**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

| [X]

Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2010.

 

 

[  ]

Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _______ to _______.

**000-52864**

(Commission file number)

 

**Total Nutraceutical Solutions, Inc.**

 (Exact name of small business issuer as specified in its charter)

**Nevada**

**26-0561199**

(State or other jurisdiction

(IRS Employer

of incorporation or organization)

Identification No.)

**PO Box 910, Stevenson, WA 98648**

 (Address of principal executive offices)

**(509) 427-5132**

 (Registrant’s telephone number)

**__________________________**

 (Former name, former address and former fiscal year, if changed since last report)

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.   Yes [X]  No [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [  ]

Accelerated filer [  ] 

Non-accelerated filer [  ] 

Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ] No [X]

On November 22, 2010, 54,012,470 shares of the registrant's common stock, par value $.001 per share, were outstanding.

**TABLE OF CONTENTS**

PART I – FINANCIAL INFORMATION

 

**3**

**Item 1.**

**Financial Statements**

 

**3**

**Item 2.**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

 

**23**

**Item 3.**

**Quantitative and Qualitative Disclosures About Market Risk**

 

**25**

**Item 4.**

**Controls and Procedures**

 

**25**

PART II – OTHER INFORMATION

 

**26**

**Item 1.**

**Legal Proceedings**

 

**26**

**Item 1A.**

**Risk Factors**

 

**26**

**Item 2.**

**Unregistered Sales of Equity Securities and Use of Proceeds**

 

**26**

**Item 3.**

**Defaults Upon Senior Securities**

 

**26**

**Item 4.**

**Submission of Matters to a Vote of Security Holders**

 

**26**

**Item 5.**

**Other Information**

 

**26**

**Item 6.**

**Exhibits**

 

**27**

SIGNATURES

 

 

**27**

 

- 2 -

 

**PART I – FINANCIAL INFORMATION**

**Item1. Financial Statements**

Total Nutraceutical Solutions, Inc.

September 30, 2010 and 2009

 

Contents                                                                                                                                                                                                            Page(s)

Consolidated Balance Sheets at September 30, 2010 (Unaudited) and December 31, 2009 

4

Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2010 and 2009 (Unaudited)  5

Consolidated Statement of Stockholders’ Equity for the Interim Period Ended September 30, 2010 (Unaudited)

6

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)

7

Notes to the Consolidated Financial Statements (Unaudited)

8-22

- 3 -

 

**TOTAL NUTRACEUTICAL SOLUTIONS, INC.**

**CONSOLIDATED BALANCE SHEETS**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2010

 

 

December 31, 2009

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

** Assets**

 

 

 

 

 

 

 

 

 

 

 

** Current Assets**

 

 

 

 

 

 

 

 

 

 

 

 Cash 

 

 

 

 

 

$

61,047 

 

$ 

48,141 

 

 Accounts receivable, net 

 

 

 

 

 

 

68,330 

 

 

3,362 

 

 Inventory 

 

 

 

 

 

 

344,704 

 

 

342,253 

 

 Prepaid expenses 

 

 

 

 

 

 

31,596 

 

 

31,418 

 

 Current maturities of lease receivable 

 

 

 

 

 

 

12,833 

 

 

11,328 

 

 Notes receivable - related party 

 

 

 

 

 

 

62,500 

 

 

- 

 

 Other current assets 

 

 

 

 

 

 

3,139 

 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Total Current Assets**

 

 

 

 

 

 

584,149 

 

 

436,502 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Property and Equipment**

 

 

 

 

 

 

 

 

 

 

 

 Property and equipment 

 

 

 

 

 

 

50,520 

 

 

20,712 

 

 Accumulated depreciation 

 

 

 

 

 

 

(6,792)

 

 

(2,290)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Property and Equipment, net**

 

 

 

 

 

 

43,728 

 

 

18,422 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Patents acquired and patents pending, net**

 

 

 

 

 

 

70,182 

 

 

35,984 

** Lease receivable, net of current maturities**

 

 

 

 

 

 

3,746 

 

 

12,237 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Total Assets**

 

 

 

 

 

$

701,805 

 

$ 

503,145 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Liabilities and Stockholders' Equity**

 

 

 

 

 

 

 

 

 

 

** Current Liabilities:**

 

 

 

 

 

 

 

 

 

 

 

 Accounts payable 

 

 

 

 

 

$

186,817 

 

$ 

111,347 

 

 Accrued compensation - officer 

 

 

 

 

 

 

107,661 

 

 

10,000 

 

 Short-term convertible notes payable, net of discount 

 

 

 

 

 

74,359 

 

 

- 

 

 Note payable - insurance 

 

 

 

 

 

 

3,867 

 

 

16,703 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Total Current Liabilities**

 

 

 

 

 

 

372,704 

 

 

138,050 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Long Term Liabilities:**

 

 

 

 

 

 

 

 

 

 

 

 Notes payable - related party, net of discount 

 

 

 

 

 

 

18,750 

 

 

- 

 

 Convertible notes payable, net of discount 

 

 

 

 

 

 

235,500 

 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Total Long Term Liabilities**

 

 

 

 

 

 

254,250 

 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Total Liabilities**

 

 

 

 

 

 

626,954 

 

 

138,050 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Stockholders' Equity**

 

 

 

 

 

 

 

 

 

 

 

 Preferred stock: $.001 par value, 5,000,000 shares authorized; 

 

 

 

 

 

 

 

 

 none issued or outstanding 

 

 

 

 

 

 

- 

 

 

- 

 

 Common stock: $.001 par value, 150,000,000 shares authorized; 

 

 

 

 

 

 

 

 54,012,470 and 52,012,470 shares issued and outstanding, respectively 

 

54,013 

 

 

52,013 

 

 Additional paid-in capital 

 

 

 

 

 

 

1,769,889 

 

 

1,148,009 

 

 Deferred compensation 

 

 

 

 

 

 

(12,250)

 

 

(20,303)

 

 Accumulated deficit  

 

 

 

 

 

 

(1,736,801)

 

 

(814,624)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Total Stockholders' Equity**

 

 

 

 

 

 

74,851 

 

 

365,095 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Total Liabilities and Stockholders' Equity**

 

 

 

 

 

$

701,805 

 

$ 

503,145 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* See accompanying notes to the consolidated financial statements.*

- 4 -

 

**TOTAL NUTRACEUTICAL SOLUTIONS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

 

Three Months

 

 

Nine Months

 

 

Nine Months

 

 

 

 

Ending

 

 

Ending

 

 

Ending

 

 

Ending

 

 

 

 

September 30, 2010

 

 

September 30, 2009

 

 

September 30, 2010

 

 

September 30, 2009

 

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 REVENUES 

 $ 

96,705 

 

$ 

39,863 

 

 

295,737 

 

$ 

39,863 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 COST OF GOODS SOLD  

 

39,644 

 

 

25,306 

 

 

123,343 

 

 

25,306 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 GROSS PROFIT 

 

57,061 

 

 

14,557 

 

 

172,394 

 

 

14,557 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 OPERATING EXPENSES 

 

 

 

 

 

 

 

 

 

 

 

 

 Advertising and promotion 

 

17,170 

 

 

932 

 

 

161,037 

 

 

25,075 

 

 Sales commissions 

 

2,084 

 

 

6,251 

 

 

18,449 

 

 

6,251 

 

 Consulting fee - officer 

 

30,000 

 

 

- 

 

 

90,000 

 

 

- 

 

 Professional fees 

 

26,625 

 

 

70,857 

 

 

89,705 

 

 

102,203 

 

 Consulting fees 

 

247,445 

 

 

81,065 

 

 

331,673 

 

 

177,572 

 

 General and administrative 

 

94,918 

 

 

46,416 

 

 

220,525 

 

 

131,679 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total Operating Expenses 

 

418,243 

 

 

205,521 

 

 

911,389 

 

 

442,780 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 LOSS FROM OPERATIONS 

 

(361,182)

 

 

(190,964)

 

 

(738,995)

 

 

(428,223)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 OTHER (INCOME) EXPENSES 

 

 

 

 

 

 

 

 

 

 

 

 

 Interest income 

 

(2,475)

 

 

(2,032)

 

 

(3,128)

 

 

(4,222)

 

 Interest expense 

 

70,142 

 

 

35 

 

 

186,310 

 

 

418 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total Other (income) Expense 

 

67,667 

 

 

(1,997)

 

 

183,182 

 

 

(3,804)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 LOSS BEFORE TAXES  

 

(428,849)

 

 

(188,967)

 

 

(922,177)

 

 

(424,419)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  INCOME TAXES  

 

- 

 

 

- 

 

 

