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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
Commission File Number 001-15977
TIGER TELEMATICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4051167
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
10201 Centurion Parkway North Ste. 600 32256
Jacksonville, FL
(Address of principal executive offices) (Zip Code)
(904) 279-9240
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class May 4, 2005
- ---------------------- -----------------
Common Stock, Par 54,600,000
Value $0.001 per share
CONTENTS
Page
----
Part I
Item 1. Financial Statements
Condensed Consolidated Balance Sheets F-2
Condensed Consolidated Statements of Operations F-3
Condensed Consolidated Statement of Stockholders' Deficiency F-5
Condensed Consolidated Statements of Cash Flows F-6
Notes to Condensed Consolidated Financial Statements F-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations F-15
Part II Tiger Telematics, Inc. Other Information
Item 1. Legal Proceedings F-20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds F-21
Item 3. Defaults Upon Senior Securities F-21
Item 4. Submission of Matters to a Vote of Security Holders F-21
Item 5. Other Information F-21
Item 6. Exhibits F-21
F-1
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2004 and December 31, 2003
June 30, December 31,
2004 2003
------------ ------------
Unaudited
ASSETS
Current Assets
Cash $ 1,831,175 $ 8,959
Accounts receivable 348,685 2,104
Inventories 35,570 35,570
Advances to employees and stockholders and other receivables 2,720,253 --
Prepaid expenses 4,780 45,383
------------ ------------
Total current assets 4,940,463 92,016
Property and Equipment, net 368,067 344,376
Other assets:
Goodwill 260,122 --
------------ ------------
Total assets $ 5,568,652 $ 436,392
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable $ 9,864,237 $ 3,667,646
Amount due employees and stockholders 1,406,336 9,191
Notes payable - Current portion 41,000 37,140
Accrued expenses 3,107,373 1,750,005
Deposits on common stock 9,404,090 2,247,891
Liabilities of discontinued operations 1,144,480 1,168,243
------------ ------------
Total current liabilities 24,967,516 8,880,116
Notes payable after one year 98,104 123,743
------------ ------------
Total liabilities 25,065,620 9,003,859
------------ ------------
Stockholders' Deficiency
Common stock - 0.001 par value
authorized 500,000,000 and 250,000,000 shares
in 2004 and 2003 respectively. Issued and outstanding
17,475,393 and 9,498,105 in 2004 and 2003 respectively 17,475 9,498
Additional paid-in-capital 27,595,208 13,051,547
Accumulated other comprehensive loss (779,993) (763,732)
Accumulated deficit (46,329,658) (20,864,780)
------------ ------------
Stockholders' deficiency (19,496,968) (8,567,467)
------------ ------------
Total liabilities and stockholders' deficiency $ 5,568,652 $ 436,392
============ ============
See Notes to Consolidated Financial Statements
F-2
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 2004 and 2003
Unaudited
2004 2003
------------ ------------
Net sales $ 183,829 $ (9,297)
Cost of goods sold 149,214 1,013
------------ ------------
Gross Profit (Loss) 34,615 (10,310)
------------ ------------
Operating expenses
Selling expense 1,182,363 18,659
General and administrative 18,548,053 341,192
------------ ------------
Total Operating Expenses 19,730,416 359,851
------------ ------------
Operating Loss (19,695,801) (370,161)
------------ ------------
Other income (expense)
Other expense 14,996 --
Interest expense (15,948) (13,618)
------------ ------------
(952) (13,618)
------------ ------------
Net Loss $(19,696,753) $ (383,779)
============ ============
Net loss per common share (basic and diluted) $ (1.21) $ (0.11)
============ ============
Weighted average shares outstanding
(basic and diluted) 16,227,321 3,484,472
============ ============
See Notes to Consolidated Financial Statements
F-3
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended June 30, 2004 and 2003
Unaudited
2004 2003
------------ ------------
Net sales $ 183,829 $ (8,247)
Cost of goods sold 149,214 4,301
------------ ------------
Gross Profit (Loss) 34,615 (12,548)
------------ ------------
Operating expenses
Selling expense 2,021,928 58,761
General and administrative 23,438,321 779,346
------------ ------------
Total Operating Expenses 25,460,249 838,107
------------ ------------
Operating Loss (25,425,634) (850,655)
------------ ------------
Other income (expense)
Other income (expense) 14,996 (38,190)
Interest expense (54,240) (24,379)
------------ ------------
(39,244) (62,569)
------------ ------------
Net Loss $(25,464,878) $ (913,224)
============ ============
Net loss per common share (basic and diluted) $ (1.86) $ (0.27)
============ ============
Weighted average shares outstanding
(basic and diluted) 13,725,749 3,376,537
============ ============
See Notes to Consolidated Financial Statements
F-4
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
For the six months ended June 30, 2004
Unaudited
Accumulated
Additional Other Total
Common Stock Paid-in Comprehensive Accumulated Stockholders'
Shares Amount Capital Loss Deficit Deficiency
------------ ------------ ------------ ------------ ------------ ------------
Balance (deficiency)
December 31, 2003 9,498,105 $ 9,498 $ 13,051,547 $ (763,732) $(20,864,780) $ (8,567,467)
Issuance of common stock:
Private placement 2,296,972 2,297 2,920,736 -- -- 2,923,033
