UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended: June 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from __________ to __________
Commission file number: 000-28007
GOLFGEAR INTERNATIONAL, INC.
--------------------------------------------
(Name of small business issuer in its charter)
NEVADA 43-1627555
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11562 KNOTT AVENUE. SUITE 9, GARDEN GROVE 90067-2320
----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (714) 892-8889
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
------------------------------
(Title of Class)
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[ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes:____; No:____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of July 18, 2005: 42,203,966
__________________________________________
Transitional Small Business Disclosure Format (Check One): Yes: ; No: X
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Table of Contents
Part I - Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 2004....... F-1
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 2004 and 2003.................... F-2
Condensed Consolidated Statements of Cash Flows for the
six months ended June, 2004 and 2003........................... F-3
Notes to Condensed Consolidated Financial Statements........... F-4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 2
Item 3. Controls and Procedures........................................ 8
Part II - Other Information
Item 1. Legal Proceedings.............................................. 9
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.... 9
Item 3. Defaults Upon Senior Securities................................ 9
Item 4. Submission of Matters to a Vote of Securities Holders.......... 9
Item 5. Other Information.............................................. 9
Item 6. Exhibits ...................................................... 9
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PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004
(UNAUDITED)
ASSETS
Current assets:
Cash $ 1,251
Accounts receivable, net of allowance
for doubtful accounts of $37,784 11,233
Prepaid expenses 10,054
-----------
Total current assets 22,538
Property and equipment, net 25,971
Other assets:
Intangible assets, net 66,770
Deposits 7,770
-----------
Total assets $ 123,049
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 1,140,094
Accrued product warranties 91,500
Accrued interest payable 222,417
Bank lines of credit 64,518
Notes payable 33,177
Convertible debentures due to related parties, net 1,000,000
Convertible debentures, net 1,200,000
-----------
Total current liabilities 3,751,706
-----------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $.001 par value;
10,000,000 shares authorized;
none issued and outstanding -
Common stock, $.001 par value;
50,000,000 shares authorized;
40,445,076 shares issued and outstanding 40,445
Additional paid-in capital 14,275,837
Deferred compensation (44,627)
Accumulated deficit (17,900,312)
-----------
Total stockholders' deficit (3,628,657)
-----------
Total liabilities and stockholders' deficit $ 123,049
===========
See accompanying notes to condensed consolidated financial statements.
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Page F-1
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ -------------
Net sales $ 205,468 $ 643,257 $ 577,025 $ 1,176,404
Cost of goods sold 81,391 339,482 258,245 667,821
------------ ------------ ------------ ------------
Gross profit 124,077 303,775 318,780 508,583
Operating expenses:
Selling and marketing 24,861 118,259 112,029 308,210
Tour and pro contracts 21,926 17,792 42,314 39,026
General and administrative 299,971 453,547 598,420 853,591
Depreciation and amortization 5,625 18,877 13,186 40,134
------------ ------------ ------------ ------------
Total operating expenses 352,383 608,475 765,949 1,240,961
------------ ------------ ------------ ------------
Loss from operations (228,306) (304,700) (447,169) (732,378)
Other income (expense):
Interest income -- 6,874 -- 13,751
Interest expense (47,197) (321,503) (1,065,960) (1,098,433)
Other, net -- 51,062 (5,140) 103,277
------------ ------------ ------------ ------------
Total expense, net (47,197) (263,567) (1,071,100) (981,405)
------------ ------------ ------------ ------------
Loss before provison for income taxes (275,503) (568,267) (1,518,269) (1,713,783)
Provision for income taxes -- -- 2,400 2,400
------------ ------------ ------------ ------------
Net loss $ (275,503) $ (568,267) $ (1,520,669) $ (1,716,183)
============ ============ ============ ============
Loss per common share-basic and diluted $ (0.01) $ (0.02) $ (0.04) $ (0.05)
============ ============ ============ ============
Weighted average number of common
shares outstanding -
Basic and diluted 40,445,076 37,681,154 40,445,076 36,855,325
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
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Page F-2
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDEDJUNE 30, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $(1,520,669) $(1,716,183)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of deferred compensation 22,314 16,734
Depreciation and amortization 13,186 40,135
Accrued interest on stock purchase note receivable -- (13,675)
Amortization of debt discount 977,778 837,130
Amortization of deferred financing costs -- 156,786
(Recovery of) provision for bad debts -- 37,055
Loss on disposal of assets 5,963 --
Gain on settlement of accounts payable -- (73,208)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 120,162 52,094
Inventories 69,379 (53,795)
Prepaid expenses 64,941 56,503
Deferred advertising costs -- (468)
Increase (decrease) in:
Accounts payable and accrued expenses 239,221 125,513
Accrued product warranties (183) 3,823
Accrued interest payable 50,078 83,225
Deferred licensing revenue (50,303) (27,042)
----------- -----------
Net cash used in operating activities (8,133) (475,373)
----------- -----------
Cash flows used in investing activities:
Purchases of property and equipment (6,250) (6,252)
----------- -----------
Cash flows from financing activities:
(Repayments) borrowings under bank lines of credit, net (44,705) 87,085
Proceeds from issuance of common stock -- 280,000
Repayment of convertible debt (100,000) --
Collection of amount due from stockholder
for convertible debenture financing 100,000 --
Proceeds from exercise of stock options -- 250
----------- -----------
Net cash provided by (used in) financing activities (44,705) 367,335
----------- -----------
Net decrease in cash (59,088) (114,290)
Cash, beginning of period 60,339 117,018
----------- -----------
Cash, end of period $ 1,251 $ 2,728
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 37,746 $ 18,292
=========== ===========
Cash paid for income taxes $ -- $ --
=========== ===========
Supplemental disclosure of non-cash activities:
Settlement of convertible debenture with transfer of inventory $ 100,000 $ --
=========== ===========
See accompanying notes to condensed consolidated financials statements
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Page F-3
GOLDGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
1. BASIS OF PRESENTATION
Management of GolfGear International, Inc. (the "Company) has prepared,
without audit, the accompanying condensed consolidated financial statements for
the six-months ended June 30, 2004 and 2003. The information furnished has been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial reporting. Accordingly,
certain disclosures normally included in a complete set of financial statements
prepared in accordance with GAAP have been condensed or omitted. In the opinion
of management, all adjustments considered necessary for the fair presentation of
the Company's financial position, results of operations and cash flows have been
included and are only of a normal recurring nature. The results of operations
for the six months ended June 30, 2004 are not necessarily indicative of the
results of operations for the year ended December 31, 2004. The interim
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's Form 10-KSB for the year ended December 31, 2003.
