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 September 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.
----------------------------------------------------------------
(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 September 30, 2003, the Company had 37,594,154 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 - September 30, 2003
(Unaudited) and December 31, 2002
Consolidated Statements of Operations (Unaudited) - Three
Months and Nine Months Ended September 30, 2003 and 2002
Consolidated Statements of Cash Flows (Unaudited) - Nine
Months Ended September 30, 2003 and 2002
Notes to Consolidated Financial Statements (Unaudited) -
Three Months and Nine Months Ended September 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 Form 8-K
SIGNATURES
EXIBITS
2
GolfGear International, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2003 December 31, 2002
-------------------- -------------------
ASSETS (Unaudited)
Current assets:
Cash $ 1,838 $ 117,018
Accounts receivable, net of allowance for doubtful accounts of $68,249 and 91,962 302,216
$99,079, respectively
Inventories 486,491 492,904
Prepaid expenses 17,420 58,053
Prepaid marketing costs 602,364 --
-------------------- -------------------
Total current assets 1,200,075 970,191
Property and equipment, net 79,092 98,740
Other assets:
Patents and trademarks, net 74,871 100,515
Deferred financing costs, net 47,499 315,366
Other assets 7,770 609,534
-------------------- -------------------
Total assets $ 1,409,307 $ 2,094,346
==================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 832,930 $ 967,108
Accrued product warranties 91,339 116,102
Accrued interest payable 203,301 89,449
Bank lines of credit 65,550 70,894
Note payable to stockholder -- 200,000
Notes payable -- 83,177
Convertible debentures 2,100,000 2,100,000
Deferred licensing revenue 44,378 75,000
Other current liabilities 1,200 1,600
-------------------- -------------------
Total current liabilities 3,338,698 3,703,330
Commitments and contingencies
Stockholders' deficit:
Common stock, $.001 par value; authorized - 50,000,000 shares; issued and 37,594 34,856
outstanding - 37,594,154 shares and 34,856,154 shares, respectively
Additional paid-in capital 13,061,924 12,808,763
Common stock purchase note receivable -- (945,164)
Deferred compensation (75,308) (100,409)
Accumulated deficit (14,953,601) (13,407,030)
-------------------- -------------------
Total stockholders' deficit (1,929,391) (1,608,984)
-------------------- -------------------
Total liabilities and stockholders' deficit $ 1,409,307 $ 2,094,346
==================== ===================
3
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
SALES $ 438,336 $ 296,785 $ 1,614,807 $ 1,060,631
------------ ------------ ------------ ------------
COST OF GOODS SOLD 245,067 301,771 912,888 865,993
------------ ------------ ------------ ------------
GROSS PROFIT 193,269 (4,986) 701,919 194,638
------------ ------------ ------------ ------------
EXPENSES:
Selling and marketing 102,690 258,385 410,900 512,342
Tour and pro contracts 17,598 46,137 56,624 64,804
Bad debt expense 13,150 8,877 50,205 31,792
General and administrative 449,366 404,810 1,268,298 998,419
Depreciation and amortization 16,909 13,960 53,543 43,844
------------ ------------ ------------ ------------
TOTAL EXPENSES 599,713 732,169 1,839,570 1,651,201
------------ ------------
LOSS FROM OPERATIONS (406,444) (737,155) (1,137,651) (1,456,563)
OTHER INCOME (EXPENSE):
Gain on settlement of accounts payable 25,000 69,654 98,208 69,654
Interest income 1,561 15,553 15,245 22,265
Royalty income 3,721 - 35,845 -
Interest expense (128,349) (675,675) (404,884) (866,495)
Other expense (151,275) - (153,334) (26,769)
------------ ------------ ------------ ------------
NET LOSS $ (655,786) $(1,327,623) $(1,546,571) $(2,257,818)
============ ============ ============ ============
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED $ (0.02) $ (0.04) $ (0.04) $ (0.09)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 37,594,154 34,586,154 37,103,898 25,888,071
============ ============ ============ ============
See notes to consolidated financial statements.