Conversion of notes
payable and amounts due
Stockholders 65,000 65 54,935 -- -- 55,000
Services 429,000 429 379,929 -- -- 380,358
Net loss -- -- -- (5,768,125) (5,768,125) (5,768,125)
Other comprehensive
loss-foreign currency
translation adjustment (34,468) (34,468)
------------
Total comprehensive loss (5,802,593)
============
------------ ------------ ------------ ------------ ------------ ------------
Balance (deficiency) March
31, 2004 12,289,077 $ 12,289 $ 16,407,147 $ (798,200) $(26,632,905) $(11,011,669)
Issuance of common stock:
Private placement 1,864,267 1,864 3,970,970 -- -- 3,972,834
Services 3,162,049 3,162 7,217,251 -- -- 7,220,413
Contingent shares
to Comworxx 160,000 160 (160) -- -- --
Net loss -- -- -- (19,696,753) (19,696,753) (19,696,753)
Other comprehensive
gain-foreign currency
translation adjustment 18,207 18,207
------------
Total comprehensive loss
(19,678,546)
============
------------ ------------ ------------ ------------ ------------ ------------
Balance (deficiency) June 30,
2004 17,475,393 $ 17,475 $ 27,595,208 $ (779,993) $(46,329,658) $(19,496,968)
============ ============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements
F-5
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2004 and 2003
Unaudited
2004 2003
------------ ------------
Cash Flows for Operating Activities:
Net Loss $(25,464,878) $ (913,224)
Other comprehensive loss (16,261) (173,889)
Adjustments to reconcile net loss from continuing
operations to net
cash used in operating activities:
Depreciation 86,790 34,509
Expenses paid with common stock 7,600,771 97,600
Impairment of goodwill 55,777 --
Changes in assets and liabilities:
(Increase) in accounts receivable (20,071) --
(Increase) in advances to stockholders, employees
and other receivables (2,734,690) --
Increase in accounts payable 5,676,171 516,961
Increase in accrued expenses 1,249,816 --
Other - net 16,840 247,232
------------ ------------
Net cash used in operating activities (13,549,735) (190,811)
------------ ------------
Cash Flows From Investing Activities:
Purchase of property and equipment (110,481) (25,806)
------------ ------------
Net cash used in investing activities (110,481) (25,806)
------------ ------------
Cash Flows From Financing Activities:
Issuance of common stock and warrants 6,895,857 290,599
Loans and advances from stockholders and employees 1,452,155 --
Repayment to stockholders -- (269,804)
Payments on notes payable (21,779) (8,979)
Deposits on common stock 7,156,199 223,010
------------ ------------
Net cash provided by financing activities 15,482,432 234,826
------------ ------------
Net change in cash 1,822,216 18,209
Cash:
Beginning of period 8,959 --
------------ ------------
End of period $ 1,831,175 $ 18,209
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 54,240 $ 24,379
============ ============
Supplemental Disclosure of Non-cash Investing and
Operating Activities:
Stock issued for operating expenses $ 7,600,771 $ 93,100
============ ============
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Financing Activities:
Conversion of stockholder debt to common stock $ 55,000 $ --
============ ============
Investing Activities:
Payable to owners of acquired company 92,800
Liabilities in excess of assets acquired 223,099
------------
$ 315,899 $ --
============ ============
Acquisition of ISIS Models Limited:
Goodwill $ 315,899
Accounts receivable 326,510
Accounts payable (520,420)
Due to related parties (14,437)
Accrued expenses (14,752)
Payable to owners of acquired company (92,800)
------------
Cash received $ --
============
See Notes to Consolidated Financial Statements
F-7
TIGER TELEMATICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The condensed consolidated financial statements as of June 30, 2004 and the
three and six months ended June 30, 2004 and June 30, 2003 included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
information for the periods indicated have been included. For further
information regarding the Company's accounting policies, refer to the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the years ended December 31, 2003 and 2002.
The consolidated financial statements include the accounts of Tiger Telematics,
Inc., (Company) the public held parent company, Tiger Telematics USA, Inc.
(Tiger USA), a near dormant subsidiary, Tiger Telematics Europe, Ltd. (Tiger
Europe), and ISIS Models Ltd. (ISIS), a seventy-five (75%) percent owned
subsidiary acquired in May 2004. The Company started Tiger Europe (now named
Gizmondo Europe Ltd.) in December 2002 and a related entity Childtracker Ltd. (a
development entity) that existed as a part of Tiger Europe's focus on developing
new telematics products including next generation fleet telematic products, the
child tracker products and the handheld multi-entertainment gaming device now
called Gizmondo.
The financial statements for the three and six months ended June 30, 2003, were
not reviewed by the Company's independent certified public accountants. However,
the financial statements for the year ended December 31, 2003, have been audited
by the Company's independent certified public accountants. The Company's
management believes that a review by the Company's independent certified public
accountants of the financial statements mentioned above would not result in any
material changes to these financial statements. See Note J to the financial
statements - Restatement of 2003 financial statements.
