UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2005
Commission File Number 001-15977
TIGER TELEMATICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4051167
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
550 Water Street, Suite 937
Jacksonville, Florida 32202
(Address of principal executive offices) (Zip Code)
(904) 279-9240
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 No X
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class September 30, 2005
--------------------------- ---------------------------
Common Stock, Par 63,225,000
Value $0.001 per share
CONTENTS
Part I Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Operations for the
six months ended June 30, 2005 and 2004 4
Condensed Consolidated Statements of Operations for the
three months ended June 30, 2005 and 2004 5
Condensed Consolidated Statement of Stockholders' Deficiency 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
Part II Tiger Telematics, Inc. Other Information
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits 27
Pursuant to Regulation S-X, prior to filing quarterly reports on Form 10-Q,
independent public accountants must review the interim financial statements
using professional standards and procedures for conducting such reviews, as
established by generally accepted auditing standards, as may be modified or
supplemented by the Securities and Exchange Commission.
The Company's independent public accountants, Goldstein Golub Kessler LLP,
declined to review the Company's financial statements as required by Regulation
S-X until an independent committee of the Company's Board of Directors completes
its investigation of certain related party transactions, all as more
particularly described in Note F - Related Party Transactions. Accordingly, the
attached financial statements do not comply with the requirements of Regulation
S-X.
The Company elected to file this Form 10-Q report without the independent public
accountants' review of the Company's financial statements in order to provide
current information to its shareholders. The Company believes the financial
statements contained herein will not be materially different from the Company's
financial statements after they are reviewed by its independent public
accountants.
1
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2005 and December 31, 2004
Unaudited
June 30, December 31,
2005 2004
------------ ------------
ASSETS
Current Assets
Cash $ 207,547 $ 4,653,559
Accounts receivable 782,331 616,571
Other receivables 5,762,111 3,129,235
Inventories 2,646,995 38,532
Advances to employees -- 204,081
Deposits with suppliers 576 924,456
Prepaid expenses and other current assets 1,497,970 698,106
------------ ------------
Total current assets 10,897,530 10,264,540
Property and Equipment, net 2,514,299 350,626
Assets held for sale 1,441,062 755,227
Other assets:
Goodwill 3,911,835 3,975,670
Other intangible assets 1,901,765 1,901,765
Deferred tax asset, net of valuation
allowance of $128,000,000 and $45,000,000
in 2005 and 2004 respectively -- --
------------ ------------
$ 20,666,491 $ 17,247,828
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Short term notes payable $ 15,154,880 $ --
Accounts payable 23,305,221 13,976,402
Amount due stockholders 1,225,638 894,933
Notes payable - Current portion 269,414 78,937
Accrued expenses 8,420,238 7,496,355
Foreign tax accrual 39,809,908 7,567,352
Deposits on common stock -- 1,871,730
Contingent liabilities arising from discontinued
operations 1,168,243 1,168,243
------------ ------------
Total current liabilities 89,353,542 33,053,952
Notes payable after one year 951,000 408,638
------------ ------------
Total liabilities 90,304,542 33,462,590
------------ ------------
2
CONSOLIDATED BALANCE SHEETS (Cont.)
June 30, 2005 and December 31, 2004
Unaudited
June 30, December 31,
2005 2004
------------- -------------
COMMITMENTS AND CONTINGENCIES
Stockholders' Deficiency
Common stock - 0.001 par value, authorized
500,000,000 shares. Issued and outstanding
56,344,967 and 36,306,607 in 2005 and 2004
respectively 56,346 36,307
Additional paid-in-capital 268,854,572 107,017,140
Accumulated other comprehensive income (loss) 1,711,063 (3,112,766)
Accumulated deficiency (340,260,032) (120,155,443)
------------- -------------
Stockholders' deficiency (69,638,051) (16,214,762)
------------- -------------
$ 20,666,491 $ 17,247,828
============= =============
See Notes to Consolidated Financial Statements
3
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended June 30, 2005 and 2004
Unaudited
2005 2004
------------- -------------
Net sales $ 1,560,199 $ 183,829
Cost of goods sold 1,186,789 149,214
------------- -------------
Gross Profit 373,410 34,615
------------- -------------
Operating expenses
Selling expense 26,539,687 2,021,928
General and administrative 191,467,038 23,438,321
------------- -------------
Total Operating Expenses 218,006,725 25,460,249
------------- -------------
Operating Loss (217,633,315) (25,425,634)
------------- -------------
Other income (expense)
Other (70,352) 14,996
Interest expense (2,098,673) (54,240)
Loss on foreign currency transactions (302,249) --
------------- -------------
(2,471,274) (39,244)
------------- -------------
Net loss $(220,104,589) $ (25,464,878)
============= =============
Net loss per common share (basic and diluted) $ (4.49) $ (1.86)
============= =============
Weighted average shares outstanding - basic
and diluted
48,998,255 13,725,749
============= =============
See Notes to Consolidated Financial Statements
4
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 2005 and 2004
Unaudited
2005 2004
------------ ------------
Net sales $ 1,140,003 $ 183,829
Cost of goods sold 731,697 149,214
------------ ------------
Gross Profit 408,306 34,615
------------ ------------
Operating expenses
Selling expense 13,982,733 1,182,363
General and administrative 40,452,571 18,548,053
------------ ------------
Total Operating Expenses 54,435,304 19,730,416
------------ ------------
Operating Loss (54,026,998) (19,695,801)
------------ ------------
Other income (expense)
Other (68,066) 14,996
Interest expense (1,949,171) (15,948)
Loss on foreign currency exchange (302,249) --
------------ ------------
(2,319,486) (952)
------------ ------------
Net loss $(56,346,484) $(19,696,753)
============ ============
Net loss per common share (basic and diluted) $ (1.02) $ (1.21)
============ ============
Weighted average shares outstanding
(basic and diluted) 54,973,969 16,227,321
============ ============
See Notes to Consolidated Financial Statements
5
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
For the six months ended June 30, 2005
Unaudited
Accumulated
Additional Other Total
Common Stock Paid-in Comprehensive Accumulated Stockholders'
Shares Amount Capital Loss Deficit Deficiency
------------- ------------- ------------- ------------- ------------- -------------
Balance (deficiency)
December 31, 2004 36,306,607 $ 36,307 $ 107,017,140 $ (3,112,766) $(120,155,443) $ (16,214,762)
============= ============= ============= ============= ============= =============
Issuance of common stock:
Private placement 2,512,799 2,513 37,930,877 -- -- 37,933,390
Stock based employee
compensation 4,916,676 4,917 37,208,806 -- -- 37,213,723
Services 11,008,885 11,009 75,691,473 -- -- 75,702,482
Interest on notes
payable 1,000,000 1,000 4,318,000 -- -- 4,319,000
Contingent shares
related to Indie
acquisition 600,000 600 4,175,400 -- -- 4,176,000
Warrants issued to
purchase 3,027,069
shares of common stock -- -- 2,512,876 -- -- 2,512,876
Net Loss -- -- -- (220,104,589) (220,104,589) (220,104,589)
Other comprehensive
income (loss) - foreign
currency translation
adjustment -- -- -- 4,823,829 -- 4,823,829
-------------
Total comprehensive loss -- -- -- (215,280,760) -- --
------------- ------------- ------------- ------------- ------------- -------------
Balance (deficiency)
June 30, 2005 56,344,967 $ 56,346 $ 268,854,572 $ 1,711,063 $(340,260,032) $ (69,638,051)
============= ============= ============= ============= ============= =============
See Notes to Consolidated Financial Statements
6
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2005 and 2004
