue is an accounting policy decision that should be disclosed.
Furthermore, for taxes reported on a gross basis, an enterprise should disclose
the amounts of those taxes in interim and annual financial statements for each
period for which an income statement is presented. The consensus is effective,
through retrospective application, for periods beginning after December 15,
2006. The Company currently presents taxes on a net basis within the scope of
this issue.
In
February 2007, the FASB issued SFAS No. 159, Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159). Under SFAS No. 159,
entities may choose to measure at fair value many financial instruments and
certain other items that are not currently required to be measured at fair
value. SFAS No. 159 also establishes recognition, presentation, and
disclosure requirements designed to facilitate comparisons between entities
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 does not affect any existing accounting
literature that requires certain assets and liabilities to be carried at fair
value. SFAS No. 159 is effective for us beginning January 1, 2008.
The adoption of this standard is not expected have any impact on our financial
position or results of operations.
In
November 2007, the FASB issued SFAS 141 (revised 2007), Business
Combination (SFAS 141R) and SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160).
SFAS 141R will change how business acquisitions are accounted for and will
impact financial statements both on the acquisition date and in subsequent
periods. SFAS 160 will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS 141R and SFAS 160 are effective for
fiscal years beginning on or after December 15, 2008. SFAS 141R will be
applied prospectively. SFAS 160 requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. All other
requirements of SFAS 160 will be applied prospectively. Early adoption is
prohibited for both standards. The adoption of this standard is not expected
have any impact on our financial position or results of operations.
F-10
NOTE 2 SHAREHOLDERS EQUITY (DEFICIT)
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
December 31, 2007, no dividends have been declared or paid by the Company.
On
March 29, 2006, the Company engaged Carnell Williams, a professional
athlete to endorse the Companys products. The Company paid Mr. Williams
an initial fee of 44,444 shares valued at $60,000 based on the Companys
closing common stock price of $1.35, the day that the agreement was reached.
On
November 21, 2006, the Company entered into a Bridge Financing Agreement
with Asset Protection Fund (APF), whereby APF loaned the Company $250,000.
The term of the loan was the shorter of when the Company completed a Private
Placement Offering or six months from the loan origination date and it accrued
interest at a rate of 10% per annum. Additionally, the Company issued APF
400,000 shares of restricted common stock as a loan fee. The Company recorded a
deferred loan cost of $140,000 based on the Companys closing common stock
price on the day that the loan was funded. The deferred loan cost was amortized
over the term of the loan and recorded as additional interest expense. On March 27,
2007, the Company completed the private placement transaction and repaid the
loan to Asset Protection Fund of $250,000 plus accrued interest of $8,630. For
the years ended December 31, 2007 and 2006, the Company recognized
$108,000 and $32,000, respectively, of interest expense related to the
amortization of the deferred loan costs.
On December 12,
2006, the Company entered into a Bridge Financing Agreement with Global Project
Finance AG (GPF), whereby GPF loaned the Company the amount of $250,000 which
was funded on January 16, 2007. The term of the loan was the shorter of
when the Company completed a Private Placement Offering or six months from the
loan origination date and it accrued interest at a rate of 10% per annum.
Additionally, the Company issued GPF 400,000 shares of restricted common stock
as a loan fee. The Company recorded, as interest expense, an amount based on
the Companys closing common stock price on the day that the loan was funded,
and the Company recorded $320,000 representing the fair value of the stock
provided. This deferred loan cost was to be amortized over the term of the loan
and recorded as an additional interest expense. On March 27, 2007 the
Company repaid the loan plus accrued interest of $4,795. For the year ended December 31,
2007, the Company recognized $320,000 of interest expense in connection with
this transaction.
On
December 18, 2006, the Company entered into an agreement with Lighthouse
Capital for the referral of APF and GPF, or other potential financing contacts
to the Company. The term of this Agreement was for a period of sixty days from
the date of the Agreement and the Company would pay a fee in the amount of
200,000 restricted shares of the Companys common stock to the referral
representative upon funding received from any one or more referrals in the
total aggregate amount of $500,000. On January 16, 2007, GPF funded the
Company $250,000, to aggregate $500,000 received by the Company from the
referrals of Lighthouse Capital. Per the terms of the Agreement, the Company
issued Lighthouse Capital 200,000 shares and recorded an expense of $160,000
based on the closing market price on the date of the funding.
