UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-28007
GOLFGEAR INTERNATIONAL, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 43-1627555
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5285 Industrial Drive, Huntington Beach, California 92649
--------------------------------------------------------------
(Address of principal executive offices)
(714) 899-4274
--------------------------
(Issuer's telephone number)
Not applicable
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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 [ ]
As of June 30, 2002, the Company had 34,511,454 shares of common stock issued
and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents incorporated by reference: None.
1
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2002 (Unaudited) and December
31, 2001
Consolidated Statements of Operations (Unaudited) - Three Months and
Six Months Ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended
June 30, 2002 and 2001
Notes to Consolidated Financial Statements (Unaudited) - Six Months
Ended June 30, 2002 and 2001
Item 2. Management's Discussion and Analysis or Plan of Operation
PART II. OTHER INFORMATION
Item 1 - Legal proceedings
Item 2 - Recent sales of unregistered securitites
Item 6 - Exhibits and reports on form 8-K
SIGNATURES
EXHIBIT
2
GolfGear International, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, December 31,
2002 2001
---------- -------------
(Unaudited)
ASSETS
Current assets:
Cash $1,135,782 $ 120,135
Accounts receivable, net of
allowance for doubtful
accounts of $60,261, and
$78,337 at June 30, 2002,
and December 31, 2001,
respectively 301,815 335,755
Inventories 642,033 691,265
Prepaid expenses 43,510 22,450
---------- -------------
Total current assets 2,123,140 1,169,605
---------- -------------
Property and equipment, net
of accumulated depreciation 105,119 128,754
---------- -------------
Other assets:
Patents and trademarks, net
of accumulated amortization 73,828 83,922
Deferred financing costs, net 487,384 ---
Infomercial costs 167,678 ---
Deposits 7,770 12,400
---------- -------------
736,660 96,322
---------- -------------
Total assets $2,964,919 $ 1,394,681
========== =============
(continued)
3
GolfGear International, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
June 30, December 31,
2002 2001
------------ --------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued
expenses $ 821,654 $ 1,127,427
Income tax payable 4,000 8,000
Accrued product warranties 110,234 101,593
Accrued interest payable 13,288 8,438
Accrued officers' compensation 70,065 90,961
Bank credit line payable 51,069 57,100
Notes payable to stockholders --- 97,166
Notes payable, current portion 83,177 69,091
------------ --------------
Total current liabilities 1,153,487 1,559,776
------------ --------------
Non-current liabilities:
Note payable --- 50,000
Convertible debentures, net 1,084,156 ---
discount of $955,844
Stockholders' equity (deficit):
Common stock, $0.001 par value;
Authorized - 50,000,000 shares
Issued and outstanding -
34,586,454 shares and 17,989,454
shares at June 30, 2002 and
December 31, 2001, respectively 34,586 17,989
Additional paid-in capital 11,477,890 8,901,273
Accumulated deficit (10,064,552) (9,134,357)
------------ --------------
Total stockholders' equity (deficit) 1,568,727 (215,095)
------------ --------------
Common stock purchase
receivable note (924,975) ---
------------ --------------
(643,752) (215,095)
------------ --------------
Total liabilities and
stockholders' equity (deficit) $ 2,964,919 $ 1,394,681
============ ==============
See accompanying notes to consolidated financial statements.
4
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Three Months Ended
June 30,
--------------------------
2002 2001
------------ ------------
Sales $ 386,066 $ 740,480
Cost of goods sold 347,959 365,511
------------ ------------
Gross profit 38,107 374,969
------------ ------------
Expenses:
Selling and marketing 160,119 132,167
Tour and pro contracts 9,795 25,156
Provision for bad debts 11,582 57,777
General and administrative 352,207 344,717
Depreciation and amortization 16,474 31,046
------------ ------------
Total expenses 550,177 590,863
------------ ------------
Net loss from operations (512,070) (215,894)
Other income (expense):
Gain on settlement of
accounts payable 57,274 ---
Interest income 6,712 523
Interest expense (184,547) (6,715)
------------ ------------
Net loss $ (632,631) $ (222,086)
============ ============
Net loss applicable to common
stockholders:
Net loss $ (632,631) $ (222,086)
Less dividends on Series A
Senior Convertible
Preferred Stock --- (32,634)
------------ ------------
Net loss applicable to common
stockholders $ (632,631) $ (255,720)
============ ============
Net loss per common share -
Basic and diluted $ (0.02) $ (0.03)
============ ============
Weighted average number of
common shares outstanding -
basic and diluted 33,793,354 15,273,598
============ ============
See accompanying notes to consolidated financial statements.