4
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
September 30, September 30,
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,546,571) $ (2,257,818)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 53,543 43,842
Accrued interest income on common stock note (15,234) (13,400)
receivable
Amortization of deferred compensation 25,101 -
Amortization of deferred financing cost 243,266 114,679
Deferred revenue - 75,000
Provision for bad debts 50,205 31,792
Gain on settlement of accounts payable (98,208) (69,654)
Forgiveness of purchase note receivable 150,000
Amortization of beneficial conversion discount - 698,501
Provision for obsolete inventory - 193,763
Fair value of stock options and warrants issued to
non-employees - 19,250
Loss on disposal of assets - 26,769
Changes in operating assets and liabilities:
Accounts receivable 160,049 153,269
Inventories 6,413 7,600
Prepaid expenses 40,633 (151,830)
Prepaid marketing costs and other assets (600) (233,984)
Accounts payable and accrued expenses 259,024 (465,013)
Accrued product warranties (24,763) 11,601
Accrued interest payable 131,079 41,716
Deferred licensing revenue (30,622) -
Other current liabilities (400) -
Accrued officer's compensation - (80,961)
--------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES (597,085) (1,929,778)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,251) (28,925)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options and warrants 280,500 -
Repayment of common stock purchase note receivable 225,000 -
Proceeds from sale of common stock - 200,025
Proceeds from sale of convertible debentures - 2,100,000
Repayment of notes payable to stockholders - (97,166)
Net repayments under bank lines of credit (5,344) (9,179)
5
Repayments of short-term borrowings (10,000) (35,914)
Payment of deferred financing costs - (3,434)
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 490,156 2,154,332
--------------- ---------------
NET INCREASE (DECREASE) IN CASH (115,180) 270,529
CASH AT BEGINNING OF PERIOD 117,018 120,135
--------------- ---------------
CASH AT END OF PERIOD $ 1,838 $ 390,664
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 23,011 $ 11,509
=============== ===============
Cash paid for taxes $ - $ -
=============== ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Cancellation of common stock issued for deferred financing costs $ 24,601
===============
Assignment of accounts payable and accrued expenses $ 294,994
===============
Assignment of notes payable and accrued interest $ 290,404
===============
Settlement of common stock purchase note receivable $ 585,398
===============
Deferred financing costs $ 516,054
===============
Issuance of note payable for settlement of accounts payable $ 100,000
===============
Value of stock issued for settlement of accounts payable $ 26,250
===============
See notes to consolidated financial statements.
GolfGear International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Three Months and Nine Months Ended September 30, 2003 and 2002
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying interim consolidated financial
---------------------
statements include the accounts of GolfGear International, Inc. and its
subsidiaries (collectively, "GolfGear" or the "Company"). All intercompany
transactions have been eliminated in consolidation.
The accompanying interim consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC") for interim financial
reporting. These interim consolidated financial statements are unaudited
and, in the opinion of management, include all adjustments (consisting of
normal recurring adjustments and accruals) necessary to present fairly the
consolidated balance sheets, consolidated operating results, and
consolidated cash flows for the periods presented in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). Operating results for the nine months ended September 30, 2003
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003 or for any other interim period during such
year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been omitted in
accordance with the rules and regulations of the SEC. These interim
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto contained in
the Company's Form 10-KSB for the year ended December 31, 2002.
6
Patents and Trademarks - Patents and trademarks are being amortized on the
----------------------
straight-line method over their estimated useful lives, which range from
two to 17 years. Management reviews its patents and trademarks for possible
impairment on an annual basis, or more frequently if events or changes in
circumstances indicate the carrying amount of the asset may not be
recoverable. If there is indication of impairment, then management prepares
an estimate of future cash flows (undiscounted and without interest
charges) expected to result from the use of the asset and its eventual
disposition. If these cash flows are less than the carrying amount of the
asset, an impairment loss is recognized to write down the asset to its
estimated fair value. There were no impairments at September 30, 2003.
