United States
Securities And Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 Or 15(d) Of The Securities Exchange Act
Of 1934
For The Quarterly Period Ended March 31, 2007.
[_] Transition Report Under Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934
For The Transition Period From ______________ To _________________
Commission File Number 333-125868
Execute Sports, Inc.
(Exact Name Of The Small Business Issuer As Specified In Its Charter)
Nevada 30-0038070
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
21143 Hawthorne BL #425
Torrance, CA 90503
(310) 515-8902
(Address, Including Zip Code, And Telephone Number, Including
Area Code, Of Registrant's mailing address in California)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
The number of outstanding shares of the issuer's common stock, $0.001 par value,
as of April 25, 2007 was 53,863,133.
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
TABLE OF CONTENTS
Page
----
Part I
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2007 (Unaudited) ............. 1
Consolidated Statements of Operations for the three months
Ended March 31, 2007 and 2006(unaudited) .............................. 2
Consolidated Statements of Stockholders Equity for the
three months Ended March 31, 2007 (unaudited) ......................... 3
Consolidated Statements of Cash Flows for the
three months ended March 31, 2007 and 2006 (unaudited) ................ 4
Notes To Financial Statements (Unaudited) ............................... 5
Item 2. Management's Discussion and Analysis ........................... 25
Item 3. Controls and Procedures ........................................ 29
Part II - Other Information
Item 1. Legal Proceedings .............................................. 30
Item 2. Unregistered Sales of Equity Securities and use of Proceeds .... 30
Item 3. Defaults Upon Senior Notes ..................................... 30
Item 6. Exhibits ....................................................... 31
Signatures .............................................................. 32
EXECUTE SPORTS, INC.
Consolidated Balance Sheet
March 31, 2007
(Unaudited)
March 31,
2007
------------
ASSETS
CURRENT ASSETS
Cash $ 24,935
Accounts receivable, net (Note B) 214,701
Inventory (Note C) 89,959
Deferred financing costs (Note G) 67,941
Loans receivable, net (Note D) 146,128
Other current assets 6,441
------------
TOTAL CURRENT ASSETS 550,105
------------
Fixed assets (Note E)
Cost 141,288
Accumulated Depreciation (45,184)
------------
Net 96,104
------------
TOTAL ASSETS $ 646,209
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses (Note F) $ 386,172
Secured borrowings 7,980
Convertible debenture (Note G) 830,801
Notes Payable (Note H) 240,768
Related party notes payable (Note H) 203,513
Convertible purchase order notes payable (Note I) 125,000
------------
TOTAL CURRENT LIABILITIES 1,794,234
------------
STOCKHOLDERS' EQUITY (Note J)
Common stock, par value $.001, 100,000,000 shares authorized
authorized; issued and outstanding 50,625,863 at
March 31, 2007 50,621
Additional paid-in capital 9,421,864
Retained earnings *deficit** (10,620,510)
------------
TOTAL STOCKHOLDERS' EQUITY (1,148,025)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 646,209
============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
EXECUTE SPORTS, INC.
Consolidated Statements of Operations
Three Months Ended March 31, 2007 and 2006
(Unaudited)
Three Months Ended
March 31,
-------------------------
2007 2006
----------- -----------
REVENUES
Sales $ 553,482 $ 595,534
Cost of sales 340,947 477,942
----------- -----------
Gross profit 212,535 117,592
EXPENSES
General and administrative expenses 338,463 804,643
Selling and advertising 22,835 127,195
Depreciation expense 2,530 1,138
----------- -----------
Total expense 363,828 932,976
Income (loss) from operations (151,293) (815,384)
OTHER INCOME AND EXPENSES
Interest income -- 4,806
Other income 462 2,803
Interest expense (70,411) (16,846)
Loss due to discount on conversion to stock (54,250) --
Amortization of beneficial conversion feature of convertible debenture (270,295) --
Amortization of warrant discount related to convertible debenture (90,381) --
Amortization of deferred financing costs (36,034) --
----------- -----------
Total other income and expenses (520,909) (9,237)
----------- -----------
Net loss before discontinued operations (672,202) (824,621)
DISCONTINUED OPERATIONS
Income (loss) from discontinued operations (1,421)
Gain (loss) on disposal of discontinued operations 208,112
----------- -----------
Total discontinued operations 206,691 --
----------- -----------
NET INCOME (LOSS) (465,511) (824,621)
=========== ===========
Net (loss) per common share Basic and diluted from continuing operations $ (0.015) $ (0.043)
Net (loss) per common share basic and diluted after discontinued operations $ (0.010) $ (0.043)
Weighted average common shares outstanding basic and diluted 44,853,102 18,971,534
The average shares listed below were not included in the computation per
share because to do so would have been antidilutive for the periods
presented:
Stock options 450,000 900,000
Warrants 3,440,238 156,190
Debt collateralized with common stock 12,792,228 661,556
SEE NOTES TO FINANCIAL STATEMENTS
2
EXECUTE SPORTS, INC.