2. LIQUIDITY AND MANAGEMENT'S PLANS
During the third quarter of 2004, the Company suspended normal
operations, including expanding brands and product offerings, new marketing
programs, and direct marketing to customers, due to a lack of operating working
capital resources. To the extent that the Company is unable to secure financing
in 2005, the Company's liquidity and ability to continue to conduct operations
will be impaired. The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Since inception, the Company has incurred
recurring losses and requires additional capital to finance continuing
operations. The Company incurred losses of $1,520,669 and $1,716,183 for the six
months ended June 30, 2004 and 2003, respectively. As of June 30, 2004, the
Company had a working capital deficit of $3,729,168 and a stockholders' deficit
of $3,628,657. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying condensed
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that may result should the Company be unable to
continue as a going concern.
The Company is attempting to increase revenues through various means,
including expanding brands and product offerings, new marketing programs, and
possibly direct marketing to customers, subject to the availability of operating
working capital resources. To the extent that the Company is unable to increase
revenues in the next few years, the Company's liquidity and ability to continue
to conduct operations may be impaired.
The Company will require additional capital to fund operating
requirements. The Company is exploring various alternatives to raise this
required capital, including convertible debentures, private infusion of equity
and various collateralized debt instruments, but there can be no assurance that
the Company will be successful in this regard. To the extent the Company is
unable to secure the capital necessary to fund its future cash requirements on a
timely basis and/or under acceptable terms and conditions, the Company may have
to substantially reduce its operations to a level consistent with its available
working capital resources. The Company may also be required to consider a formal
or informal restructuring or reorganization.
As discussed in Note 10 the Company has secured a commitment for a
$10,000,000 private placement offering whereby a third party investor will
purchase up to $10,000,000 of the Company's common stock over a twenty-four
month period to provide the Company with operating capital. Funding is subject
to, among other things, the Company filing a registration statement with the
United States Securities and Exchange Commission with respect to the resale of
common stock sold in the private placement offering. The Company is currently
working towards satisfying all conditions precedent to closing the funding, but
there can be no assurance that the Company will be successful in satisfying
these terms.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies presented below is
designed to assist in understanding the Company's condensed consolidated
financial statements. Such condensed consolidated financial statements and
accompanying notes are the representations of the Company's management, who is
responsible for their integrity and objectivity. These accounting policies
conform to GAAP in all material respects, and have been consistently applied in
preparing the accompanying consolidated financial statements.
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Page F-4
Principles of Consolidation
The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, GGI, Inc., GearFit Golf Company,
Pacific Golf Holdings, Inc. Bel Air Players Group, Inc. and Leading Edge
Acquisition, Inc. All significant intercompany transactions and balances have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, 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. Significant estimates made by management
are, among others, the realizability of accounts receivable and inventories,
recoverability of long-lived assets, and valuation of deferred tax assets.
Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
estimated markets. Market is determined by comparison with recent sales or
estimated net realizable value. During the six months ended June 30, 2004, the
Company sold all of its inventories
Net realizable value is based on management's forecasts for sales of
the Company's products and services in the ensuing years and/or consideration
and analysis of changes in the customer base, product mix, or other issues that
may impact the estimated net realizable value. Should the demand for the
Company's products and/or services prove to be significantly less than
anticipated, the ultimate realizable value of the Company's inventories could be
substantially less than reflected in the accompanying condensed consolidated
balance sheet.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on
the straight-line method over the estimated useful lives of the assets that
range from five to seven years. Leasehold improvements are amortized on the
straight-line method over the term of the lease or the useful life of the asset,
whichever is shorter. Maintenance and repairs are charged to expense as
incurred. Renewals and improvements of a major nature are capitalized. At the
time of retirement or other disposition of property and equipment, the cost and
accumulated depreciation are removed from the accounts and any resulting gains
or losses are reflected in operations.
Intangible Assets
Intangible assets include the cost of patents and trademarks, and are
being amortized on the straight-line basis over their estimated useful lives,
which vary from two to seventeen years.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the
Company evaluates the carrying value of long-lived assets for impairment
whenever events or change in circumstances indicate that such carrying values
may not be recoverable. Under SFAS No. 144, the Company estimates the future
undiscounted cash flows derived from an asset to assess whether or not a
potential impairment exists when events or circumstances indicate the carrying
value of a long-lived asset may differ. An impairment loss is recognized when
the undiscounted future cash flows are less than its carrying amount. The
Company uses its best judgment based on the most current facts and circumstances
surrounding its business when applying these impairment rules to determine the
timing of the impairment test, the undiscounted cash flows used to assess
impairments and the fair value of a potentially impaired asset. Changes in
assumptions used could have a significant impact on the Company's assessment of
recoverability. At June 30, 2004, the Company determined that no impairment loss
was necessary. There can be no assurance, however, that demand for the Company's
products will continue, which could result in impairment of long-lived assets in
the future.
Deferred Financing Costs
Deferred financing costs represent costs incurred in connection with
the issuance of the convertible debentures. Deferred financing costs are
amortized over the life of the convertible debentures on the straight-line
basis, which approximates the effective interest method.
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Page F-5
GOLDGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Beneficial Conversion Feature
The convertible feature of certain convertible notes provides for a
rate of conversion that is below market value. Such feature is normally
characterized as a "beneficial conversion feature" ("BCF"). Pursuant to Emerging
Issues Task Force ("EITF") Issue No. 98-5, "Accounting For Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratio" and EITF Issue No. 00-27, "Application of EITF Issue No. 98-5
To Certain Convertible Instruments," the relative fair values of the BCF's have
been recorded as a discount to the face amount of the respective debt
instrument. The Company is amortizing the discount using the straight-line
method, which approximates the effective interest method, through maturity of
such instruments. The Company will record the corresponding unamortized debt
discount related to the BCF and the warrants as interest expense when the
related instrument is converted into the Company's common stock.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts
receivable, accounts payable, accrued expenses, notes payable and convertible
debentures. The carrying value for all such instruments, except the convertible
debentures, considering the terms, approximates fair value at June 30, 2004. The
fair value of convertible debentures is not determinable as equivalent
instruments could not be located.
Revenue Recognition
Revenue is recognized in accordance with Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements", as revised by
SAB 104. The Company recognizes revenue when products are shipped to a customer
and the risks and rewards of ownership and title have passed based on the terms
of sale. The Company records a provision for sales returns and claims based upon
historical experience. Actual returns and claims in any future period may differ
from the Company's estimates.
Amounts billed to customers for shipping and handling fees are included
in net sales, and freight costs incurred related to these fees are included in
cost of goods sold in accordance with EITF Issue No. 00-01, "Accounting for
Shipping and Handling Fees and Costs."