Liquidity:
The Company has sustained net losses over the past three years and at June 30,
2004 had a net working capital deficit of $20,027,053. The Company will move
deposits on common stock of $9,404,090 to equity in the third quarter of 2004
when the Company issued the physical share certificates for such common stock.
Management sold off its unprofitable flooring business and is pursuing its
telematics business and the wireless handheld multi-entertainment gaming device,
Gizmondo. The Company anticipates issuing equity securities to meet working
capital requirements and to fund development costs incurred in connection with
developing Gizmondo and telematics related products that the Company believes
will enhance its operations.
F-8
Description of the Business:
The Company and its wholly owned subsidiaries are engaged in the business of
developing and marketing the Gizmondo wireless handheld multi-entertainment
gaming device.
The Company started Gizmondo Europe, Ltd. in late 2002 to focus on developing
new telematics products including next generation fleet telematics products, the
Gizmondo electronic game product, and to focus on marketing principally in the
UK.
In early 2003, the Company began developing a new multi-entertainment wireless
handheld gaming device that is now referred to as Gizmondo. Since then the
Company's primary business strategy has been to develop and market Gizmondo. The
Company initially launched a limited production version of the Gizmondo in the
UK on October 29, 2004, and expects to launch the full-scale production of
Gizmondo in 2005.
Segment Information: The Company focuses primarily all of its business in one
segment, the development, production, and sale of the handheld
multi-entertainment gaming device, Gizmondo.
NOTE B - ADVANCES TO AND AMOUNTS DUE FROM EMPLOYEES AND STOCKHOLDERS AND OTHER
RECEIVABLES
The advances are due from employees and stockholders of subsidiaries of the
Company and are due on demand, without interest. The amounts were repaid in the
third quarter of 2004.
Amounts due to employees and stockholders are due on demand, without interest.
Other receivables are amounts due from vendors and VAT tax recoverable from
government agencies.
NOTE C - EQUITY TRANSACTIONS
The Company issued 3,162,049 shares of restricted common stock during the second
quarter of 2004 in payment of services provided by unrelated vendors,
principally consulting, related to product development. The shares issued were
valued at $2.25 to $2.73 per share.
During the second quarter of 2004, the Company sold 1,864,267 shares of
restricted common stock for $.75 to $3.75 per share.
F-9
During the year ended December 31, 2004, the Company issued approximately
26,808,502 shares of restricted common stock, including first and second quarter
shares, as follows:
Shares Dollars
----------- -----------
Private placement 12,726,172 $55,496,479
Conversion of debt to equity 70,000 $ 92,500
Satisfaction of contingencies 160,000
Acquisition of Subsidiaries 1,537,866 $15,059,996
Payment for services 12,314,464 $22,464,350
----------- -----------
Total 26,808,502 $93,113,325
=========== ===========
Shares issued during the first quarter of 2005 16,928,664
===========
Shares issued and outstanding at March 31, 2005 53,235,271
===========
Shares issued from April 1 to May 4, 2005 1,400,000
===========
NOTE D- REVERSE STOCK SPLIT AND INCREASE IN AUTHORIZED SHARES
In July 2004, the Company's shareholders approved a 1 for 25 reverse stock
split. The number of authorized shares and par value were unchanged. All common
stock amounts have been adjusted to reflect this change for all periods
presented.
In May 2003, the Company's shareholders approved an increase in the number of
authorized shares from 100 million shares to 250 million shares. In January
2004, the authorized shares were increased to 500 million shares.
NOTE E - STOCK BASED COMPENSATION
The Company uses the intrinsic-value method of accounting for stock based
compensation. Under this method, compensation cost is the excess, if any, of the
quoted market price over the amount an employee must pay to acquire the stock at
the date of the grant. The Company generally grants options with an exercise
price equal to the market value of the common stock at the date of grant.
The Black-Scholes option price model was used to estimate the fair value as of
the date of grant using the following assumptions:
Dividend yield 0%
Risk-free interest rates 4.35%
Volatility 163.00%
Expected option term (years) 9.61
Weighted-average fair value of options granted during
the year $1.50
F-10
If the Company had determined compensation expense for the Plan based on the
fair value at the grant dates consistent with the method of SFAS No. 123 and
SFAS No. 148, the Company's pro-forma net loss and basic loss per share would
have been as follows:
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
------------- -------------
Net loss as reported $ (25,464,878) $ (913,224)
Stock based compensation expense under the
fair value based method, net of tax ($0) $ (27,000) $ (27,000)
Pro forma net loss $ (25,491,878) $ (940,224)
Basic and diluted net loss per share, as
reported $ (1.86) $ (.27)
Pro forma basic and diluted net loss per
share $ (1.86) $ (.28)
NOTE F - RELATED PARTY TRANSACTIONS
Included in accrued expenses are amounts owed an executive officer and director
of $145,683 and $136,571 at June 30, 2004 and December 31, 2003, respectively,
for back salary and reimbursable expenses incurred on behalf of the Company.
NOTE G - INVENTORY
Inventories are stated at the lower of cost (specific identification basis) or
market, and consist of electronic components.