Consolidated Statement of Stockholder's Equity
As of March 31, 2007
Common Stock
--------------------------------- Additional Retained Total
Number of Payable/ Paid-in Earnings Stockholders
Shares Amount Subscribed Capital *Deficit** Equity
---------- --------- ---------- ---------- ------------ -----------=
December 31, 2005 18,706,501 $18,702 $ 788,900 $4,958,951 $ (4,546,089) $ 1,220,464
Shares subscriptions received 5,130 5,130
Shares issued for acquisition 1,932,569 1,933 (676,400) 674,467 --
Shares issued for director compensation 1,073,808 1,073 (7,500) 36,533 30,106
Shares issued for cash in connection with
the SB-2 filed 6/16/05 300,000 300 (105,000) 104,700 --
Founders shares voluntarily canceled (1,000,000) (1,000) 1,000 --
Shares issued pursuant to warrant exercises 655,000 655 137,595 138,250
Shares issued for cash 200,000 200 69,800 70,000
Shares issued for services 12,303,816 12,304 470,399 482,703
Shares issued for notes payable 1,862,127 1,862 368,480 370,342
Shares issued pursuant to PUT agreement 2,750,049 2,750 161,347 164,097
Stock options granted 85,313 85,313
Beneficial conversion feature of
convertible debenture 1,425,000 1,425,000
Warrant discount to convertible debenture 475,000 475,000
Net loss (5,608,910) (5,608,910)
---------- ------- --------- ---------- ------------ -----------
December 31, 2006 38,783,870 $38,779 $ -- $8,973,715 $(10,154,999) $(1,142,505)
========== ======= ========= ========== ============ ===========
Shares issued for director compensation 1,250,000 1,250 61,250 62,500
Shares issued for services 1,000,000 1,000 49,000 50,000
Shares issued pursuant to put agreement
for repayment of debenture 7,679,788 7,680 263,643 271,323
Shares issued pursuant to put agreement for cash 1,912,205 1,912 74,256 76,168
Net loss (465,511) (465,511)
---------- ------- --------- ---------- ------------ -----------
March 31, 2007 50,625,863 $50,621 $ -- $9,421,864 $(10,620,510) $(1,148,025)
========== ======= ========= ========== ============ ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
EXECUTE SPORTS, INC.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2007 and 2006
(Unaudited)
Three Months Ended
March 31,
---------------------
2007 2006
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $(672,202) $(824,621)
Net gain from discontinued operations 206,691
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation 2,530 1,138
Common stock payable for services 112,500 52,368
Compensation expense on options granted -- 45,938
Loss on the conversion of convertible debt 54,250 --
Amortization of beneficial conversion feature 270,295 --
Amortization of warrant discount related to convertible debenture 90,381 --
Issuance of common stock for convertible debenture 53,126
CHANGES IN CURRENT ASSETS AND CURRENT
LIABILITIES:
(Increase) decrease in current assets:
Accounts receivable 38,236 (112,903)
Inventory (61,604) (219,882)
Prepaid expenses 49,494 123,673
Deferred financing costs 36,034 --
Other current assets (5,441) (10,129)
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (354,111) 269,363
Customer deposits -- (25,262)
--------- ---------
NET CASH USED FOR OPERATING ACTIVITIES (179,821) (700,317)
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan proceeds to unaffiliated company -- (142,436)
Acquisition of furniture and equipment (1,058) (3,306)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (1,058) (145,742)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits -- (1,563)
Common stock subscribed -- 4,828
Issuance of common stock for cash 76,168 232,369
Proceeds from notes payable 8,874 515,000
Repayment of notes payable -- (36,598)
Proceeds from related party notes payable 388,207 58,431
Repayment of related party notes payable (307,300) (12,560)
Secured borrowings (34,521) (229,436)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 131,428 530,471
NET INCREASE *DECREASE** IN CASH (49,451) (315,588)
CASH, beginning of period 74,386 371,135
--------- ---------
CASH, end of period $ 24,935 $ 55,547
========= =========
SUPPLEMENTAL DISCLOSURE:
Taxes paid $ -- $ 12,468
Interest paid $ -- $ 6,000
Other non-cash investing and financing activities:
Shares issued for services $ 112,250 $ 37,054
Shares issued for debt retirement $ 271,323 $ 72,553
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited financial statements of Execute Sports, Inc. as of March 31, 2007
and for the three month periods ended March 31, 2007 and 2006 have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial reporting. Accordingly, they do not include all of the
disclosures required by accounting principles generally accepted in the United
States for complete financial statements and should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Execute Sports, Inc.'s Form 10-KSB for the fiscal year ended December 31, 2006
filed with the SEC on April 16, 2007. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of the interim financial information have been
included. The results of operations for any interim period are not necessarily
indicative of the results of operations for the entire year.
Organization
Execute Sports, Inc. (the "Company") was founded in 2002 as Padova International
USA, Inc. to produce graphics kits and ancillary soft goods for the motocross,
enduro and ATV markets.
In 2003, the Company launched its water sports division under the "Execute
Sports" brand to provide wetsuits, vests, rash guards and ancillary products to
the wake board and ski markets.
On March 3, 2005 the Company changed its name from Padova International U.S.A.,
Inc. (DBA Execute Sports) to Execute Sports, Inc.
In January 2006, the Company expanded its product mix by consummating the
acqusition of Pacific Sports Group, Inc. ("PSG"), which owned and operated
Academy Snowboards, Kampus Wakesk8s, Kampus Wake Shoes and Collective
Development Bags and Bindings. In January, 2007, the Company entered into a
trademark transfer and assignment agreement whereby all right, title, interest
and good will in the Academy brand were transferred to the two former owners of
PSG.
Summary of Significant Accounting Principles
Basis of Presentation
The financial statements include the accounts of Execute Sports, Inc. and its
wholly owned subsidiary PSG under the accrual basis of accounting.
5
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Principles of consolidation
The consolidated financial statements include the accounts of Execute Sports,
Inc. and its subsidiary, which is 100% consolidated in the financial statements.
All material inter-company accounts and transactions have been eliminated.
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
Accounts receivable are reported at the customers' outstanding balances less any
allowance for doubtful accounts. Interest is not accrued on overdue accounts
receivable. The Company evaluates receivables on a regular basis for potential
reserve. During the three months ended March 31, 2007, the allowance for
doubtful accounts did not increase from $49,000 at December 31, 2006.
The Company has entered into a factoring agreement with JD Factors. Pursuant to
the agreement JD Factors' will provide account receivable financing and
factoring to the Company. JD Factors 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.
6
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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 March 31, 2007 and 2006 the Company incurred approximately $0 and $51,355
in advertising expenses, respectively.
7
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Loss per common share
The Company adopted Statement of Financial Accounting Standards No. 128, that
requires 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 covered in this report 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
included in this report.
Income taxes
On November 1, 2004, the Company amended its Articles of Incorporation to make
the transition from an S-Corporation to a C-Corporation. Prior to the
transition, 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 N).
Impact of accounting standards
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and
Error Corrections" ("SFAS 154") which replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, "Reporting Accounting Changes in Interim
Financial Statements". Among other changes, SFAS 154 requires that a voluntary
change in an accounting principle or a change required by a new accounting
pronouncement that does not include specific transition provisions be applied
retroactively with all prior period financial statements presented on the new
accounting principle, unless it is impracticable to do so. SFAS 154 also
provides that (1) a change in method of depreciating or amortizing a long-lived
non-financial asset be accounted for as a change in estimate (prospectively)
that was effected by a change in accounting principle, and (2) correction of
errors in previously issued financial statements should be termed a
"restatement." SFAS No. 154 is effective for accounting changes and correction
of errors made in fiscal years beginning after June 15, 2005. Accordingly, the
Company is required to adopt the provisions of SFAS No. 154 in the first quarter
of fiscal 2006, beginning on January 1, 2006. The Company does not believe that
this recent accounting pronouncement will have a material impact on its
financial position or results of operations.
