UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2/A
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
EXECUTE SPORTS, INC.
(Name of small business issuer in its charter)
Nevada 2320 30-0038070
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1284 Puerta Del Sol, Suite 150
San Clemente, CA 92673
(949) 498-5990
(Address and telephone number of principal
executive offices and principal place of business)
Copies To:
Michael L. Corrigan
Attorney At Law
4275 Executive Square Suite 215
La Jolla, CA 92037
(858) 362-1440
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434 under
the Securities Act, check the following box. |_|
CALCULATION OF REGISTRATION FEE
- ----------------------------- ----------------- ----------------------- --------------------- ---------------
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered registered offering price per aggregate offering registration
share price per share (3) fee
- ----------------------------- ----------------- ----------------------- --------------------- ---------------
Common stock, par value 3,571,428 $.35 $1,250,000 $418.21
$.001 per share, included
by Company pursuant to this
offering (1)
- ----------------------------- ----------------- ----------------------- --------------------- ---------------
Common stock, par value 6,679,350 $.35 $2,337,773 $772.15
$.001 per share held by
current shareholders
subject to this
registration statement (2)
- ----------------------------- ----------------- ----------------------- --------------------- ---------------
Totals 10,250,778 $.35 $3,587,771 $1,200.36
- ----------------------------- ----------------- ----------------------- --------------------- ---------------
Estimated solely for the purpose of calculating the registration fee pursuant to
Rule 457(o) promulgated under the Securities Act of 1933, as amended.
(1) These shares are the new distribution shares. These shares represent
the shares with respect to which the Company will receive proceeds from
the sale of such shares. The Company will not receive proceeds from the
sale of any shares currently held by the Company's shareholders. See also
"Plan of Distribution" on page 19. The initial offering price of all
shares of common stock offered for sale by the Company pursuant to this
registration statement will be $.35 per share for the duration of this
offering until all such shares are sold to third-parties by the Company.
The $.35 per share price for shares of common stock sold by the Company
will not be changed by the Company regardless of the prevailing market
prices of shares of common sold on any securities exchange or privately
negotiated transaction.
(2) This amount includes all shares of common stock issued to the
Company's shareholders who may sell or distribute shares which are subject
to this registration statement. See "Plan of Distribution" on page 19. The
selling security holders are offering up to 6,679,350 shares at $.35 per
share until our common stock is quoted on the OTC Bulletin Board or other
secondary trading marketplace. Thereafter, the selling security holders
may sell their shares of common stock subject to this registration
statement at prevailing market prices or privately negotiated prices.
(3) Estimated solely for the purpose of calculating the registration fee
under Rule 457(c) or (g) under the Securities Act of 1933 based on the per
share book value of the registrant as of June 30, 2005. No market
currently exists for the shares.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTES AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE
PROSPECTUS
Shares of Common Stock of Execute Sports, Inc.
This prospectus relates to the registration, distribution and sale of the common
shares of Execute Sports, Inc., consisting of:
(1) up to 6,679,350 shares currently held by the Company's shareholders
who are specified on page 36 "Selling Shareholders"; and
(2) up to 3,571,428 new distribution shares on a self-undwritten basis
which may be issued by the Company in this offering.
This is our initial public offering of shares of our common stock. The Company
is registering these shares with the SEC using a shelf registration process
which will allow the sales of shares held by our current shareholders over a
period of time in varying amounts as described under "Plan of Distribution" on
page 19. We will receive no proceeds from the sale of any shares made by any
selling shareholders. We will receive proceeds from the sale of any new
distribution shares pursuant to this offering. There is no minimum number of
shares that we have to sell pursuant to this offering. There will be no escrow
account, trust or similar account established for the sale of new distribution
shares. All consideration received from the offering of the new distribution
shares by the Company will be immediately used by us and there will be no
refunds. The Company may also issue new distribution shares in exchange for
non-cash consideration.
We have arbitrarily set the offering price for our shares at $.35, and the
offering price does not bear any relationship to our assets, book value, net
worth, earnings, results of operations or other established valuation criteria.
We plan for our shares to become approved for trading on the OTC Bulletin Board.
No market maker has yet undertaken to sponsor the Company's stock. The Company
has not engaged and does not anticipate engaging any underwriter to assist in
the distribution of the shares at this time. The Company anticipates that all
offers, sales and other distributions of the new distribution shares will be by
or through the Company's officers or other representatives (who fall within the
requirements of Rule 3a4-1 of the Securities Act of 1934), without special
compensation or commission with respect to any such sales or distributions of
such new distribution shares. However, the Company reserves the right to engage
an underwriter at some future date and upon compliance with any disclosure
obligations associated herewith. This offering shall commence upon effectiveness
of this registration statement and will expire whenever all of the shares have
been sold or 12 months after the date of effectiveness, whichever comes first.
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 4.
Per Share Total
------------ ------------
Public offering price $ .35 $ 1,250,000
Underwriting discounts and
commissions $ 0.00 $ 0.00
Delivery of the shares will be made on or about September 30, 2005.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense. The information in this prospectus is not complete. No one is
allowed to distribute the common stock offered by this prospectus until the
registration statement that we have filed with the SEC becomes effective. This
prospectus is not an offer to sell our common stock - and does not solicit
offers to buy - in any state where the offer or sale is not permitted.
The date of this prospectus is September 15, 2005, subject to completion.
Table of Contents
Page
----
PART I
Prospectus Summary 1
Risk Factors 4
Note Regarding Forward Looking Statements 11
Use of Proceeds 12
Determination of Offering Price 13
Capitalization 13
Dilution 14
Plan of Distribution 16
Management's Discussion and Analysis 22
Description of Business 33
Directors, Executive Officers, Promoters, Control Persons 37
Security Ownership of Certain Beneficial Owners and Management 38
Executive Compensation 39
Description of Property 41
Certain Relationships and Related Transactions 41
Selling Shareholders 42
Legal Proceedings 45
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 45
Description of Securities 46
Interest of Named Experts and Counsel 47
Transfer Agent and Registrar 48
Market for Common Equity and Related Stockholder Matters 48
Financial Statements 49
Financial Statements for the Years Ended Dec 31,
2004 and Dec. 31, 2003 F-3
Financial Statements for the Six Months Ended June 30, 2005
and June 30, 2004 F-23
PART II
Indemnification of Directors and Officers 50
Other Expenses of Issuance and Distribution 50
Recent Sales of Unregistered Securities 51
Exhibits 51
Undertakings 52
Certifications 53
You should rely only on the information contained in this prospectus. We have
not authorized any other person to provide you with information that is
different from that contained in this prospectus. If anyone provides you with
different or inconsistent information, you should not rely on it. The
information contained in, or that can be accessed through, our websites is not a
part of this prospectus. We are not making an offer to sell these securities in
any jurisdiction where the offer or sale is not permitted. You should assume the
information appearing in this prospectus is accurate only as of the date on the
front cover of the prospectus. Our business, financial condition, results of
operations and prospects may have changed since that date.
We use market data and industry forecasts and projections throughout this
prospectus, which we have obtained from third party market research, publicly
available information and industry publications. These sources generally state
that the information they provide has been obtained from sources believed to be
reliable, but that the accuracy and completeness of the information are not
guaranteed. The forecasts and projections are based on industry surveys and the
preparers' experience in the industry and there is no assurance that any of the
projected amounts will be achieved. Similarly, we believe that the surveys and
market research others have performed are reliable, but we have not
independently verified and do not guarantee the accuracy or completeness of this
information.
This prospectus refers to brand names, trademarks, service marks and trade names
of other companies and organizations. We have registered the following marks
with the United States Patent and Trademark Office: Execute SportsSM. Each other
trademark, trade name or service mark appearing in this prospectus belongs to
its respective owner.
PROSPECTUS SUMMARY
This summary does not contain all of the information you should consider before
buying shares of our common stock. You should read the entire prospectus
carefully, especially the "Risk Factors" section and our financial statements
and the related notes appearing at the end of this prospectus, before deciding
to invest in shares of our common stock.
EXECUTE SPORTS, INC.
Our Company
We design, market and distribute "Execute Sports" branded products to the motor
sport and water sports markets. We rely on relationships with contract
manufacturers to produce our products. The Company's products include team and
factory graphics kits for motocross, ancillary clothing and travel bags,
wetsuits, vests and gloves, dry jackets and graphics kits for NASCAR and leading
wakeboarding brands and athletes. In addition, we license other leading power
sports brands to create apparel and ancillary products that we distribute on
both a wholesale and a retail basis.
Our graphics kits for motocross were commercialized in 2002 under a "private
label" program, and in 2003, we began selling motocross graphics and accessories
under the "Execute Sports" brand. Our wetsuits, vests and ancillary products
were commercialized in 2003 under the "Execute Sports" brand. Our
Nascar-licensed graphics kits were commercialized in May, 2005 and are still in
development stages.
The Company has international operations, with headquarters in San Clemente,
California and representation through a satellite office in Taipei, Taiwan
R.O.C., as well as contract manufacturing representatives in Mainland China.
Execute Sport's mandate is to design, develop and distribute the best quality
products at the most reasonable prices.
1
The Company markets its products through a network of independent dealers
located throughout the United States, and through distributors representing
dealers in Europe, Australia, South Africa, Asia and other international
markets. The "Execute Sports" brand name has existed for two years.
Our products are marketed and sold to consumers of and participants in the
"power sports" market. The "power sports" industry is composed of motorcycles,
personal watercraft (PWC), all-terrain vehicles (ATVs) and snowmobiles. The
Company's success in the market place depends strongly on the continued interest
and participation in power sports by consumers.
Recent Developments
In September, 2004, we commenced a private placement offering of 2,918,000
shares of common stock at $.25 per share. On May 27, 2005, we closed the private
placement offering, having received gross proceeds of $729,500.
Summary of the Offering
The Company. We were incorporated in Nevada in January 2002 under the
name "Padova International USA, Inc." and in March, 2005
changed our name to "Execute Sports, Inc." to more
accurately reflect the nature of our business and
products to the market place. The name change took
effect on March 15, 2005.
Our executive offices are located at 1284 Puerta Del
Sol, Suite 150, San Clemente, California 92673 and our
telephone number is (949) 498-5990. Our Internet site is
www.executesports.com .
Capital Structure We are authorized to issue 75,000,000 shares of common
stock, having par value of $.001 per share. Immediately
prior to the filing of this registration statement the
Company had outstanding 15,644,928 shares of common stock.
The Offering;
Shares Registered In addition to the 3,571,428 shares that are being
initially offered by the Company in this prospectus, the
selling stockholders identified on page 36 of this
prospectus are offering 6,679,350 shares on a resale
basis for a total of 10,250,778 shares:
* 2,918,000 shares of our outstanding common stock
issued in connection with our September, 2004 private
placement;
* 171,350 shares of our outstanding common stock issued
in connection with debt conversion in February 2005;
* 3,340,000 shares of our outstanding common stock
issued in connection with professional services
contracts and consulting fees in February 2005;
* 250,000 shares of our outstanding common stock issued
to employees in February 2005.
Common stock offered ..................10,250,778 shares
Common stock outstanding after
this offering .........................19,216,356 shares
Trading Market OTC Bulletin Board
Offering Period The Company is registering the current holder shares
under a shelf registration to allow the Company's
current shareholders the opportunity to sell their
shares over an extended period of time.
2
The new distribution shares are being offered to the
public upon effectiveness of this registration statement
by the Company. This offering shall commence upon
effectiveness of this registration statement and will
expire whenever all of the shares have been sold or 12
months after the date of effectiveness, whichever comes
first.
Determination
of Offering Price We arbitrarily determined the offering price for
our shares, and the offering does not bear any
relationship to our assets, book value, net worth,
earnings, results of operations or other established
valuation criteria.
Investor Suitability A purchase of our shares involves very high
risk and should not be purchased by investors who cannot
afford the loss of their entire investment.
Risk Factors The shares being offered are speculative and
involve very high risks, including those listed in "Risk
Factors".
Net Proceeds The Company will not receive any proceeds from the sale
of any shares by any selling shareholder. The Company
will only receive proceeds from the sale of new
distribution shares pursuant to this offering. If the
maximum number of 3,571,428 new distribution shares are
sold for cash consideration, our net proceeds will be
$1,250,000, excluding costs of this offering. However,
the Company may not sell the maximum number of new
distribution shares in this offering.
Use of Proceeds We intend to use the net proceeds from this offering for
working capital, marketing activities, inventory,
international expansion, the payment of certain
outstanding obligations and other general corporate
purposes. See "Use of Proceeds" on page 15 below.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
3
Summary Financial Data
The following table summarizes historical financial data regarding our business
and should be read together with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
the related notes included elsewhere in this prospectus. The summary information
for the years ended December 31, 2003 and 2004 and the six months ended June 30,
2005 and 2004 have been derived from our financial statements, which were
audited by Bedinger & Company for the years ended December 31, 2004 and 2003,
and are included elsewhere in this prospectus.
Year ended December 31, Six Months ended June 30,
------------------------------ ------------------------------
2004 2003 2005 2004
------------- ------------- ------------- -------------
Revenues $ 1,384,188 $ 726,048 $ 1,258,893 $ 1,117,517
Operating Expenses 630,216 295,991 2,841,970 272,793
Net (Loss) Income (540,490) (288,854) (2,518,983) 48,550
Weighted Avg. Shares Out 224,773 -- -- --
Net (Loss) Income Per Common Share
Basic and Diluted $ (2.40) -- -- --
Year ended December 31, Six Months ended June 30,
------------------------------ ------------------------------
2004 2003 2005 2004
------------- ------------- ------------- -------------
Cashflows Used in Operating Activities (127,222) (250,413) (437,506) (26,183)
Net loss (540,490) (288,854) (2,518,983) 48,550
Cash and Cash Equivalents
(end of period) 5,154 40,244 52,060 32,405
Total Current Assets 306,110 424,238 1,457,412 607,259
Total Assets 327,916 447,567 1,476,241 628,218
Total Current Liabilities 1,137,925 886,586 1,162,071 1,018,687
Total Stockholder's Equity (810,009) (439,019) 314,170 (390,470)
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks described below with all of the other information
included in this prospectus before making an investment decision. If any of the
possible adverse events described below actually occur, our business, results of
operations or financial condition would likely suffer. In such an event, the
market price of our common stock could decline and you could lose all or part of
your investment. The risks and uncertainties described below are not the only
ones we face. Additional risks and uncertainties not presently known to us or
that we currently believe to be immaterial may also adversely affect our
business, results of operations or financial condition.
Risks Relating to Our Business
We have historically incurred losses and may continue to incur losses in the
future, which may impact our ability to implement our business strategy and
adversely affect our financial condition.
In the review of our financial statements, our auditors, Bedinger & Company,
have questioned our ability to continue as a going concern (see page F-1 of this
Registration Statement). This is based on our Company's history of reported
losses. We have a history of losses. We had a net loss of $540,490 for the
fiscal year ended December 31, 2004 and a net loss of $288,854 for the fiscal
year ended December 31, 2003.
4
We showed a net loss for the three months ended March 31, 2005 of $4,382 and a
net loss for the six months ended June 30, 2005 of $2,514,601. The increase in
net loss for the quarter ended June 30, 2005 was due primarily to the expensing
of stock issued to founders, key employees and for professional services. The
majority of net loss for the six months ended June 30, 2005 was incurred due to
the expensing of $2,125,000 in stock issued to founders. The expensing of stock
issued for the period ending June 30, 2005 was a non-cash expense.
The report accompanying our second quarter of 2005, as well as fiscal year ended
2004 and 2003 financial statements by our independent registered public
accounting firm states that our operating results, working capital deficit, net
capital deficit and limited available financing sources raise substantial doubt
about our ability to continue as a going concern. We may never achieve sustained
profitability.
We expect to significantly increase our operating expenses by expanding our
marketing operations and increasing our level of capital expenditures in order
to grow our business and further develop and maintain our services. Such
increases in operating expense levels and capital expenditures may adversely
affect our operating results if we are unable to immediately realize benefits
from such expenditures. In addition, if we are unable to manage a significant
increase in operating expenses, our liquidity will likely decrease and
negatively impact our cash flow and ability to sustain operations. In turn, this
would have a negative impact on our financial condition and share price.
We also expect that our operating expenses will significantly increase as a
result of becoming a public company following this offering. We cannot assure
you that we will be profitable or generate sufficient profits from operations in
the future. If our revenue growth does not continue, we may experience a loss in
one or more future periods. We may not be able to reduce or maintain our
expenses in response to any decrease in our revenue, which may impact our
ability to implement our business strategy and adversely affect our financial
condition. This would also have a negative impact on our share price.
Our business is subject to "seasonal" or "cyclical" factors.
There is a cyclical component of our waters sports business wherein we receive a
relatively larger portion of revenue because our water sports customers submit
the majority of their purchase orders for product in the months of September
through November for the coming sales year and are shipped in January through
May. The majority of our water sports business is driven by the
wakeboarding/waterski industy, which historically is the most active in the
spring and summer months. We anticipate this cyclical aspect of our water sports
business to continue for the foreseeable future but can make no assurances that
will be the case.
Our industry is highly competitive and we may not be able to compete
effectively, which could reduce demand for our services.
The power sports market is intensely competitive. Our current primary
competitors for motocross graphics include One Industries Graphics, Factory
Effex, NStyle, and our primary competitors for wetsuits includes O'neil, Rip
Curl and Quicksilver. The market for the Company's products is characterized by
competing businesses introducing products similar to those offered by the
Company. There are relatively low barriers to entry into the business. Many of
the Company's competitors or potential competitors have longer operating
histories, longer customer relationships and significantly greater financial,
managerial, sale and marketing and other resources than does the Company. The
Company is vulnerable to a competitor making a late, but well-funded, run at the
Company if it is not aggressive in quickly attaining a consumer base sufficient
for the Company to rely on for sustainable cash flow, and strategic partners as
well as establishing a strong brand identity.
5
Our Success is Tied to Dependence on Key Personnel.
The Company's success depends to a significant extent upon efforts and abilities
of its key personnel, including Don Dallape, Chief Executive Officer and Scott
Swendener, President, as well as other key creative and strategic marketing
personnel. Competition for highly qualified personnel is intense. The loss of
any executive officer, manager or other key employee could have a material
adverse effect upon the Company's business, operating results and financial
condition. If the Company is not able to efficiently replace its key personnel
with qualified individuals, its business and operational activities could
suffer. In turn, if the Company's operational activities decline, its financial
performance and overall financial condition will also suffer. This would have an
adverse affect on our share price. No assurances can be given that a replacement
for Mr. Dallape or Mr. Swendener could be located if their services were no
longer available. At present, we do not have key man insurance for either Mr.
Dallape or Mr. Swendener.
We Are a High Risk Early Stage Company.
The Company is a high-risk early stage company with limited operating history in
a competitive industry. In addition, the Company's limited operating history
provides a limited basis on which to base an evaluation of its business and
prospects. In addition, the Company's revenue model relies substantially on the
assumption that the Company will be able to successfully expand its sales and
distribution channels in key markets. The Company's prospects must be considered
in light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies in the earliest stages of development. To be successful
in this market, the Company must, among other things:
* Continue to expand distribution and sales channels for its products;
* Attract and maintain customer loyalty;
* Continue to establish and increase awareness of the Company's brand
and develop customer loyalty;
* Provide desirable products to customers at attractive prices;
* Establish and maintain strategic relationships with strategic
partners and affiliates;
* Rapidly respond to competitive developments;
* Build an operations and customer service structure to support the
Company's business; and
* Attract, retain and motivate qualified personnel.
The Company cannot guarantee that it will be able to achieve these goals, and
its failure to do so could have a material adverse effect on the Company's
business. If the Company's business suffers as a result of failing to meet any
one or all of the above listed goals, its financial performance and financial
condition will suffer. This will also have an adverse affect on the price of the
Company's shares.
Moreover, there can be no assurance that the Company's financial resources will
be sufficient to enable it to operate for the length of time that management
expects, or that the Company will be able to obtain additional funding when the
Company's current financial resources are exhausted. The Company expects that
its revenues and operating results will fluctuate significantly in the future.
There can be no assurance that any or all of the Company's efforts will be
successful or that the Company will ever be profitable. If the Company's efforts
are unsuccessful or other unexpected events occur, purchasers of the Shares
offered hereby could lose their entire investment.
We may need additional financing to support business growth, and this capital
might not be available on acceptable terms, or at all, which could adversely
affect our financial condition.
The Company's financial resources are limited and the amount of funding that it
will require to develop and commercialize its products is highly uncertain.
Adequate funds may not be available when needed or on terms satisfactory to the
Company. Lack of funds may cause the Company to delay, reduce and/or abandon
certain of all aspects of its product development programs.
6
There are a number of factors that we cannot control that could require us to
seek additional financing to support further demand for those products in the
market both through existing distribution channels and potentially through new
ones, and to finance the development, production and distribution of new
products, as well as the development of new distribution channels and new
markets.
The Company plans to, upon completion of this Offering, seek immediately
additional financing through a subsequent offering, which may include the
issuance of equity securities. If additional funds are raised through the
issuance of equity or convertible debt securities, the percentage ownership of
the stockholders of the Company will be reduced, stockholders may experience
additional dilution and such securities may have rights, preferences and
privileges senior to those of the Company's Common Stock. There can be no
assurance that additional financing will be available on terms favorable to the
Company or at all. If adequate funds are not available or are not available on
acceptable terms, the Company may not be able to fund its expansion, take
advantage of unanticipated acquisition opportunities, develop or enhance
products or respond to competitive pressures. Such inability could have a
material adverse effect on the Company's business, and ability finance its
operations. If the Company cannot finance its operations, the affect on our
stock price will be adverse. See "Use of Proceeds."
Our quarterly operating results may fluctuate in future periods and, as a
result, we may fail to meet investor expectations, which could cause the price
of our common stock to decline.
As a result of our history of incurring net losses, the relatively short-term
nature of our licensing, distribution and partner agreements, we may not be able
to accurately predict our operating results on a quarterly basis, if at all. We
expect to experience significant fluctuations in our future quarterly operating
results due to a variety of factors, many of which are outside of our control,
including:
* the Company's ability to establish and strengthen brand awareness;
* the Company's success, and the success of its strategic partners, in
promoting the Company's products;
* the overall market demand for motorcycle and water sports products
of the type offered by the Company and in general;
* pricing changes for motorcycle and water sports products as a result
of competition or otherwise;
* the amount and timing of the costs relating to the Company's
marketing efforts or other initiatives;
* the timing of contracts with strategic partners and other parties;
* fees the Company may pay for distribution and promotional
arrangements or other costs it incurs as it expands its operations;
* the Company's ability to compete in a highly competitive market, and
the introduction of new products by the Company; and
* economic conditions specific to the motorcycle and water sports
industries and general economic conditions.
We believe period-to-period comparisons of our operating results are not
necessarily meaningful, and you should not rely upon them as indicators of
future performance. It is also possible that in the future, our operating
results will be below the expectations of public market analysts and investors
due to quarterly fluctuations rather than our overall performance. In that
event, the trading price of our common stock may decline.
We Rely Heavily on Four Major Customers for Revenue
Historically, four primary customers have accounted for more than 90% of our
business. The three primary customers of our water sports products are Bass Pro
Shops , GI Joes and Galyans - Dicks Sporting Goods. These three customers
account for more than 80% of our water sports revenue. If any of these customers
decide to exit the water sports market, or to select one of our competitor's
products over our own, our business would be materially adversely impacted.
Other larger , better capitalized competitors could offer these customers
preferable price points or other incentives that we might not be able to compete
with. The primary customer of our motorcycle graphics business is Global Motor
Sports Group, which accounts for about 50% of our graphics business. If Global
Motor Sports Group selects one of our competitors graphics products and
terminates our relationship we would be materially adversely affected. There are
larger, better capitalized competitors that could provide Global Motor Sports
Groups with lower pricing and additional incentives that we might not be able to
effectively compete against. If we were to lose any one of these customers our
business and financial condition would likely be negatively impacted. In turn
our financial results would decline and our share price would also likely
decline.
7
We Rely on Three Major Manufacturers of our Products
Sheico, Winning Industries and Hydro Dynamics manufacture 100% of our products,
and 65%, 15% and 5% respectively. All manufacturing is based in mainland China.
If these facilities were inaccessible to us for political reasons or in the
event of a natural disaster, our business would be materially adversely
affected. We might not be able to transition our manufacturing business to
another manufacturer in a timely manner and the costs of changing facilities as
well as the costs of manufacturing elsewhere could be prohibitively high. In
addition, each of these manufacturers are "contract" manufacturers and
consequently are not solely obligated to service our account. In which case,
other larger customers might demand more of these manufacturers resources which
in turn, could cause delays in their ability to provide us with timely delivery
of product. If , for any of the reasons stated above, we are not able to timely
respond to purchase orders through our existing contract manufacturing partners,
we would likely see a negative impact in our business and operations. In turn,
this would have a material adverse impact on our financial results and our share
price would likely decline.
We Could Have Difficulty in the Management of Potential Growth.