Licensing revenue is recognized when earned per the terms of royalty
agreements. Occasionally, licensees pay royalties in advance, which are recorded
as deferred licensing revenue in the accompanying consolidated balance sheet
until such time they are earned.
Product Warranties
The Company generally provides a lifetime warranty against defects. The
Company maintains a reserve for its product warranty liability based on
estimates calculated using historical warranty experience. While warranty costs
have historically been within the Company's expectations, there can be no
assurance that the Company will continue to experience the same warranty return
rates or repair costs as in prior years. A significant increase in product
return rates, or a significant increase in the costs to repair product, could
have a material adverse impact on the Company's operating results. Warranty
activity was not significant during the periods presented.
Advertising
Advertising costs for the six months ended June 30, 2004 and 2003 were
$29,272 and $69,775, respectively, which is included in selling and marketing
expenses in the accompanying condensed consolidated statements of operations.
Basic and Diluted Loss Per Share
Basic earnings (loss) per common share are computed based on the
weighted average number of shares outstanding for the period. Diluted earnings
(loss) per share is computed by dividing net income (loss) by the weighted
average shares outstanding assuming all dilutive potential common shares are
issued. Basic and diluted loss per share is the same as the effect of stock
options and warrants on loss per share are anti-dilutive and thus not included
in the diluted loss per share calculation. However, the impact under the
treasury stock method of dilutive stock options and warrants would have been
zero and 2,628,125 incremental shares for six months ended June 30, 2004 and
2003, respectively.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
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Page F-6
GOLDGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Segment and Geographic Information
The Company operates in one business segment. The Company sells to
customers in the United States, and the Far East. During the three months ended
June 30, 2004 and 2003, the Company had international sales of $30,732 and
$39,039, respectively. Sales for the six months ended June 30, 2004 and 2003 to
customers internationally were $30,732 and $39,039, respectively.
Stock-Based Compensation
The Company periodically issues common stock options and common stock
purchase warrants to employees and non-employees in non-capital raising
transactions for services rendered and to be rendered, and as financing costs.
Stock-based awards to non-employees are accounted for using the fair
value method in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," and EITF Issue No. 96-18, "Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. The measurement
date used to determine the fair value of the equity instrument issued is the
earlier of the date on which the third-party performance is complete or the date
on which it is probable that performance will occur.
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with APB Opinion No. 25. As permitted by
SFAS No. 123, as amended by SFAS No. 148, the Company has chosen to continue to
account for its employee stock-based compensation plan under APB Opinion No. 25
and provide the expanded disclosures specified in SFAS No. 123, as amended by
SFAS No. 148. Had employee stock based compensation cost been determined using
the fair value method, the Company's net loss and loss per share would have been
adjusted to the pro forma amounts indicated below:
For the Three Months Ended June 30, For the Six Months Ended June 30,
----------------------------------- -----------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Net loss as reported $ (275,503) $ (568,267) $ (1,520,669) $ (1,716,183)
Deduct: Total stock-based
employee compensation
under fair value based
method for all awards,
net of related tax effects (37,250) (74,667)
--------------- --------------- --------------- ---------------
Pro forma net loss $ (275,503) $ (605,517) $ (1,520,669) $ (1,790,850)
=============== =============== =============== ===============
Basic and diluted loss per
share - as reported $ (0.01) $ (0.02) $ (0.04) $ (0.05)
=============== =============== =============== ===============
Basic and diluted loss per
share - pro forma $ (0.01) $ (0.02) $ (0.04) $ (0.05)
=============== =============== =============== ===============
Issued Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 also includes required disclosures for financial instruments within its
scope. For the Company, SFAS No. 150 was effective for instruments entered into
or modified after May 31, 2003 and otherwise will be effective as of January 1,
2004, except for mandatory redeemable financial instruments. For certain
mandatory redeemable financial instruments, SFAS No. 150 will be effective for
the Company on January 1, 2005. The Company is in process of evaluating whether
the adoption of SFAS No. 150 will have a significant impact on the Company's
overall results of operations or financial position.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No. 151 clarify
that abnormal amounts of facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and require
the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The Company is
in the process of evaluating whether the adoption of SFAS No. 151 will have a
significant impact on the Company's overall results of operations or financial
position.
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Page F-7
GOLDGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
In December 2004, the FASB issued SFAS No. 123 (revised 2004) ("SFAS
No. 123(R)"), "Share-Based Payment," to provide investors and other users of
financial statements with more complete and neutral financial information by
requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. Statement
No. 123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS No. 123(R) replaces
SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123, as originally
issued in 1995, established as preferable a fair-value-based method of
accounting for share-based payment transactions with employees. However, that
statement permitted entities the option of continuing to apply the guidance in
APB Opinion No. 25, as long as the footnotes to financial statements disclosed
what net income would have been had the preferable fair-value-based method been
used. The Company will be required to apply SFAS No. 123(R) as of January 1,
2006. The Company is in the process of evaluating whether the adoption of SFAS
No. 123(R) will have a significant impact on the Company's overall results of
operations or financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets - an amendment of APB Opinion No. 29, Accounting for
Non-monetary Transactions." This statement amends APB Opinion No. 29 to
eliminate the exceptions for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. A non-monetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions for SFAS No. 153 are
effective for non-monetary asset exchanges incurred during fiscal years
beginning after June 15, 2005. The Company is currently evaluating the effect,
if any, of adopting SFAS No. 153.
4. BANK LINES OF CREDIT
The Company had a $250,000 bank line collateralized by eligible
accounts receivable. The line of credit originally matured on December 9, 2003
and was extended to June 2004. Outstanding borrowings bore interest at 28%
annually. Interest was payable monthly. There were no outstanding borrowings
under this line at June 30, 2004. The Company also had an unsecured $70,000 line
of credit with another bank. Interest was payable monthly at a variable rate
(10% at June 30, 2004). Outstanding borrowings at June 30, 2004 were $64,518.
This line of credit was closed and paid in full in September 2004. Interest
expense related to the bank lines of credit was $14,283 and $18,292 for the six
months ended June 30, 2004 and 2003, respectively.
5. CONVERTIBLE DEBENTURES DUE TO RELATED PARTIES
On October 7, 2003, the Company completed the sale of $250,000 of 5%
convertible debentures to MC Corporation, a company affiliated with a Company
director and stockholder ("MC Corp"). These debentures were convertible into
common stock at $0.09 per share for a period of three months from the date of
issuance. For each share of common stock issued upon conversion of the
debentures, one common stock purchase warrant will be issued and will be
exercisable for a period of twelve months at $0.045 per share. Issuance costs
were not significant. The estimated value of the beneficial conversion feature
was not significant at the date of issuance. In December 2003, these debentures,
including accrued interest of $2,083, were converted into 2,800,922 shares of
common stock. The warrants expired unexercised.
