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 March 31, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-25963
GPS INDUSTRIES, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 88-0350120
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5500 - 152nd Street, Suite 214, Surrey, British Columbia, Canada V3S-5J9
(Address of principal executive offices)
Issuer's telephone number: (604) 576-7442
(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 issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check One): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated
filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 12, 2006 the Company had 306,774,211 shares of common stock issued and
outstanding
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents incorporated by reference: None.
GPS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - March 31, 2006 (Unaudited)..................3
Consolidated Statements of Operations (Unaudited) -
Three months ended March 31, 2006 and 2005...............................4
Consolidated Statements of Cash Flows (Unaudited) -
Three months ended March 31, 2006 and 2005...............................5
Notes to Consolidated Financial Statements (Unaudited) -
Three months ended March 31, 2006 and 2005...............................6
Item 2. Management's Discussion and Analysis or Plan of Operation........15
Item 3. Controls and Procedures..........................................24
PART II. OTHER INFORMATION
Item 1. Legal proceedings................................................25
Item 2. Changes in Securities and Use of Proceeds........................25
Item 3. Defaults Upon Senior Securities..................................25
Item 4. Submission of matters to a vote of security holders..............25
Item 5. Other information................................................25
Item 6. Exhibits.........................................................25
SIGNATURES
2
ITEM 1. FINANCIAL STATEMENTS
GPS INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2006
(Unaudited)
Assets
Current
Cash $ 70,864
Accounts receivable 421,411
Inventories 1,481,308
Prepaid expenses and other current assets 289,598
-------------
Total current assets 2,263,181
Long-term accounts receivable 131,097
Property and equipment, net 77,487
Patents 1,454,235
Deferred implementation costs 141,510
--------------
$ 4,067,510
==============
Liabilities and Stockholders' Deficit
Current liabilities
Bank indebtedness $ 2,938,843
Bank loan 20,987
Deferred Revenue 433,295
Short term loans 3,416,077
Accounts payable and accrued liabilities 4,684,949
Liability associated with Optimal Golf acquisition 3,127,000
Promissory notes - related parties 505,705
Derivative liabilities 8,197,951
--------------
23,324,807
Liabilities related to discontinued operations
(Chapter 7 proceedings filed in 2002)
Promissory note payable 1,274,757
Accounts payable and accrued liabilities 1,241,391
Loans payable to related parties 258,000
Capital lease obligations ( in default) 29,467
-------------
2,803,615
--------------
Total current liabilities 26,128,422
--------------
Convertible Debt, net of unamortized debt discount and deferred interest 516,278
of $2,708,080
Long Term debt - Related Party, net of unamortized debt discount of $394,286 2,286,643
Stockholders' deficit
5% Convertible Preferred Shares, $.001 par value, 50,000,000 authorized
375,000 issued and outstanding 375,000
Class A common stock, $.001 par value, 500,000,000 authorized
294,224,200 issued and outstanding 294,224
Accumulated other comprehensive income 722,295
Deferred compensation expense ( 394,210)
Deferred Financing Costs ( 320,918)
Additional paid-in capital 38,024,148
Accumulated deficit ( 63,564,372)
Total Stockholder's Deficit ( 24,863,833)
--------------
$ 4,067,510
==============
See accompanying notes to unaudited consolidated financial statements
3
GPS INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------
For the Three Months Ended March 31 2006 2005
--------------------------------
(Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------
Revenue $ 826,091 $ 1,118,616
Cost of Goods Sold 433,257 583,923
Installation Costs 55,394 85,534
---------------------------------
Gross Profit 337,440 449,159
---------------------------------
Operating Expenses
General and Administrative Expenses 936,763 940,536
Depreciation and amortization 84,143 67,365
Sales and marketing 645,594 554,830
Engineering and Research and Development 647,226 310,016
---------------------------------
2,313,726 1,872,747
---------------------------------
Loss Before Other Income (Expense) ( 1,976,286) ( 1,423,588)
---------------------------------
Other Income (Expense)
Finance costs ( 54,112) ( 63,031)
Interest expense ( 999,897) ( 328,740)
Derivative liabilities - Decrease in fair value 1,262,415 -
Gain (loss) on foreign exchange ( 290) -
Gain on extinguishment of debt 87,950 161,701
---------------------------------
296,066 ( 230,070)
---------------------------------
Net Loss $ ( 1,680,220) $ ( 1,653,658)
- --------------------------------------------------------------------------------------------------------
Loss per common share - basic and diluted
$ ( 0.01) $ ( 0.01)
---------------------------------
Weighted average number of common shares outstanding -
basic and diluted 286,870,323 207,216,257
- --------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
4
GPS INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31 2006 2005
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flow From Operating Activities
Net loss from operations $ ( 1,680,220) $ ( 1,653,658)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 84,143 76,188
Amortization of deferred compensation 56,316 56,315
Extinguishment of debt 77,017 138,278
Expenses paid by issuance of stock 115,380 307,265
Interest converted to stock - 93,750
Decrease in fair value of derivative liabilities (1,262,415) -
Amortization of debt discount 595,867 -
Amortization of finance costs 87,140 80,000
Changes ion operating assets and liabilities:
Inventories (380,601) ( 246,400)
Accounts receivable 282,687 ( 485,818)
Long-term accounts receivable (13,288) -
Prepaid expenses and deposits (88,459) ( 43,886)
Deferred implementation costs (13,596) ( 171,266)
Accounts payable and accrued liabilities 571,847 163,609
Discontinues operations - accounts payable and accrued liabilities (164,967) ( 299,979)
Deferred revenue 209,309 458,005
------------- -----------
Net Cash Used In Operating Activities ( 1,523,840) ( 1,527,597)
------------- -----------
Cash Flow From Investing Activities
Purchase of property and equipment ( 20,272) ( 391)
Purchase of patents - ( 5,000)
------------- -----------
Net Cash Flow Used In Investing Activities ( 20,272) ( 5,391)
------------- -----------
Cash Flow From Financing Activities
Common stock issued for cash - 700
Proceeds from loans 1,094,241 861,726
Repayments of long term loan 17,143 ( 286,600)
Borrowings under bank indebtedness 381,050 775,141
Repayments of loans from related parties ( 8,632) ( 7,985)
Borrowing on convertible loans - 19,224
------------- -----------
Net Cash Flow From Financing Activities 1,483,802 1,362,206
------------- -----------
Net Decrease In Cash ( 60,310) ( 170,782)
Cash, Beginning Of Period 131,174 173,092
------------- -----------
Cash, End Of Period $ 70,864 $ 2,310
==============================
See accompanying notes to unaudited consolidated financial statements
5
GPS Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Three Months Ended March 31, 2006 and
2005 (Unaudited)
1. Organization and Basis of Presentation
Basis of Presentation - The consolidated financial statements include the
operations of GPS Industries, Inc. and its wholly-owned subsidiaries (the
"Company"). All significant intercompany transactions and balances have been
eliminated in consolidation.
The interim consolidated financial statements are unaudited, but in the opinion
of management of the Company, contain all adjustments, which include normal
recurring adjustments, necessary to present fairly the financial position at
March 31, 2006, the results of operations for the three months ended March 31,
2006 and 2005, and the cash flows for the three months ended March 31, 2006 and
2005. The results of operations for the three months ended March 31, 2006 are
not necessarily indicative of the results of operations to be expected for the
full fiscal year ending December 31, 2006.
Certain information and footnote disclosures normally included in financial
statements that have been presented in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission with respect to interim
financial statements, although management of the Company believes that the
disclosures contained in these financial statements are adequate to make the
information presented therein not misleading. For further information, refer to
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
2005, as filed with the Securities and Exchange Commission.
Business - The Company develops and markets GPS and Wi-Fi wireless business
solutions for golf courses, golf residential communities and golf resorts. The
Company's management information system enables golf course owners and managers
to run their business more efficiently with pace-of-play monitoring, data
consolidation and reporting capabilities. Courses can generate more revenue with
advertising, tournament and point-of-purchase applications, reduce costs of
operations and retain more customers with customer relationship management
programs. The Company has developed both hand-held and cart-mounted products
using Differential Global Positioning Satellite ("DGPS") technology. These units
help attract and retain customers by delivering a better golf experience with
precise distance measurement, detailed color course maps, media streaming of
real-time sports scores and news headlines, food and beverage ordering,
electronic scoring, tournament play and emergency communication with the
clubhouse. At March 31, 2006, substantially all of the Company's assets and
operations were located in Canada.
The Company recognizes revenue only when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable, and
collectibility is probable. When other significant obligations remain after
products are delivered, associated revenue is recognized only after such
obligations are fulfilled. Cost of Goods Sold represents the cost of physical
equipment delivered to the customer and installed on the customer's site. The
cost of installing the equipment on the customer's site, such as labour, travel
and accommodation expenses, are recorded as Installation Costs. The cost of
developing the equipment and the software installed in the equipment on the
customer's site is recorded as an operating expense in the category
"Engineering, Research and Development", all such costs are expensed as they are
incurred.
During the three months ended December 31, 2002, the Company's wholly-owned
subsidiary, Inforetech Golf Technology 2000 Inc., ceased operations and filed a
petition for relief under Chapter 7 of the United States Bankruptcy Code on
December 19, 2002, which was subsequently granted (see Note 5).
The Company acquired 100% of the equity of ProShot Golf Inc. ("ProShot") on
January 12, 2001. ProShot was a California-based company involved in the
manufacture, marketing, leasing and installation of an integrated GPS system
that was installed directly on golf courses and provided golfers with yardage
readings and potential shot options from any location on a golf course. During
the three months ended December 31, 2001, ProShot ceased operations and filed a
petition for relief under Chapter 7 of the United States Bankruptcy Code on May
31, 2002, which was subsequently granted (see Note 5).
As a result of these Chapter 7 bankruptcy filings, the remaining liabilities of
such discontinued subsidiaries have been classified as liabilities of
discontinued operations in the accompanying financial statements. These
liabilities are being written off in accordance with the statute of limitations
in the jurisdiction in which they were incurred.
6
On November 19, 2004 GPS Industries, Inc. purchased 100% of the common shares of
Optimal Golf Solutions, Inc. ("Optimal"), the financial results (including
Patent License Fee Revenues) of which are consolidated into the financial
statements of GPSI. No pro-forma consolidated financial statements have been
included in this report as the results of Optimal are not material to the
consolidated financial statements of the Company.