The Company anticipates that a period of significant expansion will be required
to address potential growth in its customer base, market opportunities and
personnel. This expansion will place a significant strain on the Company's
management, operational and financial resources. To manage the expected growth
of its operations and personnel, the Company will be required to implement new
operational and financial systems, procedures and controls, and to expand, train
and manage its growing employee base. The Company also will be required to
expand its finance, administrative and operations staff. Further, the Company
anticipates entering into relationships with various strategic partners and
third parties necessary to the Company's business. There can be no assurance
that the Company's current and planned personnel, systems, procedures and
controls will be adequate to support the Company's future operations, that
management will be able to hire, train, retain, motivate and manage required
personnel for planned operations, or that Company management will be able to
identify, manage and exploit existing and potential strategic relationship and
market opportunities. The failure of the Company to manage growth effectively
could have a material adverse effect on the Company's business because it might
be unable to meet purchase order demands from its customers, or maintain a level
of inventory sufficient to support demand. This could cause the Company to lose
customer and distribution relationship that would , in turn have an adverse
affect on the Company's results of operations and financial condition. In which
case, the Company's share price would be adversely affected.
If we chose to acquire new or complementary businesses, services or
technologies, we may not be able to complete those acquisitions or successfully
integrate them.
In addition to organic growth to expand our operations and market presence, we
intend to pursue a growth strategy driven by acquisitions and business
combinations of complementary business, services or technologies or engage in
other strategic alliances with third parties. Any such transactions would be
accompanied by the risks commonly encountered in such transactions, including,
among others, the difficulty of assimilating operations, technology and
personnel of the combined companies, the potential disruption of our ongoing
business, the inability to retain key technical and managerial personnel, the
inability of management to maximize our financial and strategic position through
the successful integration of acquired businesses, additional expenses
associated with amortization of acquired intangible assets, the maintenance of
uniform standards, controls and policies and the impairment of relationships
with existing employees and customers. We may not be successful in overcoming
these risks or any other potential problems. Any acquisition may have a material
adverse effect on our business if it any of the risks stated above materialize,
and each of the risks stated above could bring about adverse operating results
which in turn, would negatively impact the Company's financial condition. In
turn, the price of our stock would be negatively affected.
8
We will incur increased costs as a result of being a public company and this may
adversely affect our operating results.
As a public company, we will incur significant legal, accounting and other
expenses that we did not incur as a private company. We also anticipate that we
will incur costs associated with recently adopted corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002, as
well as new rules implemented by the SEC and the OTCBB. We expect these rules
and regulations will increase our legal and financial compliance costs and make
some activities more time consuming and costly. We are currently evaluating and
monitoring developments with respect to these new rules, and we cannot predict
or estimate the amount of additional costs we may incur or the timing of such
costs.
New rules, including those contained in and issued under the Sarbanes-Oxley Act
of 2002, may make it difficult for us to retain or attract qualified officers
and directors, which could adversely affect the management of our business and
our ability to obtain or retain the trading status of our common stock on the
Over the Counter Bulletin Board Market.
We may be unable to attract and retain qualified officers, directors and members
of board committees required for our effective management as a result of the
recent and currently proposed changes in the rules and regulations which govern
publicly-held companies, including, but not limited to, certifications from
executive officers and requirements regarding audit committee financial experts.
The perceived increased personal risk associated with these recent changes may
deter qualified individuals from accepting these roles. The enactment of the
Sarbanes-Oxley Act of 2002 has resulted in the issuance of a series of new rules
and regulations and the strengthening of existing rules and regulations by the
SEC, as well as the adoption of new and more stringent rules by OTCBB.
Furthermore, certain aspects of these recent and proposed changes heighten the
requirements for board and committee membership, particularly with respect to an
individual's independence from the corporation and level of experience in
finance and accounting matters. We may have difficulty attracting and retaining
directors with the requisite qualifications. If we are unable to attract and
retain qualified officers and directors, we may be unable to maintain the
trading status of our common stock on the OTCBB Market.
If we fail to maintain an effective system of internal controls, we may not be
able to accurately report our financial results or prevent fraud. As a result,
current and potential stockholders could lose confidence in our financial
reporting, which would harm our business and the trading price of our stock.
Effective internal controls are necessary for us to provide reliable financial
reports and effectively prevent fraud. If we cannot provide reliable financial
reports or prevent fraud, our operating results could be harmed. Any failure to
implement required new or improved controls, or difficulties encountered in
their implementation, could harm our operating results or cause us to fail to
meet our reporting obligations. Inferior internal controls could also cause
investors to lose confidence in our reported financial information, which could
have a negative effect on the trading price of our stock.
As of the date of this registration statement, we have made loans in the form of
promissory notes to a strategic partner amounting to $199,478, which represents
approximately 14% of our total assets. The promissory notes bear an annual
interest rate of 2% and come to maturity beginning on April 7, 2006 through July
1, 2006. If these loans are not repayed by maturity date, our business will be
adversely affected.
We have established a strategic relationship with WDHQ, Inc. and 449, Inc. (the
"Debt Holders"), which are both owned and operated by the same individual, Don
Swedo, who is an unrelated party to our business. The Debt Holders own and
operate five retail franchises of EagleRider Corporation (the "Parent Company")
located in Miami, St. Louis, Phoenix, Palm Springs and San Diego. If the Debt
Holders fail to repay the principal and interest on the note in a timely
fashion, our cash flow from existing operations could be negatively impacted. In
turn, this would negatively impact our financial performance and results, as
well as our ability to respond efficiently to purchase orders from other
distributors.
9
Risks Relating to this Offering and Ownership of Our Common Stock
The market price of our common stock is likely to be highly volatile, which
could cause investment losses for our stockholders and result in stockholder
litigation with substantial costs, economic loss and diversion of our resources.
The trading price of our common stock is likely to be highly volatile and could
be subject to wide fluctuations as a result of various factors, many of which
are beyond our control, including:
* developments concerning licenses and trademarks by us or a
competitor;
* announcements by us or our competitors of significant contracts,
acquisitions, commercial relationships, joint ventures or capital
commitments;
* actual or anticipated fluctuations in our operating results;
* introductions of new products by us or our competitors;
* changes in the number of our distribution partners;
* loss of key employees;
* changes in the market valuations of similar companies; and
* changes in our industry and the overall economic environment.
In addition, the stock market in general, and the OTCBB have experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of the listed companies. These broad market and
industry factors may seriously harm the market price of our common stock,
regardless of our operating performance. In the past, following periods of
volatility in the market, securities class action litigation has often been
instituted against these companies. Litigation against us, whether or not a
judgment is entered against us, could result in substantial costs, and
potentially, economic loss, and a diversion of our management's attention and
resources.
We plan to continue to pay for consulting and professional services fees with
our stock and this would be dilutive to investors.
In the past we have issued shares to consultants and professional services
providers as a means of paying certain professional service fees and consulting
agreements. We plan to continue to use our stock in the future as a means of
paying for these kind of services, and believe that doing so will enable us to
retain a greater percentage of our operating capital to pay for operations,
product development and purchase of additional inventory.
Price and volume fluctuations in our stock might negatively impact our ability
to effectively use our stock to pay for services, or it could cause us to offer
stock as compensation for services on terms that are not favorable to the
Company and its shareholders. If we did resort to granting stock in lieu of cash
for consulting and professional services fees under unfavorable circumstances,
it would result in increased dilution to investors.
We cannot assure you that a market will develop for our common stock or what the
market price of our common stock will be.
Prior to this offering, there was no public trading market for our common stock,
and we cannot assure you that one will develop or be sustained after this
offering. We cannot predict the extent to which investor interest will lead to
the development of an active and liquid trading market for our common stock. The
initial public offering price will be determined by our market maker that will
sponsor our application for trading status on the OTCBB and us and may bear no
relationship to the price at which our common stock will trade upon completion
of this offering. You may not be able to resell your shares above the initial
public offering price and may suffer a loss in your investment.
10
Management has broad discretion to use the proceeds from this offering for
business activities that may not be successful, which could affect the trading
price of our common stock.
We intend to use the net proceeds from this offering to pay certain outstanding
obligations, increase working capital, fund capital expenditures, finance our
international expansion and fund marketing activities. Accordingly, management
will have significant flexibility in applying the net proceeds of this offering.
The failure of management to apply such funds effectively could have a material
adverse effect on our business, results of operations and financial condition.
Future sales of shares of our common stock that are eligible for sale by our
stockholders may decrease the price of our common stock.
We had 15,644,928 shares of common stock outstanding on August 9, 2005. Based on
shares outstanding as of August 9, 2005, upon completion of this offering, we
will have 19,216,356 shares of common stock outstanding if the maximum is
subscribed. Of these shares, 8,456,000 are held by directors, executive officers
and other affiliates and will be subject to volume limitations under Rule 144
under the Securities Act. Actual sales, or the prospect of sales by our present
stockholders or by future stockholders, may have a negative effect on the market
price of our common stock.
You will incur immediate and substantial dilution in the net tangible book value
of the common stock you purchase, which could adversely affect the market price
of our common stock.
Assuming the maximum offering, 75% of the maximum offering, or 60% of the
maximum of the offering, this offering, will result in an immediate decrease to
our net tangible deficit, of $(0.10), $(0.08) or $(0.06) per share, respectively
to existing stockholders and an immediate dilution in net tangible book value of
$(0.47), $(0.50) or $(0.51) per share to new investors purchasing shares of our
common stock in this offering. Accordingly, the investors will bear the
preponderant part of the financial risk associated with the Company's business,
while effective control will remain with the Principal Stockholders. See
"Dilution", "Description of Capital Stock", and "Capitalization".
Our common stock is considered to be a "penny stock" as defined by Section
3(a)(51) and Rule 3a51-1 under the Securities Exchange Act, and is therefore
subject to penny stock regulations. These regulations could make it more
difficult for you to sell shares you acquire in the offering.
Our common stock is subject to regulations of the Securities and Exchange
Commission relating to the market for penny stocks. These regulations generally
require broker-dealers who sell penny stocks to persons other than established
customers and accredited investors to deliver a disclosure schedule explaining
the penny stock market and the risks associated with that market. These
regulations also impose various sales practice requirements on broker-dealers.
The regulations that apply to penny stocks may severely affect the market
liquidity for our securities and that could limit your ability to sell your
securities in the secondary market.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this prospectus that are not purely historical are
forward-looking statements that are based on our management's beliefs and
assumptions and on information currently available to our management. The
forward-looking statements are contained principally in the sections entitled
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Use of Proceeds" and
"Business." In some cases, you can identify forward-looking statements by terms
such as "anticipates," "believes," "could," "estimates," "expects," "intends,"
"may," "plans," "possible," "potential," "predicts," "projects," "should,"
"will," "would" and similar expressions intended to identify forward-looking
statements.
11
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements to
be materially different from any future results, performances or achievements
expressed or implied by the forward-looking statements. We discuss many of these
risks in this prospectus in greater detail under the heading "Risk Factors."
Given these uncertainties, you should not place undue reliance on these
forward-looking statements. Also, forward-looking statements represent our
management's beliefs and assumptions only as of the date of this prospectus. You
should read this prospectus and the documents that we reference in this
prospectus and have filed as exhibits to the registration statement, of which
this prospectus is a part, completely and with the understanding that our actual
future results may be materially different from what we expect.
Except as required by law, we assume no obligation to update these
forward-looking statements publicly, or to update the reasons actual results
could differ materially from those anticipated in these forward-looking
statements, even if new information becomes available in the future.
USE OF PROCEEDS
This prospectus relates to 10,250,778 shares of our common stock, of which, we
will not receive any part of the proceeds of the sale of 6,679,350 of the shares
that are being offered by the selling shareholders on page 36. The net proceeds
to the Company from the sale of the remaining 2,142,857 shares (if 60% of the
maximum is sold) and 3,571,428 shares (if maximum is sold), at the offering
price of $.35 per share, is estimated to be approximately $750,000 (if 60% of
the maximum is sold) and $1,100,000 (if maximum is sold), after deducting the
estimated costs and expenses of this offering.
The Company intends to use the net proceeds of this Offering to continue its
development, manufacturing and marketing of its products. The Company may also
use the proceeds of this Offering maintain optimal inventory levels, to reduce
debt, and, to the extent available, to fund other working capital needs
(including SEC compliance and related public company costs). The proceeds of
this offering are not expected to be sufficient to provide funding to pursue and
execute the Company's acquisition strategy.
The Company has not yet determined all of its expected expenditures, and cannot
estimate the amounts to be used for each purpose set forth above. Accordingly,
management will have significant flexibility in applying a substantial portion
of the net proceeds of this Offering.
Our offering is being made on a $1,250,000 maximum self-underwritten basis. The
table below sets forth the use of proceeds if 60%,, 75% and 100% of the offering
is sold.
At the Maximum Offering At 75% At 60%
-----------------------------------------------------------
Marketing and Sales $ 375,000 256,250 166,000
Inventory 150,000 150,000 150,000
Working Capital 300,000 150,000 100,000
Operating Expenses 100,000 100,000 100,000
Debt Reduction 175,000 131,250 84,000
-----------------------------------------------
Net Proceeds 1,100,000 787,500 600,000
The amounts and timing of the Company's actual expenditures will depend upon
numerous factors, including the progress of the Company's efforts. The foregoing
discussion represents the Company's best estimate of its allocation of the net
proceeds of this Offering based upon current plans and estimates regarding
anticipated expenditures. Actual expenditures may vary substantially from these
estimates, and the Company may find it necessary or advisable to reallocate the
net proceeds within the above-described uses for other purposes.
12
The Company anticipates, based on management's current plans and assumption
relating to its operations, that the net proceeds of this Offering, if the
maximum subscription is achieved, will be sufficient to satisfy its contemplated
cash requirements to implement its business plan for its core through December,
2005. In the event that the proceeds of the Offering prove to be less or are
insufficient to fund the implementation of its business plan (due to a change in
the Company's plans or a material inaccuracy in its assumptions, or as a result
of unanticipated expenses, or other unanticipated problems), the Company will be
required to seek additional financing sooner than currently anticipated in order
to proceed with such implementation.
THE FOREGOING REFLECTS ONLY ESTIMATES OF THE USE OF THE PROCEEDS IF THE MAXIMUM
SUBSCRIPTION IS ATTAINED. IF LESS THAN THE MAXIMUM SUBSCRIPTION IS ATTAINED, THE
AMOUNTS WILL BE ADJUSTED APPROPRIATELY. ACTUAL EXPENDITURES MAY VARY MATERIALLY
FROM THESE ESTIMATES.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of our board of directors and will depend
upon our financial condition, operating results, capital requirements, covenants
in our debt instruments, and such other factors as our board of directors deems
relevant.
DETERMINATION OF OFFERING PRICE
As no underwriter has been retained to offer our securities, the offering price
of our shares was not determined by negotiation with an underwriter as is
customary in underwritten public offerings. The offering price of $.35 per share
of common stock has been arbitrarily determined by us and bears no relationship
between the offering price of the shares and our assets, earnings, book value,
net worth or other economic or recognized criteria or future value of our
shares. The factors considered were:
* our relatively short operating history;
* the proceeds to be raised by this offering;
* our relative cash requirements; and
* the price that we believe a purchase is willing to pay for our
shares.
The selling shareholders will sell our shares at $0.35 per share until our
shares are quoted on the OTC Bulletin Board, and thereafter at prevailing market
prices or privately negotiated prices.
CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization
as of June 30, 2005 on:
* an actual basis, and
* a pro forma, as adjusted basis to reflect our sale of 10,250,778
shares of common stock in this offering at an assumed public
offering price of $.35 per share and the receipt and application of
the proceeds from (a) the sale of 3,571,428 of those shares upon
maximum subscription, (b) the sale of 2,678,571shares at 75%
subscription and (c) 2,142,857 shares at 60% subscription, estimated
offering expenses
You should read this table in conjunction with our consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," including elsewhere in this
prospectus.
13
June 30, 2005
----------------------------------------------------------------
Actual Pro Forma
------------- -----------------------------------------------
At the At 75% of the At 60% of the
Maximum Maximum Maximum
Offering Offering Offering
------------- ------------- ------------- -------------
Cash and cash equivalents $ 52,060 $ 1,152,060 839,560 652,060
------------- ------------- ------------- -------------
Short-term debt $ 561,750 $ 561,750 $ 561,750 $ 561,750
Long-term debt -- -- -- --
------------- ------------- ------------- -------------
Total debt 561,750 561,750 561,750 561,750
Stockholders' equity:
Common Stock: $0.001 par value,
100,000,000 shares authorized -- 3,571 2,679 2,143
Additional-paid-in-capital -- 1,096,428 784,821 597,857
Common stock payable/subscribed 3,812,662 3,812,662 3,812,662 3,812,662
Retained Earnings (3,498,492) (3,498,492) (3,498,492) (3,498,492)
------------- ------------- ------------- -------------
Total stockholders' equity 314,170 1,414,170 1,101,670 914,170
------------- ------------- ------------- -------------
Total capitalization $ 875,920 $ 1,975,920 $ 1,663,420 $ 1,475,920
------------- ------------- ------------- -------------
DILUTION
Purchasers of our common stock in this offering will experience immediate and
substantial dilution in the pro forma net tangible book value of the common
stock from the initial public offering price. In our calculations, we have
assumed an initial public offering price of $.35 per share of common stock.
Pro forma net tangible book value per common share is determined by dividing pro
forma net tangible book value (total tangible assets less total liabilities) by
the pro forma number of shares of common stock outstanding as of June 30, 2005
As of June 30, 2005, the pro forma net tangible deficit of our common stock was
approximately $(3,498,492), or approximately $(.22) on a per share basis as if
all our common stock payable/subscribed had been issued as of June 30, 2005.
As of June 30, 2005, after giving effect to the sale of 3,571,428 shares
(maximum offering), 2,678,571 shares (75% of the maximum offering), or 2,142,857
shares (60% of the maximum offering) of common stock offered by this prospectus
(after deduction of estimated offering expenses of $150,000), our adjusted net
tangible book value would have been approximately $(2,398,492), $(2,710,992) or
$(2,898,492), respectively, or $(0.12), $(0.15) or $(0.16) per share of common
stock assuming the maximum offering price, 75% of the maximum offering price and
60% of the maximum offering price, respectively.
Assuming the maximum offering, 75% of the maximum offering, or the 60% of the
maximum offering, this offering, will result in an immediate decrease to our net
tangible deficit, of $(0.10), $(0.08) or $(0.06) per share, respectively to
existing stockholders and an immediate dilution in net tangible book value of
$(0.47), $(0.50) or $(0.51) per share to new investors purchasing shares of our
common stock in this offering.
14
The following table illustrates the effects of this offering on our net tangible
deficit and per share dilution to the new investors:
At the Maximum Offering At 75% At 60%
----------------------------------------------------------
June 30, 2005 net tangible deficit $(3,498,492) $ (3,498,492) $ (3,498,492)
Gross offering proceeds 1,250,000 937,500 750,000
Offering fees (150,000) (150,000) (150,000)
----------------------------------------------------------
Net offering proceeds 1,100,000 787,500 600,000
Post offering net tangible deficit $(2,398,492) $ (2,710,992) $ (2,898,492)
Number of common shares payable/
subscribed as of June 30, 2005 15,644,928 15,644,928 15,644,928
June 30, 2005 net tangible deficit per
common share payable/subscribed $ (0.22) $ (0.22) $ (0.22)
Shares issued per this offering 3,571,428 2,678,571 2,142,857
----------------------------------------------------------
Post offering common shares outstanding 19,216,356 18,323,499 17,787,785
Post offering net tabgible deficit
per common share $ (0.12) $ (0.15) $ (0.16)
Per share decrease in net deficit as a
result of the offering $ (0.10) $ (0.08) $ (0.06)
Public offering price per share $ 0.35 $ 0.35 $ 0.35
Dilution per share to new investors
in this offering $ (0.47) $ (0.50) $ (0.51)
The following tables summarize, on a pro forma basis as of June 30, 2005, after
giving effect to this offering, the differences between existing holdings of
common stock and the new investors with respect to the number of shares of
common stock purchased from us, the total cash consideration paid and the
average price per share paid by existing holders and investors in this offering,
in each case before deducting estimated offering expenses, and illustrating
three scenarios including, the maximum offering is sold, 75% of the maximum
offering is sold and 60% of the maximum offering is sold:
- ------------------------------------------------------------------------------------------------------------------------------------
AT THE MAXIMUM OFFERING Shares Payable/Subscribed Total Cash Consideration Average Price
- ------------------------------------------------------------------------------------------------------------------- Per
Number Percent Amount Percent Share Sold
-----------------------------------------------------------------------------------
As of December 31, 2004 278,000 1.4% $69,500 4% $0.25
Q1 shares to be issued for:
Cash 690,000 3.6% $172,500 9% $0.25
Services 750,000 3.9%
Accrued interest 416,928 2.2%
-----------------------------------------------------------------------------------
Total shares to be issued at March 31, 2005 2,134,928 11.1%
Q2 shares to be issued for:
Cash 1,950,000 10.1% $487,500 25% $0.25
Founders shares 8,500,000 44.2%
Services 3,060,000 15.9%
-----------------------------------------------------------------------------------
Total shares to be issued as of June 30, 2005 15,644,928 81.4%
New investors 3,571,428 18.6% $1,250,000 63% $0.35
-----------------------------------------------------------------------------------
Total 19,216,356 100.0% $1,979,500 100% $0.31
- ------------------------------------------------------------------------------------------------------------------------------------
15
- ------------------------------------------------------------------------------------------------------------------------------------
AT 75% OF THE MAXIMUM OFFERING Shares Payable/Subscribed Total Cash Consideration Average Price
- ----------------------------------------------------------------------------------------------------------------- Per
Number Percent Amount Percent Share Sold
-------------------------------------------------------------------------------------
As of December 31, 2004 278,000 1.5% $69,500 4% $0.25
Q1 shares to be issued for:
Cash 690,000 3.8% $172,500 10% $0.25
Services 750,000 4.1%
Accrued interest 416,928 2.3%
-------------------------------------------------------------------------------------
Total shares to be issued at March 31, 2005 2,134,928 11.7%
Q2 shares to be issued for:
Cash 1,950,000 10.6% $487,500 29% $0.25
Founders shares 8,500,000 46.4%
Services 3,060,000 16.7%
-------------------------------------------------------------------------------------
Total shares to be issued as of June 30, 2005 15,644,928 85.4%
New investors 2,678,571 14.6% $937,500 56% $0.35
-------------------------------------------------------------------------------------
Total 18,323,499 100.0% $1,667,000 100% $0.30
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
AT 60% OF THE MAXIMUM OFFERING Shares Payable/Subscribed Total Cash Consideration Average
- ---------------------------------------------------------------------------------------------------------------------- Price Per
Number Percent Amount Percent Share Sold
---------------------------------------------------------------------------------
As of December 31, 2004 278,000 1.6% $69,500 5% $0.25
Q1 shares to be issued for:
Cash 690,000 3.9% $172,500 12% $0.25
Services 750,000 4.2%
Accrued interest 416,928 2.3%
---------------------------------------------------------------------------------
Total shares to be issued at March 31, 2005 2,134,928 12.0%
Q2 shares to be issued for:
Cash 1,950,000 11.0% $487,500 33% $0.25
Founders shares 8,500,000 47.8%
Services 3,060,000 17.2%
---------------------------------------------------------------------------------
Total shares to be issued as of June 30, 2005 15,644,928 88.0%
New investors 2,142,857 12.0% $750,000 51% $0.35
---------------------------------------------------------------------------------
Total 17,787,785 100.0% $1,479,500 100% $0.29
- ------------------------------------------------------------------------------------------------------------------------------------
PLAN OF DISTRIBUTION
This offering shall commence upon effectiveness of this registration statement
and will expire whenever all of the shares have been sold or 12 months after the
date of effectiveness, whichever comes first. The Company does not anticipate
engaging an underwriter for the sale or distribution of the shares at this time.
All sales of the shares will be effected by officers or other representatives of
the Company (who fall within the requirements of Rule 3a4-1 of the Securities
Exchange Act of 1934), who will not receive any special compensation in
connection with such sale or distribution. The Company reserves the right to
engage an underwriter in the future for the purpose of offering and selling
shares. Any underwriter will only be engaged upon compliance with requisite
disclosure obligations of the Company.
We are managing this offering without an underwriter. The shares will be offered
and sold by our officers and directors. These officers and directors will not
receive a sales commission or any other form of compensation for this offering.
In connection with their efforts, our officers and directors will rely on the
safe harbor provisions of Rule 3a4-1 of the Securities and Exchange Act of 1934.
Generally speaking, Rule 3a4-1 provides an exemption from the broker/dealer
registration requirements of the 1934 act for associated persons of an issuer.
No one has made any commitment to purchase any or all of the shares being
offered. Rather, the officers and directors will use their best efforts to find
purchasers for the shares. We cannot predict how many shares, if any, will
successfully be sold.