On
March 5, 2007, the Company announced that it had completed the sale of two
million units in a private placement transaction for gross proceeds of
$2,000,000. The placement was sold to accredited individual 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 was comprised
of one share and one half of a warrant to purchase a share of common stock at
an exercise price of $1.50 per share. The shares of common stock and the
shares underlying the warrants have been registered under the Securities Act of
1933, as amended, and may be offered or sold in the United States. On March 7,
2007, the shareholders approved the placement transaction, and on March 27,
the Company closed the transaction. The Company incurred $221,907 of offering
expenses
F-11
in
connection with the offering, netting the Company $1,778,094 in proceeds.
Additionally, the Company engaged a number of selling agents in connection with
the sale of the private placement and paid compensation of 108,500 warrants for
their efforts.
On
March 7, 2007, at the annual shareholder meeting, the shareholder approved
an increase in the number of shares issuable under the 2003 Stock Incentive
Plan to 2,200,000 shares of our Common Stock. For the year ended December 31,
2007 the Company recorded an expense of $822,676 related to options issued to
athletes, consultants, employees and executives of the Company. Additionally,
at the shareholder meeting, the stockholders of the Company approved the
creation of the 2006 Distributor Option Plan and reserved thereunder options to
purchase 500,000 shares of common stock. The Company recorded an expense of
$39,732 for the year ended December 31, 2007, in connection with the
issuance of options under this plan.
On
March 26, 2007, the Company entered into an amended employment contract (Employment
Agreement) with Sanford Greenberg to provide for the assignment of the
benefits and obligations of the Employee Agreement from XELR8 Holdings, Inc.
to XELR8, Inc. The amendment provides that Mr. Greenberg will receive
annual compensation of $1
. Additionally, Mr. Greenberg
waives any and all rights to participate in any incentive executive bonus plan
of the Company, but will receive a bonus equal to one percent (1%) of the net
sales of XELR8, Inc. from November 1, 2006, for a period of 12 years.
Further, Mr. Greenberg shall receive 1,500,000 restricted shares of the
Company, and he agreed to waive and forfeit options for 250,000 shares of the
Companys common stock that were granted on April 1, 2004.
The
1,500,000 restricted shares were issued on March 27, 2007, in satisfaction
of the obligation of $540,000 which was recorded in the year ended December 31,
2006 financial statements. The fair value was determined based on the closing
market value of the Company share price on the date that the Company and Mr. Greenberg
agreed to the amendment, subject to shareholder approval, of November 17,
2006.
On
April 6, 2007, Mr. Greenberg granted 200,000 shares of common stock
to the employees of the Company. Under the guidance issued by the SEC 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. As a principal shareholder, Mr. Greenberg,
is a holder of an economic interest in the entity, and therefore the Company is
required to record an expense of $350,000 in stock based compensation and
an off-setting entry directly to additional paid in capital based on the
share price on the date of the grant.
On
May 8, 2007, the Company announced that it had completed the sale of one
million units in a private placement transaction for gross proceeds of
$2,000,000. The placement was sold to an accredited individual 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 $2.00 per
unit. Each unit was comprised of one share of common stock, half of a Class E
warrant to purchase common stock and half of a Class F warrant to purchase
common stock. The Class E warrants have an exercise price of $2.00
and are for a five year period with a call provision by the Company when the
Companys share price trades above $4.50 for twenty consecutive days. The Class F
warrants have an exercise price of $2.00 and a five year term, with no call
provision. The shares of common stock and the shares underlying the warrants
have been registered under the Securities Act of 1933, as amended, and may be
offered or sold in the United States. The Company incurred $158,645 of offering
expenses in connection with the offering, netting the Company $1,841,355 in
proceeds. Additionally, the Company engaged a number of selling agents in
connection with the sale of the private placement and paid compensation of
55,000 warrants for their efforts.
NOTE 3 STOCK OPTIONS
Effective July 1, 2003, the shareholders of the Company adopted
the 2003 Stock Incentive Plan (the Plan).