2. Going Concern
Going Concern - The consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. 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 incurred significant losses and had a
working capital deficit at March 31, 2006 and December 31, 2005. The continued
commercialization of the Company's technology is dependent on the Company's
ability to successfully finance its working capital requirements through a
combination of debt and equity financings, sales of its GPS systems and payments
from distributors and potential strategic partners. The Company's independent
certified public accountants, in their independent auditors' report on the
consolidated financial statements as of and for the year ended December 31,
2005, have expressed substantial doubt about the Company's ability to continue
as a going concern.
The Company is attempting to restructure its debt obligations and raise new
capital. To the extent that the Company is unable to successfully restructure
its debt obligations and/or obtain the capital necessary to fund its future cash
requirements on a timely basis and under acceptable terms and conditions, the
Company will not have sufficient cash resources to maintain operations, and may
consider a formal or informal restructuring or reorganization.
3. Summary of Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Derivative Liabilities - The Company accounts for its liquidated damages
pursuant to Emerging Issue Task Force ("EITF") 05-04, View C, "The Effect of a
Liquidated Damages Clause on a Freestanding Financial Instrument", subject to
EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock". Pursuant to EITF 05-04,
View C, liquidated damages payable in cash or stock are accounted for as a
separate derivative, which requires a periodical valuation of its fair value and
a corresponding recognition of liabilities associated with such derivative. The
Company accounts for its embedded conversion features and freestanding warrants
pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which requires a periodic valuation of their fair value and a
corresponding recognition of liabilities associated with such derivatives. The
recognition of derivative liabilities related to the issuance of shares of
common stock is applied first to the proceeds of such issuance, at the date of
issuance, and the excess of derivative liabilities over the proceeds is
recognized as other expense in the accompanying consolidated financial
statements. The recognition of derivative liabilities related to the issuance of
convertible debt is applied first to the proceeds of such issuance as a debt
discount, at the date of issuance, and the excess of derivative liabilities over
the proceeds is recognized as other expense in the accompanying consolidated
financial statements. Any subsequent increase or decrease in the fair value of
the derivative liabilities is recognized as other expense or other income,
respectively.
Foreign Currency Translation - Assets and liabilities of subsidiaries in foreign
countries are translated into United States dollars using the exchange rate in
effect at the balance sheet date or the historical rate, as applicable. Results
of operations are translated using the average exchange rates prevailing
throughout the period. The effects of exchange rate fluctuations on translating
foreign currency assets and liabilities into United States dollars are included
in stockholders' deficiency as accumulated other comprehensive income, while
gains and losses resulting from foreign currency transactions are included in
operations.
Net Loss Per Common Share - Basic loss per common share is calculated by
dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted loss per common share reflects the potential dilution
that would occur if dilutive stock options and warrants were exercised. These
potentially dilutive securities were not included in the calculation of loss per
share for the periods presented because the Company incurred a loss during such
periods and thus their effect would have been anti-dilutive. Accordingly, basic
and diluted loss per common share is the same for all periods presented.
7
Stock, Options and Warrants Issued for Services - Issuances of shares of the
Company's stock to employees or third-parties for compensation or services is
valued using the closing market price on the date of grant for employees and the
date services are completed for non-employees. Issuances of options and warrants
of the Companies stock are valued using the Black-Scholes option model.
Stock Options - In December 2004, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123R,
Share-Based Payment ("SFAS No. 123R"). This Statement is a revision of SFAS No.
123, Accounting for Stock-Based Compensation, and supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
its related implementation guidance. SFAS No. 123R focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. The Statement requires entities to recognize
stock compensation expense for awards of equity instruments to employees based
on the grant-date fair value of those awards (with limited exceptions).
Reclassifications - Certain reclassifications of items in the prior period's
financial statements have been made to conform to the current year's
presentation.
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 154, "Accounting Changes and Error
Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS
154"). This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.
APB Opinion No. 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this
Statement requires that the new accounting principle be applied to the balances
of assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for
that period rather than being reported in an income statement. When it is
impracticable to determine the cumulative effect of applying a change in
accounting principle to all prior periods, this Statement requires that the new
accounting principle be applied as if it were adopted prospectively from the
earliest date practicable. This Statement shall be effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company does not believe that the adoption of SFAS 154 will have a
significant effect on its financial statements.
In February 2006, the FASB issued FASB Statement No. 155, which is an amendment
of FASB Statements No. 133 and 140. This Statement; a) permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, b) clarifies which
interest-only strip and principal-only strip are not subject to the requirements
of Statement 133, c) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives, e) amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. This
Statement is effective for financial statements for fiscal years beginning after
September 15, 2006. Earlier adoption of this Statement is permitted as of the
beginning of an entity's fiscal year, provided the entity has not yet issued any
financial statements for that fiscal year. Management believes this Statement
will have no impact on the financial statements of the Company once adopted.
8
In March 2006, the FASB issued FASB Statement No. 156, which amends FASB
Statement No. 140. This Statement establishes, among other things, the
accounting for all separately recognized servicing assets and servicing
liabilities. This Statement amends Statement 140 to require that all separately
recognized servicing assets and servicing liabilities be initially measured at
fair value, if practicable. This Statement permits, but does not require, the
subsequent measurement of separately recognized servicing assets and servicing
liabilities at fair value. An entity that uses derivative instruments to
mitigate the risks inherent in servicing assets and servicing liabilities is
required to account for those derivative instruments at fair value. Under this
Statement, an entity can elect subsequent fair value measurement to account for
its separately recognized servicing assets and servicing liabilities. By
electing that option, an entity may simplify its accounting because this
Statement permits income statement recognition of the potential offsetting
changes in fair value of those servicing assets and servicing liabilities and
derivative instruments in the same accounting period. This Statement is
effective for financial statements for fiscal years beginning after September
15, 2006. Earlier adoption of this Statement is permitted as of the beginning of
an entity's fiscal year, provided the entity has not yet issued any financial
statements for that fiscal year. Management believes this Statement will have no
impact on the financial statements of the Company once adopted.
4. Debt
Bank Indebtedness
Effective June 27, 2003, the Company obtained a bank line of credit for
$1,425,000 to fund its operations. As of March 31, 2006, the Company had
borrowed approximately $1,531,452 under this line of credit. The excess
represents the cash float arising from timing differences between when payments
are issued from this account and when they are presented for payment. The line
of credit bears interest at prime plus 0.5%, is repayable in full on demand and
is secured by a one year standby bank letter of credit for $1,500,000 that was
provided by a third party, Hansen Inc. This standby letter of credit from Hansen
Inc. was renewed until March 27, 2005 and subsequently to October 27, 2005 and
has now been renewed to September 30, 2006. As consideration for renewing the
standby bank letter of credit, the Company issued to Hansen Inc. a common stock
purchase warrant to purchase 500,000 shares of the Company's common stock,
exercisable at $0.10 per share (a 15% discount to the then market price) for a
period of three years. The Company has issued a further common stock purchase
warrant to Hansen Inc. to purchase 1,000,000 shares of the Company's common
stock, exercisable at $0.10 per share for a period of three years. $17,900, the
fair value of this common stock purchase warrant, calculated pursuant to the
Black-Scholes option pricing model, was charged to operations as finance costs
for the three months ended March 31, 2006. The Company also pays a standby LOC
fee to Hansen Inc. of 2% per annum on a quarterly basis, amounting to
approximately $7,500 per quarter.
Effective March 23, 2004, the Company entered into a Reimbursement Agreement
with Douglas J. Wood, Daniel S. Wood and James Liken (the Secured Party) to have
them secure a new $1,000,000 line of credit to be used for manufacturing
purposes. The security provided was a Letter of Credit from Citicorp North
America Inc. The Company's bankers, HSBC Bank Canada, provided the Company this
new line of credit on April 29, 2004 based on the security provided, on which
interest at prime plus one half of one percent interest is payable. As of March
31, 2006 this line was drawn approximately $1,221,998. The excess represents the
cash float arising from timing differences between when payments are issued from
this account and when they are presented for payment. The term was for a period
of 1 year from the date of the agreement. As consideration for the security
provided, the Company agreed to pay the Secured Party 15% per annum of the
maximum amount outstanding in the month, payable 50% in US$ and 50% in common
shares of the Company, issued at a 10% discount to market based on the seven day
average price prior to each quarter end. The Company has accrued this
consideration to March 31, 2006. Additionally the Company agreed to issue
666,667 warrants to purchase common stock of the Company at $0.15 per common
share for a period of three years. The Company also granted the Secured Party a
security interest in all the Company's inventory. This letter of credit, along
with its related Reimbursement Agreement, was renewed until October 31, 2005 and
subsequently renewed until October 2006.
Short-Term Loan
As of March 31, 2006 the Company has $3,416,077 owing on short term notes. These
amounts are repayable on demand and bear interest at varying rates. The largest
of these, amounting to $1,755,000, is from a director and shareholder.
9
Purchase Order Financing
In January 2006 the Company entered into an agreement with Great White Shark
Enterprises to obtain purchase order financing on confirmed sales orders. As of
March 31, 2006 the Company owed $754,242 on this purchase order financing line
of credit. The Company pays 18% per annum interest for the period the advance is
required. Additionally the lender receives 100,000 shares for each $250,000
advanced. The balance of $754,242 owing under this financing line at March 31,
2006 is included in the balance of $3,416,077 owed on Short Term Loans.
Liability Associated with Acquisition of Optimal Golf Solutions, Inc.
On November 19, 2004 GPSI acquired 100% of the common shares of Optimal Golf
Solutions, Inc. ("Optimal"), a Texas corporation owned by Darryl Cornish and
Charles Huston ("Optimal Shareholders"), for a total of $5,250,000 plus interest
of 4.75% per annum on the principal balance outstanding payable as follows:
$100,000 on signing a Letter Of Intent on November 8, 2004, $1,000,000 on
closing, a stock payment of 9,000,000 restricted common shares of GPSI valued at
$2,250,000 using a minimum price of $.25 per share and a final stock payment of
$1,900,000 representing 7,600,000 common shares of GPSI using a minimum price of
$.25 per share. These shares can be sold after the effectiveness of a
registration statement and in accordance with a Leakage Agreement. The final
purchase price will vary based upon the performance of the Company's shares. The
obligation to pay the deferred purchase price was secured by a first security
interest in the Optimal patents.