5
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Six Months Ended
June 30,
--------------------------
2002 2001
------------ ------------
Sales $ 763,846 $ 1,311,526
Cost of goods sold 564,222 716,639
------------ ------------
Gross profit 199,624 594,887
------------ ------------
Expenses:
Selling and marketing 273,458 216,780
Tour and pro contracts 18,666 55,064
Provision for bad debts 22,915 59,711
General and administrative 574,109 583,452
Depreciation and amortization 29,884 55,256
------------ ------------
Total expenses 919,032 970,263
------------ ------------
Net loss from operations (872,921) (375,376)
Other income (expense):
Gain settlement of
accounts payable 57,274 ---
Interest income 6,712 929
Interest expense (190,730) (13,959)
Loss on disposal of assets (26,769) ---
------------ ------------
Net loss $ (930,195) $ (388,406)
============ ============
Net loss applicable to common
stockholders:
Net loss $ (930,195) $ (388,406)
Less dividends on Series A
Senior Convertible
Preferred Stock --- (66,414)
------------ ------------
Net loss applicable to common
stockholders $ (930,195) $ (454,820)
============ ============
Net loss per common share -
Basic and diluted $ (0.04) $ (0.03)
============ ============
Weighted average number of
common shares outstanding -
basic and diluted 25,875,571 15,273,598
============ ============
See accompanying notes to consolidated financial statements.
6
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30,
----------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net loss $(930,195) $(388,406)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities:
Depreciation and amortization 29,884 55,256
Provision for obsolete inventory 93,680 ---
Amortization of financing costs 28,670 ---
Amortization of Beneficial
Conversion discount 147,053
Provision for bad debts 22,915 59,711
Gain on settlement of
accounts payable (57,274) ---
Fair value of stock options and
warrants issued to non-employees --- 46,065
Loss on disposal of assets 26,769 ---
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivable 11,025 (207,430)
Inventories (44,449) 362,122
Prepaid expenses (21,059) 1,917
Deposits 4,630 12,217
Increase (decrease) in:
Accounts payable and
accrued expenses 222,249) 78,437
Accrued product warranties 8,641 10,208
Accrued interest payable 4,850 6,743
Accrued officer's compensation (20,896) 12,000
---------- ----------
Net cash provided by (used
in) operating activities (864,731) 48,840
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (22,924) (90,881)
Infomercial costs (167,678) ---
---------- ----------
Net cash used in investing activities (190,602) (90,881)
---------- ----------
(continued)
7
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited) (continued)
Six Months Ended
June 30,
---------------------
2002 2001
----------- --------
Cash flows from financing activities:
Increase (decrease) in notes
payable to stockholders $ (97,166) $20,666
Decrease in bank credit line (6,031) (1,182)
Proceeds from sale of
convertible debentures 2,040,000 ---
Deferred finaning costs (29,934) ---
Proceeds from short-term borrowings --- 40,000
Repayments of short-term borrowings (35,914) ---
Proceeds from sale of common stock 200,025 ---
----------- --------
Net cash provided by (used in)
financing activities 2,070,980 65,484
----------- --------
Cash:
Net increase 1,015,647 23,443
At beginning of period 120,135 39,754
----------- --------
At end of period 1,135,782 $63,197
=========== ========
Non-cash Transactions:
Deferred financial costs $ (486,120) ---
=========== ========
Settlement of accounts payable $ 183,524 ---
New note issued 100,000 ---
Value of stock issued 26,250 ---
----------- --------
Gain on settlement of
accounts payable $ 57,274 ---
=========== ========
Other Cash Information:
Interest paid $ 7,283 ---
=========== ========
Taxes paid $ 6,643 ---
=========== ========
See accompanying notes to consolidated financial statements.
8
GolfGear International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2002 and 2001
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared
by GolfGear International, Inc. and subsidiaries (collectively, "GolfGear" or
the "Company") pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC")for interim financial reporting. These
consolidated financial statements are unaudited and, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments
and accruals) necessary for a fair presentation of the balance sheets, operating
results, and cash flows for the periods presented. Operating results for the
three and six months ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 2002.
Certain financial information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted in accordance with the rules and
regulations of the SEC. These consolidated financial statements should be read
in conjunction with the audited consolidated financial statements, and
accompanying notes, included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001. The consolidated balance sheet at December
31, 2001 has been derived from the audited consolidated financial statements at
that date.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
9
Organization and Description of Business - The Company designs, develops and
markets premium golf clubs and related golf products utilizing its proprietary
forged face insert technology.
The golf club industry is highly seasonal, with most companies experiencing up
to 60% of their annual sales between February and June, with an additional 20%
of their annual sales occurring between October and December for the Christmas
buying season.
The Company is attempting to increase revenues through various means, including
expanding brands and product offerings, new marketing programs, and the
production of on an infomercial, which it hopes will air in late November or
early December. These types of programs take time to develop and the results of
any successful program may not be apparent in the Company's revenues for 2002.
The Company has raised $2,240,025 in new capital, and is currently attempting to
raise additional capital 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 reduce its
operations to a level consistent with its available working capital resources.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, 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.
Loss Per Share - Basic earnings per share are calculated by dividing net loss
applicable to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflects the
potential dilution that would occur if stock options, and warrants were
exercised. These potentially dilutive securities were anti-dilutive for all
periods presented, and accordingly, basic and diluted earnings per share are the
same for all periods presented. As of June 30, 2002 and 2001, potentially
dilutive securities consisted of outstanding stock options and warrants to
acquire 3,179,721 shares and 2,622,789 shares of common stock, respectively.