NOTE H - CONTINGENCIES
A shareholder of the Company borrowed some of the funds advanced to the Company
(with funds going to Tiger Telematics, Ltd. (Tiger Ltd), a former subsidiary of
the Company) from a private investment bank, London International Mercantile
Bank (LIM), based in London. The shareholder failed to repay the note when due
and LIM made demand on Tiger Ltd to repay the funds. The Company maintained that
it was not responsible for that obligation and responded to the demand
accordingly. Tiger Ltd entered into a settlement agreement the Court approved as
a Tomblin Order where the demand note payable to the shareholder was forgiven in
exchange for the Company entering into an installment note for approximately
$475,000, to be paid over time directly to LIM. The shareholder remained
contingently obligated for the sum owed plus interest in event that the payment
was not made timely by Tiger Ltd. The Company issued a limited guaranty for the
obligation to LIM.
The settlement agreement called for monthly payments at a variable interest
rate. Tiger Ltd repaid approximately $80,000 prior to the sale of the business
on December 17, 2002. Following the sale of Tiger Ltd, the Company was apprised
that Tiger Ltd was placed in liquidation insolvency under the laws of the United
Kingdom for failure to make the payments required under this arrangement.
F-11
LIM made demand on the Company for approximately $450,000 under the guarantee
but has made no attempt to collect on the guaranty as it pursues its direct
remedies against the original borrower of the funds. LIM also holds 140,000
shares of the Company's common stock and certain real estate provided by the
original borrower as collateral. The Company has reserved an amount that it
believes will cover any obligation that may arise.
On April 26, 2002, the Company entered into a Lease Agreement with Christian and
Timbers UK Ltd (C&T) for office premises for its subsidiary for a term of five
years. The Company paid the first year's rent by issuing 20,000 shares of common
stock. The subsidiary subsequently defaulted on the lease arrangement. In the
summer of 2003, C&T sued the Company pursuant to the Company's guarantee. In
October 2003, the Company entered into a judgment stipulation for $300,000 to
settle all obligations under the guarantee. The Company has issued shares of
common stock to C&T that it believes will satisfy the amount of the outstanding
judgment.
In March 2004, Jordan Grand Prix Limited, filed suit against the Company in the
High Court of Justice, Queen's Bench Division (Central Office), London, UK,
alleging violation of a sponsorship agreement and dated letter agreement entered
into in July 2003. Jordan sued the Company for $3 million and alleged that the
Company defaulted on a payment of $500,000, due on January 1, 2004, under the
sponsorship agreement, and a payment for $250,000, due on the same date under
the letter agreement. On February 26, 2004, Jordan terminated both agreements.
In order to avoid summary judgment in favor of the plaintiff, the Company
escrowed with the court 70,000 shares of its common stock and prior to trial is
required to substitute $1.5 million for the escrowed shares. Trial is set for
July 2005. While the Company is unable to predict the outcome of this
litigation, it believes that it has good and meritorious defenses to the suit
and intends to defend vigorously the claims made against it.
In January 2005, the Company filed a lawsuit against a former investment advisor
of the Company, based on a breach of the agreement between the advisor and the
Company. As payment for investment advisory services, the Company originally
issued 40,000 (1,000,000 pre reverse split) shares of common stock in 2002 and
2003. The advisor subsequently alleged in December 2004 that the Company owed
him an additional 960,000 shares of common stock to maintain his ownership in
the Company at 1,000,000 shares. In April 2005, the Company and the advisor
agreed to settle all claims, with the Company issuing an additional 60,000
shares of common stock to the advisor.
In October 2004, Gizmondo Europe Ltd. (Gizmondo), a subsidiary of the Company
signed a contract with SCi Entertainment Group Plc (SCi), a games publisher,
under which Gizmondo has licensed the right to develop and publish twelve SCi
products for the Gizmondo platform. The agreement covers both currently released
titles as well as those in the pipeline, and establishes the structure for
continuing collaboration between the two companies.
The agreement has Gizmondo paying a minimum guarantee of approximately
$1,250,000 allocated by and among 12 products. The guarantee, which has been
paid, is non-refundable but fully recoverable against earned royalties of each
product. An earned royalty of 50% of net receipts is to be paid on each product.
On March 22, 2005, the Board of Regents of the University of Texas System filed
an action against the Company and one of its subsidiaries, Gizmondo Europe, Ltd.
F-12
in the United States District Court for the Western District of Texas, Austin
Division, alleging that predictive text software used in the Company's Gizmondo
gaming device infringes a patent held by the Board of Regents. The Company
believes that its software does not infringe the Board of Regents' patent. The
Company licenses this software from another company, which under the license
agreement, has indemnified the Company for infringement claims. The Company and
its licensor intend to vigorously defend the infringement claims against the
Company and Gizmondo Europe, Ltd.
NOTE I - WARRANTS
No warrants were outstanding at June 30, 2004.
NOTE J - RESTATEMENT OF 2003 FINANCIAL STATEMENTS:
The net loss for the quarter ended June 30, 2003 has been restated by $23,810
from $(359,969) to $(383,779) to reflect the effect of audit adjustments made
during the 2002 and 2003 audit that was completed subsequent to the date these
financial statements were originally issued and the effect of reclassifying
foreign currency exchange losses from operations to Accumulated Other
Comprehensive Loss. The net loss for the six months ended June 30, 2003 has been
restated by $25,971 from $(939,195) to $(913,224) for the same reasons as stated
in the preceding sentence.