On December 30, 2003, the Company completed the sale of $1,000,000 of
5% convertible debentures to Quincy and MC Corp. The debentures were
automatically convertible into 525,000 shares of Series A preferred stock of the
Company within ninety days of the date of issuance. Pursuant to the terms of the
debenture agreement, if the Company was unable to convert the debentures into
shares of Series A preferred stock within ninety days of issuance, the
debentures would become immediately due and payable in full, with interest
continuing to accrue at the face rate of interest of 5% per annum. As of
December 31, 2003, the Company had not received $100,000 in proceeds from
Quincy, and accordingly, the Company recorded $100,000 due from stockholder in
the accompanying consolidated balance sheet. The amount was subsequently
received in January 2004. The debentures are currently in default and are due on
demand.
Holders of the Series A preferred stock have the right to convert the
Series A preferred stock into shares of common stock of the Company at
conversion rates of 158:1 for Quincy and 161:1 for MC Corp. upon any of the
following: (i) eighteen months after the date of issuance of the Series A
preferred stock, (ii) a change of control, as defined, or (iii) upon the date
the Company is no longer required to file reports or financial statements with
the United States Securities Exchange Commission.
The conversion feature of the convertible debentures provides for a
rate of conversion that is below market value, resulting in a beneficial
conversion feature. The Company estimated the fair value of the beneficial
conversion feature to be $1,000,000 at date of issuance, and recorded such
conversion feature as a debt discount. The Company recorded interest expense of
$977,778 during the six months ended June 30, 2004 related to the amortization
of the debt discount.
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Page F-8
GOLDGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
6. CONVERTIBLE DEBENTURES
On June 6, 2002, the Company completed the sale of $2,100,000 of 7%
convertible debentures. The debentures are convertible into common stock at
$0.25 per share for the period of 12 months commencing six months after the
initial sale of the debentures, and were due in December 2003. The Company's
patents, trademarks, and other intangible assets secure the debentures. For each
share of common stock issued upon conversion of the debentures, one common stock
purchase warrant will be issued, which will be exercisable at $0.10 per share
for a period of 18 months from the date of conversion.
The conversion feature of the convertible debentures provides for a
rate of conversion that is below market value, resulting in a beneficial
conversion feature. The Company estimated the fair value of the beneficial
conversion feature to be $2,100,000 at date of issuance, and recorded such
conversion feature as a debt discount, which was amortized to interest expense
over the term of the debentures. On December 16, 2002, the Company's Board of
Directors approved a modification to the original debenture agreement to provide
for the exercise of warrants prior to the conversion of the debentures. The
Company estimated the fair value of the warrants at the date of the modification
and reallocated $600,000 of the original debt discount of $2,100,000 to the
warrants based on the relative fair values of the warrants and beneficial
conversion feature as of December 16, 2002. The estimated fair value of the
warrants was amortized over the remaining term of the debentures.
In connection with the issuance of the debentures, the Company issued
420,000 shares of the Company's common stock valued at $105,000 to Wyngate as a
finder's fee. In addition, the Company granted Wyngate a warrant to purchase
420,000 shares of the Company's common stock at an exercise price of $0.10 per
share, which were exercisable for a period of eighteen months. The warrants were
valued at $172,200 using the Black-Scholes option-pricing model. In addition,
the Company issued 540,000 shares of the Company's common stock valued at
$135,000 as a finder's fee to an unrelated third party. The Company also paid
legal fees of $29,934 related to the financing.
The costs incurred in connection with the convertible debenture
financing were capitalized as deferred financing costs and are being amortized
over the term of the convertible debentures. Amortization of deferred financing
costs was $156,786 during the six months ended June 30, 2003, and is included in
interest expense in the accompanying condensed consolidated statements of
operations.
In January and February 2004, the Company repaid an additional $200,000
in debentures, including accrued interest, which was satisfied with
approximately $122,000 cash and inventories valued at $100,000. The Company
continues to accrue interest on all outstanding debentures at the face rate of
interest.
Interest expense related to the convertible debentures was $49,069 and
$914,758 for the six months ended June 30, 2004 and 2003, respectively. For the
six months ended June 30, 2003, $837,130 related to the amortization of the debt
discount. Accrued interest at June 30, 2004 related to the convertible
debentures was $193,161.
7. STOCKHOLDERS' EQUITY
During the six months ended June 30, 2003, the Company issued 2,800,000
shares of common stock for exercised warrants at $0.10 per share. During the six
months ended June 30, 2003, the Company issued 25,000 shares of common stock for
exercised options at $0.01 per share.
During the six months ended June 30, 2004, the Company issued no equity
instruments.
8. COMMITMENTS AND CONTINGENCIES
Litigation
On December 18, 2003, the Company received a resignation letter from
Donald A. Anderson as a member of the Board of Directors of the Company. On
December 19, 2003, Mr. Anderson also resigned as Chief Executive Officer of the
Company. Prior to his resignation, on or about November 8, 2003, Mr. Anderson
was suspended pending an investigation into possible violations of his
employment contract with the Company and breach of fiduciary duty.
--------------------------------------------------------------------------------
Page F-9
GOLDGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
On November 18, 2003, Mr. Anderson filed a complaint against the
Company and its officers for breach of written contract, wrongful termination of
employment and slander. Subsequently, the Company filed a cross complaint
against Mr. Anderson for, among other things, breach of fiduciary duty and
breach of written contract.
On June 23, 2004, the Company, its officers and Mr. Anderson entered
into a Settlement Agreement (the "Settlement Agreement"), wherein, among other
things, the Company withdrew its allegation that Mr. Anderson breached his
fiduciary duties. Pursuant to the terms of the Settlement Agreement, the Company
agreed to (i) pay Mr. Anderson $165,000 in varying installments through January
30, 2006, (ii) transfer the title of a 1996 Ford custom tour van (with a net
book value of approximately $7,000) owned by the Company to Mr. Anderson, and
remove Mr. Anderson as a guarantor from certain Company debt obligations. In
return, Mr. Anderson returned to the Company 994,110 shares of the Company's
common stock owned by him valued at approximately $30,000 (fair market value of
the Company's stock on the settlement date). As of December 31, 2003, the
Company recorded a net liability of approximately $142,000 related to the
settlement of this lawsuit. Mr. Anderson also agreed to convert $60,000 in
debentures, including accrued interest, held by him into shares of the Company's
common stock at a conversion rate of $0.095 per share. These debentures were
converted into 753,000 shares of the Company's common stock on February 23,
2005.
The Company is currently in default for payment of amounts due to Mr.
