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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-KSB
[ X ] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ________ to ___________
Commission file number: 333-14477
SPORTSNUTS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 87-0561426
- ---------------------------------------------------- --------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
11585 South State Street, Suite 102
Draper, Utah 84020
- ---------------------------------------------------- --------------------------------------
(Address of principal executive offices) (Zip Code)
(801) 816-2500
(Issuer's telephone number)
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(Former name or former address and former fiscal year, if changed since last
report.)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
The Company's revenues for the fiscal year ending December 31, 2004 were
$828,055.
The aggregate market value of the Company's voting stock held by
non-affiliates computed by reference to the closing price as quoted on the NASD
Electronic Bulletin Board on March 1, 2005, was approximately $354,878.81. For
purposes of this calculation, voting stock held by officers, directors, and
affiliates has been excluded.
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of March 1, 2005, the
Company had outstanding 111,674,854 shares of common stock, par value $0.002 per
share.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one) [ ] Yes [x] No
TABLE OF CONTENTS
PART I.........................................................................1
ITEM 1: DESCRIPTION OF BUSINESS............................................1
ITEM 2: DESCRIPTION OF PROPERTY...........................................11
ITEM 3: LEGAL PROCEEDINGS.................................................12
ITEM 4: SUBMISSION ON MATTERS TO A VOTE OF SECURITY HOLDERS...............12
PART II.......................................................................13
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........13
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL.................14
ITEM 7: FINANCIAL STATEMENTS REQUIRED BY FORM 10-KSB......................18
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...............................................39
ITEM 8A: CONTROLS AND PROCEDURES...........................................39
PART III......................................................................40
ITEM 9: DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT................................40
ITEM 10: EXECUTIVE COMPENSATION...........................................41
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANGEMENT AND
RELATED STOCKHOLDER MATTERS......................................42
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................43
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K.................................43
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................44
INDEX TO EXHIBITS.............................................................44
SIGNATURES....................................................................46
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-KSB, IN PARTICULAR "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"ITEM 1. BUSINESS," INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE STATEMENTS
REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS CONCERNING, AMONG OTHER THINGS,
FUTURE REVENUE, EARNINGS, AND OTHER FINANCIAL RESULTS, PROPOSED ACQUISITIONS AND
NEW PRODUCTS, ENTRY INTO NEW MARKETS, FUTURE OPERATIONS AND OPERATING RESULTS,
FUTURE BUSINESS AND MARKET OPPORTUNITIES. THE COMPANY WISHES TO CAUTION AND
ADVISE READERS THAT THESE STATEMENTS INVOLVE RISK AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE EXPECTATIONS AND BELIEFS
CONTAINED HEREIN. FOR A SUMMARY OF CERTAIN RISKS RELATED TO THE COMPANY'S
BUSINESS, SEE "RISK FACTORS." UNDER "ITEM 1. DESCRIPTION OF BUSINESS."
Unless the context requires otherwise, references to the Company are to
SportsNuts, Inc. and its subsidiaries.
PART I.
ITEM 1: DESCRIPTION OF BUSINESS
Cautionary Factors That May Affect Future Results (Cautionary Statements Under
the Private Securities Litigation Reform Act of 1995)
The disclosure and analysis set forth herein contains certain forward
looking statements, particularly statements relating to future actions,
performance or results of current and anticipated products and services, sales
efforts, expenditures, and financial results. From time to time, the Company
also provides forward-looking statements in other publicly-released materials,
both written and oral. Forward-looking statements provide current expectations
or forecasts of future events such as new products or services, product
approvals, revenues, and financial performance. These statements are identified
as any statement that does not relate strictly to historical or current facts.
They use words such as "anticipates," "intends," "plans," "expects," "will," and
other words and phrases of similar meaning. In all cases, a broad variety of
assumptions can affect the realization of the expectations or forecasts in those
statements. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially.
The Company undertakes no obligation to update any forward-looking
statements, but investors are advised to consult any further disclosures by the
Company on this subject in its subsequent filings pursuant to the Securities
Exchange Act of 1934. Furthermore, as permitted by the Private Securities
Litigation Reform Act of 1995, the Company provides these cautionary statements
identifying risk factors, listed below, that could cause the Company's actual
results to differ materially from expected and historical results. It is not
possible to foresee or identify all such factors. Consequently, this list should
not be considered an exhaustive statement of all potential risks, uncertainties
and inaccurate assumptions.
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RISK FACTORS
Operating Risks
Defaults in Senior Securities. Effective February 1, 2000, the Company sold
and issued a promissory note secured by virtually all tangible and intangible
assets of the Company ("Note") in exchange for $450,000 in cash proceeds. As of
May 1, 2000, the Company is in default with respect to the Note. Although the
Note holder continues to be supportive of the Company and its management, if the
holder of the Note determines to foreclose upon the Note, the Company would
likely be forced to sell all of its tangible and intangible assets to satisfy
the obligation represented by the Note and would, therefore, likely cease
operations entirely. The Note and Security Agreement executed in connection
therewith have been filed as an exhibit to the Company's 1999 annual report on
Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2000.
Dependence on Key Personnel. The Company's success depends, in large part,
upon the talents and skills of its management and key personnel. Kenneth Denos,
the Chief Executive Officer of the Company, has deferred his entire salary since
the second quarter of 2000, and has since provided legal and consulting services
to various of his clientele to supplement his income. As a result, Mr. Denos has
not been able to devote his full time and attention to the activities of the
Company and will be unable to do so until the Company is able to pay him a full
salary on a regular basis. In addition, to the extent that any of the Company's
key personnel are unable or refuse to continue their association with the
Company, a suitable replacement would have to be found. The competition for
qualified personnel in the computer software and programming markets is intense,
and there are limited numbers of such qualified personnel in the metropolitan
Salt Lake City area. There is no assurance that the Company would be able to
find suitable replacements for its existing management personnel or technical
personnel or that such replacements could be obtained for an amount affordable
to the Company.
Additional Financing Required. The Company will likely require substantial
additional capital in the future for expansion, business development, marketing,
computer software and systems, overhead, administrative, and other expenses.
There is no assurance that the Company will be able to raise additional funds or
that financing will be available on acceptable terms. Lack of additional funds
could significantly affect the Company and its business. Further, funds raised
through future equity financing could be substantially dilutive to existing
shareholders.
Company Not Currently Profitable. The Company was organized on July 12,
1996. Since the date of its inception, the Company has incurred substantial
losses and has not yet generated a profit. To achieve any significant measure of
profitability, the Company must create substantial activity through its Web Site
to generate revenues, and there is no assurance that the Company will do so in
the future or that such revenue generation will ultimately lead to the Company
becoming profitable.
Revenues Subject to Seasonal Fluctuation. The Company expects that it will
experience an increase in commercial activity during the spring and winter
months, principally due to spring recreational athletic leagues, tournaments,
and events operating during that period. During the winter months, winter games
events, basketball tournaments, leagues, and events, and other winter events are
expected to generate increases in revenue as compared to the summer and fall
periods. There can be no assurance that the Company can decrease its selling,
general, and administrative expenses during periods of decreased revenue and
that the Company's results of operations during these periods will not be
materially adversely affected.
2
Government Regulation of the Internet. There are currently few laws or
regulations directly applicable to electronic commerce. Due to the increasing
popularity and use of the Internet, it is possible that a number of laws and
regulations may be adopted with respect to the Internet which could materially
increase the cost of transacting business on the Internet. Although
transmissions from the Company's Web Site originate from the State of Utah, the
government of the United States and the governments of other states and foreign
countries might attempt to regulate such transmissions or assess taxes, fees,
tariffs, duties, or other payments against the Company, the Company's
Affiliates, or customers purchasing products or services through the Web Site.
Any such regulations or assessments could adversely affect the Company's
business, operating results, and financial condition.
Risk of Computer System Failure. The success of the Company is
substantially dependent upon its ability to deliver high quality, uninterrupted
access to its technology applications, which requires that the Company protect
its computer hardware and software systems and the data and information stored
in connection therewith. The Company's systems are vulnerable to damage by fire,
water (principally from overhead sprinkler systems that may be triggered by fire
or excessive heat within the building in which the Company and other co-tenants
operate), natural disaster, power loss, telecommunications failures,
unauthorized intrusion, and other catastrophic events. Any substantial
interruption in the Company's systems would have a material adverse effect on
the Company's business, operating results, and financial condition. Although the
Company carries general commercial insurance coverage, such coverage may not be
adequate to compensate for the losses that may occur. In addition, the Company's
systems may be vulnerable to computer viruses, physical or electronic break-ins,
sabotage, or other problems caused by third parties which could lead to
interruptions, delays, loss of data, or cessation in service to persons desiring
to access the Company's Internet properties. The occurrence of any of these
risks could have a material adverse effect upon the Company's business, results
of operations, and financial condition.
Electronic Data Transmission Security Risks. A significant barrier to the
electronic transmission of confidential data over the Internet is the perception
that such data may not be secure. The Company relies upon encryption and
authentication technology to provide the security necessary to effect secure
transmissions of confidential information. There can be no assurance that
advances in decryption technology, computer espionage, and other developments
will not result in a breach or compromise of the algorithms used by the Company
to protect transaction data of persons accessing the Company's internet
properties and internet properties of the Company's clients, and therefore lead
to the misappropriation of such data by third parties. Any such breach,
compromise, or misappropriation could damage the Company's reputation and expose
the Company to a risk of loss or litigation and possible liability, and could
have a material adverse effect upon the Company's business, results of
operations, or financial condition.
No Proprietary Protection for Technology. The Company's online registration
system, statistical information system, and the league management system are not
protected by any copyright or patent, and the Company does not anticipate filing
an application with the United States Patent and Trademark Office ("USPTO") or
the United States Copyright Office for protection of these systems. Although the
Company believes that copyright and patent protection for these systems is
either cost prohibitive or unnecessary, it may be wrong. If the Company is
wrong, it could face unexpected expenses pursuing, defending, or otherwise
becoming involved in a copyright or patent dispute, any of which could have a
material adverse effect upon the Company's business, results of operations, and
financial condition.