NOTE K - ACQUISITIONS
In May 2004 Gizmondo Europe, Ltd. acquired a seventy-five percent (75%) interest
in ISIS Models Ltd., for 40,000 shares of the Company's restricted common stock
issued in the third quarter of 2004, valued at $92,800. Because liabilities
acquired exceed assets obtained and the Company is expected to absorb future
losses, the minority interest is valued at zero and any allocation of future net
income or losses is not expected to be material. ISIS was acquired to provide
marketing support and arrangements for Gizmondo. The Company also assumed
liabilities in excess of the value of tangible assets acquired of $223,099. ISIS
is the successor company to ISIS Models Management Limited, a company that has
previously ceased operations. ISIS had no assets or liabilities when acquired.
From the date of acquisition through June 30, 2004, ISIS generated revenue of
$183,829. The excess of purchase price over the value of the tangible assets
acquired ($315,899), was assigned to Goodwill. The Company subsequently realized
an impairment loss of approximately $56,000, which is included in general and
administrative expenses.
The following proforma information reflects the net sales, net loss and per
share amounts for the six-month period ended June 30, 2004 as if the Company had
acquired ISIS on January 1, 2004. The operating information of the predecessor
company (ISIS Models Management Limited) is reflected below. Neither of the ISIS
companies had operations prior to June 30, 2003. Therefore, no proforma amounts
are shown for the six-month period ended June 30, 2003.
Pro forma net sales $ 1,176,000
Pro forma net loss $ (25,666,000)
Pro forma basic and diluted net loss per
common share $ (1.86)
Weighted average shares outstanding -
basic and diluted 13,765,749
F-13
Goodwill represents the excess of the cost of an acquisition over the fair value
of the net assets acquired. The Company tests goodwill and other intangible
assets on an annual basis, or more frequently if events or circumstances
indicate that there may have been impairment. The goodwill impairment test
estimates the fair value of each reporting unit, through the use of a discounted
cash flows model, and compares this fair value to the reporting unit's carrying
value. The goodwill impairment test requires management to make judgments in
determining the assumptions used in the calculations. Management believes the
remaining goodwill is not impaired and is properly recorded in the financial
statements.
NOTE L - SUBSEQUENT EVENTS
Warthog Plc
The Company executed an Asset Purchase Agreement dated November 3, 2004 and
closed the transaction on that date, for the acquisition of Warthog Plc's
subsidiaries, intellectual property and assets, in a move to further expand the
Company's games development agenda and management infrastructure. Within two
days of closing, the Company injected approximately $1.3 million into the
Warthog subsidiaries for working capital purposes.
As a result the Company paid $1,113,000 in cash and issued 497,866 shares of its
restricted common stock on November 3, 2004.
Indie Studios
On August 2, 2004, Gizmondo Europe, Ltd. closed the purchase of Indie Studios on
a transaction agreed to pursuant to a Purchase Agreement dated May 20, 2004 for
one million shares of the Company's restricted common stock. There are also
600,000 contingent shares reserved for future issuance based on the completion
of two games in progress as of the acquisition date. For financial statement
purposes, the Company recorded approximately $2.5 million of goodwill to reflect
the excess of purchase price over net assets acquired.
Integra SP
The Company executed a share Purchase Agreement dated October 29, 2004 to buy
the shares of Integra SP (Integra), which owns several UK subsidiaries that
provide software for process management and integration of real-time systems.
Integra's domain expertise and Altio product set enable businesses to provide
integration to various financial services institutions supporting a wide range
of formats and protocols. For the fiscal year ended June 30, 2004, Integra had
unaudited revenues of $4.1 million.
The transaction has not closed. When approved, the Company will issue 625,250
shares at closing and escrow 2,794,785 shares for payouts over two years, based
on an earn out formula. The maximum number of shares to be issued under the two
year payout is 1,984,469 and under the earn out is 3,420,035.
F-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 23E of the Securities
Act of 1934, as amended. These statements relate to future events or future
financial performance. Any statements contained in this report that are not
statements of historical fact may be deemed to be forward-looking statements and
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. In some cases, forward-looking statements can be
identified by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "intend", "believe," "estimate," "predict," "potential" or
"continue," or the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
Investors are cautioned that these forward-looking statements reflect numerous
assumptions and involve risks and uncertainties that may affect the Company's
business and prospects and cause actual results to differ materially from these
forward-looking statements. Among the factors that could cause actual results to
differ are the Company's operating history; competition; low barriers to entry;
reliance on strategic relationships; rapid technological changes; inability to
complete transactions on favorable terms; consumer demand for video game
hardware and software; the timing of the introduction of new generation
competitive hardware systems; pricing changes by key vendors for hardware and
software and the timing of any such changes, and the adequacy of supplies of new
software products.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither the
Company, nor any other person or entity, assumes responsibility for the accuracy
and completeness of the forward-looking statements. The Company is under no
obligation to update any of the forward-looking statements after the filing of
this Form 10-Q to conform such statements to actual results or to changes in the
Company's expectations.