Unaudited
2005 2004
------------- -------------
Cash Flows from Operating Activities:
Net loss $(220,104,589) $ (25,464,878)
Other comprehensive income (loss) 4,823,829 (16,261)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Depreciation 254,342 86,790
Expenses paid with common stock 121,411,205 7,600,771
Impairment of goodwill 63,835 55,777
Changes in assets and liabilities:
(Increase) in other accounts receivable (2,632,876) (20,071)
(Increase) in inventory (2,608,463) --
Decrease (increase) in advances to employees 204,081 (2,734,690)
Decrease in deposits with suppliers 923,880 --
(Increase) in prepaid expenses (799,864) --
Increase in short term notes payable 15,154,880 --
Increase in accounts payable 9,328,819 5,676,171
Increase (decrease) in accrued expenses 923,883 1,249,816
Increase in foreign tax accrual 32,242,556 --
Other - net (165,760) 16,840
------------- -------------
Net cash used in operating activities (40,980,242) (13,549,735)
------------- -------------
Cash Flows From Investing Activities:
Purchase of property and equipment (2,418,015) (110,481)
Assets held for sale (685,835) --
------------- -------------
Net cash used in investing activities (3,103,850) (110,481)
------------- -------------
Cash Flows From Financing Activities:
Issuance of common stock and warrants 40,446,266 6,895,857
Loans and advances from stockholders 330,705 1,452,155
Repayment to stockholders -- --
Proceeds from long term borrowing 762,839 --
Payments on debt (30,000) (21,779)
Deposits on common stock (1,871,730) 7,156,199
------------- -------------
Net cash provided by financing activities 39,638,080 15,482,432
------------- -------------
Net change in cash (4,446,012) 1,822,216
Cash:
Beginning of year 4,653,559 8,959
------------- -------------
End of Year $ 207,547 $ 1,831,175
============= =============
Supplemental disclosure of Cash Flow Information:
Cash paid for interest $ 232,741 $ 54,240
============= =============
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
For the six months ended June 30, 2005 and 2004
Unaudited
2005 2004
------------- -------------
Supplemental Disclosure of Non-cash Investing and
Operating Activities: Stock issued for:
Operating expenses $ 75,702,482 $ 93,100
Employee compensation 37,213,723 --
Interest on notes payable 4,319,000 --
Contingent consideration for Indie
Studios acquisition 4,176,000 --
------------- -------------
$ 121,411,205 $ 93,100
============= =============
Financing Activities:
Conversion of stockholder debt to common stock $ -- $ 55,000
============= =============
Investing Activities:
Common stock owed to sellers $ 92,800
Liabilities in excess of assets acquired 223,099
-------------
$ 315,899
=============
Acquisition of ISIS Models Limited:
Goodwill $ 315,899
Accounts receivable 326,510
Accounts payable (520,420)
Due to related parties (14,437)
Accrued expenses (14,752)
Common stock owed to sellers (92,800)
-------------
Cash received $ --
=============
See Notes to Consolidated Financial Statements
8
TIGER TELEMATICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
Pursuant to Regulation S-X, prior to filing quarterly reports on Form 10-Q,
independent public accountants must review the interim financial statements
using professional standards and procedures for conducting such reviews, as
established by generally accepted auditing standards, as may be modified or
supplemented by the Securities and Exchange Commission.
The Company's independent public accountants, Goldstein Golub Kessler LLP,
declined to review the Company's financial statements as required by Regulation
S-X until an independent committee of the Company's Board of Directors completes
its investigation of certain related party transactions, all as more
particularly described in Note F - Related Party Transactions. Accordingly, the
attached financial statements do not comply with the requirements of Regulation
S-X.
The Company elected to file this Form 10-Q report without the independent public
accountants' review of the Company's financial statements in order to provide
current information to its shareholders. The Company believes the financial
statements contained herein will not be materially different from the Company's
financial statements after they are reviewed by its independent public
accountants.
The condensed consolidated financial statements as of June 30, 2005 and for the
three month and six month periods ended June 30, 2005 and June 30, 2004,
included herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
information for the periods indicated have been included. For further
information regarding the Company's accounting policies, refer to the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004.
Tiger Telematics, Inc. ("Tiger Telematics" or the "Company"), a Delaware
corporation, is the parent company of several subsidiaries, including Gizmondo
Europe Ltd., the developer of the multi-entertainment wireless handheld gaming
device called the Gizmondo and Gizmondo Games Studios that makes new games and
converts existing games for the Gizmondo. The consolidated financial statements
include the accounts of Tiger Telematics and its subsidiaries, Gizmondo Europe
Ltd. (and its subsidiaries), Tiger Telematics USA, Inc., ISIS Models Ltd., Indie
Studios AB, Gizmondo Studios AB, Gizmondo Studios Texas, Gizmondo Games Ltd (UK)
and Gizmondo Studios Ltd (UK). Intercompany accounts and transactions have been
eliminated.
Going Concern:
The Company has sustained net losses aggregating $118 million for the three
years ended December 31, 2004 and $220 million for the six months ended June 30,
9
2005. In addition, the Company at June 30, 2005 had a net working capital
deficiency of $78.5 million. During those periods, $156 million of expenses were
funded by issuing restricted common stock in exchange for services and did not
require the use of cash. Management anticipates proceeds from sales of Gizmondo
units and accessories to increase significantly after the U. S. launch of the
product on October 22, 2005. Management also anticipates the issuance of equity
securities to meet working capital requirements and to fund development costs
incurred in connection with developing telematics related products that the
Company believes will enhance its operations. Additionally, the Company borrowed
approximately $21.2 million from shareholders on a short-term basis during the
second quarter and management believes that future shareholder loans are
available if needed.
The Company has instituted significant cost savings measures including: closing
unneeded facilities, reducing staff and instituting other cost savings measures.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classifications of liabilities that might be necessary in the event the Company
cannot continue as a going concern.
Description of the business:
Tiger Telematics and its subsidiaries are principally engaged in the business of
developing and marketing the Gizmondo wireless handheld multi-entertainment
gaming device and related games and accessories associated with the Gizmondo.
The Company started Gizmondo Europe, Ltd. (formerly Tiger Telematics Europe
Ltd.) in late 2002 to focus on developing new telematics products including next
generation fleet telematics products and child tracker products.
In 2003, the Company began developing a new multi-entertainment wireless
handheld gaming device referred to as Gizmondo. While the Company previously
developed a variety of commercial telematics products, since early 2004 the
Company's primary business strategy has been to develop the Gizmondo. The
Company launched the full-scale production of Gizmondo in the UK in March 2005,
and on October 22, 2005 made a full-scale introduction to the US market. The
Gizmondo is powered by a Microsoft Windows CE.net platform, has a 2.8-inch TFT
color screen with a Samsung ARM9 400Mhz processor and incorporates the GoForce
3D 4500 NVIDIA graphics accelerator. Gizmondo provides cutting-edge gaming,
multimedia messaging, an MP3 music player, Mpeg4 movie playing capability, a
digital camera and a GPRS network link to allow wide-area network gaming.