Anderson under the Settlement Agreement. On February 15, 2005, Mr. Anderson
received a judgment for $76,310 due to him under the terms of the Settlement
Agreement. Pursuant to the Settlement Agreement, the Company agreed to issue a
new stock certificate to Mr. Anderson for a stolen stock certificate for
2,642,625 shares of the Company's common stock. As of July 18, 2005, the Company
has not issued this stock certificate. Mr. Anderson will dismiss the lawsuit
upon the Company's full performance of the Settlement Agreement.
In March 2004, holders in the amount of $200,000 of the Company's
convertible debentures filed suit against the Company claiming, among other
things, breach of written contract and default under security agreement and
possession of collateral. The plaintiffs are seeking repayment of the principal
amount of the debentures, including accrued interest, which matured on January
6, 2004, and possession of the intellectual property, including patents and
trademarks, which collateralized the debentures. The parties are currently
attempting to reach agreement on resolving this action in its entirety.
From time to time the Company is involved in various types of
litigation in the normal course of business, none of which is considered
material at this time.
Indemnities and Guaranties
The Company has executed certain contractual indemnities and
guarantees, under which it may be required to make payments to a guaranteed or
indemnified party. The Company also has agreed to indemnify its directors,
officers, employees and agents to the maximum extent permitted under the laws of
the State of Nevada. In connection with a certain facility lease, the Company
has indemnified its lessor for certain claims arising from the use of the
facilities. The duration of the guarantees and indemnities varies, and in many
cases is indefinite. These guarantees and indemnities do not provide for any
limitation of the maximum potential future payments the Company could be
obligated to make. Historically, the Company has not been obligated to make any
payments for these obligations and no liabilities have been recorded for these
indemnities and guarantees in the accompanying consolidated balance sheet.
9. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
During the year ended December 31, 2003, the Company determined that
the manner in which it accounted for the beneficial conversion option on the
sale of its $2,100,000 of convertible debentures in 2002 was not in accordance
with Emerging Issues Task Force Issue No. 00-27, "Application of Issue No. 98-5
to Certain Convertible Instruments," which states that the debt discount
resulting from recording a beneficial conversion option should be accreted from
the date of issuance to the stated redemption date of the convertible
instrument, regardless of when the earliest conversion date occurs. Accordingly,
in connection with the restatement adjustments, the Company has appropriately
reflected the amortization of the debt discount resulting from the recording of
the beneficial conversion option over the term of the convertible debentures.
The Company had previously recorded the amortization of the debt discount over
the earliest period that the convertible debentures could be converted.
--------------------------------------------------------------------------------
Page F-10
GOLDGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
During the year ended December 31, 2003, the Company also determined
that certain transactions involving the issuance of its common stock were not
recorded appropriately in 2002. During 2002, the Company acquired the operating
assets of Lazereyes and issued 150,000 shares of its common stock valued at
$42,000 as purchase consideration. In connection with the restatement
adjustments, the Company has reflected the value of the purchase consideration
at $42,000 and amortized the additional purchase consideration that was
allocated to acquired intangibles. The Company had previously recorded the
purchase consideration as 100,000 shares of its common stock valued at $28,000.
In addition, during 2002 the Company issued 960,000 shares of its common stock
valued at $240,000 and warrants valued at $172,200 as deferred financing costs
in connection with the $2,100,000 convertible debenture financing. The Company
had previously recorded 1,072,000 shares of its common stock valued at $268,000
and warrants valued at $218,120 as deferred financing costs. Accordingly, in
connection with the restatement adjustments, the Company has reflected the
appropriate number of shares issued and the associated value, and amortized the
adjusted amount over the term of the convertible debentures.
The following table presents a summary of the effects of the
restatement adjustments on the Company's consolidated statement of operations
for the three and six months ended June 30, 2003:
Consolidated statements of operations:
Three Months Ended June 30, 2003 Six Months Ended June 30, 2003
------------------------------------------ ------------------------------------------
As previously As previously
reported Adjustments As restated reported Adjustments As restated
----------- ----------- ----------- ----------- ----------- -----------
Interest expense $ 143,170 $ 178,333 $ 321,503 $ 276,535 $ 821,898 $ 1,098,433
Depreciation and amortization 17,127 1,750 18,877 36,635 3,499 40,134
Net loss (388,184) (180,083) (568,267) (890,785) (825,398) (1,716,183)
Loss per common share -
basic and diluted $ (0.01) $ (0.01) $ (0.02) $ (0.02) $ (0.03) $ (0.05)
10. SUBSEQUENT EVENTS
During the third quarter of 2004 the Company suspended normal
operations, including expanding brands and product offerings, new marketing
programs, and direct marketing to customers, due to a lack of operating working
capital resources. To the extent that the Company is unable to secure financing
in 2005, the Company's liquidity and ability to continue to conduct operations
will be impaired.
From July 2004 through June 2005, a director and stockholder has
advanced $340,000 to the Company to be used for working capital. The Company has
received these funds and recorded them as loans from stockholder of $185,600
during 2004 and $154,400 during 2005.
On January 14, 2005, the Company secured a commitment for a $10,000,000
private placement offering whereby a third party investor (the "Investor") will
purchase up to $10,000,000 of the Company's common stock over a twenty-four
month period to provide the Company with operating capital. Funding is subject
to, among other things, the Company filing a registration statement with the
U.S. Securities and Exchange Commission with respect to the resale of common
stock sold in the private placement offering. The Company is currently working
towards satisfying all conditions precedent to closing the funding, but there
can be no assurance that the Company will be successful in satisfying these
terms. In connection with the funding commitment, the Company paid a structuring
fee of $10,000 and issued 2,000,000 shares of the Company's common stock to the
Investor as a commitment fee.
On February 23, 2005, a debenture for $60,000, including accrued
interest, was converted to 753,000 shares of the Company's common stock.
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Page F-11
GOLDGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The following discussion should be read in conjunction with the
condensed unaudited consolidated financial statements and notes thereto of the
Company appearing elsewhere in this report. Such financial statements have been
prepared to reflect the Company's financial position as of June 30, 2004,
together with the results of operations for the three and six months ended June
30, 2004 and 2003, and cash flows for the six months ended June 30, 2004 and
2003.
Forward-Looking Statements
Historical results and trends should not be taken as indicative of
future operations. Management's statements contained in this report that are not
historical facts are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act".) Actual results may differ
materially from those included in the forward-looking statements. The Company
intends such forward-looking statements to be covered by the safe-harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and is including this statement for purposes of
complying with those safe-harbor provisions. Forward-looking statements, which
are based on certain assumptions and describe future plans, strategies and
expectations of the Company, are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project," "prospects,"
or similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse affect on the operations and future prospects of
the Company on a consolidated basis include, but are not limited to: changes in
economic conditions generally in the United States of America and the other
countries in which the Company operates, legislative/regulatory changes, the
political climate in the foreign countries in which the Company operates, the
availability of capital, interest rates, competition, and accounting principles
generally accepted in the United States of America ("GAAP"). These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that could
materially affect the Company's financial results, is included herein and in the
Company's other filings with the Securities and Exchange Commission.
