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EX-10.16 - EXCLUSIVE TERRITORY DISTRIBUTION AGREEMENT - Xenacare Holdings, Inc.xcho_nutra.htm
EX-31.1 - CERTIFICATION - Xenacare Holdings, Inc.xcho_ex31z1.htm
EX-31.2 - CERTIFICATION - Xenacare Holdings, Inc.xcho_ex31z2.htm
EX-32.1 - CERTIFICATION - Xenacare Holdings, Inc.xcho_ex32z1.htm
EX-32.2 - CERTIFICATION - Xenacare Holdings, Inc.xcho_ex32z2.htm
EX-10.17 - EXCLUSIVE TERRITORY DISTRIBUTION AGREEMENT - Xenacare Holdings, Inc.xcho_mineral.htm


 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

(Mark one)

X

 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended: September 30, 2009

 

 

 

 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from: _____________ to _____________


XenaCare Holdings, Inc.

(Exact name of Registrant issuer as specified in its charter)

 

 

 

Florida

333-139595

20-3075747

(State or Other Jurisdiction

(Commission

(I.R.S. Employer

of Incorporation)

File Number)

Identification No.)


14000 Military Trail, Suite 104

Delray Beach, Florida 33484

(Address of Principal Executive Office) (Zip Code)

(561) 496-6676

(Registrant’s telephone number, including area code)


 

 

 

 

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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. 

 

X

 Yes

 

 No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

 

Large accelerated filer

 

 

 

Accelerated filer

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

X

 

 (Do not check if a smaller reporting company

 

 

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

 

 Yes

X

 No

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


65,741,702 shares of $0.001 par value common stock at September 30, 2009.

 

 

 




XENACARE HOLDINGS, INC. AND SUBSIDIARIES

INDEX

Page

PART I – FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

1

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS

13

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

21

ITEM 4T.   CONTROLS AND PROCEDURES

21

PART II – OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

22

ITEM 1A.   RISK FACTORS

22

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

22

ITEM 3.     DEFAULTS ON SENIOR DEBT

22

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF THE SECURITIES HOLDERS

22

ITEM 5.     OTHER INFORMATION

22

ITEM 6.     EXHIBIT

22

SIGNATURES

23





PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

XenaCare Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets


 

 

September 30,

2009

 

December 31,

2008

 

 

 

 

 

 

 

(Unaudited)

 

(Audited)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash

 

$

255,415

 

$

362

 

Accounts receivable

 

 

259,818

 

 

331,027

 

Inventory

 

 

286,822

 

 

311,103

 

Prepaid expenses and other current assets

 

 

138,908

 

 

302,453

 

 

 

 

 

 

 

 

 

Total Current Assets

 

 

940,963

 

 

944,945

 

 

 

 

 

 

 

 

 

Office Furniture and Equipment, net

 

 

531

 

 

1,482

 

Other Assets

 

 

273,000

 

 

273,000

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,214,494

 

$

1,219,427

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

1,546,341

 

$

857,603

 

Notes payable - current

 

 

1,326,475

 

 

1,154,392

 

 

 

 

 

 

 

 

 

Total Current Liabilities

 

 

2,872,816

 

 

2,011,995

 

 

 

 

 

 

 

 

 

Notes payable - non-current

 

 

 

 

 

Other liabilities

 

 

172,790

 

 

257,290

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

3,045,606

 

 

2,269,285

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholder's Equity Deficit

 

 

 

 

 

 

 

Preferred stock, 5,000,000 shares authorized:
Series A, $0.001 par value, 0 and 500,000 shares issued
and outstanding at September 30, 2009 and December 31, 2008

 

 

 

 

500

 

Common stock, $0.001 par value, 200,000,000 shares authorized:
65,741,702 and 43,026,695 shares issued and outstanding at
September 30, 2009 and December 31, 2008, respectively

 

 

65,741

 

 

43,026

 

 

 

Additional paid-in-capital

 

 

6,462,181

 

 

5,984,396

 

Stock subscription receivable

 

 

 

 

 

Accumulated deficit

 

 

(8,359,034

)

 

(7,077,780

)

 

 

 

 

 

 

 

 

Total Shareholders' Deficit

 

 

(1,831,112

)

 

(1,049,858

)

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT

 

$

1,214,494

 

$

1,219,427

 


See accompanying notes to consolidated financial statements




1



XenaCare Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)


 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

     

 

                   

     

 

                   

     

 

                   

     

 

                   

 

Product sales

 

$

8,240

 

$

328,644

 

$

79,929

 

$

395,286

 

Other fee revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

8,240

 

 

328,644

 

 

79,929

 

 

395,286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

1,947

 

 

157,927

 

 

24,475

 

 

178,569

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

6,293

 

 

170,717

 

 

55,454

 

 

216,717

 

 

 

 

76.4

%

 

51.9

%

 

69.4

%

 

54.8

%

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

 

127,522

 

 

228,026

 

 

245,460

 

 

490,043

 

General and administrative

 

 

252,229

 

 

(181,638

)

 

929,831

 

 

431,567

 

Write downs

 

 

7,951

 

 

59,160

 

 

17,951

 

 

59,160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating costs and expenses

 

 

387,702

 

 

105,548

 

 

1,193,242

 

 

980,770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(54,572

)

 

65,654

 

 

(130,090

)

 

(12,555

)

Other income

 

 

12,519

 

 

50

 

 

28,093

 

 

87,045

 

Other expenses

 

 

127

 

 

70,502

 

 

(41,469

)

 

(222,646

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

 

(41,926

)

 

136,206

 

 

(143,466

)

 

(148,156

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

(423,335

)

$

201,375

 

$

(1,281,254

)

$

(912,209

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - basic and diluted

 

 

59,491,869

 

 

25,893,338

 

 

53,938,034

 

 

25,083,088

 

Basic and diluted loss per share

 

$

(0.01

)

$

0.01

 

$

(0.02

)

$

(0.04

)


See accompanying notes to consolidated financial statements




2



XenaCare Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


 

 

Nine Months Ended

September 30,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

     

 

 

 

 

 

 

Net loss

 

$

(1,281,254

)

$

(912,209

)

Adjustments to reconcile net loss to net
cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

951

 

 

951

 

Stock issued for services

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

71,210

 

 

(312,414

)

Inventory

 

 

24,281

 

 

56,706

 

Prepaid expenses and other current assets

 

 

163,544

 

 

(384,475

)

Accounts payable and accrued expenses

 

 

688,740

 

 

(97,967

)

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

(332,528

)

 

(1,649,407

)

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Purchase of office furniture and equipment

 

 

 

 

(213

)

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

 

 

(213

)

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Proceeds from notes payable

 

 

 

 

 

Repayments on notes payable

 

 

35,731

 

 

 

Advances from (Payments to) related parties

 

 

51,850

 

 

929,459

 

Proceeds from sale of stock

 

 

500,000

 

 

719,335

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

587,581

 

 

1,648,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) in Cash

 

 

255,053

 

 

(826

)

Cash, Beginning of Period

 

 

362

 

 

1,607

 

 

 

 

 

 

 

 

 

Cash, End of Period

 

$

255,415

 

$

780

 

 

 

 

 

 

 

 

 

Supplemental Information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

$

 

Cash paid for taxes

 

$

 

$

 

NonCash Transactions:

 

 

 

 

 

 

 

Conversion of preferred series A

 

$

10,215

 

$

 

Shares issued under antidilutive clauses

 

$

 

$

1,251

 


See accompanying notes to consolidated financial statements




3



XENACARE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1. – ORGANIZATION AND NATURE OF BUSINESS

Organization and Nature of Business

XenaCare Holdings, Inc. (the “Company”, “XenaCare”, “XC Holdings”, “we”, “us” or “our”) was organized under the laws of Florida in June 2005 to formulate, market and distribute a line of clinical, life style performance and protective nutrition supplement products (“NSPs”).