Additionally, Gizmondo contains a GPS chip for location based services, is
equipped with Bluetooth for use in multi-player gaming and accepts MMC card
accessories. The Company's Games Studios develops new games and converts
existing games for use with the Gizmondo. The Gizmondo represents the Company's
primary business segment.
Valuation of Common Stock:
The shares of the Company's common stock issued as payment for services,
employee bonuses, acquisitions and debt payments are restricted securities and
may not be currently sold. An independent business valuation expert determines
the "fair value" of these restricted securities on a quarterly basis. Management
believes that the appraised value is a better indication of the fair value of
the restricted shares issued than the price of freely traded shares in the open
market due to the large number of issued restricted shares.
10
Segment Information:
The Company primarily focuses all of its business in one segment, the
development, production, and sale of the wireless handheld multi-entertainment
gaming device, Gizmondo, and the related game products for use on the Gizmondo.
NOTE B - ADVANCES TO AND AMOUNTS DUE EMPLOYEES AND STOCKHOLDERS AND OTHER
RECEIVABLES
Advances to employees and stockholders of subsidiaries of the Company of $0 and
$204 thousand at June 30, 2005 and December 31, 2004, respectively, are due on
demand, without interest.
Amounts due to employees and stockholders of $1.2 million and $248 thousand at
June 30, 2005 and December 31, 2004, respectively, are due on demand, without
interest.
Other receivables of $5.8 million and $3.1 million at June 30, 2005 and December
31, 2004, respectively, consist primarily of VAT tax recoverable from government
agencies. At June 30, 2005, other receivables also includes $1.4 million due
from Integra, a former acquisition candidate. The Company believes that the
receivable due from Integra is fully collectable based on the collateral pledged
to secure this loan. (See NOTE K - Contingencies)
NOTE C - EQUITY TRANSACTIONS
During the first six months of 2005, the Company issued 20,038,360 shares of
restricted common stock in numerous private transactions with an aggregate value
of $159.3 million, all as more particularly described below:
Issued 12,008,885 shares in payment of consulting services related to
development of the Gizmondo, aggregating $80.0 million. The shares
issued were valued at $4.31 to $7.92 per share. Included in the above
amounts were 1 million shares valued at $4.3 million for interest on
short-term notes payable.
Sold 2,512,799 shares of restricted common stock in various private
placement transactions with individual and institutional investors
aggregating $37.9 million in cash. The shares issued were valued at
$5.00 to $20.00 per share.
Issued 600,000 shares of restricted common stock valued at $4.2 million
in connection with the successful completion of a product development
project.
Issued 4,916,676 shares of restricted common stock in payment to
employees aggregating $37.2 million. The shares were valued at $4.31 to
$7.92 per share. Of those shares, executives of the Company received
4,045,036 shares valued at $27.9 million, and Warthog employees
received 422,000 shares valued at $3.2 million.
11
From July 1 to September 30, 2005, the Company issued approximately 5.8 million
additional shares in numerous private transactions (a) for cash, (b) to settle
accounts payable or other liabilities, and (c) to purchase goods or services
provided by vendors, strategic partners, professionals, consultants and
employees. In each case the Company recorded capital surplus based upon the fair
value of the Company's common stock at the time of issuance or agreement to
issue. The aggregate amount recorded during 2005 was approximately $211 million,
including the above-described shares.
Following is a recap of additional shares issued after June 30, 2005:
------------------------------- -------------- ------------------- --------------------
Number of Price Per Share Common Stock and
Shares Additional Paid
in Capital
------------------------------- -------------- ------------------- --------------------
Balance, June 30, 2005 56,344,967 $268,854,572
------------------------------- -------------- ------------------- --------------------
July 1 to September 30, 2005:
------------------------------- -------------- ------------------- --------------------
Sale of Securities 2,472,741 $3.50 to $20.00 25,629,274
------------------------------- -------------- ------------------- --------------------
Services 4,059,294 $4.61 to $5.60 20,475,271
------------------------------- -------------- ------------------- --------------------
Employee compensation 230,950 $4.61 to $5.60 1,220,938
------------------------------- -------------- ------------------- --------------------
Acquisition of Globicom, Inc. 116,859 $4.61 538,720
------------------------------- -------------- ------------------- --------------------
Totals at September 30, 2005 63,224,811 $316,718,775
------------------------------- -------------- ------------------- --------------------
NOTE D- REVERSE STOCK SPLIT
In July 2004, the Company's shareholders approved a 1 for 25 reverse stock
split. The number of authorized shares and par value were unchanged. All common
stock amounts described in this Form 10-Q have been adjusted to reflect this
change for all periods presented.
NOTE E - STOCK BASED COMPENSATION
The Company uses the intrinsic-value method of accounting for stock based
compensation. Under this method, compensation cost is the excess, if any, of the
fair value over the amount an employee must pay to acquire the stock at the date
of the grant. The Company generally grants options with an exercise price equal
to the market value of the common stock at the date of grant.
The Black-Scholes option price model was used to estimate the fair value as of
the date of grant using the following assumptions:
Dividend yield 0%
Risk-free interest rates 4.35%
Volatility 163.00%
Expected option term (years) 9.61
Weighted-average fair value of options
granted during the year $1.50
12
If the Company had determined compensation expense for the Plan based on the
fair value at the grant dates consistent with the method of SFAS No. 123 and
SFAS No. 148, the Company's pro-forma net loss and basic loss per share would
have been as follows:
Six Months Ended Six Months Ended
June 30, 2005 June 30, 2004
------------- -------------
(Thousands) (Thousands)
----------- -----------
Net loss as reported $ (220,105) $ (25,465)
Stock based compensation expense,
net of tax ($0) included in the
determination of net loss as reported $ (37.214) $ (28)
Stock based compensation expense
under the fair value based method,
net of tax ($0)
$ (37.242) $ (28)
Pro forma net loss $ (220,133) $ (25,493)
Basic and diluted net loss per
share, as reported $ (4.49) $ (1.86)
Pro forma basic and diluted net
loss per share $ (4.49) $ (1.86)
NOTE F - RELATED PARTY TRANSACTIONS
Included in amount due stockholders are $1.1 million and $0.7 million at June
30, 2005 and December 31, 2004, respectively, for back salary and reimbursable
expenses owed to the Company's CEO.
In September 2004, Northern Lights Software Limited ("Northern Lights"), a
company registered in the United Kingdom, and Gizmondo Europe entered into a
License Agreement, pursuant to which Northern Lights licensed the games Chicane
and Colors and provided software development services to Gizmondo Europe. During
2004, Gizmondo Europe paid Northern Lights a total of $3.5 million under the
License Agreement, which amount was invoiced during the regular course of
business. Carl Freer, Chairman of the Company's Board of Directors, and Stefan
Eriksson are directors of both Northern Lights and Gizmondo Europe and each is
the beneficial owner of 23.5% of the issued and outstanding share capital of
Northern Lights. The outstanding balance payable to Northern Lights was $0.9
million at June 30, 2005 and December 31, 2004, respectively. On September 29,
2005, Mr. Freer paid $3.5 million into an escrow account held by the Company,
pending the determination of a special committee of independent directors of the
fairness of the transaction to the Company. The special committee is relying, in
part, upon independent counsel and a fairness opinion of independent financial
experts.