2. Convertible Debentures
On June 6, 2002, GolfGear International, Inc. (the "Company") completed the sale
of $2,000,000 of convertible debentures. The debentures are convertible into
common stock at $0.25 per share for a period of twelve (12) months commencing
six (6) months after the initial sale of the debentures. The debentures are
secured by the Company's patents. For each share of common stock issued upon
conversion of the debentures, one (1) common stock purchase warrant will be
issued, which will be exercisable for a period of eighteen (18) months at $0.10
10
per share. The costs associated with the issuance of the Debentures have been
capitalized and are being amortized over the 18 months. If the Debentures
convert to equity prior to the 18 month term the unamortized portion will be
debited to additional paid in capital. The Company has not recognized any
expense for the warrants at this time because the warrants are only issued when
and if the debentures convert to stock. At that point the company will treat
the value of the warrants as a cost of equity.
Pursuant to the terms of this financing, on June 11, 2002 Wyngate's President,
Peter H. Pocklington, was appointed as Chairman of the Board of Directors and
Chief Executive Officer. The financing also provides for Wyngate to appoint a
majority of the Board of Directors of the Company. To this end Wyngate has only
appointed Roger Miller and Dean Rienmuth. With the resignation of Frank Mc
Garvey the new appointees is only equal to the current number of sitting board
members. Don Anderson, the Company's founder, remained with the Company as
President and Chief Operating Officer.
3. Stockholders' Equity
For the three months ended June 30, 2001, 3,541 shares of Series A Senior
Convertible Preferred Stock were issued as payment of dividends of $33,634.
For the six months ended June 30, 2001, 6,992 shares of Series A Senior
Convertible Preferred Stock were issued as payment of dividends of $66,414.
During the three months ended June 30, 2002 the Company canceled 5,000 shares
issued to a former employee.
During the six months ended June 30, 2002 the Company canceled 105,000 shares
issued to a former employee and issued 5,000 shares in consideration for an
extension granted on a certain note payable.
On March 23, 2002 the Company entered into an agreement for the sale of
15,000,000 shares of its common stock, for $1,125,000, at which time $200,025
was received in cash and $924,975 in a promissory note with interest at 2.88%
per annum. Pursuant to the promissory note, the balance is due and payable
October 8, 2003. The promissory note is secured by a stock pledge agreement
which pledges 12,333,000 shares of the common stock, which shall be held by the
Company as security for payment of the promissory note.
On May 30, 2002, the Company entered into a settlement agreement and mutual
general release (the "Settlement Agreement") with MC Corporation. The
Settlement Agreement provided that the Company issue a total of 3,000,000 shares
of common stock to MC Corporation, of which 2,450,330 shares have already been
reflected as issued and outstanding in the Company's financial statements at
December 31, 2001 and March 31, 2002. The additional 549,700 shares of common
stock are reflected as issued and outstanding in the June 30 2002.
On June 6, 2002 the Company completed the sale of $2,000,000 of convertible
debentures. The debentures are convertible into common stock at $0.25 per share
for a period of twelve (12) months commencing six (6) months after the initial
sale of the debentures. As part of this financing, the Company issued 1,072,000
shares of its common stock as a finders fee.
11
Effective June 30, 2002 the Company issued 75,000 shares of common stock as part
of accounts payable settlement on a debt of $183,524. The Company recorded note
payable of $100,000 and a gain of $57,274. The Stock was valued at the current
market price of $26,250.
4. Segment and Geographic Information;
The Company operates in one business segment. The Company sells to customers in
the United States, and the rest of the world. During the three months ended June
30, 2002, sales to customers in the United States, and the rest of the world
were $391,137, and $13,724, respectively. During the three months ended June
30, 2001, sales to customers in the United States, and the rest of the world
were $712,303, and $28,177 respectively.
During the six months ended June 30, 2002, sales to customers in the United
States, and the rest of the world were $689,719, and $74,127, respectively.
During the six months ended June 30, 2001, sales to customers in the United
States, and the rest of the world were $1,000,163, and $311,363 respectively.
5. Inventories
At June 30, 2002 and December 31, 2001, inventories consist of the following:
2002 2001
--------- --------
Components parts $334,823 $482,024
Finished goods 352,874 254,905
--------- ---------
687,697 736,929
Reserve for obsolescence (45,664) (45,664)
--------- ---------
$642,033 $691,265
========= =========
6. Legal Proceedings
On November 17, 2001, MC Corporation, a Japanese corporation, filed an action
against the Company in the United States District Court, Central District of
California. MC Corporation had purchased 210,526 shares of Series A Senior
Convertible Preferred Stock in October 1999 for $2,000,000 which, combined with
the 34,504 shares of preferred stock received as dividends and pursuant to an
anti-dilution provision, automatically converted into 2,450,300 shares of common
stock in October 2001 pursuant to a subscription agreement dated September 1,
1999 (the "Subscription Agreement"). MC Corporation contended that it was
entitled to approximately an additional 8,500,000 shares of common stock based
on its interpretation of the reset provision contained in the Subscription
Agreement. The Company filed a cross-complaint against MC Corporation for
reformation of the Subscription Agreement to conform it to the mutual
understanding of the parties at the time it was executed.
