UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 20, 2006 the Company had 333,846,802 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 - September 30, 2006 (Unaudited).............3
Consolidated Statements of Operations (Unaudited) -
Nine months ended September 30, 2006 and 2005...........................4
Consolidated Statements of Operations (Unaudited) -
Three months ended September 30, 2006 and 2005..........................5
Consolidated Statements of Cash Flows (Unaudited) -
Nine months ended September 30, 2006 and 2005...........................6
Notes to Consolidated Financial Statements (Unaudited) -
Nine months ended September 30, 2006 and 2005...........................7
Item 2. Management's Discussion and Analysis or Plan of Operation.......25
Item 3. Controls and Procedures.........................................35
PART II. OTHER INFORMATION
Item 1. Legal proceedings...............................................36
Item 2. Changes in Securities and Use of Proceeds.......................36
Item 3. Defaults Upon Senior Securities.................................38
Item 4. Submission of matters to a vote of security holders.............38
Item 5. Other information...............................................38
Item 6. Exhibits........................................................38
SIGNATURES
ITEM 1. FINANCIAL STATEMENTS
GPS INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2006
(Unaudited)
- ----------------------------------------------------------------------------
Assets
Current
Cash $ 12,813
Accounts receivable 1,010,979
Inventories 1,117,576
Prepaid expenses and other current assets 596,163
-------------
Total current assets 2,737,531
Long-term accounts receivable 106,480
Property and equipment, net 96,877
Patents 1,328,740
Deferred implementation costs 215,897
--------------
$ 4,485,525
==============
- ----------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
Current liabilities
Bank indebtedness $ 3,492,892
Bank loan 11,218
Deferred Revenue 421,727
Short term loans 7,362,080
Accounts payable and accrued liabilities 5,708,427
Liability associated with Optimal Golf acquisition 2,847,000
Promissory notes - related parties 471,268
Derivative liabilities 6,691,683
--------------
27,006,295
Liabilities related to discontinued operations
(Chapter 7 proceedings filed in 2002)
Promissory note payable 1,274,757
Accounts payable and accrued liabilities 911,458
Loans payable to related parties 258,000
Capital lease obligations ( in default) 29,467
--------------
2,473,682
--------------
Total current liabilities 29,479,977
--------------
Convertible Debt, net of unamortized debt discount and
deferred interest of $1,628,498 971,322
Long Term debt - Related Party, net of unamortized debt
discount of $360,000 2,094,166
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, 308,769,895 issued and outstanding 308,770
Accumulated other comprehensive income 722,295
Deferred compensation expense (281,578)
Deferred Financing Costs (223,392)
Additional paid-in capital 38,763,891
Accumulated deficit (67,724,926)
--------------
Total Stockholder's Deficit (28,059,940)
--------------
$ 4,485,525
==============
- ----------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
3
GPS INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------
For the Nine Months Ended September 30 2006 2005
---------------------------------
(Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------
Revenue $ 4,571,908 $ 4,039,278
Cost of Goods Sold 2,400,167 2,142,546
Installation Costs 508,650 618,616
---------------------------------
Gross Profit 1,663,091 1,278,116
---------------------------------
Operating Expenses
General and Administrative Expenses 2,716,005 4,057,653
Depreciation and amortization 250,521 207,210
Sales and marketing 1,720,778 1,439,274
Engineering and Research and Development 2,352,108 1,454,659
---------------------------------
7,039,412 7,158,796
---------------------------------
Loss Before Other Income (Expense) (5,376,321) (5,880,680)
---------------------------------
Other Income (Expense)
Finance costs (162,019) (603,835)
Interest expense (3,342,170) (1,258,327)
Derivative liabilities - Decrease in
fair value 2,768,683 -
(Loss)/Gain on foreign exchange (132,767) 1,287
Gain on extinguishment of debt 403,820 244,292
---------------------------------
(464,453) (1,616,583)
---------------------------------
Net Loss $ (5,840,774) $ (7,497,263)
- -----------------------------------------------------------------------------------------
Loss per common share - basic and diluted
$ (0.02) $ (0.03)
---------------------------------
Weighted average number of common shares outstanding -
basic and diluted 297,479,180 228,078,000
- -----------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
4
GPS INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------
For the Three Months Ended September 30 2006 2005
(Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------
Revenue $ 2,116,188 $ 810,766
Cost of Goods Sold 1,052,871 419,474
Installation Costs 258,783 209,565