- 

 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 NET LOSS 

 $ 

(428,849)

 

$ 

(188,967)

 

 

(922,177)

 

$ 

(424,419)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 NET LOSS PER COMMON SHARE 

 

 

 

 

 

 

 

 

 

 

 

 

  - BASIC AND DILUTED: 

 $ 

(0.01)

 

$ 

(0.00)

 

 

(0.02)

 

$ 

(0.01)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Weighted common shares outstanding 

 

 

 

 

 

 

 

 

 

 

 

 

 

  - basic and diluted 

 

52,773,270 

 

 

51,945,803 

 

 

52,268,870 

 

 

50,946,759 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* See accompanying notes to the consolidated financial statements.*

 

- 5 -

 

**TOTAL NUTRACEUTICAL SOLUTIONS, INC.**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY**

**FOR THE INTERIM PERIOD ENDED SEPTEMBER 30, 2010**

**(UNAUDITED)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

Stock

 

 

Par

 

 

Paid

 

 

Deferred 

 

 

Accumulated 

 

 

Stockholders'

 

 

 

 

 

Shares

 

 

Value

 

 

In Capital

 

 

Compensation

 

 

Deficit

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Balance - December 31, 2008**

 

 

49,673,750 

 

$ 

49,674 

 

$ 

510,776 

 

$ 

- 

 

$ 

(120,170)

 

$ 

440,280 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Shares issued for cash in February 2009, 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 net of offering costs of $15,000 

 

 

600,000 

 

 

600 

 

 

104,430 

 

 

 

 

 

 

 

 

105,030 

 Warrants issued in connection with the 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 sale of common shares in February 2009 

 

 

 

 

 

 

 

29,970 

 

 

 

 

 

 

 

 

29,970 

 Issuance of warrants for future services in Feburary 2009 

 

 

 

 

 

 

 

8,360 

 

 

(8,360)

 

 

 

 

 

- 

 Issuance of warrants for future services in April 2009 

 

 

 

 

 

 

 

8,530 

 

 

(8,530)

 

 

 

 

 

- 

 Shares issued for agreement in March 2009 

 

720 

 

 

1 

 

 

179 

 

 

 

 

 

 

 

 

180 

 Shares issued for cash in June 2009, 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 net of offering costs of $47,068 

 

 

1,638,000 

 

 

1,638 

 

 

265,112 

 

 

 

 

 

 

 

 

266,750 

 Warrants issued in connection with the 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 sale of common shares in June 2009 

 

 

 

 

 

 

 

95,682 

 

 

 

 

 

 

 

 

95,682 

 Issuance of warrants for future services in July 2009 

 

 

 

 

 

 

 

21,250 

 

 

(21,250)

 

 

 

 

 

- 

 Issuance of warrants for future services in September 2009 

 

 

 

 

 

 

 

4,250 

 

 

(4,250)

 

 

 

 

 

- 

 Shares issued for cash in September 2009 

 

100,000 

 

 

100 

 

 

24,900 

 

 

 

 

 

 

 

 

25,000 

 Warrants issued for future services in October 2009 

 

 

 

 

 

 

 

9,570 

 

 

(9,570)

 

 

 

 

 

- 

 Warrants issued for future services in December 2009 

 

 

 

 

 

 

 

15,000 

 

 

(7,500)

 

 

 

 

 

7,500 

 Issuance of warrants in connection  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 with convertible note payable in December 2009 

 

 

 

 

 

 

 

22,200 

 

 

 

 

 

 

 

 

22,200 

 Beneficial conversion feature in connection  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 with convertible note payable in December 2009 

 

 

 

 

 

 

 

27,800 

 

 

 

 

 

 

 

 

27,800 

 Amortization of deferred compensation 

 

 

 

 

 

 

 

 

 

 

39,157 

 

 

 

 

 

39,157 

 Net loss 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(694,454)

 

 

(694,454)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Balance - December 31, 2009**

 

 

52,012,470 

 

 

52,013 

 

 

1,148,009 

 

 

(20,303)

 

 

(814,624)

 

 

365,095 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Issuance of warrants in connection with short-term 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 convertible note payable issued in January 2010 

 

 

 

 

 

 

 

49,200 

 

 

 

 

 

 

 

 

49,200 

 Beneficial conversion feature in connection with short-term 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 convertible note payable issued in January 2010 

 

 

 

 

 

 

 

50,800 

 

 

 

 

 

 

 

 

50,800 

 Issuance of warrants in connection with 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 convertible note payable issued in February 2010 

 

 

 

 

 

 

 

74,550 

 

 

 

 

 

 

 

 

74,550 

 Beneficial conversion feature in connection with 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 convertible note payable issued in February 2010 

 

 

 

 

 

 

 

75,450 

 

 

 

 

 

 

 

 

75,450 

 Issuance of warrants in connection with 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 convertible note payable issued in March 2010 

 

 

 

 

 

 

 

68,700 

 

 

 

 

 

 

 

 

68,700 

 Beneficial conversion feature in connection with 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 convertible note payable issued in March 2010 

 

 

 

 

 

 

 

68,700 

 

 

 

 

 

 

 

 

68,700 

 Issuance of warrants for future services  

 

 

 

 

 

 

 

26,480 

 

 

(26,480)

 

 

 

 

 

- 

 Issuance of common stock for services 

 

2,000,000 

 

 

2,000 

 

 

208,000 

 

 

 

 

 

 

 

 

210,000 

 Amortization of deferred compensation 

 

 

 

 

 

 

 

 

 

 

34,533 

 

 

 

 

 

34,533 

 Net loss 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(922,177)

 

 

(922,177)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** Balance - September 30, 2010**

 

 

54,012,470 

 

$ 

54,013 

 

$ 

1,769,889 

 

$ 

(12,250)

 

$ 

(1,736,801)

 

# 

74,851 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* See accompanying notes to the consolidated financial statements.*

- 6 -

 

**TOTAL NUTRACEUTICAL SOLUTIONS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months

 

 

Nine Months

 

 

 

 

 

 

 

 

 

 

 

 

 

Ended

 

 

Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2010

 

 

September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 CASH FLOWS FROM OPERATING ACTIVITIES: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net loss 

 

 

 

 

 

 

 

 

$

(922,177)

 

$

(424,419)

 

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

 

 

 

 

 

 

 

 

 Depreciation 

 

 

 

 

 

 

 

 

 

4,502 

 

 

673 

 

 

 Amortization of discount on short-term convertible note payable 

 

 

74,359 

 

 

- 

 

 

 Amortization of discount on notes payable - related parties 

 

 

 

18,750 

 

 

- 

 

 

 Amortization of discount on convertible notes payable 

 

 

 

 

 

 

72,901 

 

 

- 

 

 

 Stock-based compensation 

 

 

 

 

 

 

 

 

 

244,533 

 

 

(21,112)

 

 

 Changes in operating assets and liabilities: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Accounts receivable 

 

 

 

 

 

 

 

 

 

(64,968)

 

 

(30,731)

 

 

 

 Inventory 

 

 

 

 

 

 

 

 

 

(2,451)

 

 

(30,909)

 

 

 

 Prepaid expenses 

 

 

 

 

 

 

 

 

 

(178)

 

 

15,742 

 

 

 

 Other current assets 

 

 

 

 

 

 

 

 

 

(3,139)

 

 

(3,458)

 

 

 

 Accounts payable 

 

 

 

 

 

 

 

 

 

75,469 

 

 

25,671 

 

 

 

 Accrued compensation - officer 

 

 

 

 

 

 

 

 

 

97,661 

 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 NET CASH USED IN OPERATING ACTIVITIES 

 

 

 

 

 

 

 

 

 

(404,738)

 

 

(468,543)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 CASH FLOWS FROM INVESTING ACTIVITIES: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Note receivable - related party 

 

 

 

 

 

 

 

 

 

(62,500)

 

 

(135,000)

 

 

 Purchase of furniture and equipment 

 

 

 

 

 

 

 

 

 

(29,808)

 

 

(3,960)

 

 

 Patents acquired and patents pending, net 

 

 

 

 

 

 

 

 

 

(34,198)

 

 

- 

 

 

 Lease receivable 

 

 

 

 

 

 

 

 

 

14,538 

 

 

(24,269)

 

 

 Collection of lease receivable 

 

 

 

 

 

 

 

 

 

(7,552)

 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 NET CASH USED IN INVESTING ACTIVITIES 

 

 

 

 

 

 

 

 

 

(119,520)

 

 

(163,229)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 CASH FLOWS FROM FINANCING ACTIVITIES: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Proceeds from short-term convertible notes payable 

 

 

 

 

 

100,000 

 

 

