UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2003
[ ] 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
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(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, 2003, the Company had 37,569,154 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, 2003 (Unaudited) and
December 31, 2002
Consolidated Statements of Operations (Unaudited) - Three Months
and Six Months Ended June 30, 2003 and 2002
Consolidated Statements of Cash Flows (Unaudited) - Six Months
Ended June 30, 2003 and 2002
Notes to Consolidated Financial Statements (Unaudited) - Three
Months and Six Months Ended June 30, 2003 and 2002
Item 2. Management's Discussion and Analysis or Plan of Operation
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on From 8-K
SIGNATURES
EXIBITS
2
GolfGear International, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2003 December 31, 2002
--------------- -------------------
ASSETS (Unaudited)
Current assets:
Cash $ 2,728 $ 117,018
Accounts receivable, net of allowance for doubtful accounts of $136,135
and $99,079, respectively 213,067 302,216
Inventories 546,699 492,904
Prepaid expenses 1,550 58,053
--------------- -------------------
Total current assets 764,044 970,191
Property and equipment, net of accumulated depreciation 85,453 98,740
Other assets:
Patents and trademarks, net of accumulated amortization 83,419 100,515
Deferred financing costs 118,747 315,366
Prepaid marketing costs and other assets 610,002 609,534
--------------- -------------------
Total assets $ 1,661,665 $ 2,094,346
=============== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 1,019,413 $ 967,108
Accrued product warranties 119,925 116,102
Accrued interest payable 172,674 89,449
Bank line of credit 157,979 70,894
Notes payable to stockholders 200,000 200,000
Notes payable 83,177 83,177
Convertible debentures 2,100,000 2,100,000
Deferred licensing revenue 47,958 75,000
Other current liabilities 1,600 1,600
--------------- -------------------
Total current liabilities 3,918,124 3,703,330
Stockholders' deficit:
Common stock, $.001 par value; authorized - 50,000,000 shares; issued
and outstanding - 37,569,154 shares and 34,856,154 shares, respectively
37,569 34,856
Additional paid-in capital 13,061,699 12,808,763
Common stock purchase receivable note (958,839) (945,164)
Deferred compensation (83,675) (100,409)
Accumulated deficit (14,297,815) (13,407,030)
--------------- -------------------
Total stockholders' deficit (2,241,061) (1,608,984)
--------------- -------------------
Total liabilities and stockholders' deficit $ 1,661,665 $ 2,094,346
=============== ===================
See notes to consolidated financial statements.
3
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
The Three Months Ended The Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
SALES $ 643,257 $ 386,066 $ 1,176,404 $ 763,846
COST OF GOODS SOLD 339,482 347,959 667,821 564,222
------------ ------------ ------------ ------------
GROSS PROFIT 303,775 38,107 508,583 199,624
------------ ------------ ------------ ------------
EXPENSES:
Selling and marketing 118,259 160,119 308,210 273,458
Tour and pro contracts 17,792 9,795 39,026 18,666
Bad debt expense 19,298 11,582 37,055 22,915
General and administrative 434,249 352,207 818,933 574,109
Depreciation and amortization 17,127 16,474 36,635 29,884
------------ ------------ ------------ ------------
TOTAL EXPENSES 606,725 550,177 1,239,859 919,032
------------ ------------ ------------ ------------
NET LOSS FROM OPERATIONS (302,950) (512,070) (731,278) (719,408)
OTHER INCOME (EXPENSE):
Gain on settlement of old AP 33,027 57,274 73,208 57,274
Interest income 6,874 6,712 13,751 6,712
Royalty income 20,093 - 32,192
Interest expense (143,170) (184,547) (276,535) (190,730)
Other Expenses (2,058) - (2,058) (26,769)
------------ ------------ ------------ ------------
NET LOSS $ (388,184) $ (632,631) $ (890,785) $ (872,921)
============ ============ ============ ============
LOSS PER COMMON SHARE -
BASIC AND DILUTED $ (0.01) $ (0.02) $ (0.02) $ (0.03)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 37,681,154 33,793,354 36,855,325 25,875,571
============ ============ ============ ============
See notes to consolidated financial statements.