The first stock payment of 9,000,000 shares can be sold (in accordance with the
Leakage Agreement) over 180 trading days. Any funds received from the sale of
those shares over $3,250,000 (i.e. $1,000,000 over the $2,250,000 target price
for the first share payment) will be deducted from the amount to be paid with
the second stock payment, for the remaining amount due of $1,900,000 (plus
interest). If the former Optimal shareholders sold their shares and received
less than the target price of $.25 per share, then the Company was required to
issue additional shares to make up the difference (or cash under certain
conditions).
The second stock payment is to be issued at a 15% discount to market price at
the time of issuance and can be sold into the market by the Optimal Shareholders
over a further 180 trading days. On May 28, 2005 the Company entered into a
First Amendment to Stock Purchase Agreement whereby the Company was granted up
to six months of additional time to have a Registration Statement declared
effective. As consideration for this extension, the Company agreed to pay
$100,000 per month, which would be applied to the balance owing which was to be
settled with the second stock payment. However, because the Registration
Statement was not filed by September 30, 2005, the Company lost the benefit of
the reduction in the balance of the second stock payment and of any amounts
realized from the sales of the first stock payment over $3,250,000 (the "cap"),
which was to reduce the amount to be paid in the second stock payment.
Because the Company did not have the Registration Statement filed by September
30, 2005, it agreed to register the resale of the 9,000,000 shares issued for
the first stock payment and an additional 31,000,000 shares to cover the shares
issuable for the second stock payment and the additional shares that must be
issued to cover decrease in the market price of its common stock which had a
closing bid price of $0.10 on October 20, 2005 when the Registration Statement
was filed.
On March 31, 2006 the Company recorded an additional $162,000 in the liability
associated with the Optimal acquisition due to the decrease in the stock price
from $.13, the price at the original issuance of the 9,000,000 shares, to $0.047
on March 31, 2006.
Long-Term Debt -Related Party (Great White Shark Enterprises)
On December 3, 2004, GPSI entered into a Credit Agreement with Great White Shark
Enterprises, Inc. ("GWSE") for GWSE to provide a Term Loan of $3,000,000 to
GPSI. These funds were received by GPSI as follows: $1,000,000 on November 22,
2004 and the balance of $2,000,000 on December 3, 2004 (less outstanding service
fees owed by GPSI to GWSE on December 31, 2004 of $548,750 pursuant to a
Merchandising Agreement dated April, 2003). Collateral for the loan was (a) a
first priority security interest in (a) all of the shares of the capital stock
of Optimal, (b) a second security interest in the Optimal Patents and (c) a
first security interest in the Pinranger Patents acquired by GPSI pursuant to an
Agreement dated July 2, 2004 between GPSI and Pinranger (Australia) Pty. Ltd.
and PagiSat, LLC. The Pinranger Patents are registered in 13 countries in
Europe, Japan, and Australia.
The Term Loan may be repaid at any time prior to maturity without premium or
penalty, except that the total minimum interest to be paid must be $300,000
irrespective of when the loan is repaid. During the term of the loan, GPSI must
pay interest of 10% per annum on a monthly basis in cash or shares. If GWSE
chooses to receive shares, the interest rate will be adjusted to 15% for the
period selected and the shares will be priced at a 15% discount to market, using
the average daily close for the three trading days prior to the end of the
monthly period for which interest is due.
10
Repayment of the principal and interest due under the Credit Agreement has been
provided for by GPSI giving to GWSE (commencing December 4, 2004) all license
payments GPSI receives under all license agreements between Optimal as licensor
and its licensees. Once the Term Loan and accrued interest is paid in full, for
a period of two years from the repayment date, GWSE will receive 20% of the
license payments and thereafter 40% of the license payments for the remaining
life of the Patents. Any fees received in connection with enforcement of the
Optimal Patents will also be paid to GWSE in accordance with the above-mentioned
formula, except that GPSI must pay all legal costs to enforce the Optimal
Patents. Any fees received from infringement payments relating to the Pinranger
Patents will be shared on a 50/50 basis (net of legal costs) until the Term Loan
and accrued interest are fully repaid, after which GPSI will have no further
obligation to GWSE regarding the Pinranger Patents for any revenue they
generate, and GWSE will agree to have its security interest in the Pinranger
Patents removed by GPSI.
To the extent that, during any calendar year commencing January 1, 2005, the
total annual license payments received by GWSE do not total $500,000, then the
shortfall must be paid to GWSE in equal monthly payments over the next calendar
year, above and beyond the following year's minimum license payment. The
maturity date of the Term Loan is November 15, 2011, the termination of the life
of one of the key Optimal Patents.
In addition to the above-mentioned interest and security provided for the Term
Loan, GWSE also received an equity bonus of 3,000,000 restricted Common Shares
of GPSI and a three year Warrant dated December 3, 2004 to purchase 2,000,000
Common Shares of GPSI at an exercise price of $.15.
The Company has not paid any of this liability during the three months ended
March 31, 2006. As at March 31, 2006 the principal amount outstanding is
$2,680,929 which is offset by unamortized debt discount of $394,286, giving a
net balance of $2,286,643.
Convertible Debt
On September 20, 2005, the Company entered into a Securities Purchase Agreement
(the "Stock Purchase Agreement") with AJW Offshore, Ltd, AJW Partners, LLC, AJW
Qualified Partners, LLC and New Millennium Capital Partners II, LLC (the
Purchasers) providing for the issuance by the Company to the Purchasers of up to
$3,720,000 of secured convertible notes (the "Notes"). The Notes are convertible
into shares of the Company's Common Stock at the option of the holder. The
conversion price is the lesser of (i) the Variable Conversion Price (as defined)
and (ii) $.10 (subject, in each case, to equitable adjustments for stock splits,
stock dividends or rights offerings combinations, recapitalization,
reclassifications, extraordinary distributions and similar events). The
"Variable Conversion Price" means the Applicable Percentage (as defined)
multiplied by the Market Price. "Market Price" means the average of the lowest
three (3) Trading Prices (as defined) for the Common Stock during the twenty
(20) Trading Day period ending one Trading Day prior to the date the conversion
notice is sent by the applicable Holder to the Company. "Trading Price" means
the intraday trading price on the Over-the-Counter Bulletin Board. The
Applicable Percentage is 60%.
The term of the Notes is three years from the date of issuance. The repayment of
the principal amount of the Notes is based on 124% of the subscription amount.
The Company may redeem the Notes upon at least 10 trading days notice in
accordance with the following. So long as the Common stock is trading at or
below $.15 per share, as such price may be adjusted for stock splits,
recapitalizations and similar events (the "Maximum Price") the Company has the
right to prepay all of the outstanding Notes in an amount in cash (the "Optional
Prepayment Amount") equal to (i) 125% (for prepayments occurring within 30 days
of the Issue Date), (ii) 130% for prepayments occurring between 31 and 60 days
of the Issue Date, or (iii) 135% (for prepayments occurring after the sixtieth
60th day following the Issue Date), multiplied by the sum of the then
outstanding principal amount of the applicable Note plus certain other amounts,
if any, required to be paid by the Company as a result of specified defaults
under the definitive agreements. If the stock is trading above the Maximum
Price, the Company may exercise its right to prepay the Notes by paying to the
Holders, in addition to the Optional Prepayment Amount, an amount equal to the
aggregate number of shares that such Holders would have received upon conversion
of the amount of the Note being prepaid multiplied by the difference between the
closing price of the Company's Common Stock on the Optional Prepayment Date less
the Conversion Price then in effect. In the event that the average daily price
of the Common Stock for each day of the month ending on any determination date
is below the Initial Market Price, the Company may, at its option, prepay a
portion of the outstanding principal amount of the Notes equal to 104% of the
principal amount hereof divided by 36 plus one month's interest. The term
"Initial Market Price" means the volume weighted average price of the Common
Stock for the five (5) Trading Days immediately preceding the Closing which is
$.08.
As a condition to the closing, the Company's President entered into a Guaranty
and Pledge agreement (the "Pledge Agreement") pursuant to which he agreed to
pledge 6,371,306 shares as collateral. The Notes are also secured by the assets
of the Company pursuant to a Security Agreement and Intellectual Property
Security Agreement.
11
On September 20, 2005, pursuant to the Securities Purchase Agreement, the
Company sold to the Purchasers, pursuant to Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act"), and Rule 506 promulgated thereunder,
$1,860,000 in aggregate principal amount of Notes and issued Warrants to
purchase an aggregate of 3,000,000 shares at an exercise price of $0.25 per
share for an aggregate purchase price of $1,500,000. Lionheart Group, Ocean
Avenue Advisors and E.H. Winston Associates and Co. received commissions in the
aggregate amount of $150,000.
On October 28, 2005, pursuant to the Securities Purchase Agreement, the Company
sold to the Purchasers, pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the "Securities Act"), and Rule 506 promulgated thereunder, $930,000
in aggregate principal amount of Notes and issued Warrants to purchase an
aggregate of 1,500,000 shares for an aggregate purchase price of $750,000.
Lionheart Group, Ocean Avenue Advisors and E.H. Winston Associates and Co.
received commissions in the aggregate amount of $75,000.
On December 9, 2005, pursuant to the Securities Purchase Agreement, the Company
sold to the Purchasers, pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the "Securities Act"), and Rule 506 promulgated thereunder, $930,000
in aggregate principal amount of Notes and issued Warrants to purchase an
aggregate of 1,500,000 shares for an aggregate purchase price of $750,000.
Lionheart Group, Ocean Avenue Advisors and E.H. Winston Associates and Co.
received commissions in the aggregate amount of $75,000.
On September 20, 2005, in connection with the purchase of the Notes, the Company
also entered into a Registration Rights Agreement with the investors signatory
thereto, which provided that on or prior to 30 days after the closing, of which
one occurred on September 20, 2005, the Company would prepare and file with the
Securities and Exchange Commission a registration statement ("Registration
Statement") covering the resale of all of the Registrable Securities (defined as
the shares issuable upon conversion of the Notes and the shares issuable upon
exercise of the Warrants). If the registration statement was not filed within 30
days or was, for any reason, not declared effective within 90 days, or was for
any reason not available for use after the effective date, the Registrant would
pay liquidated damages to the investors. The Company filed the Registration
Statement on October 20, 2005 and it was declared effective on December 7, 2005.