----------------------------------
Gross Profit 804,534 181,727
----------------------------------
Operating Expenses
General and Administrative Expenses 1,085,516 922,710
Depreciation and amortization 83,853 67,357
Sales and marketing 544,069 348,237
Engineering and Research and Development 998,053 527,166
----------------------------------
2,711,491 1,865,470
----------------------------------
Loss Before Other Income (Expense) (1,906,957) (1,683,743)
----------------------------------
Other Income (Expense)
Finance costs (54,009) (262,574)
Interest expense (1,281,841) (285,485)
Derivative Liabilities - Increase in fair
value (440,984) -
Gain/(Loss) on foreign exchange 34,440 (860)
Gain on extinguishment of debt 164,966 56,839
----------------------------------
(1,577,428) (492,080)
----------------------------------
Net Loss $ (3,484,385) $ (2,175,823)
- ------------------------------------------------------------------------------------------
Loss per common share - basic and diluted
$ (0.01) $ (0.01)
----------------------------------
Weighted average number of common shares outstanding -
basic and diluted 305,233,628 256,458,508
- ------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
5
GPS INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------
For the Nine Months Ended September 30 2006 2005
(Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------
Cash Flow From Operating Activities
Net loss from operations $ (5,840,774) $ (7,497,263)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 250,521 234,707
Amortization of deferred compensation 168,948 168,948
Loss on extinguishment of debt 91,078 174,854
Expenses paid by issuance of stock 199,530 1,982,592
Expenses paid by issuance of stock options 20,106 -
Interest converted to stock 180,050 501,491
Finance charges converted to stock - 168,550
Finance charges charged to equity 32,900 -
Decrease in fair value of derivative liabilities (2,768,683) -
Amortization of debt discount 1,726,878 -
Amortization of finance costs 184,666 100,000
Changes in operating assets and liabilities:
Inventories (16,869) (231,431)
Accounts receivable (306,881) (574,745)
Long-term accounts receivable 11,329 -
Prepaid expenses and deposits (395,024) 7,310
Deferred implementation costs (87,983) (210,242)
Accounts payable and accrued liabilities 1,926,565 1,455,621
Discontinued operations - accounts payable and
accrued liabilities (494,900) (419,146)
Deferred Revenue 197,741 153,877
-----------------------------------
Net Cash Used In Operating Activities (4,920,802) (3,984,877)
-----------------------------------
Cash Flow From Investing Activities
Purchase of property and equipment (80,545) (7,672)
Purchase of patents - (8,900)
Investment in Optimal Golf Solutions Inc. (334,000) (300,000)
-----------------------------------
Net Cash Flow Used In Investing Activities (414,545) (316,572)
-----------------------------------
Cash Flow From Financing Activities
Common stock issued for cash - 1,225,000
Proceeds from loans 5,040,244 1,464,598
Repayments of long term loan (226,762) (267,643)
Repayments of bank loan (9,769) (4,134)
Borrowings under bank indebtedness 935,099 229,504
Repayments of loans from related parties (43,069) (37,562)
Borrowing on convertible loans (478,757) 1,571,095
-----------------------------------
Net Cash Flow Provided By Financing Activities 5,216,986 4,180,858
-----------------------------------
Net Decrease In Cash (118,361) (120,591)
Cash, Beginning Of Period 131,174 173,092
-----------------------------------
Cash, End Of Period $ 12,813 $ 52,501
===================================
- ------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 493,972 $ 471,351
===================================
Cash paid for taxes $ - $ -
===================================
Non-Cash Investing And Financing Activities
Common stock issued on conversion of convertible notes $ 467,863 $ 726,000
===================================
Common stock issued to settle debt $ 107,241 $ 400,000
===================================
Common stock issued in settlement of accounts payable $ 982,000 $ 143,425
===================================
See accompanying notes to unaudited consolidated financial statements
6
GPS Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Nine months ended September 30, 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
September 30, 2006, the results of operations for the nine months ended
September 30, 2006 and 2005, and the cash flows for the nine months ended
September 30, 2006 and 2005. The results of operations for the nine months ended
September 30, 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 September 30, 2006, substantially all of the Company's assets and
operations were located in Canada.
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.
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.
7
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 September 30, 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 registered 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.