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.
Prepaid Marketing Costs - Prepaid marketing costs are related to the costs
-----------------------
incurred to produce a television commercial advertisement. Subsequent to
September 30, 2003, the Company started airing this advertisement and
expects to expense the entire balance of prepaid marketing costs in the
fourth quarter of fiscal year 2003.
Revenue Recognition - Revenue is recognized in accordance with Staff
-------------------
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". Sales of products are recognized when the products are shipped
from the Company's facility.
Warranty Reserves - 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. A reconciliation of the beginning and ending
balances of warranty reserves for the nine-month period ended September 30,
2003 is as follows:
Balance at January 1, 2003 $ 116,102
Accruals for warranties issued during 2003 11,549
Settlements made (in cash or in kind) during 2003 (36,312)
-----------
Balance at September 30, 2003 $ 91,339
===========
Stock-Based Compensation - The Company accounts for options granted to
------------------------
employees in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". Had the Company applied the fair
value recognition provisions of SFAS No. 123 to stock-based employee
compensation, there would have been no difference between the reported and
pro forma net loss and net loss per share for the three months and nine
months ended September 30, 2003 and 2002.
7
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123.
Recent Accounting Pronouncements - In May 2003, the Financial Accounting
--------------------------------
Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after September 15, 2003.
It is to be implemented by reporting the cumulative effect of a change in
an accounting principal for financial instruments created before the
issuance date of the Statement and still existing at the beginning of the
interim period of adoption. Restatement is not permitted. The Company does
not expect the adoption of SFAS No. 150 to have a material impact upon its
financial position, cash flows or results of operations.
2. GOING CONCERN
The consolidated financial statements as of and for the three months and
nine months ended September 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 nine months ended September 30,
2003 the Company incurred losses from operations of $406,444 and
$1,137,651, respectively, and a net loss of $655,786 and $1,546,571,
respectively. The Company used cash in operating activities of $597,085 and
as of September 30, 2003 had a working capital deficit of $2,138,623and a
stockholders' deficit of $1,929,391. As a result of these factors, there is
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 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 assurance 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.
8
3. INVENTORIES
Inventories consist of the following:
September 30, December 31,
2003 2002
--------------- -------------
(unaudited)
Component parts $ 370,395 $ 189,616
Finished goods 116,096 303,288
--------------- -------------
$ 486,491 $ 492,904
=============== =============
4. BANK LINES OF CREDIT
The Company has a $250,000 bank line collateralized by eligible accounts
receivable. The line of credit which matures on December 9, 2003 is
automatically renewable for a year at the Company's option, and bears
interest at 28% annually. Interest is payable monthly. Outstanding
borrowings at September 30, 2003 and December 31, 2002, were $31,303 and
$26,253 respectively.
The Company also has an unsecured $70,000 revolving line of credit with
another bank. Interest is payable monthly at a variable rate (10% at
September 30, 2003). Outstanding borrowings at September 30, 2003 and
December 31, 2002 were $34,247 and $44,641, respectively. The revolving
line of credit has no maturity date and is personally guaranteed by the
Company's founder.
The Company is currently exploring various alternatives to raise capital or
to replace its existing indebtedness under the bank lines of credit.
5. DEBT
Notes Payable
--------------
At December 31, 2002, the Company had notes payable of $83,177 due to
individuals which were payable on demand and bore interest at rates ranging
from 6% to 8%. During the three month period ended September 30, 2003, the
Company assigned its obligations under these notes to Quincy Investments
Corporation ("Quincy"), an entity affiliated with Peter Pocklington, the
Company's Chairman and Chief Executive Officer (see Note 6).
Note Payable to Stockholder
---------------------------
On November 20, 2002, the Company entered into a loan agreement with Mr.