4
Consolidated Statements of Cash Flows (Unaudited)
June 30, 2003 June 30, 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (890,785) $ (872,921)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 36,635 29,884
Accrued interest income (13,675) -
Amortization of deferred compensation 16,734 -
Amortization of deferred financing cost 172,018 28,670
Provision for bad debts 37,055 22,915
Gain on settlement of accounts payable (73,208) (57,274)
Amortization of beneficial conversion discount - 147,053
Provision for obsolete inventory - 93,680
Other - 26,769
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 52,094 11,025
Inventories (53,795) (44,449)
Prepaid expenses 56,503 (21,059)
Prepaid marketing (468) (167,678)
Other - 4,630
Increase (decrease) in:
Accounts payable and accrued expenses 125,513 (222,249)
Income tax payable - (4,000)
Accrued product warranties 3,823 8,641
Accrued interest 83,225 4,850
Prepaid royalties (27,042) -
Other - (20,896)
--------------- ---------------
NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES (475,373) (1,032,409)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (6,252) (22,924)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock and exercise of warrants 280,250 200,025
Proceeds from sale of convertible debenture - 2,040,000
Decrease in notes payable shareholders - (97,166)
Increase (decrease) in notes payable - (35,914)
Borrowings under bank line 1,071,819 -
Repayments of borrowings under bank line (984,734) (6,031)
Other - (29,934)
--------------- ---------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 367,335 2,070,980
--------------- ---------------
CASH:
NET INCREASE (DECREASE) (114,290) 1,015,647
AT BEGINNING OF PERIOD 117,018 120,135
--------------- ---------------
AT END OF PERIOD $ 2,728 $ 1,135,782
=============== ===============
Cash paid for interest $ 18,292 $ 7,283
=============== ===============
Cash paid for taxes $ - $ 6,643
=============== ===============
See notes to consolidated financial statements.
5
GolfGear International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Three Months and Six Months Ended June 30, 2003 and 2002
1. BASIS OF PRESENTATION
The consolidated financial statements as of and for the three months and
six months ended June 30, 2003 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 three months and the six months ended June 30, 2003 the Company
incurred losses from operations of $302,950 and $731,278 and a net loss of
$388,184 and $890,785 respectively. The Company used cash in operating
activities of $475,373 and as of June 30, 2003 had a working capital
deficit of $3,154,080 and a stockholder's deficit of $2,241,061. As a
result of these factors, there is a substantial doubt about the Company's
ability 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 2003, 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 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.
GolfGear International, Inc. and its subsidiaries (collectively, "GolfGear"
or the "Company") designs, develops and markets golf clubs and related golf
products.
2. INVENTORIES
6
Inventories consisted of the following:
June 30, December 31,
2003 2002
------------- --------------
(unaudited)
Component parts $ 326,926 $ 189,616
Finished goods 219,773 303,288
------------- --------------
$ 546,699 $ 492,904
============= ==============
3. BANK LINES OF CREDIT
The Company has a $250,000 bank line collateralized by eligible accounts
receivable. The line of credit matures on December 9, 2003 and bears
interest at 28% annually. Interest is payable monthly. Outstanding
borrowings at June 30, 2003 and December 31, 2002, were $120,158 and
$26,253 respectively.
The Company also has an unsecured $70,000 line of credit with another bank.
Interest is payable monthly at a variable rate (10.25% at June 30, 2003).
Outstanding borrowings at June 30, 2003 and December 31, 2002, were $37,821
and $44,641, respectively. This is a revolving line of credit with no
maturity date personally guaranteed by the Company's Founder.
4. NOTES PAYABLE AND NOTES PAYABLE TO STOCKHOLDERS
Notes payable consisted of the following:
June 30, December 31,
2003 2002
--------- -------------
(unaudited)
Notes payable to individuals, payable
on demand plus interest at rates
ranging from prime to 18% $ 83,177 $ 83,177
========= =============
On November 20, 2002 the Company entered into a loan agreement with Peter
Pocklington, its Chairman and Chief Executive Officer whereby Mr.