12
MC Corporation had also been the exclusive distributor of the Company's
products in Japan since September 1999. Effective March 5, 2002, the Company
terminated its distribution agreement with MC Corporation as a result of MC
Corporation's failure to comply with the terms of the distribution agreement.
On May 30, 2002, the Company entered into a settlement agreement and mutual
general release (the "Settlement Agreement") with MC Corporation, John Kura and
Keizaikai USA, Inc. (hereinafter collectively referred to as the "MC Corporation
parties"). The Settlement Agreement provides that the Company issue a total of
3,000,000 shares of common stock to MC Corporation, consisting of 2,450,300
shares of common stock for the conversion at (the specified ten to one
conversion rate) of 245,030 shares of convertible preferred stock previously
issued to MC Corporation, and an additional 549,700 shares of common stock for
other consideration. The 2,450,330 shares have already been reflected as issued
and outstanding in the Company's financial statements at December 31, 2001 and
March 31, 2002. The additional 549,700 shares of common stock are reflected as
issued and outstanding in the June 30 2002. The Company was given the right of
first refusal to repurchase any shares of common stock owned by MC Corporation
it may desire to sell in a private transaction for a period of eighteen (18)
months from the date of execution of the Settlement Agreement. All stock options
and warrants owned by the MC Corporation parties were cancelled and MC
Corporation's anti-dilution rights arising under the Settlement Agreement were
terminated. The Settlement Agreement also provides that MC Corporation's
representative on the Company's Board of Directors will resign, and the
Company's distribution agreement with MC Corporation was formally terminated.
The MC Corporation parties agreed to restrict the sale of their shares of
common stock in a public transaction for a period of eighteen (18) months as
follows: no sale of shares shall be made during the first six (6)months; during
the second six (6) months, the MC Corporation parties agreed to sell no more
than fifty percent (50%) of the limitation on volume restrictions contained in
Rule 144(e) of the Securities Act of 1933, as amended; during the third six (6)
month period, all sales must be made in compliance with the volume limitations
contained in Rule 144(e).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
2002 contains "forward-looking" statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, including statements that include the
words "believes", "expects", "anticipates", or similar expressions. These
forward-looking statements include, among others, statements concerning the
Company's expectations regarding its working capital requirements, gross margin,
results of operations, business, growth prospects, competition and other
13
statements of expectations, beliefs, future plans and strategies, anticipated
events or trends, and similar expressions concerning matters that are not
historical facts. The forward-looking statements included in this Quarterly
Report on Form 10-QSB for the quarterly period ended June 30, 2002 involve known
and unknown risks, uncertainties and other factors that could cause the actual
results, performance or achievements of the Company to differ materially from
those expressed in or implied by the forward-looking statements contained
herein.
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, the Far East and Europe.
The golf club industry is highly seasonal, with most companies experiencing up
to 60% of their annual sales between February and June, with an additional 20%
of their annual sales occurring between October and December for the Christmas
buying season.
The consolidated financial statements include the accounts of the Company and
its direct and indirect wholly-owned subsidiaries, Gear Fit Golf Company,
Pacific Golf Holdings, Inc., Bel Air-Players Group, Inc. and Leading Edge
Acquisition, Inc. All significant inter-company transactions and balances have
been eliminated in consolidation.
The Company is attempting to increase revenues through various means, including
expanding brands and product offerings, new marketing programs, and the
production of on an infomercial, which it hopes will air in late November or
early December. These types of programs take time to develop and the results of
any successful program may not be apparent in the Company's revenues for 2002.
The Company has raised $2,240,025 in new capital, and is currently attempting to
raise additional capital 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.
GolfGear International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2002 and 2001
Restatement of the Six Months Ended June 30, 2002
As described in Note 2, on June 8, 2002, the Company completed the sale of
$2,040,000 of convertible debentures. At the time the convertible
debentures were sold they contained a conversion feature that was
beneficial to the holders based on the then current market value of the
Company's common stock. Under the guidance of EITF 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios", the Company is required to discount the debt
for the value of the conversion feature, and amortize the discount to
interest expense over the period that the debt first becomes convertible.