Uncertain Protection of Trade Names and Related Intangible Assets. The
Company has registered the Internet domain names, "www.sportsnuts.com," and
"www.sportsnuts.net." Given the
3
lack of financial resources available to the Company during 2004, the Company
has not pursued trademark applications of its name and brand. Consequently,
other companies with names, marks, or slogans similar to SportsNuts could seek
to require that the Company obtain a license from them or require the Company to
change its name, either of which could entail substantial costs. Additionally,
if the Company were requried to change its name, it could lose all goodwill
associated with the "SportsNuts" mark. In addition, future products and services
offered by the Company may need to be marketed under different names if the mark
"SportsNuts" causes confusion with another trade name being used by another
company. The Company could also incur substantial costs to defend any legal
action taken against the Company pursuant to a trademark or service mark
dispute. If any legal action against the Company, its asserted trademarks, or
service marks should be found to infringe upon intellectual property rights of a
third party, the Company could be enjoined from further infringement and could
be required to pay damages. In the event a third party were to sustain a valid
claim against the Company, and in the event a required license were not
available on commercially reasonable terms, the Company's financial operations
and results of operations could be materially adversely affected. Litigation,
which could result in substantial cost to and diversion of resources of the
Company, may also be necessary to enforce intellectual property rights of the
Company or to defend the Company against claimed infringements of the rights of
others.
Competition and Technological Change. The market for computer technology
products, services, and advertising within the amateur sports market is new,
rapidly evolving, and intensely competitive and will continue to undergo rapid
technological change. The Company must continue to enhance and improve the
functionality and features of its online services and sports information
management software. New industry needs, standards, and practices have emerged
that threaten the marketability of the SportsNuts technology services offered
through its internet properties and may render such services obsolete.
Developing and enhancing the Company's proprietary technology entails
significant technical and business risks, in addition to substantial costs. If
the Company faces delays in introducing new services, products and enhancements,
its users may forego the use of the Company's services and use those of its
competitors. The Company currently competes with many other amateur sports
information and product web sites and the Company anticipates competition to
intensify in the future. Barriers to entry are not significant, and current and
new competitors have been able to launch new web sites and new operations
quickly at a relatively low cost. Accordingly, the Company believes that its
success will depend heavily upon achieving significant market acceptance before
its competitors and potential competitors introduce competing services. Many of
the Company's competitors, as well as potential entrants into the Internet
amateur sports market, have longer operating histories, larger customer or user
bases, greater brand recognition and significantly greater financial, marketing,
and other resources than the Company. Furthermore, several of the Company's
competitors have acquired certain key sponsorships and relationships with a few
well-known amateur sports organizations which may impede the Company's growth
and thereby have a material adverse effect upon the Company's business, results
of operations, and financial condition.
Investment Risks
Speculative Investment. The shares of the Company's common stock are a
speculative investment. To date, the Company has generated substantial losses
and has yet to achieve a profit. If the Company fails to generate profits, it is
unlikely that the Company will be able to meet its financial obligations and
investors could lose their entire investments.
Securities Class Action Claims Based Upon Price Fluctuation. Securities
class action claims have been brought against issuing companies in the past
after volatility in the market price of a company's securities. With respect to
the Company, such litigation could be very costly and divert the
4
attention of the Company's management and resources, and any adverse
determination in such litigation could also subject the Company to significant
liabilities, any or all of which could have a material adverse effect on the
Company's business, results of operations, and financial condition.
No Active Market. Although the Company's shares are traded on the NASD
Electronic Bulletin Board, the Company believes that the public trading price
may be an inaccurate representation of the value of the Company because there is
little or no trading volume in the Company's shares and no analysts or NASD
market makers actively follow the Company.
No Dividends. The Company does not anticipate paying dividends on its
Common Stock in the foreseeable future, and may be restricted from paying
dividends in the future pursuant to subsequent financing arrangements.
Classified Board of Directors. Pursuant to the Company's Certificate of
Incorporation, the Board of Directors has been divided into three classes, with
only one class subject to reelection in a given year. The Certificate of
Incorporation requires a vote of 66 2/3% of the shares of the Company to amend
the provision governing the election of directors. Consequently, even if a
shareholder or group of shareholders were to acquire a majority of the
outstanding shares of the Company, such acquisition would not necessarily lead
to a change in control of the Company. However, the Company cannot guarantee
that certain persons, either collectively or individually, will not be able to
control the election of the Board of Directors and that minority shareholders
will not be adversely affected as a result.
Other Anti-Takeover Provisions. The Company's Certificate of Incorporation
contains certain provisions which could be an impediment to a non-negotiated
change in control of the Company, namely an ability, without stockholder
approval, to issue up to 20,000,000 shares of preferred stock with rights and
preferences determined by the board of directors, staggered terms for directors,
and super-voting requirements. These provisions could impede a non-negotiated
change in control and thereby prevent stockholders from obtaining a premium for
their Common Stock.
Securities Eligible for Public Trading. All of the Company's outstanding
shares are either freely tradeable or immediately eligible for resale under Rule
144 promulgated pursuant to the Securities Act of 1933, as amended. Sales of
substantial amounts of freely tradeable stock in the public market could
adversely affect the market price of the Common Stock. The Company has also
filed a registration statement with respect to its 2000 Stock Option Plan, the
result of which could be the sale of a significant number of shares in the
public market, and consequently, an adverse effect upon the public trading price
of the Company's Common Stock.
Private Liability of Management. The Company has adopted provisions in its
Certificate of Incorporation which limit the liability of its officers and
directors and provisions in its bylaws which provide for indemnification by the
Company of its officers and directors to the fullest extent permitted by
Delaware corporate law. The Company's Certificate of Incorporation generally
provides that its directors shall have no personal liability to the Company or
its stockholders for monetary damages for breaches of their fiduciary duties as
directors, except for breaches of their duties of loyalty, acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
law, acts involving unlawful payment of dividends or unlawful stock purchases or
redemptions, or any transaction from which a director derives an improper
personal benefit. Such provisions substantially limit the shareholders' ability
to hold directors liable for breaches of fiduciary duty.
Potential Issuance of Additional Common and Preferred Stock. The Company is
authorized to issue up to 200,000,000 shares of Common Stock. To the extent of
such authorization, the Board of
5
Directors of the Company will have the ability, without seeking shareholder
approval, to issue additional shares of common stock in the future for such
consideration as the Board of Directors may consider sufficient. The issuance of
additional Common Stock in the future may reduce the proportionate ownership and
voting power of existing shareholders. The Company is also authorized to issue
up to 20,000,000 shares of preferred stock, the rights and preferences of which
may be designated in series by the Board of Directors. To the extent of such
authorization, such designations may be made without shareholder approval. The
designation and issuance of series of preferred stock in the future would create
additional securities which would have dividend and liquidation preferences over
common stock.
Volatility of Stock Prices. In the event that there is an established
public market for the Company's Common Stock, market prices will be influenced
by many factors and will be more subject to significant fluctuations in response
to variations in operating results of the Company and other factors such as
investor perceptions of the Company, supply and demand, interest rates, general
economic conditions and those specific to the industry, developments with regard
to the Company's activities, future financial condition and management.
Applicability of Low Priced Stock Risk Disclosure Requirements. The Common
Stock of the Company may be considered a low priced security under rules
promulgated under the Securities Exchange Act of 1934. Under these rules,
broker-dealers participating in transactions in low priced securities must first
deliver a risk disclosure document which describes the risks associated with
such stocks, the broker-dealers's duties, the customer's rights and remedies,
certain market and other information, and make a suitability determination
approving the customer for low priced stock transactions based on the customer's
financial situation, investment experience and objectives. Broker-dealers must
also disclose these restrictions in writing to the customer, obtain specific
written consent of the customer, and provide monthly account statements to the
customer. With all these restrictions, the likely effect of designation as a low
priced stock will be to decrease the willingness of broker-dealers to make a
market for the stock, to decrease the liquidity of the stock and to increase the
transaction cost of sales and purchases of such stock compared to other
securities.
6
BUSINESS OVERVIEW
DESCRIPTION OF BUSINESS
SportsNuts, Inc. (sometimes referred to hereinafter as the "Company") is a
sports management and marketing company, with a focus on community-based amateur
athletics, providing unique solutions to the challenges faced by athletes and
the organizations in which they participate. Incorporated in Delaware on July
12, 1996, the Company helps organize and manage a wide variety of sports events,
providing online registration and merchandise sales, event sponsorship, event
coordination, and targeted promotion using technology and strategic media
relationships. The Company seeks to be the emerging technology leader in sports
information systems and the only organization of its kind to complement its
technology solutions with offline marketing, sales, and support. The Company's
mission is to become the ultimate resource for amateur and community event
coordinators, administrators, athletes, fans and coaches.
SportsNuts endeavors to make events more profitable and efficient by
promoting such events through various media channels, attracting corporate
sponsorships, and providing technology tools to decrease administrative and
personnel costs.
The Company previously provided technology-based services such as hosting,
email exchange services, and website design to sports and other organizations
through Synerteck Incorporated, the Company's wholly-owned subsidiary
("Synerteck"). On November 15, 2004, Synerteck was spun off, on a pro-rata
basis, to the shareholders of SportsNuts. The spin-off is described in a report
on Form 8-K filed by the Company with the Securities and Exchange Commission on
October 12, 2004.
Beginning in February, 2004, the Company began offering computer hardware
sales and related services through Secure Networks, Inc., its wholly-owned
subsidiary. The Company has recently announced that it intends to focus
exclusively on the sports industry and, consistent with the spin-off of
Synerteck, intends to sell or spin-off Secure Networks in the future.
BUSINESS FOCUS
The Company targets organized sports events with its broad range of
marketing and technology services to increase consumer satisfaction, athlete
participation, corporate involvement, and purchasing opportunities. Through its
relationships with radio, print, and direct mail providers, the Company seeks to
create increased awareness of participating events within surrounding
communities. Through its Internet properties, the Company provides online event
registration and merchandise sales, event website hosting, and the issuance of
targeted e-mails to sports participants who have requested information about
upcoming sporting events. Event administrators can access and download
customizable reports on their events, requesting a full financial breakdown or
simply creating a report that displays the name and t-shirt size of each
participant.
TECHNOLOGY DEVELOPMENT
Databases. The heart of the Company's operations and services is the sports
information management system user base. A database contains all the detailed
information that the Company gathers
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on every single registered Internet user on its site. The database software
holds and manipulates all such information. This database is built with Sequel
software. The Company has invested in this software in order to insure
reliability as well as scalability. For the size of the Company's computer
systems and the volume of throughput, Sequel databases are typically the fastest
and are easily moved from one computer platform to another. The database can
efficiently provide any of the stored information when it is automatically
requested by the Company's web site, software applications or manually requested
by an employee for corporate use. When the processing demand of the database
servers is being taxed to the pre-determined limits, the Company intends to move
the database to more powerful, alpha processor-based computer systems in order
to maintain the efficiency, speed and quality of service.