In 2004 and the first quarter of 2005, Gizmondo Europe paid Anneli Freer, the
spouse of Mr. Freer, $116 thousand and $58 thousand, respectively, for
consultancy services provided to Gizmondo Europe. Mrs. Freer provided marketing
and public relations services, an introduction to the performer Sting and time
spent in connection with the creation of the "Agaju" gaming concept currently in
development. Mr. Freer reimbursed the Company for these entire amounts on
September 28, 2005. This amount was recorded as additional paid in capital upon
receipt.
13
In 2004, the Company paid $164 thousand to Bankside Law for legal fees incurred
on behalf of Mr. Freer, personally. The Company included this amount as
additional compensation to Mr. Freer. Mr. Freer reimbursed the Company for these
entire amounts on September 28, 2005. This amount was recorded as additional
paid in capital upon receipt.
During 2004, Mr. Freer and Mr. Eriksson entered into a multi-party transaction,
whereby they caused Asiatic Bank and Finance, a company registered in Panama
with its head office in Hong Kong, to pay $7.6 million that was previously owed
by Asiatic to Messrs. Freer and Eriksson, directly to 3P PreForm Marketing and
Research AB and other non-affiliated third parties in repayment of research and
development expenditures owed to these parties by Gizmondo Europe. Gizmondo
Europe then credited this amount in payment of amounts previously owed by Mr.
Freer and Mr. Eriksson to Gizmondo Europe. Asiatic Bank and Finance owns 400,000
shares of common stock of the Company that it acquired in November 2003 at a
price of $.50 per share.
Gizmondo Europe maintains directors accounts whereby amounts owing to and from
directors of Gizmondo Europe are netted in order to facilitate advances made and
expenses incurred by directors. During 2004, Gizmondo Europe was owed as much as
$5.7 million, and $3.1 million, by Messrs. Freer and Eriksson, respectively.
Prior to his becoming a director of the Company in August 2004, all amounts owed
by Mr. Freer and a portion of amounts owed by Mr. Eriksson were satisfied by
Asiatic in the transaction described in the preceding paragraph. As of December
31, 2004, Mr. Eriksson owed $204 thousand to Gizmondo. These loans were
subsequently repaid in 2005. During 2005, Mr. Eriksson owed as much as $114
thousand to Gizmondo Europe, all of which has been repaid.
Several of the transactions described above were consummated without prior
approval by the Company's Board of Directors. Since the Company had three
directors, all of whom are involved in management of the Company and its
subsidiaries, none of these transactions were approved by independent directors.
On September 29, 2005, the Company appointed three independent directors. With
respect to any transactions since January 1, 2004, in which Mr. Freer, Mrs.
Freer and/or Mr. Eriksson had an interest, the Company appointed two independent
directors as a special committee of the Board, authorized to retain independent
counsel and other experts and with their assistance investigate, review and
determine the fairness of these transactions and, if appropriate, initiate
remedial actions. The independent directors have retained Marshall & Stevens, a
national independent valuation and appraisal consulting firm, to assist in
valuing these transactions. The independent directors are in the process of
retaining independent counsel to represent the special committee.
Mr. Freer and Mr. Eriksson resigned on October 20, 2005 as employees and
officers of Gizmondo Europe Ltd. and in Mr. Freer's case, as a Director of the
Company.
NOTE G - INVENTORY
Inventories are stated at the lower of cost (specific identification basis) or
market, and consist of the following at June 30, 2005 and December 31, 2004:
2005 2004
---------- ----------
Electronic components $ 282,402 $ 38,532
Finished goods 1,474,935 --
Supplies 889,658 --
---------- ----------
Total $2,646,995 $ 38,532
========== ==========
14
NOTE H - FOREIGN TAX ACCRUAL
The Company has accrued a UK Tax that may be levied on the restricted common
stock issued to employees as compensation. To date no levy has been made.
NOTE I - LONG-TERM DEBT
2005 2004
---- ----
The notes are payable to a bank in
equal monthly installments, with
interest ranging from 10.4% to 14% and
are collateralized by automobiles $ 1,220,414 $ 487,575
Less amount due within one year 269,414 78,937
----------- -----------
Long term portion of notes payable $ 951,000 $ 408,638
=========== ===========
Automobiles costing $1.4 million, classified as assets held for sale,
collateralize loans with unpaid balances of approximately $946 thousand. The
loans are payable in monthly installments over five years through January 2009.
NOTE J - SHORT TERM DEBT
In May 2005, two entities that are shareholders of the Company provided an
aggregate total of approximately $21.2 million in two separate short-term loans
to Gizmondo Europe. The loans were payable on October 31, 2005. One of the
lenders agreed to extend the maturity date of one loan to November 30, 2005, and
the Company anticipates that the other lender will extend the maturity date of
the other loan to November 30, 2005. The loans are personally guaranteed by Mr.
Freer and Mr. Eriksson. The Company also pledged 1,027,069 shares of its common
stock as collateral for the loans.
During the second quarter of 2005, as payment for interest and loan fees related
to the short term loans described above, the Company (i) issued 1.2 million
shares of its restricted common stock valued at approximately $5 million and
issued an additional 1.2 million shares of restricted common stock valued at
$6.5 million in the third quarter of 2005, and (ii) granted warrants to purchase
3,027,069 shares of the its restricted common stock for $8.00 per share. The
warrants are valued at approximately $2.5 million. The warrants are exercisable
at any time and expire as follows: December 31, 2005 - 1,027,069 shares;
December 31, 2006 - 2,000,000 shares.
The total value of shares and warrants issued aggregates approximately $14
million. Interest expense was computed over the entire term of the notes,
through October 31, 2005. Interest expense of $4 million was recorded in the
second quarter of 2005. Prepaid interest of approximately $9.3 million and
accrued interest (value of shares to be issued in third quarter of 2005) of $6.4
million were netted against the note payable balance.
15
NOTE K - CONTINGENCIES
In August 2005, the Company filed an action against Integra SP Holdings Limited
and Integra SP Nominee Limited (collectively "Integra") seeking a declaratory
judgment that the Company had properly terminated a stock purchase agreement
between the Company and Integra. In November 2004, the Company entered into an
agreement with Integra to acquire all of the outstanding share capital of
Integra SP Holdings Limited for Company common stock with a market value of
approximately $35 million based on $14.06 per share. The agreement, which was
amended in January 2005, required the satisfaction of numerous conditions in
order to close. Several of those conditions were not satisfied and on July 7,
2005, the Company notified Integra that it had elected to terminate the
agreement. In connection with entering into the agreement the Company had also
loaned Integra approximately $1.4 million under a debenture providing for loans
by the Company of up to $1.9 million, secured by Integra's intellectual property
rights. Termination of the stock purchase agreement entitles the Company to
demand payment on the debenture with 60 days notice, which the Company did on
July 7, 2005. The loan with a balance of $1.4 million is included as other
receivables. The Company considers this loan to be recoverable given the value
of the collateral securing this loan.
