Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
Quarterly Report Pursuant to Section 13
or 15(d) of the
Securities
Exchange Act of 1934
For
the quarterly period ended June 30, 2008
or
o
Transition Report Pursuant to Section 13
or 15 (d) of
the
Securities Exchange Act of 1934
Commission file No. 000-50875
XELR8 HOLDINGS, INC.
(Exact name of small business issuer as specified
in its charter)
Nevada
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84-1575085
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(State of incorporation)
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(I.R.S. Employer Identification Number)
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480 South Holly Street
Denver, CO 80246
(Address of principal
executive offices)
(303)-316-8577
(Issuers telephone number)
Indicate by check
mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the proceeding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES
x
NO
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act. (Check one):
Large
accelerated filer
o
|
Accelerated
filer
o
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Non-accelerated
filer
o
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Smaller
reporting company
x
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(Do not check if
a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES
o
NO
x
As
of August 4, 2008 the Company had 15,697,170 shares of its $.001 par value
common stock issued and outstanding.
Table
of Contents
Part I FINANCIAL
INFORMATION
Item 1
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
XELR8 HOLDINGS, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
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June 30,
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December 31,
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2008
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2007
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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2,263,673
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$
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2,245,858
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Accounts receivable, net of allowance for doubtful accounts of
$10,130 and $12,231, respectively
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2,390
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7,460
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Inventory, net of allowance for obsolescence of $181,256 and
$189,403, respectively
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322,478
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370,843
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Prepaid expenses and other current assets
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498,172
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329,015
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Total current assets
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3,086,713
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2,953,176
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Intangible assets, net
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17,345
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17,959
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Property and equipment, net
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57,201
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81,405
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Total assets
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$
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3,161,259
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$
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3,052,540
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
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Accounts payable and accrued expenses
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$
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1,283,923
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$
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832,697
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Short-term note payable
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Total Liabilities
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1,283,923
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832,697
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Commitments and Contingencies
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SHAREHOLDERS EQUITY (Note 2):
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Preferred stock, authorized 5,000,000 shares, $.001 par value, none
issued or outstanding
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Common stock, authorized 50,000,000 shares, $.001 par value,
15,697,170 and 15,197,170 shares issued and outstanding respectively
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15,697
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15,197
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Additional paid in capital
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23,715,986
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22,696,657
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Accumulated (deficit)
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(21,854,347
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)
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(20,492,011
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)
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Total shareholders equity
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1,877,336
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2,219,843
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Total liabilities and shareholders equity
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$
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3,161,259
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$
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3,052,540
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The accompanying notes are an integral part of these condensed
consolidated financial statements
2
Table of
Contents
XELR8 HOLDINGS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
Three and Six Months Ended June 30, 2008 and 2007
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For the Three
Months Ended
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For the Six
Months Ended
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June 30, 2008
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June 30, 2007
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June 30, 2008
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June 30, 2007
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Net sales
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$
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2,276,415
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$
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1,386,395
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$
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3,854,199
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$
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2,255,470
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Cost of goods sold
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523,482
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366,939
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883,060
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672,531
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Gross profit
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1,752,933
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1,019,456
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2,971,139
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1,582,939
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Operating expenses:
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Selling and marketing expenses
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1,614,161
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967,853
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2,704,953
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1,597,119
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General and administrative expenses
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752,173
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937,289
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1,621,058
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1,786,810
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Research and development expenses
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2,087
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4,517
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2,512
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5,130
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Depreciation and amortization
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11,844
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22,497
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23,687
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34,276
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Total operating expenses
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2,380,265
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1,932,156
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4,352,210
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3,423,335
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Net (loss) from operations
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(627,332
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)
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(912,700
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)
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(1,381,071
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)
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(1,840,396
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)
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Other income (expense)
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Interest income
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14,358
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31,917
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33,636
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35,043
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Other expenses
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(13,770
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)
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(Loss) on disposal of asset
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(1,130
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)
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Interest (expense)
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(439,537
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)
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Total other income (expense)
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14,358
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31,917
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18,736
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(404,494
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)
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Net (loss)
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$
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(612,974
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)
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$
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(880,783
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)
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$