Our Clinical NSP product group has commenced the formulation and brand building of a line of NSPs for the replenishment of nutrients lost due to pharmaceutical medications, which will be sold through mass media buys (radio and television advertising), web sales and other channels of distribution.

Our Lifestyles Performance NSP product group is involved in the formulation of a line of NSPs for the energy/lifestyle performance market to be sold through mass media buys (radio and television advertising), web sales and other channels of distribution.

Our Protective NSP product group is directed to the energy/lifestyle performance market. Our initial product, SunPill™, is formulated to protect the skin when exposed to damaging ultraviolet rays. However, during the quarter, as a result of challenges we encountered in introducing this product to the marketplace, we have decided to discontinue further attempts to commercialize this product. We are currently in process of negotiating for the liquidation of existing inventory. We believe that we will able to recover our product costs and accordingly have not provided for any impairment expense.

XenaCare exclusively markets and distributes Cobroxin™ for Nutra Pharma Corporation (OTCBB: NPHC) in the United States. Cobroxin™ is the first opiate and acetaminophen-free pain reliever available as an over-the-counter formulation clinically proven to treat moderate to severe (Stage 2) pain. Available in a topical gel that relieves pain associated with joints, repetitive stress and arthritis, and in an oral spray that is formulated to relieve lower back pain, migraines, neck aches, shoulder pain, cramps and neuralgia, Cobroxin™ is derived from cobra venom. On November 3, 2009, XenaCare announced that the Chain Drug Marketing Association (CDMA) will begin inventorying Cobroxin™ for redistribution to its member pharmacies. The CDMA currently has over 6,000 independent pharmacy members throughout the United States.

XenaCare exclusively markets and distributes Zeolite from Mineral Sciences, LLC within the United States. Zeolite is a cellular cleanse and detoxification product designed as an effective solution for removing heavy metals and toxins from the body. Research has also shown that the product’s ingredients may help reduce viral replication and support healthy blood sugar levels. Additionally, this product improves nutrient absorption, supports immune system function and reduces symptoms of allergies.

History of the Company

Initial operations have traditionally focused on providing a small but targeted platform of poly-formulas to the patient that address key multi-factors in disease processes such as atherosclerosis and diabetes (as opposed to the single target restrictions placed on prescription drugs that must focus on one disease factor at a time such as an HMG reductase inhibitor (Statin) that does not address the multi-factors of atherosclerosis). The Company’s historical lines of NSPs are: XenaCor, XenaZymePlus and XenaTri.

In mid 2005 the Company began to formulate NSPs for personal performance and lifestyle performance products. The Company also developed new distribution channels for the historical NSPs, including web site and infomercials. The Company has also formulated a line of body replenishment NSPs, which are designed to eliminate prescription induced nutrient depletion. To replace these nutrients, NSPs have been formulated, which the Company believes will combat the depletion effects of commonly prescribed drugs. Additionally, the Company has added a nutritional supplement (worldwide patent pending) that defends the skin from the damaging effects of the sun, and a patented process.

October 30, 2007 XenaCare completed an asset purchase covering certain assets of 2B Healthy, a division of Beta Pharmaceutical Corporation. Beta Pharmaceutical Corporation is a $190 million pharmaceutical company with home offices in the US and distribution in 14 South American countries. As part of the asset purchase, XenaCare took ownership of several product lines in the 2B Healthy portfolio, of which B-Alert already has slotting fees and UPC codes registered with McLane Company, Weis Markets, Bashas’, Kinray and Hannaford. This relationship will allow XenaCare immediate distribution in 14 South American countries and increased distribution in the US.



4



XENACARE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 2. – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Terms and Definitions

Company

“XenaCare”, “XC Holdings”, “we”, “us” or “our”

AICPA

American Institute of Certified Public Accountants

APB

Accounting Principles Board

ARB

Accounting Review Board

ASC

Accounting Standards Codification

ASU

Accounting Standards Update

EITF

Emerging Issues Task Force

FASB

Financial Accounting Standards Board

FSP

FASB Staff Position

FIFO

First-in, First-out

GAAP (US)

Generally Accepted Accounting Principals

NSP

Nutrition Supplement Product

SAB

Staff Accounting Bulletin

SEC

Securities Exchange Commission

SFAS or

FAS

Statement of Financial Accounting Standards

Q308

Three months Ended September 30, 2008

Q309

Three months Ended September 30, 2008

9MOS08

Nine months Ended September 30, 2008

9MOS09

Nine months Ended September 30, 2009

Basis of Accounting

The financial statements are prepared using the accrual basis of accounting where revenues and expenses are recognized in the period in which they were incurred. The basis of accounting conforms to accounting principles generally accepted in the United States of America.

Principles of Consolidation and Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: BRS, Inc.; XenaCare, LLC; XenaStaff, LLC; and XenaCeutical, LLC and Raw Material Ingredients, Inc. All material intercompany accounts and transactions have been eliminated in consolidation.

Interim Financial Statements

The interim financial statements presented herein have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The interim financial statements should be read in conjunction with the Company’s annual financial statements, notes and accounting policies included in the Company’s Annual Report. In the opinion of management, all adjustments which are necessary to provide a fair presentation of financial position as of September 30, 2009 and the related operating results and cash flows for the interim period presented have been made. All adjustments are of a normal recurring nature. The results of operations, for the period presented are not necessarily indicative of the results to be expected for the year ended December 31, 2009.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.

Risks and Uncertainties

The Company’s business could be impacted by continuing price pressure on its product manufacturing, acceptance of its products in the marketplace, new competitors, changes in federal and/or state legislation and other factors. Adverse changes in these areas could negatively impact the Company’s financial position, results of operations and cash flows.



5



XENACARE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 2. – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Going Concern

As shown in the accompanying financial statements, the Company’s operating and capital requirements in connection with operations have been and will continue to be significant. The recurring losses from operations and increased contractual agreements raise doubt about the Company’s ability to continue as a going concern. Based on current plans, the Company anticipates that revenues earned from Cobroxin™ and Zeolite product sales will be the primary source of funds for operating activities. In addition to existing cash, the Company may rely on bank borrowing, if available, or sales of securities to meet the basic capital and liquidity needs for the next 12 months. Additional capital may be sought to fund the expansion of product lines and marketing efforts, which may also include bank borrowing, or a private placement of securities. Our ability to continue as a going concern is dependent upon our ability to generate sales from our new products and our obtaining adequate capital to fund losses until we become profitable. There can be no assurance that management’s plans will be successful.

The financial statements have been prepared on a “going concern” basis and accordingly do not include any adjustments that might result from the outcome of this uncertainty.

Accounts Receivable

Accounts receivable are reported at net realizable value. The Company establishes an allowance for doubtful accounts based upon factors pertaining to the credit risk of specific customers, historical trends, and other information. Delinquent accounts are written-off when it is determined that the amounts are uncollectible. At September 30, 2009 and December 31, 2008, the allowance for doubtful accounts was $48,697 and $0, respectively.