Pocklington, whereby Mr. Pocklington loaned the Company $200,000. As
additional 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 from
an entity affiliated with Mr. Pocklington for the purchase of 15,000,000
shares of the Company's common stock (see Note 6). The loan bore interest
at 9 %. During the three month period ended September 30, 2003, the Company
converted the loan into a payment against the common stock purchase note
receivable due from Wyngate Limited ("Wyngate"), an entity affiliated with
Mr. Pocklington (see Note 6).
9
Convertible Debentures
----------------------
On June 6, 2002, the Company completed the sale of $2,100,000 of 7%
convertible debentures (the "Debentures"). The Debentures are convertible
into the Company's common stock at $0.25 per share for a period of 12
months, commencing six months after the initial sale of the Debentures. For
each share of common stock issued upon conversion, the holder will receive
a warrant for the purchase of one share of the Company's common stock at
$0.10 per share exercisable for a period of 18 months. The costs associated
with the issuance of the Debentures have been capitalized as deferred
financing costs and are being amortized over the 18 month life of the
Debentures. The Debentures are secured by the Company's patents,
trademarks, and other intangible assets, and are due and payable on
December 6, 2003. The Company is currently negotiating an extension of the
maturity date with the holders of the Debentures. In addition, the Company
is in discussions with certain of its stockholders to provide any necessary
capital to fund any Debentures that are not extended and become due and
payable at December 6, 2003.
In connection with the Debenture financing, Mr. Pocklington had the right
to have the Company acquire Meditron Medical, Inc. ("Meditron"), a Canadian
corporation controlled by Mr. Pocklington, in a reverse merger transaction.
During the three month period ended September 30, 2003, this right was
cancelled (see Note 6).
6. STOCKHOLDERS' EQUITY
During the nine months ended September 30, 2003, the Company issued
2,800,000 shares of common stock for exercised warrants at $0.10 per share.
In addition, the Company issued 50,000 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 Debentures as a finders
fee and recorded as a deferred financing cost. As a result, the Company
recorded the unamortized balance of the value of these shares of $24,601 as
a reduction of stockholders' equity.
During the nine months ended September 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, 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, $200,025 of which was paid upon execution of
the Agreement. 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 principal and accrued interest was due and payable
on October 8, 2003. On July 17, 2003 Mr. Pocklington, Wyngate and Quincy
(collectively, the "Parties") jointly and collectively entered into an
agreement with the Company whereby the Parties satisfied the then
outstanding balance of the promissory note of $960,398 (including accrued
interest) in exchange for (1) a cash payment of $225,000, (2) conversion of
the $200,000 note payable due to stockholder, including accrued interest of
$14,710 to equity (see Note 5), (3) cancellation of the Company's
10
obligation to acquire Meditron (see Note 5), (4) assumption of
$370,688 of the Company's existing notes payable and certain accounts
payable obligations, and (5) forgiveness of $150,000 due under the
promissory note, which was recorded to other expense in the accompanying
consolidated statement of operations.
7. MAJOR CUSTOMER INFORMATION
During the three months and nine months ended September 30, 2003, one
customer accounted for approximately 15.1% and 21.2% of total sales,
respectively. At September 30, 2003, one customer accounted for $53,988
(59%) of net accounts receivable. During the three months and nine months
ended September 30, 2002, two customers accounted for approximately 24.9%
and one customer accounted for approximately 14.3% of total sales,
respectively. At September 30, 2002, no customers accounted for more than
9% of net accounts receivable.
8. COMMITMENTS AND CONTINGENCIES
Litigation - On November 8, 2003, at a special meeting of the Board of
----------
Directors, Don Anderson, CEO and Founder of the Company was suspended
pending the outcome of an investigation into alleged violations of his
employment contract. On November 18, 2003, the Company and certain officers
and board members were served summons and a complaint was filed on behalf
of Don Anderson in Orange County Superior Court alleging breach of written
employment agreement and slander. The Company, its officers and directors
are in the process of engaging legal counsel and intend to vigorously
defend against this complaint.
Management is not aware of any other litigation matters pending or
threatened against the Company or any of its subsidiaries.