8
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Impact of accounting standards (Continued)
In February 2006, the FASB issued SFAS 155 "Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133" and in February
2006, the FASB issued SFAS 155 "Accounting for Certain Hybrid Financial
Instruments, an amendment of FASB Statements No. 133 and 140. This Statement
amends FASB Statements No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement resolves
issues addressed in Statement 133 Implementation Issue No. D1, Application of
statement 133 to Beneficial Interests in Securitized Financial Assets. This
Statement:
a. Permits fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation;
b. Clarifies which interest-only strips and principal-only strips are not
subject to the requirements of Statement 133;
c. Establishes a requirement to evaluate interests in securitized financial
assets to identify interests that are freestanding derivatives or that are
hybrid financial instruments that contain an embedded derivative requiring
bifurcation;
d. Clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives; and
e. Amends Statement 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument.
This Statement is effective for all financial instruments acquired or issued
after the beginning of an entity's first fiscal year that begins after September
15, 2006. The fair value election provided for in paragraph 4 of this Statement
may also be applied upon adoption of this Statement for hybrid financial
instruments that had been bifurcated under paragraph 12 of Statement 133 prior
to the adoption of this Statement. Earlier adoption is permitted as of the
beginning of an entity's fiscal year, provided the entity has not yet issued
financial statements, including financial statements for any interim period for
that fiscal year. Provisions of this Statement may be applied to instruments
that an entity holds at the date of adoption on an instrument-by-instrument
basis. The Company does not believe that this recent accounting pronouncement
will have a material impact on their financial position or results of
operations.
9
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Impact of accounting standards (Continued)
In March 2006, the FASB issued SFAS No. 156 ("FAS 156"), "Accounting for
Servicing of Financial Assets--An Amendment of FASB Statement No. 140." Among
other requirements, FAS 156 requires a company to recognize a servicing asset or
servicing liability when it undertakes an obligation to service a financial
asset by entering into a servicing contract under certain situations. Under FAS
156 an election can also be made for subsequent fair value measurement of
servicing assets and servicing liabilities by class, thus simplifying the
accounting and provide for income statement recognition of potential offsetting
changes in the fair value of servicing assets, servicing liabilities and related
derivative instruments. The Statement will be effective beginning the first
fiscal year that begins after September 15, 2006. The Company does not believe
that this recent accounting pronouncement will have a material impact on its
financial position or results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements." The standard provides guidance for using
fair value to measure assets and liabilities. Under the standard, fair value
refers to the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants in the market
in which the reporting entity transacts. The standard clarifies the principle
that fair value should be based on the assumptions market participants would use
when pricing the asset or liability. In support of this principle, the standard
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The Statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company is currently evaluating the Statement to
determine what impact, if any, it will have on the Company.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132R"
("SFAS 158"). This statement requires balance sheet recognition of the funded
status, which is the difference between the fair value of plan assets and the
benefit obligation, of pension and postretirement benefit plans as a net asset
or liability, with an offsetting adjustment to accumulated other comprehensive
income in shareholders' equity. In addition, the measurement date, the date at
which plan assets and the benefit obligation are measured, is required to be the
company's fiscal year end. The Company does not believe that this recent
accounting pronouncement will have a material impact on its financial position
or results of operations.
10
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Impact of accounting standards (Continued)
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities".
This statement permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This Statement is
expected to expand the use of fair value measurement, which is consistent with
the Board's long-term measurement objectives for accounting for financial
instruments. This Statement is effective as of the beginning of an entity's
first fiscal year that begins after November 15, 2007. The Company does not
believe that this recent accounting pronouncement will have a material impact on
its financial position or results of operations.
Concentrations of credit risk
The Company performs ongoing credit evaluations of its customers. In the three
months ended March 31, 2007, the Company's two largest customers accounted for
59% (47% and 12%) of accounts receivable. In the three months ended March 31,
2006, the Company's largest customer accounted for 30% of accounts receivable.
For the three months ended March 31, 2007, two customers individually accounted
for approximately 91% of sales (65% and 26%). For the three months ended March
31, 2006, one customer accounted for approximately 68% of sales.
For the three months ended March 31, 2007 and 2006, approximately 0% and 2%,
respectively, of the Company's net sales were made to customers outside the
United States.
The Company is dependent on third-party manufacturers and distributors for all
of its supply of inventory. For the three months ended March 31, 2007, the
Company's two largest suppliers accounted for 96% (77% and 19%) of product
purchases. For the three months ended March 31, 2006, the Company's three
largest suppliers individually accounted for approximately 82% (57%, 15% and
10%) of product purchases. 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.
11
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
Disclosure about Fair Value of Financial Instruments
The Company estimates that the fair value of all financial instruments at March
31, 2007, 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
On September 12, 2005, the Company entered into a factoring agreement with JD
Factor ("Factor") subsequent to terminating the factoring agreement with
Benefactor Funding Corp. in August 2005. The Factor purchases certain customer
accounts receivable on a non-recourse basis with certain broad exceptions. 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. Under certain circumstances the
Factor has the right to charge back to the Company for specific invoices. 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 of the Company's 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 March 31, 2007, the balance
due to the Factor was $7,980 collateralized by factored receivables of $9,975.
The accounts receivable balance as of March 31, 2007 is reported net of an
allowance for doubtful accounts of $49,000.
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 March 31, 2007:
2007
-------
Finished goods $89,959
=======
12
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE D - LOANS RECEIVABLE
During 2005 and 2006, the Company made strategic loans totaling $396,127 for
potential future association to an unaffiliated company that accrues interest at
2% per year and due 12 months from the date of draw.
As of March 31, 2007, the entire balance of the loans were in default. The
Company has created a reserve of $250,000 against the loans
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2007 consists of the following:
2007
--------
Computer and office equipment $127,745
Furniture and fixtures 2,281
Machinery and equipment 11,262
--------
$141,288
Less: Accumulated Depreciation (45,184)
--------
$ 96,104
========
Depreciation expense for the three months ended March 31, 2007 and 2006 was
$2,530 and $1,138, respectively.
NOTE F - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at March 31, 2007 consist of the
following:
2007
--------
Payables to vendors $ 62,364
Payables for inventory 237,461
Payables for professional services 30,957
Accrued payroll 35,023
Accrued interest 20,334
Accrued taxes 33
--------
$386,172
========
13
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE G - CONVERTIBLE DEBENTURE
On May 15, 2006, the Company completed a private placement of convertible
debentures generating gross proceeds of $1.9 million, and the issuance of
warrants to purchase $475,000 worth of the Company's common stock. Third party
fees totaled $191,000, which were paid in cash.
The terms of the warrants and debentures are substantially the same. The
exercise price of the warrants is calculated the same as for the conversion
price of the convertible debentures. The warrants and debentures are immediately
exercisable. The debentures bear interest at 12% per annum, interest payable
monthly at the option of the Holder in cash or common stock. The debenture
agreement payment schedule provides for full repayment by September 30, 2011,
the maturity date of this debenture, any remaining principle balance
automatically converts to the Company's common stock.