The effects of this restatement is shown in the following tables:
Consolidated Balance Sheet: June 30, 2002
As Originally Restatement
Reported Adjustment As Restated
Convertible Debt 2,040,000 (955,844) 1,084,158
Stockholder's Equity(Deficit) (312,092) 955,844 643,752
Consolidated Statement of Operations: Three Months Ended
June 30, 2002
As Originally Restatement
Reported Adjustment As Restated
Interest Expense 37,494 147,053 184,547
Net Loss (542,852) (147,053) (689,905)
Net Loss per common share-
Basic and diluted ($0.02) $ 0.00 $ (0.02)
Consolidated Statement of Operations: Six Months Ended
June 30, 2002
As Originally Restatement
Reported Adjustment As Restated
Interest Expense 43,677 147,053 190,730
Net Loss (783,142) (147,053) (930,195)
Net Loss per common share-
Basic and diluted ($0.03) ($0.01) $ (0.04)
Results of Operations
Three Months ended June 30, 2002 and 2001 -
14
Net sales decreased to $386,066 in 2002 from $740,480 in 2001, a decrease of
$354,414 or 47.9%. The Company's sales in the second and third quarter are
generally re-orders. The lack of working capital in the first quarter delayed
the production of inventory resulting in the loss of the initial sell-in. These
initially lost sales result in the loss of re-orders significantly affecting the
Company's second quarter sales. The Company also believes that the decline in
sales to its major customers has been caused be the general economic slowdown
and the softness in the equipment industry.
Gross profit decreased to $38,107 in 2002 from $374,969 in 2001, and decreased
as a percentage of net sales to 9.9% in 2002 from 50.6% in 2001. The gross
profit would have been $169,483 or 43.9% if it had not been for several factors
including a 10% increase in freight-in expense a result of the lack of working
capital and the Company's inability to take advantage of greater lead times. The
Company also chose to write-down older inventory - a total of $93,681 or 24% of
the gross profit. This was done in anticipation of the introduction of new
product preventing the Company from recovering its cost on the older inventory.
Selling and marketing expenses increased to $160,119 in 2002 (41.5% of sales)
from $132,167 in 2001 (17.8% of sales), an increase of $27,952 or 21.1%. Selling
and marketing expenses increased in 2002 as compared to 2001 as a result of the
Company's continued efforts to increase sales in 2002.
Tour and pro contract expenses decreased to $9,795 in 2002 (2.5% of sales) from
$25,156 in 2001 (3.4% of sales), a decrease of $15,361 or 61.1%. Tour and pro
contract expenses decreased in 2002 as compared to 2001 as previous obligations
have expired and have not been renewed.
General and administrative expenses increased to $352,207 in 2002 (91.2% of
sales) from $344,717 in 2001 (46.6% of sales), an increase of $7,490 (2.2%).
Depreciation and amortization decreased to $16,474 in 2002 from $31,046 in 2001,
a decrease of $14,572 or 46.9%. The decrease is a result of the write off of
Goodwill and certain other tangible assets at December 31, 2001.
Interest expense increased to $184,547 in 2002 from $6,715 in 2001, an increase
of $187,832. Interest expense increased in 2002 as compared to 2001 due to the
sale of the convertible debenture. The debenture bears interest at seven percent
(7%). The sales of the debenture resulted in $487,348 in capitalized financing
costs. These costs are being amortized over the 18-month life of the debenture.
Bad debt expense decreased to $11,582 in 2002 from $57,777 in 2001, a decrease
of $46,195. The allowance in 2002 is being calculated at 3% of sales where as
in 2001 specific accounts were being reserved for.
Net loss was $632,631 for the three months ended June 30, 2002, as compared to a
net loss of $222,086 for the three months ended June 30, 2001. An increased
loss of $410,545 or 184.9%. The main factor in the increased loss was the
decrease in sales.
Net Loss Applicable to Common Stockholders. During the three months ended June
30, 2001, the Company recorded preferred stock dividends of $32,634, which were
reflected as a return to the preferred stockholder and as an increase in the
loss to common stockholders. The Company did not have preferred stock in 2002.
15
Six Months ended June 30, 2002 and 2001 -
Net sales decreased to $763,846 in 2002 from $1,311,526 in 2001, a decrease of
$547,680 or 41.8%. The Company's sales in the second and third quarter are
generally re-orders. The lack of working capital in the first quarter delayed
the production of inventory resulting in the loss of the initial sell-in. These
initially lost sales resulted in the loss of re-orders significantly affecting
the Company's second quarter sales. In 2001 the Company sold $243,915 in Japan
but had no sales there in 2002. The Company terminated its distribution
agreement with MC Corporation as a result of MC Corporation's failure to comply
with the terms of the distribution agreement. Additionally the Company believes
that the decline in sales to its major customers is a result of the general
economic slowdown and the softness in the equipment industry.
Gross profit decreased to $199,624 in 2002 from $594,887 in 2001, but decreased
as a percentage of net sales to 26.1% in 2002 from 45.4% in 2001. The gross
profit would have been $330,524 or 43.3% if it had not been for several factors
including a 10% increase in freight-in expense a result of the lack of working
capital and the Company's inability to take advantage of greater lead times. The
Company also chose to write-down older inventory - a total of $93,681 or 12% of
the gross profit. This was done in anticipation of the introduction of new
product preventing the Company from recovering its cost on the older inventory.