Software Applications. A custom designed program comprises the backbone of
the Company's sports information management system. This program collects
information about athletes, teams and leagues, individual athlete statistics,
team statistics, and schedules. The program stores this information in the
database and posts it on the Company's Web site. An administrative part of the
program allows certain pre-established users to access the user interface and
upload the most up to date information to the Company's database and site.
Coaches and other administrators can upload biographical information, photos,
articles, announcements and other information about athletes, game results,
teams, schools, etc. so that it can be viewed on the Web.
MARKET ANALYSIS/OPPORTUNITIES
The market for products and services among amateur sports enthusiasts in
the United States is rapidly evolving and intensely competitive with a large
number of competitors in the Internet sports industry. However, the niche market
in which the Company competes possesses relatively few amateur sports
organizations that can provide a comprehensive marketing and technological
approach to organizations that seek to increase participation and attendance for
their events. However, there can be no assurance that the Company can maintain a
competitive position against current or future competitors as they enter the
markets in which it competes, particularly those with greater financial,
marketing, service, support, technical and other resources than those possessed
by the Company. The Company's failure to maintain a competitive position within
the market could have a material adverse effect on its business, financial
condition, results of operations and cash flows.
The Reach of Amateur Sports. Amateur sports in the United States has a
massive following, estimated by the Company at 135 million fans, 76 million
active participants, 4 million organized teams, and over $30 billion spent
annually on products and services.
Amateur sports touches multiple audiences (athletes, fans, coaches,
officials, sports physicians, athletic directors, community sports writers) who
generally want to enhance the experience for themselves and the participants. At
the grass-roots level, amateur sports tends to generate more emotional
involvement than any other activity with the exception of academic education.
The dreams of millions of athletes are pursued through sports and many families
live vicariously through sports in various supporting roles. Amateur sports
typically require a substantial investment of time and money. The demographic
profile of amateur sports enthusiasts is therefore strong relative to
recreational spending.
The Internet. Sports has been a core staple in the development of the
Internet. Over thirty million users in the United States access the Internet
each day for sports-related information. The administration of amateur sports
organizations and events and the information management of amateur sports data
lend itself to unique marketing approaches that can be greatly facilitated
through various web-based solutions, but are currently not addressed efficiently
by any single organization.
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Market Segmentation/User Needs
Generally. The Company has divided the grass roots amateur sports market
into three specific segments: (i) Youth Sports (ages 5-13), (ii) High School
Sports (ages 14-18), and (iii) Adult Recreation Sports (ages 19+). As discussed
below, the Company believes that there are approximately 76 million persons
within these three categories, or roughly thirty percent of the U.S. population.
Each segment has specific interests and needs, but they all share the common
goal of improving the amateur athletic experience by strengthening coaching and
playing skills and providing easier access to reliable information and quality
products and services.
Youth Sports. The Company estimated that there are roughly three million
organized youth sports teams in the United States. Each team has an average of
12 players (36 million total players). However, since most children play more
than one sport, the Company estimates that the number of unique participants in
this segment to be 24 million.
Youth sports are typically less organized and managed far less efficiently
than high school or adult recreational sports. The registration, rostering, and
scheduling process is costly and cumbersome for youth sports organizations. In
addition, game and event information is usually difficult to obtain, including
time and location of contest, profile of the opposing team, and a summary of the
event itself. Coaching at the youth sports level is often highly erratic, with a
large number of children either inspired by or alienated toward organized sports
for life during this period. Youth coaches require a variety of resources
necessary to improve the quality of the instructional environment. Finally,
youth sports are constantly in need of funding for equipment, facilities, and
transportation.
High School Sports. The Company estimates that there are approximately
20,000 high schools in the United States, with approximately 25 teams of 20
athletes each per school across all sports and grade levels (10 million total
players). As with youth sports, since most teens play more than one sport, the
Company estimates that the number of unique participants, together with a
significant number of non-athlete participants (e.g. drill team members,
cheerleaders, and equipment managers) in this segment to be 8 million.
Competition becomes significantly more important relative to youth sports
as athletes reach their teenage years. Nevertheless, current methods of tracking
the history or performance of an individual or team are difficult or impossible,
and broad comparison and ranking systems are largely unavailable. Moreover, the
scouting process is often unreliable, time consuming, and cost prohibitive. High
school athletes desire the type of tangible performance measurements and
statistics available through the Company's sports information management system.
In addition, those prep athletes with aspirations to participate in collegiate
athletics are highly interested in scholarship and college placement
opportunities afforded by increased exposure to college recruiters. As with
youth sports, high school sports programs are also chronically underfunded.
Finally, because of the increased intensity level of high school sports and the
resulting injuries, these athletes will likely require access to sports medicine
services, which is currently not available from any comprehensive source online.
Parents/Adult Recreation Sports. The Company estimates that the 32 million
children and teens participating in amateur sports will have at least one
non-participant supporter, most likely a parent. Although most youth and high
school athletes have more than one parent who follows their activities, many
parents with children who play sports typically have more than one child
participating in organized amateur sports. Many of these adults also participate
in recreational sports themselves. The Company believes that an additional 12
million adults who participate in recreational sports do not currently have
children engaged in amateur sports. Accordingly, the Company estimates that 44
million U.S. adults
9
follow a child who participates in amateur sports and/or personally participate
in adult recreational sports.
Because competition as well as exercise is at the heart of adult sports
participation, a source for statistical information is likely to be a
significant attraction within this category. These persons are also more likely
to utilize sports medicine services, given their increased susceptibility to
aches, soreness, and injury due to age and increasing fragility. Sports-oriented
adults have significant purchasing power relative to the youth sports and high
school sports segment, particularly with credit card transactions over the
Internet. Adults desire a wide range of and sufficient information concerning
products and services that cater to their interests.
INTELLECTUAL PROPERTY
The Company has registered the Internet domain names, "www.sportsnuts.com,"
and "www.sportsnuts.net." Given the lack of resources available to the Company
during 2004, the Company has not pursued any trademark applications for its name
and brand.
The Company's online registration, statistical information system, and the
league management systems are not protected by any copyright or patent, and the
Company does not anticipate filing an application with the U.S. Patent and
Trademark Office or the United States Copyright Office for protection of any of
these systems. Although the Company believes that copyright and patent
protection for these systems is either cost prohibitive or unnecessary, it may
be wrong. If the Company is wrong, it could face unexpected expenses pursuing,
defending, or otherwise becoming involved in a copyright or patent dispute, any
of which could have a material adverse effect upon the Company's business,
results of operations, and financial condition.
Because the Company has no formal trademark protection, other companies
with names, marks, or slogans similar to SportsNuts could seek to require that
the Company obtain a license from them or require the Company to change its
name, either of which could entail substantial costs. Additionally, if the
Company were requried to change its name, it could lose all goodwill associated
with the "SportsNuts" mark. In addition, future products and services offered by
the Company may need to be marketed under different names if the mark
"SportsNuts" causes confusion with another trade name being used by another
company. The Company could also incur substantial costs to defend any legal
action taken against the Company pursuant to a trademark or service mark
dispute. If, in any legal action against the Company, its asserted trademarks,
or service marks should be found to infringe upon intellectual property rights
of a third party, the Company could be enjoined from further infringement and
could be required to pay damages. In the event a third party were to sustain a
valid claim against the Company, and in the event a required license were not
available on commercially reasonable terms, the Company's financial operations
and results of operations could be materially adversely affected. Litigation,
which could result in substantial cost to and diversion of resources of the
Company, may also be necessary to enforce intellectual property rights of the
Company or to defend the Company against claimed infringements of the rights of
others.
GOVERNMENT REGULATION
There are currently few laws or regulations directly applicable to
information technology or electronic commerce. Due to the increasing popularity
and use of the Internet, it is possible that a number of laws and regulations
may be adopted with respect to the Internet which could materially increase the
10
cost of transacting business on the Internet. Although transmissions from the
Company's Internet properties originate from the State of Utah, the government
of the United States and the governments of other states and foreign countries
might attempt to regulate such transmissions or assess taxes, fees, tariffs,
duties, or other payments against the Company, its affiliates, or customers
purchasing products or services through its internet properties of its clients.
Any such regulations or assessments could adversely affect the Company's
business, financial condition, and results of operations.
EMPLOYEES
As of March 1, 2005, the Company employed nine persons on a part-time
basis. The Company presently has no full-time employees. In order to execute the
Company's business strategy, however, the Company will likely require a
significant increase in employees and contract personnel. Competition for
qualified personnel in the information technology industry is intense,
particularly among technical personnel in the Salt Lake City metropolitan area.
The Company believes that its future success will depend in part on its
continued ability to attract, hire, and retain a sufficient number of highly
skilled personnel.
REPORTS TO SECURITY HOLDERS
SportsNuts is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files quarterly
and annual reports, as well as other information with the Securities and
Exchange Commission ("Commission") under File No. 333-14477. Such reports and
other information filed with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates, and at various regional and
district offices maintained by the Commission throughout the United States.
Information about the operation of the Commission's public reference facilities
may be obtained by calling the Commission at 1-800-SEC-0330. The Commission also
maintains a website at http://www.sec.gov that contains reports and other
information regarding the Company and other registrants that file electronic
reports and information with the Commission.
ITEM 2: DESCRIPTION OF PROPERTY
The Company's executive offices are located in a 5,000 square foot facility
in south Salt Lake County, Utah, twenty minutes from the Salt Lake City
International Airport and adjacent to Interstate 15. Base rent for this facility
is $4,250.00 per month, exclusive of utilities and other occupancy related
charges, on a three-year lease commencing January 1, 2003. The base rent
increases to $4,500.00 for the third year of the lease term.
The Company believes that the size of its executive offices are adequate
for its business, technology, and operational needs for the intermediate future.
In the aggregate, however, the Company believes that additional office space may
be necessary in the near future to accommodate its growth. The current
commercial real estate market in Salt Lake City has sufficient capacity that
management believes that the Company should not experience any significant
difficulty in procuring additional office space as needed.
11
ITEM 3: LEGAL PROCEEDINGS
None.
ITEM 4: SUBMISSION ON MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II.
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market for Common Equity and Related Stockholder Matters.
(1) Market Information.