The Plan includes incentive and non-qualified stock options and
restricted stock grants. The initial
maximum number of shares of common stock available for grants under the Plan
was 800,000 shares. The Plan provides that with respect to incentive stock
options (ISO) the option price per share must be at least the fair market
value (as determined by the Compensation Committee or, in lieu thereof, the
Board of Directors) of the common stock on the date the stock option is granted
or based on daily quotes from an exchange or quotation system designated by the
Compensation Committee as the primary market for the shares. Under the Plan, if an ISO is granted to an
employee who owns more than 10% of the total combined
F-12
voting power of all classes of stock of the Company or any of its
subsidiaries, then the option price must be at least 110% of the fair market
value of the stock subject to the option, and the term of the option must not
exceed 5 years from the date of grant.
Under the Plan, if for any reason, a change in control of the Company
occurred, all shares subject to the Plan immediately become vested and
exercisable. On October 15, 2004, the shareholders approved an amendment
to the Plan to increase the number of shares available under the Plan to
1,000,000 shares of common stock.
On
July 22, 2005, the shareholders approved an amendment to the Plan to
increase the number of shares available under the Plan to 1,800,000 shares of
common stock, and again on March 7, 2007 and on November 12, 2007 the
shareholder approved an increase in the Plan bringing the total shares
available under the Plan to 3,000,000.
A summary of the status of the Plan for the years ended December 31,
2007 and 2006, together with changes during each of the years then ended, is
presented in the following table:
2003 Stock Incentive Plan
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Qualified
|
|
Non-qualified
|
|
|
|
Exercise
|
|
Exercise
|
|
|
|
Options
|
|
Options
|
|
Total
|
|
Price Range
|
|
Price
|
|
Balances, January 1, 2006
|
|
688,000
|
|
809,350
|
|
1,497,350
|
|
$1.28 to $5.00
|
|
$
|
3.40
|
|
Granted
|
|
100,000
|
|
201,000
|
|
301,000
|
|
$0.45 to $3.20
|
|
$
|
1.25
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006
|
|
788,000
|
|
1,010,350
|
|
1,798,350
|
|
$0.45 to $5.00
|
|
$
|
2.94
|
|
Granted
|
|
370,000
|
|
400,000
|
|
770,000
|
|
$1.00 to $2.19
|
|
$
|
1.47
|
|
Forfeited
|
|
(146,500
|
)
|
(38,050
|
)
|
(184,550
|
)
|
$0.49 to $5.00
|
|
$
|
3.57
|
|
Balances, December 31, 2007
|
|
1,011,500
|
|
1,372,300
|
|
2,383,800
|
|
$0.45 to $5.00
|
|
$
|
2.34
|
|
Number of options exercisable At
December 31, 2007
|
|
730,585
|
|
1,183,883
|
|
1,914,469
|
|
$0.45 to $5.00
|
|
$
|
2.51
|
|
The following table sets
forth the exercise price range, number of shares, weighted average exercise
price and remaining contractual lives at December 31, 2007:
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Number of
|
|
Weighted
|
|
Exercise
|
|
Number of
|
|
Average
|
|
Contractual
|
|
Shares
|
|
Average
|
|
Prices
|
|
Outstanding
|
|
Exercise Price
|
|
Life (months)
|
|
Exercisable
|
|
Exercise Price
|
|
5.00
|
|
518,700
|
|
$
|
5.00
|
|
25.2
|
|
510,242
|
|
$
|
5.00
|
|
3.20
|
|
145,000
|
|
$
|
3.20
|
|
31.8
|
|
145,000
|
|
$
|
3.20
|
|
2.19 to 2.55
|
|
290,000
|
|
$
|
2.25
|
|
49.2
|
|
196,885
|
|
$
|
2.28
|
|
1.28 to 1.80
|
|
900,100
|
|
$
|
1.54
|
|
37.8
|
|
620,319
|
|
$
|
1.54
|
|
1.00 to 1.15
|
|
410,000
|
|
$
|
1.01
|
|
52.4
|
|
322,022
|
|
$
|
1.01
|
|
0.45 to 0.65
|
|
120,000
|
|
$
|
0.52
|
|
42.8
|
|
120,000
|
|
$
|
0.52
|
|
|
|
2,383,800
|
|
|
|
|
|
1,914,469
|
|
|
|
At
December 31, 2007, 616,200 options were available for future grants under
the Plan.