The aggregate principal amount of the Notes is $3,720,000 of which $720,000
represents deferred interest at 8% p.a. over a three year term. This deferred
interest has been recorded as an offset against the principal amount of the
notes to be amortized over the term of the notes. In addition there were debt
discounts incurred on the issue of the Notes and Warrants and a Derivatibe
Liability arising from the conversion features of the Notes and Warrants. See
"Derivative Liabilities". The debt discount arising from the issuance of the
Notes amounted to $3,000,000. Both the debt discount and deferred interest
amounts have been recorded as an offset against the principal amount of the
notes to be amortized over the term of the notes. For the period ended March 31,
2006 amortization of these offsets amounted to $595,867.
The Noteholders exercised their conversion privileges to convert a total of
$332,083 of the principal amount in the period ended March 31, 2006 leaving a
principal balance payable of $3,224,358. Unamortized debt discount and deferred
interest amounted to $2,708,080 at March 31, 2006 giving a net balance of
$516,278.
The issuance of the Notes and the Registration Statement, in particular the
variable conversion rights and the potential for liquidated damages and a
default premium if the Company has insufficient authorized and unissued shares
to meet its obligations under the Notes, created derivative liabilities which
the Company has valued at March 31, 2006 as approximately $8.2 million. Changes
in the fair value of the derivative liability are recorded as an Other Income or
Expense item in the Consolidated Statement of Operations. The change in the fair
value of the derivative in the three months ended March 31, 2006 resulted in
income of approximately $1.262 million. The derivative liabilities are more
fully disclosed in the "Derivative Liabilities" note to the Financial
Statements.
Other Debt Related Activity
Derivative Liabilities
During the year ended December 31, 2005, the Company recognized derivative
liabilities of approximately $9.5 million pursuant to the issuance of $3,720,000
Secured Convertible Notes ("the Notes") and the granting of certain registration
rights which provided for liquidated damages and a default premium in the event
of failure to timely register or deliver the shares in connection with the
issuance of the Notes and the related Warrants. (See "Convertible Debt"). The
recognition of these derivative liabilities is more fully described in the
10-KSB for the year ended December 31, 2005
12
After the Company satisfied certain conditions precedent it issued $3,720,000 of
Notes in three tranches: $1,860,000 on September 20, 2005, $930,000 on October
28, 2005 and $930,000 on December 9, 2005
In connection with the issuance of the Notes, the Company determined that the
conversion feature of the Notes represents an embedded derivative and the Notes
are not considered to be conventional debt under EITF 00-19 and the embedded
conversion feature must be bifurcated from the debt host and accounted for as a
derivative liability. Furthermore, the related warrants require that the Company
reimburse any holder of a warrant in respect of any trading loss resulting from
the failure of the Company to timely deliver shares issued pursuant to the
exercise of warrants. This compensation may be paid in shares of common stock or
cash.
The Company believes that the aforementioned embedded derivatives and
freestanding warrants meet the criteria of SFAS 133 and EITF 00-19, when
appropriate, and should be accounted for as separate derivatives with a
corresponding value recorded as liability
Additionally, because the number of shares that are to be delivered upon
satisfaction of the conversion of the Notes and warrants or liquidated damages
is variable, the Company is unable to assert that it had sufficient authorized
and unissued shares to settle the liquidated damages or conversion of the Notes
and Warrants. Accordingly, all of the Company's previously issued and
outstanding instruments, such as warrants and convertible preferred shares as
well as those issued in the future, would be classified as liabilities as well,
effective with the granting of the registration rights. The fair value of the
derivative liabilities at the date of issuance of the Notes and the granting of
registration rights, at December 31, 2005 and at March 31, 2006 is as follows:
---------------------------------- -------------------- ------------------------ ----------------------
At Issuance At December 31, 2005 At March 31, 2006
---------------------------------- -------------------- ------------------------ ----------------------
Convertible Notes $8,162,811 $8,702,321 $7,731,784
---------------------------------- -------------------- ------------------------ ----------------------
Warrants associated with the $330,224 $223,383 $148,565
Convertible Notes
---------------------------------- -------------------- ------------------------ ----------------------
Other outstanding warrants $461,950 $335,531 $202,426
---------------------------------- -------------------- ------------------------ ----------------------
Convertible preferred shares $307,242 $199,131 $115,176
---------------------------------- -------------------- ------------------------ ----------------------
$9,262,227 $9,460,366 $8,197,951
---------------------------------- -------------------- ------------------------ ----------------------
The above total is net of $720,000 of the fair value of the Notes which was
recorded as deferred interest and will be amortized over the term of the Notes.
$3,000,000, the amount of proceeds actually received on issuance of the Notes,
has been recorded as a debt discount to be amortized over the term of the Notes.
The balance of the fair value at December 31, 2005, amounting to $6,460,366, was
recorded as other expense. The change in the balance of the fair value in the
three months ended March 31, 2006, amounting to $1,262,415 has been recorded as
other income for the period.
The Company computed the fair value of the identified derivatives using the
Black Scholes valuation model with the following assumptions:
At the date of issuance of the three tranches of Convertible Notes, related
warrants, and related registration rights, at December 31, 2005 and at March 31,
2006
13
Convertible Notes
--------------------------- -- -------------------- ------------------------- -----------------------
At issuance At December 31, 2005 At March 31, 2006
--------------------------- -- -------------------- ------------------------- -----------------------
Market $0.10 - $0.065 $0.047
price: $.078
--------------------------- -- -------------------- ------------------------- -----------------------
Conversion price: $0.0556 - $0.0422 $0.0328 $0.0239
--------------------------- -- -------------------- ------------------------- -----------------------
Term: 3 years 2.72 - 2.94 years 2.48-2.7 years
--------------------------- -- -------------------- ------------------------- -----------------------
Volatility: 102.8% 102.8% 106.31%
--------------------------- -- -------------------- ------------------------- -----------------------
Risk-free interest rate: 3.96% - 4.39% 4.39% 4.74%
--------------------------- -- -------------------- ------------------------- -----------------------
Maximum liability:
--------------------------- -- -------------------- ------------------------- -----------------------
Principal Notes: $3,720,000 $3,546,440 $3,224,358
--------------------------- -- -------------------- ------------------------- -----------------------
Liquidated $1,547,692
damages: $1,785,600 $1,702,291
--------------------------- -- -------------------- ------------------------- -----------------------
Default premium: $1,116,000 $1,063,932 $967,307
--------------------------- -- -------------------- ------------------------- -----------------------
Warrants associated with the Convertible Notes
--------------------------- -- -------------------- ------------------------- -----------------------
At issuance At December 31, 2005 At March 31, 2006
--------------------------- -- -------------------- ------------------------- -----------------------
Market price: $0.10 -$.078 $0.065 $0.047
--------------------------- -- -------------------- ------------------------- -----------------------
Exercise price: $0.25 $0.25 $0.25
--------------------------- -- -------------------- ------------------------- -----------------------
Term: 5 years 4.72 - 4.94 years 4.48-4.7 years
--------------------------- -- -------------------- ------------------------- -----------------------
Volatility: 102.8% 102.8% 106.31%
--------------------------- -- -------------------- ------------------------- -----------------------
Risk-free interest rate: 3.96% 4.39% 4.74%
--------------------------- -- -------------------- ------------------------- -----------------------
Number of Warrants 6,000,000 6,000,000 6,000,000
--------------------------- -- -------------------- ------------------------- -----------------------
Other outstanding warrants
--------------------------- -- -------------------- ------------------------- -----------------------
At issuance At December 31, 2005 At March 31, 2006
--------------------------- -- -------------------- ------------------------- -----------------------
Market price: $.085 $0.065 $0.047
--------------------------- -- -------------------- ------------------------- -----------------------
Exercise price: $6.28 - $0.055 $6.28 - $0.055 $6.28 - $0.055
--------------------------- -- -------------------- ------------------------- -----------------------
Term: 3 - 0.48 years 2.78 - 0.20 years 2.54 - 0.08 years
--------------------------- -- -------------------- ------------------------- -----------------------
Volatility: 102.8% 102.8% 106.31%
--------------------------- -- -------------------- ------------------------- -----------------------
Risk-free interest rate: 3.96% 4.39% 4.74%
--------------------------- -- -------------------- ------------------------- -----------------------
Number of Warrants 16,763,884 19,472,773 20,968,860
--------------------------- -- -------------------- ------------------------- -----------------------
14
Convertible preferred shares outstanding
--------------------------- -- -------------------- ------------------------- -----------------------
At issuance At December 31, 2005 At March 31, 2006
--------------------------- -- -------------------- ------------------------- -----------------------
Market price: $.085 $0.065 $0.047
--------------------------- -- -------------------- ------------------------- -----------------------
Exercise price: $.0527 - $0.0710 $.0527 - $0.0710 $.0527 - $0.0710
--------------------------- -- -------------------- ------------------------- -----------------------
Term: 2.1 - 1.87 years 1.82 - 1.59 years 1.58 - 1.34 years
--------------------------- -- -------------------- ------------------------- -----------------------
Volatility: 102.8% 102.8% 106.31%
--------------------------- -- -------------------- ------------------------- -----------------------
Risk-free interest rate: 3.96% 4.39% 4.74%
--------------------------- -- -------------------- ------------------------- -----------------------
Number of shares 5,893,043 5,893,043 5,893,043
--------------------------- -- -------------------- ------------------------- -----------------------
5. Liabilities Related to Discontinued Operations
During the three months ended December 31, 2002, the Company's wholly-owned
subsidiary, Inforetech Golf Technology 2000 Inc., ceased operations and filed a
petition for relief under Chapter 7 of the United States Bankruptcy Code on
December 19, 2002, which was subsequently granted. The Company has recorded
accounts payable and accrued liabilities of $778,234 with respect to this
discontinued operation, which are included in liabilities related to
discontinued operations in the accompanying consolidated balance sheet.
The Company acquired 100% of the equity of ProShot Golf Inc. ("ProShot") on
January 12, 2001. ProShot was a California-based company involved in the
manufacture, marketing, leasing and installation of an integrated GPS system
that was installed directly on golf courses and provided golfers with yardage
readings and potential shot options from any location on a golf course. During
the three months ended December 31, 2001, ProShot ceased operations and filed a
petition for relief under Chapter 7 of the United States Bankruptcy Code on May
31, 2002, which was subsequently granted. In conjunction with the ProShot
transaction, the Company has recorded loans payable to related parties of
$258,000, promissory notes payable of $1,274,757, capital leases in default of
$29,467 and accounts payable and accrued liabilities of $463,158. All such
liabilities are included in liabilities related to discontinued operations in
the accompanying consolidated balance sheet. In accordance with GAAP the amounts
are recorded on the books until the relevant statutes of limitations expire, at
which point they will be written off.
