Attached files
Exhibit 99.1
EPIC SPORTS INTERNATIONAL. INC.
(F/K/A KLIP AMERICA, INC.)
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
WITH
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
CONTENTS
December 31, 2009 and 2008
--------------------------------------------------------------------------------
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 3
FINANCIAL STATEMENTS
Balance Sheets 4
Statements of Operations 5
Statements of Changes in Stockholders' Equity (Deficiency) 6
Statements of Cash Flows 7
Notes to Financial Statements 8-19
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Epic Sports International, Inc.
(F/K/A Klip America, Inc.)
We have audited the accompanying balance sheets of Epic Sports International,
Inc. (F/K/A Klip America, Inc.) ( the "Company") as of December 31, 2009 and
2008 and the related statements of operations, changes in stockholders' equity
(deficiency) and cash flows for the year ended December 31, 2009, the period
from September 19, 2008 through December 31, 2008 (Successor Company), and the
period from January 1, 2008 through September 18, 2008 (Predecessor Company).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements based on
our audits.
We conducted our audits 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, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Epic Sports International, Inc.
(F/K/A Klip America, Inc.) at December 31, 2009 and 2008 and the results of
their operations and cash flows for the year ended December 31, 2009, the period
from September 19, 2008 through December 31, 2008 (Successor Company), and the
period from January 1, 2008 through September 18, 2008 (Predecessor Company) in
conformity with accounting principles generally accepted in the United States of
America.
/s/ ROSEN SEYMOUR SHAPSS MARTIN & COMPANY LLP
---------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
September 1, 2010
3
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
BALANCE SHEETS
December 31, 2009 and 2008
--------------------------------------------------------------------------------
2009 2008
---------- ----------
ASSETS
Current Assets:
Cash $ 13,690 $ 8,851
Due from factor - related party 910,237 257,776
Accounts receivable 104,736 58,312
Inventory, net 318,420 815,444
Prepaid expenses and other current assets 11,281 31,689
---------- ----------
Total current assets 1,358,364 1,172,072
---------- ----------
PROPERTY AND EQUIPMENT -
net of accumulated depreciation of $8,905 and $4,048
in 2009 and 2008, respectively 16,522 4,161
GOODWILL 192,000 192,000
INTANGIBLE ASSETS, NET 422,920 506,982
OTHER ASSETS 7,087 6,587
---------- ----------
Total assets $1,996,893 $1,881,802
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable - trade $ 170,899 $ 348,568
Loans payable - related party -- 1,492,787
Accrued interest - related party -- 611,086
Loans payable - bank- line of credit 77,204 88,679
Due to shareholder 142,455 131,903
Deferred revenue 335,893 124,526
Due to related party 9,987 --
Accrued expenses and other current liabilities 227,675 225,564
---------- ----------
Total current liabilities 964,113 3,023,113
---------- ----------
NON-CURRENT LIABILITIES:
Loan payable - SBA 89,495 102,316
---------- ----------
Total non-current liabilities 89,495 102,316
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Convertible Preferred Stock, Series A $0.001 par value;
30,000 shares authorized, 20,000 issued and outstanding 20 20
Common stock, $0.01 par value; 100,000 shares authorized,
5,000 issued and outstanding 50 50
Additional paid-in capital 4,430,464 9,980
Accumulated deficit (3,487,249) (1,253,677)
---------- ----------
Total stockholders' equity (deficiency) 943,285 (1,243,627)
---------- ----------
Total liabilities and stockholders' equity (deficiency) $1,996,893 $1,881,802
========== ==========
The accompanying notes are an integral part of these financial statements.