Effective March 7, 2007, the shareholders of the Company adopted
the 2006 Distributor Stock Incentive Plan (the Plan). Options granted under
the 2006 Distributor Stock Incentive Plan will be nonqualified options, as
defined under the Internal Revenue Code. The expiration date, maximum number of
F-13
shares
purchasable, vesting provisions and any other provisions of options granted
under the 2006 Distributor Stock Incentive Plan will be established at the time
of grant. The 2006 Distributor Stock Incentive Plan will be administered by the
Board of the Company. The term of the option will be three years unless that
administrator designates a different term for a specific award, but no options
may be granted for terms of greater than ten years. Options will vest and
become exercisable in whole or in one or more installments at such time as may
be determined by the plan administrator. The exercise price may not be less
than the fair market value of the Common Stock on the date of grant. The
initial maximum number of shares of common stock available for grants under the
Plan was 500,000 shares, and on November 12, 2007, this was increased to
1,500,000.
A summary of the status of the Plan for the year ended December 31,
2007, together with changes during each of the years then ended, is presented
in the following table:
2006 Distributor Option Plan
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Non-qualified
|
|
|
|
Exercise
|
|
Average Exercise
|
|
|
|
Options
|
|
Total
|
|
Price Range
|
|
Price
|
|
Balances, January 1, 2007
|
|
|
|
|
|
|
|
|
|
Granted
|
|
84,500
|
|
84,500
|
|
$0.49 to $1.90
|
|
$
|
1.21
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007
|
|
84,500
|
|
84,500
|
|
$0.45 to $5.00
|
|
$
|
1.21
|
|
Number of options exercisable At
December 31, 2007
|
|
84,500
|
|
84,500
|
|
$0.45 to $5.00
|
|
$
|
1.21
|
|
The following table sets
forth the exercise price range, number of shares, weighted average exercise
price and remaining contractual lives at December 31, 2007:
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Number of
|
|
Weighted
|
|
Exercise
|
|
Number of
|
|
Average
|
|
Contractual
|
|
Shares
|
|
Average
|
|
Prices
|
|
Outstanding
|
|
Exercise Price
|
|
Life (months)
|
|
Exercisable
|
|
Exercise Price
|
|
$ 0.49 to
$1.90
|
|
84,500
|
|
$
|
1.21
|
|
29.1
|
|
84,500
|
|
$
|
1.21
|
|
|
|
84,500
|
|
|
|
|
|
84,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, 1,415,500 options were available for future
grants under the Plan.
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
F-14
|
|
December 31,
2007
|
|
December 31,
2006
|
|
Furniture & fixtures
|
|
$
|
50,963
|
|
$
|
50,963
|
|
Office equipment
|
|
15,456
|
|
18,438
|
|
Software
|
|
245,912
|
|
245,912
|
|
Leasehold improvements
|
|
121,605
|
|
121,605
|
|
|
|
433,936
|
|
436,918
|
|
Accumulated depreciation
|
|
(352,531
|
)
|
(312,975
|
)
|
|
|
|
|
|
|
|
|
$
|
81,405
|
|
$
|
123,943
|
|
Depreciation expense was $46,372 and $41,326
for the years ended December 31, 2007 and 2006, respectively.
NOTE 5 INTANGIBLE ASSETS
The Company has incurred costs to trademark eight of its current
products and marketing nomenclatures.
During the year, the Company accelerated the amortization on six of the
trademarks which related to products that the Company no longer marketed.
Patents and trademarks are being amortized over a period of 15 years.
Amortization expense was $11,661 and $25,007 for the years ended December 31,
2007 and December 31, 2006, respectively.
Intangible assets are:
|
|
December 31,
2007
|
|
December 31,
2006
|
|
Patents and trademarks
|
|
$
|
68,460
|
|
$
|
50,052
|
|
Accumulated amortization and Impairment
|
|
(50,501
|
)
|
(38,840
|
)
|
|
|
|
|
|
|
|
|
$
|
17,959
|
|
$
|
11,212
|
|
NOTE 6 INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS
109). Under the provisions of SFAS 109,
a deferred tax liability or asset (net of a valuation allowance) is provided in
the financial statements by applying the provisions of applicable laws to
measure the deferred tax consequences of temporary differences that will result
in net taxable or deductible amounts in future years as a result of events
recognized in the financial statements in the current or preceding years.