On November 13, 2006, the Company entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement ") with Great White Shark Enterprises, Inc
(GWSE) and Leisurecorp, LLC (Leisurecorp) pursuant to which the Company agreed,
subject to certain closing conditions, to sell for an aggregate purchase price
of $15,740,890 (i) a total of 1,574,089 shares of newly authorized Series B
Convertible Preferred Stock (the "Preferred Shares") and warrants to purchase up
to 53,278,689 shares of the Company's Common Stock. The warrants will be
exercisable for five years, beginning after the closing under the Securities
Purchase Agreement, at an initial exercise price of $0.122 per share. In
addition, under the Securities Purchase Agreement, at the closing, the Company
shall issue to GWSE 274,089 Preferred Shares and warrants to purchase 6,606,497
shares of Common Stock in exchange for the cancellation of certain indebtedness
owed by the Company to GWSE having an aggregate unpaid balance of $2,740,890.
On November 13, 2006, the Company obtained a $1,500,000 loan from GWSE and a
$5,000,000 loan from Leisurecorp (individually, a "Lender" and collectively the
"Lenders"). GWSE currently is a shareholder of the Company and a lender to the
Company under an existing purchase order credit facility. Bart Collins, one of
the Company's directors, is the President of GWSE. The foregoing loans are each
evidenced by an unsecured promissory note (the "Bridge Promissory Notes"). At
the time of the execution of the Bridge Promissory Notes and the Securities
Purchase Agreement, Leisurecorp was not affiliated with the Company in any way.
The Bridge Promissory Notes bear interest on the outstanding unpaid principal
balance at a rate 4.83% per annum, provided that the interest rate will increase
to 11% per annum in the event that an Event of Default (as defined in the Bridge
Promissory Notes) has occurred. The principal and all accrued and unpaid
interest is required to be paid in cash on the earliest to occur of (i) March
31, 2007, and (ii) the closing of the purchase by Lenders of the Company's
Series B Convertible Preferred Stock and warrants pursuant to the Securities
Purchase Agreement. If the Bridge Promissory Notes are paid at the closing of
the purchase by the Lenders of the Company's Series B Convertible Preferred
Stock, the Lenders will apply the outstanding principal and accrued interest due
under the Bridge Promissory Notes towards their purchases of the Company's
Series B Convertible Preferred Stock and Warrants.
The above transactions are more fully described in Note 8, Subsequent Events.
3. Summary of Significant Accounting Policies
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 delivered to the customer and
installed on the customer's site. The cost of installing the equipment on the
customer's site, such as contract 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.
8
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.
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).
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.
9
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.
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 is currently evaluating
the impact this statement will have 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 is currently evaluating the impact
this statement will have on the financial statements of the Company once
adopted.
10
In June 2006, the Financial Accounting Standards Board (FASB) issued Financial
Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109." FIN 48 addresses the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." FIN 48 prescribes specific criteria for the
financial statement recognition and measurement of the tax effects of a position
taken or expected to be taken in a tax return. This interpretation also provides
guidance on de-recognition of previously recognized tax benefits, classification
of tax liabilities on the balance sheet, recording interest and penalties on tax
underpayments, accounting in interim periods, and disclosure requirements. FIN
48 is effective for fiscal periods beginning after December 15, 2006. The
Company is currently evaluating the impact, if any that the adoption of FIN 48
will have on its financial statements.
In September 2006, the FASB issued FASB Statement No. 157. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is a
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practices. This Statement is effective for
financial statements for fiscal years beginning after November 15, 2007. Earlier
application is permitted provided that the reporting entity has not yet issued
financial statements for that fiscal year. Management is currently evaluating
the impact, if any, that the adoption of FAS 157 will have on its financial
statements.
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 September 30, 2006, the Company had
borrowed approximately $2,041,953 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 December 31, 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 nine months ended September 30, 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. In the nine months ended September 30, 2006
Hansen Inc. loaned the Company a further $100,000. This amount is included in
the Short-Term Loan total below. In return for this loan and the extension of
the line of credit 1,500,000 warrants to Hansen Inc. were extended to a period
of five years at a price of $0.05 per share. The fair value of this change in
the warrants, amounting to $32,900 was charged to operations as a finance cost
for the period.
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. This line of credit was subsequently increased to $1,400,000 on June
16, 2006. 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
September 30, 2006 this line was drawn approximately $1,450,939. The excess
represents the cash float arising from timing differences between when payments
are issued from this account and when they are presented for payment. The term
was for a period of 1 year from the date of the agreement. As consideration for
the security provided, the Company agreed to pay the Secured Party 15% per annum
of the maximum amount outstanding in the month, payable 50% in US$ 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 September 30, 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 December 2006.
11
Short-Term Loan
As of September 30, 2006 the Company has $7,362,080 owing on short term notes.
These amounts are repayable on demand and bear interest at varying rates. The
largest of these, amounting to $4,934,665, is from a director and shareholder.