4
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
Years ended December 31, 2009 and 2008
--------------------------------------------------------------------------------
(Predecessor (Successor Company) (Predecessor Company)
and Successor For the Period For the Period
Companies) September 18, 2008 January 1, 2008
Year Ended Year Ended to to
December 31, December 31, December 31, September 17,
2009 2008 2008 2008
------------ ------------ ------------ ------------
Net Sales $ 3,803,853 $ 3,315,489 $ 578,432 $ 2,737,057
Cost of sales 2,654,319 2,524,915 810,829 1,714,086
------------ ------------ ------------ ------------
Gross profit 1,149,534 790,574 (232,397) 1,022,971
Operating Expenses:
Selling 1,308,777 891,428 284,646 606,782
General and administrative 1,107,343 1,066,736 288,627 778,109
------------ ------------ ------------ ------------
Total operating expenses 2,416,120 1,958,164 573,273 1,384,891
------------ ------------ ------------ ------------
Loss from operations (1,266,586) (1,167,590) (805,670) (361,920)
Other Expenses:
Interest expense - related party 801,290 1,071,894 377,047 694,847
Factor fees - related party 165,695 278,335 70,960 207,375
------------ ------------ ------------ ------------
Total other expenses 966,985 1,350,229 448,007 902,222
------------ ------------ ------------ ------------
NET LOSS $ (2,233,571) $ (2,517,819) $ (1,253,677) $ (1,264,142)
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
5
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended December 31, 2009 and 2008
--------------------------------------------------------------------------------
Convertible
Preferred Stock,
Common Stock Series A Additional Total
-------------- --------------- Paid-In Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficiency)
------ ------ ------ ------ ------- ------- ------------
Balances - January 1, 2008 (Predecessor Company) 5,000 $ 50 -- $ -- $ -- $(1,876,607) $(1,876,557)
Net Loss (Predecessor Company) - for the period
January 1, 2008 through September 18, 2008 -- -- -- -- -- (1,264,142) (1,264,142)
------ ----- ------- ---- ---------- ----------- -----------
Balances - September 18, 2008 (Predecessor Company) 5,000 50 -- -- -- (3,140,749) (3,140,699)
Recapitalization of Company - due to acquisition 3,140,749 3,140,749
Issuance of Preferred Stock -- -- 20,000 20 9,980 -- 10,000
Net Loss (Successor Company) -
September 19, 2008 through December 31, 2008 -- -- -- -- -- (1,253,677) (1,253,677)
------ ----- ------- ---- ---------- ----------- -----------
Balances - December 31, 2008 (Successor Company) 5,000 50 20,000 20 9,980 (1,253,677) (1,243,627)
Conversion of related party loan and accrued interest -- -- -- -- 4,420,484 -- 4,420,484
Net Loss - December 31, 2009 -- -- -- -- -- (2,233,572) (2,233,572)
------ ----- ------- ---- ---------- ----------- -----------
Balances - December 31, 2009 5,000 $ 50 20,000 $ 20 $4,430,464 $(3,487,249) $ 943,285
====== ===== ======= ==== ========== =========== ===========
The accompanying notes are an integral part of these financial statements.
6
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009 and 2008
--------------------------------------------------------------------------------
(Predecessor (Successor (Predecessor
and Successor Company) Company)
Companies) For the Period For the Period
Twelve Months September 19, 2008 January 1, 2008
Year Ended Ended to to
December 31, December 31, December 31, September 18,
2009 2008 2008 2008
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,233,571) $ (2,517,819) $ (1,253,677) $ (1,264,142)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 4,857 1,769 502 1,267
Amortization of intangible assets 84,062 24,518 24,518 --
Reserve for inventory obsolescence (225,000) 127,500 -- 127,500
Changes in operating assets and liabilities:
Accounts receivable, net (46,424) 96,161 346,920 (250,759)
Inventory, net 722,024 440 158,566 (158,126)
Prepaid expenses and other current assets 19,907 (28,189) (28,189) --
Accounts payable and accrued expenses (175,558) 115,520 124,241 (8,721)
Accrued interest - related party 162,206 611,086 211,698 399,388
Deferred revenue 211,367 124,526 124,526 --
------------ ------------ ------------ ------------
Net cash used in operating activities (1,476,130) (1,444,488) (290,895) (1,153,593)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (17,218) -- -- --
------------ ------------ ------------ ------------
Net cash used in investing activities (17,218) -- -- --
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds received from purchase order financing 2,154,405 1,362,923 (176,950) 1,539,873
Net borrowings from related party - factor (652,461) 196,137 454,914 (258,777)
Net borrowings from related party 9,987 -- -- --
Net borrowings from line-of-credit (24,296) (23,672) (7,917) (15,755)
Net borrowings from shareholder 10,552 (99,157) 3,109 (102,266)
Proceeds from the sale of convertible preferred stock -- 10,000 10,000 --
------------ ------------ ------------ ------------
Net cash provided by financing activities 1,498,187 1,446,231 283,156 1,163,075
------------ ------------ ------------ ------------
Net increase (decrease) in cash 4,839 1,743 (7,739) 9,482