16
Don Dallape, our President is responsible for the sale of the securities on
behalf of Execute Sports. Mr. Dallape shall not be compensated in connection
with his participation by the payment of commissions or other remuneration based
either directly or indirectly on transactions in our securities. Neither Mr.
Dallape, nor any other of our officers and directors associated with offering
and selling the shares are considered associated persons of any broker or
dealer.
Our officers meet all of the following conditions:
* They primarily perform, or intend to primarily perform at the end of
the offering, substantial duties for or on behalf of Execute Sports
otherwise than in connection with the sale and distribution of the
shares;
* They were not a broker or dealer, or an associated person of a
broker or dealer, within the preceding twelve months;
* The officers do not participate in selling and offering of
securities for any issuer more than once every twelve months other
than in reliance certain exemptions provided for under Rule
3a4-1(a)(4)(i) and (a)(4)(iii), except that for securities issued
pursuant to Rule 415 under the Securities Act 1933, the twelve
months shall begin with the last sale of any security included
within one Rule 415 registration.
In the past, we have received unsolicited indications of interest in Execute
Sports from persons familiar with us. Our officers will deliver prospectuses to
these individuals and to others who they believe might have interest in
purchasing all or part of this offering. We also may retain licensed
broker/dealers to assist us in the offering and selling of shares, if we deem
such to be in our best interest. At this time we do not have any commitments,
agreements or understandings with any broker/dealers. The maximum underwriting
discount and commissions we are willing to pay to engage broker/dealers is 10%.
In the event we retain any broker/dealers to assist in the offering and selling
of units we will update this prospectus accordingly.
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this prospectus and if given or made, that information or representation must
not be relied on as having been authorized by Execute Sports. This prospectus is
not an offer to sell or a solicitation of an offer to buy any of the securities
to any person in any jurisdiction in which that offer or solicitation is
unlawful.
Neither the delivery of this prospectus nor any sale hereunder shall under any
circumstances, create any implication that the information in this prospectus is
correct as of any date later than the date of this prospectus.
We have the right to accept or reject subscriptions in whole or in part, for any
reason of for no reason. All monies from rejected subscriptions will be returned
immediately to the subscriber, without interest or deductions. Subscriptions for
securities will be accepted or rejected within 48 hours after we receive them.
Any purchases made by officers, directors, and their affiliates shall be for
investment purposes and not for resale. In addition, no proceeds from this
offering will be used to finance any such purchases.
Purchasers of share either in this offering or in any subsequent trading market
that may develop must be residents of states in which the securities are
registered or exempt from registration. Some of the exemptions are
self-executing, that is to say that there are no notice or filing requirements,
and compliance with the conditions of the exemption render exemption applicable.
We are registering the shares offered by this prospectus in part on behalf of
the selling stockholders. The selling stockholders, which as used herein
includes donees, pledges, transferees or other successors-in-interest selling
shares of common stock or interests in shares of common stock received after the
date of this prospectus from a selling stockholder as a gift, pledge,
partnership distribution or other transfer, may, from time to time sell,
transfer or otherwise dispose of any or all of their shares of common stock or
interests in shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These
dispositions may be at fixed prices, at prevailing market prices at the time of
sale, at prices related to the prevailing market price, at varying prices
determined at the time of sale, or at negotiated prices.
17
The selling stockholders may use any one or more of the following methods when
disposing of shares or interests therein:
* ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
* block trades in which the broker-dealer will attempt to sell the
shares as agent, but may position and resell a portion of the block
as principle to facilitate the transaction;
* purchases by a broker-dealer as principle and resale by the
broker-dealer for its account;
* an exchange distribution in accordance with the rules of the
applicable exchange;
* privately negotiated transaction;
* broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
* a combination of any such methods of sale; and
* any other method permitted pursuant to applicable law.
New Distribution Shares
We are registering for sale or distribution a maximum of 3,571,428 shares of
common stock at the initial offering price of $.35 per share. There is no
minimum number of shares that must be sold in this offering. There will be no
escrow account. All money received from this offering will be immediately used
by us and there will be no refunds.
The total number of shares of common stock we have issued and outstanding prior
to the offering of the new distribution shares is 15,644,928 shares. None of the
holders of our shares have made any distribution, transfer or sale of the shares
we issued to them except as described in "Recent Sales of Unregistered
Securities" in Part II below.
In order to purchase shares you must complete and execute the subscription
agreement and return it to us at 1284 Puerta Del Sol, Suite 150, San Clemente,
CA 92673. Payment for the purchase price must be made by check payable to the
order of "Execute Sports, Inc." The check may be delivered directly to us at the
abovementioned address.
We have the right to accept or reject subscriptions in whole or in part, for any
reason or for no reason. All monies from rejected subscriptions will be returned
immediately by us to the subscriber, without interest or deductions.
Subscriptions for shares will be accepted or rejected within 48 hours after we
receive them.
Offers by Selling Shareholders
The Company is registering the shares currently held by the Company's
shareholders to permit the shareholders and their transferees or other
successors in interest to offer the shares from time to time. The Company will
not offer any shares on behalf of any selling shareholder. None of the Company's
shareholders are required to sell their shares, nor as of the date of this
prospectus, has any shareholder indicated an intention to the Company to sell
his, her or its shares. The selling shareholders will sell their shares of
common stock at the offering price of $.35 per share until our common stock is
quoted on the OTC Bulletin Board, or other recognized secondary trading system.
At such time, if ever, the selling shareholders may sell their shares of our
common stock at prevailing market prices or privately negotiated prices.
18
The shares being offered by the selling shareholders may be sold from time to
time in one or more transactions (which may involve block transactions):
* on the OTC Bulletin Board or on such other market on which the
common stock may from time to time be trading;
* in privately-negotiated transactions; or
* any combination of the above.
As of the date of this prospectus, the Company has no information on the manner
or method by which any selling shareholder may intend to sell shares. The sale
price to the public may be the market price prevailing at the time of sale, a
price related to such prevailing market price, at negotiated prices or such
other price as the selling shareholders determine from time to time. The shares
may also be sold pursuant to Rule 144. The selling shareholders have the sole
and absolute discretion not to accept any purchase offer or make any sale of
shares if they deem the purchase price to be unsatisfactory at any particular
time.
The selling shareholders may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling shareholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling shareholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. There
can be no assurance that all or any of the shares offered by this prospectus
will be issued to, or sold by, the selling shareholders. The selling
shareholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered by this prospectus, may be deemed "underwriters" as that
term is defined under the Securities Act of 1933 or the Securities Exchange Act
of 1934, or the rules and regulations thereunder.
The selling shareholders, alternatively, may sell all or any part of the shares
offered by this prospectus through an underwriter. No selling shareholder has
entered into an agreement with a prospective underwriter. If a selling
shareholder enters into such an agreement or agreements, the relevant details
will be set forth in a supplement or revision to this prospectus.
The selling shareholders and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934 and the rules and regulations thereunder,
including, without limitation, Regulation M, which may restrict certain
activities of, and limit the timing of purchases and sales of any of the shares
by the selling shareholders or any other such person. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions, subject to specified exceptions or
exemptions. All of these limitations may affect the marketability of the shares.
Under the regulations of the Securities Exchange Act of 1934, any person engaged
in a distribution of the shares offered by this prospectus may not
simultaneously engage in market making activities with respect to the common
stock of Execute Sports during the applicable "cooling off" periods prior to the
commencement of such distribution. In addition, and without limiting the
foregoing, the selling shareholders will be subject to applicable provisions,
rules and regulations of the Exchange Act, which provisions may limit the timing
of purchases and sales of common stock by the selling shareholders.
We have advised the selling shareholders that, during such time as they may be
engaged in a distribution of any of the shares we are registering on their
behalf in this registration statement, they are required to comply with
Regulation M as promulgated under the Securities Exchange Act of 1934. In
general, Regulation M precludes any selling shareholder, any affiliated
purchasers and any broker-dealer or other person who participates in such
distribution from bidding for or purchasing, or attempting to induce any person
to bid for or purchase, any security which is the subject of the distribution
until the entire distribution is complete. Regulation M defines a "distribution"
as an offering of securities that is distinguished from ordinary trading
activities by the magnitude of the offering and the presence of special selling
efforts and selling methods. Regulation M also defines a "distribution
participant" as an underwriter, prospective underwriter, broker, dealer, or
other person who has agreed to participate or who is participating in a
distribution. Our officers and directors, along with affiliates, will not engage
in any hedging, short, or any other type of transaction covered by Regulation M.
19
Regulation M prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security, except
as specifically permitted by Rule 104 of Regulation M. These stabilizing
transactions may cause the price of the common stock to be higher than it would
otherwise be in the absence of those transactions. We have advised the selling
shareholders that stabilizing transactions permitted by Regulation M allow bids
to purchase our common stock so long as the stabilizing bids do not exceed a
specified maximum, and that Regulation M specifically prohibits stabilizing that
is the result of fraudulent, manipulative, or deceptive practices. Selling
shareholders and distribution participants will be required to consult with
their own legal counsel to ensure compliance with Regulation M.
Application for Trading of Execute Sports Common Stock on the OTC Bulletin Board
Prior to the date of this document, there has not been any established trading
market for our common stock. Following the consummation of this offering, we
will seek a market maker to sponsor our common stock on the OTC Bulletin Board.
Application will then be made by the market maker to sponsor the shares of
Execute Sports common stock on the OTC Bulletin Board. No market maker has yet
undertaken to sponsor our common stock on the OTC Bulletin Board, and there can
be no assurance as to the prices at which the our common stock will trade, if at
all. Until our common stock is fully distributed and an orderly market develops,
if ever, in our common stock, the price at which it trades may fluctuate
significantly. Prices for our common stock will be determined in the marketplace
and may be influenced by many factors, including the depth and liquidity of the
market for shares of our common stock, developments affecting the businesses of
Execute Sports generally, including the impact of the factors referred to in
"Risk Factors," on page 10 above, investor perception of Execute Sports and
general economic and market conditions. No assurances can be given that an
orderly or liquid market will ever develop for the shares of our common stock.
Shares of common stock distributed to Execute Sports stockholders will be freely
transferable, except for shares of Execute Sports common stock received by
persons who may be deemed to be "affiliates" of Execute Sports under the
Securities Act of 1933, as amended. Persons who may be deemed to be affiliates
of Execute Sports generally include individuals or entities that control, are
controlled by or are under common control with Execute Sports, and may include
senior officers and directors of Execute Sports, as well as principal
stockholders of Execute Sports. Persons who are affiliates of Execute Sports
will be permitted to sell their shares of common stock only pursuant to an
effective registration statement under the Securities Act or an exemption from
the registration requirements of the Securities Act, such as the exemption
afforded by Section 4(1) of the Securities Act or Rule 144 issued under the
Securities Act.
If securities are sold for the account of an affiliate, the securities may only
be sold in "brokers transactions", and the amount of securities sold, together
with all sales of restricted and other securities of the same class for the
account of the person deemed an affiliate within the preceding three months,
shall not exceed the greater of:
* one percent of the shares or other units of the class outstanding,
or
* the average weekly reported volume of trading in such securities on
all national securities exchanges and/or reported through the
automated quotation system of a registered securities association
during the four calendar weeks preceding the filing of notice, or
* the average weekly volume of trading in such securities reported
through the consolidated transaction reporting system during the
four-week period.
We will endeavor to apply to have our shares of common stock quoted and traded
on the OTC Bulletin Board. Execute Sports, however, cannot give any assurances
as to whether it will be successful in having its shares sponsored by a market
maker for application to trade on the OTC Bulletin Board, as well as the
acceptance for trading of our shares on the OTC Bulletin Board.
20
Penny Stock Regulations
Our common stock will be considered a "penny stock" as defined by Section
3(a)(51) and Rule 3a51-1 under the Securities Exchange Act. A penny stock is any
stock that:
* sells for less than $5 a share,
* is not listed on an exchange or authorized for quotation on the
Nasdaq Stock Market, and
* is not a stock of a "substantial issuer." Execute Sports, Inc. is
not now a "substantial issuer" and cannot become one until it has
net tangible assets of at least $5 million, which it does not now
have.
There are statutes and regulations of the Securities and Exchange Commission
that impose strict requirements on brokers that recommend penny stocks.
The Penny Stock Suitability Rule
Before a broker-dealer can recommend and sell a penny stock to a new customer
who is not an institutional accredited investor, the broker-dealer must obtain
from the customer information concerning the person's financial situation,
investment experience and investment objectives. Then, the broker-dealer must
"reasonably determine"
* that transactions in penny stocks are suitable for the person and
* the person, or his/her advisor, is capable of evaluating the risks
in penny stocks.
After making this determination, the broker-dealer must furnish the customer
with a written statement describing the basis for this suitability
determination. The customer must sign and date a copy of the written statement
and return it to the broker-dealer.
Finally the broker-dealer must also obtain from the customer a written agreement
to purchase the penny stock, identifying the stock and the number of shares to
be purchased.
The above exercise often delays a proposed transaction. It causes many
broker-dealer firms to adopt a policy of not allowing their representatives to
recommend penny stocks to their customers. The Penny Stock Suitability Rule,
described above, and the Penny Stock Disclosure Rule, described below, do not
apply to the following:
* transactions not recommended by the broker-dealer,
* sales to institutional accredited investors,
* sales to "established customers" of the broker-dealer - persons who
either have had an account with the broker-dealer for at least a
year or who have effected 3 purchases of penny stocks with the
broker-dealer on 3 different days involving three different issuers,
and
* transactions in penny stocks by broker-dealers whose income from
penny stock activities does not exceed five percent of their total
income during certain defined periods.
The Penny Stock Disclosure Rule
Another Commission rule - the Penny Stock Disclosure Rule - requires a
broker-dealer, who recommends the sale of a penny stock to a customer to furnish
the customer with a "risk disclosure document." This document includes a
description of the penny stock market and how it functions, its inadequacies and
shortcomings, and the risks associated with investments in the penny stock
market. The broker-dealer must also disclose the stock's bid and ask price
information and the dealer's and salesperson's compensation for the proposed
transaction. Finally, the broker-dealer must furnish the customer with a monthly
statement including specific information relating to market and price
information about the penny stocks held in the customer's account.
Effects of the Rule
21
The above penny stock regulatory scheme is a response by the Congress and the
Securities and Exchange Commission to abuses in the telemarketing of low-priced
securities by "boiler shop" operators. The scheme imposes market impediments on
the sale and trading of penny stocks. It limits a shareholder's ability to
resell a penny stock.
Our common stock likely will continue to trade below $5 a share and be, for some
time at least, be a "penny stock" subject to the trading market impediments
described above.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results could differ materially from those anticipated in the
forward-looking statements as a result of certain factors discussed in "Risk
Factors" and elsewhere in this prospectus.
Overview
Execute Sports Inc. is a premier, branded consumer products company with
targeting its "Execute Sports", "White Rapids" and "Water Skeeter" branded
apparel, graphics kits, and sportswear to the Power Sports and Action Sports
markets. In addition to its branded products, the Company also licenses leading
brands such as NASCAR and EagleRider, Inc. to provide a line of products for the
retail market for sports racing and Harley Davidson enthusiasts, respectively.
The Company derives its revenue primarily from the design, manufacturing and
retail sales of its "Execute Sports" branded products into the waters sports and
motor sports markets. In the water sports market, the majority of our revenue is
from the sales of wetsuits, rash guards, life jackets and ancillary products to
the wakeboarding and water skiing consumers. We also private label these
products to select customers. In the motor sports market, the majority of our
revenue is from the sales of graphics kits, seat covers and number plates for
leading Motorcycle brands including Honda, Kawaski, Suzuki, KTM and Yamaha.
Our business is not directly tied to any specific geographic region. Rather, it
is driven in large part by the customer base of our distributors. The sports of
wakeboarding, water skiing and motocross are ubiquitous and participation in any
one or all of these sports is not specific to a geographical region. Rather, in
the case of watersports, any geographical location with a lake, rive or ocean
will be an addressable geographical market for our products, and with respect to
motocross, any geographical location with a trail, open area, street or arena is
an addressable geographic market for our products.
Execute Sports intends to continue to leverage its existing operations and to
complement and diversify its product offerings within the sporting goods and
recreational products industries. As our cashflow and capital resources permit,
we intend to expand our product lines in both water sports and in motor sports,
and also to continue to respond to what we believe our customers want through
the introduction of and diversification into new product lines. Our customer
relationships are important to providing us with feedback in terms of how their
end customer are responding to our products and also as to where they see demand
increasing and decreasing in our markets. We intend to continue to leverage our
customer's feedback to better position our product development strategies going
forward.
In addition, through our sponsorship of leading athletes and high-profile
events, and our participation in the target markets, we intend to identify and
understand what the market trends are and we will also use that understanding to
influence our product development strategies.
We intend to implement our internal growth strategy by continuing to improve
operating efficiencies. For example, we will seek out distribution relationships
that enable us to sell both water sports and motor sports products into their
channels, as opposed to one or the other. We will also work to establish
"private label" wholesale distribution relationships with customers whose
products are complimentary to our own that will, in turn, allow us to sell our
branded products into their channels. As noted above, we intend to extend our
product offerings through new product launches and maximizing our extensive
distribution channels. In addition, we will seek strategic acquisitions of other
power sports and action sports companies with well-established brands and with
complementary distribution channels.
22
Our ability to service and expand existing distribution channels both domestic
and internationally, as well as open new distribution channels is key to our
revenue growth. General economic and industry conditions could also affect our
revenue performance.
In the review of our financial statements, our auditors, Bedinger & Company,
have questioned our ability to continue as a going concern (see page F-1 of this
Registration Statement). This is based on our Company's history of reported
losses. Our plans to address this issue and to minimize the threat of
liquidation or reorganization are dependent on our ability to obtain additional
funding from new investors to support the Company's working capital
deficiencies, to implement sales strategies that will generate higher levels of
sales in proportion to our fixed expenses and cost of goods.
We believe that our public offering will support our strategy to establish
sustainable business operations through the addition of working capital in the
following ways:
* Additional working capital will provide us with the capital needed
to internally finance our inventory and purchase orders thereby
reducing our dependence on factoring to finance purchase orders.
This will enable us to eliminate interest payments to our factoring
partner, thereby increasing our gross profits.
* In addition, additional working capital will enable us to build
inventory at in a more cost-effective manner. For instance, we can
order inventory from our contract manufacturers in their off-season,
thereby securing more favorable manufacturing prices as incentives
to book orders when they need to achieve higher utilization rates.
* Additional working capital will enable us to increase the level of
inventory that we are able to distribute through our channels, and
* Additional working capital will enable us to further build brand
awareness of our products through the implementation of strategic
marketing strategies such as increased sponsorship of high-profile
athletes and high-profile events. As a retailer of the "Execute
Sports" brand it is important to increase the visibility of our
brand amongst our target consumer market in order to develop a
demand for the brand amongst these consumers. We believe that the
association of our brand with high-profile athletes and high-profile
events will increase the visibility of our brand to our target
consumer. Our objective is that a higher level of brand visibility
and association with these high-profile athletes and related events
will increase the demand for our product in the market.
The maximum net proceeds from this offering are $1,100,000. We believe that if
we achieve the maximum offering, these proceeds will provide us with the
necessary working capital to address each of the strategies listed above to
contribute to sustainable business operations through the end of the year.
However, we anticipate that we will need an additional $2,000,000 to fund our
business plan for the next 12 months. This additional working capital will be
used to increase inventory necessary to add distribution channels, retain key
employees and sales people, expand our product lines and towards implementing
our acquisition strategy. In addition, we believe that certain amounts of these
funds will be required in the event that our branding and marketing efforts are
successful enough to require additional investment and allocation of the
Company's resources, we will need to raise additional capital in response to
increased purchase orders from our customers and to sustain a greater level of
inventory. In the event that our branding and marketing efforts are not
successful, we may need to raise additional capital to avoid the threat of
liquidation or reorganization.
23
If we are unable to achieve the maximum offering, and raise substantially less,
or half as much as the targeted maximum net proceeds of this offering, our
available working capital might not be sufficient to sustain our operations
through the end of the year. This would negatively impact our ability to
continue as a going concern. In an event that we do raise substantially less
than the targeted maximum net proceeds of this offering, we will have to
consider offering shares of our stock at lower prices or entering into a
financing on less favorable terms to the Company and its current shareholders
than the current offering.
At present, the Company is not able to secure debt financing on any terms, and
we believe that the only source of debt financing that would be available to the
Company would be in the form of a convertible debenture after the Company's
common stock becomes traded on the OTC Bulletin Board. We believe that this
source of financing would be unfavorable, but if we are unable to achieve
financing directly through equity, or the sale of our common stock, we would be
forced to consider this source as an alternative.
If we are unsuccessful in achieving the maximum offering on these less favorable
terms, we will be forced to scale back our operations and business plan
significantly to meet the shortfall in required operating capital. We will do
this be decreasing administrative salaries, eliminating sales channels and
thereby reducing inventory requirements, and perhaps seeking new operating
facilities.
Even if we are able to achieve the maximum offering of $1,250,000 which will
result in net proceeds to the Company of $1,100,000, we anticipate that we will
need to raise the additional $2,000,000 within the next six months to finance
our business plan through the next 12 months.
We believe that we will be able to secure financing needed to fund operations
over the next 12 months much more efficiently if our stock is declared
"effective" and able to trade on the OTC Bulletin Board pursuant to this
Registration Statement by the Securities and Exchange Commission.
In addition, we believe that the power sports market is fragmented and that
there are numerous opportunities to grow our business through the acquisition
process. We intend that our public offering will better position our Company to
facilitate this process by leveraging our shares as currency in future
transactions. We also anticipate that we will need to seek further capital if we
are to pursue this acquisition strategy.
As stated above in the "Risk Factors" section and also noted on F-10 of our
financial notes, historically, four primary customers have accounted for more
than 90% of our business. The three primary customers of our water sports
products are Bass Pro Shops , GI Joes and Galyans - Dicks Sporting Goods. These
three customers account for more than 80% of our water sports revenue. If any of
these customers decides to exit the water sports market, or to select one of our
competitor's products over our own, our business would be materially adversely
impacted through a substantial decline in revenue and we might be able to
compensate for this decline in revenue through other customers.
Our fourth primary customer and the primary customer of our motorcycle graphics
business is Global Motor Sports Group, which accounts for about 50% of our
graphics business. If Global Motor Sports Group selects one of our competitors
graphics products and terminates our relationship we would be materially
adversely affected. There are larger, better capitalized competitors that could
provide Global Motor Sports Groups with lower pricing and additional incentives
that we might not be able to effectively compete against. In the case that we
lost Global Motor Sports Group as a customer, we would like see a substantial
decline in revenue and we might not be able to compensate for that decline in
revenue right away, if at all, through other customers.
We believe that our relationships with our four primary customers remains
strong. However, we do not have any contractual agreements with any of these
customers that obligates them to purchase a specified amount of products from us
each year, or any products at all. Our sales to these customers is largely
dependent upon demand in their businesses for products that we produce and also
our ability to convince these customers, and any of our other customers, that
our products are superior from both a quality and a cost perspective. Our
relationships with each of these customers has been in place for the past two
fiscal years and we expect that they will remain in place for the foreseeable
future.
24
In order to facilitate our purchase order and accounts receivables process, we
have developed a relationship with a factoring bank. We sell our products to
customers open account, thereby creating an account receivable. We then sell
certain accounts receivable to our factoring bank (a percentage of the face
value of our invoices to our customers), which provides us with a percentage of
these accounts receivable so that we can use it for operating capital until the
accounts receivable are paid by the customer. Customers typically pay accounts
receivable within 60 days or so of their receipt of their invoice from our
Company. When the customer pays the invoice, our factoring bank retains a fee
and we receive the remaining balance. In addition to providing our Company with
operating capital against our factor also acts as our credit department by
providing credit information on and evaluations of potential customers, thereby
reducing our credit risk.
In the past we have issued shares to consultants and professional services
providers as a means of paying certain professional service fees and consulting
agreements. We plan to continue to use our stock in the future as a means of
paying for these kind of services, and believe that doing so will enable us to
retain a greater percentage of our operating capital to pay for operations,
product development and purchase of additional inventory.
Summary of Significant Accounting Principles
Critical Accounting Policies
The Company's discussion and analysis of its results of operations, financial
condition and liquidity are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments 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 period. The Company bases its estimates on historical
experience and on various other assumptions that it believes to be reasonable
under the circumstances. Actual results may materially differ from these
estimates under different assumptions or conditions. On an on-going basis, the
Company reviews its estimates to ensure that the estimates appropriately reflect
changes in its business.
Inventories
Inventories are valued at the lower of cost or market and primarily consist of
wetsuits, sticker kits and related accessories. Cost is determined using the
average cost method. The inventory balance reflects management's estimate of net
realizable value. Management performs periodic assessments based on our
understanding of market conditions and forecasts of future product demand to
determine the existence of obsolete, slow moving and non-salable inventories,
and records the necessary adjustment at the time of assessment directly to the
statement of operations to reduce such inventories to their net realizable
value. If the actual amount of obsolete inventory significantly exceeds the
inventory balance, the Company's costs of goods sold and gross profit and
resulting net income or loss would be significantly adversely affected.