Indemnities and Guaranties - During the normal course of business, the
--------------------------
Company has made certain indemnities and guarantees under which it may be
required to make payments in relation to certain transactions. These
indemnities include certain agreements with the Company's officers, under
which the Company may be required to indemnify such persons for liabilities
arising out of their employment relationship. The duration of these
indemnities and guarantees varies and, in certain cases, is indefinite. The
majority of these indemnities and guarantees do not provide for any
limitation of the maximum potential future payments the Company could be
obligated to make. Historically, the Company has not been obligated to make
significant payments for these obligations and no liabilities have been
recorded for these indemnities and guarantees in the accompanying
consolidated balance sheet.
9. SUBSEQUENT EVENT
On October 7, 2003, the Company completed the sale of $250,000 of
convertible debentures. The debentures are convertible into common stock at
$0.09 per share for a period of three months. For each share of common
stock issued upon conversion of the debentures, holders will receive one
common stock purchase warrant, which will be exercisable for a period of 12
months at $0.045 per share.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Quarterly Report on Form 10-QSB for the quarterly period ended
September 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 September 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
nine months ended September 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 nine months ended September 30,
2003 the Company incurred losses from operations of $406,444 and
$1,137,651, respectively, and a net loss of $655,786 and $1,546,571,
respectively. The Company used cash in operating activities of $597,085
and, as of September 30, 2003 had a working capital deficit of $2,138,623
and a stockholders' deficit of $1,929,391. 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 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
12
Three Months ended September 30, 2003 and 2002 - (unaudited)
Net sales increased to $438,336 in 2003 from $296,785 in 2002, an increase
of $141,551 or 47.7%. 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 $193,269 in 2003 from $(4,986) in 2002, an
increase as a percentage of net sales to 44.1% in 2003 from (1.7%) in 2002.
In 2002, the gross profit would have been $95,097 or 32.0% if the Company
had not written-down older inventory during the quarter - a total of
$100,083 or 33.7% of the net sales. This was done in anticipation of the
introduction of new product lines impairing the Company's ability to
recover its cost on the older inventory. In 2003, the Company reduced its
wholesale prices and decreased some key component costs while offering a
new and improved product line.
Selling and marketing expenses decreased to $102,690 in 2003 (23.4% of net
sales) from $258,385 in 2002 (87.1% of net sales), a decrease of $155,695
or 60.3%. Selling and marketing expenses decreased in 2003 as compared to
2002 as a result of the Company 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 decreased to $17,598 in 2003 (4.0% of net
sales) from $46,137 in 2002 (15.5% of net sales), a decrease of $28,539 or
61.9%. Tour and pro contract expenses decreased in 2003 as compared to 2002
due to costs incurred in 2002 related to identifying golf professionals on
the Buy.com Tour for use in Company's infomercial.
Bad debt expense increased to $13,150 in 2003 from $8,877 in 2002, an
increase of $4,273. The increase in the bad debt expense is a reflection of
the increase in sales.
General and administrative expenses increased to $449,366 in 2003 (102.5%
of net sales) from $404,810 in 2002 (136.4% of net sales), an increase of
$44,556 (11.0%). The increase in general and administrative expenses is due
to increases in salaries, insurance, rent accounting and legal expenses.
The increase in salaries is due to new hires (President and SVP of Sales
and Marketing).
Depreciation and amortization expense increased to $16,909 in 2003 from
$13,960 in 2002, an increase of $2,949 or 21.1%. The increase is a result
of the acquisition of certain intangible and fixed assets.
Interest expense decreased to $128,349 in 2003 from $675,675 in 2002, a
decrease of $547,326 or 81.0%. In 2002, the Company issued a convertible
debenture with warrants attached at a discount. The debenture was recorded
at the discounted amount and the discount was amortized as an interest
expense over the next six months - the earliest point at which the
debenture could be converted.