CASH, beginning of year (period) 8,851 7,108 16,590 7,108
------------ ------------ ------------ ------------
CASH, end of year (period) $ 13,690 $ 8,851 $ 8,851 $ 16,590
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 804,779 $ 739,143 $ 236,309 $ 502,834
============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Net assets acquired $ -- $ 3,140,749 $ 3,140,749 $ --
============ ============ ============ ============
Related party loans payable and accrued interest
converted to equity $ 4,420,484 $ -- $ -- $ --
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
7
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 2009 and 2008
--------------------------------------------------------------------------------
1. ORGANIZATION AND NATURE OF BUSINESS
Klip America, Inc. ("Klip" or the "Company") was incorporated on August 12,
2002, in the state of Nevada. Pursuant to an agreement dated September 18, 2008
with Capstone Capital Group I, LLC ("Capstone"), Klip issued 20,000 shares of
Convertible Series A Preferred Stock to Universal Apparel Holdings, Inc.
("UAH"), which is related to Capstone. As a result of this preferred stock
issuance, UAH became an 80% owner in the Company.
The Company is an importer and wholesale distributor of high-end performance and
lifestyle apparel, tennis racquets, tennis bags and sporting goods accessories.
In January 2009, the Company became the worldwide licensee for Volkl and Boris
Becker Tennis.
In April 2010 the Company changed its name to Epic Sports International, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid short-term instruments purchased with
initial maturity dates of three months or less to be cash equivalents. There
were no cash equivalents as of December 31, 2009 and 2008.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") 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 these estimates.
Significant estimates include, but are not limited to, the valuation allowance
for deferred income taxes, the amount of impairment of long-lived assets,
inventory obsolescence and the allowance for chargebacks.
DUE FROM FACTOR - RELATED PARTY
The Company factors its accounts receivable with a related party ("factor").
Amounts due from the factor represent receivables carried at the amount billed
to customers, net of an allowance for chargebacks and factor commissions due.
INVENTORY
Inventory consists of finished goods, and is valued at the lower of cost or
market using the first-in, first-out method. Market is determined based on net
realizable value with appropriate consideration given to obsolescence, excessive
8
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2009 and 2008
--------------------------------------------------------------------------------
levels and other market factors. An inventory reserve is recorded if the
carrying amount of the inventory exceeds its estimated market value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which range
from three to five years.
Improvements to leased premises are amortized over the lesser of their estimated
useful lives or the remaining lease terms. Expenditures for repairs and
maintenance are charged to expense as incurred. When equipment is retired or
otherwise disposed of the cost and related accumulated depreciation is removed
from the accounts and the resulting gain or loss is recognized in operations.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the net carrying amount may not be recoverable. When
such events occur, the estimated future undiscounted cash flows associated with
the asset are compared to the asset's carrying amount to determine if a
write-down to fair value is required. The Company measures impairment by
comparing the carrying value of each group of assets that generates cash flows
with the estimated present value of the corresponding cash flows. If the
expected present value of the future cash flows is less than the carrying amount
of the asset group, the Company recognizes an impairment loss. Management has
reviewed the Company's long-lived assets and believes that there has been no
impairment.
REVENUE RECOGNITION
Revenue is recognized upon the shipment of products. Allowances, credits and
other adjustments are recorded in the period the related sales occur.
INCOME TAXES
The Company recognizes income taxes under the liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and loss carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which the tax effects of those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
9
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2009 and 2008
--------------------------------------------------------------------------------
GAAP requires that, in applying the liability method, the financial statement
effects of an uncertain tax position be recognized based on the outcome that is
more likely than not to occur. Under this criterion the most likely resolution
of an uncertain tax position should be analyzed based on technical merits and on
the outcome that will likely be sustained under examination. These requirements
became effective for annual financial statements beginning after December 15,
2008 and the Company adopted them as of January 1, 2009.