On August 19, 2005, Ogilvy Group Sweden Limited ("Ogilvy") commenced an action
against Gizmondo Europe Limited in the Stockholm District Court to collect
approximately $4.1 million plus interest allegedly owed to Ogilvy for marketing
and advertising services provided to Gizmondo Europe during 2003 and 2004.
Gizmondo Europe's relationship with Ogilvy was terminated on June 30, 2005.
Pursuant to a Securities Lending Agreement, the Company issued 400,000 shares of
its common stock to Ogilvy as collateral for Gizmondo Europe's obligations to
Ogilvy. At June 30, 2005, the value of these shares is included in accounts
payable. On October 3, 2005, Ogilvy filed an action against the Company and
Gizmondo Europe in the U. S. District Court, Southern District of New York, to
recover the amounts described above based on alleged defaults under the
Securities Lending Agreement.
On August 29, 2005, an affiliate of Ogilvy, Ogilvy Public Relations Worldwide,
Inc. ("Ogilvy PR"), commenced an arbitration proceeding in New York City against
Gizmondo Europe and the Company to collect approximately $305 thousand plus
interest allegedly owed to Ogilvy PR for public relations services under an
agreement dated June 30, 2004. On September 20, 2005, the Company and Ogilvy PR
settled this dispute for $125 thousand to be paid by the Company.
On September 2, 2005, MTV Networks Europe demanded payment of $1.5 million
previously invoiced to Gizmondo Europe under an agreement dated June 30, 2005
with Gizmondo Europe guaranteed by the Company. The agreement provides for
sponsorship fees of $2.6 million plus VAT and airtime advertising fees of $2.6
million. MTV Networks Europe has terminated the agreement effective September 9,
2005, reserving its right to bring legal proceedings for payment of the
outstanding invoices and damages for lost profits resulting from termination of
this agreement. Management anticipates an amicable settlement based on current
discussions with MTV.
In the second quarter of 2005, HandHeld Games, Inc. filed suit against the
Company for damages and costs in excess of $1 million as a result of a dispute
between the Company and HandHeld Games over a game development contract for the
game "Chicane". The suit is in the discovery stages, but the Company believes it
16
has meritorious defenses and does not expect the outcome of the matter to have a
material effect on the financial condition of the Company.
Mr. Joe Marten, previously a Director of Gizmondo Europe Ltd., demanded payment
of $740 thousand that he maintains the Company owes him. Although the Company
carries the obligation as a payable to other creditors, it denies that the sum
is owed to him due to an offset against other obligations Mr. Marten owes the
Company.
In October 2004, Gizmondo Europe Ltd, (Gizmondo), a subsidiary of the Company
signed a contract with SCi Entertainment Group Plc (SCi), a leading games
publisher, under which Gizmondo has licensed the right to develop and publish
twelve SCi products for the Gizmondo platform. The agreement covers both
currently released titles as well as those in the pipeline, and establishes the
structure for continuing collaboration between the two companies. The agreement
has Gizmondo paying a minimum guarantee of approximately $1.3 million allocated
by and among 12 products. The guarantee, which has been paid, is non-refundable
but fully recoverable against earned royalties of each product. An earned
royalty of 5% of net receipts is to be paid on each product.
NOTE L - WARRANTS
----------- ------------- ------------ --------------- --------------- --------------- -------------
Date of Number of Exercise Expiration Expired / Balance
Grant Shares Price Exercisable Date Exercised
----------- ------------- ------------ --------------- --------------- --------------- -------------
Sept 30, Sept. 30,
2004 250,000 $5.00 Immediately 2006 None 250,000
----------- ------------- ------------ --------------- --------------- --------------- -------------
June June 30,
2004 245,525 $11.25 Immediately 2006 None 245,525
----------- ------------- ------------ --------------- --------------- --------------- -------------
Balance at
December 31,
2004 495,525
----------- ------------- ------------ --------------- --------------- --------------- -------------
May December 31,
2005 1,027,069 $8.00 Immediately 2005 None 1,027,069
----------- ------------- ------------ --------------- --------------- --------------- -------------
June December 31,
2005 2,000,000 $8.00 Immediately 2006 None 2,000,000
----------- ------------- ------------ --------------- --------------- --------------- -------------
Balance at
June 30,
2005 3,522,594
----------- ------------- ------------ --------------- --------------- --------------- -------------
No warrants were outstanding at January 1, 2004.
The warrants to purchase 3,027,069 shares of the Company's common stock, issued
in 2005, were valued at approximately $2.5 million, using the Black Scholes
method. The value of the warrants was credited to paid in capital.
17
NOTE M - SUBSEQUENT EVENTS
In August 2005, Gizmondo Europe and U. S. game developer Electronic Arts entered
into a Software Development Contract for the development of two games, FIFA and
FXXFSX. In connection with this contract, Gizmondo Europe paid Electronic Arts
$5.9 million.
In October 2005 the Company paid $400,000 to Electronic Arts as the first
installment of a $3.9 million arrangement for a yet to be announced game. The
balance of the $3.9 million is due when the Company decides to go forward with
development of the game.
Mr. Freer loaned the Company $1.8 million on September 18, 2005, and paid an
additional $1.5 million on behalf of the Company to satisfy a payable due to a
component supplier. These amounts are interest free demand notes. The Company
satisfied these amounts shortly thereafter.
On September 8, 2005, the Company executed a Stock Purchase Agreement with
certain stockholders of Globicom, Inc., a Texas corporation, and closed the
transaction on that date, for the acquisition of approximately eighty-four
percent (84%) of the issued and outstanding common stock of Globicom, Inc. The
Company acquired Globicom in a move to provide wireless network support and
expand the wireless infrastructure for Gizmondo. The Company paid $200,000 in
cash and issued 116,859 shares of its restricted common stock on September 8,
2005. An additional contingent cash payment of $120,000 is due upon the
completion of certain milestones.
Payments of $3.9 million have been made to Games Factory Publishing Ltd in
connection with a games development agreement entered into in August 2005 for
the development of 19 games to be used on the Gizmondo handheld device. A 50%
shareholder of Games Factory Publishing Ltd owns 100,000 shares of the Company's
common stock. In October 2005, the Company exercised a withdrawal provision in
the agreement due to a delay in game delivery and received a reimbursement of
$2.5 million and a commitment from Games Factory Publishing Ltd to pay the
remaining $1.4 million.
NOTE N - ACQUISITIONS
The Company acquired several subsidiaries during 2004, ISIS Models, Ltd., Indie
Studios AB and four subsidiaries of Warthog, PLC.