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(1,362,335
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)
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$
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(2,244,890
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)
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Net (loss) per common share
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Basic and diluted net (loss) per share
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$
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(0.04
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)
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$
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(0.06
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)
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$
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(0.09
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)
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$
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(0.18
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)
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Weighted average common shares outstanding, basic and diluted
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15,697,170
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14,603,763
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15,515,851
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12,699,948
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The accompanying notes are an integral part of these condensed
consolidated financial statements
3
XELR8 HOLDINGS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 2008 and 2007
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June 30
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June 30
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2008
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2007
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Cash flows from operating activities:
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Net income (loss)
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$
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(1,362,335
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)
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$
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(2,244,890
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)
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Adjustments to reconcile
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Depreciation and amortization
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23,687
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34,276
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Loss on disposal of asset
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1,130
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Stock and stock options issued for services
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566,856
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1,011,132
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Expense related to anti-dilution of warrants
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13,770
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Interest expense and amortization related to bridge loan financing
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428,889
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Change in allowance for doubtful accounts
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(2,101
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)
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5,629
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Change in allowance for inventory obsolesence
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(8,147
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)
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41,661
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Change in allowance for product returns
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26,147
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30,866
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Changes in assets and liabilities:
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Accounts receivable
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7,171
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(8,835
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)
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Inventory
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56,512
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16,634
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Other current assets
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(169,157
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)
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(17,601
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)
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Accounts payable and accrued expenses
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425,079
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239,415
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Net cash (used) by operating activities
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(421,388
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)
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(462,824
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)
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Cash flows from investing activities:
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Proceeds from maturity of investments
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Capital expenditures
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(10,408
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)
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Net cash (used) by investing activities
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(10,408
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)
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Cash flows from financing activites:
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Proceeds from bridge loan financing
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250,000
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Repayments of bridge financing
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(500,000
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)
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Offering costs
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(60,797
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)
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(367,166
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)
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Issuance of common stock
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500,000
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4,000,000
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Net cash provided from financing activities
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439,203
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3,382,834
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NET INCREASE (DECREASE) IN CASH
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17,815
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2,909,602
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CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
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2,245,858
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76,147
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CASH AND CASH EQUIVALENTS, END OF THE PERIOD
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$
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2,263,673
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$
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2,985,749
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SUPPLEMENTAL CASH FLOW DISCLOSURES
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Cash paid for interest
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$
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$
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13,425
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Stock issued for satisfaction of accrued compensation expense
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$
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$
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540,000
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Deferred offering costs applied against proceeds from offering
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$
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$
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25,000
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The
accompanying notes are an integral part of these condensed consolidated
financial statements
4
XELR8 HOLDINGS, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - ORGANIZATION,
OPERATIONS AND BASIS OF PRESENTATION
Organization and Business
The condensed
consolidated financial statements include those of XELR8 Holdings, Inc.
(formerly VitaCube Systems Holdings, Inc.), and its wholly owned
subsidiaries, VitaCube Systems, Inc., XELR8, Inc. (formerly VitaCube
Network, Inc.), XELR8 International, Inc. and XELR8 Canada, Corp.
Collectively, they are referred to herein as the the Company.
The Company is in the
business of selling, marketing and distributing nutritional supplement products
and functional foods. Our product lines consist of a liquid dietary
supplement, a sports hydration drink, a protein shake, a sports energy drink, a
meal replacement drink, a functional food snack and a full product line of
vitamins and minerals in the form of tablets, softgels or capsules, all of
which are manufactured using our proprietary product formulations.
The Company sells and
markets the products through a direct selling channel, in which independent
distributors sell our products through a network of customers and other
distributors. These activities are conducted through XELR8, Inc., a
wholly owned Colorado corporation, formed on July 9, 2003. In
addition, we sell our products directly to professional and Olympic athletes
and professional sports teams through VitaCube Systems, Inc. To date there
have been no activities in XELR8 International, Inc. and XELR8 Canada,
Corp.
Basis of Presentation
The condensed interim
financial statements included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. The condensed
interim financial statements and notes thereto should be read in conjunction
with the financial statements and the notes thereto, included in the Companys
Annual Report to the Securities and Exchange Commission for the fiscal year
ended December 31, 2007, filed on Form 10-KSB on March 28, 2008.
The accompanying
condensed interim financial statements have been prepared, in all material
respects, in conformity with the standards of accounting measurements set forth
in Accounting Principles Board Opinion No. 28 and reflect, in the opinion
of management, all adjustments necessary to summarize fairly the financial
position and results of operations for such periods in accordance with
accounting principles generally accepted in the United States of America.
All adjustments are of a normal recurring nature. The results of operations for
the most recent interim period are not necessarily indicative of the results to
be expected for the full year.
Principles of Consolidation
The accompanying
financial statements include the accounts of the Company and its wholly owned
subsidiaries VitaCube Systems, Inc., XELR8, Inc., XELR8 International, Inc.
and XELR8 Canada, Corp. All inter-company accounts and transactions have
been eliminated in the preparation of these consolidated statements.