Prior to maturity, the debentures and warrants are convertible into the
Company's common stock at a fixed conversion price equal to the lowest closing
bid price of the common stock between the issuance date and the date of the
filing the registration statement covering resale of the shares underlying the
debenture, or at a conversion price of fifteen cents ($.15). Since the Company's
stock price did not decline below $0.15 prior to the filing of the registration
statement, $0.15 is the fixed conversion price for this debenture and associated
warrants.
The debentures provide that the Holders may only convert the debenture if the
number of shares held by the lender or its affiliates after conversion would not
exceed 4.99% of the outstanding shares of the Company's common stock following
such conversion.
In connection with the transaction, we entered into a Registration Rights
Agreement. Pursuant to the terms of the Registration Rights Agreement, within
twenty-one calendar days following the initial closing date, or June 5, 2006,
the Company was required to file with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended, covering
the resale of all of the common stock underlying the convertible debenture and
issuable upon the exercise of the warrants based on a conversion price of $0.15
per share.
The Registration Rights Agreement further provides that if a registration
statement is not filed within 21 days from the initial closing date, then in
addition to any other rights the Holder may have, and until the registration
statement is filed, the Company would be required to pay the Holder an amount in
cash, as liquidated damages, equal to an aggregate two percent (2%) of the
purchase price of the debentures. In addition, the conversion price would
decrease by 10% of the fixed conversion price for each fifteen (15) day calendar
period that a registration statement is not filed. The Registration Rights
Agreement further provides that if a registration statement is not declared
effective within 80 days from the initial closing date, then the Company would
be required to pay the Holder an amount in cash, as liquidated damages, equal to
an aggregate two percent (2%) of the purchase price of the debentures until the
registration statement becomes effective. The Company initially filed the
registration statement on May 24, 2006 and it was declared effective on June 15,
2006, or 30 days from the initial close date both within the time frames set
forth in the Registration Rights Agreement.
14
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE G - CONVERTIBLE DEBENTURE (Continued)
The issuance costs related to the convertible debentures of approximately
$191,000 in cash were capitalized to prepaid expenses on the balance sheet and
are being amortized over the term of the repayment schedule which is calculated
based upon the effective interest method. For the three months ended March 31,
2007, the Company recognized $36,034 as other expense related to the
amortization of the issuance costs with a $67,941 balance remaining in prepaid
expenses.
Pursuant to Paragraph 9-32 of EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, the
warrants issued in connection with the convertible debentures meet the
requirements of and are accounted for as permanent equity since the filing of an
effective registration statement within the allotted time frames negated any
liquidated damages, settlement is by delivery of shares only and the exercise
price is fixed. The initial value of the warrants was treated as a discount to
the debenture and recorded as additional paid in capital. The Company calculated
the initial value of the warrants on the closing date of the transaction as
being $633,333 as determined using a Black-Scholes option pricing model with the
following assumptions: expected term 5 years, exercise price $0.15, volatility
7.6%, risk free rate 5.15%, and zero dividend yield. The total value of the
warrants and the debenture was $2.53 million of which the warrants represented
25%. Thus, the relative value of the warrants to the total value, or 25% was
applied to the debenture value of $1.90 million yielding a warrant discount of
$475,000. The discount to the debenture is being amortized over the term of the
repayment schedule, or sixteen (16) months, and is calculated based upon the
effective interest method. During the three months ended March 31, 2007, the
Company recognized $90,381 in non-cash amortization expense related to the
warrant discount.
The Company determined that the $1.90 million debenture was issued with a
beneficial conversion feature ("BCF") due to the conversion price ($0.15) being
less than the closing stock price ($.32) on the date of issuance, and the
conversion feature being in-the-money. Thus, pursuant to EITF 00-27, 27,
Application of Issue No. 98-5 to Certain Convertible Instruments, the BCF has
been determined based on the gross debenture amount less the portion
attributable to the warrants described above, and recorded as a discount to
reduce the carry value of the debenture and increase additional-paid-in-capital.
The Company calculated the initial BCF on the closing date of the transaction to
be $1,615,000 using the intrinsic value method.
Since this amount is greater than the $1,425,000 remaining value of the
debenture after deducting for the warrant discount described above, the Company
reduced the initial carry value of the debenture to zero effectively recording a
BCF of $1,425,000 as additional-paid-in-capital. The BCF discount is being
amortized over the debenture repayment term of sixteen (16) months and
calculated based upon the effective interest method. During the three months
ended March 31, 2007, the Company recognized $270,295 in non-cash amortization
expense attributable to the amortization of the beneficial conversion feature
discount.
15
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE G - CONVERTIBLE DEBENTURE (Continued)
In connection with the debenture, the Company entered into a separate Investment
Agreement on May 15, 2006 with Dutchess Private Equities Fund, L.P.
("Dutchess"), which provides for the sale and issuance from time to time of up
to $10,000,000 in shares of Common Stock for a period of up to 36 months from
the date the Registration Statement is declared effective. The maximum number of
shares that the Company may put to Dutchess at any one time shall be equal to,
at the Company's election, either (a) 200% of the average daily volume in the
U.S. market of the Common Stock for the ten trading days prior to the date the
Company notifies Dutchess of its intent to sell shares to Dutchess, multiplied
by the average of the three daily closing bid prices immediately preceding the
date a Put Notice is delivered, or (b) a number of shares having a value of
$100,000. The Company may not submit a Put Notice until after the completion of
a previous sale under the Investment Agreement. The purchase price for the
Common Stock to be sold shall be equal to 93% of the lowest closing best bid
price of the Common Stock during the five-day period following the date the
Company delivers a Put Notice. Since the price of the shares put to Dutchess are
expected to be below market price at 93% of the market price, there is no added
benefit to the Company. Thus, the Company has not recorded an asset related to
this agreement. Upon the delivery of shares and receipt of cash related to this
Investment Agreement, the Company records the increase in cash or decrease in
debenture interest and principle, and an increase in common stock and additional
paid in capital. During the three months ended March 31, 2007, the Company
placed puts with Dutchess totaling $347,491 resulting in the issuance of
9,591,993 shares of common stock. Of the $347,491, $76,168 was received as cash
and $54,250 was recognized as a loss due to the conversion discount and $217,073
was applied to accrued interest and principle.
During the three months ended March 31, 2007, the Company recognized $54,250 as
a non-cash loss due to the conversion discount applied upon the conversion of
interest and principle into common stock of the Company pursuant to the
Investment Agreement and Debenture Agreement.