F-15
Income tax provision consisted of the following:
|
|
2007
|
|
2006
|
|
Current:
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
Federal
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Provision
|
|
$
|
|
|
$
|
|
|
Reconciliation of effective tax rate:
|
|
2007
|
|
2006
|
|
Federal taxes at statutory rate
|
|
34.0000
|
%
|
34.00
|
%
|
State taxes, net of federal benefit
|
|
2.5600
|
%
|
3.06
|
%
|
Permanent items
|
|
(5.4800
|
)%
|
|
|
Generation of general business credits
|
|
|
%
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
(31.0800
|
)%
|
(37.06
|
)%
|
Effective income tax rate
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Companys
deferred tax assets and liabilities are as follows:
Deferred tax assets:
|
|
|
|
|
|
Net operating losses
|
|
$
|
5,160,023
|
|
$
|
4,533,000
|
|
Other
|
|
701,672
|
|
(45,000
|
)
|
Gross deferred tax assets
|
|
5,861,695
|
|
4,488,000
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
|
|
|
Net deferred tax assets before valuation
allowance
|
|
5,861,695
|
|
4,488,000
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
(5,861,695
|
)
|
(4,488,000
|
)
|
Deferred Tax Assets (Liabilities), Net
|
|
$
|
|
|
$
|
|
|
At December 31, 2007 approximately $13,923,000 of net operating
loss carryforwards for federal income tax purposes were available to offset
future taxable income through the year 2027.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become realizable. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based upon the limited history of the Company
and projections for future taxable income over the periods in which the
deferred tax assets are realizable, management believes it
F-16
is more likely
than not that the Company will not realize the benefits of these deductible
differences and therefore a full valuation allowance against the deferred tax
assets has been established.
The Tax Reform Act of 1986 contains provisions that limit the
utilization of net operating loss and tax credit carryforwards if there has
been a change of ownership as described in Section 382 of the Internal
Revenue Code. Such an analysis has not
been performed by the Company to determined the impact of these provisions on
the Companys net operating losses, though management believes the impact would
be minimal, if any. A limitation under
these provisions would reduce the amount of losses available to offset future
taxable income of the Company.
NOTE 7 COMMITMENTS
We lease our current corporate office space from Arnold Greenberg, the
father of our Founder, Sanford D. Greenberg. We paid $38,830 and $42,780 in
rent for the years ended December 31, 2006 and 2007, respectively. Our
current lease at $3,900 per month expired at the end of March 2006, and
has been replaced with a month to month lease at the same amount.
The Company has various operating leases for copiers, telephone and
computer equipment that range from 1 to 5 years in length. Rental expenses for these operating leases
were $64,869 and $102,856 for the years ended December 31, 2007 and 2006,
respectively. Minimum future rentals under these agreements at December 31,
2007 are as follows:
Year
|
|
|
|
2008
|
|
$
|
61,154
|
|
2009
|
|
22,404
|
|
2010
|
|
22,404
|
|
2011
|
|
18,477
|
|
2012
|
|
11,245
|
|
|
|
$
|
135,684
|
|
|
|
|
|
|
|
The Company maintains employment agreements
with certain key management. The
agreements provide for minimum base salaries, eligibility for stock options and
performance bonuses and severance payments.
NOTE 8 RELATED PARTY TRANSACTIONS
As further described in Note 7, the Company leases office space from a
relative of the Companys founder.
NOTE 9 SUBSEQUENT EVENTS
On February 19, 2008
XELR8 Holdings, Inc. (the Company) announced that it had sold 500,000
units of its securities at $1 per unit to a group of accredited investors.
Each unit consists of one share of common stock and six/tenths (6/10) of
a Class G Warrant to purchase common stock. As a part of the private
placement terms, the Company agreed to reduce the exercise price of its Series E
Warrants and Series F Warrants previously purchased by the same investors
in a prior 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 Class 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 Class 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.
F-17
Xelr8 Holdings (AMEX:BZI)
Graphique Historique de l'Action
De Mai 2024 à Juin 2024
Xelr8 Holdings (AMEX:BZI)
Graphique Historique de l'Action
De Juin 2023 à Juin 2024