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
September 30, 2006 the Company owed $906,959 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 $906,959 owing under this financing line at
September 30, 2006 is included in the balance of $7,362,080 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.
12
The trading period for the first stock payment expired on August 22, 2006. Based
upon the receipts from the sale of the first stock payment during the trading
period the Company had a liability to the Optimal Shareholders for the balance
of the first stock payment of approximately $1.65 million at that date. The
Company also has a liability to issue approximately 30,400,000 shares to the
Optimal Shareholders to fund the second stock payment liability of approximately
$1.65 million. The Company is currently in negotiations with the Optimal
Shareholders regarding the settlement of the first stock payment and the
issuance of the shares for the second stock payment.
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 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.
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 paid $226,762 of this liability during the nine months ended
September 30, 2006. As at September 30, 2006 the principal amount outstanding is
$2,454,166 which is offset by unamortized debt discount of $360,000, giving a
net balance of $2,094,166.
13
On November 13, 2006 the Company entered into a Securities Purchase Agreement
with GWSE. Under the terms of this agreement the Term Loan will be cancelled by
GWSE in exchange for 274,089 of the Company's Series B Preferred Shares and
warrants to purchase 6,606,497 shares of the Company's common stock at a price
of $0.122 per share. This agreement is more fully described in Note 8,
Subsequent Events.
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. During the nine months ended September 30, 2006 the Company prepaid a
portion of the outstanding principal amount under this provision, amounting to
$478,757.
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.
14
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 September
30, 2006 amortization of these offsets amounted to $1,675,449.
The Noteholders exercised their conversion privileges to convert a total of
$467,863 of the principal amount in the period ended September 30, 2006 leaving
a principal balance payable of $2,599,820. Unamortized debt discount and
deferred interest amounted to $1,628,498 at September 30, 2006 giving a net
balance of $971,322.
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 September 30, 2006 as approximately $6.69 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 nine months ended September 30, 2006
resulted in income of $2,768,683. The derivative liabilities are more fully
disclosed in the "Derivative Liabilities" note to the Financial Statements.
On November 8, 2006 the Company entered into an agreement with the Noteholders
to pay $2.8 million and issue 3 million warrants to purchase shares of the
Company's common stock at a price of $0.122 per share in full satisfaction of
all amounts owing under the Notes. On November 15, 2006, the Company paid the
$2.8 million and on November 16, 2006 the Company issued the warrants to the
Noteholders. This agreement is more fully described in Note 8, Subsequent
Events.
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
15
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 September 30, 2006 is as
follows:
---------------------------------- -------------------- ------------------------ ----------------------
At Issuance At December 31, 2005 At September 30, 2006
---------------------------------- -------------------- ------------------------ ----------------------
Convertible Notes $ 8,162,811 $ 8,702,321 $ 6,104,803
---------------------------------- -------------------- ------------------------ ----------------------
Warrants associated with the $ 330,224 $ 223,383 $ 320,397
Convertible Notes
---------------------------------- -------------------- ------------------------ ----------------------
Other outstanding warrants $ 461,950 $ 335,531 $ 187,083
---------------------------------- -------------------- ------------------------ ----------------------
Convertible preferred shares $ 307,242 $ 199,131 $ 79,400
---------------------------------- -------------------- ------------------------ ----------------------
$ 9,262,227 $ 9,460,366 $ 6,691,683
---------------------------------- -------------------- ------------------------ ----------------------
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
nine months ended September 30, 2006, amounting to $2,768,683 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 September
30, 2006
16
Convertible Notes
--------------------------- -------------------- ------------------------- -----------------------
At issuance At December 31, 2005 At September 30, 2006
--------------------------- -------------------- ------------------------- -----------------------
Market price $0.10 - $.078 $0.065 $0.082
--------------------------- -------------------- ------------------------- -----------------------
Conversion price: $0.0556 - $0.0422 $0.0328 $0.0416
--------------------------- -------------------- ------------------------- -----------------------
Term: 3 years 2.72 - 2.94 years 1.97-2.19 years
--------------------------- -------------------- ------------------------- -----------------------
Volatility: 102.8% 102.8% 119.4%
--------------------------- -------------------- ------------------------- -----------------------
Risk-free interest rate: 3.96% - 4.39% 4.39% 4.69%
--------------------------- -------------------- ------------------------- -----------------------
Maximum liability:
--------------------------- -------------------- ------------------------- -----------------------
Principal Notes: $3,720,000 $3,546,440 $2,599,820
--------------------------- -------------------- ------------------------- -----------------------
Liquidated damages: $1,785,600 $1,702,291 $1,247,914
--------------------------- -------------------- ------------------------- -----------------------
Default premium: $1,116,000 $1,063,932 $779,946
--------------------------- -------------------- ------------------------- -----------------------
Warrants associated with the Convertible Notes
--------------------------- -------------------- ------------------------- -----------------------
At issuance At December 31, 2005 At September 30, 2006
--------------------------- -------------------- ------------------------- -----------------------
Market price: $0.10 - $.078 $0.065 $0.082
--------------------------- -------------------- ------------------------- -----------------------
Exercise price: $0.25 $0.25 $0.25
--------------------------- -------------------- ------------------------- -----------------------
Term: 5 years 4.72 - 4.94 years 3.97-4.19 years
--------------------------- -------------------- ------------------------- -----------------------
Volatility: 102.8% 102.8% 119.4%
--------------------------- -------------------- ------------------------- -----------------------
Risk-free interest rate: 3.96% 4.39% 4.69%
--------------------------- -------------------- ------------------------- -----------------------
Number of Warrants 6,000,000 6,000,000 6,000,000
--------------------------- -------------------- ------------------------- -----------------------
Other outstanding warrants
--------------------------- -------------------- ------------------------- -----------------------
At issuance At December 31, 2005 At September 30, 2006
--------------------------- -------------------- ------------------------- -----------------------
Market price: $.085 $0.065 $0.082
--------------------------- -------------------- ------------------------- -----------------------
Exercise price: $6.28 - $0.055 $6.28 - $0.055 $0.32 - $0.05
--------------------------- -------------------- ------------------------- -----------------------
Term: 3 - 0.48 years 2.78 - 0.20 years 3.24 - 0.31 years
--------------------------- -------------------- ------------------------- -----------------------
Volatility: 102.8% 102.8% 119.4%
--------------------------- -------------------- ------------------------- -----------------------
Risk-free interest rate: 3.96% 4.39% 4.69%
--------------------------- -------------------- ------------------------- -----------------------
Number of Warrants 16,763,884 19,472,773 18,370,492
--------------------------- -------------------- ------------------------- -----------------------
Convertible preferred shares outstanding
--------------------------- -------------------- ------------------------- -----------------------
At issuance At December 31, 2005 At September 30, 2006
--------------------------- -------------------- ------------------------- -----------------------
Market price: $.085 $0.065 $0.082
--------------------------- -------------------- ------------------------- -----------------------
Exercise price: $.0527 - $0.0710 $.0527 - $0.0710 $.0527 - $0.0710
--------------------------- -------------------- ------------------------- -----------------------
Term: 2.1 - 1.87 years 1.82 - 1.59 years 1.07 - .84 years
--------------------------- -------------------- ------------------------- -----------------------
Volatility: 102.8% 102.8% 119.4%
--------------------------- -------------------- ------------------------- -----------------------
Risk-free interest rate: 3.96% 4.39% 4.69%
--------------------------- -------------------- ------------------------- -----------------------
Number of shares 5,893,043 5,893,043 5,893,043
--------------------------- -------------------- ------------------------- -----------------------
On November 8, 2006 the Company entered into an agreement with the holder of the
Notes to pay $2.8 million and issue 3 million warrants to purchase shares of the
Company's common stock at a price of $0.122 per share in full satisfaction of
all amounts owing under the Notes. On November 15, 2006, the Company paid the
$2.8 million and on November 16, 2006 the Company issued the warrants to the
Noteholders. This agreement is more fully described in Note 8, Subsequent
Events.
17
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 $533,218 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 $378,240. 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 nine months ended September 30, 2006 the Company wrote off trade
debts arising from discontinued operations amounting to $494,900. 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 September 30, 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 ("Prolink"), 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.
On October 26, 2006, the Company entered into a Settlement Agreement (the
"Settlement Agreement") with ProLink, Elumina Iberica S.A. and Elumina Iberica
Limited (collectively, the"Defendants"). ProLink, for and on behalf of the
Defendants, agreed to pay the Company $1,200,000 (the "Settlement Payment") in
settlement of the Company's claim that the Defendants infringed the Company's
European Patent 0 617 794 B1. The Settlement Payment is to be paid by an initial
payment of $202,500 and nineteen quarterly payments of $52,500 commencing
February 1, 2007. In consideration of the Settlement Payment, the Company
granted to ProLink a non-exclusive paid-up license in specified patents owned by
the Company in Australia, Japan and certain countries in Europe (the "Licensor
Patents") with respect to products for a golf course using GPS technology.