Pocklington loaned the Company $200,000. As consideration for the loan the
Company agreed to an amendment to a stock pledge agreement and released
9,029,518 shares of Common Stock held by the Company as security for
payment of a promissory note due for Pocklington's purchase of 15,000,000
shares of Common Stock. The promissory note remains collateralized by
3,303,482 shares of Common Stock to secure the unpaid balance of the
promissory note less the loan to the Company. The loan bears interest at 9
1/2% and was due on June 20, 2003. (See Note7, Subsequent Events.) The
Company's board of directors unanimously approved the transaction by
written consent on November 20, 2002.
On June 6, 2002, GolfGear International, Inc. (the "Company") completed the
sale of
7
$2,100,000 of convertible debentures. The debentures are convertible into
common stock at $0.25 per share for a period of 12 months commencing 6
months after the initial sale of the debentures. The Company's patents,
trademarks, and other intangible assets secured the debentures. For each
share of common stock issued upon conversion of the debentures, 1 common
stock purchase warrant will be issued, which will be exercisable for a
period of 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. Pursuant to the terms as outlined above the balance of any
debentures that do not convert to equity is due and payable December 6,
2003.
5. 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.
On June 28, 2003 the Company canceled 112,000 shares of common stock, which
were originally issued in connection with the convertible debenture as a
finders fee and recorded as a deferred financing cost. The deferred
financing costs were being amortized over the life of the debenture. Net of
the par value the balance of the deferred financing costs ($24,489) was
debited to additional paid in capital.
During the six months ended June 30, 2002 the Company canceled 100,000
shares issued to a former employee and issued 5,000 shares in consideration
to the extension granted on a certain note payable.
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.
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.
6. MAJOR CUSTOMER INFORMATION
During the three months and six months ended June 30, 2003, two customers
accounted for 48.5% and 54.9% of total sales respectively. At June 30,
2003, three customers accounted
8
for $157,785 (74%) of net accounts receivable. During the three months and
six months ended June 30, 2002, one customer accounted for approximately
15.6% and 13.5% of total sales respectively. At June 30, 2002, no customers
accounted for more then 8% of net accounts receivable.
7. SUBSEQUENT EVENTS
On July 17, 2003 Peter Pocklington, Wyngate Limited and Quincy Investments
(the Parties) jointly and collectively entered into an agreement with the
Company whereby the Parties paid the Company the amount of $225,000 under
an existing note (the Note) with the balance of the note due no later then
December 5, 2003. Additionally the Parties converted the note due them for
$200,000 into a payment against the Note. The Company forgave $150,000 of
the Note in consideration for the Parties cancellation of their right to
merge the Company with Meditron Medical, Inc., an option that they had
acquired under the terms of their original investment.
8. CRITICAL ACCOUNTING POLICIES
Patents and Trademarks - Patents and trademarks are being amortized on the
-----------------------
straight-line method over the estimated useful life, which vary from two to
17 years. SFAS No. 142 requires companies to cease amortizing goodwill that
exists at the date of adoption. SFAS No. 142 establishes a new method of
testing intangible assets for impairment on an annual basis or an interim
basis if an event occurs or circumstances change that would reduce the fair
value of a reporting unit carrying value. The Company effectively adopted
these standards as of January 1, 2002. No impairments were recorded in
2002.
Deferred Financing Costs - Deferred Financing Costs are amortized over the
-------------------------
life of the convertible debentures on the straight-line basis, which
approximates the effective interest method due to the short maturity of the
debentures.
Revenue Recognition - Revenue is recognized in accordance with SAB No. 101
--------------------
"Revenue Recognition in Financial Statements". Sales of products are
recognized when the products are shipped from the Company's facility. The
Company generally provides a lifetime warranty against defects. The Company
makes a provision for warranty costs in the period of sale. The Company
periodically reviews the adequacy of the accrued product warranties.
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.
The Company adopted Statement of Financial Accounting Standards ("SFAS) No.
123, "Accounting for Stock-Based Compensation", which establishes a fair
value method of accounting for stock-based compensation plans.