During the three months ended March 31, 2007, the Company recognized $53,049 in
interest expense related to the debentures.
As of March 31, 2007, the actual dollar amount due to the Holders of the
Company's debentures was $1,728,760. The following table represents the actual
balance due compared to the amount recorded on the balance sheet as of March 31,
2007:
March 31, 2007
--------------
Amount borrowed under the convertible debenture 1,900,000
Accrued interest 85,901
Payments applied to principle (257,141)
---------
Debenture balance 1,728,760
Unamortized beneficial conversion feature (719,128)
Unamortized Warrant discount (178,831)
---------
Recorded debenture balance 830,801
16
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE H - NOTES PAYABLE
Notes payable at March 31, 2007 is as follows:
Unsecured demand note payable to Ron and Dori Arko, bearing interest
at 2% per year; currently in default. $ 9,539
Unsecured demand note payable to John Helms, bearing interest at 2%
per year; currently in default. $159,829
Unsecured demand note payable to New Heart Ministries, bearing
interest at 2% per year; currently in default. $ 2,925
Unsecured demand note payable to Pacific Sports Investors LLC,
bearing interest at 10% per year; currently in default. $ 40,375
Secured demand note payable to Christian Beckas, bearing interest at
12% per year collateralized by 80,000 shares of common stock;
currently in default. $ 19,300
Secured demand note payable to Hector Peneda, bearing interest at
12% per year collateralized by 40,000 shares of common stock;
currently in default. $ 8,800
--------
Total $240,768
========
Related party Notes payable at March 31, 2007 is as follows:
Secured demand note payable to Craig Hudson, bearing interest at 12%
per year collateralized by 116,000 shares of common stock;
currently in default $ 32,065
Secured demand note payable to Robert Bridges, bearing interest at
9% per year and is collateralized by 240,000 shares of common
stock; currently in default $ 60,000
Secured demand note payable to Tom Bridges, bearing interest at 9%
per year and is collateralized by 240,000 shares of common stock;
currently in default $ 60,000
Unsecured note payable to Geno Apicella, Vice-President,
non-interest bearing. $ 4,223
Unsecured demand note payable to Sheryl Gardner, CFO, bearing
interest at 4% per year; currently in default $ 47,225
--------
Total $203,513
========
The interest rate offered on the 0% - 4% loans above is below market rate. The
Company has determined the difference between the stated interest rate and the
rate available at the date of the loan(s) would be immaterial to these financial
statements
During the three months ended March 31, 2007, the Company recognized $4,973 of
interest expense related to the notes above. Total interest paid during the
three months ended March 31, 2007 and 2006 was $0 and $6,000, respectively.
Interest paid to related parties during the three months ended March 31, 2007
and 2006 was $0 and $0, respectively.
The Company anticipates entering into debt conversion agreements with certain of
the noteholders to convert the principle and interest into shares of common
stock.
17
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE I - PURCHASE ORDER FINANCING
During the three months ended March 31, 2007, the Holders of our convertible
debentures advanced to the Company $370,000 to be used specifically for
production of watersports goods. The advances bear interest of three percent
(3%) per month and mature within three months. The advances are secured by the
Company's assets and are convertible into shares of common stock of the Company
at the lenders discretion pursuant to the Investment Agreement as described in
Note G above. During the three months ended march 31, 2007, the Company repaid
$245,000 of principle and incurred $12,250 of interest expense related to the
purchase order financing. No debt was converted into common stock.
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 common stock as of that date. The contract term is 24
months. During the three months ended March 31, 2007 and 2006, the Company
recognized $0 and $31,507, respectively, of expense in connection with this
contract, which has been fully expensed as of December 31, 2006.
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, 2007 and 2006, the Company recognized $5,137 and
$7,705, respectively, of expense in connection with this contract, which has
been fully expensed as of March 31, 2007.
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 year ended December 31, 2005,
the Company received $660,000 in cash in exchange for 2,640,000 shares of common
stock. In total, the PPM resulted in the issuance of 2,918,000 shares of common
stock and gross proceeds of $729,500.
On January 2, 2005, the Company paid 100,000 shares of common stock for legal
services 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.
As of February 28, 2005, all of the notes payable outstanding at December 31,
2004, totaling $614,800, were cancelled and new notes payable were 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 416,931 shares of common stock.
18
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE J - STOCKHOLDERS' EQUITY (Continued)
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.
During the three months ended June 30, 2005, the company issued 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. During the three months
ended March 31, 2007 and 2006, the Company recognized $0, and $101,384,
respectively, of expense in connection with these contracts which have been
fully expensed as of December 31, 2006.
The Company did not issue any stock during the years ending December 31, 2003,
2004 or the six month period ending June 30, 2005. From July 22, 2005 through
August 9, 2005, the Company issued 15,644,931 shares of common stock related to
the items above. Our December 31, 2005 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 that would be issued for services had been
issued on the date of purchase or contract date for services.
During the three months ended December 31, 2005, the Company received net
proceeds of $1,176,550 and issued 3,061,570 shares of common stock with
$105,000, or 300,000 shares unissued and included in common stock payable as of
December 31, 2005. On January 8, 2006, the Company issued the 300,000 shares.
On January 3, 2006, the Company issued 200,000 shares of common stock in
exchange for $70,000. These shares were issued pursuant to the company's SB-2
registration statement originally filed with the Securities and Exchange
Commission on June 16, 2005 with final approval occurring on September 27, 2005,
our final amended SB-2/A filing. In total, the Company issued 3,561,570 shares
of common stock in exchange for $1,246,550.
On December 31, 2005, the Company's board of directors approved the issuance of
21,428 shares of common stock payable to a member of the Board of Directors for
services rendered during fiscal year 2005. The shares were expensed in fiscal
2005 and valued at fair market value, or $0.35, resulting in compensation
expense of $7,500. The shares were issued on March 6, 2006.
On December 28, 2005, the Company and the stockholders of PSG entered into a
binding letter of intent providing for the acquisition of PSG by the Company. On
March 10, 2006, the Company issued the PSG shareholder's 1,932,569 shares of
common stock valued at $0.35, or a total of $676,400.
19
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE J - STOCKHOLDERS' EQUITY (Continued)
During the quarter ended March 31, 2006, 1,000,000 shares of common stock
previously issued to the founders and president (300,000 to Don Dallape, 300,000
to Scott Swedener, 300,000 to Geno Apicella and 100,000 to Todd Pitcher) were
retired and canceled by each shareholder in an effort to improve the Company's
capital structure.