- 

 

 

 Proceeds from note payable - insurance 

 

 

 

 

 

 

 

 

 

4,796 

 

 

- 

 

 

 Repayment of note payable - insurance 

 

 

 

 

 

 

 

 

 

(17,632)

 

 

(16,539)

 

 

 Proceeds from convertible notes payable 

 

 

 

 

 

 

 

 

 

450,000 

 

 

- 

 

 

 Proceeds from sale of common stock, net of offering cost 

 

 

 

- 

 

 

565,002 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 NET CASH PROVIDED BY FINANCING ACTIVITIES 

 

 

 

 

 

 

 

 

537,164 

 

 

548,463 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 NET CHANGE IN CASH 

 

 

 

 

 

 

 

 

 

12,906 

 

 

(83,309)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Cash at beginning of period 

 

 

 

 

 

 

 

 

 

48,141 

 

 

273,171 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Cash at end of period 

 

 

 

 

 

 

 

 

$

61,047 

 

$ 

189,862 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: 

 

 

 

 

 

 

 

 Interest paid 

 

 

 

 

 

 

 

 

$

485 

 

$ 

418 

 

 

 Income taxes paid 

 

 

 

 

 

 

 

 

$

- 

 

$ 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 SUPPLEMENTAL DISCLOSURE OF NONCASH FLOWS FINANCING 

 

 

 

 

 

 

 

 AND INVESTING ACTIVITIES: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Warrants issued for future services 

 

 

 

 

 

 

 

 

$

26,480 

 

$ 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* See accompanying notes to the consolidated financial statements.*

- 7 -

 

**Total Nutraceutical Solutions, Inc****.**

**September 30, 2010 and 2009**

**Notes to the Financial Statements**

**(Unaudited)**

**NOTE 1 - ORGANIZATION AND OPERATIONS**

Generic Marketing Services, Inc. (“Generic Marketing Services”) was incorporated on July 19, 2007 under the laws of the State of Nevada.  The company was incorporated as a subsidiary of Basic Services, Inc. (“Basic Services”), a Nevada corporation.   On December 31, 2007, Basic Services decided to spin off its subsidiary.  On October 8, 2008, Generic Marketing Services filed a Certificate of Amendment to its Articles of Incorporation with the Nevada Secretary of State to change its corporate name from Generic Marketing Services, Inc. to “Total Nutraceutical Solutions, Inc.” (“TNS” or the “Company”).  The Company engages in the distribution of organic nutraceutical products in the United States of America.

*Formation of a joint venture*

On March 26, 2010 the Company entered into a Profit Sharing Agreement or Direct Marketing Affiliates Project (DMAP) with American Charter & Marketing LLC (ACM) and Delta Group Investments Limited (DGI), with the primary focus of undertaking a direct mail marketing campaign designed to sell nutraceutical products developed and manufactured by the Company.  The Company will act as Managing Affiliate.  DGI will provide $300,000 in the form of a loan, as starting capital for the project (see Note 5), which is guaranteed by the Company.   The financial results of the DMAP are consolidated into these financial statements.  The net profits of the DMAP project will be shared with 25% going to the Company, 25% to DGI, 25% to ACM and 25% as a return on the initial loan.  The DMAP project is to be in effect for three (3) years from date of execution.  The DMAP agreement contains an option to convert profits into shares of the Company’s restricted common stock.  Certain administrative expenses incurred by the Company were reimbursed by the DMAP and are classified on the Consolidated Statement of Operations as administrative expenses.  The amount of reimbursed expenses was approximately $2,000 for the three months ending September 30, 2010 and $14,000 for the nine months ending September 30, 2010.  This agreement is accounted for in accordance with Topic 525.

**NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*Basis of presentation*

The accompanying consolidated unaudited interim financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.  Unaudited interim results are not necessarily indicative of the results for the full year.  These unaudited interim financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2009 and notes thereto contained in the information as part of the Company’s Annual Report on Form 10-K filed with the SEC on April 15, 2010. 

The consolidated financial statements include all accounts of TNS as of September 30, 2010 and 2009 and for the interim periods then ended; and all accounts of DMAP as of September 30, 2010 and for the period from March 26, 2010 (inception) through September 30, 2010.  All inter-company balances and transactions have been eliminated.

*Reclassifications*

Certain reclassifications have been made in our fiscal 2009 financial statements to conform to current year’s presentation of financial information.

*Use of estimates*

The preparation of financial statements in conformity with generally accepted accounting principles 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 revenues and expenses during the reporting period.  Actual results could differ from those estimates.

*Fiscal year end*

- 8 -

 

The Company elected July 31 as its initial fiscal year end date upon its formation.  On November 11, 2008, the Company changed its fiscal year end date from July 31 to December 31.

*Cash equivalents*

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

*Accounts receivable*

Accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts.  Allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable.  The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions.  The allowance for doubtful accounts was $1,138 at September 30, 2010 and $0 at December 31, 2009.  Bad debt expense is included in general and administrative expenses, if any.

Outstanding account balances are reviewed individually for collectability.  Account balances are charged off against allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

The Company does not have any off-balance-sheet credit exposure to its customers.

*Inventory*

The Company values its inventory, consisting of purchased raw materials and finished goods, at the lower of cost or market.  Cost is determined on the First-in and First-out (“FIFO”) method.  The Company regularly reviews its inventory on hand and, when necessary, records a provision for excess or obsolete inventory based primarily on current selling price.  The Company determined that there was no inventory obsolescence as of September 30, 2010 or December 31, 2009.

*Property and equipment*

Property and equipment are recorded at cost.  Expenditures for major additions and betterments are capitalized.  Maintenance and repairs are charged to operations as incurred.  Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful lives of three (3) or five (5) years.  Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in statements of operations.

*Patents acquired and patents pending*

The Company has adopted the guidelines as set out in subtopic 350-30 of the FASB Accounting Standards Codification (“Subtopic 350-30”) for patents.  Under the requirements as set out in Subtopic 350-30, the Company amortizes the costs of acquired patents over their remaining legal lives, estimated useful lives, or the term of the contract, whichever is shorter.  All internally developed process costs incurred to the point when a patent application is to be filed are expensed as incurred and classified as research and development costs.  Patent application costs, generally legal costs, thereafter incurred, are capitalized pending disposition of the individual patent application, and are subsequently either amortized based on the initial patent life granted, generally fifteen (15) to twenty (20) years for domestic patents and five (5) to twenty (20) years for foreign patents, or expensed if the patent application is rejected.  The costs of defending and maintaining patents are expensed as incurred.  Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

*Impairment of long-lived assets*

The Company follows paragraph 360-10-35-17 of the FASB Accounting Standards Codification for its long-lived assets. The Company’s long-lived assets, which include property and equipment, intangible assets and patents pending are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.  Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.  If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.  The Company determined that there were no impairments of long-lived assets as of September 30, 2010 or December 31, 2009.

- 9 -

 

*Lease receivable*

The Company follows paragraph 840-30-35-23 of the FASB Accounting Standards Codification and amortizes the unearned income and initial direct costs on a direct financing lease to income over the term of the lease to produce a constant periodic rate of return on the net investment in the lease.

*Discount on convertible notes payable*

The Company follows subtopic 470-20 of the FASB Accounting Standards Codification (“Subtopic 470-20”) “*Debt with Conversion and Other Options*,” when accounting for convertible notes payable. The Company allocates the proceeds received between convertible notes payable and warrants, if applicable. The resulting warrants discount from the face amount of the convertible notes payable is amortized using the effective interest method over the life of the debt instruments. After allocating a portion of the proceeds to the warrants, the effective conversion price of the convertible notes payable can be determined. If the effective conversion price is lower than the market price at the date of issuance, a beneficial conversion feature needs to be recorded as a discount to the convertible notes payable. The beneficial conversion feature discount needs to be amortized using the effective interest method over the life of the debt instruments.  

*Fair value of financial instruments*

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (“U.S. GAAP”), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.  The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

Level 1

 

Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.

 

 

 

Level 2

 

Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

 

 

 

Level 3

 

Pricing inputs that are generally observable inputs and not corroborated by market data.

The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses, accounts payable and accrued officer’s compensation, approximate their fair values because of the short maturity of these instruments.  The Company’s lease receivable, note payable and convertible notes payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at September 30, 2010 and December 31, 2009.

The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at September 30, 2010 or December 31, 2009, nor gains or losses are reported in the statement of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the interim periods ended September 30, 2010 or 2009. 