Overview
The Company designs, develops and markets premium golf clubs and
related golf products. The Company utilizes its proprietary forged face insert
technology to offer a full line of golf equipment. The Company's patent
portfolio with respect to insert technology is the largest and most
comprehensive in the golf industry, with nine domestic and foreign patents
issued related to forged face insert technology. These patents incorporate a
wide variety of forged face insert materials, including titanium, beryllium
copper, stainless steel, carbon steel, aluminum, and related alloys thereof, and
include technology relating to varying the face thickness of the insert. The
Company operates in one business segment. The Company sells to customers in the
United States and the Far East.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, GGI, Inc., GearFit Golf Company,
Pacific Golf Holdings, Inc., Bel Air Players Group, Inc. and Leading Edge
Acquisition, Inc. All intercompany transactions and balances have been
eliminated in consolidation.
During the third quarter of 2004, the Company suspended normal
operations, including expanding brands and product offerings, new marketing
programs, and direct marketing to customers, due to a lack of operating working
capital resources. To the extent that the Company is unable to secure financing
in 2005, the Company's liquidity and ability to continue to conduct operations
will be impaired.
Restatement of Previously Issued Financial Statements
During the year ended December 31, 2003, the Company determined that
the manner in which it accounted for the beneficial conversion option on the
sale of its $2,100,000 of convertible debentures in 2002 was not in accordance
with Emerging Issues Task Force Issue No. 00-27, "Application of Issue No. 98-5
to Certain Convertible Instruments," which states that the debt discount
resulting from recording a beneficial conversion option should be accreted from
the date of issuance to the stated redemption date of the convertible
instrument, regardless of when the earliest conversion date occurs. Accordingly,
in connection with the restatement adjustments, the Company has appropriately
reflected the amortization of the debt discount resulting from the recording of
the beneficial conversion option over the term of the convertible debentures.
The Company had previously recorded the amortization of the debt discount over
the earliest period that the convertible debentures could be converted.
--------------------------------------------------------------------------------
Page 2
During the year ended December 31, 2003, the Company also determined
that certain transactions involving the issuance of its common stock were not
recorded appropriately in 2002. During 2002, the Company acquired the operating
assets of Lazereyes and issued 150,000 shares of its common stock valued at
$42,000 as purchase consideration. In connection with the restatement
adjustments, the Company has reflected the value of the purchase consideration
at $42,000 and amortized the additional purchase consideration that was
allocated to acquired intangibles. The Company had previously recorded the
purchase consideration as 100,000 shares of its common stock valued at $28,000.
In addition, during 2002 the Company issued 960,000 shares of its common stock
valued at $240,000 and warrants valued at $172,200 as deferred financing costs
in connection with the $2,100,000 convertible debenture financing. The Company
had previously recorded 1,072,000 shares of its common stock valued at $268,000
and warrants valued at $218,120 as deferred financing costs. Accordingly, in
connection with the restatement adjustments, the Company has reflected the
appropriate number of shares issued and the associated value, and amortized the
adjusted amount over the term of the convertible debentures.
See Note 9 to the accompanying condensed consolidated financial
statements included in this Quarterly Report on Form 10-QSB for a summary of the
effects of the restatement adjustments on the Company's consolidated statement
of operations for the three and six months ended June 30, 2003. The information
provided in the accompanying Management's Discussion and Analysis of Financial
Condition and Results of Operations reflects the effect of the restatement
adjustments.
Results of Operations
Comparison of Three Months Ended June 30, 2004 and 2003
Net sales decreased to $205,468 in 2004 from $643,257 in 2003, a
decrease of $437,789 or 68.1%. The decrease in net sales in 2004 as compared to
2003 is a result of the Company's lack of inventory and marketing efforts. The
Company lacked the financial resources necessary to acquire inventory or sustain
marketing efforts.
Gross profit decreased to $124,077 in 2004 from $303,775 in 2003, and
increased as a percentage of net sales to 60.4% in 2004 from 47.2% in 2003. The
increase in gross profit as a percentage in 2004 is due to the Company
negotiating better pricing from its suppliers and selling off of previously
written off obsolete inventory.
Selling and marketing expenses decreased to $24,861 in 2004 (12.1% of
net sales) from $118,259 in 2003 (18.4% of net sales), a decrease of $93,398. In
2004, the Company lacked the financial resources necessary to acquire inventory
or sustain marketing efforts.
Tour and pro contract expenses increased to $21,926 in 2004 (10.7% of
net sales) from $17,792 in 2003 (2.8% of net sales), an increase of $4,134. Tour
and pro contract expenses increased in 2004 as compared to 2003 as a result of
prior contractual obligations.
General and administrative expenses decreased to $299,971 in 2004 (146%
of net sales) from $453,547 in 2003 (70.5% of net sales), a decrease of
$153,576. In 2004, the Company limited resources required reducing
non-essential expenses, including reduction in personnel.
Depreciation and amortization decreased to $5,625 in 2004 from $18,877
in 2003, a decrease of $13,252. The decrease is a result of the Company's
downsizing and disposal of certain non-essential assets.
Interest expense decreased to $47,197 in 2004 from $321,503 in 2003.
The increase in interest expense in 2003 was primarily due to the increase in
interest expense related to the $2,100,000 convertible debenture financing which
closed in June 2002. In connection with the financing, the Company incurred
deferred financing costs and recorded a debt discount related to a beneficial
conversion feature and the estimated fair value of warrants issued in as part of
the financing. The deferred financing costs were amortized over the 18-month
term of the convertible debentures and were recorded as interest expense.
Net loss was $275,503 for 2004 as compared to a net loss of $568,267
for 2003. The decrease in the net loss is primarily related to the downsizing of
the business activities.
Comparison of Six Months Ended June 30, 2004 and 2003
Net sales decreased to $577,025 in 2004 from $1,176,404 in 2003, a
decrease of $599,379 or 51%. The decrease in net sales in 2004 as compared to
2003 is a result of the Company's lack of inventory and marketing efforts. The
Company lacked the financial resources necessary to acquire inventory or sustain
marketing efforts.
--------------------------------------------------------------------------------
Page 3
Gross profit decreased to $318,780 in 2004 from $508,583 in 2003, and
increased as a percentage of net sales to 55.3% in 2004 from 43.2% in 2003. The
increase in gross profit as a percentage in 2004 is due to the Company
negotiating better pricing from its suppliers and selling off of previously
written off obsolete inventory.