As of December 31, 2009, the Company has determined that it has no uncertain tax
positions that require either recognition or disclosure in the financial
statements.
The Company's income tax returns for the years ended 2006 through 2009 are
subject to examination by federal, state and local tax authorities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value as required by ASC 825:
Cash: The carrying amount is the fair value.
Accounts Receivable and Accounts Payable: The carrying amount approximates
fair value because of the short-term duration of those instruments.
Revolving Line of Credit and Long-Term Debt: The carrying amount
approximates fair value based on current market conditions and interest
rates available to the Company for similar financial instruments.
GOODWILL AND INTANGIBLE ASSETS
Goodwill, which represents the cost of acquiring a business that is in excess of
the net of the fair values ascribed to the identifiable assets and liabilities,
is not amortized.
Intangible assets with finite useful lives are amortized on a straight-line
basis over the periods they are expected to provide benefits.
Goodwill and indefinite-lived intangibles are tested for impairment annually and
whenever events or circumstances change, such as a significant adverse change in
the economic climate that would make it more likely than not that impairment may
have occurred. If the carrying value of goodwill or an indefinite-lived
intangible assets exceeds its fair value, an impairment loss is recognized.
10
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2009 and 2008
--------------------------------------------------------------------------------
ADVERTISING COSTS
The Company's advertising costs are expensed as incurred. For the year ended
December 31, 2009, the period from September 19, 2008 to December 31, 2008, and
the period from January 1, 2008 to September 18, 2008 advertising expense
amounted to $70,137, $22,265 and $51,048, respectively, and is included in
selling expense.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are recorded within cost of sales in the statements
of operations
RELATED PARTIES
For the purpose of these financial statements, parties are considered to be
related if one party has the ability, directly or indirectly, to control another
party or exercise significant influence over the other party in making financial
and operating decisions or where the Company and the party are subject to common
control or common significant influence. Related parties may be individuals or
other entities.
3. BUSINESS COMBINATIONS
On September 18, 2008, through the issuance of 20,000 shares of Convertible
Series A Preferred stock with voting rights, 80% of the Company was acquired by
UAH (a party related to Capstone). The transaction was accounted for as a
business combination in accordance with GAAP
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the acquisition date.
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash $ 17,000
Due from factor - related party 713,000
Inventory, net 974,000
Prepaid and other current assets 409,000
Property and equipment - net 5,000
Other Assets 6,700
Intangible assets 553,000
Goodwill 192,000
Accounts payable - trade (306,000)
Loans payable and accrued interest - related party (1,345,000)
Accrued expenses and other current liabilities (366,000)
Non - current liabilities (106,000)
-----------
Net assets acquired $ 746,700
===========
11
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2009 and 2008
--------------------------------------------------------------------------------
4. DUE FROM FACTOR - RELATED PARTY
In February 2007 the Company entered into a factoring agreement with a related
party ("factor"). Under the terms of the agreement the factor has agreed to
purchase the eligible receivables at the calculated borrowing base (80% of the
aggregate value of all eligible receivables) for the then immediately preceding
calculation period.
A 2% commission is charged on all receivables purchased by the factor. Annual
minimum commissions under the agreement are $100,000 during year and $131,200 in
all subsequent years. The agreement remains in effect until either party
terminates the agreement upon giving no less than thirty day's written notice.
The factor has been granted a security interest in substantially all of the
Company's assets.
For the year ended December 31, 2009, the period from September 19, 2008 to
December 31, 2008, and the period from January 1, 2008 to September 18, 2008
interest and commissions amounted to $165,695, $70,960 and $207,375,
respectively.
5. INVENTORY
Inventory at December 31, 2009 and 2008 consists of the following:
2009 2008
---------- ----------
Finished goods $ 318,420 $1,040,444
Less: inventory reserve -- (225,000)
---------- ----------
$ 318,420 $ 815,444
========== ==========
The inventory is pledged as collateral under the terms of the factoring
agreement and a revolving loan agreement.
