ORGANIZATION, OPERATIONS AND BASIS OF PRESENTATION

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

NOTE 1. ORGANIZATION, OPERATIONS AND BASIS OF PRESENTATION

Organization and Business

 The consolidated financial statements include those of Bazi International, Inc., formerly named XELR8 Holdings, Inc., and its wholly owned subsidiaries, Bazi Company, Inc. (formerly VitaCube Systems, Inc.), Bazi, Inc., formerly known as XELR8, Inc., XELR8 International, Inc. and XELR8 Canada, Corp. Bazi International, Inc. and its wholly owned subsidiaries are collectively referred to herein as the “Company.”

We currently develop, market, sell and distribute Bazi®, the Company’s flagship liquid nutritional supplement drink. Until January 18, 2010, our principal channel of distribution was through a multilevel distributor network. The Company terminated its multilevel distributor network compensation plan in favor of a retail and direct-to-consumer, online sales model in January 2010. We are currently distributing Bazi® through select retail channels, online, and through our existing database of customers. As a result of the determination to implement our new distribution strategy, and the termination of our multilevel distributor model, most of our top distributors terminated their relationship with the Company during the first quarter of 2010.

Our objective is to continue selling Bazi® through our existing database of customers and selected retail customers, as well as seek a potential partner with which to merge; however, in the absence of securing additional capital, our ability to grow revenue, capitalize on our existing product distribution channels, or find a suitable partner with which to merge on terms deemed acceptable, will suffer.

While we currently focus our sales and marketing efforts on Bazi®, we have also offered eight different nutritional products and supplements that have historically been sold under the XELR8™ brand. We have discontinued the XELR8™ brand, including many of our nutritional products, and instead are focusing our sales and marketing efforts on Bazi®.

We were formed in 2001, under the name “Instanet, Inc.” Instanet acquired Vita Cube Systems, Inc. (“V3S”), a Colorado corporation, in a stock-for-stock exchange on June 20, 2003. In the exchange, the then existing stockholders of V3S exchanged their stock in V3S for shares of common stock of Instanet, then representing a 90% ownership interest in Instanet. V3S then became a wholly-owned subsidiary of Instanet. Instanet changed its name to VitaCube Systems Holdings, Inc. The acquisition of V3S by Instanet is considered a reverse acquisition and was accounted for under the purchase method of accounting. Under reverse acquisition accounting, V3S is considered the acquirer for accounting and financial reporting purposes. In September 2005, we changed the name of the network marketing subsidiary from Vitacube Network, Inc. to XELR8, Inc. In March 2007, the shareholders approved the change of the name of the parent company from Vitacube Systems Holdings, Inc. to XELR8 Holdings, Inc. In August 2007, XELR8, Inc. formed a wholly owned subsidiary, XELR8 International, Inc. (“XELR8 International”), a Colorado corporation, through which we planned to conduct our international expansion. In September 2007, XELR8 International Inc. formed a wholly owned subsidiary, XELR8 Canada Incorporated (“XELR8 Canada”), a Nova Scotia Unlimited Company. To date, there has been no business conducted by XELR8 International or XELR8 Canada.

On August 10, 2010, we changed the name of the Company from XELR8 Holdings, Inc. to Bazi International, Inc. and XELR8, Inc. was changed to Bazi, Inc. in November 2010. In January 2011, we changed the name of Vita Cube Systems, Inc. to Bazi Company, Inc.

The description of our business describes the business being conducted by the Company and Bazi, Inc. Instanet discontinued its business prior to the stock-for-stock exchange. The Company is currently listed for quotation on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol BAZI.OB. As of December 31, 2011, the Company had four full-time employees.

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company incurred net losses of $3,946,151 and $3,418,838 for the years ended December 31, 2011 and 2010, respectively, and has incurred significant net losses since inception. As a result, the report of our independent registered public accounting firm on the financial statements for the years ending December 31, 2011 and 2010 includes an explanatory paragraph relating to substantial doubt or uncertainty of our ability to continue as a going concern.

The Company does not have sufficient cash on hand to fund its administrative and other operating expenses going forward. The Company’s ability to become a profitable operating company is dependent upon obtaining additional capital or otherwise consummate a reverse merger or other transaction

However, there can be no assurance that additional capital will be available, which may affect the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

Principles of Consolidation

The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries Bazi Company, Inc., Bazi, Inc., XELR8 International, Inc. and XELR8 Canada, Corp. All inter-company accounts and transactions have been eliminated in the preparation of these consolidated statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management believes that the estimates utilized in the preparation of financial statements are prudent and reasonable. Actual results could differ from these estimates.

Revenue Recognition

The Company ships its products by common carrier and receives payment in the form of cash, credit card or approved credit terms. In May 2004, the Company revised its product return policy to provide a 60-day money back guarantee on orders placed by first-time customers and distributors. After 60 days and for all subsequent orders placed by customers and distributors, the Company allows resalable products to be returned within 12 months of the purchase date for a 100% sales price refund, subject to a 10% restocking fee. As a result of the termination of our multilevel marketing network channel, our return policy changed on March 1, 2010 to a 20 day money back guarantee. From August 2003 to February 2010, the Company experienced monthly returns ranging from 0.7% to 7.7% of net sales. Subsequent to the change in the policy the return percentage has varied from 0.1% to 8% and was 0.6% as of December 31, 2011. Revenue and estimated returns are recorded when the merchandise is shipped since performance by the Company is considered met when products are in the hands of the common carrier. Amounts received for unshipped merchandise are recorded as customer deposits and are included in accrued liabilities net of sales tax.