Selling and marketing expenses decreased to $112,029 in 2004 (19.4% of
net sales) from $308,210 in 2003 (26.2% of net sales), an decrease of $196,181.
In 2004, the Company lacked the financial resources necessary to acquire
inventory or sustain marketing efforts.
Tour and pro contract expenses increased to $42,314 in 2004 (7.3% of
net sales) from $39,026 in 2003 (3.3% of net sales), an increase of $3,288. Tour
and pro contract expenses increased in 2004 as compared to 2003 as a result of
prior contractual obligations.
General and administrative expenses decreased to $598,420 in 2004
(103.7% of net sales) from $853,597 in 2003 (72.6% of net sales), a decrease of
$255,172. In 2004, the Company limited resources required reducing
non-essential expenses, including reduction in personnel.
Depreciation and amortization decreased to $13,186 in 2004 from $40,134
in 2003, a decrease of $26,947. The decrease is a result of the Company's
downsizing and disposal of certain non-essential assets.
Interest expense decreased to $1,065,960 in 2004 from $1,098,433 in
2003, a decrease of $32,473. The increase in interest expense in 2003 was
primarily due to the increase in interest expense related to the $2,100,000
convertible debenture financing which closed in June 2002. In connection with
the financing, the Company incurred deferred financing costs and recorded a debt
discount related to a beneficial conversion feature and the estimated fair value
of warrants issued in as part of the financing. The deferred financing costs
were amortized over the 18-month term of the convertible debentures and were
recorded as interest expense. The decrease in interest expense in 2004 was
primarily due to the interest expense related to the $1,000,000 convertible
debenture financing which closed in December 2003. The conversion feature of the
convertible debentures provides for a rate of conversion that is below market
value, resulting in a beneficial conversion feature. The Company estimated the
fair value of the beneficial conversion feature to be $1,000,000 at date of
issuance, and recorded such conversion feature as a debt discount, which was
amortized to interest expense over the term of the debentures. The Company
recorded interest expense of $977,778 during the six months ended June 30, 2004
related to the amortization of the debt discount.
Net loss was $1,520,669 for 2004 as compared to a net loss of
$1,716,183 for 2003, a decrease of $195,517. The decrease in the net loss is
primarily related to the downsizing of the business activities.
Liquidity and Capital Resources
The consolidated financial statements as of and for the six months
ended June 30, 2004 have been prepared assuming that the Company will continue
as a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The carrying
amounts of assets and liabilities presented in the consolidated financial
statements do not purport to represent the realizable or settlement values. The
Company has suffered recurring operating losses and requires additional
financing to continue operations. For the six months ended June 30, 2004, the
Company incurred losses from operations of $1,520,669; cash used in operating
activities of $8,133; a working capital deficit of $3,729,168; and a
stockholders' deficit of $3,628,657. As a result of these factors, among others,
there is substantial doubt about the Company's ability to continue as a going
concern.
The Company will require additional capital to fund operating
requirements. The Company is exploring various alternatives to raise this
required capital, including convertible debentures, private infusion of equity
and various collateralized debt instruments, but there can be no assurances that
the Company will be successful in this regard. To the extent that the Company is
unable to secure the capital necessary to fund its future cash requirements on a
timely basis and/or under acceptable terms and conditions, the Company may have
to substantially reduce its operations to a level consistent with its available
working capital resources. The Company may also be required to consider a formal
or informal restructuring or reorganization.
The Company has financed its working capital requirements during the
past few years principally from the private placement of securities. Such funds
have periodically been supplemented with short-term borrowings under the
Company's bank line of credit and other private sources. The Company's bank
lines of credit paid in full and closed in 2004. The Company is actively seeking
an investment of additional capital. If adequate funds are not available on
acceptable terms, the Company may be unable to continue operations, develop,
enhance and market products, retain qualified personnel, take advantage of
future opportunities, or respond to competitive pressures, any of which could
have a material adverse effect on the Company's business, operating results,
financial condition or liquidity (see financing activities below for additional
information on future funding).
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Page 4
Operating Activities
The Company's net cash used in operations of $8,133 during the six
months ended June 30, 2004, as compared to utilizing cash of $475,373 during the
corresponding period for 2003. The decrease in cash utilized in operating
activities in 2004 as compared to 2003 was primarily a result of higher gross
margins, increased accounts payable, collection of accounts receivable and
utilization of prepaid expenses and inventory. At June 30, 2004, cash was $1,251
representing a decrease of $59,088, as compared to $60,339 at December 31, 2003.
The Company had a working capital deficit of $3,729,168 at June 30, 2004, as
compared to a working capital deficit of $2,243,712 at December 31, 2003.
Investing Activities
During the six months ended June 30, 2004 and 2003, net cash used in
investing activities was $6,250 and $6,252, respectively.
Financing Activities
During the six months ended June 30, 2004, the Company used cash from
financing activities of $44,705 by reducing its borrowings on bank lines of
credit by $44,705. During the six months ended June 30, 2003, the Company
provided cash from financing activities of $367,335 by increasing its borrowing
on lines of credit by $87,085, issuance of common stock for an aggregate of
$280,000 and proceeds from exercise of stock options of $250.
Funds from these transactions have been used for working capital. We
believe that our cash flow from operations, our June 30, 2004 cash balance,
additional capital raised and the borrowing capacity available under the line of
credit, will not be sufficient to meet our projected capital expenditures,
working capital and other cash requirements for the near future. In order for
the Company to continue its growth plan, additional funding will be required
from outside sources.
From January 2004 through June 2005, a director and stockholder has
advanced approximately $340,000 to the Company to be used for working capital.
The Company has received these funds and recorded them as loans from stockholder
of $185,600 during 2004 and $154,400 during 2005.
During the third quarter of 2004 the Company suspended normal
operations, including expanding brands and product offerings, new marketing
programs, and direct marketing to customers, due to a lack of operating working
capital resources. To the extent that the Company is unable to secure financing
in 2005, the Company's liquidity and ability to continue to conduct operations
will be impaired.
On January 14, 2005, the Company secured a commitment for a $10,000,000
private placement offering whereby a third party investor (the "Investor") will
purchase up to $10,000,000 of the Company's common stock over a twenty-four
month period to provide the Company with operating capital. Funding is subject
to, among other things, the Company filing a registration statement with the
U.S. Securities and Exchange Commission with respect to the resale of common
stock sold in the private placement offering. The Company is currently working
towards satisfying all conditions precedent to closing the funding, but there
can be no assurance that the Company will be successful in satisfying these
terms. In connection with the funding commitment, the Company paid a structuring
fee of $10,000 and issued 2,000,000 shares of the Company's common stock to the
Investor as a commitment fee.