The Company's Common Stock is listed on the NASD Electronic Bulletin Board
("Bulletin Board") under the symbol "SPCI." The Company's stock has been traded
on the Bulletin Board since approximately January, 1997. As of March 1, 2005,
there was no active public market for the Company's Common Stock. The following
table sets forth, for the periods indicated, the high and low closing sales
prices, as to Bulletin Board prices of shares of the Company's Common Stock
during the calendar year ended December 31, 2004:
High Low
- ---------------------------------------- ------------------------------------- --------------------------------------
Fourth Quarter 2004 $ 0.02 $ 0.008
- ---------------------------------------- ------------------------------------- --------------------------------------
Third Quarter 2004 $ 0.008 $ 0.008
- ---------------------------------------- ------------------------------------- --------------------------------------
Second Quarter 2004 $ 0.013 $ 0.008
- ---------------------------------------- ------------------------------------- --------------------------------------
First Quarter 2004 $ 0.025 $ 0.006
- ---------------------------------------- ------------------------------------- --------------------------------------
The following table sets forth, for the periods indicated, the high and low
closing sales prices, as to Bulletin Board prices of shares of the Company's
Common Stock during the calendar year ended December 31, 2003:
High Low
- ---------------------------------------- ------------------------------------- --------------------------------------
Fourth Quarter 2003 $ 0.008 $ 0.0013
- ---------------------------------------- ------------------------------------- --------------------------------------
Third Quarter 2003 $ 0.07 $ 0.005
- ---------------------------------------- ------------------------------------- --------------------------------------
Second Quarter 2003 $ 0.008 $ 0.003
- ---------------------------------------- ------------------------------------- --------------------------------------
First Quarter 2003 $ 0.01 $ 0.003
- ---------------------------------------- ------------------------------------- --------------------------------------
(2) Holders.
As of March 1, 2005, the Company had approximately 380 holders of record of
its Common Stock.
(3) Dividends.
The Company has not paid any cash dividends on its Common Stock since
inception and does not anticipate paying cash dividends in the foreseeable
future. The Company anticipates that any future earnings will be retained for
use in developing and/or expanding the business.
13
(b) Recent Sales of Unregistered Securities.
As of December 31, 2004, the Company has outstanding 19,755,000 common
stock purchase options granted to various officers, directors, employees, and
service providers of the Company pursuant to the Company's 2000 Stock Option
Plan ("Plan"). The Company believes that the options granted under the Plan are
exempt from registration under the Securities Act of 1933 pursuant to Section
4(2) of such Act.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of SportsNuts, Inc. and its subsidiaries (hereafter collectively,
"SportsNuts" or the "Company") should be read in conjunction with the Audited
Financial Statements and related Notes thereto included herein. This discussion
may contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including, without limitation, statements regarding the Company's expectations,
beliefs, intentions, or future strategies that are signified by the words
"expects," "anticipates," "intends," "believes," or similar language. Actual
results could differ materially from those projected in the forward looking
statements. Prospective investors should carefully consider the information set
forth below under the caption "Risk Factors" in addition to the other
information set forth herein. The Company cautions investors that its business
and financial performance is subject to substantial risks and uncertainties.
Overview
SportsNuts is a sports management and marketing company, with a focus on
community-based amateur athletics, providing unique solutions to the challenges
faced by athletes and the organizations in which they participate. The Company
helps organize and manage a wide variety of sports events, providing online
registration and merchandise sales, event sponsorship, event coordination, and
targeted promotion using technology and strategic media relationships. The
Company seeks to be the emerging technology leader in sports information systems
and the only organization of its kind to complement its technology solutions
with offline marketing, sales, and support. The Company's mission is to become
the ultimate resource for amateur and community event coordinators,
administrators, athletes, fans and coaches.
SportsNuts endeavors to make events more profitable and efficient by
promoting such events through various media channels, attracting corporate
sponsorships, and providing technology tools to decrease administrative and
personnel costs.
The Company previously provided technology-based services such as hosting,
email exchange services, and website design to sports and other organizations
through Synerteck Incorporated, the Company's wholly-owned subsidiary
("Synerteck"). On November 15, 2004, Synerteck was spun off, on a pro-rata
basis, to the shareholders of SportsNuts. The spin-off is described in a report
on Form 8-K filed by the Company with the Securities and Exchange Commission on
October 12, 2004.
Beginning in February, 2004, the Company began offering computer hardware
sales and related services through Secure Networks, Inc., its wholly-owned
subsidiary. The Company intends to focus
14
exclusively on the sports industry and, consistent with the spin-off of
Synerteck, intends to sell or spin-off Secure Networks in the future.
The Company's principal sources of revenues are (i) online services
targeted to sports organizations and their members, (ii) offline promotional,
management, and sponsorship services provided in connection with community-based
sports events, and (iii) computer hardware sales. The ability to generate
revenues during the year 2004 and beyond depends substantially upon the
Company's resources available in order to market to and engage organizations and
their members to receive these services. Such efforts require significant
systems development, marketing and personnel costs, which, in turn, requires
substantial funding. If the Company is unable to obtain such funding, its
ability to generate revenues will be significantly impaired.
Expenses which comprise cost of goods sold are principally comprised of
offline costs associated with the management and promotion of sporting events
which the company has an active role. Also included in cost of goods sold are
commissions paid for information technology consulting contracts. As more
organizations utilize the Company's technology services, future expenses
included in cost of goods sold will be personnel and materials costs to
administer these services, as well as potential fee sharing expenses to
organizations involved in sports event management, and online registration and
administration.
General and administrative expenses have been comprised of administrative
wages and benefits; occupancy and office expenses; outside legal, accounting and
other professional fees; travel and other miscellaneous office and
administrative expenses. Selling and marketing expenses include
selling/marketing wages and benefits; advertising and promotional expenses;
travel and other miscellaneous related expenses. R&D expenses consist mainly of
development expenses related to creating new technology applications. In the
future, the Company anticipates significant expenditures in business development
to create strategic alliances with third parties, and in developing a sales
channel to the various amateur sports organizations throughout the United
States.
Because the Company has incurred losses, income tax expenses are
immaterial. No tax benefits have been booked related to operating loss
carryforwards, given the uncertainty of the Company being able to utilize such
loss carryforwards in future years. The Company anticipates incurring additional
losses during the coming year.
Results of Operations
Following is management's discussion of the relevant items affecting
results of operations for the years ended December 31, 2004 and 2003.
Revenues. The Company generated net revenues of $828,055 during the year
ended December 31, 2004, which represents a 26% increase compared to $659,223 in
net revenues during the year 2003. This increase was primarily due to greater
technology consulting fees generated during 2004 and revenues from computer
hardware sales through Secure Networks, Inc., the Company's wholly-owned
subsidiary. Along with event administration, other sources of revenue were the
sales of the Company's online services, information technology consulting, and
computer hardware sales. Because of the spin-off of Synerteck, one of the
Company's wholly-owned subsidiaries, the Company's source of revenues will be
related to sports events and services rendered pursuant thereto and computer
hardware and software sales. Accordingly, the Company anticipates that future
overall consolidated revenues will likely be lower than in prior periods.
Cost of Sales. Cost of sales for the year ended December 31, 2004 were
$506,948, a 36%
15
increase from $373,087 during the year 2003. This increase correlates to the
increase in revenues and is mainly attributable to expenses incurred pursuant to
the delivery of the Company's online registration services, sports event
management and promotional services, and sales commissions paid in connection
with technology consulting projects. The increased percentage is due to the
sales of hardware and software which do not have as high of margins as other
revenue sources of the Company. The Company anticipates that cost of sales will
increase in the future as a result of increased revenues associated with
hardware sales through Secure Networks, Inc., its wholly owned subsidiary.
General and Administrative Expenses. General and administrative expenses
for the year ended December 31, 2004 were $470,996, a 23% increase from $383,366
during the year 2003. This increase was principally due to the acquisition of
Secure Networks, Inc. which added approximately $57,000 in general and
administrative expenses during the year 2004. The Company also had expiring
warrants which were issued below market value resulting in an expense of
$50,200. Furthermore, consulting fees of $25,000 were incurred in connection
with the integration of new phone systems and other technology services.
Excluding the above expenses, general and administrative expenses for the year
ended December 31, 2004 would have been $338,796, a 12% decrease compared to the
year 2003. Management continues to make a concerted effort to decrease certain
costs associated with personnel salaries and benefits, professional fees,
contract labor, and rent and occupancy-related expense. Payroll expense and
professional fees accounted for approximately $298,231 and $34,918,
respectively, of general and administrative expenses during 2004, as compared to
$268,512 and $9,905 during 2003. The increase in payroll is once again
attributable to the addition of Secure Networks. The increase in professional
fees is due to fees associated with the spin-off of the wholly owned subsidiary,
Synerteck, Incorporated.
Selling and Marketing Expenses. Selling and marketing expenses for the year
ended December 31, 2004 were $219,462, a 6% increase from $206,482 during 2003.
This increase was primarily attributable to the acquisition of Secure Networks,
Inc. and the sales of computer hardware and software which added approximately
$49,000 in selling and marketing expenses for the year 2004. The Company
anticipates that selling and marketing expenses in the future will increase as
the Company seeks to market and promote its online technology services to sports
and non-sports organizations throughout the United States.
Product Development. Product research and development expenditures were
$63,061 for the year ended December 31, 2004, as compared to $64,011 during
2003, a decrease of 1%. Product development expenses related to the Company's
Internet services consist primarily of payroll, software and systems, and
related costs for programmers and software developers. Product development
expenses related to the Company's information technology consulting consists
primarily of payroll and systems development for the web site hosting services.
Where appropriate, the Company capitalizes certain systems development costs in
accordance with generally accepted accounting principles. The Company believes
that significant investments in product development are required to remain
competitive. Accordingly, the Company expects to incur increased expenditures
with respect to product development in future periods.
Other Income (Expense). The Company had net other expense of $121,162 for
the year ended December 31, 2004 compared to net other expense of $42,526 during
2003. The increase was primarily due to the write down of goodwill of $153,270
related to the wholly owned subsidiary Rocky Mountain Sports Alliance. Although
management believes the subsidiary will improve its operations and become
profitable, the goodwill recorded at acquisition is no longer justifiable. Gain
on forgiveness of debt of $90,539 contributed to the income in this category.
Other expenses incurred were comprised primarily of interest expenses related to
balances on Company credit cards and short term loans.