*Revenue recognition*

The Company follows the guidance of paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition.  The Company recognizes revenue when it is realized or realizable and earned.  The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

The Company recognizes its revenue from sales contracts with customers with revenues being generated upon the shipment of product.  Persuasive evidence of an arrangement is demonstrated via invoice, product delivery is evidenced by warehouse shipping log as well as a signed bill of lading from the trucking company or third party carrier and title transfers upon shipment, based on free on board (“FOB”) warehouse; the sales price to the customer is fixed upon acceptance of the purchase order and there is no separate sales rebate, discount, or volume incentive.

- 10 -

 

*Shipping and handling costs*

The Company accounts for shipping and handling fees in accordance with paragraph 605-45-45-19 of the FASB Accounting Standards Codification.  While amounts charged to customers for shipping products are included in revenues, the related costs are classified in cost of goods sold as incurred.

*Advertising costs*

Advertising costs are expensed as incurred.

*Research and development*

The Company follows paragraph 730-10-25-1 and 730-20-25-11 of the FASB Accounting Standards Codification for research and development costs.  Research and development costs are charged to expense as incurred.  Research and development costs consist primarily of remuneration for research and development staff, depreciation and maintenance expenses of research and development equipment, material and testing costs for research and development as well as research and development arrangements with unrelated third party research and development institutions.  Those research and development arrangements usually involve one specific research and development project of the development of a specific drug compound.  Often times, the Company makes non-refundable advances upon signing of these arrangements.  The Company adopted paragraph 730-20-25-13 and 730-20-35-1 of the FASB Accounting Standards Codification for those non-refundable advances.  Non-refundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized.  Such amounts are recognized as an expense as the related goods are delivered or the related services are performed.  Management continues to evaluate whether the Company expect the goods to be delivered or services to be rendered.  If the management does not expect the goods to be delivered or services to be rendered, the capitalized advance payment are charged to expense.

*Foreign currency transactions*

The Company applies the guidelines as set out in Section 830-20-35 of the FASB Accounting Standards Codification (“Section 830-20-35”) for foreign currency transactions.  Pursuant to Section 830-20-35 of the FASB Accounting Standards Codification, foreign currency transactions are transactions denominated in currencies other than U.S. Dollar, the Company’s functional and reporting currency.  Foreign currency transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid.  A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. That increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or loss****that generally shall be included in determining net income for the period in which the exchange rate changes. Likewise, a transaction gain or loss (measured from the transaction date****or the most recent intervening balance sheet date, whichever is later) realized upon settlement of a foreign currency transaction generally shall be included in determining net income for the period in which the transaction is settled.

*Equity instruments issued to parties other than employees for acquiring goods or services*

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of section 505-50-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

The fair value of each option/warrant award is estimated on the date of grant using a Black-Scholes option-pricing valuation model.  The ranges of assumptions for stock options and warrants are as follows:

- 11 -

 

·

The expected life of options/warrants granted is derived from paragraph 718-10-S99-1 of the FASB Accounting Standards Codification and represents the period of time the options are expected to be outstanding.

·

The expected volatility is based on a combination of the historical volatility of comparable companies’ stock over the contractual life of the options.

·

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the option/warrant.

·

The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the contractual life of the option.

The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.  Additionally, the Company’s policy is to issue new shares of common stock to satisfy stock option/warrant exercises.

*Income taxes*

The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of income and comprehensive income in the period that includes the enactment date.

The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”).  Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.  The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of Section 740-10-25.

*Net income (loss) per common share*

Net income (loss) per common share is computed pursuant to paragraph of 260-10-45-10 of the FASB Accounting Standards Codification.  Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period.  Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period to reflect the potential dilution.   

The following table shows the weighted-average number of potentially outstanding dilutive shares excluded from the diluted net loss per share calculation for the interim periods ended September 30, 2010 and 2009 as they were anti-dilutive.

- 12 -

 

 

 

Weighted average number of 

potentially outstanding dilutive shares

 

 

 

For the nine months ended

September 30, 2010

 

 

For the nine months ended

September 30, 2009

 

 

 

 

 

 

 

 

 

 

Warrants issued, exercisable and outstanding in connection with the sale of common stock from August 2008 through October 2008

 

 

2,650,000

 

 

 

2,650,000

 

 

 

 

 

 

 

 

 

 

Warrants issued, exercisable and outstanding in connection with the sale of common stock on February 3, 2009 

 

 

660,000

 

 

 

660,000

 

 

 

 

 

 

 

 

 

 

Warrants issued, exercisable and outstanding as compensation on February 3, 2009

 

 

50,000

 

 

 

50,000

 

 

 

 

 

 

 

 

 

 

Warrants issued, exercisable and outstanding as compensation on April 1, 2009 

 

 

50,000

 

 

 

50,000

 

 

 

 

 

 

 

 

 

 

Warrants issued, exercisable and outstanding in connection with the sale of common stock June 9, 2009

 

 

1,801,800

 

 

 

1,801,800

 

 

 

 

 

 

 

 

 

 

Warrants issued, exercisable and outstanding as compensation from June 2009 to September 2009

 

150,000

 

 

 

150,000

 

 

 

 

 

 

 

 

 

 

Warrants issued, exercisable and outstanding as compensation from October 1, 2009, to December 31, 2009

 

 

169,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Convertible notes payable issued on December 30, 2009 maturing on December 31, 2011 with 6.0% interest per annum, convertible to common shares at $.20 per share

 

 

250,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Warrants issued, exercisable and outstanding in connection with the issuance of Convertible notes payable on December 30, 2009

 

 

250,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Warrants issued, exercisable and outstanding as compensation on January 1, 2010

 

 

125,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Convertible notes payable issued on January 12, 2010, February 18, 2010 and March 26, 2010, convertible to common shares

 

 

2,450,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Warrants issued, exercisable and outstanding in connection with the issuance of Convertible notes payable on January 12, 2010, February 18, 2010 and March 31, 2010

 

 

1,850,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Warrants issued, exercisable and outstanding as compensation from April 2010 to June 2010

 

 

27,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Warrants issued, exercisable and outstanding as compensation from July 2010 to September 2010

 

 

32,500

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Interests accrued on convertible notes payable, convertible to common shares

 

 

84,801

 

 

 

 

 

 

 

 

 

 

 

 

Total potentially outstanding dilutive shares

 

 

10,600,101

 

 

 

5,361,800

 

*Commitments and contingencies*

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies.  Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

*Cash flows reporting*

The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments.  The Company reports the reporting 

- 13 -

 

currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.

*Subsequent events*

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements are issued.  Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.
*Recently issued accounting pronouncements*

In January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-01 *“Equity Topic 505 – Accounting for Distributions to Shareholders with Components of Stock and Cash”*, which clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share (“EPS”)).  Those distributions should be accounted for and included in EPS calculations in accordance with paragraphs 480-10-25-14 and 260-10-45-45 through 45-47 of the FASB Accounting Standards codification.  The amendments in this Update also provide a technical correction to the Accounting Standards Codification.  The correction moves guidance that was previously included in the Overview and Background Section to the definition of a stock dividend in the Master Glossary.  That guidance indicates that a stock dividend takes nothing from the property of the corporation and adds nothing to the interests of the stockholders.  It also indicates that the proportional interest of each shareholder remains the same, and is a key factor to consider in determining whether a distribution is a stock dividend. The amendments in this Update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis.

In January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-02 *“Consolidation Topic 810 – Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification”*, which provides amendments to Subtopic 810-10 and related guidance within U.S. GAAP to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applies to the following:

1.

A subsidiary or group of assets that is a business or nonprofit activity

2.

A subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture

3.

An exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity (including an equity method investee or joint venture).

The amendments in this Update also clarify that the decrease in ownership guidance in Subtopic 810-10 does not apply to the following transactions even if they involve businesses:

1.

Sales of in substance real estate.  Entities should apply the sale of real estate guidance in Subtopics 360-20 (Property, Plant, and Equipment) and 976-605 (Retail/Land) to such transactions.

2.

Conveyances of oil and gas mineral rights.  Entities should apply the mineral property conveyance and related transactions guidance in Subtopic 932-360 (Oil and Gas-Property, Plant, and Equipment) to such transactions.

If a decrease in ownership occurs in a subsidiary that is not a business or nonprofit activity, an entity first needs to consider whether the substance of the transaction causing the decrease in ownership is addressed in other U.S. GAAP, such as transfers of financial assets, revenue recognition, exchanges of nonmonetary assets, sales of in substance real estate, or conveyances of oil and gas mineral rights, and apply that guidance as applicable. If no other guidance exists, an entity should apply the guidance in Subtopic 810-10.  The amendments in this Update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009.

In January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-06 *“Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements”*, which provides amendments to Subtopic 820-10 that require new disclosures as follows:

1.

Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 

- 14 -

 

2.

Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). 

This Update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows:

1.

Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 

2.

Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. 

This Update also includes conforming amendments to the guidance on employers' disclosures about postretirement benefit plan assets (Subtopic 715-20). The conforming amendments to Subtopic 715-20 change the terminology from *major categories*of assets to *classes*of assets and provide a cross reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.

In February 2010, the FASB issued the FASB Accounting Standards Update No. 2010-09 *“Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements”*, which provides amendments to Subtopic 855-10 as follows:

1.

An entity that either (a) is an SEC filer or(b) is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets) is required to evaluate subsequent events through the date that the financial statements are issued. If an entity meets neither of those criteria, then it should evaluate subsequent events through the date the financial statements are available to be issued.

2.

An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements.

3.

The scope of the reissuance disclosure requirements is refined to include revised financial statements only. The term *revised financial statements*is added to the glossary of Topic 855. Revised financial statements include financial statements revised either as a result of correction of an error or retrospective application of U.S. generally accepted accounting principles.

All of the amendments in this Update are effective upon issuance of the final Update, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010.

In April 2010, the FASB issued the FASB Accounting Standards Update No. 2010-17 *“Revenue Recognition — Milestone Method (Topic 605) Milestone Method of Revenue Recognition”*, which provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive.

Determining whether a milestone is substantive is a matter of judgment made at the inception of the arrangement. The following criteria must be met for a milestone to be considered substantive. The consideration earned by achieving the milestone should:

1.

Be commensurate with either of the following:

a.

The vendor's performance to achieve the milestone

b.

The enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor's performance to achieve the milestone 

2.

Relate solely to past performance

3.

Be reasonable relative to all deliverables and payment terms in the arrangement.

A milestone should be considered substantive in its entirety. An individual milestone may not be bifurcated. An arrangement may include more than one milestone, and each milestone should be evaluated separately to determine whether the milestone is substantive. Accordingly, an arrangement may contain both substantive and nonsubstantive milestones.

- 15 -

 

A vendor's decision to use the milestone method of revenue recognition for transactions within the scope of the amendments in this Update is a policy election. Other proportional revenue recognition methods also may be applied as long as the application of those other methods does not result in the recognition of consideration in its entirety in the period the milestone is achieved.

A vendor that is affected by the amendments in this Update is required to provide all of the following disclosures:

1.

A description of the overall arrangement 

2.

A description of each milestone and related contingent consideration 

3.

A determination of whether each milestone is considered substantive 

4.

The factors that the entity considered in determining whether the milestone or milestones are substantive 

5.

The amount of consideration recognized during the period for the milestone or milestones. 

The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity's fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. Additionally, a vendor electing early adoption should disclose the following information at a minimum for all previously reported interim periods in the fiscal year of adoption:

1.

Revenue 

2.

Income before income taxes 

3.

Net income 

4.

Earnings per share 

5.

The effect of the change for the captions presented. 

A vendor may elect, but is not required, to adopt the amendments in this Update retrospectively for all prior periods.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
**NOTE 2 – GOING CONCERN**

As reflected in the accompanying consolidated financial statements, the Company had an accumulated deficit of $1,736,801 at September 30, 2010 and had a net loss of $922,177 and net cash used in operating activities of $404,738 for the interim period then ended, respectively.

While the Company is attempting to generate sufficient revenues, the Company’s cash position may not be sufficient to support the Company’s daily operations.  Management intends to raise additional funds by way of a public or private offering.  Management believes that the actions presently being taken to generate sufficient revenues provide the opportunity for the Company to continue as a going concern.  While the Company believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect.  The ability of the Company to continue as a going concern is dependent upon the Company’s ability to generate sufficient revenues.
The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. 

**NOTE 3 – INVENTORY**

Inventory at September 30, 2010 and December 31, 2009 consisted of the following:

 

 

September 30, 2010

 

 

December 31, 2009

 

Raw materials

 

$

300,392

 

 

$

321,229

 

Finished goods

 

 

44,312

 

 

 

21,024

 

 

 

$

344,704

 

 

$

342,253

 

- 16 -

 

**NOTE 4 – PROPERTY AND EQUIPMENT**

Property and equipment, stated at cost, less accumulated depreciation at September 30, 2010 and December 31, 2009 consisted of the following:

 

Estimated Useful Life (Years)

 

September 30, 2010

 

 

December 31,

2009

 

Office equipment 

3

 

$

21,556

 

 

$

5,261

 

Production equipment

3 to 5

 

 

28,964

 

 

 

15,451

 

 

 

 

 

50,520

 

 

 

20,712

 

Less accumulated depreciation

 

 

 

(6,792

)

 

 

(2,290

)

 

 

 

$

43,728

 

 

$

18,422

 

**NOTE 5 – NOTES RECEIVABLE - RELATED PARTY**

Notes receivable – related party at September 30, 2010 and December 31, 2009 consisted of the following:

 

 

September 30, 2010

 

 

December 31,

2009

 

On February 25, 2010, the Company granted a promissory note to Gary Ballen, a related party, in the amount of $12,500 with interest at 6% per annum.  The note is due and payable on September 30, 2010.  

 

 

12,500

 

 

 

-

 

On June 30, 2010, the Company granted a promissory note to Gary Ballen, a related party, in the amount of $50,000 with interest at 6% per annum.  The note is due and payable on September 30, 2010.  

 

 

50,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

$

62,500

 

 

$

-

 

**NOTE 6 – NOTE PAYABLE – D&O INSURANCE**

Note payable at September 30, 2010 and December 31, 2009 consisted of the following:

 

 

September 30, 2010

 

 

December 31,

2009

 

On November 12, 2009 the Company entered into a short term financing agreement of $18,750 for Director’s and Officer’s Insurance.  Repayment is to be paid over nine (9) months, with interest at 5.25% per annum, paid in full by August 1, 2010.  

 

 

-

 

 

 

16,703

 

On August 11, 2010 the Company entered into a short term financing agreement of $4,796 for Product Liability Insurance.  Repayment is to be paid over ten (10) months, with interest at 9.65% per annum.  

 

 

3,867

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

$

3,867

 

 

$

16,703

 

**NOTE 7 – SHORT-TERM CONVERTIBLE NOTE PAYABLE**

On January 12, 2010, the Company entered into a 6% short-term convertible note payable of $100,000 (“Short-term Convertible Note”) with Larry Johnson (the “Payee”) maturing on December 31, 2010. The Payee has the option to convert the outstanding note and interest due into Company’s restricted common shares at $.20 per share at any time prior to December 31, 2010. In connection with the issuance of the Short-term Convertible Note, the Company granted to the Payee a warrant to purchase 500,000 common shares exercisable at $0.10 per share expiring five (5) year from the date of issuance.

The relative fair value of the warrant granted, estimated on the date of grant, was $49,200, which was recorded as a discount to the Short-term Convertible Note using the Black-Scholes option-pricing model with the following assumptions:

- 17 -

 

Expected option life (year)

 

 

5.00

 

Expected volatility

 

 

72.67%

 

Risk-free interest rate

 

 

2.49%

 

Dividend yield

 

 

0.00%

 

After allocating the $49,200, portion of the proceeds to the warrant as a discount to the Short-term Convertible Note, the effective conversion price of the short-term convertible note payable was lower than the market price at the date of issuance and per calculation the remaining balance of the net proceeds was allocated to a beneficial conversion feature by crediting $50,800 to additional paid-in capital and debiting the same amount to a beneficial conversion feature. The Company is amortizing the discount and beneficial conversion feature over the term of the Short-term Convertible Note. The amortization of the discount and beneficial conversion feature amounted to $74,359 for the interim period ended September 30, 2010.

Short-term convertible note payable at September 30, 2010 and December 31, 2009 consisted of the following:

 

 

September 30, 2010

 

 

December 31,

2009

 

 

 

 

 

 

 

 

 

 

Short-term convertible note payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Face amount of short-term convertible note payable 

 

$

100,000

 

 

$

-

 

 

 

 

 

 

 

 

 

 

Discount representing (i) the relative fair value of the warrants issued in connection with the issuance of the short-term convertible note and (ii) the beneficial conversion feature

 

 

(100,000

)

 

 

-

 

 

 

 

 

 

 

 

 

 

Accumulated amortization of discount 

 

 

74,359

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

$

74,359

 

 

$

-

 

**NOTE 8 – NOTES PAYABLE - RELATED PARTIES**

On December 30, 2009, the Company entered into two (2) 6% notes payable of $25,000 each, or $50,000 in aggregate (“Notes - Related Parties”) with (i) Marvin Hausman, M.D., Chief Executive Officer, Director and Stockholder of the Company and (ii) Philip Sobol, a Director of the Company (the “Payees”) maturing on December 31, 2011. Notes – Related Parties, at the discretion of the Payees, is due and payable in the event that the Company completes a capital fund raising of any amount greater than $250,000.  If the Company completes such a capital fund raising, the Payees shall have 30 days from the close of the fundraising to to convert their notes to equity in the form of restricted common stock.  The Payees have the option to convert the outstanding notes and interest due into Company restricted common shares at $.20 per share at any time after the fundraising but prior to December 31, 2011. In connection with the issuance of Notes - Related Parties, the Company granted the Payees warrants to purchase 250,000 common shares exercisable at $0.10 per share expiring five (5) year from the date of issuance.