On March 8, 2006, the Company entered into a line of credit with a primary
softgoods supplier whereby the Company will issue up to 1,142,857 shares of
common stock in exchange for $400,000 of inventory. On March 10, 2006, the
Company issued 174,031 shares of common stock pursuant to the line of credit in
exchange for a reduction in accounts payable for inventory valued at $60,911.
Pursuant to this agreement, the supplier was granted two warrants to purchase
the Company's common stock. The supplier exercised one warrant in full and
received 400,000 shares of common stock in exchange for $100,000. The remaining
warrant gives the supplier the right to purchase 500,000 shares of common stock
for $0.35 per share.
In July of 2006, 255,000 "Debenture" Warrants were exercised at a strike price
of $.15 per share of common stock resulting in proceeds of $38,250 to the
Company.
During the fiscal year ended December 31, 2006, the Company issued 12,129,785
shares of common stock in exchange for services and product valued on the date
of each issuance or $430,923.
During the fiscal year ended December 31, 2006, the Company converted $370,342
of related party and non related party debt into 1,862,127 shares of common
stock.
During the fiscal year ended December 31, 2006, the Company issued 1,073,808
shares of common stock valued at the closing price of the stock on the date of
issuance, or $30,106 to two of its directors as payment in lieu of cash.
During the fiscal year ended December 31, 2006, the Company placed 2,750,049
shares to Dutchess pursuant to the Investment Agreement (See NOTE G). The total
value of the shares on the dates of issuance was $164,097. Of this amount
$131,275 was applied as a reduction of principle and interest on the Company's
debenture and $32,822 was recognized as a loss due to a conversion discount.
During the three months ended March 31, 2007, the Company issued 1,250,000
shares of common stock valued at the closing price of the stock on the date of
issuance, or $62,500 to two of its directors as payment in lieu of cash.
During the three months ended March 31, 2007, the Company issued 1,000,000
shares of common stock valued at the closing price of the stock on the date of
issuance, or $50,000 to two of its employees as payment in lieu of cash.
20
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE J - STOCKHOLDERS' EQUITY (Continued)
During the three months ended March 31, 2007, the Company placed 9,591,993
shares to Dutchess pursuant to the Investment Agreement (See NOTE G). The total
value of the shares on the dates of issuance was $347,491. Of this amount
$217,073 was applied as a reduction of principle and interest on the Company's
debenture, $54,250 was recognized as a loss due to a conversion discount and
$76,168 was received in cash.
NOTE K - WARRANTS
At March 31, 2007, the Company had 3,440,238 Warrants outstanding entitling the
holder thereof the right to purchase one share of common stock for each warrant
held as follows:
Exercise
Warrant Number of Price Per Issue Expiration
Class Warrants Warrant Date Date
- --------- --------- --------- --------- ----------
A 500,000 $0.35 3/3/2006 TBD
A 28,571 $0.35 3/29/2006 9/30/07
Debenture 2,911,667 $0.15 5/15/2006 5/15/11
---------
Total 3,440,238
=========
During the three months ended March 31, 2007, no warrants were issued or
exercised.
Stock Warrants Issued to Third Parties
The Company accounts for stock-based compensation issued to non-employees in
accordance with the provisions of SFAS 123 and the Emerging Issues Task Force
consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring or in Conjunction with
Selling, Goods or Services".
In addition, the Company evaluates each derivative issued to determine whether
treatment as either equity or a liability is warranted for that derivative
pursuant to EITF 00-19, Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in a Company's Own Stock of that derivative.
NOTE L - STOCK INCENTIVE PLAN
On December 13, 2005, pursuant to an Employment Agreement and in anticipation of
approval of the Stock Incentive Plan, the Company awarded its then Product
Manager, Duane Pacha a non-qualified stock option to purchase 300,000 shares of
common stock of the Company at an exercise price of $.35 per share with an
expiration date of December 12, 2015. The option vests and become exercisable at
a rate of 12,500 per month over a twenty-four month period. On December 31,
2006, the Company terminated Mr. Pacha's position as Product Manager due to the
disposition of the Academy business. At the time of departure from the Company,
options to purchase 150,000 shares had vested. The remaining options to purchase
150,000 shares were canceled.
21
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE L - STOCK INCENTIVE PLAN (Continued)
On December 13, 2005, pursuant to an Employment Agreement and in anticipation of
approval of the Stock Incentive Plan, the Company awarded its then Marketing
Director, Jeff Baughn a non-qualified stock option to purchase 300,000 shares of
common stock of the Company at an exercise price of $.35 per share with an
expiration date of December 12, 2015. The option vests and become exercisable at
a rate of 12,500 per month over a twenty-four month period. On December 15,
2006, the Company terminated Jeff Baughn's position as Marketing Director due to
the disposition of the Academy business. At the time of departure from the
Company, options to purchase 150,000 shares had vested. The remaining options to
purchase 150,000 shares were canceled.
On December 15, 2005, pursuant to an Employment Agreement and in anticipation of
approval of the Stock Incentive Plan, the Company awarded its President, Todd
Pitcher a non-qualified stock option to purchase 300,000 shares of common stock
of the Company at an exercise price of $.35 per share with an expiration date of
December 14, 2015. The option vests and become exercisable at a rate of 12,500
per month over a twenty-four month period. On December 22, 2006, the Company and
Todd Pitcher mutually agreed to terminate Mr. Pitcher as President in order to
improve operational cash flow. At the time of departure from the Company,
options to purchase 150,000 shares had vested. The remaining options to purchase
150,000 shares were canceled.
The following table summarizes the Company's stock option activity for the three
months ended March 31, 2007:
2007
--------------------------
Weighted Average
Shares Exercise Price
------- ----------------
Outstanding at beginning of period 450,000 $0.35
Granted --
Forfeited --
Exercised --
------- -----
Outstanding at end of period 450,000 $0.35
======= =====
Options exerciseable at end of period 450,000
=======
22
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE L - STOCK INCENTIVE PLAN (Continued)
The following table summarizes information about the Company's stock options
outstanding at March 31, 2007:
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Number Weighted Weighted Weighted
Range of Outstanding Average Average Average
Exercise At March 31, Contractural Exercise Number Exercise
Prices 2007 Life (years) Price Outstanding Price
- -------- ------------- ------------ -------- ----------- --------
$0.35 450,000 -- $0.35 450,000 $0.35
------- --- ----- ------- -----
Total 450,000 -- $0.35 450,000 $0.35
======= === ===== ======= =====
The Company accounts for stock options pursuant to Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment. The Company values each
option grant utilizing the grant date fair value for fixed awards based on the
Black-Scholes Option Pricing Model. Compensation cost is amortized over the
vesting period.