Use of Estimates
The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Management believes
that the estimates utilized in the preparation of financial statements are
prudent and reasonable. Actual results
could differ from these estimates.
5
Table of Contents
Revenue Recognition
The Company ships its
products by common carrier and receives payment in the form of cash, credit
card or approved credit terms. In May 2004, the Company revised its
product return policy to provide a 60-day money back guarantee on orders placed
by first-time customers and distributors. After 60 days and for all
subsequent orders placed by customers and distributors, the Company allows resalable
products to be returned within 12 months of the purchase date for a 100% sales
price refund, subject to a 10% restocking fee. Since August 2003,
the Company has experienced monthly returns ranging from 0.7% to 7.7% of net
sales. Sales revenue and estimated returns are recorded when the
merchandise is shipped since performance by the Company is considered met when
products are in the hands of the common carrier. Amounts received for unshipped
merchandise are recorded as customer deposits and are included in accrued
liabilities.
Inventory
Inventory is stated at
the lower of cost or market on a FIFO (first-in first-out) basis.
Provision is made to reduce excess or obsolete inventory to the estimated net
realizable value. The Company purchases for resale a liquid nutrition
drink, a sports hydration drink, a sports energy drink, a protein shake, an
appetite suppressant chew and other vitamins and nutritional supplements, which
it packages in various forms and containers.
Inventory is comprised of
the following:
|
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June 30, 2008
|
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December 31, 2007
|
|
Raw materials
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$
|
67,626
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|
$
|
58,746
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Finished goods
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|
436,108
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|
501,500
|
|
Provision for obsolete inventory
|
|
(181,256
|
)
|
(189,403
|
)
|
|
|
$
|
322,478
|
|
$
|
370,843
|
|
A summary of the reserve
for obsolete and excess inventory is as follows:
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Balance as of January 1
|
|
$
|
189,403
|
|
$
|
41,655
|
|
Addition to provision
|
|
11,339
|
|
216,760
|
|
Write-off of obsolete inventory
|
|
(19,486
|
)
|
(69,012
|
)
|
|
|
$
|
181,256
|
|
$
|
189,403
|
|
Income Taxes
The Company accounts for
income taxes in accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS 109). Under the asset and liability
method of SFAS 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled.
In June 2006, the
Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainties in Income Taxes, an interpretation of SFAS No. 109,
Accounting for Income Taxes (FIN 48). FIN 48 prescribes a comprehensive
model for how companies should recognize, measure, present, and disclose in
their financial statements uncertain tax positions taken or expected to be
taken on a tax return. Under FIN 48, tax positions must initially be recognized
in the financial statements when it is more likely than not the position will
be sustained upon examination by the tax authorities. Such tax positions must
initially and subsequently be measured as the largest amount of tax benefit
that has a greater than 50% likelihood of being realized upon ultimate
settlement with the tax authority assuming full knowledge of the position and
relevant facts. FIN 48 is effective for fiscal years beginning after December 15,
2006.
FIN 48 became effective
for the Company on January 1, 2007. The cumulative effect of adopting FIN
48 on January 1, 2007 has been recorded net in deferred tax assets, which
resulted in no FIN 48 liability on the balance sheet. The total amount of
unrecognized tax benefits as of the date of adoption was zero. There are open
statutes of limitations for taxing authorities in federal and state
jurisdictions to audit the Companys tax returns from 2006 through the current
period. The Companys policy is to account for income tax related interest and
penalties in income tax expense in the statement of operations. There have been
no income tax related interest or penalties assessed or recorded. Because the
6
Table of
Contents
Company has provided a
full valuation allowance on all of its deferred tax assets, the adoption of FIN
48 had no impact on the Companys effective tax rate.
Stock-Based Compensation
Effective January 1,
2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004),
Share-Based Payment
(SFAS 123R),
which requires compensation costs related to share-based transactions, including
employee stock options, to be recognized in the financial statements based on
fair value. SFAS 123R revises Statement of Financial Accounting Standards 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 six months ended June 30, 2008, was $467,588 compared with the
$1,011,132 for the six months ended June 30, 2007.
The Company uses a Black-Scholes
option-pricing model (Black-Scholes model) to estimate the fair value of the
stock option grant. The use of a valuation model requires the Company to make
certain assumptions with respect to selected model inputs. Expected volatility
was calculated based on the historical volatility of the Companys stock price.