Liquidity and Capital Resources
16
As of December 31, 2004, the Company's primary source of liquidity
consisted of $14,105 in cash and cash equivalents. The Company holds most of its
cash reserves in local sweep accounts with local financial institutions. Since
inception, the Company has financed its operations through a combination of
short and long-term loans, and through the private placement of its Common
Stock.
The Company has sustained significant net losses which have resulted in an
accumulated deficit at December 31, 2004 of $23,578,674 and is currently
experiencing a substantial shortfall in operating capital which raises doubt
about the Company's ability to continue as a going concern. The net loss for the
years ended December 31, 2004 and 2003 was $553,574 and $410,249, respectively.
The Company anticipates a net loss for the year ended December 31, 2005 and with
the expected cash requirements for the coming months, without additional cash
inflows from an increase in revenues combined with continued cost-cutting or a
receipt of cash from capital investment, there is substantial doubt as to the
Company's ability to continue operations.
The Company believes these conditions have resulted from the inherent risks
associated with the small startup technology-oriented companies. Such risks
include, but are not limited to, the ability to (i) generate revenues and sales
of its products and services at levels sufficient to cover its costs and provide
a return for investors, (ii) attract additional capital in order to finance
growth, (iii) further develop and successfully market commercial products and
services, and (iv) successfully compete with other comparable companies having
financial, production and marketing resources significantly greater than those
of the Company.
The Company has made substantial progress in developing its business and
revenue models during the year 2004. In addition, the Company has implemented
stringent cost-cutting efforts and is presently working with sources of
investment capital to fund operating losses until the Company reaches
profitability. Presently, however, the Company believes that its capital
resources are insufficient for ongoing operations, with minimal current cash
reserves. The Company will likely require considerable amounts of financing to
make any significant advancements in its business strategy. There is presently
no agreement in place with any source of financing and, although management is
optimistic about the Company's ability to secure investment, there can be no
assurance that the Company will be able to raise any additional funds, or that
such funds will be available on acceptable terms. Funds raised through future
equity financing will likely be dilutive to current shareholders. Lack of
additional funds will materially affect the Company and its business, and may
cause the Company to cease operations. Consequently, shareholders could incur a
loss of their entire investment in the Company.
17
ITEM 7: FINANCIAL STATEMENTS REQUIRED BY FORM 10-KSB
CONTENTS
Report of Independent Registered Public Accounting Firm.......................19
Consolidated Balance Sheet....................................................20
Consolidated Statements of Operations........................................ 22
Consolidated Statements of Stockholders' Deficit............................. 23
Consolidated Statements of Cash Flows........................................ 25
Notes to the Consolidated Financial Statements............................... 27
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
SportsNuts, Inc. and Subsidiaries
Draper, Utah
We have audited the accompanying consolidated balance sheets of SportsNuts, Inc.
and Subsidiaries as of December 31, 2004 and the related consolidated statements
of operations, stockholders' deficit and cash flows for the years ended December
31, 2004 and 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company has
determined that it is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
SportsNuts, Inc. and Subsidiaries as of December 31, 2004 and the consolidated
results of their operations and their cash flows for the years ended December
31, 2004 and 2003 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 7 to the
consolidated financial statements, the Company has negative working capital,
negative cash flows from operations and recurring operating losses which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 7. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Bouwhuis, Morrill & Company, LLC
Layton, Utah
March 29, 2005
19
SPORTSNUTS, INC.
Consolidated Balance Sheet
ASSETS
December 31,
2004
----------------------
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 14,105
Accounts receivable, net (Note 1) 148,604
Advances due from related party (Note 8) 19,876
Prepaid expenses 7,230
----------------------
Total Current Assets 189,815
----------------------
PROPERTY AND EQUIPMENT (Note 1)
Computer hardware 514,954
Computer software 789,409
Furniture and office equipment 196,719
Less - accumulated depreciation (1,448,343)
----------------------
Total Property and Equipment 52,739
----------------------
OTHER ASSETS
Goodwill, net (Note 1) 52,696
----------------------
Total Other Assets 52,696
----------------------
TOTAL ASSETS $ 295,250
======================
The accompanying notes are an integral part of these financial statements.
20
SPORTSNUTS, INC.
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' DEFICIT
December 31,
2004
----------------------
CURRENT LIABILITIES
Accounts payable $ 867,593
Accrued expenses (Note 1) 1,480,798
Notes payable, current portion (Note 3) 110,000
Notes payable, related parties (Note 2) 597,666
----------------------
Total Current Liabilities 3,056,057
----------------------
STOCKHOLDERS DEFICIT
Common stock, $0.002 par value; 200,000,000 shares authorized,
111,674,854 shares issued and outstanding, respectively 223,350
Additional paid-in capital 20,656,267
Stock subscriptions receivable (61,750)
Accumulated deficit (23,578,674)
----------------------
Total Stockholders' Deficit (2,760,807)
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 295,250
======================
The accompanying notes are an integral part of these financial statements.
21
SPORTSNUTS, INC.
Consolidated Statements of Operations
For the Years Ended
December 31,
2004 2003
-------------------- --------------------
NET SALES $ 828,055 $ 659,223
-------------------- --------------------
OPERATING EXPENSES
Cost of sales 506,948 373,087
General and administrative 470,996 383,366
Selling and marketing 219,462 206,482
Research and development 63,061 64,011
-------------------- --------------------
Total Operating Expenses 1,260,467 1,026,946
-------------------- --------------------
LOSS FROM OPERATIONS (432,412) (367,723)
-------------------- --------------------
OTHER INCOME (EXPENSES)
Interest expense (144,581) (114,758)
Impairment of goodwill (153,270) -
Interest income 330 222
Gain on settlement of debt (Note 1) 90,539 12,470
Other income 85,820 59,540
-------------------- --------------------
Total Other Income (Expenses) (121,162) (42,526)
-------------------- --------------------
LOSS BEFORE INCOME TAXES (553,574) (410,249)
INCOME TAX EXPENSE - -
-------------------- --------------------
NET LOSS $ (553,574) $ (410,249)
==================== ====================
==================== ====================
BASIC NET LOSS PER COMMON SHARE -
BASIC AND DILUTED (Note 1)
Net loss from continuing operations $ (0.01) $ (0.00)
-------------------- --------------------
Basic Net loss Per Share $ (0.01) $ (0.00)
==================== ====================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 104,673,073 98,269,829
==================== ====================
The accompanying notes are an integral part of these financial statements.
22
SPORTSNUTS, INC.
Consolidated Statements of Stockholders' Deficit
Preferred Stock Common Stock
Shares Amount Shares Amount
------ ------ ------ ------
Balance, December 31, 2002 178,000 $ 98,268,854 $
196,538
356
Warrants/Options issued below market value - - - -
Conversion of preferred stock to common stock (178,000) $ 356,000 712
(356)
Net loss for the year ended December 31, 2003
- - - -
Balance, December 31, 2003 - - 98,624,854 197,250
Warrants/Options issued below market value - - - -
Shares issued for purchase of Secure Networks, Inc. - - 2,500,000 $ 5,000
Shares issued for debt payment - - 8,150,000 $ 16,300
Spin-off of Synerteck, Incorporated - - - -
Sale of Sports Management Partners, Inc. - - - -
Exercise of stock options - - 2,400,000 4,800
Net loss for the year ended December 31, 2004 - - - -
- - - -
Balance, December 31, 2004 $ - 111,674,854 $ 223,350
=========== ========= =========== ==========
The accompanying notes are an integral part of these financial statements.
23
SPORTSNUTS, INC.
Consolidated Statements of Stockholders' Deficit (Continued)
Additional Stock Total
Paid-In Subscription Accumulated Stockholders'
Capital Receivable Deficit Deficit
------- ---------- ------- -------
Balance, December 31, 2002 $ 20,163,380 - (22,614,851) (2,254,577)
Warrants/Options issued below market value 16,281 - - 16.281
Conversion of preferred stock to common stock (356) - - -
Net loss for the year ended December 31, 2003 - - (410,249) (410,249)
----------- --------- ------------ -----------
Balance, December 31, 2003 20,179,305 - (23,025,100) (2,648,545)
Warrants/Options issued below market value 50,200 - - 50,200
Shares issued to purchase Secure Networks, Inc. 22,500 - - 27,500
Shares issued for debt payment 24,450 - - 40,750
Spin-off of Synerteck, Incorporated 33,011 - - 33,011
Sale of Sports Management Partners, Inc. 289,851 - - 289,851
Exercise of stock options 56,950 (61,750) - -
Net loss for the year ended December 31, 2004 - - (553,574) (553,574)
------------ ----------- ---------- -----------
Balance, December 31, 2004 $ 20,656,267 (61,750) (23,578,674) (2,760,807)
============ =========== ========== ===========
The accompanying notes are an integral part of these financial statements.
24
SPORTSNUTS, INC.
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
2004 2003
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (553,574) $ (410,249)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 44,345 43,855
Warrants/options issued below market value 50,200 16,281
Gain on settlement of debt (90,539) (12,470)
Loss on impairment of goodwill 153,270 -
Changes in operating assets and liabilities:
Accounts receivable (175,403) 5,731
Advances due from related party (3,431) 39,144
Other current assets (1,230) (439)
Deferred revenue (7,500) 7,500
Accounts payable and accrued expenses 543,244 353,023
-------------------- --------------------
Net Cash Provided (Used) in Operating Activities (40,618) 42,376
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (24,204) (33,022)
-------------------- --------------------
Net Cash Used in Investing Activities (24,204) (33,022)
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable - related parties 27,000 52,000
Principal payments of notes payable - related parties - (50,000)
-------------------- --------------------
Net Cash Provided by Financing Activities $ 27,000 $ 2,000
-------------------- --------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (37,822) $ 11,354
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 51,927 40,573
-------------------- --------------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 14,105 $ 51,927
==================== ====================
The accompanying notes are an integral part of these financial statements.
25
SPORTSNUTS, INC.
Consolidated Statements of Cash Flows (Continued)
For the Years Ended
December 31,
--------------------------------------
2004 2003
----------------- -----------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest $ 4,815 $ 13,877
Income taxes $ - $ -
The accompanying notes are an integral part of these financial statements.
26
SPORTSNUTS, INC.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
a. Organization and Description of Business
SportsNuts, Inc. (the "Company") was incorporated under the laws of
the State of Delaware on July 12, 1996. On April 15, 2001 the Company
changed its name from SportsNuts.com International, Inc. to
SportsNuts, Inc. Prior to the reorganization with SportsNuts.com, Inc.