Inventory

Inventory is reported at the lower end of cost or market on the first-in, first-out (FIFO) method. Our inventory is subject to expiration and accordingly quantities purchased and sell through rates are periodically monitored for potential overstocking or pending expiration as a basis for establishing the appropriate reserve for any estimated expiration or obsolescence. The Company’s principal brands are XenaCor, XenaTri, XenaZyme, Body Replenishment Line and its newest product lines, Cobroxin™ and Zeolite™.

Office Furniture and Equipment

Office furniture and equipment are recorded at cost and depreciation is provided using the straight-line method over the estimated useful lives of the assets. Expenditures for repairs and maintenance of equipment are charged to expense as incurred. Major replacements and betterments are capitalized and depreciated over the remaining useful lives of the assets.

Office furniture and equipment is depreciated over various lives ranging from 5 to 10 years. Depreciation expense for the nine months ended September 30, 2009 and 2008 was $951 and $951, respectively.

Revenue Recognition

The Company’s product revenues represent primarily sales of SunPill™, XenaCor, XenaTri, XenaZyme and the Body Replenishment Line. The B-Alert or 2BHealthy product lines have generated nominal revenue. Revenue is recognized when a product is shipped. Product is not shipped until check or credit card payment is received from the customer. The Company manages the collection process for transactions processed on its website, but it outsources its fulfillment (delivery) process to a third party for certain products.

The Company’s revenue recognition policies are in compliance with SAB 104, Revenue Recognition, which establishes criteria that must be satisfied before revenue is realized or realizable and earned. The Company recognizes revenue when all of the following four criteria are met:

·

persuasive evidence of a sales arrangement exists,

·

delivery has occurred,

·

the sales price is fixed or determinable, and

·

collectability is probable.



6



XENACARE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 2. – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Shipping and handling charges related to sales transactions are recorded as sales revenues when billed to customers or included in the sales price in accordance with ASC Topic 605, formerly EITF 00-10, “ Accounting for Shipping and Handling Fees and Costs.”  Shipping and handling costs are included in cost of revenue.

The Company accepts product returns and will issue a credit, refund or product exchange. To date, product returns have occurred but are not considered material. The Company does not have a product return reserve established.

Research and Development

The Company does not engage in research and development as defined in ASC Topic 730, formerly SFAS 2, “Accounting for Research and Development Costs.” However, the Company does incur formulation costs that include salaries, materials and consultant fees. These costs are classified as selling, general and administrative expenses in the consolidated statements of operations.

Income Taxes

We recognize deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be recovered. We provide a valuation allowance for deferred tax assets for which we do not consider realization of such assets to be more likely than not.

Earnings per share

The Company computes basic and diluted earnings per share amounts in accordance with ASC Topic 260, formerly SFAS 128, “Earnings per Share” Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company.

Segment Information

ASC Topic 280, formerly SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. The Company operates in one segment for management reporting purposes.

NOTE 3. – RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements that the Company has adopted or that will be required to adopt in the future are summarized below.

In June 2009, FASB issued its final statement SFAS 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162”. SFAS 168 made the FASB Accounting Standards Codification (the Codification) the single source of U.S. GAAP used by nongovernmental entities in the preparation of financial statements, except for rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative accounting guidance for SEC registrants. The Codification is meant to simplify user access to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics within a consistent structure; its purpose is not to create new accounting and reporting guidance. The Codification supersedes all existing non-SEC accounting and reporting standards and was effective for the Company beginning July 1, 2009. Following SFAS 168, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates (ASU). The FASB will not consider ASUs as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification.



7



XENACARE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 3. – RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

In August 2009, the FASB issued ASU 2009-05 which includes amendments to Subtopic 820-10, “Fair Value Measurements and Disclosures—Overall”. The update provides clarification that in circumstances, in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. The amendments in this ASU clarify that a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance provided in this ASU is effective for the first reporting period, including interim periods, beginning after issuance. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

In September 2009, the FASB issued ASU 2009-06, Income Taxes (Topic 740), ”Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities”, which provides implementation guidance on accounting for uncertainty in income taxes, as well as eliminates certain disclosure requirements for nonpublic entities. For entities that are currently applying the standards for accounting for uncertainty in income taxes, this update shall be effective for interim and annual periods ending after September 15, 2009. For those entities that have deferred the application of accounting for uncertainty in income taxes in accordance with paragraph 740-10-65-1(e), this update shall be effective upon adoption of those standards. The adoption of this standard is not expected to have an impact on the Company’s consolidated financial position and results of operations since this accounting standard update provides only amends implementation and disclosure.

In September 2009, the FASB has published ASU No. 2009-12, “Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”. This ASU amends Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall”, to permit a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent). This ASU also requires new disclosures, by major category of investments including the attributes of investments within the scope of this amendment to the Codification. The guidance in this Update is effective for interim and annual periods ending after December 15, 2009. Early application is permitted.  The Company is in the process of evaluating the impact of this standard on its consolidated financial position and results of operations. The adoption of this standard did not have an impact on the Company’s consolidated financial position and results of operations.

In October 2009, the FASB has published ASU 2009-13, “Revenue Recognition (Topic 605)-Multiple Deliverable Revenue Arrangements”, which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, “Revenue Recognition-Multiple-Element Arrangements”, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and also requires expanded disclosures. The guidance in this update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this standard did not have an impact on the Company’s consolidated financial position and results of operations.

In October 2009, the FASB has published ASU 2009-14, “Software (Topic 985)-Certain Revenue Arrangements that Include Software Elements” and changes the accounting model for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and nonsoftware components that function together to deliver the tangible product's essential functionality are excluded from the software revenue guidance in Subtopic 985-605, “Software-Revenue Recognition”. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. The guidance in this ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this standard did not have an impact on the Company’s consolidated financial position and results of operations.

Other ASUs not effective until after September 30, 2009, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.



8



XENACARE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 4. – INVENTORY

Significant components of inventory at September 30, 2009 and December 31, 2008 consist primarily of:

 

 

2009

 

2008

 

 

 

 

 

 

 

 

 

Bulk product

 

$

96,640

 

$

112,061

 

Merchandise inventory

 

 

245,726

 

 

239,164

 

 

 

 

342,366

 

 

351,225

 

Allowances for expiration

 

 

(55,544

)

 

(40,122

)

 

 

 

 

 

 

 

 

 

 

$

286,822

 

$

311,103

 


Bulk product – Bulk product consists of completed unpackaged loose SunPill™ product that has been stored in barrels awaiting commercial packaging to make it market ready for distribution.

Merchandise inventory - Merchandise inventory consists primarily of the SunPill™ product along with lesser quantities of XenaCore and BRS product. Our formulations are batch controlled and carry an expiration date in accordance with applicable government regulations. Any product approaching their expiration date have been destroyed and removed from the inventory. Continued delays in fully implementing our marketing and distribution programs have resulted in significantly slower than anticipated sales in 2009 and 2008. Consequently, we have established an allowance on the remaining inventory, based on the estimated sell through rate for each product, before their expiration.

During the quarter, as a result of challenges we encountered in introducing this product to the marketplace, we have decided to discontinue further attempts to commercialize the SunPill™ product. We are currently in process of negotiating for the liquidation of existing inventory. We believe that we will able to recover our product costs and accordingly have not provided for any impairment expense.