In the future the average expected life will be based on the contractual term
of the option and expected employee exercise and post-vesting employment
termination behavior. Currently it is based on the simplified approach provided
by 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:
|
|
Six months ended
|
|
Six months ended
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
Stock price volatility
|
|
94.5
- 96.4
|
%
|
98.5%
- 98.7
|
%
|
Risk-free rate of return
|
|
1.55
3.09
|
%
|
4.91%-
4.95
|
%
|
Annual dividend yield
|
|
0
|
%
|
0
|
%
|
Expected life
|
|
1.5
to 4.5 Years
|
|
1.5
to 4.5 Years
|
|
Net Loss Per Share
Earnings
per share require presentation of both basic earnings per common share and
diluted earnings per common share. Since
the Company has a net loss for all periods presented since inception, common
stock equivalents are not included in the weighted average calculation since
their effect would be anti-dilutive.
NOTE 2 - SHAREHOLDERS EQUITY
The authorized capital
stock of the Company consists of 50,000,000 shares of common stock at $.001 par
value and 5,000,000 shares of preferred stock at $.001 par value. The
holders of the common stock are entitled to receive, when and as declared by
the Board of Directors, dividends payable either in cash, in property or in
shares of the common stock of the Company. Dividends have no cumulative
rights and dividends will not accumulate if the Board of Directors does not
declare such dividends. Through March 31, 2008, no dividends have
been declared or paid by the Company.
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On February 19,
2008, the Company announced that it had completed the sale of one-half million
units in a private placement transaction for gross proceeds of $500,000. The
placement was sold to accredited individuals and institutional investors. The
units were sold under the exemption provided in Regulation D of Rule 506
and Section 415 of the Securities Act. The terms of the private placement
provided for a unit offering at $1.00 per unit. Each unit consists of one
share of common stock and six/tenths (6/10) of a Class G Warrant to
purchase common stock. In connection with the private placement, the Company agreed
to reduce the exercise price of certain of its Series E Warrants and Series F
Warrants previously purchased by the same investors in the May 8, 2007
private placement. The Class G Warrants have an exercise price of $1.50
and are exerciseable for a five year period with a call provision by the
Company if the Companys share price closes above $2.50 for twenty consecutive
days. The Amended Series E Warrants have an exercise price of $1.50 and
are exerciseable for a five year period, with a call provision by the Company
if the Companys share price closes above $3.00 for twenty consecutive days.
The Amended Series F Warrants have an exercise price of $1.50 and are
exerciseable for a five year period, with a call provision by the Company if
the Companys share price closes above $4.50 for twenty consecutive days. The
shares of common stock have not been registered under the Securities Act of
1933, as amended. The Company has one year from the closing date to file a
registration statement for the shares underlying the Class G Warrants. If
the Company does not have an effective registration statement for the common
stock underlying the Amended Series E and F Warrants within one year, the
holder would receive cashless exercise rights. The Company incurred $60,797
of offering expenses in connection with the offering, netting the Company
$439,203 in proceeds. Additionally, the Company engaged a number of selling
agents in connection with the sale of the private placement and paid
compensation of 25,000 warrants for their efforts. As a result of the offering,
and the lowering of the exercise price of the Original Series E and Series F
warrants, the Company recorded a dilution expense of $13,770 for the Investors
who participated in the May 8, 2007 offering, but not in the February 19,
2008 placement. On March 6, 2008 the American Stock Exchange approved the
issue of the shares.
Item 2 MANAGEMENTS DISCUSSION AND ANAYLSIS OR PLAN OF
OPERATION
Cautionary Note Regarding Forward-Looking
Statements
This report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934 and is subject to
the safe harbor created by those sections. We intend to identify
forward-looking statements in this report by using words such as believes, intends,
expects, may, will, should, plan, projected, contemplates, anticipates,
estimates, predicts, potential, continue, or similar terminology. These
statements are based on our beliefs as well as assumptions we made using
information currently available to us. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise. Because these statements reflect our
current views concerning future events, these statements involve risks,
uncertainties, and assumptions. Actual future results may differ significantly
from the results discussed in the forward-looking statements. These risks include
changes in demand for our products, changes in the level of operating expenses,
our ability to expand our network of distributors, changes in general economic
conditions that impact consumer behavior and spending, product supply, the
availability, amount, and cost of capital to us and our use of such capital,
and other risks discussed in this report. Additional risks that may affect our
performance are discussed under Risk Factors Associated with Our Business in
our Form 10-KSB for the fiscal year ended December 31, 2007. Readers
are cautioned not to place undue reliance on the forward-looking statements
contained in this report
and in Registration
Statements on Form S-8 declared effective on June 11, 2008 and June 17,
2008. Readers are cautioned not to place undue reliance on the forward-looking
statements contained in this report.