Off Balance Sheet Arrangements
As of June 30, 2004, the Company has no off balance sheet arrangements.
Inflation
We do not believe that inflation has had a material effect on our
business, financial condition or results of operations. If our costs were to
become subject to significant inflationary pressures, we may not be able to
fully offset such higher costs through price increases. Our inability or failure
to do so could adversely affect our business, financial condition and results of
operations.
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Page 5
New Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 also includes required disclosures for financial instruments within its
scope. For the Company, SFAS No. 150 was effective for instruments entered into
or modified after May 31, 2003 and otherwise will be effective as of January 1,
2004, except for mandatory redeemable financial instruments. For certain
mandatory redeemable financial instruments, SFAS No. 150 will be effective for
the Company on January 1, 2005. The Company is in process of evaluating whether
the adoption of SFAS No. 150 will have a significant impact on the Company's
overall results of operations or financial position.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No. 151 clarify
that abnormal amounts of facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and require
the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The Company is
in the process of evaluating whether the adoption of SFAS No. 151 will have a
significant impact on the Company's overall results of operations or financial
position.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) ("SFAS
No. 123(R)"), "Share-Based Payment," to provide investors and other users of
financial statements with more complete and neutral financial information by
requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. Statement
No. 123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS No. 123(R) replaces
SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123, as originally
issued in 1995, established as preferable a fair-value-based method of
accounting for share-based payment transactions with employees. However, that
statement permitted entities the option of continuing to apply the guidance in
APB Opinion No. 25, as long as the footnotes to financial statements disclosed
what net income would have been had the preferable fair-value-based method been
used. The Company will be required to apply SFAS No. 123(R) as of January 1,
2006. The Company is in the process of evaluating whether the adoption of SFAS
No. 123(R) will have a significant impact on the Company's overall results of
operations or financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets - an amendment of APB Opinion No. 29, Accounting for
Non-monetary Transactions." This statement amends APB Opinion No. 29 to
eliminate the exceptions for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. A non-monetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions for SFAS No. 153 are
effective for non-monetary asset exchanges incurred during fiscal years
beginning after June 15, 2005. The Company is currently evaluating the effect,
if any, of adopting SFAS No. 153.
Critical Accounting Policies
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
estimated market, and consist of raw materials, work in process and finished
goods. Market is determined by comparison with recent sales or estimated net
realizable value.
Net realizable value is based on management's forecasts for sales of
the Company's products and services in the ensuing years and/or consideration
and analysis of changes in the customer base, product mix, or other issues that
may impact the estimated net realizable value. Should the demand for the
Company's products or services prove to be significantly less than anticipated,
the ultimate realizable value of the Company's inventories could be
substantially less than reflected in the accompanying condensed consolidated
balance sheet.
Long-Lived Assets
In July 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. If the
cost basis of a long-lived asset is greater than the projected future
undiscounted net cash flows from such asset, an impairment loss is recognized.
Impairment losses are calculated as the difference between the cost basis of an
asset and its estimated fair value.
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As of June 30, 2004, management has determined that no such impairment
exists and therefore, no adjustments have been made to the carrying values of
long-lived assets. There can be no assurance, however, that market conditions
will not change or demand for the Company's services and products will continue
which could result in impairment of long-lived assets in the future.
Intangible Assets
SFAS No. 142, "Goodwill and Other Intangible Assets", which is
effective for fiscal years beginning after December 15, 2001, addresses how
intangible assets that are acquired individually or with a group of other assets
should be accounted for upon their acquisition and after they have been
initially recognized in the financial statements. SFAS No. 142 requires that
goodwill and intangible assets that have indefinite useful lives not be
amortized, but rather be tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their estimated useful
lives. SFAS No. 142 provides specific guidance for testing goodwill and
identifiable intangible assets that will not be amortized for impairment. In
addition, SFAS No. 142 expands the disclosure requirements about goodwill and
other intangible assets in the years subsequent to their acquisition. The
principal effect of SFAS No. 142 on the Company's accompanying consolidated
financial statements is that the goodwill described in Note 3 to the
accompanying condensed consolidated financial statements is not required to be
amortized.
Revenue Recognition
The Company recognizes revenue when products are shipped to a customer
and the risks and rewards of ownership and title have passed based on the terms
of sale. The Company records a provision for sales returns and claims based upon
historical experience. Actual returns and claims in any future period may differ
from the Company's estimates.
Amounts billed to customers for shipping and handling fees are included
in net sales, and freight costs incurred related to these fees are included in
cost of goods sold in accordance with Emerging Issues Task Force ("EITF") Issue
No. 00-01,
"Accounting for Shipping and Handling Fees and Costs."
Licensing revenue is recognized when earned per the terms of royalty
agreements. Occasionally, licensees pay royalties in advance, which are recorded
as deferred licensing revenue in the accompanying consolidated balance sheets
until such time they are earned.
Advertising
The Company expenses advertising costs as incurred, except certain
direct-response advertising costs. Direct-response advertising costs are
capitalized as incurred and then expensed when the related advertising program
is aired.
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ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the
Company's disclosure controls and procedures. Based upon that evaluation, the
CEO and CFO concluded that as of June 30, 2004 our disclosure controls and
procedures are of limited effectiveness at the reasonable assurance level such
that the information relating to the Company, required to be disclosed in SEC
reports (i) is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and (ii) is accumulated and
communicated to the Company's management, including our CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. There has
been no change in the Company's internal control over financial reporting that
occurred during the fiscal quarter ended June 30, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Limitations on the Effectiveness of Internal Controls
The Company's management, including the CEO and CFO, does not expect
that our disclosure controls and procedures or our internal control over
financial reporting will necessarily prevent all fraud and material error. An
internal control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the internal control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, control may
become inadequate because of changes in conditions, and/or the degree of
compliance with the policies or procedures may deteriorate.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may be involved in various claims,
lawsuits, disputes with third parties, and actions involving allegations or
discrimination or breach of contract actions incidental to the normal operations
of the business. The Company is not currently involved in any litigation which
management believes could have a material adverse effect on its financial
position or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibit No. Description
----------- -----------
Exhibit 31* Certification of Chief Executive Officer pursuant to Exchange Act
Rule 13a-14(a) or 15d-14(a).
Exhibit 32* Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
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* Filed herewith
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
GOLFGEAR INTERNATIONAL, INC.
----------------------------
(Registrant)
Date: July 25, 2005 /s/ Daniel C. Wright
---------------------
Daniel C. Wright
President, Chief Executive Officer
and Chief Financial Officer
EXHIBIT INDEX
Exhibit 31 Certification of Chief Executive Officer pursuant to Exchange Act
Rule 13a-14(a) or 15d-14(a).
Exhibit 32 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.