Revenue recognition
The Company recognizes revenue when the product is shipped. At that time, the
title and risk of loss transfer to the customer, and collectability is
reasonably assured. Collectability is evaluated on an individual customer basis
taking into consideration historical payment trends, current financial position,
results of independent credit evaluations and payment terms. Additionally, an
estimate of product returns are recorded when revenue is recognized. Estimates
are based on historical trends taking into consideration current market
conditions, customer demands and product sell through. If actual sales returns
significantly exceed the recorded estimated expense, the Company's sales would
be adversely affected.
Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. An
estimate of uncollectable amounts is made by management based upon historical
bad debts, current customer receivable balances and aging, the customer's
financial condition and current economic conditions. If a significant number of
customers with significant receivable balances in excess of the allowance fail
to make required payments, the Company's operating results would be
significantly adversely affected. Based on management's assessment, the Company
provides for estimated uncollectable amounts through a charge to earnings and a
credit to the valuation allowance. Balances that remain outstanding after the
Company has used reasonable collection efforts are written off through a charge
to the valuation allowance and a credit to accounts receivable. The Company
generally does not require collateral.
25
Product Warranty
The Company's Motocross Graphic and Seatcover replacement kits are sold under
warranty against defects in material and workmanship for a period of thirty days
with the exception of Watersports products which carry a ninety day warranty.
Warranty costs are charged against sales in the period products are sold as a
reduction in the selling price. Historically, warranty costs have been less than
1% of sales. In estimating its warranty obligations, the Company considers
various relevant factors, including the Company's stated warranty policies, the
historical frequency of claims, and the cost to replace or repair the product.
If the actual amount of warranty claims significantly exceeds the estimated
expense, the Company's costs of goods sold and gross profit and resulting net
income or loss would be significantly adversely affected.
Income taxes
On November 1, 2004, the Company legally amended its Articles of Incorporation
to make the transition from an S-Corporation to a C-Corporation. Prior to that
the S Corporation was not a tax paying entity for federal or state income tax
purposes and thus no provision for income taxes was recognized. The Company
accounts for income taxes using the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to the differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted rates recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. In assessing the realizability of
deferred income tax assets, the Company considers whether it is more likely than
not that some portion or all of the deferred income tax assets will be realized.
The ultimate realization of deferred income tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Due to the historical operating results of the
Company, management is unable to conclude on a more likely than not basis that
all deferred income tax assets generated from net operating losses and other
deferred tax assets through December 31, 2004 will be realized. Accordingly, the
Company has recognized a valuation allowance equal to the entire deferred income
tax asset.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
26
Statement of Position and of Results of Operations for the Six Months Ended June
30, 2005 and June 30, 2004
PADOVA INTERNATIONAL U.S.A., INC.
(DBA EXECUTE SPORTS)
Balance Sheets
December 31, 2004 (Restated) and June 30, 2005
- --------------------------------------------------------------------------------
June 30, December 31,
------------------------------------------
2005 2004
------------------- --------------------
ASSETS (Restated)
- ------
CURRENT ASSETS
- --------------
Cash $ 52,060 $ 5,154
Accounts receivable, net 464,655 107,708
Inventory 173,713 111,741
Prepaid expenses 585,706 81,507
Prepaid expense-related party 58,740 -
Loans receivable 122,538 -
------------------- --------------------
TOTAL CURRENT ASSETS 1,457,412 306,110
Fixed assets
Cost 35,443 35,443
Accumulated Depreciation (20,174) (17,197)
------------------- --------------------
Net 15,269 18,246
Deposits 3,560 3,560
------------------- --------------------
TOTAL ASSETS $1,476,241 $ 327,916
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable and accrued expenses $ 360,703 $ 458,417
Secured borrowings 239,618 64,708
Notes payable 462,258 514,800
Related party notes payable 99,492 100,000
------------------- --------------------
TOTAL CURRENT LIABILITIES 1,162,071 1,137,925
COMMITMENT
STOCKHOLDERS' EQUITY
- --------------------
Common stock, par value $.001, 75,000,000 shares
authorized; issued and outstanding 0
at December 31, 2004 and 2003. - -
Additional paid-in capital - -
Common stock payable/subscribed 3,812,662 169,500
Retainedtearningsated (3,498,492) (979,509)
------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 314,170 (810,009)
------------------- --------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,476,241 $ 327,916
=================== ====================
27
Accounts receivable increased $356,947 from $107,708 as of December 31, 2004 to
$464,655 as of June 30, 2005. The increase is primarily due to the June balance
occurring at the peak of the Company's sales cycle with shipments to customers
primarily occurring from March through July compared to relatively little sales
activity during the winter months.
Commensurate with the sales cycle, the inventory balance increased $61,972 from
$111,741 as of December 31, 2004 to $173,713 as of June 30, 2005.
Prepaid expenses increased $504,199 from $81,507 as of December 31, 2004 to
$585,706 as of June 30, 2005. The increase is due to the company granting stock
for professional services to be rendered as described in Note D and Note J to
the June 30, 2005 financial statements below.
Loans receivable increased $122,538 from $0 as of December 31, 2004 to $122,538
as of June 30, 2005. The increase is due to the Company making strategic loans
totaling for potential future association to an unaffiliated company. The loan
accrues interest at 2% per year and due 12 months from the date of draw.
Secured borrowings increased $174,910 from $64,708 as of December 31, 2004 to
$239,618 as of June 30, 2005. This amount is the balance due to our factor for
their purchase of our accounts receivable. The increase is due to higher sales
activity during the spring months commensurate with our sales cycle.
Notes payable decreased $52,542 from $514,800 as of December 31, 2004 to
$462,258 as of June 30, 2005. The decrease is due to the Company making payments
against the outstanding notes.
28
EXECUTE SPORTS, INC.
(formerly Padova International U.S.A., Inc.)
Statements of Operations
Three and Six Months Ended June 30, 2005 and 2004
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
REVENUES
Sales $ 580,498 $ 490,906 $ 1,258,893 $ 1,117,517
Cost of sales 460,924 358,825 880,230 737,222
----------- ----------- ----------- -----------
Gross profit 119,574 132,081 378,663 380,295
EXPENSES
General and administrative expenses 2,564,605 65,902 2,729,722 146,944
Selling and advertising 63,563 50,746 109,272 122,720
Depreciation expense 1,488 1,583 2,977 3,130
----------- ----------- ----------- -----------
Total expense 2,629,656 118,231 2,841,970 272,793
Income from operations (2,510,081) 13,849 (2,463,307) 107,501
OTHER INCOME AND EXPENSES
Interest income -- -- -- 1
Interest expense 4,520 25,591 55,676 58,952
----------- ----------- ----------- -----------
Total other income and expenses (4,520) (25,591) (55,676) (58,951)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(2,514,601) $ (11,741) $(2,518,983) $ 48,550
=========== =========== =========== ===========
Weighted average shares outstanding -- -- -- --
=========== =========== =========== ===========
Earnings per share $ -- $ -- $ -- $ --
=========== =========== =========== ===========
During the three and six months ended June 30, 2005, the Company achieved
revenues of $580,498 and $1,258,893, respectively compared with revenue of
$490,906 and $1,117,517 for the same periods in 2004. The increase in revenue
was the result adding distribution for our motorcycle products in Sweden and
Australia and we added distribution for our water sports products in Japan.
During the Six months ended June 30, 2005, the Company achieved gross profit of
$378,663 and a gross profit margin of 30% compared to gross profit of $380,295
and a gross profit margin of 34% for the six months ended June 30, 2004. Cost of
sales increased $143,008 from $737,222 for the six months ended June 30, 2004
compared to $880,230 for the six months ended June 30, 2005. The increase in
cost of sales is due to an increase in sales of $141,376 for the six months
ended June 30, 2005 compared to the six months ended June 30, 2004 and higher
costs related to freight and inventory
For the three and six months ended June 30, 2005, SG&A expenses increased to
$2,629,656 and $2,841,970, respectively from $118,231 and $272,793 in the same
period last year. The three and six month year-over-year increase of $2,511,425
and $2,569,177, respectively in SG&A expenses was the result of an increase in
stock based compensation for professional services, founders and key employees.
In addition, SG&A increased to support increasing demand for the Company's
products as well as entrance into new product lines.
29
For the three and six months ended June 30, 2005, the Company's net loss
increased to $2,514,601 and $2,518,983, respectively, from a net loss of $11,741
and net income of $48,550 in the same periods last year. The three and six month
year-over-year increase of $2,502,860 and $2,567,533 respectively was due
primarily to increases in SG&A expenses described above with a slight offset
from increased sales.
Financial Condition
From inception to June 30, 2005, we incurred an accumulated deficit of
$(3,498,492), and we expect to incur additional losses for the foreseeable
future. This loss has been incurred through a combination of selling and
operating expenses related to expensing of stock, as well as in support of our
plans to expand sales and distribution channels, as well as to develop new
products.
We have financed our operations since inception primarily through a combination
of debt and equity financing. During the three and six months ended June 30,
2005 we had a net increase of cash of $22,667 and $46,906, respectively. Total
cash resources as of June 30, 2005 were $52,060, compared with $32,405 at June
30, 2004.
Our available working capital and capital requirements will depend on numerous
factors, including progress in our distribution and sales of our products, the
timing and cost of expanding into new markets, the cost of developing new
products, changes in our existing collaborative and licensing relationships, the
resources that we devote to developing new products and commercializing
capabilities, the status of our competitors, our ability to establish
collaborative arrangements with other organizations, our ability to attract and
retain key employees, our management of inventory and our need to purchase
additional capital equipment.
The Company's Liquidity Plan
Recent operating results give rise to concerns about the Company's ability to
generate cash flow from operations sufficient to sustain ongoing viability.
During the first six months of 2005 and the latter half of 2004, the Company's
cost control strategies focused on managing general and administrative expenses
through keeping headcount growth to a minimum, amongst other things, and
maintaining a focused marketing and sales strategy that leverages existing
channel partnerships
While we believe that proceeds from the current offering, if the maximum
subscription to this offering is achieved, will provide the Company with
sufficient funds to develop and commercialize its existing products into
existing distribution channels, we may need to raise additional capital if
demand for our products requires stronger production and inventory commitments.
In addition, if we decide to increase product lines our existing cash flow might
be insufficient and we may likely need to seek additional capital to do so. In
the event that we do need to seek additional capital, we will attempt to raise
additional funds through equity financing. However, if equity financing is not
available, we may have to incur debt through debt financing.
In the event that the maximum subscription to this offering is not achieved, we
will likely need to attempt to raise capital in an additional offering right
away.
The Company's need to raise additional equity or debt financing and the
Company's ability to generate cash flow from operations will depend on its
future performance and the Company's ability to successfully implement business
and growth strategies. The Company's performance will also be affected by
prevailing economic conditions. Many of these factors are beyond the Company's
control. If future cash flows and capital resources are insufficient to meet the
Company's commitments, the Company may be forced to reduce or delay activities
and capital expenditures or obtain additional equity capital. In the event that
the Company is unable to do so, the Company may be left without sufficient
liquidity.
30
In September, 2004 we commenced a private placement to sell up to 7,000,000
shares at a per share cost of $.25. We closed the financing on May 27, 2005
accepting no further subscription agreements pursuant to the September 2004
private placement offering, and have received proceeds of $729,500 in connection
with the financing.
Off-Balance Sheet Arrangements
At June 30, 2005, the Company had no obligations that would qualify to be
disclosed as off-balance sheet arrangements.
Outlook for Our Business
Due to strong secular trends in the action sports and power sports markets, we
have experienced significant revenue growth since 2002. We anticipate continued
revenue growth in the future due to our planned expansion of products,
distribution channels and our acquisition strategy. We intend to grow our
product lines going forward primarily through the use of existing cash flow. In
addition, we anticipate that we will raise additional capital through equity
financing at some point in the future, and we intend to use proceeds from these
additional financing rounds to expand out product lines also. We do not
anticipate that significant capital resources will be required to expand our
distribution channels. We believe that our existing relationships with athletes,
vendors and manufacturers will be sufficient to provide opportunities to enter
into new markets and add new distributors. We do however, intend to finance our
acquisition strategy going forward through additional rounds of equity financing
as well as through the use of our stock. If we fail to raise additional capital,
our ability to implement additional businesses that are a strategic fit to our
own will be negatively impacted.
Our revenue has grown from $337,258 in 2002 to $1,384,188 in 2004. Our revenue
growth has been and will continue to be dependent, in part, on our ability to
increase production and respond efficiently to market demand for our products.
In addition, we believe that continued revenue growth is dependent, in part, on
growing our distribution channels and retail points of presence overseas.
We have increased our operating expenses to support the growth in our business
and to develop and market our products. Our wetsuit and graphics products are
our largest expenses and have increased as our revenue has increased. Our
personnel expenses are our next largest expense and consist of salaries,
commissions, benefit plans and other payroll costs. We intend to hire additional
personnel primarily in the areas of sales and marketing to support our
anticipated growth.
Prior to February 28, 2005,we were making regular monthly interest payments on
our notes payable of approximately $15,700 per month, which represented a 2%
monthly interest rate. These interest payments severely hampered the Company's
ability to achieve profitability.
On February 28, 2005, our debt was renegotiated with all accrued interest
converted to stock. The renegotiated notes payable now have a 2% annual interest
rate with payments against the principal of the loan being made as our cash flow
permits. As of June 30, 2005 we had outstanding notes payable of $561,750. At
the current balance our outstanding notes payable represents approximately $900
per month in interest expense and is not expected to have a material impact on
our results of operations.
Our revenue, profitability and future growth depend not only on our ability to
execute our business plan, but also, among other things, on customer acceptance
of our services, the growth of the paid-search market and competition from other
providers of paid-search technologies and services. See "Risk Factors" for a
more detailed discussion of these and other risks.
Results of Operations for the Years Ended December 31, 2004 and December 31,2003
During the year ended December 31, 2004, the Company achieved revenues of
$1,384,188 compared with revenue of $726,048 for the year ended December 31,
2003. The increase in sales was the result of increased distribution, with more
stores ordering more of our products. In particular we had increased sales from
Bass Pro Shops, we added Furindo (a large watersports distributor in Japan) , we
added stores to our independent representative sales network and experienced
general increased market demand for the Company's products.
31
During the year ended December 31, 2004, the Company achieved gross profit of
$248,885 and a gross profit margin of 18% compared to gross profit of $119,319
and a gross profit margin of 16% for the year ended December 31, 2003. Cost of
sales increased $528,574 from $606,729 for the year ended December 31, 2003
compared to $1,135,303 for the year ended December 31, 2004. The increase in
cost of sales is due to an increase in sales of $658,140 for the year ended
December 31, 2004 compared to the year ended December 31, 2003. The increase in
the gross profit margin is primarily due to lower freight costs in 2004 compared
to 2003.
For the year ended December 31, 2004 SG&A expenses were $630,216 compared with
SG&A expenses of $295,991 for the year ended December 31, 2003. The $334,225
increase in SG&A expenses was the result of a general increase in administrative
and selling expenses to support the Company's growth initiatives. In particular,
we had an approximate increase of: $47 thousand in interest expense related to
notes payable, $76 thousand in fees related to the financing of production and
accounts receivable with Benefactor Funding Corp., $45 thousand in professional
services, $60 thousand in marketing and advertising and $37 thousand in
commissions and employee benefits.
Net loss for the year ended December 31, 2004 was $540,490 as compared with a
net loss of $288,854 for the year ended December 31, 2003. The $251,636 increase
in net loss was due to the $334 thousand increase in SG&A expense and $47
thousand increase in loan related interest expense offset by a $129 thousand
increase in gross profit.
Inventory decreased $187 thousand to $112 thousand as of December 31, 2004
compared to $299 thousand as of December 31, 2003. The decrease was primarily
the result of a physical inventory and periodic assessment that resulted in a
$106 thousand write-down of inventory to the lower of cost or market with the
remaining $81 thousand decrease due to improved inventory management and
purchasing of product against specific purchase orders rather than for stock.
The inventory write down was expensed in 2004 and is included in selling,
general and administrative expense.
Prepaid expenses increased $81 thousand to $81 thousand as of December 31, 2004
compared to $0 as of December 31, 2003. The increase was due to the Company
entering into a professional services contract on August 18, 2004 for value of
$100,000 payable in 400,000 shares of common stock with $18,493 of related
expense recognized in 2004. This contract is part of this registration statement
and contained as Exhibit 10.3. The Company intends to leverage its common stock
in the future as payment for other professional services which will result in
increases to prepaid expense.
Current liabilities increased $251 thousand to $1,138 thousand as of December
31, 2004 compared to $887 thousand as of December 31, 2003 resulting in a
decrease of our current ratio from 0.48 to 0.27. The increase was due to an
increase of $74 thousand in trade payables, $74 thousand of accrued interest
expense on notes payable, $9 thousand in payroll taxes payable, an increase in
notes payable of $29 thousand and an increase of $65 thousand due to our factor.
Management expects to convert the $74 thousand of accrued interest into common
stock during the quarter ended March 31, 2005. The Company intends to use a
portion of the funds from our initial stock offering to pay down trade payables
and a portion of outstanding notes payable which, we expect, will bring our
current liabilities down to approximately 2003 levels or less.
Common stock payable/subscribed increased to $169,500 as of December 31, 2004
compared to $0 as of December 31, 2003 due to the receipt of $69,500 in cash for
the purchase of 278,000 shares of common stock and $100,000 in professional
services in exchange for 400,000 shares of common stock. The related shares were
issued on July 22, 2005.
32
DECSRIPTION OF BUSINESS
Execute Sports, Inc. is a Nevada Corporation incorporated under the name Padova
International USA, Inc. on January 31, 2002. Effective March 15, 2005, the
Company changed its name to Execute Sports, Inc. to more accurately reflect the
nature of its business. The Company is an early-stage business that
manufactures, markets and sells graphics kits, wetsuits, vests and ancillary
products to the power sports industry. The Company relies on overseas contract
manufacturers to create its products. The registered office and agent for
service is located at 350 S. Center St. Reno, Nevada 89501-2114 and the phone
number is 1-775-329-7721. The Company's telephone and fax numbers are
1-866-498-5990 and 1-949-498-6122, respectively, and its corporate website is
www.executesports.com .
The Company has international operations, with headquarters in San Clemente,
California and representation through a satellite office in Taipei, Taiwan
R.O.C. as well as contract manufacturing representatives in Mainland China.
Execute Sports' mandate is to design, develop and distribute the best quality
products at the most reasonable prices.
The Company markets its products through a network of independent dealers
located throughout the United States, and through distributors representing
dealers in Europe, Australia, South Africa, Asia and other international
markets. The "Execute Sports" brand name has existed for two years and our
objective is to grow it to become one of the most widely recognized and
respected names in the power sports industry - specifically, amongst wakeboard
and motocross consumers.
Our graphics kits for motocross were commercialized in 2002 under a "private
label" program, and in 2003, we began selling motocross graphics and accessories
under the "Execute Sports" brand. Our wetsuits, vests and ancillary products
were commercialized in 2003 under the "Execute Sports" brand. Our
Nascar-licensed graphics kits were commercialized in May, 2005 and are still in
development stages
Key to the extension of its brand, and the acceptance of its products in the
marketplace is the Company's aggressive marketing strategy which consists in
aligning its brand with leading wakeboard, motocross, NASCAR and Formula 1
athletes. In doing so, the Company establishes brand credibility amongst its
target consumer base and provides its distributors with a greater ability to
push its products through their channels.
Current Execute Sports Sponsorships
Athlete/Team Sport
- --------------------------------------------------------
Sean O'Brien Wakeboarding
Perry Richmond Wakeboarding
Cobe Mikacich Wakeboarding
Nick Weinacker Wakeboarding
Keith Lyman Wakeboarding
Steve Lamson Motocross
Team ECC Motocross
Team MDK Motocross
Execute Sports is also sponsor of the Pro Wakeboard Tour .
As stated above in other sections of this offering, (see "Risk Factors", "MD&A"
and financial notes on page F-10), historically, four primary customers have
accounted for more than 90% of our business. The three primary customers of our
water sports products are Bass Pro Shops , GI Joes and Galyans - Dicks Sporting
Goods. These three customers account for more than 80% of our water sports
revenue. If any of these customers decides to exit the water sports market, or
to select one of our competitor's products over our own, our business would be
materially adversely impacted through a substantial decline in revenue and we
might be able to compensate for this decline in revenue through other customers.
33
Our fourth primary customer and the primary customer of our motorcycle graphics
business is Global Motor Sports Group, which accounts for about 50% of our
graphics business. If Global Motor Sports Group selects one of our competitors
graphics products and terminates our relationship we would be materially
adversely affected. There are larger, better capitalized competitors that could
provide Global Motor Sports Groups with lower pricing and additional incentives
that we might not be able to effectively compete against. In the case that we
lost Global Motor Sports Group as a customer, we would like see a substantial
decline in revenue and we might not be able to compensate for that decline in
revenue right away, if at all, through other customers.
We believe that our relationships with our four primary customers remains
strong. However, we do not have any contractual agreements with any of these
customers that obligates them to purchase a specified amount of products from us
each year, or any products at all. Our sales to these customers is largely
dependent upon demand in their businesses for products that we produce and also
our ability to convince these customers, and any of our other customers, that
our products are superior from both a quality and a cost perspective. Our
relationships with each of these customers has been in place for the past two
fiscal years and we expect that they will remain in place for the foreseeable
future.
Industry Background
Execute Sports, Inc. competes in the "power sports" industry, which is composed
of motorcycles, personal watercraft (PWC), all-terrain vehicles (ATVs) and
snowmobiles. We estimate that the markets in which Execute Sports competes
(wetsuits, ski/wakeboard vests, graphics kits, accessories and apparel)
represents an addressable market of close to $1 billion in annual sales.
Motocross
According to the Motorcycle Industry Council's "2004 Motorcycle Statistical
Annual," usage of Off-Highway motorcycles have increased to 1,883,000 units as
of 2003, representing approximately 21.4% of total,. The report also states that
off-highway motorcycle sales represents about 12% or $984 million of total
motorcycle sales. As of 2003, 13,924 retail outlets sold motorcycles and related
products in the U.S. alone. Supercross racing, held in arenas, is second only to
NASCAR racing in attendance, and on television, ESPN's Moto-X freestyle jumping
events are a huge draw to action sports enthusiasts.
ATV
The worldwide market for ATVs stands at an estimated $5 billion, according to
the Motorcycle Industry Council. The ATV market can be divided into three market
segments, broadly defined. The Recreation/Utility segment (designed for trail
riding, hunting, farming, etc.) is the largest, representing 71 percent of units
sold. Sport ATVs (designed for racing and desert dune riding) represent 21
percent of the volume. Youth ATVs represent the remaining 8 percent.
Watersports
Water skiing and wakeboarding participation are driving sales in the water
sports industry. The growth of wakeboarding has been a `shot in the arm' to the
water sports industry and is one of the few water sports that could be called
"hot."
Wakeboarding has been one of the biggest sports-related phenomena of the past
decade. Once considered an obscure addition to the family of water sports, it
now is recognized as the fastest growing water sport in the world. Last year,
nearly 4 million people worldwide participated in this fast moving sport. More
than 11 million people water ski in the U.S. alone.
According to a recent study by the Sporting Goods Manufacturer's Association,
U.S. sales for water-ski, wakeboard and water sports equipment increased by $22
million. This increase in sales does not take into account increases in the
sales of watercraft.
34
Growth Strategy
The Company's mission is to create and maintain the leading product and
accessory mix to the burgeoning water sports and motor sports markets. The
following strategies will assist Execute Sports in achieving its growth
initiatives:
Develop an extensive worldwide distribution network. To date, the Company has
established several key distribution relationships in channels throughout the
United States, Great Britain, South Africa and Australia. In order to ensure its
success, Execute Sports must continue to maintain and expand upon its
distribution channels by maintaining a compelling product mix offering supported
by the highest level of quality and sufficient discount to incentivize
distribution partners to push its products.
Establish the "Execute Sports" brand through leveraging its association with
world-class athletes. Execute Sports has established several licensing and
sponsorship arrangements with leading athletes in motocross, wakeboarding,
NASCAR and Formula 1 Racing for its "Execute Sports" brand. By doing so, the
Company is able to leverage the broad appeal and awareness of each athlete
amongst its target consumer base for its branded products that are affiliated
with the athletes. Moreover, the affiliation of world-class athletes with its
branded products establishes the greatest level of credibility amongst
consumers. An additional benefit of this strategy is that it provides the
Company's distribution partners the best chances of establishing shelf space for
its products at the retail level.
Establish and maintain position in marketplace as leading low-cost, premium
quality provider. Through its manufacturing resources in Mainland China, Execute
Sports is able to produce the best quality products at the lowest possible
prices. In turn, this provides the Company with the ability to compete with
larger, more established companies on price points.