NOTE 5. – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Significant components of accounts payable and accrued expenses at September 30, 2009 and December 31, 2008 consist primarily of:

 

 

2009

 

2008

 

 

 

 

 

 

 

 

 

Trade payables

 

$

163,874

 

$

245,928

 

Accrued accounting and legal fees

 

 

41,443

 

 

37,500

 

Accrued product and description costs

 

 

 

 

1,500

 

Accrued payroll

 

 

958,361

 

 

206,018

 

Accrued interest

 

 

71,080

 

 

18,099

 

Expenses reimbursable to officer

 

 

52,369

 

 

64,344

 

Other accrued expenses

 

 

 

 

25,000

 

Unearned revenue

 

 

259,214

 

 

259,214

 

 

 

 

 

 

 

 

 

 

 

$

1,546,341

 

$

857,603

 






9



XENACARE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 5. – ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Continued)

Unearned revenue - Unearned revenue represents product shipped and invoiced but subject to return by the retailer. Due to the potential right of return, the Company has recorded the invoicing as unearned revenue and will recognize revenue on these transactions, only when collectability is reasonably assured, in accordance with the guidance offered in SAB 104. Revenue on these transactions will be recognized when the retailer acknowledges selling the product and commits to payment or when payment is received.

NOTE 6. – NOTES PAYABLE - CURRENT

Significant components of notes payable – current at September 30, 2009 and December 31, 2008 consist primarily of:

 

 

2009

 

2008

 

 

 

 

 

 

 

 

 

Related parties

 

$

135,074

 

$

135,072

 

Investors

 

 

217,448

 

 

5,000

 

Wachovia - line of credit

 

 

(3,047

)

 

37,320

 

Sun Packing, Inc.

 

 

977,000

 

977,000

 

 

 

 

 

 

 

 

 

 

 

$

1,326,475

 

$

1,154,392

 


Related Parties - Notes payable to related parties were issued in various traunches, each mature one year from issuance and bear interest at 15%. The lenders are related parties to the Company through common executive management as our CFO and President are also officers in the lenders. The terms of the notes have been extended to mature on June 30, 2009. We have not paid these notes as of September 30, 2009, and are discussing a further extension with the lenders.

Investors - Notes payable to investors were issued in various traunches commencing in January 2009, each mature one year from issuance and bear interest at 15%.

Wachovia - The Wachovia line of credit was originated in November 2007 and is personally guaranteed by the Company’s President. The line of credit bears interest at 10.1%.

Sun Packing, Inc. - The Sun Packing, Inc. note originated during merger negotiations with the Company during the third and fourth quarters of 2008. The parties were unable to reach an agreement on several key issues and the merger negotiations were discontinued. The note is personally guaranteed by our officers and bears interest at 6%. The note is payable upon demand. To date the note has not been called.

NOTE 7. – COMMITMENTS AND CONTINGENCIES

The Company is currently operating under several material agreements as listed below:

·

Employment agreements with three individuals for their services in the areas of sales, operations and mergers and acquisitions. These agreements cover cash as well as stock compensation and health insurance benefits and expire December 31, 2011.

·

Business consulting agreement with one individual for his services in the areas of mergers and acquisitions. The agreement covers cash as well as stock compensation and health insurance benefits and expire December 31, 2011.

·

On August 5, 2008 the Company amended its April 23, 2008 sales agreement with Pure Laboratories, LLC to purchase all rights to SunPill™. This agreement supersedes the Company’s previous SunPill™ license agreement with Pure Laboratories, LLC dated February 8, 2007. The aggregate purchase price is the greater of 5% of gross sales capped at $2,500,000, payable quarterly at 5% of gross sales subject to an annual minimum payment of $75,000.



10



XENACARE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 7. – COMMITMENTS AND CONTINGENCIES (Continued)

·

The Company leases office space on a month-to-month basis from a non-related party. The annualized rental expense is approximately $50,000.

NOTE 8. – COMMON AND PREFERRED STOCK

Common Stock

The Company’s shares commenced quotation on the Over the Counter Bulletin Board on March 5, 2008. The Company’s quotation symbol is XCHO:OTC.

During the first quarter of 2009, the Company retired 33,000 shares of common stock and issued 10,748,340 shares of common stock to retire Preferred A shares. During the third quarter of 2009, the Company sold 12, 500,000 shares of restricted common stock to an accredited investor for $500,000.

Preferred Stock

During the first quarter of 2009, the Company converted 500,000 shares of Preferred A to 10,748,340 shares of restricted common stock.

NOTE 9. – INCOME TAXES

The provision (benefit) for income taxes is summarized as follows:

 

 

Nine Months Ended

September 30,

 

 

 

2009

 

2008

 

Current:

 

 

 

 

 

 

 

Federal

 

$

 

$

 

State

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred:

 

 

 

 

 

 

 

Federal

 

 

448,439

 

 

319,273

 

State

 

 

57,656

 

 

41,049

 

 

 

 

 

 

 

 

 

Increase in Valuation allowance

 

 

(506,095

)

 

(360,322

)

 

 

 

 

 

 

 

 

Total provision (benefit) for income taxes

 

$

 

$

 




11



XENACARE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 9. – INCOME TAXES (Continued)

The provision for income taxes differs from the amount computed by applying the federal statutory rate to income (loss) before provision (benefit) for income taxes as follows:

 

 

Nine Months Ended

September 30,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

 

 

Expected provision(benefit) at statutory rate

 

 

35.0

%

 

35.0

%

State taxes

 

 

4.5

%

 

4.5

%

Valuation allowance for Net Loss

 

 

-39.5

%

 

-39.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total provision (benefit) for income taxes

 

 

0.0

%

 

0.0

%


Deferred income taxes reflect the net tax effect of tax carry-forward items and the temporary differences between the recognition of income and expenses for financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax assets and liabilities are as follows:

 

 

September 30,

2009

 

December 31,

2008

 

Deferred tax assets:

 

 

 

 

 

 

 

Net operating loss carry-forwards

 

$

3,173,019

 

$

2,666,924

 

 

 

 

 

 

 

Total deferred tax assets

 

 

3,173,019

 

 

2,666,924

 

Valuation allowance

 

 

(3,173,019

)

 

(2,666,924

)

Net deferred tax assets

 

$

 

$

 


As of September 30, 2009 and December 31, 2008 the Company had a valuation allowance on its deferred tax assets of $3,173,019 and $2,666,924, respectively, which relates to net operating losses. The valuation allowance increased $506,095 and $711,764 in the nine months ended September 30, 2009 and the year ended December 31, 2008 respectively. The increase in 2009 and 2008 were attributable to accumulated net operating losses.

As of September 30, 2009 and 2008, the Company had net operating loss carry-forwards of $8,359,034 and $7,077,780, respectively. Unused net operating loss carry-forwards will expire at various dates beginning 2020.

As of September 30, 2009 and December 31, 2008, the Company had no unrecognized tax benefit and accordingly no related accrued interest or penalties. The Company is not under examination by either the US federal or State of Florida tax authorities.