The following proforma information reflects the net sales, net loss, and per
share amounts for the first six months of 2004 as if the Company had made the
2004 Acquisitions on January 1, 2004.
June 30,
2004
----
Pro forma net sales $ 6,356,000
Pro forma net loss $(34,619,000)
Pro forma basic and diluted net loss ($2.27)
per common share
Weighted average shares outstanding 15,263,615
- basic and diluted
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 23E of the Securities
Act of 1934, as amended. These statements relate to future events or future
financial performance. Any statements contained in this report that are not
statements of historical fact may be deemed to be forward-looking statements and
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. In some cases, forward-looking statements can be
identified by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "intend", "believe," "estimate," "predict," "potential" or
"continue," or the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
Investors are cautioned that these forward-looking statements reflect numerous
assumptions and involve risks and uncertainties that may affect the Company's
business and prospects and cause actual results to differ materially from these
forward-looking statements. Among the factors that could cause actual results to
differ are the Company's operating history; competition; low barriers to entry;
reliance on strategic relationships; rapid technological changes; inability to
complete transactions on favorable terms; consumer demand for video game
hardware and software; the timing of the introduction of new generation
competitive hardware systems; pricing changes by key vendors for hardware and
software and the timing of any such changes, and the adequacy of supplies of new
software products.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither the
Company, nor any other person or entity, assumes responsibility for the accuracy
and completeness of the forward-looking statements. The Company is under no
obligation to update any of the forward-looking statements after the filing of
this Form 10-Q to conform such statements to actual results or to changes in the
Company's expectations.
The following discussion should be read in conjunction with the Company's
financial statements, related notes and the other financial information
appearing elsewhere in this Form 10-Q.
General Overview
In early 2003, the Company began developing a new multi-entertainment wireless
handheld gaming device that is now referred to as Gizmondo. Since then the
Company's primary business strategy has been to develop and market Gizmondo. The
Company initially launched a limited production version of the Gizmondo in the
UK on March 19, 2005, and, on October 22, 2005, launched the full-scale
production of Gizmondo selling in the U.S. market. The Gizmondo is powered by a
Microsoft Windows CE.net platform, has a 2.8-inch TFT color screen and a Samsung
ARM9 400Mhz processor and incorporates the GoForce 3D 4500 NVIDIA graphics
accelerator. Gizmondo provides cutting-edge gaming, multimedia messaging, an MP3
music player, Mpeg4 movie playing capability, a digital camera and a GPRS
network link to allow wide-area network gaming. Additionally, Gizmondo contains
a GPS chip for location based services, is equipped with Bluetooth for use in
multi-player gaming and accepts MMC card accessories.
19
Six months-ended June 30, 2005 compared to the six months ended June 30, 2004:
Net Sales: The Company's net sales were $1.5 million for the six months ended
June 30, 2005 and $183 thousand for the six months ended June 30, 2004. The
Company began selling its Gizmondo products in the United Kingdom in 2005 while
in 2004 had only incidental sales. In both quarters the Company has focused and
will continue to focus its full attention to the development of the Gizmondo
device.
Gross Profits: The Company's gross profit was $373 thousand and $35 thousand for
the six month periods ended June 30, 2005 and 2004. Sales of the Gizmondo device
began in 2005 and only minor sales amounts have been recorded. Gross profit at
this sales level is not a meaningful measure.
Selling Expenses: Selling and marketing expenses for the six months ended June
30, 2005 were $27 million compared with $2 million for the same time period in
2004. Most of the increase can be attributed to moving towards the launch of the
Gizmondo device in Europe and the United States in October of 2005. Direct
advertising expenses aggregated $1.7 million in 2005 as compared to $ 0 in the
first six months of 2004. Sales promotion activities aggregated $23 million in
2005 compared to $709 thousand in for the same period in 2004. Additional
expenses were incurred in recruiting various distributors and representatives in
various market regions prior to the Gizmondo launch.
General and Administrative Expenses: General and administrative expenses for the
six months ended June 30, 2005 were $188 million compared to $23 million in
2004, an increase of over $165 million. This increase came primarily from
expenses related to development of the Gizmondo device. The Company incurred
over $14 million in research and development costs directly attributable to the
Gizmondo in 2005 as compared to approximately $10 million in 2004. All of these
costs are expensed as incurred and are not capitalized for financial reporting
purposes. In addition, salaries and related costs rose to over $83 million in
2005 from $3.4 million in 2004 as the Company continued in the product
development phase and awarded significant stock bonuses related to the launch of
the Gizmondo product. The Company also incurred over $75 million of legal,
accounting and consulting costs in the first six months of 2005, up from $8
million in 2004, as consultants were engaged to assist the Company in activities
related to the development and launch of the Gizmondo. In 2005, approximately
$117 million of the above costs was paid by issuance of the Company's restricted
common stock.
Interest expense: Interest expense rose to over $2 million from $54 thousand
during the first six months of 2005 and 2004, respectively. The major part of
the increase relates to interest paid on short-term loans. The interest was paid
by issuing shares of the Company's common stock and issuing warrants to purchase
additional shares in the future.
Net Loss: The Company reported a net loss of $220 million for the six-month
period ended June 30, 2005 compared to $25 million for the same time period in
2004. $121 million of this loss was the non-cash cost of issuing shares for
services, goods and interest. The aforementioned costs associated with the
development of Gizmondo account for this material increase in operating loss.
20
Three months-ended June 30, 2005 compared to the three months ended June 30,
2004:
Net Sales: The Company's net sales were $1.1 million for the three months ended
June 30, 2005 and $183 thousand for the three months ended June 30, 2004. The
Company began selling its Gizmondo products in the United Kingdom in 2005. In
both quarters the Company has focused and will continue to focus its full
attention to the development of the Gizmondo device.
Gross Profits: The Company's gross profit was $408 thousand and $35 thousand
for the periods ended June 30, 2005 and 2004. Sales of the Gizmondo device began
in 2005 and only minor sales amounts have been recorded. Gross profit at this
sales level is not a meaningful measure.
Selling Expenses: Selling and marketing expenses for the three months ended June
30, 2005 were $14 million compared with $1.2 million for the same time period in
2004. Most of the increase can be attributed to moving towards the launch of the
Gizmondo device in Europe and the United States in the fourth quarter of 2005.
Direct advertising expenses aggregated $853 thousand in 2005 as compared to $ 50
thousand in the three months ended June 30, 2004. Sales promotion activities
aggregated $12.8 million in 2005 compared to $1.1 million for the same period in
2004. Additional expenses were incurred in recruiting various distributors and
representatives in various market regions prior to the Gizmondo launch.
General and Administrative Expenses: General and administrative expenses for the
three months ended June 30, 2005 were $40.5 million compared to $18.5 million
for 2004, or up approximately over $22 million. This increase came primarily
from expenses related to development of the Gizmondo device. The Company
incurred over $8.4 million in research and development costs directly
attributable to the Gizmondo in 2005 as compared to approximately $8.7 million
in 2004. All of these costs are expensed as incurred and are not capitalized for
financial reporting purposes. In addition, salaries and related costs rose to
over $10.9 million in 2005 from $2.6 million in 2004 as the Company continued in
the product development phase and awarded significant stock bonuses related to
the launch of the Gizmondo product. The Company also incurred over $7.3 million
of legal, accounting and consulting costs in the second quarter of 2005, up from
$6.4 million in 2004, as consultants were engaged to assist the Company in
activities related to the development and launch of the Gizmondo. In the three
month period ended June 30, 2005, approximately $7.7 million of the above costs
was paid by issuance of the Company's restricted common stock.