During the three months ended March 31, 2007, no compensation expense related to
options was recognized. To date, the Company has recognized compensation expense
of $85,313.
NOTE M - 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, 2006, 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, 2006 $5,602,753 December 31, 2026
December 31, 2005 $3,559,866 December 31, 2025
December 31, 2004 $ 420,421 December 31, 2024
23
EXECUTE SPORTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
NOTE M - NET OPERATING LOSS CARRY FORWARD (Continued)
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.
The loss for the fiscal year ended December 31, 2006, was $5,608,910. As of
December 31, 2006, a valuation allowance for the full amount of the net deferred
tax asset has been recognized over the period for $2,243,564, based on an
anticipated tax rate of 40%.
NOTE N - 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 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 from 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 consolidated financial statements do not include any
adjustments that might result from the outcome of these risks and uncertainty.
NOTE O - RELATED PARTY TRANSACTIONS
As of December 31, 2006, Mr. Appicella was owed $54,700. During the three months
ended March 31, 2007, the Company incurred $11,800 of expenses paid on its
behalf by Geno Apicella, CEO. In addition, during the three months ended March
31, 2007, the Company repaid $62,300 to Mr. Apicella leaving a balance due to
Mr. Apicella of $4,223 as of March 31, 2007.
NOTE P - DISPOSITION OF ACADEMY LINE
On February 5, 2007 the Company filed a current report on Form 8-k with the
United States Securities arid Exchange Commission relating it) the January 31,
2007, Trademark Transfer and Assignment Agreement (the "Agreement") with Duane
Pacha ("Duane") and Jeff Baughn ("Jeff", with Duarne, the "Buyers") pursuant to
which the Company transferred all right, title, interest and good will in the
ACADEMY SNOWBOARD CO. and ACADEMY trademarks, and the associated ACADEMY logo
and their goodwill, and all associated domain names, in particular the domain
www.academysnowboaards,com, trades secrets arid copyrights and their goodwill
(collectively, the, "Brand"). Moreover, as per the Agreement, there was no cash
component relating to the transfer and assignment of the Brand and the Company
shall assign to Buyers certain of the Company's accounts payable and accounts
receivable relating to the Brand. Specifically, the accounts receivable in the
amount of $107,761-52 were transferred to the Buyers resulting in a decrease to
accounts receivable. Accounts payable in the amount of $345,321.5() were
transferred to the, Buyers resulting in a decrease to accounts payable.
NOTE Q - SUBSEQUENT EVENTS
From April 1, 2007 through April 20, 2007, the Company issued 346,154 and
384,616 shares of common stock to two officers and two directors, respectively,
with a combined value of $29,231 based on the closing stock price on the date of
issuance.
From April 1, 2007 through April 20, 2007, the Company issued 2,506,500 shares
of common stock in repayment of debt with a value of approximately $78,000.
On April 9, 2007, the Company issued to Dutchess a promissory note in the face
amount of $132,000 for gross proceeds of $110,000 (the "Note"). The Note bears
interest at 12% per annum and matures on April 9, 2008 ("Maturity Date").
Pursuant to the Note, the Company is required to make payments to Dutchess in
the amount of the greater of a) one hundred percent (100%) of each Put (as
defined in the Investment Agreement between the Company and the Investor dated
June 28, 2005 (See NOTE G)) given to Dutchess from the Company; or b) eleven
thousand seven hundred twenty-one dollars and 39/100 ($11,721.39) until the Face
Amount is paid in full, minus any fees due.
24
Item 2 - Management's Discussion and Analysis of Operations
This management's discussion and analysis of results of operations and financial
condition contains forward-looking statements that involve risks and
uncertainties. In some cases, you can identify these statements by
forward-looking words such as "may," "might," "will," "should," "expect(s),"
"plan(s)," "anticipate(s)," "believe(s)," "estimate(s)," "predict(s),"
"intend(s)," "potential" and similar expressions. All of the forward-looking
statements contained in this registration statement are based on estimates and
assumptions made by our management. These estimates and assumptions reflect our
best judgment based on currently known market and other factors. Although we
believe such estimates and assumptions are reasonable, they are inherently
uncertain and involve risks and uncertainties. In addition, management's
assumptions about future events may prove to be inaccurate. We caution you that
the forward-looking statements contained in this registration statement are not
guarantees of future performance and we cannot assure you that such statements
will be realized. In all likelihood, actual results will differ from those
contemplated by such forward-looking statements as a result of a variety of
factors, including, but not limited to, those factors discussed in "Risk
Factors" and included in our on Form 10-KSB for the fiscal year ended December
31, 2006. Except as required by law, we undertake no obligation to update any of
these forward-looking statements.
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.
25
Revenue recognition
The Company recognizes revenue when the product is shipped to the customer. 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 uncollectible 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 uncollectible 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.
Product Warranty
The Company's Watersports products 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.
26
Income taxes
On November 1, 2004, the Company amended its Articles of Incorporation to make
the transition from an S-Corporation to a C-Corporation. Prior to the transition
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. SFAS No. 109 requires a valuation allowance to be
recorded when it is more likely than not that some or all of the deferred tax
assets will not be realized. The Company has recorded a valuation allowance for
the full amount of the net deferred tax asset because of uncertainties as to the
amount of taxable income that would be generated in future years.
Overview
Results of Operations
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
Net Sales for the three months ended March 31, 2007 and 2006 were $553,482 and
$595,534, respectively, representing a $42,052, or 7% decrease. The three month
year-over-year decrease is due to the disposition of the Academy and Eagle Rider
product lines.
Gross margin for the three months ended March 31, 2007 and 2006 was $212,535, or
38% and $117,592, or 20%, respectively. The $94,943 increase in gross margin
over the previous year was primarily due to decreased cost of goods and overhead
costs.
Selling, General and Administrative expenses for the three months ended March
31, 2007 and 2006 was $363,828 and $932,976, respectively, representing a
$569,148 decrease. The year-over-year decrease was the result of no acquisition
costs, significantly less stock based compensation expense, lower selling and
advertising costs and lower personnel and professional service costs in the
current quarter compared to the same quarter in the prior year.
Net loss from continuing operations for the three months ended March 31, 2007
and 2006 was $672,202 and $824,621, respectively, representing a $152,419, or
19% decrease in the net loss from continuing operations compared to the same
period last year. The improvement in net loss is due primarily to decreased
operating costs described above offset by higher, non-cash convertible debenture
related amortization and interest expense.
Net loss for the three months ended March 31, 2007 and 2006 was $465,511 and
$824,621, respectively, representing a $359,110, or 44% decrease in net loss
compared to the same period last year. The improvement in the net loss compared
to the net loss from continuing operations is due to the $206,691 net gain
recognized by the Company upon the disposition of the Academy brand.