13
Other expense increased to $151,273 in 2003 from $0 in 2002, an increase of
$151,273 or 100%. The increase is primarily related to the partial
forgiveness of $150,000 related to the common stock purchase note
receivable due from a stockholder.
Net loss was $655,784 for the three months ended September 30, 2003, as
compared to a net loss of $1,327,623 for the three months ended September
30, 2002. The primary reason for the decreased loss was the increase in
sales, the overall increase in the gross profit and the decrease in
interest expense.
Nine Months ended September 30, 2003 and 2002 - (unaudited)
Net sales increased to $1,614,807 in 2003 from $1,060,631 in 2002, an
increase of $554,176 or 52.2%. 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 $701,919 in 2003 from $194,638 in 2002, an
increase as a percentage of net sales to 43.5% in 2003 from 18.4% in 2002.
In 2002 the gross profit would have been $388,402 or 36.6% if the Company
had not written-down older inventory during the period - a total of
$193,764 or 18.3% of net sales. This was done in anticipation of the
introduction of new product lines impairing the Company's ability to
recover its cost on the older inventory.
Selling and marketing expenses decreased to $410,900 in 2003 (25.4% of net
sales) from $512,342 in 2002 (48.3% of net sales), a decrease of $101,442
or 19.8% but an overall decrease as a percentage of sales of 9.6%. Selling
and marketing expenses decreased in 2003 as compared to 2002 as a result of
the Company's continued efforts to reduce unnecessary selling and marketing
costs due to cash flow restrictions.
Tour and pro contract expenses decreased to $56,624 in 2003 (3.5% of net
sales) from $64,804 in 2002 (6.1% of net sales), a decrease of $8,180 or
12.6%. Tour and pro contract expenses decreased in 2003 as compared to 2002
as the Company ended its obligations with certain golf professionals.
Bad debt expense increased to $50,205 in 2003 from $31,792 in 2002, an
increase of $18,413. The increase in the bad debt expense is a reflection
of the increase in sales.
General and administrative expenses increased to $1,268,299 in 2003 (78.5%
of net sales) from $998,419 in 2002 (94.1% of net sales), an increase of
$269,880 (27.0%). The increase 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.
14
Depreciation and amortization expense increased to $53,542 in 2003 from
$43,884 in 2002, an increase of $9,658 or 22.0%. The increase is a result
of the acquisition of certain intangible and fixed assets.
Interest expense decreased to $404,884 in 2003 from $866,495 in 2002, a
decrease of $461,611 or 53.3%. In 2002 the corporation issued a convertible
debenture with warrants attached. The convertible debentures were issued in
June of 2002 and they bear interest at 7%. The debenture was recorded at
the discounted amount and the discount was amortized as an interest expense
over the next six months - the earliest point at which the debenture could
be converted. Additionally the debenture resulted in $516,054 in
capitalized financing costs. These costs are being amortized over the
18-month life of the debenture.
The Company is currently exploring various alternatives to raise capital or
to replace its existing indebtedness under the bank lines of credit.
Net loss was $1,546,568 for the nine months ended September 30, 2003, as
compared to a net loss of $2,257,818 for the nine months ended June 30,
2002. The primary reason for the decreased loss was the increase in sales,
the overall increase in the gross profit and the decrease in interest
expense.
Liquidity and Capital Resources - September 30, 2003:
The Company is attempting to increase revenues through various means,
including expanding brands and product offerings, new marketing programs,
and 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. 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 $597,085
during the nine months ended September 30, 2003, as compared to utilizing
cash of $1,854,878 during the nine months ended September 30, 2002. The
decrease in cash utilized in operating activities in 2003 as compared to
2002 was primarily a result of the decrease in the net loss, utilization of
prepaid expenses, collections of receivables and an increase in accounts
payable and accrued expenses. At September 30, 2003, cash has decreased to
$1,838 as compared to $117,018 at December 31, 2002. The Company had a
working capital deficit of $2,138,623 at September 30, 2003, as compared to
a working capital deficit of $2,733,139 at December 31, 2002, reflecting
current ratios of 0.36:1 and 0.26:1 at September 30, 2003 and December 31,
2002, respectively.