12



ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Introduction

Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to our condensed consolidated financial statements and accompanying notes to help provide an understanding of our financial condition, changes in financial condition and results of operations. The discussion and analysis is organized as follows:

Terms and Definitions

Company

“XenaCare”, “XC Holdings”, “we”, “us” or “our”

AICPA

American Institute of Certified Public Accountants

APB

Accounting Principles Board

ARB

Accounting Review Board

ASC

Accounting Standards Codification

ASU

Accounting Standards Update

EITF

Emerging Issues Task Force

FASB

Financial Accounting Standards Board

FSP

FASB Staff Position

FIFO

First-in, First-out

GAAP (US)

Generally Accepted Accounting Principals

NSP

Nutrition Supplement Product

SAB

Staff Accounting Bulletin

SEC

Securities Exchange Commission

SFAS or

FAS

Statement of Financial Accounting Standards

Q308

Three months Ended September 30, 2008

Q309

Three months Ended September 30, 2008

9MOS08

Nine months Ended September 30, 2008

9MOS09

Nine months Ended September 30, 2009

Overview and Operations This section provides a general description of our business, trends in our industry, as well as significant transactions that have occurred that we believe are important in understanding our financial condition and results of operations.

·

Caution concerning forward-looking statements. This section discusses how certain forward-looking statements made by us throughout this discussion and analysis are based on management’s present expectations about future events and are inherently susceptible to uncertainty and changes in circumstance.

·

Recent accounting pronouncements. This section provides an analysis of relevant recent accounting pronouncements issued by the FASB and the effect of those pronouncements.

·

Critical accounting policies and estimates. This section discusses those accounting policies that are both considered important to our financial condition and results of operations, and require significant judgment and estimates on the part of management in their application for the three and nine months ended September 30, 2009.

·

Results of operations. This section provides an analysis of our results of operations for Q109 relative to the comparative prior year period presented in the accompanying consolidated statements of operations.

·

Liquidity and capital resources. This section provides an analysis of our cash flows, capital resources and off-balance sheet arrangements and our contractual obligations as of September 30, 2009.

XenaCare Holdings, Inc. (the “Company”, “XC Holdings”, “we”, “us” or “our”) was organized under the laws of Florida in June 2005 to formulate, market and distribute nutrition supplement products (“NSPs”).

The Company currently operates or is in the process of developing the following lines of NSPs and performance products:

·

Our line of Clinical NSPs includes XenaCor, XenaZyme Plus and XenaTri. These products are poly-formulas designed to address key multi-factors in disease processes such as atherosclerosis and diabetes.



13



The Company has expanded its historical clinical line by formulating a line of body replenishment NSPs, which are designed to combat the nutrient depletion effects of commonly prescribed drugs.

·

Our line of Lifestyle Performance NSPs is currently under development. We are developing formulations for the Lifestyle Performance market, which consists of a sports line for athletes and increased performance for the over 50 generation. As of the date of this filing we have not completed any of the formulations.

·

Our line of Protective NSPs currently consists of SunPill™ and Cobroxin™. SunPill™ is a revolutionary nutritional supplement that is designed to defend your skin from photo-aging and sun damage.

·

Our line of Pain Relievers currently consists of Cobroxin™ which is the first opiate and acetaminophen-free pain reliever available as an over-the-counter formulation clinically proven to treat moderate to severe (Stage 2) pain.

·

Our line of Detoxification product currently consists of Zeolite which is a cellular cleanse and detoxification product designed as an effective solution for removing heavy metals and toxins from the body.

Since mid-2005, we expanded our focus and began to formulate NSPs for personal and lifestyle performance products and develop new distribution channels for our historical Clinical NSPs. We have also acquired exclusive worldwide rights, patents and technology developed by Pure Laboratories, LLC, through which we will showcase and market, the SunPill™. Additionally, we have entered into an exclusive worldwide proprietary sales agreement for Algae BioSciences, an algae-based Omega 3 fatty acid that can be ingested as a food additive or through other nutraceutical and medicinal applications.

Substantially all revenues to date have been generated from sales of historical Clinical NSPs, XenaCor, XenaTri and XenaZymePlus. Since our inception, we have never been profitable.

We purchase all of our products and supplies from third-party sources. We have no long-term contracts, as purchases are made on an order-by-order basis. In the event that a current manufacturer is unable to meet our manufacturing and delivery requirements at some time in the future, we may suffer short-term interruptions of delivery of certain products while we establish an alternative source.

Clinical NSPs

Our line of Clinical NSPs seek to shift a portion of current consumer “out-of-pocket” spending on ineffective and/or incomplete self-care and healing products, obtained through a myriad of retail and internet distribution systems. Our Clinical NSPs provide consumers with access to proprietary nutritional supplements and supplement nutrient depletion resulting from the use of certain prescription pharmaceuticals. We also plan to sell and distribute these products through pharmacies and other distribution outlets as well as through infomercials and a book authored by Dr. Xenakis.

XenaCor, XenaTri and XenaZymePlus are specifically formulated to support and help maintain patient healthcare for many risk factors, including those related to homocysteine levels, lipid control, blood flow and blood pressure. These NSPs are formulated under the guidelines of the Food and Drug Administration (“FDA”) and its regulation of the Nutritional Supplement and Health Education Act. However, while the FDA regulates the nutritional supplement industry, no approvals by the FDA are required for our products.

We believe our Clinical NSPs listed below support and maintain the following:

·

XenaCor: the lowering of serum cholesterol, C-reactive protein and homocysteine levels. This product was designed to support cardiovascular health.

·

XenaTri: the lowering of triglycerides and raising of HDL. This product was designed to support cardiovascular health.

·

XenaZyme Plus: increases the body’s oxygen-carrying capacities. This product was designed to support digestion.

We believe these NSPs significantly differentiate themselves from our competition including self-help vitamin and herbal product manufacturers and distributors. These NSPs are formulated to support the delivery of measurable subjective (improved medical history) and/or objective (laboratory results) effects regardless of what other medications or supplements the patient is taking. We believe that these NSPs support significant positive health actions and outcomes



14



without deleterious adverse side effects. The Company does not diagnose nor treat diseases. Our products are only formulated to support and maintain an individual’s health and well being.

Body Replenishment Systems (“BRS”) formulations provide patients access to NSPs that combat prescription drug induced nutrient depletion problems widely recognized by both consumer and clinician. As stated in The Drug-induced Nutrient Depletion Handbook, second edition (2003) by Ross Pelton et al., “ 16 of the top 20 drugs are associated with drug/nutrient interaction.” BRS formulations focus on replacing prescription drug depleted nutrients and position themselves as extensions to the primary Clinical NSPs. We believe that BRS formulations will not compete with our historical Clinical NSPs as our historical Clinical NSPs specifically support disease treatment. We also believe that BRS formulations will meet a high revenue opportunity without affecting current revenue generating Clinical NSPs. The BRS formulations will be marketed and sold through the same outlets as our other Clinical NSPs. This strategy has no effect on the current and future operations of our other Clinical NSPs.

Presently various new formulations have been designed and manufactured for consumers being treated with prescription drugs for high blood pressure, heart disease, diabetes, ulcers, depression, infection, arthritis, aids and weight loss. BRS intends to utilize toll free telephone and virtual computer linkups, using the same marketing and sales practices as our current Clinical NSPs operations. We believe BRS is a natural supplementation for prescription induced nutrition depletion and is necessary and important for positive patient health outcomes. As part of our marketing program, Dr. Xenakis, our CEO and chairman, wrote a book titled, “When Good Medicines do Bad Things to Healthy Bodies” in 2006. In addition, an infomercial featuring Dr. Xenakis is being produced to educate the consumer on the depletion of nutrients by the use of prescription drugs.