Cash and Cash Equivalents

For the purpose of reporting cash flows, the Company considers all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company considers deposits in banks and investments purchased with original maturities of more than three months and less than a year to be short term investments.

Concentrations

The Company has no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains the majority of its cash balances with two financial institutions in the form of demand deposits and money market funds. There are no funds in excess of the federally insured amount of $250,000 through December 31, 2011, are subject to credit risk, and the Company believes that the financial institutions are financially sound and the risk of loss is minimal.

During 2011, the Company relied significantly on one supplier for 100% of its purchases of inventory held for sale. The Company entered into an Exclusive Manufacturing Agreement with this supplier in 2007 to produce the Bazi® product. The Company owns the formula and management believes that its purchasing requirements can be readily met from alternative sources.

The Company generates a significant proportion of its revenue from the sale of its product Bazi®. For the years ended December 31, 2011 and 2010, Bazi® accounted for 97% and 95% of the Company’s total revenue, respectively.

Fair Value of Financial Instruments

Substantially all of the Company’s assets and liabilities are carried at fair value or at contracted amounts that approximate fair value. Estimates of fair value are made at a specific point in time, based on relative market information and information about each financial instrument, specifically, the value of the underlying financial instrument. Assets that are recorded at carrying value consist largely of cash, short term investments and accounts receivable, which are carried at contracted amounts that approximate fair value. Similarly, the Company’s liabilities consist primarily of short term liabilities recorded at contracted amounts that approximate fair value.

Inventory

Inventory is stated at the lower of cost or market on a FIFO (first-in first-out) basis. Provision is made to reduce excess or obsolete inventory to the estimated net realizable value. The Company purchases for resale a liquid dietary supplement, a sports hydration drink, and a protein shake, which it packages in various forms and containers.

Inventory is comprised of the following:

	December  31, 2011			December  31, 2010
Purchased materials	$	1,379		$	6,169
Finished goods		11,643			64,883
Reserve for obsolete inventory		(11,169	)		(28,022	)
	$	1,853		$	43,030

A summary of the reserve for obsolete and excess inventory is as follows as of December 31, 2011 and 2010:

	2011			2010
Balance as of January 1	$	28,022		$	113,790
Addition to provision		-			41,418
Deduction to provision		(1,198	)		-
Recapture previously provisioned		(9,498	)		-
Write-off of obsolete inventory		(6,157	)		(127,186	)
Balance as of December 31	$	11,169		$	28,022

Property and Equipment

Property and equipment are stated at cost. The Company provides for depreciation of property and equipment using the straight-line method based on estimated useful lives of between three and ten years.

Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows estimated to be generated by the asset. An impairment was not deemed necessary in either 2011 or 2010.

Intangible Assets

Intangible assets, to date, have consisted of the direct costs incurred for application fees and legal expenses associated with trademarks on the Company’s products. The Company’s intangible assets, consisting of trademarks and patent costs, are being amortized over their estimated life of 15 years. The Company evaluates the useful lives of its intangible assets annually and adjusts the lives according to the expected useful life. An impairment was not deemed necessary in either 2011 or 2010.

Advertising Costs

Advertising and marketing costs were $760,129 and $1,347,605 for the years ended December 31, 2011 and 2010, respectively, and are expensed as incurred or the first time the advertising takes place.

Shipping and Handling Costs

Shipping and handling costs for products sold are included in cost of goods sold when incurred.

Sales Tax

Sales Tax, when applicable, is collected based on the regulations of the jurisdiction for the delivery location of the order.

Income Taxes

The Company accounts for income taxes in accordance with FASB Accounting Standards Codification 740 (the ASC Topic 740), formerly Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under the asset and liability method of ASC Topic 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Effective January 1, 2007, the Company adopted the provisions of ASC 740 that provide detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized. Upon the adoption of ASC 740, the Company had no unrecognized tax positions. During the years ended December 31, 2011 and 2010, the Company recognized no adjustments for uncertain tax positions.

Stock-Based Compensation

Total share-based compensation expense, for all of the Company’s share-based awards recognized for the year ended December 31, 2011, was $510,599 or $0.01 per share basic and diluted compared with the $851,077 or $0.05 per share for the year ended December 31, 2010.

The Company uses a Black-Scholes option-pricing model (Black-Scholes model) to estimate the fair value of the stock option grant. The use of a valuation model requires the Company to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the historical volatility of the Company’s stock price over the contractual term of the option. The expected life will be based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. Currently it is based on the simplified approach provided by SAB 107. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of the grant. The following were the factors used in the Black-Sholes model in the quarters to calculate the compensation cost:

	Year ended December 31, 2011			Year ended December 31, 2010
Stock price volatility		123.6 – 209.9	%	142.0 – 155.7 %
Risk-free rate of return		0.15 – 2.02	%	0.57 – 2.21 %
Annual dividend yield		0	%		0	%
Expected life	.50 to 5 Years			2.25 to 5 Years

Net Loss Per Share

Earnings per share require presentation of both basic earnings per common share and diluted earnings per common share. Since the Company has a net loss for all periods presented since inception, common stock equivalents are not included in the weighted average calculation since their effect would be anti-dilutive.

Research and Development

Research and development costs are expensed as incurred.

Subsequent Events

Management has evaluated subsequent events through April 6, 2012, the date the financial statements were issued, to ensure that the financial statements include appropriate disclosure or recognition of events that occurred subsequent to December 31, 2011.

Recent Accounting Pronouncements

The Company has reviewed all recently issued, but not yet effective accounting pronouncements and has concluded that there are no recently issued, but not yet effective pronouncements that may have a material impact on results of operations, financial condition, or cash flows, based on current information.