Leverage the "Cross-Over" characteristic of the marketplace to extend the
"Execute Sports" brand. The action sports market is characterized by
participants that take part in multiple sports. For example, more than 70% of
those who ride off-road motorcycles also participate in wakeboarding. This
crossover is exemplified by the fact that leading manufacturers of motorcycles
including Yamaha and Honda have entered the personal watercraft market.
Execute's decision to produce both motocross and water sports products under its
"Execute Sports" brand will enable it to introduce its water sports line to
"core" motocross participants and its motocross products to "core" water sports
participants.
Identify Synergistic Businesses and Implement Acquisition Strategy. The Company
believes that the power sports markets, and in particular, the action sports
segments, are extremely fragmented and that the industry is consolidating. This
is demonstrable by recent acquisition strategies implemented by market leaders
such as K2, Inc. (NYSE:KTO) and Quicksilver (NYSE:ZQK) over the past few years.
Execute Sports has identified and is in discussions with several businesses that
its management believes are extremely synergistic to its own, and intends to
initiate an acquisition strategy of a number of these businesses after its has
successfully established itself as a publicly traded company. The Company
intends to use its stock as a primary source of capital in this acquisition
strategy, and there is no guarantee that it will be effectively able to succeed.
In addition, the Company will likely have to raise additional capital through
equity and/or debt financing to support its acquisition strategy in the
future.If successful, the Company believes that this strategy can contribute to
substantially growing the Company's revenues and market share.
Expand The Company's Line of Products. Large sporting goods retailers and other
key sales channels prefer to work with suppliers that offer a broader selection
of brands and products that span several sports and seasons. Execute Sports
intends to expand its product offerings both organically and through
consolidation that will provide retailers with a "one stop shop" for power
sports and action sports products.
35
Competition
Our products are not unique and our competition is made up of companies from
several industries including graphics, wetsuits and apparel. The overwhelming
majority of our competitors are larger than us and have a longer history of
operations and greater financial resources.
The $50 million motorcycle and ATV graphics industry is dominated by a few large
companies including NStyle, One Industries and Factory Effex. The Company has
been establishing a footprint in the graphics market by combining lower price
points and more consistent delivery to its retail points of presence and
distribution channels.
The $1 billion wetsuit, vest and lycra industry is dominated by a few large
companies including O'neil, Rip Curl, Billabong, Quicksilver and Excel. Execute
Sports' strategy for entrance into the marketplace has been to focus on the
wakeboarding and water ski market, which is substantially less competitive. As
with its graphics business, price points and delivery are also integral to the
continued growth of its footprint in the market.
Products
Execute's products include motorcycle accessories such as graphics kits, seat
covers and apparel, as well as water sports products including wet suits,
wakeboard/water ski vests, gear bags, and accessory products to media, sport
specific, sportswear, and licensed merchandise outlets.
MX & ATV Graphics
Execute has designed "works kits" (includes graphics, fender kit and grip seat)
and "team kits" (includes graphics, fender kit, grip seat, backgrounds and
numbers) for each of the leading manufacturers including Honda, Yamaha, Suzuki,
Kawasaki and KTM. The Company has also created graphics kits for Honda and
Yamaha ATVs.
Wetsuits & USCG Approved Ski/Wakeboard Vests
Execute's wetsuit line includes spring suits, full suits, rash guards, shorts,
water sports gloves and booties for men, women and youth. The Company has also
developed US Coast Guard approved vests and competition vests for men, women and
youth.
Pro Rider Graphic Kits
Execute has created pro rider graphics kits that include two 12x20" 4mm Die-Cut
Vinyl Sheets of Stickers and a 12x20" Color Glossy Photo of featured world-class
wakeboard athletes including: Parks Bonifay, Scott Byerly, Brett Eisenhauer,
Thomas Horrell, Keith Lyman, Cobe Mikacich, Shaun Murray, Gregg Necrason, Erik
Ruck, Josh Sanders, Darin Shapiro and Daniel Watkins.
Gear Bags and Ancillary Goods
Execute designs and distributes wakeboard/snowboard travel bags, motocross gear
bags and multi-sport travel bags. The Company also intends to support and build
its "Execute Sports" brand through the design, manufacturing and distribution of
hats, shirts and other "Execute" - branded goods.
Sales and Distribution
The Company's products are currently sold through an extensive network of
independent dealers located throughout the United States, and through
distributors representing dealers in Europe, South Africa, Australia and other
international markets. To promote new dealerships and to service its existing
dealer network, the Company also contracts on an independent basis with sales
representatives throughout the United States to represent the Company and its
products.
36
Through its direct efforts, as well as through independent sales
representatives, Execute has established distribution to more than 200 retail
stores in the United States, including Cycle Gear, Bass Pro, Galyan's, GI Joes,
Bart's, Ski World, Performance, Ski Masters and Active. Worldwide, Execute
Sports relies on strategic distribution partnerships to establish retail
channels. Management believes the Company's relationship with its distributors
will be a major strength.
The Company utilizes exclusive distributors outside the United States to take
advantage of their knowledge and experience in their respective markets and to
increase market penetration of the Company's products. Each distributor is
subject to a distribution agreement that stipulates an exclusive territory for a
term ranging from one to three years with specified minimum sales and service
requirements for their territory.
DIRECTORS EXECUTIVE OFFICERS, PROMOTERS CONTROL PERSONS
Prior to the consummation of this Offering, the executive officers and directors
of the Company will be as follows:
Name Age Position
- ----------------------------------------------------------------------------------------------------------
Scott Swendener 48 Vice-President
Don Dallape 46 President, Chief Executive Officer & Chairman
Geno Apicella 40 Vice President, Watersports
Sheryl Gardner 43 Chief Financial Officer and Principal Accounting Officer
Todd M. Pitcher 37 Director
Craig Washington 42 Director
Background of Officers and Directors
Scott Swendener, 48, completed his education at the University of California at
Los Angeles in 1978. Mr. Swendener was employed by Prestige Manufacturing from
1998 through 2001 and has been employed by Execute Sports (formerly Padova
International USA, Inc.) since 2001. Prior to that he was a licensed California
building contractor for 12 years and began his career in the apparel industry.
He has an extensive worldwide sourcing background with substantial expertise in
consulting and production of full package apparel programs to large retailers
such as Galyan's, Limited, Dick's Sporting Goods, Sports Authority and Big 5
Sporting Goods. Scott also brings extensive knowledge and experience in
manufacturing both hard and soft goods.
Don Dallape, 46, started in the apparel industry in 1986 after completing his
education at San Diego State University. Mr. Dallape was employed by Prestige
Manufacturing from 1998 through 2001 and has been employed by Execute Sports
(formerly Padova International USA, Inc.) since 2001. Since then, he has
consulting provided services in marketing and manufacturing for leading
companies such as Sony Signatures, JEM Sportswear, Walt Disney Corp.,
Quicksilver, O'Neil, Bear Surf and a number of other leading businesses
operating in the action sports lifestyle marketplace.
Geno Apicella, 40, was graduated from San Francisco State University in 1983. He
was the Executive Vice President of Zakk Sports from 1994 through 2001 and has
been employed by Execute Sports (formerly Padova International USA, Inc.) since
2001 Geno's innovative designs in wetsuits and ski vests are currently present
in the marketplace today. He is responsible for the marketing, design and
distribution for all watersports products at the company.
37
Sheryl Gardner, 43, was graduated from the University of Alabama, Tuscaloosa in
1985 and brings more than two decades experience and expertise in contract and
forensic accounting. Ms. Gardner was employed as a controller for Creative
Perspective from 1999 through 2002 and has been employed by Execute Sports
(formerly Padova International USA, Inc.) since 2002.
Todd M. Pitcher, 37, Mr. Pitcher is currently and has served as the Chairman of
Superclick, Inc., a publicly traded provider of IP management solutions since
2003. He also sits on the board of directors of a number of other early stage
companies including Manu Forti Group, Inc. From 2002 through 2003, Mr. Pitcher
served as President of 4Dcard, Inc., a multi-media marketing company to the
action sports market. From 2000 to 2002, Mr. Pitcher was a principal of
InverSel, a full-service consulting firm providing business development and
other related corporate services to client companies. Mr. Pitcher has several
years experience in the investment banking, business consulting and equity
research, serving as Director of Equity Research at Equity Securities in Golden
Valley, Minnesota and several other regional investment banking firms. Mr.
Pitcher has a B.A. in Philosophy from the University of California at Berkeley
and has attended graduate school at the University of California at Santa
Barbara and Claremont Graduate School.
Craig Washington , 42, is a licensed CPA and Real Estate Broker. Prior to
founding the real estate firm where he is currently a principal, Washington
Realty Group, in 2000, Mr. Washington served as an accountant at Arthur
Anderson. Mr. Washington was graduated from San Francisco State University in
1984.
Code of Ethics.
The Company has adopted a Code of Ethics and Business Conduct which applies to
our principal executive and financial officers and other senior management
(including our principal accounting officer, controller and persons performing
similar functions). A copy of the Code of Ethics is included as an exhibit to
this registration statement. The Company will provide a copy of its Code of
Ethics to any person making a request for a copy of the Code of Ethics in
writing by first class mail addressed to the President of the Company.
Conflicts of Interest Between Management.
There are no family relationships or understandings between any of the directors
and executive officers of the Company. In addition, there was no arrangement or
understanding between any executive officer and any other person pursuant to
which any person was selected an executive officer.
Board Committees
The Board of Directors presently has no standing committees. The Board acts as a
whole on all matters coming before it.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Capitalization. The Company only has one class of equity security outstanding as
described herein.
38
Security Ownership of Management. The following table sets forth certain
information regarding beneficial ownership of the Company's common and preferred
stock as of the date of this prospectus by (i) each person known by us to be the
beneficial owner of more than 5 percent of the outstanding common stock, (ii)
each director, (iii) each executive officer, and (iv) all executive officers and
directors as a group. The number of shares beneficially owned is determined
under the rules promulgated by the SEC, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under those rules,
beneficial ownership included any shares as to which the individual has sole or
shared voting power or investment power and also any shares which the individual
has the right to acquire within 60 days of the date hereof, through the exercise
or conversion of any stock option, convertible security, warrant or other right.
Including those shares in the tables does not, however, constitute an admission
that the named stockholder is a direct or indirect beneficial owner of those
shares. Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power (or shares that power with that person's
spouse) with respect to all shares of capital stock listed as owned by that
person or entity. Unless otherwise indicated, the address of each of the
following persons is 1284 Puerta Del Sol, Suite 150, San Clemente, CA 92673,
Tel: 949-498-5990, Fax: 949-498-6122.
Common Stock
- -------------------------------------------------------- ----------------------------------------------------
Beneficial Ownership Before Offering Beneficial Ownership After Offering (1) (2)
- -------------------------------------------------------- ----------------------------------------------------
Shareholder Shares Percent Shares Percent (1) Percent (2)
- --------------------- ------------------ --------------- ------------------- ---------------- ---------------
Don Dallape 2,500,000 15.97% 2,500,000 13.0% 14.05%
- --------------------- ------------------ --------------- ------------------- ---------------- ---------------
Scott Swendener 2,500,000 15.97% 2,500,000 13.0% 14.05%
- --------------------- ------------------ --------------- ------------------- ---------------- ---------------
Geno Apicella 2,500,000 15.97% 2,500,000 13.0% 14.05%
- --------------------- ------------------ --------------- ------------------- ---------------- ---------------
Sheryl Gardner 556,000 3.5% 556,000 2.8% 3.12%
- --------------------- ------------------ --------------- ------------------- ---------------- ---------------
Todd M. Pitcher 400,000 2.5% 400,000 2.0% 2.2%
- --------------------- ------------------ --------------- ------------------- ---------------- ---------------
Total 8,456,000 54.04% 8,456,000 44.0% 47.53%
- --------------------- ------------------ --------------- ------------------- ---------------- ---------------
(1) Assumes Maximum Subscription
(2) Assumes 60% Subscription
EXECUTIVE COMPENSATION
Director and Officer Compensation. The members of our board of directors who are
not our employees are reimbursed for travel, lodging and other reasonable
expenses incurred in attending board and committee meetings. Board members do
not receive cash compensation for attending board and committee meetings.
The following table sets forth, for the last two fiscal years, the compensation
earned for the services rendered in all capacities by the Company's executive
officers serving as such at the end of 2004. The individuals in the table will
be hereinafter referred to as the "Named Officers."
Summary Compensation Table
- ----------------------- ---------------------------------- --------------------------------------------------
Annual Compensation Long-Term Compensation
- ----------------------- ---------------------------------- --------------------------------------------------
Awards Payouts
- --------------- ------- --------- -------- --------------- -------------------------- --------- -------------
Name and Year Salary Bonus Other Annual Restricted Securities LTIP All Other
Principal ($) ($) Compensation Stock Underlying Payouts Compensation
Position ($) Award(s) Options/SARS
($) (#)
- --------------- ------- --------- -------- --------------- ----------- -------------- --------- -------------
Don Dallape - 2005 $132,000 NA NA $625,000(1) -- -- --
President and
CEO
- --------------- ------- --------- -------- --------------- ----------- -------------- --------- -------------
2004 -- -- -- -- -- -- --
- --------------- ------- --------- -------- --------------- ----------- -------------- --------- -------------
2003 -- -- -- -- -- -- --
- --------------- ------- --------- -------- --------------- ----------- -------------- --------- -------------
Scott 2005 $72,000 -- -- $625,000(2) -- -- --
Swendener -
Vice President
- --------------- ------- --------- -------- --------------- ----------- -------------- --------- -------------
2004 -- -- -- -- -- -- --
- --------------- ------- --------- -------- --------------- ----------- -------------- --------- -------------
2003 -- -- -- -- -- -- --
- --------------- ------- --------- -------- --------------- ----------- -------------- --------- -------------
Geno Apicella 2005 $72,000 -- -- $625,000(3) -- -- --
- Vice
President,
Watersports
- --------------- ------- --------- -------- --------------- ----------- -------------- --------- -------------
2004 -- -- -- -- -- -- --
- --------------- ------- --------- -------- --------------- ----------- -------------- --------- -------------
2003 -- -- -- -- -- -- --
- --------------- ------- --------- -------- --------------- ----------- -------------- --------- -------------
Sheryl Gardner 2005 $72,000 -- -- $100,000(4) -- -- --
- --------------- ------- --------- -------- --------------- ----------- -------------- --------- -------------
2004 -- -- -- -- -- -- --
- --------------- ------- --------- -------- --------------- ----------- -------------- --------- -------------
2003 -- -- -- -- -- -- --
- --------------- ------- --------- -------- --------------- ----------- -------------- --------- -------------
39
(1) There have been 2,500,000 shares awarded to Mr. Dallape. The stock is
fully vested and is restricted only in accordance with the conditions
of Rule 144. There are no other performance based, "continued service",
or other conditions or restrictions to the vesting of the stock.
(2) There have been 2,500,000 shares awarded to Mr. Swendener. The stock is
fully vested and is restricted only in accordance with the conditions
of Rule 144. There are no other performance based, "continued service",
or other conditions or restrictions to the vesting of the stock.
(3) There have been 2,500,000 shares awarded to Mr. Apicella. The stock is
fully vested and is restricted only in accordance with the conditions
of Rule 144. There are no other performance based, "continued service",
or other conditions or restrictions to the vesting of the stock.
(4) There have been 400,000 shares awarded to Ms. Gardner. The stock is
fully vested and is restricted only in accordance with the conditions
of Rule 144. There are no other performance based, "continued service",
or other conditions or restrictions to the vesting of the stock.
Options and Stock Appreciation Rights
We currently do not have any stock option plan for executive officers in place.
Long Term Incentive Plan Awards
No long term incentive plan awards were made to any of our executive officers
during the last fiscal year.
Executives' Compensation Policies
Compensation of our executives is intended to attract, retain and award persons
who are essential to the corporate enterprise. The fundamental policy of our
executive compensation program is to offer competitive compensation to
executives that appropriately rewards the individual executive's contribution to
corporate performance. The board of directors utilizes subjective criteria for
evaluation of individual performance and relies substantially on our executives
in doing so. The Board focuses on two primary components of our executives
compensation program, each of which is intended to reflect individual and
corporate performance: base salary and long-term incentive compensation.
Executives' base salaries are determined primarily by reference to compensation
packages for similarly situated executives of companies of similar size or in
comparable lines of business with whom we expect to compete for executive talent
and with reference to revenues, gross profits and other financial criteria. The
Board also assesses subjective qualitative factors to discern a particular
executive's relative value to the corporate enterprise in establishing base
salaries.
It is the Board's philosophy that significant stock ownership by management
creates a powerful incentive for executives to build long-term shareholder
value. Accordingly, the board believes that an integral component of executive
compensation is the award of equity-based compensation, which is intended to
align executives' long-term interests with those of our shareholders. The board
believes that option grants should be considered on an annual basis.
Employment Agreements
Don Dallape. Mr. Dallape's employment with us is governed by an employment
agreement which provides for a base salary at the rate of one hundred and thirty
two thousand ($132,000.00) per year under employment. In addition to his base
salary, Mr. Dallape has been granted 2,500,000 shares of the Company's
restricted common stock. The Company may also provide Mr. Dallape with bonuses
in cash or other compensation.
40
Scott Swendener. Mr. Swendener's employment with us is governed by an employment
agreement which provides for a base salary at the rate of seventy two thousand
($72,000.00) per year under employment. In addition to his base salary, Mr.
Swendener has been granted 2,500,000 shares of the Company's restricted common
stock. The Company may also provide Mr. Swendener with bonuses in cash or other
compensation.
Geno Apicella. Mr. Apicella's employment with us is governed by an employment
agreement which provides for a base salary at the rate of seventy two thousand
($72,000.00) per year under employment. In addition to his base salary, Mr.
Apicella has been granted 2,500,000 shares of the Company's restricted common
stock. The Company may also provide Mr. Apicella with bonuses in cash or other
compensation.
Employees
As of the date of this prospectus, Execute Sports had five employees. Management
believes that its relationship with its employees is good. The Company believes
that additional employees may be required in the near future.
DESCRIPTION OF PROPERTY
The business and operations of the Company are currently conducted at the
following location:
Location Approximate Square Feet Current Lease Term Monthly Rent
- --------------------------------------------------------------------------------------------------------------
1284 Puerta Del Sol Suite 150 8,883 Through December 31, 2005 $ 6,806
1284 Puerta Del Sol Suite 150 8,883 January 1, 2006 through April 30, 2006 $ 7,216
We have an agent who represents Execute Sports, who has an office in Taipei.
They allow us to use their address as they represent us for manufacturing in
that particular country, and act as our interpreters/representatives in Asia. We
pay the agent a fee of 5% of the Cost of Good's for their services
CERTAIN RELATIONSHIPS AND PARTY RELATED TRANSACTIONS
We have described below transaction in the last two years between Execute Sports
and an officer, director, 5% stockholder or any of their immediate family
members that have been entered. For information about compensation paid in
connection with employment or Board service for Named Officers and directors,
see "Executive Compensation" beginning on page 34.
Related Party Transactions.
In 2003, the Company issued unsecured promissory Notes (the "Notes") bearing 2%
interest per month to Don Dallape and Scott Swendener, two of our executive
officers, each of whom was also one of our directors, who provided financing to
our Company in the aggregate principle amount of $585,762.
In 2004, the Company issued additional unsecured promissory Notes (the "Notes")
bearing 2% interest per month to Don Dallape and Scott Swendener who provided
financing to our Company in the aggregate principle amount of $92,353.
Later in 2004, all of the Notes issued to Don Dallape and Scott Swendener were
converted to outside, non-affiliated individuals to the Company. In February
2005, the Notes were renegotiated by the Company to bear 2% annual interest, and
all unpaid back interest totaling $104,232 will be converted to the Company's
common stock at $.25 per share, or 4 shares for each unpaid $1.00 of interest.
Each of the restructured notes is included in the Exhibit section of this
Registration Statement.
41
In 2004, the Company entered into a Consulting Agreement with Todd M. Pitcher,
one of the Company's directors, to provide business consulting services on an
ongoing basis to the Company. Such services include the maintaining of corporate
minutes and related administrative documentation, shareholder recordkeeping,
debt restructuring and distribution of shareholder reports. The Consulting
Agreement commenced in August, 2004 remains in effect until August, 2006. Under
the terms of the Agreement the Company will pay Mr. Pitcher at a rate of
$2,000.00 per month and a grant of 400,000 shares of the Company's restricted
Common Stock.
SELLING SHAREHOLDERS
The Company is registering the shares, in part, on behalf of the Company's
current shareholders and the Company. The Company will pay all costs, expenses
and fees related to the registration, including all registration and filing
fees, printing expenses, fees and disbursements of its counsel, blue sky fees
and expenses. The Company will not offer any shares on behalf of any selling
shareholder.
This prospectus relates, in part, to the continued offering of 6,679,350- shares
of our common stock by the persons listed below under the heading "Selling
Shareholders". None of the Company's shareholders are required to sell their
shares, nor has any shareholder indicated to the Company, as of the date of this
prospectus, an intention to sell his, her or its shares. Any shares offered by
current selling shareholders were acquired in private placement transactions.
Any selling shareholders are offering the common stock for their own accounts.
Any material relationship between the Company and a shareholder is identified
below in the footnotes to the table of stockholders. The Company's shareholders
are under no obligation to sell all or any portion of their shares. Particular
shareholders may not have a present intention of selling their shares and may
sell less than the number of shares indicated.
For purposes of illustration only, the following table assumes that all of the
Company's shareholders will sell all of their shares. Alternatively, the current
shareholders may choose not to sell any shares current held by them, or they may
sell some lesser portion of their holdings. In these three possible
circumstances, respectively, the selling shareholders would then own no shares
in the Company, all of the shares they currently hold in the Company, or some
number of shares less than the number of shares they currently hold in the
Company.
The following table sets forth the number of shares of the common stock owned by
the selling stockholders as of January 21, 2004 and after giving affect to this
offering.
Shares Issued in Connection with September 8, 2004 Private Placement
42
Shares Issued in Connection with September 8, 2004 Private Placement
Name Shares beneficially Number of outstanding Percentage of beneficial
owned before offering shares offered by selling ownership after offering
shareholder
- -----------------------------------------------------------------------------------------------------------------
Victor Varela 20,000 20,000 *
Chris Loriditch 4,000 4,000 *
Mary Lou Manson 2,000 2,000 *
Craig Washington 20,000 20,000 *
Joseph Szlammik 4,000 4,000 *
Erik Hagestedt 4,000 4,000 *
William J. Paolantonio 4,000 4,000 *
Rebecca A. Paolantonio 4,000 4,000 *
Michael A. Paolantonio 4,000 4,000 *
Jonathan Lopez 4,000 4,000 *
Andrew Shlapak 1,000 1,000 *
Ron Kumiesky 10,000 10,000 *
David Shlapak 1,000 1,000 *
Mathew Lopez 4,000 4,000 *
Veronica Lopez 4,000 4,000 *
Dwayne C. Kirkwood 4,000 4,000 *
Sascha Schneider 16,000 16,000 *
Chester Spirlin 8,000 8,000 *
Thomas S. Bridges 200,000 200,000 1.04%
Robert C. Bridges 160,000 160,000 *
Radosveta Rizzo 400,000 400,000 2.08%
Casey Smart 50,000 50,000 *
Joe Spadafore 40,000 40,000 *
Coastal Asset Mgt. 100,000 100,000 *
Brad Stuit 400,000 400,000 2.08%
Ben Johnson 100,000 100,000 *
Beatrice Anne Rizzo 320,000 320,000 1.66%
Electronic Relationship
Marketing Solutions, Inc.(1) 320,000 320,000 1.66%
Florian Zgunea 50,000 50,000 *
International Investment
Pool(2) 200,000 200,000 1.04%
Frank Hoffman 40,000 40,000 *
Lawrence Isen 100,000 100,000 *
518464 B.C. Ltd. 100,000 100,000 *
Franz-Joseph Lang 80,000 80,000 *
Sam Maywood 100,000 100,000 *
Alex London 40,000 40,000 *
Total 2,918,000 2,918,000 15.18%
(1) John Rizzo has voting control over the shares registered in the name of
Electronic Relationship Marketing Solutions, Inc.
(2) Leonhard Kurten has voting control over the shares registered in the name
of International Investment Pool.
Shares Issued in Connection with Business Related Expenses
Name Shares beneficially Number of outstanding Percentage of beneficial
owned before offering shares offered by selling ownership after offering
shareholder
- ----------------------------------------------------------------------------------------------------------------
Ron & Dori Arko 25,492 12,746 *
Sheryl Gardner(1) 556,000 278,000 2.89%
Mrywood & Coral Guy 9,374 4,686 *
Ty Guy 7,441 3,720 *
John Helms 109,196 54,598 *
New Heart Ministries 35,200 17,600 *
Michael L. Corrigan 100,000 30,000 *
Sundar Communications
Group, Inc. 700,000 700,000 3.64%
Crail Capital SA 700,000 700,000 3.64%
Valley Financial Corp. 750,000 750,000 3.90%
Blue Water Capital 750,000 750,000 3.90%
EGA, LLC 250,000 250,000 1.30%
Faber West Construction 120,000 120,000 *
Chris Martin 40,000 40,000 *
Stephen Carter 400,000 25,000 *
Cobe Mikacich 200,000 25,000 *
Total 4,752,703 3,761,350 24.7%
43
(1) Ms. Gardner is an officer of the Company.