Overview
We are in the business of
developing, selling, marketing and distributing nutritional supplement products
and functional foods. We market our products primarily through direct selling
or network marketing, in which independent distributors sell our products. In
addition, we sell our products directly to professional and Olympic athletes
and professional sports teams.
Our product lines consist
of 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
8
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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 June 30, 2008 we had 6,264 independent distributors
and 4,370 customers (excluding professional athletes and sports teams) who had
purchased our products within the prior twelve months.
We maintain an inventory
of our products to insure that we can timely fill our customer orders. During
2007 we entered into a five year manufacturing agreement with Arizona Packaging
and Production, who manufactures our flagship product, Bazi. The terms of the
agreement provide that they be the exclusive manufacturer of this product and
also stipulate certain prices, quantities and delivery timelines. As a result
the lead time on this product has been reduced to 6 weeks. Our inventory, net
of our allowance for obsolescence, was $322,478 at June 30, 2008, a
decrease from $370,843 at December 31, 2007.
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 six months ended June 30, 2008, it
is appropriately classified as a current asset based on the ongoing
implementation of our new single product marketing plan which is designed to
increase our distributor base and sales.
Since the launch of our
liquid dietary supplement, Bazi on January 12, 2007, we have seen the
demand for all of our legacy products (all products other than Bazi) decrease
as customers favored the convenience and simplicity of Bazi. In February 2008
we announced our decision to focus our sales and marketing efforts around this
single product. Both of these factors resulted in taking a charge against
operations for obsolete inventory of $216,760 for the year ended December 31,
2007. Our allowance for obsolete inventory decreased from $189,403 at December 31,
2007 to $181,256 at June 30, 2008 as we started to dispose of our legacy
products. We believe our reserve for obsolescence is reasonable because (i) substantially
all of our Bazi inventory has been recently purchased, and (ii) the shelf
life of our legacy products averages three years and Bazi is a year.
Our network marketing
program is designed to provide an incentive for independent distributors to
build, maintain and motivate a sales organization of customers and other
independent distributors to enhance earning potential. Our independent
distributors are compensated with commissions and bonuses on sales generated
through their downline organization. Independent distributors advance in
distributor levels as they develop their sales organization and increase their
sales volume, which increases their compensation.
We recognize revenue when
products are shipped to our customers. Revenue is reduced by product returns at
the time we take the product either back into inventory or dispose of it. In
addition, we estimate a reserve total for future returns. Cost of our sales
consists of expenses directly related to the production and distribution of the
products and certain sales materials. Included in the sales and marketing
expenses are independent distributor commissions, bonus and incentives along
with other general selling expenses. We expect our independent distributor
expenses, as a percentage of net revenues, to decrease as independent
distributors receive less additional incentives and rely on the incentives in
our direct sales program. General and administrative expenses include salaries
and benefits, rent and building expenses, legal, accounting, telephone and
professional fees.
Our revenue will depend
on the number and productivity of our independent distributors, who purchase
products and sales materials from us for resale to their customers or for
personal use. Because we will distribute substantially all of our products
through our independent distributors, our failure to retain our existing
distributors and recruit additional distributors could have an adverse effect
on our revenue.
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
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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 6 months.
Critical Accounting Policies and Estimates
Discussion and analysis
of our financial condition and results of operations are based upon financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates; including those related to collection of receivables, inventory
obsolescence, sales returns and non-monetary transactions such as stock and
stock options issued for services and beneficial conversion features of notes
payable. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting
policies affect our more significant judgments and estimates used in the
preparation of our financial statements.
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 June 30,
2008, orders shipped that are subject to our 60-day money back guarantee were
approximately $492,423. 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 June 30, 2008 and December 31,
2007 was $102,340 and $76,193, respectively. To date, product expiration dates
have not played any role in product returns, and we do not expect they will in
the future because it is unlikely that we will ship product with an expiration
date earlier than the latest allowable product return date.
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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 $181,256 for obsolete inventory as of June 30, 2008 and $189,403
as of December 31, 2007.
Stock Based Compensation.
Many equity instrument transactions are
valued based on pricing models such as Black-Scholes-Merton, which require
judgments by us. Values for such transactions can very widely and are often
material to the financial statements.
Effective January 1,
2006, we adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS 123R), which requires
compensation costs related to share-based transactions, including employee
stock options, to be recognized in the financial statements based on fair
value. SFAS 123R revises SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) and supersedes Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees. In March 2005,
the Securities and Exchange Commission (the SEC) issued Staff Accounting
Bulletin No. 107 (SAB 107) regarding the SECs interpretation of
SFAS 123R and the valuation of share-based payments for public companies.