Lifestyle Performance NSPs

We are developing formulations for the Lifestyle Performance market, which consist of a sports line for athletes and increased performance for the over 50 generation. As of the date of this filing we have not completed any of the formulations.

Protective NSPs

SunPill™, a nutritional supplement that is designed to defend your skin from photo-aging and sun damage, was developed by the founder of Banana Boat, and Sea and Ski, an inventor at the forefront of protecting skin from the damaging effects of the sun. We have acquired the worldwide rights to produce and distribute the SunPill™. We believe the composition of the SunPill™, when taken daily, protects the skin against the effects of ultraviolet (UV) radiation from the sun or other sources which include sunburn, skin redness, swelling, immune suppression, photo-damage.

Formulation of NSPs

The Company has no patent protection for any of its products or services, except the SunPill™ but has multiple trademark protection on certain service marks currently in commerce. We have historically expensed our formulation costs and do not have any separately itemized research and development expenses.

Manufacturing and Supplies

The Company uses contracted third parties to manufacture its products and to provide raw materials. The third party manufacturers are responsible for receipt and storage of raw material, production and packaging, and labeling of finished goods. At present, the Company is dependent upon manufacturers for the production of all of its products and, should the manufacturers discontinue their relationship with us, the Company’s sales could be adversely impacted. The Company believes at the present time it will be able to obtain the quantity of products and supplies needed to meet orders.

We purchase all of our products from third-party suppliers and manufacturers pursuant to purchase orders without any long-term agreements. In the event that a current manufacturer is unable to meet our manufacturing and delivery requirements at some time in the future, we may suffer short-term interruptions of delivery of certain products while we establish an alternative source. While we believe alternative sources are in most cases readily available and we have also established working relationships with several third-party suppliers and manufacturers, none of these agreements are long term. We also rely on third-party carriers for product shipments, including shipments to and from our distribution facilities. We are, therefore, subject to the risks, including employee strikes and inclement weather, associated with our carrier’s ability to provide delivery services to meet our fulfillment and shipping needs. Failure to deliver products to our customers in a timely and accurate manner would harm our reputation, our business and results of operations.



15



Pain Reliever

XenaCare exclusively markets and distributes Cobroxin™ for Nutra Pharma Corporation (OTCBB: NPHC) within the United States. On November 3, 2009, XenaCare announced that the Chain Drug Marketing Association (CDMA) will begin inventorying Cobroxin™ for redistribution to its member pharmacies. The CDMA currently has over 6,000 independent pharmacy members throughout the United States.

Cobroxin™ is the first opiate and acetaminophen-free pain reliever available as an over-the-counter formulation clinically proven to treat moderate to severe (Stage 2) pain. Available in a topical gel that relieves pain associated with joints, repetitive stress and arthritis, and in an oral spray that is formulated to relieve lower back pain, migraines, neck aches, shoulder pain, cramps and neuralgia, Cobroxin™ is derived from cobra venom. The medical application of cobra venom was incorporated into the Homeopathic Pharmacopoeia Materia Medica in the 1800s along with several other snake venoms. In the early 1900s, Calmette (of BCG fame) investigated the use of cobra venom in the treatment of cancer in mice. It was subsequently applied clinically to subjects with cancer where it established a reputation in France for relieving pain. In 1936, Macht, a researcher within the pharmaceutical company, Westcott, Hynson and Dunning, showed that cobra venom, when injected in minute doses, produced analgesic effects that were superior to morphine in activity. In fact, cobra venom was employed when morphine was no longer effective or when patients became addicted to the opiate. Cobra venom proved to be 80% effective in the clinic for the treatment of headache and arthritis pain and it allowed long-term control of chronic pain conditions without addictive problems. A feature of this venom product was its slow onset of analgesic activity however its activity is prolonged. In 1938, acceptance of homeopathic medicine including cobra venom was incorporated into the Food, Drug & Cosmetic Act sponsored by Royal Copeland. In the latter part of the last century cobra venoms were studied for the treatment of severe pain but also rheumatism, trigeminal neuralgia, asthma, ocular therapy, and neuroses.

Today, Cobra venom is being studied for treating various forms of pain, cancers, autoimmune and neurological disorders. Researchers have proven that cobra venom contains constituents that control pain and inflammation. Researchers in China are examining the possibility that cobra venom can be used to treat drug addiction. The National Cancer Institute in Italy has participated in Chinese clinical trials to assess the efficacy of Cobra toxins in controlling post operative pain and moderate to severe cancer pain. More recently Cobra toxin has been reported to kill mesothelioma and lung cancer cells, 75 years after the first reports in the 1933 issue of the medical journal Lancet.

Detoxification product

Zeolite is a cellular cleanse and detoxification product designed as an effective solution for removing heavy metals and toxins from the body. Research has also shown that the product’s ingredients may help reduce viral replication and support healthy blood sugar levels. Additionally, this product improves nutrient absorption, supports immune system function and reduces symptoms of allergies.

The detox market is one of the fastest growing nutritional markets in the U.S. with current estimates at over $4 billion annually. Many of these products include digestive cleansers that act mostly as laxatives. Zeolite™ is unique in its ability to detox the entire body – not just the digestive system.

XenaCare exclusively markets and distributes Zeolite™ within the United States.

Governmental Regulation

The Federal Drug Administration (FDA) oversees product safety, manufacturing, and product information, such as statements on the product’s label, package inserts, and accompanying literature. The FDA has promulgated regulations governing the labeling and marketing of dietary and nutritional supplement products. The regulations include:

·

the identification of dietary or nutritional supplements and their nutrition and ingredient labeling;

·

requirements related to the wording used for statements about nutrients, health statements, and statements of nutritional support;

·

labeling requirements for dietary or nutritional supplements for which “high potency,” “antioxidant,” and “trans-fatty acids” statements are made;

·

notification procedures for statements on dietary and nutritional supplements; and

·

pre-market notification procedures for new dietary ingredients in nutritional supplements.



16



We utilize a substantiation program that involves the compilation and review of scientific literature pertinent to the ingredients contained in each of our products. We continuously update our substantiation program to expand evidence for each of our product statements and notify the FDA of certain types of performance statements made in connection with our products.

In certain markets, including the United States, specific statements made by us with respect to our products may change the regulatory status of a product. For example, a product sold as a nutritional supplement but marketed as a treatment, prevention, or cure for a specific disease or condition would likely be considered by the FDA or other regulatory bodies as an unapproved drug and asked to be removed from the market. To maintain the product’s status as a nutritional supplement, the labeling and marketing must comply with the provisions in the Dietary Supplement Health and Education Act of 1994 (DSHEA) and the FDA’s extensive regulations. As a result, we have procedures in place to promote and enforce compliance by our employees related to the requirements of DSHEA, the Food, Drug and Cosmetic Act, and various other regulations. Because of the diverse scope of regulations applicable to our products, and the varied regulators enforcing these regulatory requirements, determining how to conform to all requirements is often open to interpretation and debate. As a result, we can make no assurances that regulators will not question any of our actions in the future, even though we have put continuing effort into complying with all applicable regulations.