During the three months ended March 31, 2006 the Company wrote off trade debts
arising from discontinued operations amounting to $164,966. This was based upon
management's belief that these debt holders rights have expired under the
statutes of limitations in the various States in which the debt holders reside.
6. Legal Proceedings
At March 31, 2006, the Company was involved in the following legal proceedings:
On November 10, 2005 the Company initiated court proceedings in the Patents
County Court in the UK against Prolink Solutions LLC, Elumina Iberica S.A. and
Elumina Iberica Limited for an injunction, delivery up and/or damages or an
account of profits arising from the defendant's infringement of European Patent
(UK) 0617794 B1, which is owned by the Company, together with a claim for the
Company's costs and expenses in the action. This case is still before the courts
and no judgement has been rendered. The defendants have counterclaimed alleging
the patent is invalid, that it is not infringed and that it be revoked. The
defendants are also claiming legal costs and expenses to defend the action.
Under the legal system in the UK if the defendant prevails in the action the
Company may be liable to pay the defendants costs, including attorney fees,
which may be substantial. As of May 17, 2006 the Company had paid UK Pounds
75,000 into the Court against the potential liability for these fees, and is
currently required to pay a further UK Pounds 115,000 on or before October 1,
2006 into the Court against this potential liability.
The Company has been sued for $25,000 fees claimed by a consultant. The Company
does not consider this claim has merit and is defending the action.
The Company has been threatened with potential litigation for an amount of
approximately $155,000, which is included in accounts payable. The agreement is
that further negotiations will take place before any action is taken on this
balance.
The Company's wholly-owned subsidiary, IGT, is a defendant in a number of
lawsuits principally arising from vendor debt, which in the aggregate are not
material or for which a provision has been recorded. Both IGT and ProShot have
filed Chapter 7 petitions under the United States Bankruptcy Code.
15
7. Capital Stock Transactions
On January 5, 2006 the Company issued 508,928 shares of common stock valued at
market value of $33,080 for services rendered.
On January 5, 2006 the Company issued 12,172,917 shares of common stock valued
at market value of $791,240 in settlement of debt. The resale of 12,129,167 of
these shares, valued at a market value of $788,396 were covered by an SB2
Registration Statement declared effective December 7, 2005
On January 5, 2006 the Company issued 2,000,000 shares of common stock valued at
$73,200 with respect to a $1,860,000 8% convertible note due September 20, 2008.
The resale of these securities were covered by an SB2 Registration Statement
declared effective December 7, 2005
On January 12, 2006 the Company issued 416,667 shares of common stock valued at
market value of $25,000 to a consultant for services rendered.
On January 16, 2006 the Company issued 300,000 shares of common stock valued at
$16,500 for services rendered.
On January 19, 2006 the Company issued 4,555,595 shares of common stock in
settlement of cashless options previously granted to employees of the Company.
On January 19, 2006 the Company issued 440,000 shares of common stock valued at
market value of $26,400 in settlement of debt.
On January 26, 2006 the Company issued 750,000 shares of common stock valued at
$24,750 with respect to a $1,860,000 8% convertible note due September 20, 2008.
The resale of these securities were covered by an SB2 Registration Statement
declared effective December 7, 2005
On February 6, 2006 the Company issued 600,000 shares of common stock valued at
$40,800 to employees as a signing bonus.
On February 6, 2006 the Company issued 324,957 shares of common stock valued at
market value of $22,097 in settlement of debt
On February 10, 2006 the Company issued 750,000 shares of common stock valued at
$24,593 with respect to a $1,860,000 8% convertible note due September 20, 2008.
The resale of these securities were covered by an SB2 Registration Statement
declared effective December 7, 2005.
On February 21, 2006 the Company issued 2,000,000 shares of common stock valued
at $71,180 with respect to a $1,860,000 8% convertible note due September 20,
2008. The resale of these securities were covered by an SB2 Registration
Statement declared effective December 7, 2005
On March 8, 2006 the Company issued 2,000,000 shares of common stock valued at
$66,780 with respect to a $1,860,000 8% convertible note due September 20, 2008.
The resale of these securities were covered by an SB2 Registration Statement
declared effective December 7, 2005
On March 22, 2006 the Company issued 2,000,000 shares of common stock valued at
$61,580 with respect to a $1,860,000 8% convertible note due September 20, 2008.
The resale of these securities were covered by an SB2 Registration Statement
declared effective December 7, 2005
All such securities were issued pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended, under Section 4 (2) and
regulation D.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-QSB for the quarterly period ended March 31,
2006 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, financing
requirements, its business, growth prospects, competition and results of
operations, 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 in this
Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2006
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.
16
Overview:
The Company is involved in the development and marketing of golf course
management technology using Differential Global Positioning Satellite (DGPS) and
Wi-Fi wireless business solutions. The Company's management information system
enables golf course owners and managers to run their business more efficiently
with pace-of-play monitoring, data consolidation and reporting capabilities.
Courses can generate more revenue with advertising, tournament and
point-of-purchase applications, reduce costs of operations and retain more
customers with customer relationship management programs. The Company has
developed both hand-held and cart-mounted products using GPS technology. These
units help attract and retain customers by delivering a better golf experience
with precise distance measurement, detailed colour course maps, media streaming
of real-time sports scores and news headlines, food and beverage ordering,
electronic scoring, tournament play and emergency communication with the
clubhouse. At March 31, 2006 and December 31, 2005, substantially all of the
Company's assets and operations were located in Canada. Sales offices are
located in Canada and the USA. The Company has distributors in Canada, United
States, Europe, Australia/New Zealand, Asia and South Africa
The Company applies DGPS, radio frequency and a sophisticated integrated network
of wireless technology to information systems for the golf and recreational
industries. The Company's portable product, the "Inforemer", is the first
patented communications network that utilizes advanced internet protocols to
provide a wireless information system to enhance recreational value, increase
golf course profits and improve player safety. The Company's objective is to
obtain a leadership position as an international supplier of GPS golf wireless
products and become the leader in hand-held portable recreational devices
("PRDs") for applications worldwide.
The Company recorded sales revenue during the three months ended March 31, 2006.
The Company recognizes revenue only when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable, and
collectibility is probable. When other significant obligations remain after
products are delivered, associated revenue is recognized only after such
obligations are fulfilled. Cost of Goods Sold represents the cost of physical
equipment products delivered to the customer and installed on the customer's
site. The costs of installing the equipment on the customer's site, such as
labour and travel and accommodation expenses, are recorded as Installation
Costs. The cost of developing software installed in the equipment on the
customer's site is recorded as an operating expense in the category
"Engineering, Research and Development", all such costs are expensed as they are
incurred.
During the three months ended December 31, 2002, the Company's wholly-owned
subsidiary, Inforetech Golf Technology 2000 Inc., ceased operations and filed a
petition for relief under Chapter 7 of the United States Bankruptcy Code on
December 19, 2002, which was subsequently granted.
The Company acquired 100% of the equity of ProShot Golf Inc. ("ProShot") on
January 12, 2001. ProShot was a California-based company involved in the
manufacture, marketing, leasing and installation of an integrated GPS system
that was installed directly on golf courses and provided golfers with yardage
readings and potential shot options from any location on a golf course. During
the three months ended December 31, 2001, ProShot ceased operations and filed a
petition for relief under Chapter 7 of the United States Bankruptcy Code on May
31, 2002, which was subsequently granted.
As a result of these Chapter 7 bankruptcy filings, the liabilities of such
discontinued subsidiaries have been classified as liabilities of discontinued
operations in the accompanying financial statements.
On November 19, 2004 the Company purchased 100% of the common shares of Optimal
Golf Solutions, Inc. ("Optimal") the financial results (including Patent License
Fee Revenues) of which are consolidated into the financial statements of the
Company.
Going Concern:
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. 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 incurred significant losses and had a working capital
deficit at March 31, 2006 and December 31, 2005. The continued commercialization
of the Company's technology is dependent on the Company's ability to
successfully finance its cash requirements through a combination of debt and
equity financings, sale of its GPS systems and payments from potential
distributors and other partners. The Company's independent certified public
accountants, in their independent auditors' report on the consolidated financial
statements as of and for the year ended December 31, 2005, have expressed
substantial doubt about the Company's ability to continue as a going concern.
17
The Company is attempting to restructure its debt obligations and raise new
capital. To the extent that the Company is unable to successfully restructure
its debt obligations and/or obtain the capital necessary to fund its future cash
requirements on a timely basis and under acceptable terms and conditions, the
Company will not have sufficient cash resources to maintain operations, and may
consider a formal or informal restructuring or reorganization.
Critical Accounting Policies:
The Company prepared the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Management periodically evaluates the estimates and judgments made.
Management bases its estimates and judgments on historical experience and on
various factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates as a result of different
assumptions or conditions.
The following critical accounting policies affect the more significant judgments
and estimates used in the preparation of the Company's consolidated financial
statements.
Revenue recognition
The Company recognizes revenue only when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable, and
collectibility is probable. When other significant obligations remain after
products are delivered, associated revenue is recognized only after such
obligations are fulfilled. Cost of Goods Sold represents the cost of physical
equipment products delivered to the customer and installed on the customer's
site. The cost of installing the equipment on the customer's site, such as labor
and travel and accommodation expenses, are recorded as Installation Costs. The
cost of developing the equipment and the software installed in the equipment on
the customer's site is recorded as an operating expense in the category
"Engineering, Research and Development", all such costs are expensed as they are
incurred.
Derivative Liabilities
The Company accounts for its liquidated damages pursuant to Emerging Issue Task
Force ("EITF") 05-04, View C, "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument", subject to EITF Issue No. 00-19, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock". Pursuant to EITF 05-04, View C, liquidated damages payable
in cash or stock are accounted for as a separate derivative, which requires a
periodical valuation of its fair value and a corresponding recognition of
liabilities associated with such derivative. The Company accounts for its
embedded conversion features and freestanding warrants pursuant to SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which requires a
periodic valuation of their fair value and a corresponding recognition of
liabilities associated with such derivatives. The recognition of derivative
liabilities related to the issuance of shares of common stock is applied first
to the proceeds of such issuance, at the date of issuance, and the excess of
derivative liabilities over the proceeds is recognized as other expense in the
accompanying consolidated financial statements. The recognition of derivative
liabilities related to the issuance of convertible debt is applied first to the
proceeds of such issuance as a debt discount, at the date of issuance, and the
excess of derivative liabilities over the proceeds is recognized as other
expense in the accompanying consolidated financial statements. Any subsequent
increase or decrease in the fair value of the derivative liabilities is
recognized as other expense or other income, respectively.