We have applied the provisions of SAB 107 in its adoption of
SFAS 123R. We adopted the provisions of SFAS 123R using the modified
prospective transition method. In accordance with this transition method, the
companys consolidated financial statements for prior periods have not been
restated to reflect the impact of SFAS 123R. Under the modified prospective
transition method, share-based compensation expense for the first quarter of
2006 includes compensation expense for all share-based compensation awards granted
prior to, but for which the requisite service has not yet been performed as of January 1,
2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123. Share-based compensation expense for all
share-based compensation awards granted after January 1, 2006 is based on
the grant date fair value estimated in accordance with the provisions of
SFAS 123R.
Results of Operations
For
the three months ended June 30, 2008 compared to the three months ended June 30,
2007.
The discussion
below first presents the results of the quarter ended June 30, 2008
followed by the results of the quarter ended June 30, 2007
Net sales.
Net sales were $2,276,415,
an increase of 64% compared to $1,386,395. The
increase in net sales can be attributed to continued
success of the Bazi product, the sales promotions that were held in the
quarter and the resulting increase in the number of independent distributors
and customers.
The percentage that each product category
represented of our net sales is as follows:
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
Product Category
|
|
% of Sales
|
|
% of Sales
|
|
Bazi
|
|
92
|
%
|
83
|
%
|
EAT
|
|
0
|
%*
|
1
|
%
|
DRINK
|
|
1
|
%
|
3
|
%
|
SNACK (formerly sZone® snack)
|
|
0
|
%*
|
0.5
|
%
|
HYDRATE (formerly eForce® sports drink)
|
|
1
|
%
|
2
|
%
|
Vitamins and minerals, including SUPPORT
|
|
1
|
%
|
2
|
%
|
BUILD (formerly VitaPro® nutrition shake)
|
|
0
|
%*
|
1.5
|
%
|
Other-educational materials, apparel
|
|
5
|
%
|
7
|
%
|
*
- less than 1%
Gross Profit.
Gross profit increased to
$1,752,933 compared to $1,019,456, an increase of 72%. Gross profit as a percentage of revenue
(gross margin) increased to 77% from 74%.
The increase
in the gross margins was a result of the increased sales of the new Bazi
product that has a higher gross margin as compared to the legacy products. The
increase
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was offset as a result of
the scrap and obsolescence charges resulting from new marketing materials for
Bazi compared with the XELR8 WHAT MOVES YOU marketing materials.
Sales and marketing expenses.
Sales and marketing
expenses increased to $1,614,161 from $967,853, an increase of 67%.
The increase in sales and marketing expenses is a result
of the increased payments to our independent distributors as a result of
increased sales. The independent distributor earnings decreased to 42% of
net sales for the current period compared to 43% for the comparable
period. Additionally, the Sales and Marketing increase was primarily due
to the payment for the termination a marketing consulting services agreement
that the Company entered into in 2003 with Mineral Deposits. The original
agreement had provided for Mineral Deposits to provide consulting services in
exchange for a monthly payment based on the Companys sales, as long as the
Company continued to sell products through a multi-level marketing system of
independent distributors. In exchange for a termination of the consulting
services agreement, which provided for monthly payments equal to ½% of the
Companys net revenue, the Company paid Mineral Deposits during the quarter,
$62,500 cash and 100,000 options with an exercise price of $1.18 per share.
General and administrative expenses.
General and
administrative expenses were $752,173, a decrease of 20% compared to
$937,289.
The decrease is a result of $350,000 in stock based
compensation that the Company recorded in the prior year period for the grant
of stock by a principal shareholder to the employees of the Company. Under the
guidance issued by the Securities and Exchange Commission in Staff Accounting
Bulletin 107 (SAB 107), share-based payments issued to an employee of a
reporting entity by a related party or other holder of economic interest in the
entity as compensation for services provided to the entity are to be recorded
as a compensation expense by the entity. This decrease was partially, offset by
higher executive compensation as a result of the restructured employment
agreement with Mr. Pougnet, our Chief Executive Officer, and Mr. Ridley,
our President, and costs associated with being a pubic company.
Depreciation and Amortization Expense.
The expense was $11,844
compared to $22,497, a decrease of 47%. As a result of the continued success of
the Bazi product we evaluated the carrying value of the trademarks associated
with the legacy products that the Company had and fully amortized these
intangible balances.
Net Loss.