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.
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.
18
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
On April 4, 2006 the Company issued 93,487 shares of common stock valued at
$4,207 in payment of interest on a short term loan.
On April 5, 2006 the Company issued 300,000 shares of common stock valued at
$13,500 for services rendered.
On April 7, 18, 21, & 27 2006 the Company issued a total of 6,000,000 shares of
common stock valued at $145,780 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 May 1, 2006 the Company issued 131,524 shares of common stock valued at
$6,445 in payment of interest on a short term loan.
19
On May 4, 2006 the Company issued 425,000 shares of common stock valued at
market value of $23,800 in settlement of debt.
On May 12, 2006 the Company issued 400,000 shares of common stock valued at
market value of $22,000 in settlement of debt.
On May 30, 2006 the Company issued 401,000 shares of common stock valued at
market value of $17,243 in settlement of debt.
On June 7, 2006 the Company issued 132,030 shares of common stock valued at
$6,337 in payment of interest on a short term loan.
On July 11, 2006 the Company issued 188,306 shares of common stock valued at
$9,604 in payment of interest on a short term loan.
On July 18, 2006 the Company issued 350,000 shares of common stock valued at
$19,950 for services rendered.
On August 8, 2006 the Company issued 2,793,497 shares of common stock valued at
$223,480 in payment of interest on loans.
On September 1, 2006 the Company issued 3,254,285 shares of common stock valued
at $244,071 for services rendered and interest on loans.
On September 18, 2006 the Company issued 76,566 shares of common stock valued at
$5,666 in payment of interest on loans.
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.
8. Subsequent Events
Settlement of Legal Proceedings
On October 26, 2006, the Company entered into a Settlement Agreement (the
"Settlement Agreement") with ProLink Solutions LLC ("ProLink"), Elumina Iberica
S.A. and Elumina Iberica Limited (collectively, the "Defendants"). ProLink, for
and on behalf of the Defendants, agreed to pay the Company $1,200,000 (the
"Settlement Payment") in settlement of the Company's claim that the Defendants
infringed the Company's European Patent 0 617 794 B1. The Company had previously
filed an action in the Patents County Court in England against the Defendants.
The Settlement Payment is to be paid by an initial payment of $202,500 and
nineteen quarterly payments of $52,500 commencing February 1, 2007. In
consideration of the Settlement Payment, the Company granted to ProLink a
non-exclusive paid-up license in specified patents owned by the Company in
Australia, Japan and certain countries in Europe (the "Licensor Patents") with
respect to products for a golf course using GPS technology.
Repayment of Convertible Debt
In anticipation of obtaining loans from the Lenders referred to below, on
November 13, 2006, the Company entered into an Agreement (the "NIR Agreement"),
dated as of November 8, 2006, with all of the investors (the "Buyers") who
purchased $3,720,000 (including prepaid interest) of the Company's Callable
Secured Convertible Notes (the "Notes") pursuant to a Securities Purchase
Agreement dated as of September 20, 2005. Under the terms of the NIR Agreement,
the Company agreed to pay, and the Buyers agreed to accept, in full satisfaction
of all amounts owing under the Notes, including outstanding principal amount and
accrued and unpaid interest thereon, the amount of $2,800,000 (the "Payoff
Amount"). In addition to the cash payment, the Company also agreed to issue to
the Buyers (pro rata in accordance with the amount being paid to the applicable
Buyer) five year warrants to purchase an aggregate of 3,000,000 shares of the
Company's Common Stock at an exercise price of $0.122 per share (the "New
Warrants"). The New Warrants contain customary piggyback registration rights
subject to priority granted in favor of certain new purchasers of the Company's
securities, noted below, in the case of cutbacks.
On November 15, 2006, the Company funded the Payoff Amount and on November 16,
2006 the Company issued the New Warrants to the Buyers. The Company obtained the
proceeds to fund the Payoff Amount from two loans from the Lenders (as defined
below) that are evidenced by the Bridge Promissory Notes (as defined below).