The following discussion should be read in conjunction with the Company's
financial statements, related notes and the other financial information
appearing elsewhere in this Form 10-Q.
General Overview
During 2001 and the first half of 2002, the Company's principal business was the
retail sale of flooring products, including carpet, area rugs, wood and
laminates, at discount prices, to commercial and retail customers. The Company
announced the discontinuation of the flooring business on June 6, 2002, and sold
the related assets on August 9, 2002.
In February 2002, the Company acquired Eagle Eye Scandinavian Distributions,
Ltd., a developer and distributor of telematics products and services to the
business-to-business segment in Europe and changed its name to Tiger Telematics,
Ltd. During 2002, the Company's principal business, selling telematics products
and services, was conducted through Tiger Telematics, Ltd., which was sold on
December 17, 2002.
F-15
The Company started Tiger Telematics Europe, Ltd. (now known as Gizmondo Europe,
Ltd.) in late 2002 to focus on developing new telematics products including next
generation fleet telematics products and to focus on marketing principally in
the UK.
Since early 2003, the Company has been developing a new multi-entertainment
wireless handheld gaming device that is now referred to as Gizmondo. The Company
initially launched a limited production version of the Gizmondo in the UK on
October 29, 2004, and launched the full scale production in the UK in March
2005. The Company expects to launch the full scale production of Gizmondo in
Europe and North America in the third quarter of 2005. The Gizmondo is powered
by a Microsoft Windows CE.net platform, has a 2.8-inch TFT color screen and a
Samsung ARM9 400Mhz processor and incorporates the GoForce 3D 4500 NVIDIA
graphics accelerator. Gizmondo provides cutting-edge gaming, multimedia
messaging, an MP3 music player, Mpeg4 movie playing capability, a digital camera
and a GPRS network link to allow wide-area network gaming. Additionally,
Gizmondo contains a GPS chip for location based services, is equipped with
Bluetooth for use in multi-player gaming and accepts MMC card accessories.
Three months-ended June 30, 2004 compared to the three months ended June 30,
2003
Below is a summary of the results of the Company for the three months ended June
30, 2004.
Net Sales: The Company's net sales were $183,829 (all from ISIS Models, Ltd.)
for the three months ended June 30, 2004 and were virtually $0 for the three
months ended June 30, 2003, although the Company is closer to the release of its
Gizmondo device now then it was in 2003. In both comparable quarters the Company
has focused its full attention to the development of the Gizmondo device and was
not actively selling its GPS Telematics products in either period.
Gross Profits: Gross profits were negligible for the three months ended June 30,
2004 and 2003. The Company expended funds in each period on the Gizmondo
development. The gross profits in 2004 results were from ISIS Models, Ltd.
Selling Expenses: Selling and marketing expenses for the three months ended June
30, 2004 were $1,182,363 compared with $18,659 for the same time period in 2003.
Most of the increase can be attributed to moving towards preliminary marketing
and market research related to the Gizmondo product. Testing of the market size
and potential market and buyer profile for the Gizmondo was a focus of
expenditures during the 2004 time period.
General and Administrative Expenses: General and administrative expenses for the
three months ended June 30, 2004 were $18,548,053 compared to $341,192 or up
approximately over $18 million. This increase came primarily from expenses the
research and development costs associated with the Gizmondo. The Company
incurred over $8.7 million in development costs directly attributable to the
Gizmondo in 2004. All of these costs are expensed as incurred and are not
capitalized for financial reporting purposes. In addition salaries rose to over
$2.6 million as the Company increased staff during the product development
phase. The Company also incurred over $6.4 million of legal, accounting and
consulting costs in the second quarter of 2004 as consultants were engaged to
assist the Company in activities related to the development and launch of the
Gizmondo. The Company anticipates a significant increase in its general and
administrative expenses in future quarterly periods as part of its product
development strategy.
F-16
Net Loss: The Company reported an operating loss of $19,696,753 in the quarter
ended June 30, 2004 compared to $383,779 for the same time period in 2003. The
aforementioned costs associated with the development of Gizmondo account for
this material increase in operating loss. Management anticipates that its losses
in future quarters will grow materially as development costs for its new gaming
device, Gizmondo, continue to accelerate.
Six months-ended June 30, 2004 compared to the six months ended June 30, 2003
Below is a summary of the results of the Company for the six months ended June
30, 2004.
Net Sales: The Company's net sales were $183,829 in the six months of 2004
compared to virtually zero in 2003. The Company is closer to the release of its
Gizmondo device now then it was in 2003. In both comparable periods, the Company
has focused its full attention to the development of the Gizmondo device and was
not actively selling its GPS Telematics products in either period.
Gross Profits: Gross profits were negligible for the first six months of 2004
andfor the first six months of 2003. Gross profits for the first six months of
2004 relate to the Company's subsidiary, ISIS. The Company continues to focus on
the development of Gizmondo and realized only incidental sales.
Selling Expenses: Selling and marketing expenses for 2004 were $2,021,928
compared with $58,761 for the same six-month period in 2003. Most of the
increase can be attributed to increases in staff and salaries as the Company
moves towards preliminary marketing and market research related to the Gizmondo
product. Testing of the market size and potential market and buyer profile for
the Gizmondo was a focus of expenditures during the 2004 time period.