Selling and marketing expenses increased to $273,458 in 2002 (35.8% of sales)
from $216,780 in 2001 (16.5% of sales), an increase of $56,678 or 26.1%. Selling
and marketing expenses increased in 2002 as compared to 2001 as a result of the
Company's continued efforts to increase sales in 2002.
Tour and pro contract expenses decreased to $18,666 in 2002 (2.4% of sales) from
$55,064 in 2001 (2.4% of sales), a decrease of $36,398 or 66.1%. Tour and pro
contract expenses decreased in 2002 as compared to 2001 as previous obligations
have expired and have not been renewed.
General and administrative expenses decreased to $574,109 in 2002 (75.2% of
sales) from $583,452 in 2001 (44.5% of sales), a decrease of $9,343 (1.6%).
Depreciation and amortization decreased to $29,884 in 2002 from $55,256 in 2001,
a decrease of $25,372 or 45.9%. The decrease is a result of the write off of
Goodwill and certain other tangible assets at December 31, 2001.
Interest expense increased to $190,730 in 2002 from $13,959 in 2001, an increase
of $176,771. Interest expense increased in 2002 as compared to 2001 due to the
sale of the convertible debenture. The debenture bears interest at seven
percent (7%). The sales of the debenture resulted in $487,348 in capitalized
financing costs. These costs are being amortized over the 18-month life of the
debenture.
16
Bad debt expense decreased to $22,915 in 2002 from $59,711 in 2001, an decrease
of $36,796. The allowance in 2002 is being calculated at 3% of sales where as
in 2001 specific accounts were being reserved for.
Net loss was $872,921 for the six months ended June 30, 2002, as compared to a
net loss of $388,406 for the six months ended June 30, 2001. An increased loss
of $84,575 or 124.7%. This increase was result of the decrease in sales,
increased expenses and the write-down of selected inventory.
Net Loss Applicable to Common Stockholders. During the three months ended June
30, 2001, the Company recorded preferred stock dividends of $66,414, which were
reflected as a return to the preferred stockholder and as an increase in the
loss to common stockholders. The Company did not have preferred stock in 2002.
Liquidity and Capital Resources - June 30, 2002:
The Company has financed its working capital requirements during the past few
years principally from the private placement of its securities. Such funds have
periodically been supplemented with short-term borrowings under the Company's
bank line of credit and other private sources. The bank line of credit is
unsecured, has a maximum borrowing level of $70,000, and is personally
guaranteed by the President of the Company.
Operating Activities. The Company's operations utilized cash of $864,731 during
the six months ended June 30, 2002, as compared to cash of $48,840 provided by
the six months ended June 30, 2001. The increase in cash utilized in operating
activities in 2002 as compared to 2001 was primarily a result of a much greater
loss. At June 30, 2002, cash had increased by $1,015,647, to $1,135,782, as
compared to $120,135 at December 31, 2001. The Company had working capital of
$969,653 at June 30, 2002, as compared to working capital deficit of $390,171 at
December 31, 2001, reflecting current ratios of 1.84:1 and 0.75:1 at June 30,
2002 and December 31, 2001, respectively.
Investing Activities. During the six months ended June 30, 2002 and 2001, net
cash used in investing activities was $190,602 and $90,881, respectively. During
the six months ended June 30, 2002 the Company invested $167,678 in the
production of an infomercial. The Company also invested $22,924 in other fixed
assets. During the six months ended 2001 the Company invested $90,881 in fixed
assets.
Financing Activities. During the six months ended June 30, 2002, the Company
repaid certain shareholders and directors $97,166. During the six months ended
June 30, 2001, the Company borrowed $26,164 net of payments on short-term notes
from its shareholders and directors. During the six months ended June 30, 2002
and 2001, the Company reduced its bank line of credit by $6,031 and $1,182,
respectively.
During the six months ended June 30, 2002, The Company sold $2,040,000 in the
form of a convertible debenture. The debentures are convertible into common
stock at $0.25 per share for a period of twelve (12) months commencing six (6)
months after the initial sale of the debentures. The debentures are secured by
the Company's patents. For each share of common stock issued upon conversion of
the debentures, one (1) common stock purchase warrant will be issued, which will
be exercisable for a period of eighteen (18) months at $0.10 per share. The
costs associated with the issuance of the Debentures have been capitalized and
are being amortized over the 18 months. If the Debentures convert to equity
prior to the 18 month term the unamortized portion will be debited to additional
paid in capital.
17
Pursuant to the terms of this financing, on June 11, 2002 Wyngate's President,
Peter H. Pocklington, was appointed as Chairman of the Board of Directors and
Chief Executive Officer. The financing also provides for Wyngate to appoint a
majority of the Board of Directors of the Company. To this end Wyngate has only
appointed Roger Miller and Dean Rienmuth. With the resignation of Frank Mc
Garvey the new appointees is only equal to the current number of sitting board
members. Don Anderson, the Company's founder, remained with the Company as
President and Chief Operating Officer.