20
Bridge Promissory Notes
On November 13, 2006, the Company obtained a $1,500,000 loan from Great White
Shark Enterprises, Inc. ("GWSE") and a $5,000,000 loan from Leisurecorp LLC
("Leisurecorp") (individually, a "Lender" and collectively the "Lenders"). GWSE
currently is a shareholder of the Company and a lender to the Company under an
existing purchase order credit facility. Bart Collins, one of the Company's
directors, is the President of GWSE. The foregoing loans are each evidenced by
an unsecured promissory note (the "Bridge Promissory Notes"). At the time of the
execution of the Bridge Promissory Notes and the Securities Purchase Agreement
described below, Leisurecorp was not affiliated with the Company in any way. The
Bridge Promissory Notes bear interest on the outstanding unpaid principal
balance at a rate 4.83% per annum, provided that the interest rate will increase
to 11% per annum in the event that an Event of Default (as defined in the Bridge
Promissory Notes) has occurred. The principal and all accrued and unpaid
interest is required to be paid in cash on the earliest to occur of (i) March
31, 2007, and (ii) the closing of the purchase by Lenders of the Company's
Series B Convertible Preferred Stock and warrants pursuant to the Securities
Purchase Agreement noted below. If the Bridge Promissory Notes are paid at the
closing of the purchase by the Lenders of the Company's Series B Convertible
Preferred Stock, the Lenders will apply the outstanding principal and accrued
interest due under the Bridge Promissory Notes towards their purchases of the
Company's Series B Convertible Preferred Stock and Warrants.
On November 15, 2006, the Company used $2,800,000 of the proceeds of the Bridge
Promissory Notes to fund the Payoff Amount payable to the Buyers under the NIR
Agreement. The Company intends (and is required to under the terms of the Bridge
Promissory Notes and the Securities Purchase Agreement) to use the balance of
the loan proceeds to repay certain other outstanding indebtedness and to fund
its short-term working capital needs, all in accordance with a use of proceeds
schedule agreed to between the Lenders and the Company. The Bridge Promissory
Notes contain restrictions on the Company's ability to take certain actions
while the Bridge Promissory Notes remain outstanding. Specifically, the Company
may not, without the consent of the Lenders, (i) amend its Articles of
Incorporation or Bylaws, (ii) issue shares of its capital stock or rights,
options, warrants or other securities that are convertible into or exchangeable
for capital stock, (iii) pay dividends, (iv) repurchase shares of its capital
stock, (v) effect a merger, consolidation, or business combination or other
acquisition, (vi) reorganize, liquidate, dissolve or wind up, (vii) incur any
new indebtedness or refinance any existing indebtedness for borrowed money other
than trade payables and accrued expenses incurred in the ordinary course of
business, (viii) incur or commit to incur any operating expenditures in excess
of (a) $50,000 in one or a series of related expenditures, or (b) in excess of
$250,000 in the aggregate, (other than in accordance with the use of proceeds
agreed with the Lenders) (ix) hire or fire the Company's Chief Executive
Officer, the Chief Financial Officer, or any other officer or employee of the
Company who, at the time, earns or is expected to earn a salary (excluding
bonuses) of $100,000 or more per year, (x) acquire any assets or equity
securities of any other business or entity, or sell any the Company's assets
(other than in the ordinary course of business), (xi) issue options or
securities except under the Company's stock compensation, bonus or other
compensation plan, (xii) amend the Company's stock compensation, bonus or other
compensation plan, or (xiii) enter into any transaction with a stockholder of
the Company or an affiliate of the Company or of a stockholder of the Company.
Securities Purchase Agreement
On November 13, 2006, the Company entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement ") with GWSE and Leisurecorp, pursuant to
which the Company agreed, subject to certain closing conditions, to sell for an
aggregate purchase price of $15,740,890 (i) a total of 1,574,089 shares of newly
authorized Series B Convertible Preferred Stock (the "Preferred Shares") and
warrants to purchase up to 53,278,689 shares of the Company's Common Stock. The
warrants will be exercisable for five years, beginning after the closing under
the Securities Purchase Agreement, at an initial exercise price of $0.122 per
share. In addition, under the Securities Purchase Agreement, at the closing, the
Company shall issue to GWSE 274,089 Preferred Shares and warrants to purchase
6,606,497 shares of Common Stock in exchange for the cancellation of certain
indebtedness owed by the Company to GWSE having an aggregate unpaid balance of
$2,740,890. As of November 6, 2006, the Company had outstanding approximately
333,847,000 shares of Common Stock.
21
The closing of the sale of the Preferred Shares and warrants is subject to (i)
the Company amending its Articles of Incorporation to increase the number of its
authorized shares of Common Stock to 1,600,000,000 shares, (ii) the repayment of
the Notes pursuant to the NIR Agreement and release of all liens on the
Company's assets granted in favor of the holders of the Notes, (iii) the
exchange by Douglas Wood, one of the Company's directors, of $3,000,000 of
indebtedness owed to him by the Company for 300,000 Preferred Shares and
warrants to purchase 49,180,328 shares of Common Stock, (iv) the exchange by Mr.