Interest expense: Interest expense rose to $1.9 million from $16 thousand during
the quarters ended June 30, 2005 and 2004 respectively. The major part of the
increase relates to interest paid on short-term loans. The interest was paid by
issuing shares of the Company's common stock and issuing warrants to purchase
additional shares in the future.
Net Loss: The Company reported a net loss of $54 million for the quarter ended
June 30, 2005 compared to $19.7 million for the same time period in 2004. $7.7
million of this loss was the non-cash cost of issuing shares for services and
goods. The aforementioned costs associated with the development of Gizmondo
account for this material increase in operating loss.
Liquidity and Capital Resources
The Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on its financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to investors.
21
The Company has funded its operations principally through private placements of
its common stock to accredited foreign investors aggregating over $96.3 million
in cash, and the issuance of common stock in exchange for goods and services
aggregating over $156 million since 2002 through June 30, 2005. During 2004 the
Company's working capital deficit increased from $8,800,000 to over $22,800,000
at December 31, 2004, and by the end of the second quarter of 2005 the working
capital deficit had increased to over $78 million. Accounts payable and accrued
expenses have increased by over $42.5 million while current assets increased
just over $632 thousand. Without such funding, the Company would not have been
able to sustain operations.
From July 1, 2005 through September 30, 2005 the Company obtained additional
equity capital of over $47 million in cash and services. The Company will seek
to raise additional equity capital and will seek trade or bank financing as
needed to fund the development and the launch of the Gizmondo product in
different regions as needed. Management anticipates that it can continue to
raise equity capital through private placements of its common stock. However,
there can be no assurance that any future capital or other financing will be
available, or if available on terms reasonably acceptable to the Company.
A subsidiary of the Company, Gizmondo Studios UK had a $184 thousand line of
credit with a balance of $122 thousand (included in accrued expenses)
outstanding at December 31, 2004. The note was unsecured, due on demand and was
repaid in 2005. Interest is computed at 3% over the bank's base rate.
In May 2005, two entities that are shareholders of the Company provided an
aggregate total of approximately $21.2 million in two separate short-term loans
to Gizmondo Europe. The loans were payable on October 31, 2005. One of the
lenders agreed to extend the maturity date of one loan to November 30, 2005, and
the Company anticipates that the other lender will extend the maturity date of
the other loan to November 30, 2005. The loans are personally guaranteed by Mr.
Freer and Mr. Eriksson. The Company also pledged 1,027,069 shares of its common
stock as collateral for the loans.
Mr. Freer loaned the Company $1.8 million on September 18, 2005, and paid an
additional $1.5 million on behalf of the Company to satisfy a payable due to a
component supplier. These amounts are interest free demand notes and have been
satisfied by the company shortly thereafter.
In October 2005 the Company cancelled the Game Factory Publishing LTD
arrangement (See Note M - Subsequent Events) that generated $2.5 million in cash
and a commitment from Games Factory Publishing Ltd to pay the remaining $1.4
million.
The Company obtained liquidity from its CEO who has deferred his salary and
reimbursable expenses aggregating $1.1 million as of June 30, 2005.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting principles
generally accepted in the U.S. requires management to make estimates and
22
assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. Management bases its estimates on historical
experience and various other assumptions believed to be reasonable. Although
these estimates are based on management's best knowledge of current events and
actions that may impact the company in the future, actual results may be
different from the estimates. Our critical accounting policies are those that
affect our financial statements materially and involve difficult, subjective or
complex judgments by management. Those policies are stock-based compensation,
income taxes, goodwill impairment and revenue recognition.
Stock-Based Compensation
------------------------
We have chosen to account for stock options granted to employees and directors
under the recognition and measurement principles of Accounting Principles Board
Opinion No. 25 instead of the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-based Compensation Transition and Disclosure."
In addition, the Company has routinely exchanged shares of its common stock for
employee compensation and services and in satisfaction of debt owed by the
Company to shareholders. Common stock exchanged for services from employees and
unrelated parties, shareholder debt and suppliers is valued at the appraised
value of the Company's restricted common stock. Differences between the
appraised value and the stated value of services or debt are charged to
operations.
The shares issued are restricted securities and may not be currently sold. An
independent business valuation expert determines the value of these restricted
securities on a quarterly basis. Management believes that the appraised value is
a better indication of the fair value of the restricted shares issued than the
price of freely traded shares in the open market due to the large number of
issued restricted shares.
Income Taxes
------------
The calculation of the Company's income tax provision and related valuation
allowance is complex and requires the use of estimates and judgments in its
determination. As part of the Company's evaluation and implementation of
business strategies, consideration is given to the regulations and tax laws that
apply to the specific facts and circumstances for any transaction under
evaluation. This analysis includes the amount and timing of the realization of
income tax liabilities or benefits. Management closely monitors tax developments
in order to evaluate the effect they may have on the Company's overall tax
position.
Impairment of Goodwill and Other Intangible Assets
--------------------------------------------------
Goodwill represents the excess of the cost of an acquisition over the fair value
of the net assets acquired. The Company tests goodwill and other intangible
assets on an annual basis, or more frequently if events or circumstances
indicate that there may have been impairment. The goodwill impairment test
estimates the fair value of each reporting unit, through the use of a discounted
cash flows model, and compares this fair value to the reporting unit's carrying
value. The goodwill impairment test requires management to make judgments in
23
determining the assumptions used in the calculations. Management believes
goodwill is not impaired and is properly recorded in the financial statements.
Revenue Recognition
-------------------
The Company enters into agreements to sell products (hardware or software),
services, and other arrangements that include combinations of products and
services. Revenue from product sales, net of trade discounts and allowances, is
recognized provided that persuasive evidence of an arrangement exists, delivery
has occurred, the price is fixed or determinable, and collectibility is
reasonably assured. Delivery is considered to have occurred when title and risk
of loss have transferred to the customer. Revenue is reduced for estimated
product returns and distributor price protection, when appropriate. For sales
that include customer-specified acceptance criteria, revenue is recognized after
the acceptance criteria have been met. Revenue from services is deferred and
recognized over the contractual period or as services are rendered and accepted
by the customer. When arrangements include multiple elements, we use objective
evidence of fair value to allocate revenue to the elements and recognize revenue
when the criteria for revenue recognition have been met for each element. The
amount of product revenue recognized is affected by our judgments as to whether
an arrangement includes multiple elements and if so, whether vendor-specific
objective evidence of fair value exists for those elements. Changes to the
elements in an arrangement and the ability to establish vendor-specific
objective evidence for those elements could affect the timing of the revenue
recognition. Most of these conditions are subjective and actual results could
vary from the estimated outcome, requiring future adjustments to revenue.
Research and Development
------------------------
The Company expenses research and development costs as incurred.
Item 3. Quantitative and Qualitative Disclosures About Market Risk:
Market risks relating to the Company's operations result primarily from changes
in foreign currency exchange rates. The Company has non-cash foreign currency
exchange gain/loss exposure from fluctuations in foreign currency exchange rates
as a result of certain receivables and payable balances. The primary currency
exchanges the Company has exposure to are the European euro and the British
pound sterling. The Company does not currently use foreign exchange forward
contracts to hedge against its foreign currency exposure, nor does it intend to
do so in the foreseeable future.