Our net loss was $612,974, or ($0.04) per
share, compared to $880,783, or ($0.06) per share, a decreased loss of $.02 per
share, or 30%, respectively. The
decreased net loss is associated with the increases in sales and gross margin.
For
the six months ended June 30, 2008 compared to the six months ended June 30,
2007.
The discussion below first presents the results of the six
months ended June 30, 2008 followed by the results of the six months ended
June 30, 2007
Net sales.
Net sales were $3,854,199,
an increase of 71% compared to $2,255,470. The
increase in net sales can be attributed to the
continued success of Bazi, the sales promotion, XELR8 to $1million,
conducted in the first half of 2008 and the resultant increase in the number of
independent distributors and customers.
The
percentage that each product category represented of our net sales is as
follows:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
Product Category
|
|
% of Sales
|
|
% of Sales
|
|
Bazi
|
|
91
|
%
|
77
|
%
|
EAT
|
|
0
|
%*
|
2
|
%
|
DRINK
|
|
1
|
%
|
4
|
%
|
SNACK (formerly sZone® snack)
|
|
0
|
%*
|
1
|
%
|
HYDRATE (formerly eForce® sports drink)
|
|
1
|
%
|
3
|
%
|
Vitamins and minerals, including SUPPORT
|
|
1
|
%
|
3
|
%
|
BUILD (formerly VitaPro® nutrition shake)
|
|
1
|
%
|
2
|
%
|
Other-educational materials, apparel
|
|
5
|
%
|
8
|
%
|
*
- less than 1%
12
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Gross Profit.
Gross profit increased to
$2,971,139 compared to $1,582,939, an increase of 88%. Gross profit as a percentage of revenue
(gross margin) increased to 77% from 70%.
The increase
in the gross margin was a result of the increased sales of Bazi which has a
higher gross margin as compared to the legacy products. The increase was
partially offset as a result of the scrap and obsolescence charges from the focus
away from the legacy products.
Sales and marketing expenses.
Sales and marketing
expenses increased to $2,704,953 from $1,597,119, an increase of 69%. Sales and
marketing expenses consist primarily of distributor commissions, costs
associated with attracting experienced field leaders for our distributor
network, events and training for the distributors. The independent distributor compensation
remained constant at 43% of net sales for the current period compared to the
prior period. W
e
incurred approximately $108,000 in additional costs for our distributor,
leadership and events in the current period, compared to the prior period. The
increase was also due to the payment for the termination a marketing consulting
services agreement that the Company entered into in 2003 with Mineral Deposits.
The original agreement had provided for Mineral Deposits to provide consulting
services in exchange for a monthly payment based on the Companys sales, as
long as the Company continued to sell products through a multi-level marketing
system of independent distributors. In exchange for a termination of the
consulting services agreement, which provided for monthly payments equal to ½%
of the Companys net revenue, the Company paid Mineral Deposits in April,
$62,500 cash and 100,000 options with an exercise price of $1.18 per share.
General and administrative expenses.
General and
administrative expenses were $1,621,058, a decrease of 9% compared to
$1,786,810.
The decrease is a result of $661,132 in stock based
compensation that we paid to the referral agent in connection with the short
term loan financing in the prior period and a charge of $350,000 in stock based
compensation that the Company recorded for the grant of stock by a principal
shareholder to the employees of the Company. Under the guidance issued by the
Securities and Exchange Commission in Staff Accounting Bulletin 107 (SAB 107),
share-based payments issued to an employee of a reporting entity by a related
party or other holder of economic interest in the entity as compensation for
services provided to the entity are to be recorded as a compensation expense by
the entity. These decreases were partially, offset by higher compensation as a
result of the variable employment agreements with our executives and additional
employees, and additional expenses incurred for filings and compliance as a
public company.
Depreciation and Amortization Expense.
The expense was $23,687
compared to $34,276, a decrease of 31%. As a result of the continued success of
the Bazi product we evaluated the carrying value of the trademarks associated
with the legacy products that the Company had and fully amortized these
intangible balances.
Interest Expense.
Interest expense was $0 compared to $439,537. In November 2006
and January 2007, the Company entered into two short term debt financing
agreements. Both provided for a 10% interest rate and an origination fee of
400,000 shares of common stock of the Company which was valued using the share
price of the Company on the dates the loans were funded and amortized over the
term of the loan. Both loans were repaid on March 27, 2007.
Net Loss.
Our net loss was $1,362,335, or ($0.09) per
share, compared to $2,244,890, or ($0.18) per share. Our net loss decreased by 39% as the result of
higher sales and gross margin contribution, which was offset by increased
expenses for Sales and Marketing.