The relative fair value of these warrants granted, estimated on the date of grant, was $22,200, which was originally recorded as a discount to notes payable – related parties, using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Expected option life (year)

 

 

5.00

 

Expected volatility

 

 

80.52%

 

Risk-free interest rate

 

 

2.69%

 

Dividend yield

 

 

0.00%

 

After allocating the $22,200, portion of the proceeds to the warrants as a discount to the Short-term Convertible Note, the effective conversion price of the notes payable – related parties was lower than the market price at the date of issuance and therefore the remaining balance of $27,800 of the net proceeds has been assigned as a beneficial conversion feature by crediting $27,800 to additional paid-in capital and debiting the same amount to the discount to the notes payable – related parties.  The Company is amortizing the discount and beneficial conversion feature over the term of the Notes payable – related parties. The amortization of the discount and beneficial conversion feature amounted to $18,750 for the interim period ended September 30, 2010.

- 18 -

 

Notes payable – related parties at September 30, 2010 and December 31, 2009 consisted of the following:

 

 

September 30, 2010

 

 

December 31,

2009

 

 

 

 

 

 

 

 

 

 

Notes payable – related parties 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Face amount of the Convertible note payable – related parties, originated on December 30, 2009, with interest at 6.00% per annum, with principal and interest due December 31, 2011.

 

$

50,000

 

 

$

50,000

 

 

 

 

 

 

 

 

 

 

Discount representing (i) the relative fair value of the warrants issued of $22,200 and (ii) the beneficial conversion feature of $27,800

 

 

(50,000

)

 

 

(50,000)

 

 

 

 

 

 

 

 

 

 

Accumulated amortization of discount 

 

 

18,750

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

$

18,750

 

 

$

-

 

**NOTE 9 – CONVERTIBLE NOTES PAYABLE**

*(i) February 18, 2010 Mark Wolf Note*

On February 18, 2010, the Company entered into two 6% convertible notes payable of $150,000 in aggregate (“Convertible Note”) with Mark Wolf (the “Payee”) maturing on December 31, 2011. The Payee has the option to convert the outstanding notes and interest due into Company restricted common shares at $.20 per share at any time prior to December 31, 2011.  In connection with the issuance of Convertible Notes, the Company granted to the Payee a warrant to purchase 750,000 common shares exercisable at $0.10 per share expiring five (5) year from the date of issuance.

The relative fair value of these warrants granted, estimated on the date of grant, was $74,550, which was recorded as a discount to the convertible notes payable, using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Expected option life (year)

 

 

5.00

 

Expected volatility

 

 

78.08%

 

Risk-free interest rate

 

 

2.46%

 

Dividend yield

 

 

0.00%

 

After allocating the $74,550 portion of the proceeds to the warrants as a discount to the Convertible Note, the effective conversion price of the convertible notes payable was lower than the market price at the date of issuance and per calculation the remaining balance of the net proceeds was allocated to a beneficial conversion feature by crediting $75,450 to additional paid-in capital and debited the same amount to the beneficial conversion feature..  The Company is amortizing the discount and beneficial conversion feature over the term of the Convertible Note. The amortization of the discount and beneficial conversion feature amounted to $50,000 for the interim period ended September 30, 2010.

 *(ii) March 26, 2010 Delta Group Note*

On March 26, 2010, the Company entered into a 5% convertible note payable of $300,000 (“Convertible Note”) with Delta Group Investments Limited (the “Payee”) maturing on March 26, 2013. The Payee has the option to convert the outstanding note into Company restricted common shares at $.25 per share at any time prior to payment in full of the principal balance of the Convertible Note. The Convertible Note is callable at the option of the Company at the rate of $.25 per share, if the stock closes at $1.00 per share or higher for thirty (30) consecutive trading days. In connection with the issuance of the Convertible Note, the Company granted the Payee a warrant to purchase 600,000 common shares exercisable at $0.15 per share expiring three (3) years from the date of issuance.

The relative fair value of these warrants granted, estimated on the date of grant, was $68,700, which was recorded as a discount to the convertible note payable, using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Expected option life (year)

 

 

3.00

 

Expected volatility

 

 

67.63%

 

Risk-free interest rate

 

 

1.64%

 

Dividend yield

 

 

0.00%

 

- 19 -

 

After allocating the $68,700, portion of the proceeds to the warrants as a discount to the Convertible Note, an additional $68,700 was allocated to a beneficial conversion feature by crediting additional $68,700 to additional paid-in capital and debiting the same amount to the beneficial conversion feature.  The Company is amortizing the discount and beneficial conversion feature over the term of the Convertible Note. The amortization of the discount and beneficial conversion feature amounted to $22,900 for the interim period ended September 30, 2010.

Convertible notes payable at September 30, 2010 and December 31, 2009 consisted of the following:

 

 

September 30, 2010

 

 

December 31,

2009

 

 

 

 

 

 

 

 

 

 

Convertible notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Face amount of convertible notes payable 

 

$

450,000

 

 

$

-

 

 

 

 

 

 

 

 

 

 

Discount representing (i) the relative fair value of the warrants issued and (ii) the beneficial conversion features

 

 

(287,400

)

 

 

-

 

 

 

 

 

 

 

 

 

 

Accumulated amortization of discount on convertible notes payable

 

 

72,900

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

$

235,500

 

 

$

-

 

**NOTE 10 – STOCKHOLDERS’ EQUITY**

*Common stock*

*(i) Sale of common stock - 2009 private placement*

The Company opened a private placement offering to sell to selected offerees a minimum of 1,200,000 Units and a maximum of 3,000,000 Units, at an offering price of $0.50 per Unit.  Each Unit is comprised of two shares of the Company's Common Stock, $0.001 par value, and two, three year callable Warrants - an "A" Warrant to purchase one share of Common Stock exercisable at $0.75 per share and a "B" Warrant to purchase one share of Common Stock exercisable at $1.00 per share.  This private placement offering closed on June 9, 2009.

On February 5, 2009, 300,000 units, or 600,000 shares of Common Stock, were sold under the private placement offering to one investor for $150,000. 

 

On March 31, 2009, 720 shares of Common Stock were issued as a consulting fee and valued at $180 based on the terms of the consulting agreement.

On June 9, 2009, 819,000 units, or 1,638,000 shares of Common Stock, were sold under the private placement offering to several investors for $409,500.

On September 22, 2009, 100,000 shares of Common Stock were issued for $25,000 cash to one investor for $0.25 a share.

*(ii) Increase of common shares authorized to 150 millions*

On January 29, 2010 a Certificate of Amendment to Articles of Incorporation of Total Nutraceutical Solutions, Inc. (“TNS”) was filed with the Secretary of State of Nevada. On January 4, 2010, a majority of the stockholders of TNS, holding 54% of the outstanding shares of TNS, pursuant to a written consent in lieu of a special meeting, adopted amendments to the Articles of Incorporation of the corporation.  The amendments involved the change of the name of the corporation from Total Nutraceutical Solutions to Total Nutraceutical Solutions, Inc. and an increase in the number of shares of common stock authorized to be issued from 70 million shares to 150 million shares.

*(iii) Issuance of common shares for services*

On August 26, 2010, the Company entered into a Consulting Agreement with Keith E. Manfred (”Consultant”).  Under this agreement the Consultant will provide certain marketing services in exchange for 4,000,000 shares of the Company’s common stock valued at $420,000 at the date of grant, the fair value of service to be rendered which is more reliably measurable.  

- 20 -

 

The stock will be issued in traunches with 2,000,000 shares issued at signing and the remaining shares to be issued on a quarterly basis over the second year of the agreement.