The provisions of SFAS No. 123 allow companies to either expense the
estimated fair value of stock options or to continue to follow the
intrinsic value method set forth in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", but to disclose the pro
forma effect on net loss and net loss per share had the fair value of the
stock
9
options been exercised. The Company has elected to continue to account for
stock-based compensation plans utilizing the intrinsic value method.
Accordingly, compensation cost for stock options is measured as the excess,
if any, of the fair market price of the Company's Common Stock at the date
of grant above the amount an employee must pay to acquire the Common Stock.
In accordance with SFAS No. 123, the Company has provided footnote
disclosure with respect to stock-based employee compensation. The cost of
stock-based employee compensation is measured at the grant date based on
the value or the award and is recognized over the vesting period. The value
of the stock-based award is determined using the Black-Scholes
option-pricing model whereby compensation cost is the excess of the fair
value of the award as determined by the pricing model at the grant date or
other measurement date above the amount an employee must pay to acquire the
stock. The resulting amount is charged to expense on the straight-line
basis over the period in which the Company expects to receive benefit,
which is generally the vesting period. Stock options issued to non-employee
directors at fair market value are accounted for under the intrinsic value
method.
Prepaid Marketing Costs - Prepaid marketing costs are capitalized as
-------------------------
incurred then amortized to expense on a cost-pool-by-cost-pool basis over
the period during which the future benefits are expected to be received.
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, 2003 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 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, 2003 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 consolidated financial statements as of and for the three months and
six months ended June 30, 2003 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
10
values. The Company has suffered recurring operating losses and requires
additional financing to continue operations. For the three months and the
six months ended June 30, 2003 the Company incurred losses from operations
of $302,950 and $731,278 and a net loss of $388,184 and $890,785
respectively. The Company used cash in operating activities of $475,373 and
as of June 30, 2003 had a working capital deficit of $3,154,080 and a
stockholders deficit of $2,241,061. As a result of these factors, there is
a substantial doubt about the Company's ability 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 2003, 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 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.
Results of Operations
Three Months ended June 30, 2003 and 2002 - (unaudited)
Net sales increased to $643,257 in 2003 from $386,066 in 2002, an increase
of $257,191 or 66.6%. The increase in net sales in 2003 as compared to 2002
is a result of the Company's new marketing efforts and the public
acceptance/demand for the Company's new product line. In order to continue
to increase sales, the Company will require additional capital to fund the
increased sales and marketing activities, as well as increased inventory
levels.
Gross profit increased to $303,775 in 2003 from $38,107 in 2002, an
increase as a percentage of net sales to 47.2% in 2003 from 9.9% in 2002.
In 2002, 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. In 2003, the Company reduced
its wholesale prices and increased some key component costs while offering
a new and improved product line.
Selling and marketing expenses decreased to $118,259 in 2003 (18.4% of net
sales) from $160,119 in 2002 (41.5% of net sales), a decrease of $41,860 or
26.1%. Selling and marketing expenses decreased in 2003 as compared to 2002
as a result of the Company
11
limiting its "new" marketing efforts in favor of focusing on the key
customer accounts that have been responsible for the increased sales in
2003.
Tour and pro contract expenses increased to $17,792 in 2003 (2.8% of net
sales) from $9,795 in 2002 (2.5% of net sales), an increase of $7,997 or
81.6%. Tour and pro contract expenses increased in 2003 as compared to 2002
as the Company has entered into new obligations with nationally known golf
professionals.
Bad debt expense increased to $19,298 in 2003 from $11,582 in 2002, an
increase of $7,716. Bad debt in these two periods was calculated as a
percentage of sales - the increase in the bad debt expense is a reflection
of the increase in sales.
General and administrative expenses increased to $434,249 in 2003 (67.5% of
net sales) from $352,207 in 2002 (91.2% of net sales), an increase of
$82,042 (23.3%). The $82,042 increases in general and administrative
expenses is due to increase in salaries, insurance and legal expenses. The
increases in salaries are due to new hires (President and SVP of Sales and
Marketing). The increases in insurance are due to expanded coverage and all
of the legal expenses were in the normal course of business.
Depreciation and amortization increased to $17,127 in 2003 from $16,474 in
2002, an increase of $653 or 4.0%. The increase is a result of the
acquisition of certain intangible and fixed assets.