6. RELATED PARTY TRANSACTION
The Company is related to Whaling Distributors, Inc. ("Whaling") through common
ownership. In December 2009, the Company relocated its operations to Fall River,
Massachusetts and currently shares its office space with Whaling. Whaling
provides operational support to the Company for a management fee. During the
year ended December 31, 2009, the Company was charged a management fee of $9,987
which is unpaid and is included in the due to related party amount on the
balance sheets.
12
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2009 and 2008
--------------------------------------------------------------------------------
7. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2009 and 2008, consists of the
following:
2009 2008
-------- --------
Furniture and fixtures $ 1,876 $ --
Computer equipment and software 23,551 8,209
-------- --------
25,427 8,209
Accumulated depreciation (8,905) (4,048)
-------- --------
$ 16,522 $ 4,161
======== ========
For the year ended December 31, 2009, the period from September 19, 2008 to
December 31, 2008, and the period from January 1, 2008 to September 18, 2008
depreciation expense amounted to $4,857, $502 and $1,267, respectively.
8. GOODWILL AND INTANGIBLE ASSETS
Intangible assets were acquired in connection with the acquisition of the
Company on September 18, 2008. The carrying values of the major classes of
intangible assets are summarized below:
2009 2008
-------- --------
Intangible assets subject to amortization:
License agreements $177,100 $177,100
R&D service contracts 354,400 354,400
-------- --------
531,500 531,500
less: accumulated amortization (108,580) (24,518)
-------- --------
Intangible assets subject to amortization, net $422,920 $506,982
======== ========
Intangible assets not subject to amortization:
Goodwill $192,000 $192,000
======== ========
Accounting rules require that intangible assets be tested for impairment at
least annually. Accordingly, an impairment analysis was performed as of December
31, 2009 and 2008 using a discounted cash flow analysis. A discounted cash flow
analysis requires that certain assumptions and estimates be made regarding
industry economic factors and future profitability and cash flows. As a result
of the 2009 and 2008 impairment analysis, it was determined that goodwill was
not impaired.
13
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2009 and 2008
--------------------------------------------------------------------------------
The useful lives of the license agreements and service contracts are estimated
to be between 5.3 and 10.3 years. Amortization expense amounted to $84,062 and
$24,518, during the years ended December 31, 2009 and 2008, respectively. For
the period from January 1, 2008 through September 18, 2008, the predecessor
company did not have any intangible assets to amortize.
Future amortization expense for intangible assets subject to amortization is as
follows:
Years Ending
December 31,
------------
2010 $ 84,062
2011 84,062
2012 84,062
2013 84,062
2014 84,062
Thereafter 2,610
---------
$ 422,920
=========
9. LOAN PAYABLE - RELATED PARTY
On September 30, 2008, the Company entered in to an amended purchase order
financing agreement with a related party ("lender") which matures on September
30, 2013. Under the agreement, the Company is allowed to take advances in an
amount equal to the lesser of (a) $1,165,976 or (b) the borrowing base for the
then immediately preceding calendar month.
Payment on advances are due on the earlier of sixty days from the date of an
advance or the day on which any of the goods paid for by an advance are shipped
to a customer. The advances bear interest at a rate of 16% per annum (over a 360
day period) and do not begin to accrue any interest until the 31st day following
the date on which such advance was made. If the Company is in default of the
agreement, the advances bear interest at a rate of 24% per annum (over a 360 day
period). The Purchase Money Advances are secured by a promissory note from the
Company covering the entire amount.
Additionally, under the terms of the agreement the lender may issue Letters of
Credit in favor of the Company's suppliers in order to enable the Company to
acquire merchandise. The Letters of Credit bear interest at annual rates of
1.50% for the first 30 days that the Letter of Credit is outstanding and 0.75%
for every 14 days thereafter that such Letter of Credit remains outstanding.
For the year ended December 31, 2009, the period from September 19, 2008 to
December 31, 2008, and the period from January 1, 2008 to September 18, 2008
interest amounted to approximately $801,290, $377,047 and $694,487,
respectively.