During the six months ended June 30, 2001 the Company borrowed $40,000 under a
short-term note from a related party. During the six months ended June 30,
2002, the Company repaid $35,914 of short-term notes to unrelated parties.
On April 8, 2002, the Company entered into a stock purchase agreement (the
"Agreement") with Wyngate Limited, a Jersey Limited Company ("Wyngate"), whereby
Wyngate agreed to purchase 15,000,000 shares of the Company's common stock at
$0.075 per share for an aggregate purchase price of $1,125,000. Of the purchase
price, $200,025 was paid upon execution of the Agreement and Wyngate executed a
promissory note with interest at 2.88% per annum in favor of the Company for the
balance of $924,975. Pursuant to the promissory note, the balance is due and
payable October 8, 2003. The promissory note is secured pursuant to a stock
pledge agreement which pledges 12,333,000 shares of the common stock, which
shall be held by the Company as security for payment of the promissory note.
Funds from this transaction will be used for working capital, sales and
marketing, tour promotion, inventory purchases, accounts payable, patent
development and general operating expenses.
On June 6, 2002, GolfGear International, Inc. (the "Company") completed the sale
of $2,000,000 of convertible debentures. The debentures are convertible into
common stock at $0.25 per share for a period of twelve (12) months commencing
six (6) months after the initial sale of the debentures. The Company may sell up
to an additional $2,000,000 of convertible debentures in the near future. As
part of this financing, the Company issued 532,000 shares of its common stock as
a finders fee.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. We believe the following critical accounting policies affect our more
significant estimates and assumptions used in the preparation of our financial
statements. Our significant estimates and assumptions are reviewed and any
required adjustments are recorded on a quarterly basis.
18
The Company has an infomercial in production. The costs associated with the
infomercial are being capitalized and will be amortized over the estimated
useful life of the Infomercial.
The Company has obtained $2,040,000 financing through a convertible debentures
(Debentures). The costs associated with the issuance of the Debentures have
been capitalized and are being amortized over the 18 months. If the Debentures
convert to equity prior to the 18 month term the unamortized portion will be
debited to additional paid in capital.
New Accounting Pronouncements:
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective January 1, 2002. SFAS No. 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, SFAS No. 142
includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of the existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS No. 142
also requires the Company to complete a transitional goodwill impairment test
six months from the date of adoption. The Company adopted SFAS No. 142 in
December of 2001. It did not have any effect, its financial statement
presentation or disclosures for this period.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses the diverse accounting practices for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company will be required to adopt SFAS
No. 143 effective January 1, 2003. The Company is reviewing SFAS No. 143 to
determine what effect, if any, it will have on its financial statement
presentation or disclosures. There was no effect on the financial statements or
disclosures for this period.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which is effective January 1, 2002. SFAS No.
144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", and a portion of APB Opinion No.
30, "Reporting the Results of Operations". SFAS No. 144 provides a single
accounting model for long-lived assets to be disposed of and significantly
changes the criteria that would have to be met to classify an asset as
held-for-sale. Classification as held-for-sale is an important distinction
since such assets are not depreciated and are stated at the lower of fair value
or carrying amount. SFAS No. 144 also requires expected future operating losses
from discontinued operations to be displayed in the period(s) in which the
losses are incurred, rather than as of the measurement date as presently
required. The Company does not anticipate that the adoption of SFAS No. 144
will have a material effect on the Company's financial statement presentation or
disclosures.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 17, 2001, MC Corporation, a Japanese corporation, filed an action
against the Company in the United States District Court, Central District of
California. MC Corporation had purchased 210,526 shares of Series A Senior
Convertible Preferred Stock in October 1999 for $2,000,000 which, combined with
the 34,504 shares of preferred stock received as dividends and pursuant to an
anti-dilution provision, automatically converted into 2,450,300 shares of common
stock in October 2001 pursuant to a subscription agreement dated September 1,
1999 (the "Subscription Agreement"). MC Corporation contended that it was
entitled to approximately an additional 8,500,000 shares of common stock based
on its interpretation of the reset provision contained in the Subscription
Agreement. The Company filed a cross-complaint against MC Corporation for
reformation of the Subscription Agreement to conform it to the mutual
understanding of the parties at the time it was executed.
MC Corporation had also been the exclusive distributor of the Company's
products in Japan since September 1999. Effective March 5, 2002, the Company
terminated its distribution agreement with MC Corporation as a result of MC
Corporation's failure to comply with the terms of the distribution agreement.