Nutritional supplements are also subject to the Nutrition, Labeling and Education Act and various other acts that regulate health statements, ingredient labeling, and nutrient content statements that characterize the level of nutrients in a product. These acts prohibit the use of any specific health statement for nutritional supplements unless the health statement is supported by significant scientific research and is pre-approved by the FDA.

Regulators such as the Federal Trade Commission (FTC) regulate marketing practices and advertising of a company and its products. In the past several years, regulators have instituted various enforcement actions against numerous nutritional supplement companies for false and/or misleading marketing practices, as well as misleading advertising of certain products. These enforcement actions have resulted in consent decrees and significant monetary judgments against the companies and/or individuals involved. Regulators require a company to convey product statements clearly and accurately, and further require marketers to maintain adequate substantiation for their statements. The FTC requires such substantiation to be competent and reliable scientific evidence. Specifically, the FTC requires a company to have a reasonable basis for the expressed and implied product statement before it disseminates an advertisement. A reasonable basis is determined based on the statements made, how the statements are presented in the context of the entire advertisement, and how the statements are qualified. The FTC’s standard for evaluating substantiation is designed to ensure that consumers are protected from false and/or misleading statements by requiring scientific substantiation of product statements at the time such statements are first made. The failure to have this substantiation violates the Federal Trade Commission Act.

Caution Concerning Forward-Looking Statements

The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This document contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues, operating income and cash flow. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “will,” “estimates,” and similar expressions are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, history of operating losses and accumulated deficit; possible need for additional financing; competition; dependence on management; risks related to proprietary rights; government regulation; and other factors discussed in this report and our other filings with the SEC.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions, and estimates that affect the amounts reported in its Consolidated Financial Statements and the accompanying notes. Note 2, “Summary of Significant Accounting Policies” of this Form 10-Q and the Notes to Consolidated Financial Statements in the Company’s 2008 Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s Consolidated Financial Statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.



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Management believes the Company’s critical accounting policies and estimates are those related to revenue recognition, accounts receivable and allowance for doubtful accounts, inventory valuation and income taxes. Management considers these critical policies because they are both important to the portrayal of the Company’s financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.

Recent Accounting Pronouncements

Recent accounting pronouncements that the Company has adopted or that will be required to adopt in the future are summarized below.

In June 2009, FASB issued its final statement SFAS 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162”. SFAS 168 made the FASB Accounting Standards Codification (the Codification) the single source of U.S. GAAP used by nongovernmental entities in the preparation of financial statements, except for rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative accounting guidance for SEC registrants. The Codification is meant to simplify user access to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics within a consistent structure; its purpose is not to create new accounting and reporting guidance. The Codification supersedes all existing non-SEC accounting and reporting standards and was effective for the Company beginning July 1, 2009. Following SFAS 168, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates (ASU). The FASB will not consider ASUs as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification.

In August 2009, the FASB issued ASU 2009-05 which includes amendments to Subtopic 820-10, “Fair Value Measurements and Disclosures—Overall”. The update provides clarification that in circumstances, in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. The amendments in this ASU clarify that a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance provided in this ASU is effective for the first reporting period, including interim periods, beginning after issuance. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

In September 2009, the FASB issued ASU 2009-06, Income Taxes (Topic 740), ”Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities”, which provides implementation guidance on accounting for uncertainty in income taxes, as well as eliminates certain disclosure requirements for nonpublic entities. For entities that are currently applying the standards for accounting for uncertainty in income taxes, this update shall be effective for interim and annual periods ending after September 15, 2009. For those entities that have deferred the application of accounting for uncertainty in income taxes in accordance with paragraph 740-10-65-1(e), this update shall be effective upon adoption of those standards. The adoption of this standard is not expected to have an impact on the Company’s consolidated financial position and results of operations since this accounting standard update provides only implementation and disclosure amendments.

In September 2009, the FASB has published ASU No. 2009-12, “Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”. This ASU amends Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall”, to permit a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent). This ASU also requires new disclosures, by major category of investments including the attributes of investments within the scope of this amendment to the Codification. The guidance in this Update is effective for interim and annual periods ending after December 15, 2009. Early application is permitted.  The Company is in the process of evaluating the impact of this standard on its consolidated financial position and results of operations. The adoption of this standard did not have an impact on the Company’s consolidated financial position and results of operations.

In October 2009, the FASB has published ASU 2009-13, “Revenue Recognition (Topic 605)-Multiple Deliverable Revenue Arrangements”, which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, “Revenue Recognition-Multiple-Element Arrangements”, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining



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the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and also requires expanded disclosures. The guidance in this update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this standard did not have an impact on the Company’s consolidated financial position and results of operations.

In October 2009, the FASB has published ASU 2009-14, “Software (Topic 985)-Certain Revenue Arrangements that Include Software Elements” and changes the accounting model for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and nonsoftware components that function together to deliver the tangible product's essential functionality are excluded from the software revenue guidance in Subtopic 985-605, “Software-Revenue Recognition”. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. The guidance in this ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this standard did not have an impact on the Company’s consolidated financial position and results of operations.

Other ASUs not effective until after September 30, 2009, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

Results of Operations

Comparison of the three months ended September 30, 2009 (“Q309”) to the three months ended September 30, 2008 (“Q308‘)

Revenues. Total net revenues decreased $320,404 or 97.5%, to $8,240 (Q309) from $326,644 (Q308). Our efforts in the past were in redirecting and allocating available resources to concentrate on the distribution of the SunPill™, a defense system that protects the skin from the damaging effects of the sun, and the distribution of AlGal, a tasteless, odorless form of Omega 3 fatty acid, which is used as a food additive has began to yield results. No sales from AlGal products were generated in Q309 however the bulk of our decrease in revenue was a result of discontinuing the SunPill™ product in Q309. We will continue to market our proprietary Clinical NSPs - XenaCor, XenaTri and XenaZymePlus distributed through the mail to our existing customer base.

The Company has approximately $300,000 of product placed with customers, however sales of SunPill™ remained suppressed during Q309 as a result of the Company’s inability to raise sufficient cash to effect the marketing promotions necessary to generate significant sell thru. These factors resulted in the decision to discontinue the SunPill™ product.

Cost of Revenues. Total cost of revenues decreased $155,980 or 98.8%, to $1,947 (Q309) from $157,927 (Q308). The decrease is directly related to our decrease in SunPill™ sales as a result of the business factors discussed above.

Selling and Marketing Costs. Selling and marketing costs decreased $100,504 or 44.1%, to $127,522 (Q309) from $228,026 (Q308). The decrease in selling and marketing expenses is primarily due to the Company’s lack of sufficient funding to adequately promote SunPill™ sales. AlGal products are still being commercialized.

General and Administrative Costs. General and administrative costs increased $433,867 or 10.5%, to $252,229 (Q309) from ($181,638) (Q308). The increase in general and administrative expenses is related primarily accrued salaries in Q309 and to certain modifications of contracts resulting in rescinding certain costs in Q308, in connection with the proposed merger which was subsequently terminated.

Other Income(Expense). Other income(expense) decreased $178,132 or 130.8% to $41,926 expense (Q309) from $136,206 income (Q308). The decrease in other income(expense) is due to accrued interest expense in Q309 and to certain modifications of contracts resulting in rescinding certain costs in Q308, in connection with the proposed merger which was subsequently terminated.