("SportsNuts"), a privately held Delaware corporation, on April 6,
1999, the Company had not commenced active business operations and was
considered a development stage company.
The Company's primary business is providing unique solutions to the
challenges faced by amateur athletes and the organizations in which
they participate. The Company helps organize and manage a wide variety
of sports events, providing online registration and merchandise sales,
event sponsorship, event coordination, and online and offline
promotion. The Company is the emerging technology leader in sports
information systems and the only organization of its kind to
compliment its technology solutions with offline, marketing, sales,
and support. The Company's mission is to become the ultimate resource
for event coordinators, administrators, athletes, fans, and coaches.
Effective April 15, 2001, the Company issued 3,800,000 shares of its
common stock to aquire Rocky Mountain Sports Alliance, Inc. ("RMSA")
in exchange for all of the issued and outstanding shares of RMSA
common stock. The acquisition was accounted for as a purchase per APB
No. 16. The RMSA is a sports management firm located in Salt Lake
City, Utah and currently holds the rights to a number of sports events
throughout Utah and the surrounding intermountain area. Management
believes that the addition of the RMSA to the Company's technology
solutions gives the Company a unique position in the amateur sports
industry in being able to provide offline as well as online support to
teams, leagues, and sports organizations.
During February 2004, the Company acquired Secure Networks, Inc. from
an individual for 2,500,000 shares of SportsNuts, Inc.'s common stock
making it a wholly owned subsidiary. The purchase agreement also
provides for issuance of up to an additional 2,500,000 shares in each
of the following three years. The actual number of shares yet to be
issued will be determined by formula in each of these three years.
Goodwill of $52,696 has been recognized as a result of this
acquisition. As of December 31, 2004, we have determined that there
has been no impairment of goodwill.
b. Accounting Method
The Company's consolidated financial statements are prepared using the
accrual method of accounting. The Company has elected a December 31
year end.
c. Cash and Cash Equivalents
Cash Equivalents include short-term, highly liquid investments with
maturities of three months or less at the time of acquisition.
27
SPORTSNUTS, INC.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Property and Equipment
Property and equipment are stated at cost. Expenditures for ordinary
maintenance and repairs are charged to operations as incurred. Major
additions and improvements are capitalized. Depreciation is computed
using the straight-line and accelerated methods over estimated useful
lives as follows:
Computer hardware 3 years
Computer software 3 years
Office equipment 7 years
Depreciation expense for the years ended December 31, 2004 and 2003
was $44,345 and $43,855, respectively.
e. Accounts Receivable
Accounts receivable are recorded net of the allowance for doubtful
accounts of $10,292 and $38,782 as of December 31, 2004 and 2003,
respectively.
f. Revenue Recognition
Substantially all of the Company's sales are on a cash-for-service
basis. Occasionally, sales are made on account for the sale of
promotional merchandise. Revenue is recognized upon completion of the
service or upon delivery of the goods.
g. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
h. Advertising
The Company follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense is included in selling and
marketing expenses in the consolidated statements of operations.
i. Goodwill
Based on SFAS No. 142, the Company has determined that the goodwill
associated with the acquisition of RMSA will no longer be amortized.
During 2004 the Company has determined that there has been an
impairment in goodwill and written off the balance of $153,270 during
the year.
28
SPORTSNUTS, INC.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
j. Basic Net Loss Per Share
For the Years Ended
December 31,
-----------------------------------------
2004 2003
------------------ -------------------
Basic net loss per share from continuing operations:
Loss (numerator) $ (553,574) $ (410,249)
Shares (denominator) 104,673,073 98,269,829
Per share amount $ (0.01) $ (0.00)
The basic loss per share of common stock is based on the weighted
average number of shares issued and outstanding during the period of
the financial statements. Common shares to be issued from preferred
stock, warrants, and options are not included in the computation
because they would have an antidilutive effect on the net loss per
common share.
k. Provision for Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes, using the liability method. The estimated future tax
effect of differences between the basis in assets and liabilities for
tax and accounting purposes is accounted for as deferred taxes. In
accordance with the provisions of SFAS No. 109, a valuation allowance
would be established to reduce deferred tax assets if it were more
likely than not that all, or some portion, of such deferred tax assets
would not be realized. A full allowance against deferred tax assets
was provided as of December 31, 2004.
At December 31, 2004 the Company had net operating loss carryforwards
of approximately $14,000,000 that may be offset against future taxable
income through 2024. No tax benefits have been reported in the
financial statements, because the potential tax benefits of the net
operating loss carry forwards are offset by a valuation allowance of
the same amount.
Due to the change in ownership provisions of the Tax Reform Act of
1986, net operating loss carryforwards for Federal income tax
reporting purposes are subject to annual limitations. Should a change
in ownership occur, net operating loss carryforwards may be limited as
to use in the future.
l. Research and Development
The Company follows the policy of charging research and development
costs to expense as incurred.
m. Stock Options and Warrants
As permitted by FASB Statement 123 "Accounting for Stock Based
Compensation" (SFAS No. 123), the Company elected to measure and
record compensation cost relative to employee stock option costs in
accordance with Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees," and related
interpretations and make pro forma disclosures of net income (loss)
and basic earnings (loss) per share as if the fair value method of
valuing stock options had been applied. Under APB Opinion 25,
compensation cost is recognized for stock options granted to employees
when the option price is less than the market price of the underlying
29
SPORTSNUTS, INC.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 -ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
m. Stock Options and Warrants (Continued)
common stock on the date of grant. As of December 31, 2004, there were
19,735,000 options outstanding which were granted to employees, all of
which were granted at exercise prices equal to or above the market
price on the grant date.
For purposes of the pro forma disclosures and to measure and record
consideration paid to non-employees in the form of stock options or
warrants, the Company applies FASB Statement 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), which requires the Company
to estimate the fair value of each dilutive instrument (stock options
and warrants) award at the grant date by using the Black-Scholes
option pricing model.
n. Gain on Settlement of Debt
The gain on settlement of debt arises from the forgiveness of certain
accounts payable by creditors of the Company in exchange for
structured cash payments or cash settlements for less than the face
amount of the obligations. The Company is continuing to negotiate with
additional creditors to settle other old accounts payable at a
discount.
o. Accrued Expenses
The company has two lines of credit outstanding at December 31, 2004.
The balances are included in accrued expenses on the financial
statements. Following are the details of each line of credit:
Line of credit is due on demand and is personally guaranteed by a shareholder of the Company.
Available credit line $ 40,000.00
Interest rate 5%
Balance outstanding at December 31, 2004 $ 21,142.86
Line of credit is due on demand.
Available credit line $ 34,000.00
Interest rate 8%
Balance outstanding at December 31, 2004 $ 28,572.74
30
SPORTSNUTS, INC.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 2 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties consisted of the following:
December 31,
2004
----------------
Note payable to a shareholder, secured by tangible
and intangible assets of the Company,
interest at 16%, principal and interest due
April 1, 2000, past due. Note is convertible into
common stock of the Company at $.10 per share. $ 450,000
Note payable to a related individual, secured
by tangible assets of the Company, interest at 16%,
principal and interest due May 4, 2000, past due.
Note is convertible into common stock of the
Company at $1.00 per share. 20,000
Notes payable to related individuals, unsecured,
interest at 10%, due on demand. 127,666
-----------------
Total notes payable - related parties 597,666
Less: current portion (597,666)
-----------------
Long-term notes payable $ -
=================
Maturities of notes payable - related parties are as follows:
Year Ending
December 31, Amount
------------------- -------------------
2005 $ 597,666
-------------------
Total $ 597,666
===================
31
SPORTSNUTS, INC.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 3 - NOTES PAYABLE
Notes payable consisted of the following:
December 31,
2004
-------------------
Note payable to an individual, secured by tangible
assets of the Company, interest at 16%,
principal and interest due May 1, 2000, past due.
Note is convertible into common stock of the
Company at $1.00 per share. $ 20,000
Note payable to an individual, unsecured,
interest at 10%, principal and interest due
June 26, 2000, past due. Note is convertible
into common stock of the Company at $1.00
per share. 25,000
Note payable to an individual, unsecured,
interest at 18%, principal and interest due
August 15, 2001, past due. Note is convertible
into common stock of the Company at $0.25
per share. 50,000
Notes payable to individuals, unsecured, interest
at 10%, due on demand. 15,000
-----------------
Total notes payable 110,000
Less: current portion (110,000)
-----------------
Long-term notes payable $ -
=================
Maturities of notes payable are as follows:
Year Ending
December 31, Amount
--------------- -----------------
2005 $ 110,000
-----------------
Total $ 110,000
=================
NOTE 4 - COMMON AND PREFERRED STOCK TRANSACTIONS
Effective December 31, 2003, the Company converted 178,000 shares of
preferred stock into 356,000 shares of common stock..
Effective February 1, 2004, the Company issued 2,500,000 shares of its
common stock valued at $0.011 per share to acquire Secure Networks,
Inc.
Effective May 14, 2004, the Company issued 3,150,000 shares of its
common stock valued at $0.005 per share in satisfaction of interest
payable due to an individual by the Company.
32
SPORTSNUTS, INC.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 4 - COMMON AND PREFERRED STOCK TRANSACTIONS (Continued)
Effective October 4, 2004, the Company issued 5,000,000 shares of its
common stock valued at $0.005 per share in satisfaction of obligations
for consulting services received by the Company.
Effective October 11, 2004, the Company issued 2,400,000 shares of its
common stock in exchange for stock options held by an employee of the
Company. The Company has recorded a stock subscription receivable of
$61,750 as payment has not yet been received.