15
Investing Activities. During the nine months ended September 30, 2003 and
2002, net cash used in investing activities for the purchase of property
and equipment was $8,251 and $28,925, respectively.
Financing Activities. The Company received $280,500 from the exercise of
common stock warrants and options during the nine months ended September
30, 2003. In addition, the Company collected $225,000 on the common stock
purchase noted receivable due from a stockholder.
The Company is currently exploring various alternatives to raise capital or
to replace its existing indebtedness under the bank lines of credit. In
addition, the Company is currently negotiating an extension of the maturity
date with the holders of the Debentures. In addition, the Company is in
discussions with certain of its stockholders to provide any necessary
capital to fund any Debentures that are not extended and become due and
payable at December 6, 2003.
The Company has a $250,000 bank line collateralized by eligible accounts
receivable. The line of credit which matures on December 9, 2003 is
automatically renewable for a year at the Company's option, and bears
interest at 28% annually. Interest is payable monthly. Outstanding
borrowings at September 30, 2003 and December 31, 2002, were $31,303 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 September 30, 2003 and December 31, 2002, were
$34,247 and $44,641, respectively. This is a revolving line of credit with
no maturity date personally guaranteed by the Company's founder.
On October 7, 2003, the Company completed the sale of $250,000 of
convertible debentures. The debentures are convertible into common stock at
$0.09 per share for a period of three months. For each share of common
stock issued upon conversion of the debentures, the holders will receive
one common stock purchase warrant, which will be exercisable for a period
of 12 months at $0.045 per share.
New Accounting Pronouncements:
In May 2003, the FASB issue SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances). SFAS 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. It is to be implemented by reporting
the cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. Restatement is
not permitted. The Company does not expect the adoption of SFAS 150 to have
a material impact upon our financial position, cash flows or results of
operations.
16
Critical Accounting Policies:
The Company's 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. The Company believes the
following critical accounting policies affect its significant estimates and
assumptions used in the preparation of its financial statements. The
significant estimates and assumptions are reviewed and any required
adjustments are recorded on a quarterly basis.
Allowance for Doubtful Accounts - The Company makes periodic evaluations of
the creditworthiness of its customers and generally does not require
collateral. As of the balance sheet dates presented, management has
determined that an adequate provision has been made for doubtful accounts.
Inventories - Inventories consist of materials, labor and manufacturing
overhead and are stated at lower of cost (first-in, first-out) or market.
The Company periodically reviews its inventory to evaluate it for
discontinued and obsolete products. The difference between the market value
of products and their cost is either written off as a direct charge to cost
of goods sold or included in the reserve allowance. The loss from the
liquidation or destruction of obsolete and discontinued inventory is
applied against the reserve allowance.
Revenue Recognition - Revenue is recognized in accordance with Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements".
Sales of products are recognized when the products are shipped from the
Company's facility.
Warranty Reserves - 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.
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 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
17
ITEM 1. LEGAL PROCEEDINGS
On November 8, 2003, at a special meeting of the Board of Directors, Don
Anderson CEO and Founder of the Company was suspended pending the outcome
of an investigation into alleged violations of his employment contract. On
November 18, 2003, the Company and certain officers and board members were
served summons and a complaint was filed on behalf of Don Anderson in
Orange County Superior Court alleging breach of written employment
agreement and slander. The Company, its officers and directors are in the
process of engaging legal counsel and intend to vigorously defend against
this complaint.
Management believes there are no other litigation matters pending or
threatened against the Company or any of its subsidiaries.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Report on form 8-K
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
31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act of 1934
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 September 30, 2003: None
18
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: November 21, 2003 By: /s/ John Pierandozzi
-------------------------
John Pierandozzi
Director, President
(Principal Executive Officer)
Date: November 21, 2003 By: /s/ Daniel C. Wright
-------------------------
Daniel C. Wright
Director, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
19