Impairment of Long-Lived Assets:
The Company's long-lived assets consist of patents, property and equipment. In
assessing the impairment of these assets, the Company makes assumptions
regarding the estimated future cash flows and other factors to determine the
fair value of the respective assets. The Company did not record any impairment
charges for the three months ended March 31, 2006. However, if these estimates
or the related assumptions change in the future, the Company may be required to
record impairment charges for these assets at such time.
Income Taxes:
The Company records a valuation allowance to reduce its deferred tax assets
arising from net operating loss carryforwards to the amount that is more likely
than not to be realized. In the event the Company was to determine that it would
be able to realize its deferred tax assets in the future in excess of its
recorded amount, an adjustment to the deferred tax assets would be credited to
operations in the period such determination was made. Likewise, should the
Company determine that it would not be able to realize all or part of its
deferred tax assets in the future, an adjustment to the deferred tax assets
would be charged to operations in the period such determination was made.
18
Results of Operations:
Three months ended March 31, 2006 and 2005
Revenue - The Company recorded total revenue in the three months ended March 31,
2006 of $826,091 as compared to $1,118,616 in the first three months of 2005.
This amounted to a decrease of $292,525 or 26 % in total revenue. This revenue
is comprised of sales of the Company's Inforemer product and related service
contract fees and purchase of promotional materials from the Company. Revenue
also includes patent licence fees received by the Company's subsidiary, Optimal
Golf Solutions, Inc. The total revenue from Inforemer products and service
contract fees amounted to $680,010 as compared to $846,322 in the first three
months of 2005. There was no revenue from distributorship partnership fees in
2006 compared to $174,000 in 2005. Total patent licence revenue earned by
Optimal Golf Solutions amounted to $146,081 as compared to $98,294 in the first
three months of 2005.
Cost of Goods Sold - Cost of Goods Sold represents the cost of Inforemer
products and related equipment delivered to the customer and installed on the
customer's site. Cost of Goods Sold for the three months ended March 31, 2006
was $488,651 of which $433,257 represents costs of goods sold and $55,394
represents installation costs. In the first three months of 2005 Cost of Goods
Sold was $669,457 comprised of cost of goods sold of $583,923 and installation
costs of $85,534.
Selling and Marketing Expenses - Selling and marketing expenses were $645,594
for the three months ended March 31, 2006, as compared to $554,830 for the three
months ended March 31, 2005. The increase was attributable to increased sales
and marketing personnel, sales commissions, creation of marketing and
promotional materials, attendance at trade shows, travel, accommodation,
advertising and various promotional costs.
General and Administrative Expenses - General and administrative expenses were
$936,763 for the three months ended March 31, 2006, as compared to $940,536 for
the three months ended March 31, 2005. The sum of expenses in this category
which were satisfied by stock issuances rather than cash payments amounted to
$115,380 or 12 % of total general and administrative expenses.
Engineering, Research and Development Expenses - Engineering, research and
development expenses increased to $647,226 for the three months ended March 31,
2006 from $310,016 for the three months ended March 31, 2005. This increase was
attributable to the engineering and continuing development cost of the Inforemer
product. These costs comprised personnel costs, consultants, computer software
development costs and service costs of the increased number of Inforemer systems
installed.
Depreciation and Amortization - Depreciation and amortization increased by
$16,778 or 25% to $84,143 in the first three months of 2006, as compared to
$67,365 in 2005. The Company acquired the rights to certain North American and
international GPS patents in the year ended December 31, 2004. These patents are
being amortized over the remaining life of the patents. The increase in
depreciation and amortization is due to the depreciation charged against
purchases of fixed assets.
Loss from Operations - The loss from operations was $1,976,286 for the three
months ended March 31, 2006, as compared to a loss from operations of $1,423,588
for the three months ended March 31, 2005. The increase was due to the reduction
in revenue, substantially higher engineering and R&D expenses and an increase in
sales and marketing expenses in the period.
Interest Expense - Interest expense increased by $671,157 to $999,897 in 2006,
as compared to $328,740 in 2005. The primary component of this increase was the
amortization of debt discount on the convertible notes, amounting to $595,867.
There was also an increase in interest-bearing debt, drawdowns on bank operating
lines of credit and short term financing loans.
Finance Costs - Finance costs relate to warrants issued in conjunction with the
Company's debt financings and fees paid to third parties who assist in raising
capital for the Company. Finance costs decreased to $54,112 in first three
months of 2006 as compared to $63,031 in the respective 2005 period.
Derivative Liabilities - Derivative liabilities were incurred in the year ended
December 31, 2005 arising from the issue of $3,720,000 of convertible secured
notes. This resulted in an expense of $6,460,366 in 2005 representing the excess
of the fair value of the derivative liabilities at December 31, 2005 over the
principal amount of the notes. At March 31, 2006 the excess of the fair value of
the of the derivative liabilities had declined by $1,262,415. This reduction is
recorded as income for the period ended March 31, 2006. The valuation and basis
for this expense is more fully discussed in the "Derivative Liabilities" note to
the financial statements.
19
Gain on Extinguishment of Debt - Gain on extinguishment of debt decreased to
$87,950 in the three months ended March 31, 2006 from $161,701 for the three
months ended March 31, 2005. This gain was comprised of a gain of $164,967
relating to the write-off of debt guarantees of discontinued operations and a
loss amounting to $77,017 arising from the issuance of stock in settlement of
debt.
Net Loss - Net loss was $1,680,220 for the three months ended March 31, 2006, as
compared to a net loss of $1,653,658 for the three months ended March 31, 2005.
This increase is a reflection of the reduction in revenue and substantial
increases in engineering and interest expenses, which were partially offset by
the decrease in the fair value of the derivative liabilities.
Liquidity and Capital Resources - March 31, 2006:
The Company is continuing its efforts to raise new capital during the remainder
of 2006.
The Company's limited cash and working capital resources, and the uncertainty
with respect to the Company's ability to fund its operations, have raised
substantial doubt about the Company's ability to continue as a going concern
(see "Going Concern" above). The Company will require a substantial input of
capital, either through debt or equity capital or a combination thereof, to
continue operations. To the extent of the inability of the Company to raise such
capital the Company may have to cease or curtail operations or seek protection
from it's creditors under the bankruptcy laws.
Operating Activities - The Company's operations utilized cash of $1,523,840
during the three months ended March 31, 2006, as compared to $1,527,597 during
the three months ended March 31, 2005.
At March 31, 2006, cash decreased by $60,310 to $70,864, as compared to $131,174
at December 31, 2005.
The Company had a working capital deficit of $23,865,241 at March 31, 2006, as
compared to a working capital deficit of $23,771,591 at December 31, 2005. At
March 31, 2006 and December 31, 2005, $2,803,615 and $2,968,582 respectively of
the Company's current liabilities consisted of liabilities with respect to
discontinued operations. At March 31, 2006 and December 31, 2005, $8,197,951 and
$9,460,366 respectively of the Company's current liabilities consisted of
liabilities with respect to derivative liabilities.
Investing Activities - Net cash used in investing activities was $20,272 and
$5,391 for the three months ended March 31, 2006 and 2005, respectively,
consisting of the purchase of equipment.
Financing Activities - Net cash provided by financing activities was $1,483,802
for the three months ended March 31, 2006, as compared to $1,362,206 for the
three months ended March 31, 2005. During the three months ended March 31, 2006,
the Company made payments on loans from related parties of $8,632 and proceeds
from bank borrowings and short term loans of $1,492,434.
Lines of Credit
Effective June 27, 2003, the Company obtained a bank line of credit for
$1,425,000 to fund its operations. As of March 31, 2006, the Company had
borrowed approximately $1,531,452 under this line of credit. The excess
represents the cash float arising from timing differences between when payments
are issued from this account and when they are presented for payment. The line
of credit bears interest at prime plus 0.5%, is repayable in full on demand and
is secured by a one year standby bank letter of credit for $1,500,000 that was
provided by a third party, Hansen Inc. This standby letter of credit from Hansen
Inc. was renewed until March 27, 2005 and subsequently to October 27, 2005 and
has now been renewed to September 30, 2006. As consideration for renewing the
standby bank letter of credit, the Company issued to Hansen Inc. a common stock
purchase warrant to purchase 500,000 shares of the Company's common stock,
exercisable at $0.10 per share (a 15% discount to the then market price) for a
period of three years. The Company has issued a further common stock purchase
warrant to Hansen Inc. to purchase 1,000,000 shares of the Company's common
stock, exercisable at $0.10 per share for a period of three years. $17,900, the
fair value of this common stock purchase warrant, calculated pursuant to the
Black-Scholes option pricing model, was charged to operations as finance costs
for the three months ended March 31, 2006. The Company also pays a standby LOC
fee to Hansen Inc. of 2% per annum on a quarterly basis, amounting to
approximately $7,500 per quarter.
20
Effective March 23, 2004, the Company entered into a Reimbursement Agreement
with Douglas J. Wood, Daniel S. Wood and James Liken (the Secured Party) to have
them secure a new $1,000,000 line of credit to be used for manufacturing
purposes. The security provided was a Letter of Credit from Citicorp North
America Inc. The Company's bankers, HSBC Bank Canada, provided the Company this
new line of credit on April 29, 2004 based on the security provided, on which
interest at prime plus one half of one percent interest is payable. As of March
31, 2006 this line was drawn approximately $1,221,998. The excess represents the
cash float arising from timing differences between when payments are issued from
this account and when they are presented for payment. The term was for a period
of 1 year from the date of the agreement. As consideration for the security
provided, the Company agreed to pay the Secured Party 15% per annum of the
maximum amount outstanding in the month, payable 50% in US$ and 50% in common
shares of the Company, issued at a 10% discount to market based on the seven day
average price prior to each quarter end. The Company has accrued this
consideration to March 31, 2006. Additionally the Company agreed to issue
666,667 warrants to purchase common stock of the Company at $0.15 per common
share for a period of three years. The Company also granted the Secured Party a
security interest in all the Company's inventory. This letter of credit, along
with its related Reimbursement Agreement, was renewed until October 31, 2005 and
subsequently renewed until October 2006.