NOTE 5 - OPTIONS AND WARRANTS
Employee Stock Options
The following tables summarize the information regarding employee
stock options at December 31, 2004:
Options outstanding at December 31, 2003 22,135,000
Options granted -
Options exercised (2,400,000)
------------------
Options outstanding at December 31, 2004 19,735,000
==================
Weighted average exercise price of options
outstanding at December 31, 2004 $ 0.01
==================
Number of Weighted Number of
Options Average Weighted Options Weighted
Outstanding Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 2004 Life Price 2004 Price
---------------------------------- ------------------------------- ----------------- ----------------
$ 0.005 8,750,000 3.80 $ 0.005 200,000 $ 0.005
$ 0.020 9,525,000 2.15 $ 0.020 3,810,416 $ 0.020
$ 0.030 1,425,000 1.38 $ 0.030 1,012,083 $ 0.030
$ 0.160 35,000 0.58 $ 0.160 35,000 $ 0.160
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plan. Accordingly, no expense has been recognized
for its stock option plan during the years ended December 31, 2004 and
2003. Had compensation cost for the Company's stock-based compensation
plan been determined based on the fair value at the grant dates for
awards under such plan consistent with the method of FASB Statement
123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the
Company's net loss and basic loss per common share would have been as
indicated below:
December 31,
-----------------------------------------
2004 2003
------------------ -------------------
------------------
Net loss as reported $ (553,574) $ (410,249)
Pro forma net loss (553,574) (455,410)
Basic loss per share as reported (0.01) (0.00)
Pro forma basic loss per share $ (0.01) $ (0.00)
33
SPORTSNUTS, INC.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 5 - OPTIONS AND WARRANTS (Continued)
The Company estimates the fair value of each stock option at the grant
date and re-valuation date by using the Black-Scholes option pricing
model based on the following assumptions:
Risk free interest rate 2.78% - 6.12%
Expected life 4-6 Years
Expected volatility 2.18 - 2.89
Dividend yield 0.0
Non-Employee Stock Options
The following tables summarize the information regarding non-employee
options outstanding at December 31, 2004.
Options outstanding at December 31, 2003 20,000
Options granted -
Options exercised -
------------------
Options outstanding at December 31, 2004 20,000
==================
Weighted average exercise price of non-employee
options outstanding at December 31, 2004 $ 0.02
==================
Number of Weighted Number of
Options Average Weighted Options Weighted
Outstanding Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 2004 Life Price 2004 Price
---------------------------------- ------------------------------- ----------------- ----------------
$ 0.02 20,000 2.22 $ 0.02 20,000 $ 0.02
The Company applies SFAS No. 123 for options issued to non-employees,
which requires the Company to estimate the fair value of each option
issued at the grant date by using the Black-Scholes pricing model with
the following assumptions:
Risk free interest rate 4.84%
Expected life 60 Months
Expected volatility 2.74
Dividend yield 0.0
As a result of applying SFAS No. 123, the Company had no expense
during the years ended December 31, 2004 and 2003.
Warrants
The following tables summarize the information regarding warrants
outstanding at December 31, 2004.
Warrants outstanding at December 31, 2003 27,339,500
Warrants granted -
Warrants expired (27,339,500)
--------------
Warrants outstanding at December 31, 2004 -
==============
34
SPORTSNUTS, INC.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 6 - OPERATING LEASES
The Company leases two (2) different facilities under non-cancelable
operating leases expiring in 2005. Rental expense for the years ended
December 31, 2004 and 2003 was $52,284 and $48,872, respectively.
Future minimum lease payments, by year and in the aggregate, under the
non-cancelable operating leases with initial or remaining terms of one
year or more are due as follows:
Year Ending
December 31, Amount
------------ ------------------
2005 $ 54,000
2006 and thereafter -
------------------
Total minimum lease payments $ 54,000
==================
NOTE 7 - GOING CONCERN
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal
course of business. The Company has sustained significant net losses
which have resulted in an accumulated deficit at December 31, 2004 of
approximately $23,500,000 and has experienced periodic cash flow
difficulties, all of which raise substantial doubt regarding the
Company's ability to continue as a going concern.
The net loss for the years ended December 31, 2004 and 2003 was
$553,574 and $410,249, respectively. To date the Company has funded
its operations through a combination of short and long-term loans and
the private placement of its common stock. The Company anticipates
another net loss for the year ended December 31, 2005 and with the
expected cash requirements for the coming year, there is substantial
doubt as to the Company's ability to continue operations.
The Company believes these conditions have resulted from the inherent
risks associated with small startup technology-oriented companies.
Such risks include, but are not limited to, the ability to (i)
generate revenues and sales of its products and services at levels
sufficient to cover its costs and provide a return for investors, (ii)
attract additional capital in order to finance growth, (iii) further
develop and successfully market commercial products and services, and
(iv) successfully compete with other comparable companies having
financial, production and marketing resources significantly greater
than those of the Company.
The Company is attempting to improve these conditions by way of
financial assistance through issuances of additional equity and by
generating revenues through sales of products and services.
NOTE 8 - RELATED PARTY TRANSACTIONS
During 2004 and 2003, the Company paid $110,938 in advances to a
company with a common officer. The balance receivable at December 31,
2004 is $19,875.
35
SPORTSNUTS, INC.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 9 - SEGMENT REPORTING
SportsNuts, Inc.'s reportable segments are business units that offer
different products and services. The Company has three reportable
business segments: online services, sports event management and
information technology consulting. The online services segment
provides internet team and league management for amateur sports
organizations and online registrations for sporting events. The sports
event management segment creates, promotes and manages sporting
events. The information technology consulting segment provides
services related to computer hardware, software and websites.
The policies applied to determine the segment information are the same
as those described in the summary of significant accounting policies
(Note 1). All significant intersegment transactions have been
eliminated in the consolidated financial statements. Financial
information as of and for the year ended December 31, 2004 with
respect to the reportable segments is as follows:
Information
Online Sports Event Technology
Services Management Consulting
--------------- --------------- ----------------
Cash $ 7,509 $ 3,349 $ 3,247
Fixed assets, net 47,456 3,256 2,027
Total assets 198,973 31,341 147,839
Total liabilities 2,776,703 39,010 240,344
External revenues 55,833 143,351 628,871
Cost of goods sold 14,199 75,154 428,595
Other income (expense) (100,301) (3,410) (17,451)
Segment profit (loss) before tax effect (414,394) (22,685) (116,495)
NOTE 10 - DISPOSITION AND SALE OF SUBSIDIARIES
Synerteck Incoporporated
On November 15, 2004, the Company distributed all of its shares of
Synerteck Incorporated (a wholly owned subsidiary) to the shareholders
of SportsNuts, Inc. on a pro-rata basis by way of an exchange and
distribution of 100% of Synerteck's outstanding shares. The total
number of SportsNuts shares outstanding has not changed due to this
transaction which terminated the parent/subsidiary relationship.
Sports Management Partners, Inc.
On October 14, 2004, the Company sold all of its shares of Sports
Management Partners, Inc. (SMPI) (a wholly owned subsidiary) to a
related individual for $1. SMPI has had not activity since 2002. At
the time of sale SMPI had an accumulated deficit of $289,851,
liabilities of $350,161 and a deficit in paid-in capital of $60,310.
SportsNuts no longer holds any interest in SMPI due to this
transaction which terminated the parent/subsidiary relationship. As
the transaction was with a related party no gain has been reported in
the income statement and the effects of this transaction have been
included in additional paid-in capital.
36
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 8A: CONTROLS AND PROCEDURES
The Company's principal executive officer and principal financial
officer, based on their evaluation of the Company's disclosure controls and
procedures (as defined in Rules 13a-14 (c) and 15d-14 (c) of the Securities
Exchange Act of 1934) as of December 31, 2004 have concluded that the Company's
disclosure controls and procedures are adequate and effective to ensure that
material information relating to the Company and its consolidated subsidiaries
are recorded, processed, summarized and reported within the time periods
specified by the SEC's rules and forms, particularly during the period in which
this annual report has been prepared.
The Company's principal executive officer and principal financial officer
have concluded that there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls for
the year ended December 31, 2004, the date of their most recent evaluation of
such controls, and that there were no significant deficiencies or material
weaknesses in the Company's internal controls.
37
PART III
ITEM 9: DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.
Pursuant to the Company's Delaware Certificate of Incorporation and Bylaws,
the Company's Board of Directors (the "Board") has been divided into three
classes, with only a single class subject to re-election each year. The initial
re-election of the Board under this procedure requires the directors to be
nominated to serve a one-, two-, or three-year term. Thereafter, any director,
whether elected or re-elected, will serve a three-year term. Each of the
Company's eight directorships has been divided into one of these three classes,
with one class containing two directorships and two classes containing three
directorships. Kenneth I. Denos, age 37, is the Chief Executive Officer of the
Company and currently the only executive officer of the Company and the only
member of the Board of Directors. A short summary of Mr. Denos' business
experience is below. His term of office will expire at the next annual
shareholders meeting. No annual shareholders meeting is planned for the year
2005.
Kenneth Denos, age 37, has worked with SportsNuts since November, 1998,
and has served as the Company's Chief Executive Officer, General Counsel,
Secretary, and a member of the Board of Directors since April, 1999. Mr. Denos
also serves on the Board of Directors of Moore, Clayton & Co., Inc., an
international strategic and advisory firm with offices in Los Angeles, Salt Lake
City, New York City, and London. Mr. Denos also serves on the Board of Directors
of Healthcare Enterprise Group PLC (LSE: HCEG) an international healthcare
products distribution and advisory firm, MCC Energy plc (LSE: MCCE), an
international energy services firm, and Synerteck Incorporated (OTCBB: SYNR), a
technology services company which files reports with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934. Previously, from
1996 to 1998, Mr. Denos practiced with the Salt Lake City-based law firm of
Jones, Waldo, Holbrook & McDonough, concentrating on growing technology and
Internet-based companies, providing assistance in corporate governance, debt and
equity financing, joint ventures, licensing, mergers, acquisitions, and
securities law compliance. Mr. Denos holds a Bachelor of Arts degree from the
University of Utah in Business Finance and Political Science, and holds a Master
of Business Administration Degree from the University of Utah School of Business
and a Juris Doctor from the University of Utah College of Law. Prior to
practicing with Jones, Waldo, he was special projects manager at Utah Technology
Finance Corporation, a technology based venture lending agency.
Board of Directors Meetings and Committees
Although various items were reviewed and approved by the Board of Directors
during 2004, the Board held no meetings during the fiscal year ended December
31, 2004.
The Company does not have Audit or Compensation Committees of the Board of
Directors.
Compensation of Directors
Although the Company anticipates compensating the members of its Board of
Directors in the future at industry levels, current members are not paid cash
compensation for their service as directors. Each director may be reimbursed for
certain expenses incurred in attending Board of Directors and committee
meetings. Directors may also be granted stock options under the Company's 2000
Stock Option Plan.
38
ITEM 10: EXECUTIVE COMPENSATION.