(2) Ron Arko has voting control over the shares registered in the name
of New Heart Ministries.
(3) Jason Sundar has voting control over the shares registered in the
name of Sundar Communications.
(4) Mark Moran has voting control over the shares registered in the name
of Crail Capital SA
(5) Ellis Skelton has voting control over the shares registered in the
name of Valley Financial Corp.
(6) Jan Archer has voting control over the shares registered in the name
of Blue Water Capital
(7) Justin Frere has voting control over the shares registered in the
name of EGA, LLC
(8) Mark Faber has voting control over the shares registered in the name
of Faber West Construction
Selling shareholders may sell their shares to purchasers from time to time
directly by and subject to the discretion of the selling shareholders. The
selling shareholders may, from time to time, offer their securities for sale
through underwriters, dealers, or agents, who may receive compensation in the
form of underwriting discounts, concessions, or commissions from the selling
shareholders and/or the purchasers of the securities for whom they may act as
agents.
As of the date of this prospectus, the Company has no information on the manner
or method by which any selling shareholder may intend to sell shares.
The securities sold by the selling shareholders may be sold from time to time in
one or more transactions at an offering price that is fixed or that may vary
from transaction to transaction depending upon the time of sale or at prices
otherwise negotiated at the time of sale. Such prices will be determined by the
selling shareholders or by agreement between the selling shareholders and any
underwriters.
Any underwriters, brokers, dealers, or agents who participate in the
distribution of the securities may be deemed to be "underwriters" under the
Securities Act, and any discounts, commissions, or concessions received by any
such underwriters, dealers, or agents may be deemed to be underwriting discounts
and commissions under the Securities Act. Accordingly, any commission, discount
or concession received by them and any profit on the resale of the shares
purchased by them may be deemed to be underwriting discounts or commissions
under the Securities Act. Because the selling shareholders may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, the
selling shareholders will be subject to the prospectus delivery requirements of
the Securities Act. Each selling shareholder has advised the Company that the
stockholder has not yet entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of the
shares.
The selling shareholders have agreed to sell the shares only through registered
or licensed brokers or dealers if required under applicable state securities
laws. In addition, in certain states the selling shareholders' shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from registration or qualification is available and has
been complied with by the selling shareholder.
The sale of the selling shareholders' shares may be affected from time to time
in transactions, which may include block transactions, in:
* the over-the-counter market;
* in negotiated transactions; or
* a combination of such methods of sale or otherwise.
44
Sales may be made at fixed prices that may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. Selling shareholders
may effect such transactions by selling their securities directly to purchasers:
* through broker-dealers acting as agents; or
* to broker-dealers who may purchase shares as principals and
thereafter sell the securities from time to time in the market in
negotiated transactions or otherwise.
Broker-dealers, if any, may receive compensation in the form of discounts,
commissions, or concessions and/or the purchasers from whom such broker-dealers
may acts as agents or to whom they may sell as principals or otherwise, which
compensation as to a particular broker-dealer may exceed customary commissions.
If any of the following events occurs, the Company will amend this prospectus to
include additional disclosure before the selling shareholder makes offers and
sales of their shares:
* to the extent such securities are sold at a fixed price or by option
at a price other than the prevailing market price; such price would
be set forth in this prospectus;
* if the securities are sold in block transactions and the purchaser
wishes to resell; such arrangements would be described in this
prospectus;
* if a compensation paid to broker-dealers is other than usual and
customary discounts, commissions, or concessions, disclosure of the
terms of the transaction would be included in this prospectus.
This prospectus would also disclose if there are other changes to the stated
plan of distribution, including arrangements that either individually or as a
group would constitute an orchestrated distribution of the selling shareholders'
shares.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the selling shareholders' shares may not
simultaneously engage in market making activities with respect to any securities
of the Company for a period of at least two (and up to nine) business days
before beginning such distribution. In addition, each selling shareholder
desiring to sell shares will be subject to the applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which provisions may limit the timing of the purchases
and sales of shares of the Company' securities by such selling shareholders.
None of the selling shareholders are presently "brokers" or "dealers" within the
meaning of Sections 2(4) or 2(5), respectively, of the Securities Act.
LEGAL PROCEEDINGS
As of the date of this Offering, the Company is not party to any lawsuits or
legal proceedings, the adverse outcome of which, in management's opinion,
individually or in the aggregate, would have a material adverse affect on the
Company's results of operations and financial position, and has no knowledge of
any threatened or potential lawsuits or legal proceedings against the Company.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On January 10, 2005, the Company elected to dismiss its principal accountant,
Traci J. Anderson, and to appoint Bedinger & Company as of January 10, 2005 in a
resolution passed by our Board. Our former principal accountants report for
fiscal 2003 contained a "Going Concern" opinion on the Company. The decision to
change auditors was approved by the Company's Board of Directors on January 10,
2005.
45
The report of Traci J. Anderson on the Company's financial statements for either
of the two most recent completed fiscal years did not contain any adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principals.
During the Company's subsequent period ending December 31, 2003 (the "Reporting
Periods"), with respect to the financial statements, there were no disagreements
with Traci J. Anderson on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Traci J. Anderson, would
have caused it to make reference to the subject matter of the disagreements in
connection with its report with respect to the financial statements of the Plan.
During the Reporting Periods, there were no "reportable events" as such item is
described in Item 304(a)(1)(v) of Regulation S-K under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") with respect to the financial
statements.
During the Reporting Periods, the Company did not consult with Bedinger &
Company with respect to the financial statements regarding (i) the application
of accounting principals to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on the financial
statements, (ii) any matter that was either the subject of disagreement (as
defined in Item 304(a)(1)(iv) of Regulation S-K under the Exchange Act and the
related instructions to Item 304 of Regulation S-K) or a "reportable event" (as
such term is described in Item 304(a)(1)(v) of Regulation S-K), or (iii) any of
the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
The Company has furnished a copy of this Report to Traci J. Anderson and
requested that Traci J. Anderson furnish the Company with a letter addressed to
the Securities and Exchange Commission stating whether the former accountant
agrees with the statements made by the Company herein in response to Item 304(a)
of Regulation S-K and, if not, stating the respects in which it does not agree.
The letter from Traci J. Anderson is attached hereto to this Registration
Statement as Exhibit 16.1.
DESCRIPTION OF SECURITIES
The Certificate of Incorporation ("Certificate") and Bylaws of the Company have
recently been approved by the Board of Directors and the majority Shareholders
of the Company. The following description of the Company's Certificate and
Bylaws is only a summary of certain significant provisions of these documents
and Nevada law. For a complete description of the rights and preferences of the
capital stock of the Company, please contact the Company to review the Bylaw of
the Company.
Authorized Capital Stock
The authorized capital stock of the Company consists of 100,000,000 shares, of
which, 90,000,000 shares are common stock, $.001 par value per share (the
"Common Stock") and 10,000,000 shares are preferred stock, $.001 par value per
share (the "Preferred Stock"). The authorized shares of Preferred Stock, as well
as shares of Common Stock, are available for issuance without further action by
shareholders of the Company.
Common Stock
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders and do not have cumulative voting
rights. Holders of Common Stock are entitled to receive ratably such dividends,
if any, as may be declared by the Board of Directors out of funds legally
available therefore, subject to any preferential dividend rights, if any of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding-up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of the Preferred Stock. Holders of
the Common Stock have no preemptive, subscription, redemption or conversion
rights. The rights, preferences and privileges of holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock, which the Company has or may designate
and issue in the future.
46
Preferred Stock
General. The Board of Directors of the Company is authorized, subject to certain
limitations prescribed by law, without further shareholder approval, to issue
from time to time up to an aggregate of 10,000,000 shares of Preferred stock in
one or more series and to fix or alter the designations, preferences, rights and
any qualifications, limitations or restrictions of the shares of each such
series, including the dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption price or prices, liquidation preferences
and the number of shares constituting any series or designation of series.
Indemnification of Officers and Directors
The Company's Articles of Incorporation and Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent permitted under
Nevada law. The Board of Directors are exploring the advisability of obtaining
an insurance policy covering officers and directors for claims made that such
officers and directors may otherwise be required to pay for or for which the
Company is required to indemnify them, subject to certain exclusions.
Insofar as indemnification by the Company for liability arising under the Act
may be permitted to director, officers and controlling persons of the Company
pursuant to provisions of the Articles of Incorporation and Bylaws, or
otherwise, the Company has been advised that in the opinion of the SEC, such
indemnification is against public policy and is, therefore, unenforceable. In
the event that a claim for indemnification by such director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding is asserted by such director, officer or controlling person in
connection with the securities being offered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the act and will
be governed by the final adjudication of such issue.
At present time, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
Reports to Shareholders
We intend to furnish shareholders with annual reports containing audited
financial statements and such other periodic reports as we may determine to be
appropriate or as may be required by law. Upon the effectiveness of this
Registration Statement, we will be required to comply with periodic reporting,
proxy solicitation and certain other requirements by the Securities Exchange Act
of 1934. You may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 100 F Street, N.S. Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains and Internet site that contains
reports, proxy and information statements, and other information regarding us at
the SEC website (http://www.sec.gov) .
INTEREST OF NAMED EXPERTS AND COUNSEL
The financial statements of Execute Sports, Inc. as of and for the year ended
December 31, 2004 and for the six month period ended June 30, 2005 appearing in
the prospectus and registration statement have been audited by Bedinger &
Company, independent accountants, to the extent and for the periods indicated in
their report appearing herein, which report expresses an unqualified opinion and
are included in reliance upon such report and upon authority of such Firm as
Experts in accounting and auditing.
47
The financial statements of Execute Sports (formerly known as Padova
International USA, Inc.) as of and for the year ended December 31, 2003
appearing in the prospectus and registration statement have been audited by
Traci J. Anderson, independent accountant, to the extent and for the periods
indicated in their report appearing herein, which report expresses an
unqualified opinion and are included in reliance upon such report and upon
authority of such Firm as experts in accounting and auditing.
Michael L. Corrigan, attorney at law, 4275 Executive Square, Suite 215, La
Jolla, CA 92037, has rendered an opinion that the shares of common stock of
Execute Sports being registered hereunder were, when sold, legally issued, fully
paid and nonassessable under the Nevada Law. None of the above experts or
counsel has any undisclosed interest in the Company or this offering.
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent is First American Stock Transfer, Inc. located at
706, East Bell Road, Suite #202, Phoenix, Arizona 85022 and its phone number is
1-602-485-1346.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At present, our securities are not traded publicly. There is no assurance that a
trading market will develop, or, if developed, that it will be sustained. We
plan to have our shares quoted and traded on the OTC Bulletin Board once our
registration statement has been declared effective by the Securities and
Exchange Commission. We cannot guarantee that we will obtain trading status on
the OTC Bulleting Board. A market maker sponsoring a company's securities is
required to obtain trading status of the securities quoted on any of the public
trading markets, including the OTC Bulletin Board. If we are unable to obtain a
market maker for our securities, we will be unable to develop a trading market
for our common stock. We may be unable to locate a market maker that will agree
to sponsor our securities. Even if we do locate a market maker, there is no
assurance that our securities will be able to meet the requirements for a
quotation or that the securities will be accepted for trading on the OTC
Bulletin Board.
A purchase of shares may, therefore, find it difficult to resell the securities
offered herein should he or she desire to do so when eligible for public resale.
Furthermore, the shares are not marginable and it is unlikely that a lending
institution would accept our common stock as collateral for a loan.
Pursuant to this registration statement, we propose to publicly offer 10,250,778
shares. To date, none of our outstanding shares of common stock are subject to
outstanding options, warrants to purchase or securities convertible into common
stock. We have not agreed to register shares of common stock held by existing
security holders for resale. We currently have 58 shareholders.
48
FINANCIAL STATEMENTS
CONTENTS
PAGE
Report of Independent Registered Public Accounting Firm.......................................... F-1
Prior Year Report of Independent Registered Public Accounting Firm............................... F-2
FINANCIAL STATEMENTS
Balance Sheets (restated) as of December 31, 2004 and 2003....................................... F-3
Statements of Operations (restated) for the years ended December 31, 2004 and 2003............... F-4
Statements of Stockholders' Equity (restated) for the years ended December 31, 2004 and 2003.... F-5
Statements of Cash Flows for the years ended (restated) December 31, 2004 and 2003............... F-6
Notes to the Restated Financial Statements ...................................................... F-7
FINANCIAL STATEMENTS
Balance Sheets as of June 30, 2005 and June 30, 2004............................................. F-23
Statements of Operations for the three months ended June 30, 2005 and 2004....................... F-24
Statements of Stockholder's Equity for the three months ended June, 2005 and 2004................ F-25
Statements of Cashflows for the three months ended June, 2005 and 2004........................... F-26
Notes to the Financial Statements ............................................................... F-27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Execute Sports, Inc.
(formerly Padova International U.S.A., Inc.)
We have audited the accompanying balance sheet (restated) of Execute Sports, Inc
(formerly Padova International U.S.A., Inc.) (the "Company"), as of December 31,
2004 and the related consolidated statements (restated) of operations,
stockholder's equity (deficit) and cash flows for the year then ended, These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of Execute
Sports, Inc. (formerly Padova International USA, Inc.) as of December 31, 2004
and the related consolidated statements of operations, stockholder's equity
(deficit), and cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. However, the Company has suffered
recurring losses from operations that raises substantial doubt about its ability
to continue as a going concern. Management plans in regards to these matters are
also described in Note J. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Bedinger & Company
Certified Public Accountants
Concord, California
February 2, 2005, except for
Note K which is February 28,
2005
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors:
Padova International U.S.A., Inc.
I have audited the balance sheet of Padova International U.S.A., Inc. as of
December 31, 2003, and the related statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 2003 and 2002. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
our audit.
I conducted my audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that I plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audit provides a reasonable
basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Padova International U.S.A., Inc.
as of December 31, 2003, and the results of its operations and its cash flows
for the years ended December 31, 2003 and 2002 in conformity with U.S. generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered recurring losses, has
negative working capital, and has yet to generate an internal cash flow that
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 6. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Traci J. Anderson, CPA
Huntersville, North Carolina
January 11, 2005
F-2
PADOVA INTERNATIONAL U.S.A., INC.
(DBA EXECUTE SPORTS)
Balance Sheets
December 31, 2004 (Restated) and 2003
==================================================================================================
December 31,
--------------------------
2004 2003
----------- -----------
ASSETS (Restated)
CURRENT ASSETS
Cash $ 5,154 $ 40,244
Accounts receivable, net (Note B) 107,708 84,808
Inventory (Note C) 111,741 299,186
Prepaid expenses (Note L)
81,507 --
----------- -----------
TOTAL CURRENT ASSETS 306,110 424,238
Fixed assets (Note D)
Cost 29,037
35,443
Accumulated Depreciation (17,197) (9,268)
----------- -----------
Net 18,246 19,769
Deposits
3,560 3,560
----------- -----------
TOTAL ASSETS $ 327,916 $ 447,567
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses (Note E) $ 458,417 $ 300,824
Secured borrowings (Note B)
64,708 --
Notes payable (Note F) 514,800
-----------
Related party notes payable (Note F) 100,000 585,762
----------- -----------
TOTAL CURRENT LIABILITIES 1,137,925 886,586
COMMITMENT (Note G)
STOCKHOLDERS' EQUITY (Note H & L)
Common stock, par value $.001, 75,000,000 shares authorized;
issued and outstanding 0 at December 31, 2004 and 2003 -- --
Additional paid-in capital
----------- -----------
Common stock payable/subscribed 169,500
Retained earnings (979,509) (439,019)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (810,009) (439,019)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 327,916 $ 447,567
=========== ===========
F-3
PADOVA INTERNATIONAL U.S.A., INC.
(DBA EXECUTE SPORTS)
Statements of Operations
For the Years Ended December 31, 2004 (Restated) and 2003
================================================================================
December 31,
--------------------------
2004 2003
----------- -----------
(Restated)
REVENUES
Sales $ 1,384,188 $ 726,048
Cost of sales (1,135,303) (606,729)
----------- -----------
Gross profit 248,885 119,319
EXPENSES
Selling, general and administrative 630,216 295,991
----------- -----------
Total expense 630,216 295,991
----------- -----------
Loss from operations (381,331) (176,672)
OTHER INCOME AND EXPENSES
Interest income
2 14
Interest expense 159,161 112,196
----------- -----------
Total other income and expenses (159,159) (112,182)
NET INCOME (LOSS) $ (540,490) $ (288,854)
=========== ===========
Weighted averge shares outstanding 224,773 --
=========== ===========
Loss per share ($ 2.40) na
=========== ===========
F-4
PADOVA INTERNATIONAL U.S.A., INC.
(DBA EXECUTE SPORTS)
Statements of Stockholder's Equity
For the Years Ended December 31, 2004 (Restated) and 2003
===========================================================================================================================
Common Stock
------------------------------------------- Additional Total
Number of Payable/ Paid-in Retained Stockholders'
Shares Amount Subscribed Capital Earnings Equity
--------------- ---------- ------------- ------------- -------------- -----------------
December 31, 2002 -- -- -- -- (150,165) (150,165)
Net loss (288,854) (288,854)
---------------------------------------------------------------------------------------------
December 31, 2003 -- $ -- $ -- $ -- $ (439,019) $ (439,019)
Shares subscribed
(278,000 shares,
$0.25 per share) 69,500 69,500
Stock payable 100,000 100,000
Net loss (540,490) (540,490)
---------------------------------------------------------------------------------------------
December 31, 2004 -- $ -- $ 169,500 $ -- $ (979,509) $ (810,009)
=============== ========== ============= ============= ============== =================
F-5
PADOVA INTERNATIONAL U.S.A., INC.
(DBA EXECUTE SPORTS)
Statements of Cash Flows
For the Years Ended December 31, 2004 (Restated) and 2003
================================================================================
Year Ended December 31,
----------------------
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES: (Restated)
Net loss $(540,490) $(288,854)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation 7,929 6,855
Common stock payable for services 100,000 --
CHANGES IN CURRENT ASSETS AND CURRENT
LIABILITIES: (Net of effect of acquisition)
(Increase) decrease in current liabilities:
Accounts receivable (22,900) (37,568)
Inventory 187,445 (227,924)
Prepaid expenses (81,507) --
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses 157,593 297,078
--------- ---------
NET CASH USED FOR OPERATING ACTIVITIES (191,930) (250,413)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of furniture and equipment (6,406) (16,813)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (6,406) (16,813)
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock subscribed 69,500 --
Related party loan 29,038 271,112
Secured borrowings 64,708
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 163,246 271,112
NET (DECREASE) INCREASE IN CASH (35,090) 3,886
CASH, beginning of period 40,244 36,358
--------- ---------
CASH, end of period $ 5,154 $ 40,244
========= =========
SUPPLEMENTAL DISCLOSURE:
Taxes paid $ 1,088 $ --
Interest paid $ 108,576 $ 112,196
F-6
NOTE A -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Padova International U.S.A., Inc. (the Company) markets and sells water sports
clothing and apparel and motorcycle accessories. The Company was certified as
incorporated in the State of Nevada officially on March 13, 2002 and filed the
Articles of Incorporation on January 30, 2002.
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Basis of Presentation
The financial statements include the accounts of Padova International U.S.A.,
Inc. under the accrual basis of accounting.
Accounting 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
Accounts receivable
The Company has entered into a factoring agreement with Benefactors, Inc. In the
agreement Benefactors, Inc. will provide account receivable financing and
factoring to the Company. Benefactors, Inc. will purchase from the Company the
accounts receivable and may pay a portion of the purchase price, or lend money
to the Company based upon accounts receivable of the Company.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined using
the average costing method. Management performs periodic assessments to
determine the existence of obsolete, slow moving and non-salable inventories,
and records necessary provisions to reduce such inventories to net realizable
value.
F-7
NOTE A -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Property and equipment
Property and equipment are stated at cost. Major renewals and improvements are
charged to the asset accounts while replacements, maintenance and repairs, which
do not improve or extend the lives of the respective assets, are expensed. At
the time property and equipment are retired or otherwise disposed of, the asset
and related accumulated depreciation accounts are relieved of the applicable
amounts. Gains or losses from retirements or sales are credited or charged to
income.
Depreciation is provided using the 200% declining balance method. It is
calculated over recovery periods as prescribed by management that range from 5
years for equipment to 7 years for furniture.
Long-lived assets
The Company has adopted Statement of Financial Accounting Standards No. 144
(SFAS 144). The Statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
historical cost-carrying value of an asset may no longer be appropriate. The
Company assesses recoverability of the carrying value of an asset by estimating
the future net cash flows expected to result from the asset, including eventual
disposition. If the future net cash flows are less than the carrying value of
the asset, an impairment loss is recorded equal to the difference between the
asset's carrying value and fair value.
Revenue recognition policy
Revenue from the sale of water sports clothing and apparel, and motorcycle
accessories is recognized when the earning process is complete and the risk and
rewards of ownership have transferred to the customer, which is generally
considered to have occurred upon the shipment to the customer.
Shipping and handling costs
The Company's policy is to classify shipping and handling costs as selling,
general and administrative expenses.
F-8
NOTE A -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Advertising
The Company expenses all advertising costs as incurred. For the years ended
December 31, 2004 and 2003 the Company incurred approximately $90,000 and
$30,000 in advertising expenses, respectively.
Loss per common share
The Company adopted Statement of Financial Accounting Standards No. 128 that
requires the reporting of both basic and diluted earnings (loss) per share.
Basic loss per share is calculated using the weighted average number of common
shares outstanding in the period. Diluted loss per share includes potentially
dilutive securities such as outstanding options and warrants, using the
"treasury stock" method and convertible securities using the "if-converted"
method. There were no adjustments required to net loss for the period presented
in the computation of diluted earnings per share.
Issuance of common stock
The issuance of common stock for other than cash is recorded by the Company at
management's estimate of the fair value of the assets acquired or services
rendered.
Comprehensive loss
The Company adopted Financial Accounting Standards Board Statement of Financial
Standards No. 130, "Reporting Comprehensive Income", which establishes standards
for the reporting and display of comprehensive income and its components in the
financial statements. There were no items of comprehensive income (loss)
applicable to the Company during the periods covered in the financial
statements.
Income taxes
On November 1, 2004, the Company legally amended its Articles of Incorporation
to make the transition from an S-Corporation to a C-Corporation. Prior to that
the S Corporation was not a tax paying entity for federal or state income tax
purposes and thus no provision for income taxes was recognized. Subsequent to
the change the Company began recognizing the full valuation for deferred tax
assets (See Note I).
F-9
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
IMPACT OF ACCOUNTING STANDARDS
In January 2003 the FASB issued Interpretation 46 "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51". This Interpretation
requires a Company to consolidate the financial statements of a "Variable
Interest Entity" "VIE", sometimes also known as a "special purpose entity", even
if the entity does not hold a majority equity interest in the VIE. The
Interpretation requires that if a business enterprise has a "controlling
financial interest" in a VIE, the assets, liabilities, and results of the
activities of the VIE should be included in consolidated financial statements
with those of the business enterprise, even if it holds a minority equity
position. This Interpretation was effective immediately for all VIE's created
after January 31, 2003; for the first fiscal year or interim period beginning
after June 15, 2003 for VIE's in which a Company holds a variable interest that
it acquired before February 1, 2003. The adoption this interpretation did not
have any impact on the Company's financial condition or results of operations.
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends SFAS 133 to
provide clarification on the financial accounting and reporting of derivative
instruments and hedging activities and requires contracts with similar
characteristics to be accounted for on a comparable basis. The adoption of SFAS
149 did not have any impact on the Company's financial condition or results of
operations.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
establishes standards on the classification and measurement of financial
instruments with characteristics of both liabilities and equity. The adoption of
SFAS 150 did not have any impact on the Company's financial condition or results
of operations.
In December 2003, the FASB issued SFAS 132r, Employers' Disclosures about
Pensions and Other Postretirement Benefits--an amendment of FASB Statements No.
87, 88, and 106. SFAS 132r revises employers' disclosures about pension plans
and other postretirement benefit plans. It does not change the measurement or
recognition of those plans required by FASB Statements No. 87, Employers'
Accounting for Pensions, No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and
No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions.
This Statement retains the disclosure requirements contained in FASB Statement
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, which it replaces. It requires additional disclosures to those in the
original Statement 132 about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit
F-10
NOTE A -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
IMPACT OF ACCOUNTING STANDARDS (CONTINUED)
postretirement plans. The adoption of SFAS 132r did not have any impact on the
Company's financial condition or results of operations.