Acquisition of Optimal Golf Solutions, Inc.
On November 19, 2004 GPSI acquired 100% of the common shares of Optimal Golf
Solutions, Inc. ("Optimal"), a Texas corporation owned by Darryl Cornish and
Charles Huston ("Optimal Shareholders"), for a total of $5,250,000 plus interest
of 4.75% per annum on the principal balance outstanding payable as follows:
$100,000 on signing a Letter Of Intent on November 8, 2004, $1,000,000 on
closing, a stock payment of 9,000,000 restricted common shares of GPSI valued at
$2,250,000 using a minimum price of $.25 per share and a final stock payment of
$1,900,000 representing 7,600,000 common shares of GPSI using a minimum price of
$.25 per share. These shares can be sold after the effectiveness of a
registration statement and in accordance with a Leakage Agreement. The final
purchase price will vary based up the performance of the Company's shares. The
obligation to pay the deferred purchase price was secured by a first security
interest in the Optimal patents.
The first stock payment of 9,000,000 shares can be sold (in accordance with the
Leakage Agreement) over 180 trading days. Any funds received from the sale of
those shares over $3,250,000 (i.e. $1,000,000 over the $2,250,000 target price
for the first share payment) will be deducted from the amount to be paid with
the second stock payment, for the remaining amount due of $1,900,000 (plus
interest). If the former Optimal shareholders sold their shares and received
less than the target price of $.25 per share, then the Company was required to
issue additional shares to make up the difference (or cash under certain
conditions).
The second stock payment is to be issued at a 15% discount to market price at
the time of issuance and can be sold into the market by the Optimal Shareholders
over a further 180 trading days. On May 28, 2005 the Company entered into a
First Amendment to Stock Purchase Agreement whereby the Company was granted up
to six months of additional time to have a Registration Statement declared
effective. As consideration for this extension, the Company agreed to pay
$100,000 per month, which would be applied to the balance owing which was to be
settled with the second stock payment. However, because the Registration
Statement was not filed by September 30, 2005, the Company lost the benefit of
the reduction in the balance of the second stock payment and of any amounts
realized from the sales of the first stock payment over $3,250,000 (the "cap"),
which was to reduce the amount to be paid in the second stock payment.
Because the Company did not have the Registration Statement filed by September
30, 2005, it agreed to register the resale of the 9,000,000 shares issued for
the first stock payment and an additional 31,000,000 shares to cover the shares
issuable for the second stock payment and the additional shares that must be
issued to cover decrease in the market price of its common stock, which had a
closing bid price of $0.047 on March 31, 2006. The Registration Statement
covering these shares was filed by the Company on October 20, 2005 and was
declared effective by the SEC on December 7, 2005.
Loan From Great White Shark Enterprises
On December 3, 2004, GPSI entered into a Credit Agreement with Great White Shark
Enterprises, Inc. ("GWSE") for GWSE to provide a Term Loan of $3,000,000 to
GPSI. These funds were received by GPSI as follows: $1,000,000 on November 22,
2004 and the balance of $2,000,000 on December 3, 2004 (less outstanding service
fees owed by GPSI to GWSE on December 31, 2004 of $548,750 pursuant to a
Merchandising Agreement dated April, 2003). Collateral for the loan was (a) a
first priority security interest in (a) all of the shares of the capital stock
of Optimal, (b) a second security interest in the Optimal Patents and (c) a
first security interest in the Pinranger Patents acquired by GPSI pursuant to an
Agreement dated July 2, 2004 between GPSI and Pinranger (Australia) Pty. Ltd.
and PagiSat, LLC. The Pinranger Patents are registered in 13 countries in
Europe, Japan, and Australia.
21
The Term Loan may be repaid at any time prior to maturity without premium or
penalty, except that the total minimum interest to be paid must be $300,000
irrespective of when the loan is repaid. During the term of the loan, GPSI must
pay interest of 10% per annum on a monthly basis in cash or shares. If GWSE
chooses to receive shares, the interest rate will be adjusted to 15% for the
period selected and the shares will be priced at a 15% discount to market, using
the average daily close for the three trading days prior to the end of the
monthly period for which interest is due.
Repayment of the principal and interest due under the Credit Agreement has been
provided for by GPSI giving to GWSE (commencing December 4, 2004) all license
payments GPSI receives under all license agreements between Optimal as licensor
and its licensees. Once the Term Loan and accrued interest is paid in full, for
a period of two years from the repayment date, GWSE will receive 20% of the
license payments and thereafter 40% of the license payments for the remaining
life of the Patents. Any fees received in connection with enforcement of the
Optimal Patents will also be paid to GWSE in accordance with the above-mentioned
formula, except that GPSI must pay all legal costs to enforce the Optimal
Patents. Any fees received from infringement payments relating to the Pinranger
Patents will be shared on a 50/50 basis (net of legal costs) until the Term Loan
and accrued interest are fully repaid, after which GPSI will have no further
obligation to GWSE regarding the Pinranger Patents for any revenue they
generate, and GWSE will agree to have its security interest in the Pinranger
Patents removed by GPSI.
To the extent that, during any calendar year commencing January 1, 2005, the
total annual license payments received by GWSE do not total $500,000, then the
shortfall must be paid to GWSE in equal monthly payments over the next calendar
year, above and beyond the following year's minimum license payment. The
maturity date of the Term Loan is November 15, 2011, the termination of the life
of one of the key Optimal Patents.
In addition to the above-mentioned interest and security provided for the Term
Loan, GWSE also received an equity bonus of 3,000,000 restricted Common Shares
of GPSI and a three year Warrant dated December 3, 2004 to purchase 2,000,000
Common Shares of GPSI at an exercise price of $.15.
The Company has not paid any of this liability during the three months ended
March 31, 2006. As at March 31, 2006 the principal amount outstanding is
$2,680,928 which is offset by unamortized debt discount of $394,285, giving a
net balance of $2,286,643.
Convertible Debt
On September 20, 2005, the Company entered into a Securities Purchase Agreement
(the "Stock Purchase Agreement") with AJW Offshore, Ltd, AJW Partners, LLC, AJW
Qualified Partners, LLC and New Millennium Capital Partners II, LLC (the
Purchasers) providing for the issuance by the Company to the Purchasers of up to
$3,720,000 of secured convertible notes (the "Notes"). The Notes are convertible
into shares of the Company's Common Stock at the option of the holder. The
conversion price is the lesser of (i) the Variable Conversion Price (as defined)
and (ii) $.10 (subject, in each case, to equitable adjustments for stock splits,
stock dividends or rights offerings combinations, recapitalization,
reclassifications, extraordinary distributions and similar events). The
"Variable Conversion Price" means the Applicable Percentage (as defined)
multiplied by the Market Price. "Market Price" means the average of the lowest
three (3) Trading Prices (as defined) for the Common Stock during the twenty
(20) Trading Day period ending one Trading Day prior to the date the conversion
notice is sent by the applicable Holder to the Company. "Trading Price" means
the intraday trading price on the Over-the-Counter Bulletin Board. The
Applicable Percentage is 60%.
The term of the Notes is three years from the date of issuance. The repayment of
the principal amount of the Notes is based on 124% of the subscription amount.
The Company may redeem the Notes upon at least 10 trading days notice in
accordance with the following. So long as the Common stock is trading at or
below $.15 per share, as such price may be adjusted for stock splits,
recapitalizations and similar events (the "Maximum Price") the Company has the
right to prepay all of the outstanding Notes in an amount in cash (the "Optional
Prepayment Amount") equal to (i) 125% (for prepayments occurring within 30 days
of the Issue Date), (ii) 130% for prepayments occurring between 31 and 60 days
of the Issue Date, or (iii) 135% (for prepayments occurring after the sixtieth
60th day following the Issue Date), multiplied by the sum of the then
outstanding principal amount of the applicable Note plus certain other amounts,
if any, required to be paid by the Company as a result of specified defaults
under the definitive agreements. If the stock is trading above the Maximum
Price, the Company may exercise its right to prepay the Notes by paying to the
Holders, in addition to the Optional Prepayment Amount, an amount equal to the
aggregate number of shares that such Holders would have received upon conversion
of the amount of the Note being prepaid multiplied by the difference between the
closing price of the Company's Common Stock on the Optional Prepayment Date less
the Conversion Price then in effect. In the event that the average daily price
of the Common Stock for each day of the month ending on any determination date
is below the Initial Market Price, the Company may, at its option, prepay a
portion of the outstanding principal amount of the Notes equal to 104% of the
principal amount hereof divided by 36 plus one month's interest. The term
"Initial Market Price" means the volume weighted average price of the Common
Stock for the five (5) Trading Days immediately preceding the Closing which is
$.08.
22
As a condition to the closing, the Company's President entered into a Guaranty
and Pledge agreement (the "Pledge Agreement") pursuant to which he agreed to
pledge 6,371,306 shares as collateral. The Notes are also secured by the assets
of the Company pursuant to a Security Agreement and Intellectual Property
Security Agreement.
On September 20, 2005, pursuant to the Securities Purchase Agreement, the
Company sold to the Purchasers, pursuant to Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act"), and Rule 506 promulgated thereunder,
$1,860,000 in aggregate principal amount of Notes and issued Warrants to
purchase an aggregate of 3,000,000 shares at an exercise price of $0.25 per
share for an aggregate purchase price of $1,500,000. Lionheart Group, Ocean
Avenue Advisors and E.H. Winston Associates and Co. received commissions in the
aggregate amount of $150,000.
On October 28, 2005, pursuant to the Securities Purchase Agreement, the Company
sold to the Purchasers, pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the "Securities Act"), and Rule 506 promulgated thereunder, $930,000
in aggregate principal amount of Notes and issued Warrants to purchase an
aggregate of 1,500,000 shares for an aggregate purchase price of $750,000.
Lionheart Group, Ocean Avenue Advisors and E.H. Winston Associates and Co.
received commissions in the aggregate amount of $75,000.