The following table sets forth certain information regarding the annual and
long-term compensation for services rendered in all capacities during the fiscal
year ended December 31, 2004, 2003, and 2002 of those persons who were the
Company's Chief Executive Officer and other executive officers of the Company.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
------------------- ------------
Name and Securities All Other
Principal Year Salary Bonus Underlying Compensation
Position Options
- -------- ---- ------ ----- ---------- ------------
Kenneth Denos 2004 $100,000 $0 $0 $0
CEO 2003 $100,000 $0 $0 $0
2002 $100,000 $0 $8,000,000 $0
(1) Represents $100,000 in earned but unpaid salary during 2004.
(2) Represents $100,000 in earned but unpaid salary during 2003.
(3) Represents $100,000 in earned but unpaid salary during 2002.
Aggregated Option Exercises in Last Fiscal Year and Year End Option Values
Number of Value of Unexercised
Unexercised Options at In-the-Money Options
December 31, 2004 at December 31, 2004(1)
Shares
Acquired Value Exercisable/
Name On Exercise Realized Exercisable/ Unexercisable
Unexercisable
---- ----------- -------- ------------- --------------
Kenneth Denos 0 0 1,000,000/0 0/0
Kenneth Denos 0 0 6,333,334/2,666,666 0/0
(1) Based on the closing sales price of the Common Stock on the NASD Electronic
Bulletin Board on December 31, 2004 of $0.012.
39
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANGEMENT AND
RELATED STOCKHOLDER MATTERS.
(a) Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock (par value $0.002 per share) as of March
1, 2005 by (i) each person (or group of affiliated persons) who is known by the
Company to beneficially own more than 5% of the outstanding shares of the
Company's Common Stock, (ii) each person who has served as a director or
executive officer of the Company during the calendar year 2004, and (iii) all
persons who have served as a director or executive officer of the Company during
the calendar year 2004 as a group. As of such date, the Company had 111,674,854
shares of Common Stock outstanding. Unless indicated otherwise, the address for
each officer, director, and 5% shareholder is c/o the Company, 11585 South State
Street, Suite 102, Draper, Utah 84020.
Common Stock
Directors, Executive Officers,
5% Stockholders Number Percent of Class(1)
--------------- ------ -------------------------
Kenneth Denos(2) 23,001,286 17.48%
Prestbury Investment Holdings Limited(3) 25,000,000 22.39%
Nigel Wray(4) 25,000,000 22.39%
Nicholas Leslau(5) 25,000,000 22.39%
Gardner Management, Inc. Profit Sharing Plan and Trust(6) 19,026,607 16.07%
Moore, Clayton & Co., Inc.(7) 14,667,953 11.71%
Todd Shell(8) 7,500,000 6.72%
- ------------- --------- -----
All directors and officers as a group 23,001,286 17.48%
(1 person)
(1) For each shareholder, the calculation of percentage of beneficial ownership
is based upon 111,674,854 shares of Common Stock outstanding as of March 1,
2005, and shares of Common Stock subject to options, warrants and/or conversion
rights held by the shareholder that are currently exercisable or exercisable
within 60 days, which are deemed to be outstanding and to be beneficially owned
by the shareholder holding such options, warrants, or conversion rights. The
percentage ownership of any shareholder is determined by assuming that the
shareholder has exercised all options, warrants and conversion rights to obtain
additional securities and that no other shareholder has exercised such rights.
Except as otherwise indicated below, the persons and entity named in the table
have sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to applicable community property
laws.
(2) Chief Executive Officer, Secretary, and Director of the Company. Includes
2,000,000 shares of Common Stock held directly by Mr. Denos and 6,333,334 shares
of Common Stock issuable upon exercise of options held by Mr. Denos that are
currently exercisable or will become exercisable within 60 days. Because Mr.
Denos is a member of the Board of Directors of Moore, Clayton & Co., Inc.
("MCC"), this number also includes 1,071,429 shares held directly by MCC, and
certain promissory notes held by MCC that are currently convertible into
13,596,524 shares of Common Stock Excludes 2,666,666 shares of Common Stock
issuable upon exercise of options held by Mr. Denos that are not currently
exercisable and will not become exercisable within 60 days.
(3) Principal Shareholder of the Company. Includes 25,000,000 shares held
directly by Prestbury Investment Holdings Limited ("PIHL").
(4) Prinicipal of PIHL and, together with Mr. Nicholas Leslau, the controlling
shareholders of PIHL. Includes 25,000,000 shares of Common Stock held directly
by PIHL.
(5) Principal of PIHL and, together with Mr. Nigel Wray, the controlling
shareholders of PIHL. Includes 25,000,000 shares of Common Stock held directly
by PIHL.
(6) Principal Shareholder of the Company. Includes 12,273,895 shares of Common
Stock held directly by Gardner Management, Inc. Profit Sharing Plan and Trust
and 6,752,712 shares of Common Stock issuable upon the exercise of a Convertible
Promissory Note held by the Trust.
40
(7) Principal Shareholder of the Company. Includes 1,071,429 shares held
directly by MCC and certain promissory notes held by MCC that are convertible
into 13,596,524 shares of Common Stock.
(8) Principal Shareholder of the Company. Includes 5,000,000 shares of Common
Stock held directly by Mr. Shell and 2,500,000 shares of Common Stock held by
Kelli Shell, the wife of Mr. Shell.
(b) Related Stockholder Matters.
(1) Equity Compensation Plan Information
Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance
exercise of outstanding options, under equity compensation
outstanding options, warrants and rights plans (excluding securities
warrants and rights reflected in column (a))
Equity compensation
plans approved by 50,000,000 $0.02 27,745,000
security holders
Equity compensation
plans not approved by 5,000,000 $0 0
security holders
Total 55,000,000 $0.018 27,745,000
(c) Possible Change of Control.
To reduce the Company's debts, the Company may attempt to convert certain
of its liabilities into Common Stock during 2005 and 2006, depending upon the
agreement of various creditors of the Company. These liabilities are the result
of loans received by the Company, accrued payroll expense for various employees
of the Company, and operating liabilities incurred but unpaid during the past
five years. Although the Company will endeavor to obtain the highest possible
conversion price to such liabilities, the collective effect of converting a
substantial amount of this debt may result in a change of control of the Company
in favor of certain of the Company's larger creditors.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 2004, Kenneth I. Denos, the Chief Executive Officer of the Company,
made various loans to the Company in his personal capacity and through a
professional corporation controlled by Mr. Denos. These loans, aggregating
$121,500, were made for working capital purposes, are due upon demand, and bear
interest at the rate of ten percent (10%) per annum until repaid.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Documents Filed as a Part of this Report
(1) Financial Statements
See "Item 7 - Financial Statements Required by Form 10-KSB."
(2) Financial Statement Schedules
41
The following Financial Statement Schedules of the Company and its
subsidiaries, together with the report of Bouwhuis Morrill & Company, LLC,
the Company's independent accountants, thereon are filed as part of this
Report on Form 10-KSB as listed below and should be read in conjunction
with the consolidated financial statements of the Company:
Report of Bouwhuis Morrill & Company, LLC, Independent Accountants, on
Financial Statement Schedules.
(3) Exhibits
See "Index to Exhibits."
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
2004.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees Billed For Audit and Non-Audit Services
The following table represents the aggregate fees billed for professional
audit services rendered to the Company by Bouwhuis, Morrill & Company, LLC, our
current independent auditor, ("BMC") for the audit of the Company's annual
financial statements for the years ended December 31, 2004 and 2003, and all
fees billed for other services rendered by BMC during those periods.
Year Ended December 31 2004 2003
- ---------------------- ---- ----
Audit Fees(1) $12,090 $0
Audit-Related Fees(2) 0 0
Tax Fees(3) 0 0
All Other Fees(4) 2,365 0
-------- ---------
Total Accounting Fees and Services $14,455 $00,000
(1) Audit Fees. These are fees for professional services for the audit of the
Company's annual financial statements, and for the review of the financial
statements included in the Company's filings on Form 10-QSB, and for services
that are normally provided in connection with statutory and regulatory filings
or engagements. The amounts shown for BMC in 2003 relate to (i) the audit of the
Company's annual financial statements for the fiscal year ended December 31,
2002, and (ii) the review of the financial statements included in the Company's
filings on Form 10-QSB for the first, second and third quarters of 2003. The
amounts shown for BMC in 2004 relate to (i) the audit of the Company's annual
financial statements for the fiscal year ended December 31, 2003, and (ii) the
review of the financial statements included in the Company's filings on Form
10-QSB for the first, second and third quarters of 2004.
(2) Audit-Related Fees. These are fees for the assurance and related services
reasonably related to the performance of the audit or the review of the
Company's financial statements.
(3) Tax Fees. These are fees for professional services with respect to tax
compliance, tax advice, and tax planning.
(4) All Other Fees. These are fees for permissible work that does not fall
within any of the other fee categories, i.e., Audit Fees, Audit-Related Fees, or
Tax Fees.
INDEX TO EXHIBITS
42
Exhibit
Number Title of Document
3.1 Certificate of Incorporation of SportsNuts, Inc., a Delaware corporation. (1)
3.2 Bylaws of SportsNuts, Inc., a Delaware corporation. (1)
10.1 Convertible Promissory Note and Security Agreement among Gardner Management, Inc.
Profit Sharing Plan and Trust, SportsNuts.com, Inc., Sportzz.com, Inc., and the
Company, including amendments, dated February 1, 2000.(3)
10.2 SportsNuts, Inc. 2000 Stock Option Plan.(4)
21.1 Subsidiaries of the Registrant (5)
Certification by Chief Executive Officer and Chief Financial Officer, Kenneth I.
99.1 Denos, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by Chief Executive Officer and Chief Financial Officer, Kenneth I.
99.2 Denos, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1) Filed as an Exhibit to the Company's quarterly report on Form 10-QSB, filed
with the Commission on August 14, 2001.
(2) Filed as an Exhibit to the Company's quarterly report on Form 10-QSB, filed
with the Commission on August 14, 2001.
(3) Filed as an Exhibit to the Company's annual report on Form 10-KSB, filed
with the Commission on March 30, 2000.
(4) Filed as an Exhibit to the Company's Quarterly Report on Form 10-QSB, filed
with the Commission on May 11, 2001.
(5) Filed as an Exhibit to the Company's quarterly report on Form 10-QSB, filed
with the Commission on March 17, 2004.
43
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPORTSNUTS, INC.
Dated: March 25, 2005 By: /s/ Kenneth Denos
-------------------------
Kenneth Denos
Chief Executive Officer
and Chief Financial Officer