Interest expense decreased to $143,170 in 2003 from $184,547 in 2002, a
decrease of $41,377 or 22.4%. This decrease is due to the settlement of
prior outstanding notes payable.
Net loss was $388,184 for the three months ended June 30, 2003, as compared
to a net loss of $632,631 for the three months ended June 30, 2002. The
primary reason for the decreased loss was the increase in sales and the
overall increase in the gross profit.
Six Months ended June 30, 2003 and 2002 - (unaudited)
Net sales increased to $1,176,404 in 2003 from $763,846 in 2002, an
increase of $412,558 or 54.6%. The increase in net sales in 2003 as
compared to 2002 is a result of the Company's new marketing efforts and the
public acceptance/demand for the Company's new product line. In order to
continue to increase sales, the Company will require additional capital to
fund the increased sales and marketing activities, as well as increased
inventory levels.
Gross profit increased to $508,583 in 2003 from $199,624 in 2002, an
increase as a percentage of net sales to 43.2% in 2003 from 26.1% in 2002.
In 2002 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.
12
Selling and marketing expenses increased to $308,210 in 2003 (26.2% of net
sales) from $273,458 in 2002 (35.8% of net sales), an increase of $34,752
or 12.7% but an overall decrease as a percentage of sales of 9.6%. Selling
and marketing expenses increased in 2003 as compared to 2002 as a result of
the Company's continued efforts to increase sales in 2003. The Company has
launched several new marketing programs offering promotional point of
purchase displays, printed brochures, and other promotional materials, as
well as a print advertisement campaign.
Tour and pro contract expenses increased to $39,026 in 2003 (3.3% of net
sales) from $18,666 in 2002 (2.4% of net sales), an increase of $20,360 or
109.1%. Tour and pro contract expenses increased in 2003 as compared to
2002 as the Company has entered into new obligations with nationally known
golf professionals.
Bad debt expense increased to $37,055 in 2003 from $22,915 in 2002, an
increase of $14,140. Bad debt in these two periods was calculated as a
percentage of sales - the increase in the bad debt expense is a reflection
of the increase in sales.
General and administrative expenses increased to $818,934 in 2003 (69.6% of
net sales) from $574,109 in 2002 (75.2% of net sales), an increase of
$244,825 (42.6%). The $244,825 increases in general and administrative
expenses is due to increase in salaries, insurance and legal expenses. The
increases in salaries are due to new hires (President and SVP of Sales and
Marketing). The increases in insurance are due to expanded coverage and all
of the legal expenses were in the normal course of business.
Depreciation and amortization increased to $36,635 in 2003 from $29,884 in
2002, an increase of $6,751 or 22.6%. The increase is a result of the
acquisition of certain intangible and fixed assets.
Interest expense increased to $276,535 in 2003 from $190,730 in 2002, an
increase of $88,805 or 45.0%. The primary reason for the increase expense
was the issuance of the convertible debentures including the amortization
of the finder's fees. The convertible debentures were issued in June of
2002 and they bear interest at 7%. The sale of the debenture resulted in
$516,054 in capitalized financing costs. These costs are being amortized
over the 18-month life of the debenture.
Net loss was $890,785 for the six months ended June 30, 2003, as compared
to a net loss of $872,921 for the six months ended June 30, 2002. The
primary reason for the decreased loss was the increase in sales and the
overall increase in the gross profit.
Liquidity and Capital Resources - June 30, 2003:
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 2003, the Company's liquidity and ability to
continue to conduct operations may be impaired.
The Company will require substantial additional capital to fund operating
requirements.
13
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.
Operating Activities. The Company's operations utilized cash of $475,373
during the six months ended June 30, 2003, as compared to utilizing cash of
$1,032,409 during the six months ended June 30, 2002. The decrease in cash
utilized in operating activities in 2003 as compared to 2002 was primarily
a result of the utilization of prepaid expenses, collections of receivables
and an increase in accounts payable and accrued expenses. At June 30, 2003,
cash has decreased to $2,728 as compared to $117,018 at December 31, 2002.