On December 9, 2005, pursuant to the Securities Purchase Agreement, the Company
sold to the Purchasers, pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the "Securities Act"), and Rule 506 promulgated thereunder, $930,000
in aggregate principal amount of Notes and issued Warrants to purchase an
aggregate of 1,500,000 shares for an aggregate purchase price of $750,000.
Lionheart Group, Ocean Avenue Advisors and E.H. Winston Associates and Co.
received commissions in the aggregate amount of $75,000.
On September 20, 2005, in connection with the purchase of the Notes, the Company
also entered into a Registration Rights Agreement with the investors signatory
thereto, which provided that on or prior to 30 days after the closing, of which
one occurred on September 20, 2005, the Company would prepare and file with the
Securities and Exchange Commission a registration statement ("Registration
Statement") covering the resale of all of the Registrable Securities (defined as
the shares issuable upon conversion of the Notes and the shares issuable upon
exercise of the Warrants). If the registration statement was not filed within 30
days or was, for any reason, not declared effective within 90 days, or was for
any reason not available for use after the effective date, the Registrant would
pay liquidated damages to the investors. The Company filed the Registration
Statement on October 20, 2005 and it was declared effective on December 7, 2005.
The aggregate principal amount of the Notes is $3,720,000 of which $720,000
represents deferred interest at 8% p.a. over a three year term. This deferred
interest has been recorded as an offset against the principal amount of the
notes to be amortized over the term of the notes. In addition there were debt
discounts incurred on the issue of the Notes and Warrants and a Derivatibe
Liability arising from the conversion features of the Notes and Warrants. See
"Derivative Liabilities". The debt discount arising from the issuance of the
Notes amounted to $3,000,000. Both the debt discount and deferred interest
amounts have been recorded as an offset against the principal amount of the
notes to be amortized over the term of the notes. For the period ended March 31,
2006 amortization of these offsets amounted to $595,867.
The Noteholders exercised their conversion privileges to convert a total of
$332,083 of the principal amount in the period ended March 31, 2006 leaving a
principal balance payable of $3,224,358. Unamortized debt discount and deferred
interest amounted to $2,708,080 at March 31, 2006 giving a net balance of
$516,278.
The issuance of the Notes and the Registration Statement, in particular the
variable conversion rights and the potential for liquidated damages and a
default premium if the Company has insufficient authorized and unissued shares
to meet its obligations under the Notes, created derivative liabilities which
the Company has valued at March 31, 2006 as approximately $8.2 million. Changes
in the fair value of the derivative liability are recorded as an Other Income or
Expense item in the Consolidated Statement of Operations. The change in the fair
value of the derivative in the three months ended March 31, 2006 resulted in
income of approximately $1.262 million. The derivative liabilities are more
fully disclosed in the "Derivative Liabilities" note to the Financial
Statements.
Off Balance Sheet Arrangements.
The Company had no Off Balance Sheet arrangements for the three months ended
March 31, 2006, or for the three months ended March 31, 2005
23
Recent Accounting Pronouncements:
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 154, "Accounting Changes and Error
Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS
154"). This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.
Opinion 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this
Statement requires that the new accounting principle be applied to the balances
of assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for
that period rather than being reported in an income statement. When it is
impracticable to determine the cumulative effect of applying a change in
accounting principle to all prior periods, this Statement requires that the new
accounting principle be applied as if it were adopted prospectively from the
earliest date practicable. This Statement shall be effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company does not believe that the adoption of SFAS 154 will have a
significant effect on its financial statements.
In February 2006, the FASB issued FASB Statement No. 155, which is an amendment
of FASB Statements No. 133 and 140. This Statement; a) permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, b) clarifies which
interest-only strip and principal-only strip are not subject to the requirements
of Statement 133, c) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives, e) amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. This
Statement is effective for financial statements for fiscal years beginning after
September 15, 2006. Earlier adoption of this Statement is permitted as of the
beginning of an entity's fiscal year, provided the entity has not yet issued any
financial statements for that fiscal year. Management believes this Statement
will have no impact on the financial statements of the Company once adopted.
In March 2006, the FASB issued FASB Statement No. 156, which amends FASB
Statement No. 140. This Statement establishes, among other things, the
accounting for all separately recognized servicing assets and servicing
liabilities. This Statement amends Statement 140 to require that all separately
recognized servicing assets and servicing liabilities be initially measured at
fair value, if practicable. This Statement permits, but does not require, the
subsequent measurement of separately recognized servicing assets and servicing
liabilities at fair value. An entity that uses derivative instruments to
mitigate the risks inherent in servicing assets and servicing liabilities is
required to account for those derivative instruments at fair value. Under this
Statement, an entity can elect subsequent fair value measurement to account for
its separately recognized servicing assets and servicing liabilities. By
electing that option, an entity may simplify its accounting because this
Statement permits income statement recognition of the potential offsetting
changes in fair value of those servicing assets and servicing liabilities and
derivative instruments in the same accounting period. This Statement is
effective for financial statements for fiscal years beginning after September
15, 2006. Earlier adoption of this Statement is permitted as of the beginning of
an entity's fiscal year, provided the entity has not yet issued any financial
statements for that fiscal year. Management believes this Statement will have no
impact on the financial statements of the Company once adopted.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.
24
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports filed under the Exchange Act of 1934 is accumulated and
communicated to management, including its principal executive and financial
officers, as appropriate, to allow timely decisions regarding required
disclosure.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's principal
executive and financial officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as of the end of
the period covered by this report. Based upon and as of the date of that
evaluation, the Company's principal executive and financial officer concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports the Company files and
submits under the Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
(b) Changes in Internal Controls
There were no changes in the Company's internal controls or in other factors
that could have materially affected those controls subsequent to the date of the
Company's most recent evaluation.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 10, 2005 the Company initiated court proceedings in the Patents
County Court in the UK against Prolink Solutions LLC, Elumina Iberica S.A. and
Elumina Iberica Limited for an injunction, delivery up and/or damages or an
account of profits arising from the defendant's infringement of European Patent
(UK) 0617794 B1, which is owned by the Company, together with a claim for the
Company's costs and expenses in the action. This case is still before the courts
and no judgement has been rendered. The defendants have counterclaimed alleging
the patent is invalid, that it is not infringed and that it be revoked. The
defendants are also claiming legal costs and expenses to defend the action.
Under the legal system in the UK if the defendant prevails in the action the
Company may be liable to pay the defendants costs, including attorney fees,
which may be substantial. As of May 17, 2006 the Company had paid UK Pounds
75,000 into the Court against the potential liability for these fees, and is
currently required to pay a further UK Pounds 115,000 on or before October 1,
2006 into the Court against this potential liability.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2006 the Company issued a total of
28,819,064 shares of common stock, valued at a market value of $1,277,200. Of
these, 1,825,595 shares were issued for services rendered valued at a market
value of $115,380; 9,500,000 shares were issued in payment of convertible debt
valued at $322,083; 12,937,874 shares were issued in other debt settlement
valued at a market value of $839,737 and 4,555,595 shares were issued upon
exercise of cashless stock options.
On January 5, 2006 the Company issued 508,928 shares of common stock valued at
market value of $33,080 for services rendered.
On January 5, 2006 the Company issued 12,172,917 shares of common stock valued
at market value of $791,240 in settlement of debt. The resale of 12,129,167 of
these shares, valued at a market value of $788,396 were covered by an SB2
Registration Statement declared effective December 7, 2005
On January 5, 2006 the Company issued 2,000,000 shares of common stock valued at
$73,200 with respect to a $1,860,000 8% convertible note due September 20, 2008.
The resale of these securities were covered by an SB2 Registration Statement
declared effective December 7, 2005
On January 12, 2006 the Company issued 416,667 shares of common stock valued at
market value of $25,000 to a consultant for services rendered.
On January 16, 2006 the Company issued 300,000 shares of common stock valued at
$16,500 for services rendered.
On January 19, 2006 the Company issued 4,555,595 shares of common stock in
settlement of cashless options previously granted to employees of the Company.
On January 19, 2006 the Company issued 440,000 shares of common stock valued at
market value of $26,400 in settlement of debt.
On January 26, 2006 the Company issued 750,000 shares of common stock valued at
$24,750 with respect to a $1,860,000 8% convertible note due September 20, 2008.
The resale of these securities were covered by an SB2 Registration Statement
declared effective December 7, 2005
On February 6, 2006 the Company issued 600,000 shares of common stock valued at
$40,800 to employees as a signing bonus.
On February 6, 2006 the Company issued 324,957 shares of common stock valued at
market value of $22,097 in settlement of debt.
On February 10, 2006 the Company issued 750,000 shares of common stock valued at
$24,593 with respect to a $1,860,000 8% convertible note due September 20, 2008.
The resale of these securities were covered by an SB2 Registration Statement
declared effective December 7, 2005.
On February 21, 2006 the Company issued 2,000,000 shares of common stock valued
at $71,180 with respect to a $1,860,000 8% convertible note due September 20,
2008. The resale of these securities were covered by an SB2 Registration
Statement declared effective December 7, 2005.
On March 8, 2006 the Company issued 2,000,000 shares of common stock valued at
$66,780 with respect to a $1,860,000 8% convertible note due September 20, 2008.
The resale of these securities were covered by an SB2 Registration Statement
declared effective December 7, 2005.
26
On March 22, 2006 the Company issued 2,000,000 shares of common stock valued at
$61,580 with respect to a $1,860,000 8% convertible note due September 20, 2008.
The resale of these securities were covered by an SB2 Registration Statement
declared effective December 7, 2005
All such securities were issued pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended, under Section 4 (2) and
regulation D.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
A list of exhibits required to be filed as part of this report is set forth in
the Index to Exhibits, which immediately precedes such exhibits, and is
incorporated herein by reference.
27
INDEX TO EXHIBITS
Exhibit Number Title
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes Oxley Act of 2002
31.2 Certification of Chief Accounting Officer pursuant
to Section 302 of the Sarbanes Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes Oxley Act of 2002
32.2 Certification of Chief Accounting Officer pursuant
to Section 906 of the Sarbanes Oxley Act of 2002
28
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GPS INDUSTRIES, INC.
(Registrant)
Date: May 22, 2006 By: /s/ ROBERT C. SILZER, SR.
---------------------------
Robert C. Silzer, Sr.
Chief Executive Officer
(Duly Authorized Officer)
Date: May 22, 2006 By: /s/ MICHAEL MARTIN
---------------------------
Michael Martin
Chief Accounting Officer
(Duly Authorized Officer)
29