27
Financial Condition
From inception to March 31, 2007, we incurred an accumulated deficit of
$10,620,510, and we expect to incur additional losses through the fiscal year
ending December 31, 2007 and 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 debt and
equity financing. During the three months ended March 31, 2007, we had a net
decrease in cash of $49,451. Total cash resources as of March 31, 2007 was
$24,935, compared with $74,386 at December 31, 2006.
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 2006 and the latter half of 2005, the Company's cost control strategies
focused on managing general and administrative expenses through keeping
headcount to a minimum, amongst other things, and maintaining a focused
marketing and sales strategy that leverages existing channel partnerships.
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.
In September 2004, we commenced a private placement to sell up to 7,000,000
shares of our common stock 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.
28
On December 26, 2005, the Company's SB-2 registration statement was declared
effective by the Securities and Exchange Commission. Pursuant to the terms of
the Offering, the Company offered to certain investors up to 3,571,428 shares of
the Company's common stock for consideration of $0.35 per share. As of December
31, 2005, the Company has received $1,246,550 in proceeds $70,000 of which was
received on January 3, 2006.
In May 2006, we commenced a private placement to sell up to $1,900,000 of
convertible debentures with a $10,000,000 equity line of credit (the "Investment
Agreement") following an effective registration statement. The Company closed
the private placement by issuing a convertible debenture for $1,900,000 and
subsequently filed an SB-2 registration statement, which became effective on
June 15, 2006. The Company now has access to funds under the Investment
Agreement.
Management is currently in the process of seeking additional equity financing
with potential investors. Management is also working with the holders of our
convertible debentures to finance production and provide working capital when
needed. There can be no assurance that such additional financing will be
obtained. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ITEM 3. CONTROLS AND PROCEDURES
(a) As of December 31, 2006, we conducted an evaluation, under the supervision
and participation of our management, including the Company's President and Chief
Executive Officer (who is the principal accounting officer) of the effectiveness
of the Company's disclosure controls and procedures as of the end of the period
covered by this report, as required by Rule 13a-15(b) under the Exchange Act of
1934, as amended (the "Exchange Act")
In connection with the audit of our Consolidated Financial Statements for the
fiscal year ended December 31, 2006, our independent registered public
accounting firm informed us that we had significant deficiency constituting
material weaknesses as defined by the standards of the Public Company Accounting
Oversight Board, which had been identified in connection with the audit of our
Consolidated Financial Statements for the fiscal year ended December 31, 2006
The significant deficiency in internal control identified consisted of
inadequate segregation of duties affecting initiating, recording and processing
financial data.
Based on the evaluation, which disclosed a deficiency in the segregation of
financial duties, the Company's President and Chief Executive Officer (who is
the principal accounting officer) concluded that the Company's disclosure
controls and procedures were effective as of the end of the period covered by
this report.
The Company has taken, and will continue to take, steps to address the specific
problems identified by the auditors including, but not limited to, emphasizing
enhancement of the segregation of duties based on the limited resources the
Company has, and, where practical, the Company will continue to assess the cost
versus benefit of adding additional resources that would mitigate the situation.
Our President and Chief Executive Officer will monitor our accounting policies
to assure proper accounting on an ongoing basis.
29
(b) There were no changes in the Company's internal controls over financial
reporting identified in connection with the evaluation by management described
above that occurred during the period covered by this report that has materially
effected, or is reasonably likely to materially effect the Company's internal
control over financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
No change since previous filing.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities during the period ended
March 31, 2007.
Item 3. Defaults Upon Senior Notes.
Due to our inability to pay, the Company is currently in default on the
following Notes:
Unsecured demand note payable to Ron and Dori Arko, bearing interest
at 2% per year; currently in default. $ 9,539
Unsecured demand note payable to John Helms, bearing interest at 2%
per year; currently in default. 159,829
Unsecured demand note payable to New Heart Ministries, bearing
interest at 2% per year; currently in default. 2,925
Unsecured demand note payable to Pacific Sports Investors LLC,
bearing interest at 10% per year; currently in default. 40,375
Secured demand note payable to Christian Beckas, bearing interest at
12% per year collateralized by 80,000 shares of common stock;
currently in default. 19,300
Secured demand note payable to Hector Peneda, bearing interest at
12% per year collateralized by 40,000 shares of common stock;
currently in default. 8,800
--------
Total $240,768
========
30
Due to our inability to pay, the Company is currently in default on the
following related party Notes:
Secured demand note payable to Craig Hudson, bearing interest at 12%
per year collateralized by 116,000 shares of common stock;
currently in default 32,065
Secured demand note payable to Robert Bridges, bearing interest at 9%
per year and is collateralized by 240,000 shares of common stock;
currently in default 60,000
Secured demand note payable to Tom Bridges, bearing interest at 9%
per year and is collateralized by 240,000 shares of common stock;
currently in default 60,000
Unsecured demand note payable to Sheryl Gardner, CFO, bearing
interest at 4% per year; currently in default 47,225
-------
Total 199,290
=======
Total interest due on the above Notes is $20,335, bringing the total amount in
default to $460,393.
Item 6. Exhibits
Exhibit By Reference
Number Description from Document
- ------- ------------------------------------------------------- -------------
2.3 Trademark Transfer and Assignment Agreement between the
Company, Duane Pacha and Jeff Baughn, dated January 31,
2007 (Filed as Exhibit 101 to the Company's Current
Report on Form 8-k filed on February 5, 2007 and
incorporated herein by reference)
There were no matters required to be disclosed in a Current Report on Form 8-K
during the period covered by this report that were not so discussed.
There were no changes to the procedures by which security holders may recommend
nominees to the Company's Board of Directors since the Company last discussed
these procedures.
10.1 Promissory note to Dutchess Private Equities Fund, Ltd. In the
amount of $132,000 dated April 9, 2007 (Filed as Exhibit 10.1 to
the Company's current report on Form 8-K filed on April 20, 2007,
and incorporated herein by reference).
31.1 Certification of Chief Executive Officer Pursuant to Rules
13a-14(a) and 15d-14(a) of the Exchange Act *
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
* Filed herewith
There were no matters required to be disclosed in a Current Report on Form 8-K
during the period covered by this report that were not so discussed.
There were no changes to the procedures by which security holders may recommend
nominees to the Company's Board of Directors since the Company last discussed
these procedures.
31
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Signature Title Date
--------- ----- ----
/s/ Geno M. Apicella Chief Executive Officer
- --------------------------- and Principle Accounting Officer May 14, 2007
Name: Geno M. Apicella
32