14
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2009 and 2008
--------------------------------------------------------------------------------
On December 31, 2009 the Company converted all of its related party debt
incurred under the purchase order financing agreements as discussed above. The
debt in the amount of $4,420,484 (which includes accrued interest in the amount
of $773,292) was converted to equity. At December 31, 2008, the Company had
related party debt incurred under the purchase order finance agreements in the
amount of $2,103,783 (which includes accrued interest in the amount of
$611,086).
10. INCOME TAXES
As of December 31, 2009 and 2008, net deferred tax assets were approximately
$1,038,000 and $635,000, respectively resulting primarily from the future tax
benefit of net operating loss carryforwards. Under the liability method, as of
December 31, 2009 and 2008, the Company has provided a 100% valuation allowance
against its net deferred tax assets.
The Company evaluates deferred income taxes annually to determine if the
valuation allowance should be adjusted. The Company assesses whether a valuation
allowance should be established against the deferred tax assets based on
consideration of all available evidence, both positive and negative, using a
more likely than not realization standard. This assessment considers, among
other matters, the nature, frequency of recent income and losses, forecasts of
future profitability, and the duration of the statutory carryforward period. In
making such judgments, significant weight is given to evidence that can be
objectively verified.
A valuation allowance has been established for deferred tax assets based on the
Company's evaluation, as described above, about the likelihood of realizing
future tax benefits. The Company's ability to realize deferred tax assets
depends on the Company's ability to generate sufficient taxable income within
the carryforward periods provided for in the tax law for each applicable tax
jurisdiction
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities as of December 31, 2009 and 2008 are presented below:
2009 2008
---------- ----------
Deferred tax assets:
Net operating loss carryforwards $1,003,000 $ 287,000
Accounts receivable allowance 35,000 14,000
Inventory reserve -- 90,000
Accrued interest - related party -- 244,000
---------- ----------
1,038,000 635,000
Less deferred tax valuation allowance 1,038,000 635,000
---------- ----------
Net deferred income tax asset $ -- $ --
========== ==========
15
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2009 and 2008
--------------------------------------------------------------------------------
The Company has not provided for income taxes because it has had no current
taxable income and, no temporary differences that are expected to have any
future income tax effects.
The Company's effective rate differs from the statutory federal income tax rate
of 34%, primarily due to the effect of state and local income taxes and the
impact of recording a valuation allowance to offset the potential future tax
benefit resulting from net operating loss carry forwards for all years
presented. The following is a reconciliation of the U.S. federal statutory
income tax rate to the Company's effective income tax rate for the years ended
December 31, 2009 and 2008:
2009 2008
-------- --------
Federal statutory rate (34.00)% (34.00)%
State and local income taxes,
net of federal tax benefit (6.00)% (6.00)%
Net operating loss carryforwards 40.00 % 40.00 %
Change to valuation allowance 0.00 % 0.00 %
-------- --------
Effective tax rate (0.00)% 0.00 %
======== ========
As of December 31, 2009, the Company's federal net operating losses were
approximately $2,506,000. The federal net operating losses expire from the year
ended 2025 through 2029. These net operating loss carryforwards may be limited
in accordance with Section 382 of the Internal Revenue Code of 1986, as amended,
based on certain changes in ownership that have occurred, or could occur in the
future.
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
On January 19, 2007 the Company entered into a non-cancelable three year lease,
commencing February 15, 2007, for office space in San Francisco. Minimum rental
payments consist of (base rent) of $874, $1,748, and $1,817, during year one,
year two, and year three, respectively. On June 1, 2009, the lease was renewed
for an additional two-year period. The base rent under the renewal amounted to
$2,180 and $2,247 for the first year and second year, respectively, of the
renewal period. In addition to the minimum base rent, the Company is required to
pay a proportional share of the total operating expenses incurred, including but
not limited to real estate taxes, utilities, and maintenance fees.
On January 1, 2009, the Company entered in to a five-year non-cancelable office
lease in Germany. Monthly rental payments under the lease amount to 1,551 Euros.
The lease has annual escalations equal to the German consumer price index.