*Stock incentive plan*

On September 17, 2010, the Board adopted the Plan effective October 21, 2010 upon approval by the stockholders for the purpose of promoting the long-term success of the Company and the creation of stockholder value by (a) encouraging Employees, Outside Directors, Consultants, Independent Contractors and Advisors to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees, Outside Directors, Consultants, Independent Contractors and Advisors with exceptional qualifications and (c) linking Employees, Outside Directors, Consultants, Independent Contractors and Advisors directly to stockholder interests through increased stock ownership.  The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares or Options (which may constitute incentive stock options or nonstatutory stock options). The Plan shall be administered by the Board of Directors or a committee of the Board of Directors consisting of two or more directors.

Common Shares issuable pursuant to the Plan may be authorized but unissued shares or treasury shares.  The aggregate number of Options and Restricted Shares awarded under the Plan shall not exceed (a) 8 million Common Shares plus (b) Annual Increase in Shares of 300,000 as of January 1 of each year, commencing with the year 2012.  If Options are forfeited or terminate for any other reason before being exercised, then the corresponding Common Shares shall again become available for the grant of Options or Restricted Shares under the Plan.  If Restricted Shares or Common Shares issued upon the exercise of Options are forfeited, then such Common Shares shall again become available for the grant of nonstatutory stock options (“NSOs”) and Restricted Shares under the Plan.  The aggregate number of Common Shares that may be issued under the Plan upon the exercise of Inceptive Stock Options (“ISOs”) shall not be increased when Restricted Shares or other Common Shares are forfeited.

Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company.  Such Option shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be granted in consideration of a reduction in the Optionee’s other compensation.  Options granted to any Optionee in a single fiscal year of the Company shall not cover more than 500,000 Common Shares.  The Exercise Price under an ISO shall in no event be less than 100% of the Fair Market Value of a Common Share on the date of grant and the Exercise Price under an NSO shall in no event be less than 85% of the Fair Market Value of a Common Share on the date of grant. In the case of an NSO, a Stock Option Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the NSO is outstanding.

**NOTE 11 – RELATED PARTY TRANSACTIONS**

*Consulting services from Chairman and CEO*

Consulting services provided by and compensation to the Chairman and CEO were $30,000 and $90,000 and $0 and $0 for the three months and nine months ended September 30, 2010 and 2009, respectively.

*Receivables from and paybles  to Related Parties*

The Company transferred the $300,000 borrowed from Delta Group Investments Limited (see Note 5) to the Direct Marketing Affiliates Program.  
The Company loaned $62,500 to one of the principals of American Charter Marketing, Gary Ballen.  The funds were transferred from the Direct Marketing Affiliates Program.

The Company borrowed $20,000 from the Direct Marketing Affiliates Program during the quarter ended September 30, 2010.

**NOTE 12 – COMMITMENTS AND CONTINGENCIES**

*Profit sharing agreement*

On March 26, 2010 the Company entered into a Profit Sharing Agreement or Direct Marketing Affiliates Project (DMAP) with American Charter & Marketing LLC (ACM) and Delta Group Investments Limited (DGI), with the primary focus of undertaking a direct mail marketing campaign designed to sell Nutraceutical products developed and manufactured by the Company.  The parties agree that the Company will act as Managing Affiliate.  DGI will provide $300,000 in the form of a loan, as starting capital for the project (see Note 5).   The net profits of the DMAP project will be shared with 25% going to the 

- 21 -

 

Company, 25% to DGI, 25% to ACM and 25% as a return on the initial loan.  The DMAP project is to be in effect for three (3) years from date of execution.  The DMAP agreement contains an option to convert profits into shares of restricted common stock.  

*Consulting agreement*

On August 26, 2010, the Company entered into a Consulting Agreement with Keith E. Manfred (”Consultant”).  Under this agreement the Consultant will provide certain marketing services in exchange for 4,000,000 shares of the Company’s common stock, valued at $420,000 at the date of grant, the fair value of service to be rendered which is more reliably measurable.  The stock will be issued in traunches with 2,000,000 shares issued at signing and the remaining shares to be issued on a quarterly basis over the second year of the agreement.

**NOTE 13 – SUBSEQUENT EVENTS**

The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued to determine if they must be reported.  The Management of the Company determined that there were no reportable subsequent events to be disclosed.

- 22 -

**Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**Forward-Looking Information**

We may from time to time make written or oral "forward-looking statements" including statements contained in this report and in other communications, which are made in good faith by us pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements of    our plans, objectives, expectations, estimates and intentions, which are subject to change based on various important factors (some of which are beyond the Company's control).  The following factors, in addition to others not listed, could cause our actual results to differ materially from those expressed in forward looking statements: the strength of the domestic and local economies in which the Company conducts operations, the impact of current uncertainties in global economic conditions and the ongoing financial crisis affecting the domestic and foreign banking system and financial markets, including the impact on our suppliers and customers, changes in client needs and consumer spending habits, the impact of competition and technological change on our company, our ability to manage its growth effectively, including its ability to successfully integrate any business which it might acquire, and currency fluctuations. All forward-looking statements in this report are based upon information available to us on the date of this report.  We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.

The following discussion and analysis should be read in conjunction with our financial statements and the notes thereto appearing in Part I, Item 1.

**Overview of Current Operations**

Total Nutraceutical Solutions is an emerging nutraceutical company with a focus on discovering, formulating and marketing products composed primarily of organic natural mushrooms that contain bioactive nutrients for potential health benefits.  Mushroom dietary supplements have the nutritional potential to provide multiple health benefits for humans, including providing antioxidants, reducing inflammation, nutritionally supporting cellular and immune system function, promoting healthy joints, increasing stamina, and reducing stress and anxiety.  We develop production and analytic technologies for food and nutritional supplements composed primarily of mushrooms.  In addition to preventative healthcare formulations and nutritional approaches to a wide variety of human conditions and illnesses, we also develop and acquire nutritional tools and products in the fields of animal husbandry and livestock feeds. 

We have developed mushroom based nutraceutical dietary supplement products that are made entirely of naturally occurring dietary substances which are manufactured under contract by a third party, Columbia Nutritional Services, Inc..  We currently market three  natural organic nutraceutical mushroom dietary supplement products, ImmuSANO and GlucoSANO for human consumption and EquiSANO for the equine market.  These naturally occurring dietary substances have not been chemically altered, and we believe these products have both health benefits and mass appeal to people wanting natural and non-toxic nutritional-based healthcare.  During the quarter ending June 30, 2010 we initiated sales of a new nutricosmetic product, Gröh which has been designed to nutritionally support  hair follicles and  nail beds.

We market our products directly to the consumer utilizing network marketing programs, including our Direct Marketing Affiliates Project described below, direct mail order, internet marketing, and commission sales people.  We sell directly to consumers our own proprietary formulations of over the counter mushroom based nutraceutical and nutricosmetic products produced by an outside contract manufacturer.

In March 2010 we entered into a Profit Sharing Agreement with American Charter Marketing , Inc. (ACM) and Delta Group Investments Limited under which we agreed to form an association referred to as the Direct Marketing Affiliates Project (DMAP).  Pursuant to the agreement the parties agree to work together to undertake a direct mail campaign designed to sell certain TNS nutraceutical products for a period of three years, with the day to day management and control of business operations of the association being vested in TNS as the managing affiliate.

One of the affiliates, Delta Group Investments Limited made an initial contribution to the association in the form of a $300,000 loan with interest at 5% per annum.  This loan shall be repaid by the association through allocation of 25% of net profits from the marketing and sale of new TNS nutraceutical products going to repayment of the loan and 25% of net profits going to each affiliate of the association.  Once Delta Group has been repaid the loan with interest, the percentage of allocation shall be shifted so that TNS, ACM and Delta Group shall receive equal shares of net profits. Once Delta Group has been repaid the loan with interest and in addition has received $300,000 in net profit allocations, the percentage of allocation shall be shifted so that TNS and ACM shall each receive 45% of the net profits and Delta Group shall receive the remaining 10% of net profits.  Allocation of net profits shall be done on a quarterly basis by the managing affiliate, TNS.  Delta Group and ACM have the 

- 23 -

 

option to convert their net profit allocations into shares of common stock of TNS and Delta Group has the option at any time to convert any portion of the loan principal and interest into TNS shares of common stock at $0.25 per share.

The marketing association can be terminated upon the expiration of the three year term, upon the election to terminate by all of the affiliates or upon 90 day prior notice from any of the affiliates.  Upon termination the property and assets of the association and such cash shall be allocated first to the payment of creditors of the association, for the reserves for contingent or unforeseen liabilities of the association as deemed necessary by TNS as the managing affiliate, then to the repayment of affiliates to the extent of loans made to the association, and finally to the payment of affiliates in respect of their interest in the capital and the profits and losses of the association.  If there are not sufficient funds at the time of the liquidation to repay in full the $300,000 loan from Delta Group plus accrued interest, TNS will be liable for the payment of any shortfall.