The Company had a working capital deficit of $2,855,263 at June 30, 2003,
as compared to a working capital deficit of $3,138,682 at December 31,
2002, reflecting current ratios of 0.20:1 and 0.26:1 at June 30, 2003 and
December 31, 2002, respectively.
Investing Activities. During the six months ended June 30, 2003 and 2002,
net cash used in investing activities for the purchase of property and
equipment was $6,252 and $22,924, respectively.
Financing Activities. The Company received $280,250 from the exercise of
common stock warrants and options during the six months ended June 30,
2003.
The Company has a $250,000 bank line collateralized by eligible accounts
receivable. The line of credit matures on December 9, 2003 and bears
interest at 28% annually. Interest is payable monthly. Outstanding
borrowings at June 30, 2003 and December 31, 2002, were $120,158 and
$26,253 respectively.
The Company also has an unsecured $70,000 line of credit with another bank.
Interest is payable monthly at a variable rate (10.25% at June 30, 2003).
Outstanding borrowings at June 30, 2003 and December 31, 2002, were $37,821
and $44,641, respectively. This is a revolving line of credit with no
maturity date personally guaranteed by the Company's Founder.
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.
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%
14
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.
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.
New Accounting Pronouncements:
New Accounting Pronouncements - In July 2002, the FASB issued SFAS No. 146
which nullifies Emerging Issues Task Force Issue No. 94-3: "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)".
SFAS No. 146 requires that a liability be recognized for those costs only
when the liability is incurred, that is, when it meets the definition of a
liability in the FASB's conceptual framework. SFAS No. 146 also establishes
fair value as the object for initial measurement of liabilities related to
exit or disposal activities. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, with earlier
adoption encouraged. Management does not expect the adoption of SFAS No.
146 to have a material impact on the Company's financial position or
results of operations.
In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transaction and Disclosure." SFAS No. 148 amends SFAS No. 123
to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based compensation. It also
amends the disclosure requirements of SFAS No. 123. If an entity elects to
adopt the recognition provisions of the fair value based method of
accounting for stock-based compensation in a fiscal year beginning before
December 16, 2003, that change in accounting principle shall be reported
using either the (i) prospective method, (ii) the modified prospective
method, or (iii) the retroactive restatement method as defined in SFAS No.
148. SFAS No. 148 is effective for fiscal years ending after December 15,
2002. Since the Company has elected to continue accounting for stock-based
compensation under APB No. 25, the adoption of SFAS no. 148 has had no
impact to the Company's financial position or results of operations. The
Company's financial statement disclosures have been designed to conform to
the new disclosure requirements prescribed by SFAS No. 148.
ITEM 3. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (the "Certifying
Officers") are responsible for establishing and maintaining disclosure
controls and procedures for the Company. The Certifying Officers have
designed such disclosure controls and procedures to ensure that material
information is made known to them, particularly during the period in which
this report was prepared. The Certifying Officers have evaluated the
effectiveness of the Company's disclosure controls and procedures as of the
end of the period covered by this
15
report and believe that the Company's disclosure controls and procedures
are effective based on the required evaluation. During the period covered
by this report, there were no changes in internal controls that materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
To the best knowledge of management, there are no litigation matters
pending or threatened against the Company or any subsidiaries.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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.
On June 28, 2003 the Company canceled 112,000 shares of common stock, which
were originally issued in connection with the convertible debenture as a
finders fee and recorder as a deferred financing cost. The deferred
financing costs were being amortized over the life of the debenture. Net of
the par value the balance of the deferred financing costs ($24,489) was
debited to additional paid in capital.
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 finder's fee. 550,000 shares of stock have been
issued to MC Corporation as part of a settlement agreement - 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 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Securities
Exchange Act of 1934 (6)
31.2 Certification of Chief Financial Officer pursuant to Securities
Exchange Act of 1934 (6)
32 Certification Pursuant to 18 U.S.C Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K - Three Months Ended March 31, 2003: None
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: August 19, 2003 By: /s/ John Pierandozzi
--------------------------
John Pierandozzi
Director, President
(Principal Executive Officer)
Date: August 19, 2003 By: /s/ Daniel C. Wright
-------------------------
Daniel C. Wright
Director, Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
17