On May 30, 2002, the Company entered into a settlement agreement and mutual
general release (the "Settlement Agreement") with MC Corporation, John Kura and
Keizaikai USA, Inc. (hereinafter collectively referred to as the "MC Corporation
parties"). The Settlement Agreement provides that the Company issue a total of
3,000,000 shares of common stock to MC Corporation, consisting of 2,450,300
shares of common stock for the conversion at (the specified ten to one
conversion rate) of 245,030 shares of convertible preferred stock previously
issued to MC Corporation, and an additional 549,700 shares of common stock for
other consideration. The 2,450,330 shares have already been reflected as issued
and outstanding in the Company's financial statements at December 31, 2001 and
March 31, 2002. The additional 549,700 shares of common stock are reflected as
issued and outstanding in the June 30 2002. The Company was given the right of
first refusal to repurchase any shares of common stock owned by MC Corporation
it may desire to sell in a private transaction for a period of eighteen (18)
months from the date of execution of the Settlement Agreement. All stock options
and warrants owned by the MC Corporation parties were cancelled and MC
Corporation's anti-dilution rights arising under the Settlement Agreement were
terminated. The Settlement Agreement also provides that MC Corporation's
representative on the Company's Board of Directors will resign, and the
Company's distribution agreement with MC Corporation was formally terminated.
20
The MC Corporation parties agreed to restrict the sale of their shares of
common stock in a public transaction for a period of eighteen (18) months as
follows: no sale of shares shall be made during the first six (6)months; during
the second six (6) months, the MC Corporation parties agreed to sell no more
than fifty percent (50%) of the limitation on volume restrictions contained in
Rule 144(e) of the Securities Act of 1933, as amended; during the third six (6)
month period, all sales must be made in compliance with the volume limitations
contained in Rule 144(e).
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent sales of unregistered securities
During the six months ended June 30, 2002 the Company canceled 105,000 and
issued 16,702 shares of its common stock. The 105,000 shares had been granted to
but never issued to former employees. 15,000,000 shares of common stock was sold
and issued to Wyngate Limited - details found else where in this document. In
connection with that sale of stock 1,072,000 shares were issued as a finders
fee. 550,000 shares of stock have been issued to MC Corporation as part of a
settlement agremment - see legal proceedings. Effective June 30, 2002 75,000
shares were issued as part of a settlement of a certain debt and 5,000 shares in
consideration for the extension granted on a certain note payable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Articles of Incorporation(1)
3.2 Certificate of Amendment of Articles of Incorporation(1)
3.3 Certificate of Amendment of Articles of Incorporation(1)
3.4 Articles of Merger(1)
3.5 Bylaws(1)
4.3 Binding Subscription Agreement for Purchase of Equity Securities
(M.C. Corporation)(1)
4.4 Certificate of Determination(1)
10.1 Distribution Agreement (M.C. Corporation)(1)
10.2 Distribution Agreement (GolfGear Korea, Ltd.)(1)
10.6 License Agreement (Wilson Sporting Goods Company)(1)
10.10 Employment Agreement (Donald A. Anderson)(1)(C)
10.11 GolfGear International, Inc. 1997 Stock Incent Plan(1)(C)
10.12 License Agreement (PowerBilt Golf)(1)
10.13 Property Lease Agreement(2)
10.14 Amended and Restated Agreement for Sale and Purchase of Assets
between Bel Air Golf Company and GolfGear International, Inc.(2)
10.15 Agreement for Sale and Purchase of Assets - Leading Edge(3)
10.16 Personal Services Agreement - Peter Alliss(3)
10.17 Exclusive Distribution Agreement (4)
20
10.18 Subscription Agreement dated March 7, 2002(5)
10.19 Stock Purchase Agreement dated April 8, 2002(5)
10.20 Promissory Note dated April 8, 2002(5)
10.21 Stock Pledge Agreement dated April 8, 2002(5)
21 Subsidiaries of the Registrant(1)
99.1 Patents(1)
99.2 Trademarks (1)
99.3 Certification pursuant to 18 U.S.C Section 1350, as
adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of
2002(contained within this document)
(b) Reports on Form 8-K - Six Months Ended June 30, 2002:
On April 8, 2002, GolfGear International, Inc. (the "Company") entered
into a stock purchase agreement with Wyngate Limited, a Jersey Limited
Company ("Wyngate"), whereby Wyngate agreed to purchase 15,000,000
shares of the Company's common stock.
On May 30, 2002, the Company entered into a settlement agreement and
mutual general release (the "Settlement Agreement") with MC
Corporation, John Kura and Keizaikai USA, Inc. (hereinafter
collectively referred to as the "MC Corporation parties").
On June 6, 2002, GolfGear International, Inc. (the "Company")
completed the sale of $2,000,000 of convertible debentures. The
debentures are convertible into common stock at $0.25 per share for a
period of twelve (12) months commencing six (6) months after the
initial sale of the debentures. The debentures are secured by the
Company's patents. For each share of common stock issued upon
conversion of the debentures, one (1) common stock purchase warrant
will be issued, which will be exercisable for a period of eighteen
(18) months at $0.10 per share.
21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GOLFGEAR INTERNATIONAL, INC.
----------------------------
(Registrant)
/s/ PETER H. POCKLINTON
Date: August 19, 2002 By: ----------------------------
PETER H. POCKLINGTON
Chief Executive Officer
(Duly Authorized Officer)
/s/DANIEL C. WRIGHT
Date: August 19, 2002 By: ----------------------------
DANIEL C. WRIGHT
Chief Financial Officer
(Principal Financial Officer)
22