General and Administrative Expenses: General and administrative expenses for
2004 were $23,438,321 compared to $779,346 for the same six-month period in
2003, or up approximately over $22.6 million. This increase came primarily from
expenses the research and development costs associated with the Gizmondo. The
Company incurred over $10 million in development costs directly attributable to
the Gizmondo. All of these costs are expensed as incurred and are not
capitalized for financial reporting purposes. In addition salaries rose to $3.4
million as the Company increased staff during the product development phase. The
Company also incurred $8.3 million of legal, accounting and consulting costs in
2004 as consultants were engaged to assist the Company in activities related to
the development and launch of the Gizmondo. The Company anticipates a
significant increase in its general and administrative expenses in future
quarterly periods as part of its product development strategy.
Other Expenses: Other expenses for the six months ended June 30, 2004 were
$(39,244) as compared to $(62,569) for the comparable period in 2003. Other
expenses consisted of interest expense of $54,240 on loans in 2004 as compared
to $24,379 in 2003. Interest in 2004 was higher than the same period in 2003 as
the European Gizmondo operations had higher loan balances.
Net Loss: The Company reported a net loss of $25,464,878 in 2004 compared to
$913,224 for the same time period in 2003. The aforementioned costs associated
with the development of Gizmondo account for this material increase in operating
loss. Management does anticipate that its losses in future quarters will grow
materially as it expenses development cost for its new gaming device Gizmondo.
F-17
Liquidity and Capital Resources
The Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on its financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to investors.
In 2002 through and into the second quarter of 2005, the Company funded its
operating losses and start-up costs principally with loans from stockholders or
other parties and, in increasing amounts, through the issuance of shares of
common stock. Without such equity funding the Company would not have been able
to sustain operations. In the six months ended June 30, 2004, the Company's
working capital position deteriorated. This was primarily the result of
increases in current liabilities of over $14.9 million, including an increase in
accounts payable of over $6.2 million, and an increase in deposits on common
stock of over $7.2 million. At the same time current assets increased over $4.85
million, consisting principally of an increase of loans to employees and other
receivables of approximately $2.7 million, an increase in accounts receivable of
$347,000 and an increase in cash of over $1.8 million. The Company raised over
$14 million in the six months ended June 30, 2004 from the sale of common stock
and additional deposits on common stock.
The Company does not have any bank loans or lending facilities. The Company has
obtained loans from stockholders and raised additional financing through private
placements of shares of common stock principally from accredited foreign
investors. See also Note C to the financial statements - Equity Transactions.
The Company continued to issue shares of its common stock in 2004 and in early
2005 to retire certain obligations due for payment.
The Company incurred losses in 2002 and in 2003 of $(11,087,747) and
$(7,812,449) respectively. The Company recorded a loss for the first six months
of 2004 of over ($25.4 million). In 2004 the losses where generated primarily
from the costs of developing the Gizmondo. Since the Company was not able to
generate positive net cash flows from operations, additional capital was needed.
This capital has been provided by certain principal stockholders, who have
funded the Company through loans as needed, and primarily from the sale of
common stock and warrants through private placement and other share subscription
agreement transactions as detailed in Note C to the financial statements -
Equity Transactions.
The Company successfully raised funds to maintain operations, fund acquisitions
and to retire obligations and obtain services. During the remainder of 2004 and
the first quarter of 2005, the Company raised over $50 million. In the second
quarter of 2005, the Company raised $21,437,537 through May 4th, through the
sale of the Company's restricted common stock. This funding has allowed the
Company to maintain its business and to continue the development and launch of
its Gizmondo product line.
The Company will seek to raise additional equity capital and obtain trade or
bank financing as needed to fund the development and the launch of the Gizmondo
product in different regions as needed. However, there can be no assurance this
additional capital or other financing will be available, or if available on
terms reasonably acceptable to the Company.
F-18
Critical Accounting Policies
The preparation of financial statements in accordance with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. Management bases its estimates on historical
experience and various other assumptions believed to be reasonable. Although
these estimates are based on management's best knowledge of current events and
actions that may impact the company in the future, actual results may be
different from the estimates. Our critical accounting policies are those that
affect our financial statements materially and involve difficult, subjective or
complex judgments by management. Those policies are stock-based compensation,
income taxes, goodwill impairment and revenue recognition.
Stock-Based Compensation
- ------------------------
We have chosen to account for stock options granted to employees and directors
under the recognition and measurement principles of Accounting Principles Board
Opinion No. 25 instead of the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-based Compensation Transition and Disclosure."
In addition, the Company has routinely exchanged shares of its common stock for
services and in satisfaction of debt owed by the Company to shareholders. Common
stock exchanged for services from unrelated parties and suppliers is valued at
the negotiated values for such common stock. Common stock exchanged for
shareholder debt is valued at recent market values for common stock sold to
unrelated investors. The difference between this "market value" and the amount
of the debt satisfied is charged to operations.