16
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2009 and 2008
--------------------------------------------------------------------------------
As of December 31, 2009, future minimum lease payments required under
non-cancelable operating leases were approximately as follows:
Years Ending US
December 31, $
------------ ---------
2010 52,900
2011 53,300
2012 28,600
2013 26,400
---------
$ 161,200
=========
For the year ended December 31, 2009, the period from September 19, 2008 to
December 31, 2008, and the period from January 1, 2008 to September 18, 2008
rent expense amounted to $76,617, $56,672 and $27,385, respectively.
LICENSING AGREEMENTS
On October 1, 2008, the Company entered in to a five-year licensing agreement
with Marker Volkl (International) GmbH with the option to renew for two
additional 5-year periods. Under the agreement, the Company has the right to
sell merchandise under the licensed name worldwide without any restrictions. In
exchange for the right to sell the licensed merchandise, the Company is to pay
royalty fees in the amount of 2.5%, 5.0% and 7.0% of net sales during years one,
two and three, and thereafter, respectively.
Minimum royalty payments under the agreement are as follows:
Amount Exchange Rate Amount
(in Euros) (12/31/09) (Dollars)
---------- ---------- ---------
Year 1 (euro) 60,700 1.4333 $ 87,000
Year 2 120,000 1.4333 172,000
Year 3 200,000 1.4333 286,700
Year 4 256,000 1.4333 366,900
Thereafter 303,000 1.4333 434,300
--------- ----------
(euro) 939,700 $1,346,900
========= ==========
On January 1, 2009, the Company entered in to a three-year licensing agreement
with Boris Becker & Co. Under the agreement, the Company has the right to sell
tennis rackets, tennis bags and tennis accessories worldwide, except for China,
under the licensed name. In exchange for the right to sell the licensed
merchandise, the Company is to pay royalty fees in the amount of 5.0% of net
sales during the term of the agreement.
17
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2009 and 2008
--------------------------------------------------------------------------------
During the year ended December 31, 2009 royalty expense under both agreements
amounted to $111,759.
12. CONCENTRATIONS OF CREDIT RISK
CASH
The Company places its cash balances with well capitalized and stable financial
institutions. At December 31, 2009 and 2008, the Company's cash balances did not
exceed the FDIC insurance limit.
MAJOR CUSTOMERS
One customer accounted for approximately $1,300,000 or 34% of gross sales for
the year ended December 31, 2009. For the year ended December 31, 2008 one
customer accounted for approximately $753,000 or 23% of gross sales.
MAJOR VENDORS
During the years ended December 31, 2009 and 2008 the Company purchased a
substantial portion of its product from one vendor. For the year ended December
31, 2009 purchases from this vendor totaled approximately $965,000 or 52% of
total purchases. For the year ended December 31, 2008 purchases from this vendor
totaled approximately $1,100,000 or 53% of total purchases.
13. LIQUIDITY
Epic has incurred losses and negative cash flows from operations for the years
ended December 31, 2009 and 2008. Epic has taken steps to improve its liquidity
by consolidating its operations with those of a related party and by seeking
additional ways of increasing its operational efficiency. Epic will continue to
use its existing financing arrangement until a new source is established.
Management is currently concluding negotiations for a financing agreement with a
financial institution. This new financing will provide management additional
working capital and funds for other purposes; however, there are no assurances
that any such new financing will be sufficient for long-term future needs.
Regardless, management believes they have sufficient access to working capital
to sustain operations through June 30, 2011.
18
EPIC SPORTS INTERNATIONAL, INC. (F/K/A KLIP AMERICA, INC.)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2009 and 2008
--------------------------------------------------------------------------------
14. SUBSEQUENT EVENTS
On January 28, 2010, the Company entered into a Letter of Intent to be acquired
by Amincor, Inc. (formerly known as Joning Corp.), a related party. Amincor is
to acquire all of the issued and outstanding stock of the Company upon the
issuance of these financial statements.
The Company has evaluated its subsequent events through September 1, 2010, the
date that the accompanying financial statements were available to be issued. The
Company had no additional subsequent events requiring disclosure.
19