Item 4. Controls and Procedures:
In August 2005, the Company began a remediation program to correct the
deficiencies noted in Management's Report on Internal Control over Financial
Reporting in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004. The Company retained BDO Stoy Hayward LLP to assist in
preparing a remediation plan. The plan was developed in October 2005 and is
currently in the design and implementation phase. The Company is planning to
remediate all of the areas of deficiency prior to December 31, 2005. For
additional information regarding Management's Report on Internal Control over
Financial Reporting, see the Company's Annual Report on Form 10-K for the year
ended December 31, 2004.
24
PART II
TIGER TELEMATICS, INC.
OTHER INFORMATION
Item 1. Legal Proceedings:
In August 2005 the Company filed an action against Integra SP Holdings Limited
and Integra SP Nominee Limited (collectively "Integra") seeking a declaratory
judgment that the Company had properly terminated a stock purchase agreement
between the Company and Integra. In November 2004 the Company entered into an
agreement with Integra to acquire all of the outstanding share capital of
Integra SP Holdings Limited for Company common stock with a market value of
approximately $35 million based on $14.06 per share. The agreement, which was
amended in January 2005, required the satisfaction of numerous conditions in
order to close. Several of those conditions were not satisfied and on July 7,
2005, the Company notified Integra that it had elected to terminate the
agreement. In connection with entering into the agreement the Company had also
loaned Integra $1.5 million in 2005 under a debenture providing for loans by the
Company of up to $1.9 million, secured by Integra's intellectual property
rights. Termination of the stock purchase agreement entitles the Company to
demand payment on the debenture with 60 days notice, which the Company did on
July 7, 2005. The action was filed in Florida State Court and has been removed
by Integra to the U.S. District Court, Middle District of Florida, Jacksonville
Division. On October 13, 2005, Integra filed a motion for preliminary injunction
seeking the return of certain property held by the Company as collateral for the
debenture. On October 31, 2005, the Company filed a response to Integra's motion
for preliminary injunction. A hearing on this motion was scheduled for November
10, 2005. On November 9, 2005, the parties agreed that the Company would retain
possession of all collateral pending resolution of the action and Integra
withdrew its motion for preliminary injunction.
On August 19, 2005, Ogilvy Group Sweden Limited ("Ogilvy") commenced an action
against Gizmondo Europe Limited in the Stockholm District Court to collect
approximately $4.1 million plus interest allegedly owed to Ogilvy for marketing
and advertising services provided to Gizmondo Europe during 2003 and 2004.
Gizmondo Europe's relationship with Ogilvy was terminated on June 30, 2005.
Pursuant to a Securities Lending Agreement, the Company issued 400,000 shares of
its common stock to Ogilvy as collateral for Gizmondo Europe's obligations to
Ogilvy. On October 3, 2005, Ogilvy filed an action against the Company and
Gizmondo Europe in the U. S. District Court, Southern District of New York, to
recover the amounts described above based on alleged defaults under the
Securities Lending Agreement.
On August 29, 2005, an affiliate of Ogilvy, Ogilvy Public Relations Worldwide,
Inc. ("Ogilvy PR"), commenced an arbitration proceeding in New York City against
Gizmondo Europe and the Company to collect approximately $305 thousand plus
interest allegedly owed to Ogilvy PR for public relations services under an
agreement dated June 30, 2004. The agreement was terminated in December 2004. On
September 20, 2005, the Company and Ogilvy PR settled this dispute for $125
thousand.
Early in the third quarter of 2005, HandHeld Games, Inc. filed suit against the
Company for damages and costs in excess of $200 thousand as a result of a
dispute between the Company and HandHeld Games over a game development contract
for the game "Chicane". The suit is in the discovery stages, but the Company
believes it has meritorious defenses and does not expect the outcome of the
matter to have a material effect on the financial condition of the Company.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:
During the first six months of 2005, the Company sold 2,512,799 shares of
restricted common stock for $37.9 million, including, $1.9 million of its
restricted common stock that was originally recorded as deposits on common stock
and subsequently moved to equity in 2005 when the Company issued the common
share certificates. The shares were sold for $3.00 to $20.00 per share and were
used for general operations.
The Company negotiated the purchase price for the sale of restricted common
stock, based upon the market price of the securities at the time of the
negotiation and with an appropriate discount for the restrictions on resale. The
restricted common stock was issued to sophisticated, accredited foreign
investors or foreign corporations in transactions exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended. Each
investor had access to financial information available in public markets and was
given the opportunity to review the Company's books, records and other
information that they requested. The proceeds were used to fund the Company's
operations.
Item 3. Defaults Upon Senior Securities:
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders:
Not Applicable
Item 5. Other Information:
The Company's independent public accountants, Goldstein Golub Kessler LLP,
declined to review the Company's financial statements as required by Regulation
S-X until an independent committee of the Company's Board of Directors completes
its investigation of certain related party transactions, all as more
particularly described in Note F - Related Party Transactions. Accordingly, the
attached financial statements do not comply with the requirements of Regulation
S-X.
The Company elected to file this Form 10-Q report without the independent public
accountants' review of the Company's financial statements in order to provide
current information to its shareholders. The Company believes the financial
statements contained herein will not be materially different from the Company's
financial statements after they are reviewed by its independent public
accountants.
As reported in the Company's Form 8-K filed on October 20, 2005, Mr. Carl Freer
resigned as Chairman of the Board and as a Director of the Company, as Managing
Director of Gizmondo Europe, Ltd. and as an officer and employee of all other
subsidiaries of the Company. Further, Mr. Stefan Eriksson resigned as an officer
and employee of Gizmondo Europe, Ltd. and as an officer and employee of all
other subsidiaries of the Company. Effective October 20, 2005 Mr. Peter Uf
resigned as a director of Gizmondo Europe, Ltd. and as an officer, director and
employee of all other subsidiaries of the Company. Messrs. Freer, Eriksson and
Uf are no longer employed by or otherwise associated with the Company or its
subsidiaries, other than as shareholders of the Company.
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Since their resignations, Messrs. Freer, Eriksson and Uf have been the subject
of several articles published in Sweden reporting alleged questionable
activities and association with a Swedish crime family and, in the case of
Messrs. Eriksson and Uf, prior convictions for fraud and other economic crimes.
Mr. Freer has advised the Company that a substantial portion of the allegations
and implications of illegal activities or improprieties attributed to him are
not true. Prior to these reports, the Company had no prior knowledge of the past
history described in these reports. The Company conducts thorough background
checks of all of its senior executives. The background checks did not reveal
these convictions or other illegal activities.
As stated in the Company's recent Form 10-K and in the related party note of
this Form 10-Q, all transactions since January 1, 2004 in which Messrs. Freer or
Eriksson had an interest are subject to review by a committee of independent
directors. Should any transactions be deemed inappropriate or unfair to the
Company by this committee, it will be fully investigated and remedial action
taken accordingly.
Item 6. Exhibits:
Exhibit 31 Rule 13a-14(a).
Exhibit 32 Section 1350 Certification.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized.
TIGER TELEMATICS, INC.
November ___, 2005
/S/ Michael W. Carrender
-------------------------
Michael W. Carrender
Chief Executive Officer, Director and
Chief Financial Officer
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