Comparison of the nine months ended September 30, 2009 (“9mos09”) to the nine months ended September 30, 2008 (“9mos08‘)

Revenues. Total net revenues decreased $315,357 or 79.8%, to $79,929 (9mos09) from $395,286 (9mos08). Our efforts in the past were in redirecting and allocating available resources to concentrate on the distribution of the SunPill™, a defense system that protects the skin from the damaging effects of the sun, and the distribution of AlGal, a tasteless, odorless form of Omega 3 fatty acid, which is used as a food additive has began to yield results. No sales from AlGal products were generated in Q309 however the bulk of our decrease in revenue was a result of discontinuing the



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SunPill™ product in Q309. We will continue to market our proprietary Clinical NSPs - XenaCor, XenaTri and XenaZymePlus distributed through the mail to our existing customer base.

The Company has approximately $300,000 of product placed with customers, however sales of SunPill™ remained suppressed during Q309 as a result of the Company’s inability to raise sufficient cash to effect the marketing promotions necessary to generate significant sell thru. These factors resulted in the decision to discontinue the SunPill™ product.

Cost of Revenues. Total cost of revenues decreased $154,094 or 86.3%, to $24,475 (9mos09) from $178,569 (9mos08). The decrease is directly related to our decrease in SunPill™ sales as a result of the business factors discussed above.

Selling and Marketing Costs. Selling and marketing costs decreased $244,583 or 49.9%, to $245,460 (9mos09) from $490,043 (9mos08). The decrease in selling and marketing expenses is primarily due to the Company’s lack of sufficient funding to adequately promote SunPill™ sales. AlGal products are still being commercialized.

General and Administrative Costs. General and administrative costs increased $498,264 or 10.5%, to $929,831 (9mos09) from $431,567 (9mos08). The increase in general and administrative expenses is related primarily accrued salaries.

Other Income(Expense). Other income(expense) decreased $4,690 or 3.2% to $143,466 expense (9mos09) from $148,156 expense (9mos08). The decrease in other income(expense) is nominal.

Liquidity and Capital Resources

Overview

We incurred a net loss for the nine months ended September 30, 2009 of $1,281,254 and had a $1,931,853deficit in working capital at September 30, 2009. We have not yet established an ongoing source of revenues sufficient to cover our operating costs and we have not raised sufficient capital to implement our business model resulting in a decline in working capital for Q309. Our ability to continue as a going concern is dependent upon our ability to generate sales from our new products and our obtaining adequate capital to fund losses until we become profitable.

Our operating and capital requirements in connection with operations have been and will continue to be significant. Our recurring losses from operations and increased contractual agreements raise doubt about our ability to continue as a going concern. Based on our current plans, we anticipate that revenues earned from Cobroxin™ and Zeolite product sales will be the primary source of funds for operating activities. In addition to existing cash and cash equivalents, we may rely on bank borrowing, if available, or sales of securities to meet the basic capital and liquidity needs for the next 12 months. Additional capital may be sought to fund the expansion of our product line and marketing efforts, which may also include bank borrowing, or a private placement of securities.

We plan to continue utilizing our current resources to further develop our business, establish our sales and marketing network, operations, customer support and administrative organizations. We believe, based upon indications from our sales agents and others that sufficient revenues will be generated from product sales by the end of the fourth quarter of 2009 to cover our expenses. These revenues from product sales together with proceeds from private placements should be sufficient to meet presently anticipated working capital and capital expenditure requirements over the next 12 months. To the extent that we do not generate sufficient revenues we will reduce our expenses and/or seek additional financing. As of September 30, 2009 there were no commitments for long-term capital expenditures other than those discussed in Note 7 to the quarterly financial statements.

Cash Flows for the Nine months ended September 30, 2009.

Our cash and cash equivalents increased $255,053 to $255,415 as of September 30, 2009 from $362 as of December 31, 2008.

Cash Flows from Operating Activities

Operating activities used net cash for the nine months ended September 30, 2009 of $332,528. Net cash used resulted from a net loss of approximately $1,280,303, after adjustment for various items which impact net income but do not impact cash during the period, such as depreciation and stock issued for services. The net loss was partially offset by net cash provided from a net change in working capital components of $947,775. The most significant working capital component change was an increase in accounts payable and accrued expenses of $688,740, resulting from the Company securing more services related to its commercialization of the SunPill™ and correspondingly increasing vendor credit utilized.



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Cash Flows used in Investing Activities

Our investing activities used $0 in net cash during the nine months ended September 30, 2009.

Cash Flows from Financing Activities

Our financing activities provided net cash of $587,581 for the nine months ended September 30, 2009. We raised approximately $500,000 from the sale of common stock to a qualified investor, supplemented by an additional $87,581 in net advances from related parties.

Financial Position

Our total assets decreased $169,363 to $1,050,064 as of September 30, 2009 from $1,219,427 as of December 31, 2008.

Our accounts receivable decreased $71,210; our inventory decreased $24,281; and our prepaid expenses and other current assets decreased $163,544 as a result of amortization of a SunPill™ related “slotting allowance” and the completion of a prepaid SunPill™ related infomercial.

Borrowings Outstanding

As of September 30, 2009, we had borrowings, both current and non-current of $1,499,265 that was composed of $525,312 from investors, shareholders, officers and related parties, $3,047 overpayment of a $40,000 line of credit from Wachovia, secured by the personal guarantee of an officer of the Company, and $977,000 from Sun Packing, Inc.

Material Commitments, Expenditures and Contingencies

We had no outstanding purchase commitments to purchase raw materials as of September 30, 2009.

Dividends

We have not paid any dividends.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The rules applicable to a smaller reporting company do not require further disclosure in this item.

ITEM 4T.

CONTROLS AND PROCEDURES

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as of September 30, 2009. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2009.

No change in internal control over financial reporting occurred during the quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect internal control over financial reporting.




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PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None

ITEM 1A.

RISK FACTORS

There have been no material changes during the period ended June 30, 2009 in our risk factors as set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Common Stock

In August 2009 we sold 12,500.000 shares of our common stock to an accredited investor for $500,000. No broker dealer was involved in the sale of the shares and no commissions or other remuneration was paid in connection with the sale. The shares were issued in a private placement to an accredited investor pursuant to an exemption from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof and Rule 506 of Regulation D. The shareholder who received the forgoing shares signed a subscription agreement acknowledging that the shares were not registered under the Securities Act of 1933, and could only be sold under a registration or exemption from registration. Each certificate for such shares contains a restrictive legend concerning the foregoing restrictions on transfer and a stop transfer order has been lodged against such shares. The investor was offered access to our books and records and the opportunity to ask our officers questions and receive answers concerning the terms and condition of the offering and the company.

ITEM 3.

DEFAULTS ON SENIOR DEBT

None

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF THE SECURITIES HOLDERS

None

ITEM 5.

OTHER INFORMATION

None

ITEM 6.

EXHIBIT

Exhibit

Description

31.1

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.

32.1

Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.

32.2

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.



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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.

Date: November 15, 2009


 

 

 

  

XenaCare Holdings, Inc.

 

 

 

 

 

 

 

By:

/s/ Frank Rizzo

 

 

Frank Rizzo

 

 

President (principal executive officer) and Director

 

 

 

 

 

 

 

By:

/s/ Bobby Story

 

 

Bobby Story

 

 

Chief Financial Officer and Treasurer (principal financial and accounting officer)

 

 

 

 

 

 




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