Liquidity and Capital Resources
To date, our operating
funds have been provided primarily from sales of our common stock
($15,413,421), and by loans from our founder and by various stockholders
($3,989,209), through June 30, 2008, and to a lesser degree, cash flow
provided by sales of our products.
On March 5, 2007, we
announced that the Company had raised $2,000,000 in gross proceeds in a private
placement transaction, which would close subject to shareholder and American
Stock Exchange approval. On March 7, 2007, the shareholders approved the
private placement transaction, and on March 27, we closed the transaction.
At the time of closing, we paid in full the short-term loans of $500,000 plus
accrued interest of $13,425 leaving us with no short-term or long-term debt at
this time, other than trade accounts payable and other accrued liabilities.
On May 8, 2007, the
Company announced that it had completed the sale of one million units in a
private placement transaction resulting in gross proceeds of $2,000,000, which
would close subject to American Stock Exchange approval. On May 24, 2007,
we closed the transaction.
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On February 19,
2008, the Company announced that it had completed the sale of one-half million
units in a private placement transaction for gross proceeds of $500,000. On March 6,
2008, the American Stock Exchange approved the issue of the shares.
We used $421,388 of cash
for operations in the six months ended June 30, 2008, compared to $462,824
of cash for operations in the six months ended June 30, 2007. The use of
cash in our operations results from incurring and accruing expenses to
suppliers necessary to generate business and service our customers at a time
when revenues did not keep pace with expenses. As of June 30, 2008, we had
$2,263,673 in cash and cash equivalents available to fund future operations.
Net working capital decreased from $2,120,479 at December 31, 2007, to
$1,802,790 at June 30, 2008.
In the event that we are
successful in completing our business plan of increasing the number of
distributors, sales levels and consequently increased profitability, we believe
that our cash resources will be sufficient to fund our operations for the next
year. If our business operations do not result in increased product sales, our
business viability, financial position, results of operations and cash flows
will likely be adversely affected. Further, if we are not successful in
achieving profitability, additional capital will be required to conduct ongoing
operations. We cannot predict the terms upon which we could raise such capital
or if any capital would be available at all.
Customer Concentrations
We
had no single customer that accounted for any substantial portion of our
revenues.
Off-Balance Sheet Items
We
have no off-balance sheet items as of June 30, 2008, or December 31,
2007.
Item
4T CONTROLS AND PROCEDURES
Prior to the filing of
this report, the Companys management carried out an evaluation, under the
supervision and with the participation of its Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure
controls and procedures as of the end of the period covered by this
report. Based on this evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Companys controls and procedures
were effective to ensure that information required to be disclosed by the
Company in the reports filed by it under the Securities and Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms, and include controls
and procedures designed to ensure that information required to be disclosed by
the Company in such reports is accumulated and communicated to the Companys
management, including the Chief Executive Officer and the Chief Financial
Officer of the Company, as appropriate to allow timely decisions regarding
required disclosure.
There has been no change
in the Companys internal control over financial reporting that occurred during
the Companys most recent fiscal quarter that has materially affected or is
reasonably likely to materially affect its internal control over financial
reporting.
14
Table
of Contents
Part II OTHER
INFORMATION
Item 1. LEGAL PROCEEDINGS
On May 27, 2008,
Bleu Ridge Consultants, Inc., filed a lawsuit against XELR8 in the
District Court for the City and County of Denver, Colorado, alleging that XELR8
breached a funding agreement by failing to make payments to Bleu Ridge. On July 11,
2008, Bleu Ridge and XELR8 entered into a standstill agreement, pursuant to
which the parties agreed to certain terms to govern the parties relationship
while they negotiated a settlement.
Item 6. EXHIBITS
Exhibit No
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Description
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31.1
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Certification of CEO as
Required by Rule 13a-14(a)/15d-14
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31.2
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Certification of CFO as
Required by Rule 13a-14(a)/15d-14
|
32.1
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Certification of CEO as
Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR
240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United
States Code
|
32.2
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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
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99.1
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Press release announcing
2nd Quarter 2008 Results
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99.2
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Standstill Agreement with
Bleu Ridge Consultants, Inc.
|
15
Table of
Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City and County of Denver, State of Colorado,
on August 7, 2008.
XELR8 HOLDINGS, INC.
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By
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/s/ John D. Pougnet
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|
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John
D. Pougnet
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|
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Chief Executive Officer
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|
|
|
|
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By
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/s/ John D. Pougnet
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|
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.
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John
D. Pougnet
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Chief
Financial Officer (Principal Accounting Officer)
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16
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