Results of Operations for the quarter ended September 30, 2010

Our financial statements are now consolidated to include the financial results of the DMAP or Direct Marketing Affiliates Project described above.  During the nine months ended September 30, 2010, we had a net loss of $922,177 versus a $424,419   net loss for the same period last year.  The increase in the net loss was attributable to an increase in marketing and promotional expenses, and consulting fees as we continue to grow our business. Our total operating expenses increased from $442,780 for the nine months ended September 30, 2009 to $911,389 for the nine months ended September 30, 2010.  Total liabilities increased from $138,050 on December 31, 2009 to $626,954 on September 30, 2010.  This increase was primarily due to the fact that we incurred debts in an aggregate principal amount of $550,000 at various rates of interest during the quarter ended March 31, 2010.  See the Liquidity and Capital Resources section below.

Revenues

We generated $96,705 in revenues for the three months ended September 30, 2010 as compared to $39,863 in revenues for the same period last year.  Our cost of goods sold was $39,644 for the quarter resulting in a gross profit of $57,061 as compared to a gross profit of $14,557for the quarter ended September 30, 2009.  

Going Concern

Our independent auditors have included an explanatory paragraph in their report on the accompanying financial statements regarding concerns about our ability to continue as a going concern.  Our financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.

Expected purchase or sale of plant and significant equipment

We do not anticipate the purchase or sale of any plant or significant equipment; as such items are not required by us at this time.

Significant changes in the number of employees

As of September 30, 2010, we did not have any employees.  Our Chief Executive Officer, Marvin S. Hausman, M.D. and our Vice President for Sales and Marketing, Devin Andres each provides employee like services pursuant to consulting arrangements.  As our operations expand, we anticipate the need to hire employees however, the exact number of employees that would be hired is not quantifiable at this time.

Liquidity and Capital Resources

As of September 30, 2010 we had cash of $61,047 compared to cash of $109,655 as of June 30, 2010 and $48,141 as of December 31, 2009.  We incurred debts in an aggregate principal amount of $550,000 at various rates of interest during the quarter ended March 31, 2010 of which $150,000 plus 6% interest matures on December 31, 2010.  The rest of the debt matures as follows:  $100,000 plus interest at 6% per annum matures on December 31, 2011 and $300,000 plus interest at 5% per annum matures in March 2013.  The proceeds from this $300,000 convertible promissory note with Delta Group was transferred to the Direct Marketing Affiliates Project and is subject to the Profit Sharing Agreement described above under which the loan shall be repaid on a quarterly basis from net profits generated under the agreement, if any.  The convertible promissory note matures in March 2013.  If there are not sufficient funds at the time of the liquidation of the Direct Marketing Affiliates Project to repay in full the $300,000 loan from Delta Group plus accrued interest, TNS will be liable for the payment of any shortfall.  TNS loaned $50,000 at 6% interest per annum on January 15, 2010 to Gary Ballen and American Charter Marketing, Inc., one of the affiliates of the Direct Marketing Affiliates Project, which promissory note matures on September 30, 2010.  On February 25, 2010, TNS also loaned an additional $12,500 to Gary Ballen and American Charter Marketing, Inc also at interest of 6% per annum with the promissory note maturing on June 30, 2010.  To date these promissory notes have not been repaid, and management is currently negotiating terms for the repayment of the notes.  Given that our CEO Dr. Hausman has been accruing his monthly consulting fee 

- 24 -

 

since June 2010 and other consultants to the company are similarly accruing their consulting fees, allowing us to conserve our operating cash.  Management believes it has sufficient funds to remain operational through January 2011.

We anticipate that we will continue to generate losses during the remainder of this fiscal year and therefore, unless we are able to raise capital through equity private placements we may be unable to continue operations in the future.  Additional working capital may be sought through notes payable to banks or related parties (officers, directors or stockholders), or from other available funding sources at market rates of interest, or a combination of these.  The ability to raise necessary financing will depend on many factors, including the nature and prospects of any business to be acquired and the economic and market conditions prevailing at the time financing is sought.  

There can be no assurance that additional debt or equity capital will be available to us.  We currently have no agreements, arrangements, or understandings with any person to obtain funds through bank loans, lines of credit, or any other sources.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

New Accounting Standards

Please see Note 2 of the Notes to Financial Statements in this quarterly report concerning new accounting standards.

**Item 3.  Quantitative and Qualitative Disclosures About Market Risk**

Not required

**Item 4.  Controls and Procedures**

**Evaluation of Disclosure Controls and Procedures**

In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of our Chief Executive Officer who is also our principal financial and accounting officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2010.  Based on that evaluation, our principal executive officer and principal financial officer concluded that the material weaknesses identified in our management report on internal controls and procedures contained in our Form 10-K, Item 9A filed on April 15, 2010 still exist, and therefore our disclosure controls and procedures were not effective as of September 30, 2010.

**Changes in Internal Control Over Financial Reporting**

As of the end of the quarter ended June 30, 2010, there have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended June 30, 2010, that materially affected, or are reasonably likely to materially affect, our company’s internal control over financial reporting.

- 25 -

 

**Part II.****OTHER INFORMATION**

**Item 1A.  Risk Factors**

See Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and the discussion above in Part I, Item 2, under " Liquidity and Capital Resources.”

**Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 
None.  

**Item 3.  Defaults Upon Senior Securities**

None.

**Item 4.  Submission of Matters to a Vote of Security Holders**

On October 21, 2010 the Annual Meeting of Stockholders of TNS was held at its executive offices in Stevenson, Washington.  Set forth below is a summary of each matter voted upon at the meeting and the number of votes cast for, against, withheld or abstained.  All three proposals passed.

*Proposal #1*: The election of Marvin Hausman, M.D, Elliot Shelton, Esq. and Philip Sobol, M.D to serve on the Board of Directors:

Nominee

 

Votes For Nominees

 

Abstained

Marvin Hausman, M.D.

 

32,752,108

 

93,270

Elliot Shelton, Esq.

 

32,832,758

 

12,620

Philip Sobol, M.D.

 

32,831,658

 

13,720

*Proposal #2*: Ratification of the adoption of the Total Nutraceutical Solutions, Inc. 2010 Stock Incentive Plan.

Total Votes For

 

Total Votes Against

 

Abstained

32,230.233

 

14,720

 

600,425

*Proposal #3*: Ratification of the appointment of Li & Company, P.C. as our independent auditors for the year ending December 31, 2010:

Total Votes For

 

Total Votes Against

 

Abstained

32,838,208

 

7,120

 

50

**Item 5.  Other Information**

None.

- 26 -

 

**Item 6.  Exhibits **

**Exhibit Number**

**Description of Exhibit**

**Filed Herewith**

**Form**

**Exhibit**

**Filing Date**

 

 

 

 

 

 

3.1

Amended and Restated  Articles of Incorporation

 

8-K

3.1

10/29/2010

 

 

 

 

 

 

3.2

Bylaws

 

SB-2

3.2

08/06/2007

 

 

 

 

 

 

3.3

Amended Articles of Merger Incorporation as currently in effect

 

8-K

3.3

10/13/2008

 

 

 

 

 

 

10.1

Exclusive Option Agreement dated May 1, 2006, between The Penn State Research Foundation and Northwest Medical Research Inc.

 

8-K

10.1

09/04/2008

 

 

 

 

 

 

10.2

Assignment Agreement to the Option Agreement, dated July 31, 2008, among The Penn State Research Foundation, Northwest Medical Research Inc. and Generic Marketing Services, Inc.

 

8-K

10.2

09/04/2008

 

 

 

 

 

 

10.3

Assignment and Assumption Agreement, dated July 31, 2008, between Northwest Medical Research Inc. and Generic Marketing Services, Inc.

 

8-K

10.3

09/04/2008

 

 

 

 

 

 

10.4

Form of Common Stock and Warrant Purchase Agreement

 

8-K

10.1

06/12/2009

 

 

 

 

 

 

10.5

Form of Securities Purchase Agreement

 

8-K

10.1

09/21/2009

 

 

 

 

 

 

31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.

X

 

 

 

 

 

 

 

 

 

31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended.

X

 

 

 

 

 

 

 

 

 

32.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).

X

 

 

 

 

 

 

 

 

 

32.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).

X

 

 

 

**SIGNATURES**

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Total Nutraceutical Solutions, Inc.

 

 

November  22, 2010

By:  

/s/ Marvin Hausman, M.D. 

 

Marvin Hausman, M.D.

Chief Executive Officer

(Principal Executive Officer and Acting Principal Financial and Accounting Officer)

- 27 -

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