In December 2003, the FASB issued FIN No. 46R, "Consolidation of Variable
Interest Entities." This requires that the assets, liabilities and results of
the activity of variable interest entities be consolidated into the financial
statements of the company that has a controlling financial interest. It also
provides the framework for determining whether an entity should be consolidated
based on voting interest or significant financial support provided to it. The
adoption of FIN No. 46R did not have any impact on the Company's financial
condition or results of operations.
In November 2004, the FASB issued SFAS 151, Inventory Costs--an amendment of ARB
No. 43, Chapter 4. The Statement amends the guidance of ARB No. 43, Chapter 4,
Inventory Pricing, by clarifying that abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and by requiring the allocation of fixed production
overheads to inventory based on the normal capacity of the production
facilities. The adoption of SFAS 151 did not have any impact on the Company's
financial condition or results of operations.
In December 2004, the FASB issued a revision to SFAS 123 (revised 2004),
Share-Based Payment. The revision requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based
payments granted to employees. The statements eliminates the alternative method
of accounting for employee share- based payments previously available under APB
25. The provisions of SFAS 123R are effective as of the first interim period
that begins after June 15, 2005. The Company does not believe that this recent
accounting pronouncement will have a material impact on their financial position
or results of operations.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary
Assets-amendment of APB Opinion No. 29". Statement 153 eliminates the exception
to fair value for exchanges of similar productive assets and replaces it with a
general exception for exchange transaction that do not have commercial
substance, defined as transaction that are not expected to result in significant
changes in the cash flows of the reporting entity. This statement is effective
for exchanges of nonmonetary assets occuring after June 15, 2005. The Company
does not believe that this recent accounting pronouncement will have a material
impact on their financial position or results of operations.
F-11
NOTE A -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Concentrations of credit risk
The Company performs ongoing credit evaluations of its customers. For the year
ended December 31, 2004, four customers individually accounted for 71% of sales
(32%, 15%, 13% and 11%). Three customers represented 85% (48% 22% and 14%) of
accounts receivable for the year ended December 31, 2004.
For the year ended December 31, 2003, four customers individually accounted for
81% of sales (24%, 21%, 20% and 16%) and 92% (42%, 29%, 13%, and 8%) of accounts
receivable.
For the years ended December 31, 2004 and 2003, approximately 18% and less than
1%, respectively, of the Company's net sales were made to customers outside the
United States.
The Company is dependent of third-party manufacturers and distributors for all
of its supply of inventory. For the years ended December 31, 2004 and 2003, the
Company's three largest suppliers accounted for 73% and 73% of product
purchases, respectively. The Company is dependent on the ability of its
suppliers to provide products and services on a timely basis and on favorable
pricing terms. The loss of certain principal suppliers or a significant
reduction in product availability from principal suppliers could have a material
adverse effect on the Company.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the fair value of all financial instruments at
December 31, 2004 and 2003, as defined in FASB 107, does not differ materially
from the aggregate carrying values of its financial instruments recorded in the
accompanying balance sheet. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. Considerable judgment is required in interpreting
market data to develop the estimates of fair value, and accordingly, the
estimates are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
NOTE B - ACCOUNTS RECEIVABLE
In May 2004, The Company entered into a factoring agreement with Benefactor
Funding Corp. ("Factor"). The Factor purchases certain customer accounts
receivable on a recourse basis. The Factor initially advances 80% of the amount
of the invoice with the remainder, less fees, paid to the company once the
customer pays the invoice. The Company performs substantially all collection
efforts and is allowed to repurchase receivables under certain circumstances.
The interest rate charged to the Company varies depending on the age of the
receivable upon customer payment. The factoring agreement is collateralized by
substantially all Company assets.
The Company is reporting the factoring agreement as a secured borrowing in
accordance with FAS 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". As of December 31, 2004, the balance
due to the Factor was $64,708, collateralized by the factored receivables of
$80,885
F-12
The accounts receivable balance as of December 31, 2004 is reported net of an
allowance for doubtful accounts of $4,000.
NOTE C - INVENTORY
Inventories are comprised of finished goods ready for resale and are stated at
the lower of cost or market, as determined using the average costing method. The
following table represents the major components of inventory at December 31,
2004 and 2003.
2004 2003
---------------- --------------
Finished goods $ 111,741 $ 299,186
================ ==============
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 and 2003 consist of the following:
2004 2003
---------------- --------------
Computer and office equipment $ 24,700 $ 21,866
Furniture and fixtures 2,281 2,281
Machinery and equipment 8,462 4,890
---------------- --------------
$ 35,443 29,037
Less: Accumulated Depreciation (17,197) (9,268)
---------------- --------------
$ 18,246 $ 19,769
================ ==============
Depreciation expense for the years ended December 31, 2004 and 2003 was $7,929
and $6,855, respectively.
NOTE E - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 2004 and 2003 consist of
the following
2004 2003
---------------- --------------
Payables to vendors $ 375,072 $ 300,824
Accrued taxes 8,963 --
Accrued interest payable (Note F) 74,382 --
---------------- --------------
$ 458,417 $ 300,824
================ ==============
F-13
NOTE F - NOTES PAYABLE
Notes payable at December 31, 2004 and 2003, are as follows:
- ---------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------
Unsecured demand note payable to
Ron and Dori Arks, bearing interest at
1.5% per month. 29,800
- ---------------------------------------------------------------------------
Unsecured demand note payable to
Ron and Dori Arks, bearing interest at
2% per month. 35,000
- ---------------------------------------------------------------------------
Unsecured demand note payable to Myrwood
and Coral Guy, bearing interest at 2% per
month. 100,000
- ---------------------------------------------------------------------------
Unsecured demand note payable to Ty Guy,
bearing interest at 2% per month. 90,000
- ---------------------------------------------------------------------------
Unsecured demand note payable to John
Helms, bearing interest at 2% per month. 210,000
- ---------------------------------------------------------------------------
Unsecured demand note payable to
New Heart Ministries, bearing interest
at 2% per month. 50,000
- ---------------------------------------------------------------------------
$ 514,800 $ --
===========================================================================
Related party Notes payable at December 31, 2004 and 2003, are as follows:
- ---------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------
Unsecured note payable to Donald A.
Dallape, President, bearing interest at
2% per month due every 30 days. $ 271,354
- ---------------------------------------------------------------------------
Unsecured note payable to Scott Swendener,
Vice-President, bearing interest at 2%
per month due every 30 days. 314,408
- ---------------------------------------------------------------------------
Unsecured demand note payable to Sheryl
Gardner, bearing interest at 2% per
month. 100,000
- ---------------------------------------------------------------------------
$ 100,000 $ 585,762
===========================================================================
During 2004, the notes payable to the two officers of the Company were replaced
by notes payable to outside individuals. Also, see Note K regarding subsequent
event.
F-14
NOTE G - COMMITMENT
During fiscal year 2004, the Company leased office and warehouse space at a rate
of $6,396 per month with lease terms extending through April 30, 2006. Future
lease payments under this operating lease are as follows:
Approximate Total
Location Square Feet Current Lease Term Monthly Rent Commitment
- ------------------------------------------------------------------------------------------------------------------------
1284 Puerta Del Sol Suite 150 8,883 January 1, 2005 through December 31, 2005 $ 6,806 $ 81,672
1284 Puerta Del Sol Suite 150 8,883 January 1, 2006 through April 30, 2006 $ 7,216 $ 86,592
--------------
Total Future Commitments $ 168,264
==============
The Company incurred $63,960 and $53,772 in rent expense during the years ended
December 31, 2004 and 2003, respectively.
NOTE H - STOCKHOLDERS' EQUITY
On August 18, 2004, the Company entered into a service contract valued at
$100,000 in exchange for 400,000 shares of common stock. The contract term is 24
months. For the year ended December 31, 2004, the company recognized $18,493 of
expense in connection with this contract with the remaining balance of $81,507
accounted for as prepaid expense. The shares related to this contract are
accounted for in the equity section of the balance sheet as Common Stock
Payable. The shares were issued on July 22, 2005.
On September 9, 2004, the Company commenced a limited Private Placement
Memorandum (PPM) to raise up to $1,750,000 through the sale of the Company's
common stock at a price of $0.25 per share. During the year ended December 31,
2004, the Company sold 278,000 shares of common stock for $0.25 per share
totaling approximately $69,500 in cash. The shares were unissued as of December
31, 2004 and are classified as Common Stock Payable/Subscribed.
On September 22, 2004, the Company increased its number of authorized shares
from 75,000 to 75,000,000. The par value increased from no par value to $0.001
per share.
During the years ended December 31, 2004 and 2003, the Company did not issue any
stock. No stock has been issued to date. Our earnings per share calculation in
the Statement of Operations is on an "if-issued" basis and reflects the weighted
average common stock that would have been outstanding had all shares that were
purchased for cash and all shares issuable for services been issued.
F-15
NOTE I - NET OPERATING LOSS CARRY FORWARD
In assessing the ability to realize deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. At December 31, 2004 a
valuation allowance for the full amount of the net deferred tax asset was
recorded because of uncertainties as to the amount of taxable income that would
be generated in future years.
United States Corporation Income Taxes
Period of Loss Amount Expiration Date
- ----------------------------------- ---------------- -----------------
December 31, 2004 $ 420,935 December 31, 2024
Prior to November 2004 the Company was organized as an S-Corporation and all
losses were distributed and recognized through the tax returns of the owners.
NOTE J - GOING CONCERN AND MANAGEMENT'S PLANS
The Company has suffered recurring losses from operations since inception. In
addition, the Company has yet to generate an internal cash flow from its
business operations. These factors give raise substantial doubt about its
ability to continue as a going concern.
Management's plans with regard to these matters encompass the following actions:
1) obtain funding form new investors to alleviate the Company's working
deficiency, and 2) implement a plan to generate sales. The Company's continued
existence is dependent upon its ability to resolve its liquidity problems and
increase profitability in its current business operations. However, the outcome
of management's plans cannot be ascertained with any degree of certainty. The
accompanying financial statements do not include any adjustments that might
result from the outcome of these risks and uncertainty.
NOTE K - SUBSEQUENT EVENT
As of February 28, 2005, all of the notes payable outstanding at December 31,
2004, totaling $614,800, were cancelled and a new note payable was issued
accruing interest at 2% per annum until February 28, 2006. At that time, the
remaining outstanding principal balance and all interest accrued but unpaid can
be paid in the Company's common stock at a conversion price of $0.25 per share
F-16
for every dollar of interest owed to the note holder. All interest accrued but
unpaid as of February 28, 2005 was converted to the Company's common stock at
the conversion price of $0.25 per share for every dollar of interest owed to the
note holder representing an addition to stockholders' equity of approximately
$104,232.
In addition through February 28, 2005, approximately $150,000 worth of common
shares were subscribed pursuant to the September, 2004 private placement
memorandum.
NOTE L - RESTATEMENT
The 10-KSB for Padova International U.S.A., Inc. as of December 31, 2004 and for
the year then ended has been restated. In July 2005, the Company was contacted
by the Securities and Exchange Commission (SEC). In their letter dated, July 12,
2005 the SEC requested additional details regarding the issuance of 3,810,000
shares issued for professional services, including how they may correlate with
the contracts included as exhibits to the Form SB-2, how we valued these
issuances and the amount of expense related to these shares and where such
expense is included in the Statement of Operations for the quarter ended March
31, 2005.
Upon review of the contracts, it came to our attention that we did not record
the stock based compensation expense related to a services contract entered into
on August 18, 2004. On August 18, 2004, the Company entered into a service
contract valued at $100,000 in exchange for 400,000 shares of common stock which
represents the fair market value of the stock as of that date. The contract term
is 24 months. For the year ended December 31, 2004, the company recognized
$18,493 of expense in connection with this contract with the remaining balance
of $81,507 accounted for as prepaid expense. The shares related to this contract
are accounted for in the equity section of the balance sheet as Common Stock
Payable. The shares were issued on July 22, 2005.
We also noted that $69,500 received in cash for the purchase of common stock was
classified as if the shares had been issued when, in fact, they were not. During
the year the Company received $69,500 in exchange for 278,000 shares which were
classified as Common Stock and Additional-Paid-in-Capital. We have reclassified
the share purchase to Common Stock Payable/Subscribed in the equity section of
the balance sheet.
The following information presents the impact of the additional expense, the
reclassification of common stock and APIC to common stock payable/subscribed,
the related impact on shares outstanding to zero, the increase in net loss, the
increase in prepaid expense, the reclassification of amounts due to our factor
to a separate line item in current liabilities and the increase in common stock
payable as of December 31, 2004 as discussed above:
F-17
PADOVA INTERNATIONAL U.S.A., INC.
(DBA EXECUTE SPORTS)
Balance Sheets
December 31, 2004 (Restated)
===========================================================================================================================
December 31,
-----------------------------------------
2004 2004 2004
----------- ----------- -----------
ASSETS (Previously (Restated) (Difference)
Reported)
CURRENT ASSETS
Cash $ 5,154 $ 5,154 $ --
Accounts receivable, net (Note B)
107,708 107,708 --
Inventory (Note C)
111,741 111,741 --
Prepaid expenses (Note L)
-- 81,507 81,507
----------- ----------- -----------
TOTAL CURRENT ASSETS 224,603 306,110 81,507
Fixed assets (Note D)
Cost 35,443 35,443 --
Accumulated Depreciation (17,197) (17,197) --
----------- ----------- -----------
Net 18,246 18,246 --
Deposits 3,560 3,560 --
----------- ----------- -----------
TOTAL ASSETS $ 246,409 $ 327,916 $ 81,507
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses (Note E) $ 523,125 $ 458,417 (64,708)
Secured borrowings (Note B) -- 64,708 64,708
Notes Payable (Note F) 514,800 614,800 100,000
Related party notes payable (Note F) 100,000 -- (100,000)
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 1,137,925 1,137,925 --
COMMITMENT (Note G)
STOCKHOLDERS' EQUITY (Note H & L)
Common stock, par value $.001, 75,000,000 shares authorized;
issued and outstanding 0 at December 31, 2004 and 2003 278 -- (278)
Additional paid-in capital 69,222 -- (69,222)
Common stock payable/subscribed -- 169,500 169,500
Retained earnings (961,016) (979,509) (18,493)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY (891,516) (810,009) 81,507
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 246,409 $ 327,916 $ 81,507
=========== =========== ===========
F-18
PADOVA INTERNATIONAL U.S.A., INC.
(DBA EXECUTE SPORTS)
Statements of Operations
For the Years Ended December 31, 2004 (Restated)
===========================================================================================
December 31,
-----------------------------------------
2004 2004 2004
----------- ----------- -----------
(Previously (Restated) (Difference)
Reported)
REVENUES
Sales $ 1,384,188 $ 1,384,188 $ --
Cost of sales (1,135,303) (1,135,303) --
----------- ----------- -----------
Gross profit 248,885 248,885 --
EXPENSES
Selling, general and administrative 611,723 630,216 18,493
----------- ----------- -----------
Total expense 611,723 630,216 18,493
----------- ----------- -----------
Loss from operations (362,838) (381,331) (18,493)
OTHER INCOME AND EXPENSES
Interest income 2 2 --
Interest expense 159,161 159,161 --
----------- ----------- -----------
Total other income and expenses (159,159) (159,159) --
NET INCOME (LOSS) $ (521,997) $ (540,490) $ (18,493)
=========== =========== ===========
Weighted averge shares outstanding -- 224,773 224,773
=========== =========== ===========
Loss per share -- ($ 2.40) $ (2.40)
=========== =========== ===========
F-19
PADOVA INTERNATIONAL U.S.A., INC.
(DBA EXECUTE SPORTS)
Statements of Stockholder's Equity
For the Year Ended December 31, 2004 (Restated)
===========================================================================================
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
----------- ----------- -----------
2004 2004 2004
----------- ----------- -----------
(Previously (Restated) (Difference)
Reported)
Common Stock:
Shares issued for cash:
Shares 278,000 -- (278,000)
Amount 278 -- (278)
Additional paid in capital (69,222) -- 69,222
Common stock payable/subscribed -- 169,500 169,500
Retained earnings (deficit) (961,016) (979,509) (18,493)
----------- ----------- -----------
Total shareholder's equity (891,516) (810,009) 81,507
=========== =========== ===========
F-20
PADOVA INTERNATIONAL U.S.A., INC.
(DBA EXECUTE SPORTS)
Statements of Cash Flows
For the Years Ended December 31, 2004 (Restated)
================================================================================================
Year Ended December 31,
-----------------------------------
2004 2004 2004
--------- --------- ---------
(Previously (Restated) (Difference)
CASH FLOWS FROM OPERATING ACTIVITIES: Reported)
Net loss $(521,997) $(540,490) $ (18,493)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation 7,929 7,929 --
Common stock payable for services -- 100,000 100,000
CHANGES IN CURRENT ASSETS AND CURRENT
LIABILITIES: (Net of effect of acquisition)
(Increase) decrease in current liabilities:
Accounts receivable (22,900) (22,900) --
Inventory 187,445 187,445 --
Prepaid expenses -- (81,507) (81,507)
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses 222,301 157,593 (64,708)
--------- --------- ---------
NET CASH USED FOR OPERATING ACTIVITIES (127,222) (191,930) (64,708)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of furniture and equipment (6,406) (6,406) --
--------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (6,406) (6,406) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 69,500 -- (69,500)
Common stock subscribed 69,500 69,500
Related party loan 29,038 29,038 --
Secured borrowings -- 64,708 64,708
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 98,538 163,246 64,708
NET (DECREASE) INCREASE IN CASH (35,090) (35,090) --
CASH, beginning of period 40,244 40,244 --
--------- --------- ---------
CASH, end of period $ 5,154 $ 5,154 $ --
========= ========= =========
SUPPLEMENTAL DISCLOSURE:
Taxes paid $ 1,088 $ 1,088 $ --
Interest paid $ 108,576 $ 108,576 $ --
F-21
EXECUTE SPORTS, INC.
FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED
JUNE 30, 2005 AND 2004
F-22
EXECUTE SPORTS, INC.
(formerly Padova International U.S.A., Inc.)
Balance Sheet
June 30, 2005
(Unaudited)
=======================================================================================================
June 30,
2005
-----------------
ASSETS
CURRENT ASSETS
Cash $ 52,060
Accounts receivable, net (Note B) 464,655
Inventory (Note C) 173,713
Prepaid expenses (Note D) 585,706
Prepaid expense-related party (Note D) 58,740
Loans receivable (Note E) 122,538
------------------
TOTAL CURRENT ASSETS 1,457,412
Fixed assets (Note F)
Cost 35,443
Accumulated Depreciation (20,174)
------------------
Net 15,269
Deposits 3,560
------------------
TOTAL ASSETS $ 1,476,241
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses (Note G) $ 360,703
Secured borrowings (Note B) 239,618
Notes Payable (Note H) 462,258
Related party notes payable (Note H) 99,492
------------------
TOTAL CURRENT LIABILITIES 1,162,071
COMMITMENT (Note I) --
STOCKHOLDERS' EQUITY (Note J)
Common stock, par value $.001, 75,000,000 shares authorized
authorized; issued and outstanding 0 at June 30, 2005
Additional paid-in capital --
Common stock payable/subscribed 3,812,662
Retained earnings (Deficit) (3,498,492)
-----------------
TOTAL STOCKHOLDERS' EQUITY 314,170
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,476,241
=================
F-23
EXECUTE SPORTS, INC.
(formerly Padova International U.S.A., Inc.)
Statements of Operations
Three and Six Months Ended June 30, 2005 and 2004
(Unaudited)
=========================================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
REVENUES
Sales $ 580,498 $ 490,906 $ 1,258,893 $ 1,117,517
Cost of sales 460,924 358,825 880,230 737,222
------------ ------------ ------------ ------------
Gross profit 119,574 132,081 378,663 380,295
EXPENSES
General and administrative expenses 2,564,605 65,902 2,729,722 146,944
Selling and advertising 63,563 50,746 109,272 122,720
Depreciation expense 1,488 1,583 2,977 3,130
------------ ------------ ------------ ------------
Total expense 2,629,656 118,231 2,841,970 272,793
Income (loss) from operations (2,510,081) 13,849 (2,463,307) 107,501
OTHER INCOME AND EXPENSES
Interest income -- -- -- 1
Interest expense 4,520 25,591 55,676 58,952
------------ ------------ ------------ ------------
Total other income and expenses (4,520) (25,591) (55,676) (58,951)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (2,514,601) $ (11,741) $ (2,518,983) $ 48,550
============ ============ ============ ============
Weighted average shares outstanding 13,688,039 7,532,196 -- --
============ ============ ============ ============
Earnings per share $ (0.184) $ (0.002) $ -- $ --
============ ============ ============ ============
F-24
EXECUTE SPORTS, INC.
(formerly Padova International U.S.A., Inc.)
Statements of Stockholders' Equity
Six Months Ended June 30, 2005
(Unaudited)
===================================================================================================================================
Common Stock
-------------------- Additional Retained Total
Number of Payable/ Paid-in Earnings Stockholders'
Shares Amount Subscribed Capital (Deficit) Equity
--------- -------- ---------- ---------- ------------ -------------
December 31, 2002 -- $ -- $ -- $ -- $ (150,165) $ (150,165)
Net loss (288,854) (288,854)
--------- -------- ---------- ---------- ------------ -------------
December 31, 2003 -- $ -- $ -- $ -- $ (439,019) $ (439,019)
Shares subscribed
(278,000 shares, $0.25 per share) 69,500 69,500
Shares payable for services
(400,000 shares, $0.25 per share) 100,000 100,000
Net loss (540,490) (540,490)
--------- -------- ---------- ---------- ------------ -------------
December 31, 2004 -- $ -- $ 169,500 $ -- $ (979,509) $ (810,009)
Shares subscriptions receivable
(394,280 shares, $0.25 per share) (98,570) (98,570)
Shares subscribed for cash
(2,640,000 shares, $0.25 per share) 660,000 660,000
Shares payable for services
( 11,910,000 shares, $0.25 per share) 2,977,500 2,977,500
Shares payable for accrued interest
(416,928 shares, $0.25 per share) 104,232 104,232
Net loss (2,518,983) (2,518,983)
--------- -------- ---------- ---------- ------------ -------------
June 30, 2005 -- $ -- $3,812,662 $ -- $ (3,498,492) $ 314,170
========= ======== ========== ========== ============ =============
F-25
EXECUTE SPORTS, INC.
(formerly Padova International U.S.A., Inc.)
Statements of Cash Flows
Six Months Ended June 30, 2005 and 2004
(Unaudited)
==========================================================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,514,601) $ (11,741) $(2,518,983) $ 48,550
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation 1,488 1,583 2,977 3,130
Common stock payable for services 2,890,000 -- 2,977,500 --
Common stock payable for accrued interest -- 104,232
CHANGES IN CURRENT ASSETS AND CURRENT
LIABILITIES:
(Increase) decrease in current assets: Accounts receivable (110,117) (128,770) (356,947) (117,415)
Inventory (5,870) (32,224) (61,972) (49,445)
Prepaid expenses (456,996) (10,000) (562,939) (24,000)
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses 29,181 150,937 (97,714) 112,997
----------- ----------- ----------- -----------
NET CASH USED FOR OPERATING ACTIVITIES (166,914) (30,214) (513,846) (26,183)
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan proceeds to unaffiliated company (122,538) -- (122,538) --
Acquisition of furniture and equipment -- -- -- (760)
----------- ----------- ----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (122,538) -- (122,538) (760)
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock subscribed 388,930 561,430
Issuance of notes payable -- 16,000
Repayment of notes payable (50,042) (52,542)
Repayment of related party notes payable (16,508) (16,508)
Proceeds from related party notes payable 24,303 -- 19,104
Secured Borrowings (10,261) 174,910
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 312,119 24,303 683,290 19,104
NET INCREASE (DECREASE) IN CASH 22,667 (5,911) 46,906 (7,839)
CASH, beginning of period 29,393 38,316 5,154 40,244
----------- ----------- ----------- -----------
CASH, end of period $ 52,060 $ 32,405 $ 52,060 $ 32,405
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Taxes paid $ -- $ -- $ -- $ 1,050
Interest paid $ -- $ 8,581 $ 20,447 $ 39,991
F-26
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Execute, Inc. (formerly Padova International U.S.A., Inc.) (the Company) markets
and sells water sports clothing and apparel and motorcycle accessories. The
Company was certified as incorporated in the State of Nevada officially on March
13, 2002 and filed the Articles of Incorporation on January 30, 2002.
On March 3, 2005 the Company changed its name from Padova International U.S.A.,
Inc. (DBA Execute Sports) to Execute, Inc.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP) for interim financial
information and item 301(b) of Regulation S-B. They do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the financial statements for the Company as of December
31, 2004 and for the two years then ended, including notes thereto.
Summary of Significant Accounting Principles
Basis of Presentation
The financial statements include the accounts of Execute, Inc. (formerly Padova
International U.S.A., Inc.) under the accrual basis of accounting.