Income Taxes
- ------------
The calculation of the Company's income tax provision and related valuation
allowance is complex and requires the use of estimates and judgments in its
determination. As part of the Company's evaluation and implementation of
business strategies, consideration is given to the regulations and tax laws that
apply to the specific facts and circumstances for any transaction under
evaluation. This analysis includes the amount and timing of the realization of
income tax liabilities or benefits. Management closely monitors tax developments
in order to evaluate the effect they may have on the Company's overall tax
position.
Impairment of Goodwill and Other Intangible Assets
- --------------------------------------------------
Goodwill represents the excess of the cost of an acquisition over the fair value
of the net assets acquired. The Company tests goodwill and other intangible
assets on an annual basis, or more frequently if events or circumstances
indicate that there may have been impairment. The goodwill impairment test
estimates the fair value of each reporting unit, through the use of a discounted
cash flows model, and compares this fair value to the reporting unit's carrying
value. The goodwill impairment test requires management to make judgments in
determining the assumptions used in the calculations. Management believes
goodwill is not impaired and is properly recorded in the financial statements.
Revenue Recognition
- -------------------
The Company enters into agreements to sell products (hardware or software),
services, and other arrangements that include combinations of products and
services. Revenue from product sales, net of trade discounts and allowances, is
F-19
recognized provided that persuasive evidence of an arrangement exists, delivery
has occurred, the price is fixed or determinable, and collectibility is
reasonably assured. Delivery is considered to have occurred when title and risk
of loss have transferred to the customer. Revenue is reduced for estimated
product returns and distributor price protection, when appropriate. For sales
that include customer-specified acceptance criteria, revenue is recognized after
the acceptance criteria have been met. Revenue from services is deferred and
recognized over the contractual period or as services are rendered and accepted
by the customer. When arrangements include multiple elements, we use objective
evidence of fair value to allocate revenue to the elements and recognize revenue
when the criteria for revenue recognition have been met for each element. The
amount of product revenue recognized is affected by our judgments as to whether
an arrangement includes multiple elements and if so, whether vendor-specific
objective evidence of fair value exists for those elements. Changes to the
elements in an arrangement and the ability to establish vendor-specific
objective evidence for those elements could affect the timing of the revenue
recognition. Most of these conditions are subjective and actual results could
vary from the estimated outcome, requiring future adjustments to revenue.
Research and Development
- ------------------------
The Company expenses research and development costs as incurred.
PART II
TIGER TELEMATICS, INC.
OTHER INFORMATION
Item 1. Legal Proceedings
In March 2004, Jordan Grand Prix Limited, filed suit against the Company in the
High Court of Justice, Queen's Bench Division (Central Office), London, UK,
alleging violation of a sponsorship agreement and dated letter agreement entered
into in July 2003. Jordan sued the Company for $3 million and alleged that the
Company defaulted on a payment of $500,000, due on January 1, 2004, under the
sponsorship agreement, and a payment for $250,000, due on the same date under
the letter agreement. On February 26, 2004, Jordan terminated both agreements.
In order to avoid summary judgment in favor of the plaintiff, the Company
escrowed with the court 70,000 shares of its common stock and prior to trial is
required to substitute $1.5 million for the escrowed shares. Trial is set for
July 2005. While the Company is unable to predict the outcome of this
litigation, it believes that it has good and meritorious defenses to the suit
and intends to defend vigorously the claims made against it.
In January 2005, the Company filed a lawsuit in the Circuit Court in and for the
County of Duval, Florida against D. Weckstein and Company and Donald E.
Weckstein, a former investment advisor to the Company, for breach of the
Company's agreement with the advisor. In a mediation process completed in April
2005, the Company issued 60,000 additional shares of restricted common stock in
full settlement of the matter and was released from all past and future
obligations under the Agreement.
On March 22, 2005, the Board of Regents of the University of Texas System filed
an action against the Company and one of its subsidiaries, Gizmondo Europe, Ltd.
in the United States District Court for the Western District of Texas, Austin
Division, alleging that predictive text software used in the Company's Gizmondo
gaming device infringes a patent held by the Board of Regents. The Company
F-20
believes that its software does not infringe the Board of Regents' patent. The
Company licenses this software from another company, which under the license
agreement, has indemnified the Company for infringement claims. The Company and
its licensor intend to vigorously defend the infringement claims against the
Company and Gizmondo Europe, Ltd.
Items 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the second quarter of 2004, the Company sold 1,864,267 shares of
restricted common stock for an aggregate sum of $3,972,834. The shares were sold
primarily for $.75 to $3.75 per share.
The Company negotiated the purchase price for the sale of restricted common
stock, based upon the market price of the securities at the time of the
negotiation and with an appropriate discount for the restrictions on resale. The
restricted common stock was issued to sophisticated, accredited foreign
investors or foreign corporations in transactions exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended. Each
investor had access to financial information available in public markets and was
given the opportunity to review the Company's books, records and other
information that they requested. The proceeds were used to fund the Company's
operations.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
Exhibit 31 Rule 13a-14(a).
Exhibit 32 Section 1350 Certification.
F-21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized.
TIGER TELEMATICS, INC.
June 3, 2005
/S/ Michael W. Carrender
------------------------
Michael W. Carrender
Chief Executive Officer, Director and
Chief Financial Officer
F-22