Accounting 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
Accounts receivable
The Company has entered into a factoring agreement with Benefactors, Inc. In the
agreement Benefactors, Inc. will provide account receivable financing and
factoring to the Company. Benefactors, Inc. will purchase from the Company the
accounts receivable and may pay a portion of the purchase price, or lend money
to the Company based upon accounts receivable of the Company.
F-27
Inventories
Inventories are valued at the lower of cost or market. Cost is determined using
the average costing method. Management performs periodic assessments to
determine the existence of obsolete, slow moving and non-salable inventories,
and records necessary provisions to reduce such inventories to net realizable
value.
Property and equipment
Property and equipment are stated at cost. Major renewals and improvements are
charged to the asset accounts while replacements, maintenance and repairs, which
do not improve or extend the lives of the respective assets, are expensed. At
the time property and equipment are retired or otherwise disposed of, the asset
and related accumulated depreciation accounts are relieved of the applicable
amounts. Gains or losses from retirements or sales are credited or charged to
income.
Depreciation is provided using the 200% declining balance method. It is
calculated over recovery periods as prescribed by management that range from 5
years for equipment to 7 years for furniture.
Long-lived assets
The Company has adopted Statement of Financial Accounting Standards No. 144
(SFAS 144). The Statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
historical cost-carrying value of an asset may no longer be appropriate. The
Company assesses recoverability of the carrying value of an asset by estimating
the future net cash flows expected to result from the asset, including eventual
disposition. If the future net cash flows are less than the carrying value of
the asset, an impairment loss is recorded equal to the difference between the
asset's carrying value and fair value.
Revenue recognition policy
Revenue from the sale of water sports clothing and apparel, and motorcycle
accessories are recognized when the earning process is complete and the risk and
rewards of ownership have transferred to the customer, which is generally
considered to have occurred upon the shipment to the customer.
Shipping and handling costs
The Company's policy is to classify shipping and handling costs as selling,
general and administrative expenses.
Advertising
The Company expenses all advertising costs as incurred. For the three months
ended June 30, 2005 and 2004 the Company incurred approximately $20,020 and
$19,823 in advertising expenses, respectively.
F-28
Loss per common share
The Company adopted Statement of Financial Accounting Standards No. 128 that
requires the reporting of both basic and diluted earnings (loss) per share.
Basic loss per share is calculated using the weighted average number of common
shares outstanding in the period. Diluted loss per share includes potentially
dilutive securities such as outstanding options and warrants, using the
"treasury stock" method and convertible securities using the "if-converted"
method. There were no adjustments required to net loss for the period presented
in the computation of diluted earnings per share.
Issuance of common stock
The issuance of common stock for other than cash is recorded by the Company at
management's estimate of the fair value of the assets acquired or services
rendered.
Comprehensive loss
The Company adopted Financial Accounting Standards Board Statement of Financial
Standards No. 130, "Reporting Comprehensive Income", which establishes standards
for the reporting and display of comprehensive income and its components in the
financial statements. There were no items of comprehensive income (loss)
applicable to the Company during the periods covered in the financial
statements.
Income taxes
On November 1, 2004, the Company legally amended its Articles of Incorporation
to make the transition from an S-Corporation to a C-Corporation. Prior to that
the S Corporation was not a tax paying entity for federal or state income tax
purposes and thus no provision for income taxes was recognized. Subsequent to
the change the Company began recognizing the full valuation for deferred tax
assets (See Note K).
Impact of accounting standards
In November 2004, the FASB issued SFAS 151, Inventory Costs--an amendment of ARB
No. 43, Chapter 4. The Statement amends the guidance of ARB No. 43, Chapter 4,
Inventory Pricing, by clarifying that abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and by requiring the allocation of fixed production
overheads to inventory based on the normal capacity of the production
facilities. The adoption of SFAS 151 did not have any impact on the Company's
financial condition or results of operations.
F-29
In December 2004, the FASB issued a revision to SFAS 123 (revised 2004),
Share-Based Payment. The revision requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based
payments granted to employees. The statements eliminates the alternative method
of accounting for employee share- based payments previously available under APB
25. The provisions of SFAS 123R are effective as of the first interim period
that begins after June 15, 2005. The Company does not believe that this recent
accounting pronouncement will have a material impact on their financial position
or results of operations.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary
Assets-amendment of APB Opinion No. 29". Statement 153 eliminates the exception
to fair value for exchanges of similar productive assets and replaces it with a
general exception for exchange transaction that do not have commercial
substance, defined as transaction that are not expected to result in significant
changes in the cash flows of the reporting entity. This statement is effective
for exchanges of nonmonetary assets occurring after June 15, 2005. The Company
does not believe that this recent accounting pronouncement will have a material
impact on their financial position or results of operations.
Concentrations of credit risk
The Company performs ongoing credit evaluations of its customers. For the three
months ended June 30, 2005, three customers individually accounted for
approximately 73% of sales (50%, 10% and 13%). Three customers represented
approximately 73% (43%, 15% and 15%) of accounts receivable at June 30, 2005.
For the three months ended June 30, 2004, two customers individually accounted
for approximately 68% of sales (56% and 12%). Two customers represented
approximately 72% (43%, and 29%) of accounts receivable at June 30, 2004.
For the three months ended June 30, 2005 and 2004, approximately 21% and 15%,
respectively, of the Company's net sales were made to customers outside the
United States.
The Company is dependent of third-party manufacturers and distributors for all
of its supply of inventory. For the three months ended June 30, 2005 and 2004,
the Company's two largest suppliers accounted for 96% and 99% of product
purchases, respectively. The Company is dependent on the ability of its
suppliers to provide products and services on a timely basis and on favorable
pricing terms. The loss of certain principal suppliers or a significant
reduction in product availability from principal suppliers could have a material
adverse effect on the Company.
Disclosure about Fair Value of Financial Instruments
The Company estimates that the fair value of all financial instruments at June
30, 2005 and 2004, as defined in FASB 107, does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
accompanying balance sheet. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. Considerable judgment is required in interpreting
market data to develop the estimates of fair value, and accordingly, the
estimates are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
NOTE B - ACCOUNTS RECEIVABLE
In May 2004, The Company entered into a factoring agreement with Benefactor
Funding Corp. ("Factor"). The Factor purchases certain customer accounts
receivable on a recourse basis. The Factor initially advances 80% of the amount
of the invoice with the remainder, less fees, paid to the company once the
customer pays the invoice. The Company performs substantially all collection
efforts and is allowed to repurchase receivables under certain circumstances.
The interest rate charged to the Company varies depending on the age of the
receivable upon customer payment. The factoring agreement is collateralized by
substantially all Company assets.
F-30
The Company is reporting the factoring agreement as a secured borrowing in
accordance with FAS 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". As of December 31, 2004, the balance
due to the Factor was $239,618, collateralized by the factored receivables of
$299,522
The accounts receivable balance as of December 31, 2004 is reported net of an
allowance for doubtful accounts of $4,000.
NOTE C - INVENTORY
Inventories are comprised of finished goods ready for resale and are stated at
the lower of cost or market, as determined using the average costing method. The
following table represents the major components of inventory at June 30, 2005
and 2004.
2005 2004
-------------- --------------
Finished goods $ 173,713 $ 348,631
============== ==============
NOTE D - PREPAID EXPENSES
Prepaid expenses as of June 30, 2005 consists of $585,706 related to
professional services (see Note J) paid with the Company's common stock and
$58,740 of salary advances to the company President and Vice-President.
NOTE E - LOANS RECEIVABLE
During the quarter ended June 30, 2005, the Company made strategic loans
totaling $122,538 for potential future association to an unaffiliated company
that accrues interest at 2% per year and due 12 months from the date of draw.
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2005 and 2004 consist of the following:
2005 2004
-------------- --------------
Computer and office equipment $ 24,700 $ 22,404
Furniture and fixtures 2,281 2,281
Machinery and equipment 8,462 5,112
-------------- --------------
$ 35,443 $ 29,797
Less: Accumulated Depreciation (20,174) (12,398)
-------------- --------------
$ 15,269 $ 17,399
============== ==============
Depreciation expense for the three months ended June 30, 2005 and 2004 was
$1,488 and $1,583, respectively.
F-31
NOTE G - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at June 30, 2005 and 2004 consist of the
following:
2005 2004
-------------- --------------
Payables to vendors 354,063 409,636
Accrued taxes 935 500
Accrued interest payable (Note J) 5,705 --
-------------- --------------
360,703 410,136
============== ==============
NOTE H - NOTES PAYABLE
Notes payable at June 30, 2005 and 2004, are as follows:
- ---------------------------------------------------------------------------
2005 2004
- ---------------------------------------------------------------------------
Unsecured demand note payable to Ron and
Dori Arks, bearing interest at 1.5% per
month. $ 25,000
- ---------------------------------------------------------------------------
Unsecured demand note payable to Ron and
Dori Arks, bearing interest at 2% per
month. 27,292
- ---------------------------------------------------------------------------
Unsecured demand note payable to Myrwood
and Coral Guy, bearing interest at 2%
per month. 89,992
- ---------------------------------------------------------------------------
Unsecured demand note payable to Ty Guy,
bearing interest at 2% per month. 79,991
- ---------------------------------------------------------------------------
Unsecured demand note payable to John
Helms, bearing interest at 2% per month. 199,991
- ---------------------------------------------------------------------------
Unsecured demand note payable to New Heart
Ministries, bearing interest at 2% per
month. 39,992
- ---------------------------------------------------------------------------
$ 462,258 $ --
===========================================================================
Related party Notes payable at June 30, 2005 and 2004, are as follows:
- ---------------------------------------------------------------------------
2005 2004
- ---------------------------------------------------------------------------
Unsecured note payable to Donald A.
Dallape, President, bearing interest at
2% per month due every 30 days. $ 280,508
- ---------------------------------------------------------------------------
Unsecured note payable to Scott
Swendener, Vice-President, bearing
interest at 2% per month due every 30
days. 324,358
- ---------------------------------------------------------------------------
Unsecured demand note payable to
Sheryl Gardner , bearing interest at 2%
per month. 89,992
- ---------------------------------------------------------------------------
Unsecured note payable to Geno Apicella,
Vice-President, non-interst bearing 9,500
- ---------------------------------------------------------------------------
$ 99,492 $ 604,866
===========================================================================
During 2004, the notes payable to the two officers of the Company were replaced
by notes payable to outside individuals. A note payable to the Company
Vice-President was issued in February 2005.
F-32
NOTE I - COMMITMENT
During the three months ended June 30, 2005, the Company leased office and
warehouse space at a rate of $6,806 per month with lease terms extending through
April 30, 2006. Future lease payments under this operating lease are as follows:
Approximate Total
Location Square Feet Current Lease Term Monthly Rent Commitment
- ------------------------------------------------------------------------------------------------------------------------
1284 Puerta Del Sol Suite 150 8,883 January 1, 2005 through December 31, 2005 $ 6,806 $ 40,836
1284 Puerta Del Sol Suite 150 8,883 January 1, 2006 through April 30, 2006 $ 7,216 $ 86,592
--------------
Total Future Commitments $ 127,428
==============
The Company incurred $20,418 and $12,792 in rent expense during the three months
ended March 31, 2005 and 2004, respectively.
NOTE J - STOCKHOLDERS' EQUITY
On August 18, 2004, the Company entered into a service contract valued at
$100,000 in exchange for 400,000 shares of common stock which represents the
fair market value of the stock as of that date. The contract term is 24 months.
For the year ended December 31, 2004, the company recognized $18,493 of expense
in connection with this contract with the remaining balance of $81,507 accounted
for as prepaid expense. During the three and six months ended June 30, 2005, the
Company recognized expense of $12,466 and $24,795, respectively. The shares
related to this contract are accounted for in the equity section of the balance
sheet as Common Stock Payable.
On January 2, 2005, the Company agreed to pay their SEC attorney 100,000 shares
of common stock valued at $25,000 which represents the fair market value of the
stock as of that date for services rendered during the quarter ended March 31,
2005. We expensed the full value of the common stock during the quarter ended
March 31, 2005. The shares related to this contract are accounted for in the
equity section of the balance sheet as Common Stock Payable.
On March 1, 2004, the Company entered into a service contract valued at $62,500
in exchange for 250,000 shares of common stock which represents the fair market
value of the stock as of that date. The contract term is 24 months. For the
three months ended March 31, 2005, the company recognized $2,568 of expense in
connection with this contract with the remaining balance of $59,932 accounted
for as prepaid expense. During the three and six months ended June 30, 2005, the
Company recognized expense of $7,791 and $10,360, respectively. The shares
related to this contract are accounted for in the equity section of the balance
sheet as Common Stock Payable.
On September 9, 2004, the Company commenced a limited Private Placement
Memorandum (PPM) to raise up to $1,750,000 through the sale of the Company's
common stock at a price of $0.25 per share. During the year ended December 31,
2004, the Company received $69,500 in exchange for 278,000 shares of common
stock. Also in connection with the PPM, during the period January 1, 2005 to
June 30, 2005 the Company received $561,430 in cash and $98,570 in commitments
in exchange for 2,640,000 shares of common stock. In total, the PPM will result
in the issuance of 2,918,000 shares of common stock. The amounts related to
these cash receipts and commitments are accounted for in the equity section of
the balance sheet as Common Stock Payable.
F-33
In May 2005, the Company closed its private placement to any further investment
so that it could submit an SB-2 registration statement pursuant to an initial
offering through which the Company intends to become publicly traded on the
Over-the-Counter Bulletin Board.
As of February 28, 2005, all of the notes payable outstanding at December 31,
2004, totaling $614,800, were cancelled and new notes payable was issued
accruing interest at 2% per annum until February 28, 2006. At that time, the
remaining outstanding principal balance and all interest accrued but unpaid can
be paid with the Company's common stock at a conversion price of $0.25 per share
for every dollar of interest owed to the note holder. All interest accrued but
unpaid as of February 28, 2005 was converted to the Company's common stock at
the conversion price of $0.25 per share for every dollar of interest owed to the
note holder representing an addition to stockholders' equity of approximately
$104,232 and 416,928 shares of common stock payable. The shares related to this
conversion are accounted for in the equity section of the balance sheet as
Common Stock Payable.
In April 2005 the Company agreed to issue 8,500,000 shares of its common stock
to its founding members and key employees for value received of $2,125,000, or
$0.25 per share. The company also agreed to issue 3,060,000 shares of its common
stock in consideration for professional and consulting services to be rendered
valued at $765,000, or $0.25 per share and included in prepaid expenses. The
amounts related to these payables are accounted for in the equity section of the
balance sheet as Common Stock Payable.
The Company did not issue any stock for the years ending December 31, 2003, 2004
or the six month period ending June 30, 2005. All share purchases and issuances
are recorded to common stock payable/subscribed as of June 30, 2005 and will be
reclassified to common stock and additional-paid-in-capital upon issuance. Our
earnings per share calculation in the Statement of Operations is on an
"if-issued" basis and reflects the weighted average common stock that would have
been outstanding had all shares that were purchased for cash and all shares
issuable for services been issued.
NOTE K - NET OPERATING LOSS CARRY FORWARD
In assessing the ability to realize deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. At December 31, 2004 a
valuation allowance for the full amount of the net deferred tax asset was
recorded because of uncertainties as to the amount of taxable income that would
be generated in future years.
United States Corporation Income Taxes
- ----------------------------------- ---------------- -- ------------------------
Period of Loss Amount Expiration Date
- ----------------------------------- ---------------- -- ------------------------
December 31, 2004 $420,935 December 31, 2024
- ----------------------------------- ---------------- -- ------------------------
Prior to November 2004 the Company was organized as an S-Corporation and all
losses were distributed and recognized through the tax returns of the owners.
F-34
The loss for the six months ended June 30, 2005 was $2,518,983. As of June 30,
2005 a valuation allowance for the full amount of the net deferred tax asset has
been recognized over the periods for $1,175,967, based on an anticipated tax
rate of 40%.
NOTE L - GOING CONCERN AND MANAGEMENT'S PLANS
The Company has suffered recurring losses from operations since inception. In
addition, the Company has yet to generate an internal cash flow from its
business operations. These factors give raise substantial doubt about its
ability to continue as a going concern.
Management's plans with regard to these matters encompass the following actions:
1) obtain funding form new investors to alleviate the Company's working capital
deficiency, and 2) implement a plan to generate additional sales. The Company's
continued existence is dependent upon its ability to resolve its liquidity
problems and increase profitability in its current business operations. However,
the outcome of management's plans cannot be ascertained with any degree of
certainty. The accompanying financial statements do not include any adjustments
that might result from the outcome of these risks and uncertainty.
NOTE M - SUBSEQUENT EVENT
On July 1, 2005, the Company made a strategic loan (see NOTE E) for $76,940.
From July 22, 2005 through August 8, 2005, Company issued 15,644,928 shares of
common stock related to the September, 2004 private placement (2,918,000),
founder's shares (8,500,000), accrued interest conversion (416,928) and service
providers (3,810,000) as described in Note J hereto.
F-35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
As permitted by Section NRS 78.138 of the Nevada State Corporation Law, we have
adopted provisions in our certificate of incorporation and bylaws that will be
in effect upon the completion of this offering that limit or eliminate the
personal liability of our directors for a breach of their fiduciary duty of care
as a director. The duty of care generally requires that, when acting on behalf
of the corporation, directors exercise an informed business judgment based on
all material information reasonably available to them. Consequently, a director
will not be personally liable to us or our stockholders for monetary damages or
breach of fiduciary duty as a director, except for liability for:
o any breach of the director's duty of loyalty to us or our
stockholders;
o any act or omission not in good faith or that involves intentional
misconduct or a knowing violation of law;
o any act related to unlawful stock repurchases, redemptions or other
distributions or payments of dividends; or
o any transaction from which the director derived an improper or
personal benefit.
These limitations of liability do not affect the availability of equitable
remedies such as injunctive relief or rescission. Our amended and restated
certificate of incorporation also authorizes us to indemnify our officers,
directors and other agents to the fullest extent permitted under Nevada law.
As permitted by Section NRS 78.138 of the Nevada State Corporation Law, our
bylaws provide that:
o we may indemnify our directors, officers, and employees to the
fullest extent permitted by the Nevada State Corporation Law,
subject to limited exceptions;
o we may advance expenses to our directors, officers and employees in
connection with a legal proceeding to the fullest extent permitted
by the Nevada State Corporation Law, subject to limited exceptions;
and
o the rights provided in our amended and restated bylaws are not
exclusive.
Our certificate of incorporation, attached as Exhibit 3.1 hereto, and our
bylaws, attached as Exhibit 3.2 hereto, provide for the indemnification
provisions described above and elsewhere herein.
Reference is made to the following documents filed as exhibits to this
registration statement regarding relevant indemnification provisions described
above and elsewhere in this registration statement:
Exhibit
Document Number
Articles of Incorporation Exhibit 3.1
Bylaws Exhibit 3.2
Item 25. Other Expenses Of Issuance And Distribution
The following table sets forth the costs and expenses payable by us in
connection with the offering of the common stock being registered. All amounts
are estimates except the SEC Registration Fee.
SEC registration fee $422.28
Accounting fees and expenses $50,000.00
Legal fees and expenses $50,000.00
Transfer agent and registrar fees and expenses $10,000.00
Directors and officers insurance premium $25,000.00
Miscellaneous $15,000.00
Total $150,422.28
49
Item 26. Recent Sales of Unregistered Securities
The following list sets forth information regarding all securities we have sold
since September 2004.
1. In the period beginning in July 2004 through May 27, 2005, we sold an
aggregate of 2,918,000 shares of our common stock for aggregate cash
consideration of $729,500.
a. In July, 2004, we sold 24,000 shares of common stock to 18
individuals for consideration of $6,000.
b. In August, 2004 we sold 94,000 shares of common stock to 18
individuals for consideration of $.25 per share or a total of
$23,500.
c. In October, 2004 we sold 120,000 shares of common stock to 2
individuals for consideration of $.25 per share for a total of
$30,000.
d. In January, 2005, we sold 600,000 shares of common stock to two
individuals for consideration of $.25 per share or a total of
$150,000.
e. In February, 2005, we sold 80,000 shares of common stock to two
individuals for consideration of $.25 per share for a total of
$20,000.
f. In March, 2005, we sold 50,000 shares of common stock to one
individual for consideration of $.25 per share for a total of
$12,500.
g. In April, 2005, we sold 1,050,000 shares of common stock to two
individuals for consideration of $.25 per share for a total of
$262,500.
h. In May, 2005 we sold 900,000 shares of common stock to ten
individuals for consideration of $.25 per share for a total of
$225,000.
All such sales of the Company's stock did not involve any public offering. All
sales were completed as private offerings to accredited investors/affiliates of
the issuer without general solicitation. The shares sold pursuant to the private
offerings were issued in July 2005 through August 2005.
The issuance of securities in the transactions described above were deemed
exempt from registration under the Securities Act in reliance on Section 4(2) or
Regulation D promulgated thereunder as transactions by an issuer not involving
any public offering. The recipients of securities in each such transaction
represented their level of sophistication or status as an accredited investor
and their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and other instruments issued in
such transactions. All recipients either received adequate information about us
or had access, through employment or other relationships, to such information.
There were no underwriters employed in connection with any of the transactions
set forth in this Item 26.
50
Item 27. Exhibits
Exhibit Exhibit Description
Number
- --------------------------------------------------------------------------------
3.1. Articles of Incorporation of the Registrant*
3.2. Bylaws*
3.3. Amended Articles of Incorporation of the Registrant*
4.1. Specimen common stock certificate*
4.2. Promissory Note, dated January 28, 2005 by and between Registrant
and Ron and Dori Arko*
4.3. Promissory Note, dated January 28, 2005 by and between Registrant
and Don Dallape and Scott * Swendener
4.4. Promissory Note, dated January 28, 2005 by and between Registrant
and Sheryl Gardner*
4.5. Promissory Note, dated January 28, 2005 by and between Registrant
and John Helms*
4.6. Promissory Note, dated January 28, 2005 by and between Registrant
and Myrwood and Coral Guy*
4.7. Promissory Note, dated January 28, 2005 by and between Registrant
and Ty Guy*
4.8. Promissory Note, dated January 28, 2005 by and between Registrant
and New Heart Ministries*
5.1 Opinion of Michael L. Corrigan, Atty. At Law (restated)
10.1 Material Contracts - IR Agreement *
10.2 Material Contracts - Consulting Agreement *
10.3 Material Contracts - Consulting Agreement*
10.4 Material Contracts - Consulting Agreement *
10.5 Material Contracts - Consulting Agreement *
10.6 Material Contracts - Consulting Agreement *
10.7 Lease Agreement *
10.8 Employment Agreement - Don Dallape *
10.9 Employment Agreement - Scott Swendener *
10.10 Employment Agreement - Geno Apicella *
10.11 Factor Agreement, dated as of May 10, 2004 by and between the
Registrant and Benefactor Funding Inc. *
10.12 License Agreement, dated as of April 28, 2005 by and between the
Registrant and Eagle Rider, Inc. *
10.13 License Agreement, dated as of March 18, 2003 by and between the
Registrant and Yamaha Motor Corp. *
10.14 License agreement dated as of March 25,2003 by and between the
Registrant and KTM of America. *
10.15 License agreement dated as of September 27,2004, by and between the
Registrant and Redline Racing *
10.16 License agreement dated as of March 24, 2003, by and between the
Registrant and AMA Inc. *
10.17 Form of Indemnity Agreement between the Registrant and each of its
directors and executive officers *
10.18 Employment Agreement - Sheryl Gardner *
10.19 Material Contracts - Consulting Agreement *
10.20 Material Contracts - Professional Services Agreement *
16.1 Change in Certifying Accountant *
23.1 Consent of Bedinger & Company independent registered public
accounting firm (Restated) *
23.2 Consent of Michael L. Corrigan (included in Exhibit 5.1) *
23.3 Consent of Traci J. Anderson independent registered public
accounting firm
* Previously filed with our Registration Statement on Form SB-2/A on August 30,
2005
Item 28. Undertakings
The undersigned registrant hereby undertakes:
1. To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statements to:
a. include any prospectus required by Section 10(a)(3) of the
Securities Act;
b. reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement; and
c. include any additional or changed material information on the
plan of distribution.
2. That, for determining liability under the Securities Act, it will
treat each post-effective amendment as a new registration statement
of the securities offered, and the offering of the securities at
that time to be the initial bona fide offering.
3. To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
4. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of
such issue.
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Clemente, State of California, on the 15th day of
September, 2005.
51
EXECUTE SPORTS, INC.
/s/ Don Dallape
------------------------------------
Don Dallape
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
----------------------- -------------------------------------------- ------------------
/s/ Donald Dallape Chief Executive Officer and September 15, 2005
-------------------- Chairman of the Board
Donald Dallape (principal executive officer)
/s/ Sheryl Gardner Chief Financial Officer and Secretary September 15, 2005
-------------------- (principal financial and accounting officer)
Sheryl Gardner
/s/ Todd M. Pitcher Director September 15, 2005
---------------------
Todd M. Pitcher
/s/Craig Washington Director September 15, 2005
---------------------
Craig Washington
52