Silzer, the Chief Executive Officer and a director of the Company, of $750,000
of certain obligations owed to him by the Company for 12,295,082 shares of
Common Stock and warrants to purchase 3,073,770 shares of Common Stock, and (v)
the satisfaction of other customary closing conditions. The Securities Purchase
Agreement will be terminable by the investors or the Company under certain
circumstances specified in the Securities Purchase Agreement, including if the
closing fails to occur for any reason on or before March 31, 2007. The Company
will have to obtain the approval of its shareholders and otherwise comply with
applicable state and federal regulations in order to amend its Articles of
Incorporation.
During the 120 calendar days following the date of the closing of the
transactions contemplated by the Securities Purchase Agreement, GWSE and
Leisurecorp shall each have the right to increase their investment, or make an
additional investment in the Company by purchasing additional shares of
Preferred Stock and warrants for cash on the same terms as the securities sold
at the closing (for each $10 cash investment, the purchaser has the right to
purchase one Preferred Share and a warrant to purchase 40.983607 shares of
Common Stock). GWSE shall have the right to increase its aggregate investment in
the Preferred Shares and warrants by $3,000,000, and Leisurecorp shall have the
right to increase its aggregate investment in the Preferred Shares and warrants
by $10,000,000. GWSE and Leisurecorp also have the right to assign (in whole or
in part) their right to purchase such additional securities to one or more of
their affiliates or designees.
Series B Convertible Preferred Stock
Under the Securities Purchase Agreement, a total of 4,000,000 shares of
Preferred Shares will be authorized for issuance under a Certificate Of
Designation Of Series B Convertible Preferred Stock, which Certificate of
Designation defines the rights, preferences and privileges of the holders of the
Preferred Shares and will be filed with the Secretary of State of the State of
Nevada prior to closing.
The Preferred Shares may, at the option of the holder, be converted at any time
or from time to time into fully paid and non-assessable shares of Common Stock
at the conversion rate then in effect. The number of shares into which one
Preferred Share shall be convertible is determined by dividing $10.00 per share
by the then existing Conversion Price. The "Conversion Price" per share for the
Preferred Shares shall be equal to $0.61 (subject to appropriate adjustment for
certain events, including stock splits, stock dividends, combinations,
recapitalizations or other recapitalizations affecting the Preferred Shares).
The Conversion Price is also subject to weighted average anti-dilution
protection in the case of certain issuances of securities by the Company below a
certain price.
Except as otherwise expressly provided in the Certificate of Designation or as
required by law, each holder of Preferred Shares shall be entitled to the number
of votes equal to the number of shares of Common Stock into which the Preferred
Shares could be converted on the record date for such vote, and shall have
voting rights and powers equal to the voting rights and powers of the Common
Stock. In addition to the foregoing voting rights, so long as Leisurecorp is the
owner of record of 25% or more of the number of Preferred Shares that it
purchases under the Securities Purchase Agreement, the Company shall not have
the right, without first obtaining the prior approval of the holders of a
majority of the then outstanding Preferred Shares, voting separately as a class,
to take any of the following actions: (i) amend the Company's Articles of
Incorporation or Bylaws if such action would adversely affect the rights,
preferences, privileges, or restrictions of the Series B Preferred Stock; (ii)
authorize or issue any class or series of the Company's capital stock or any
rights, options, warrants or other securities that are convertible into or
exchangeable for any capital stock of the Corporation, having any right,
preference or privilege superior to or on parity with the Series B Preferred
Stock in any respect whether by reclassification or otherwise; (iii) pay any
dividends or distributions on any shares of capital stock of the Company; (iv)
amend any of the provisions of the Certificate of Designation; (v) redeem or
declare a dividend with respect to any security of the Company; (vi) increase or
decrease the authorized number of shares of Series B Preferred Stock; (vii)
effect a merger, consolidation, or business combination or other acquisition
involving the Company (other than solely for the purposes of reincorporation);
or (viii) increase or decrease the authorized number of directors on the
Company's Board of Directors.
22
The holders of a majority of the outstanding Preferred Shares also have the
right, voting as a separate class, to elect three members of the Company's board
of directors (the "Preferred Directors"), of which two shall be designated by
such holders of a majority of the outstanding Preferred Shares as the "Reviewing
Preferred Directors." The Company's Board of Directors may not take certain
actions, and none of such actions shall be valid and constitute an action of the
Board of Directors unless such action is approved by a majority of the Board of
Directors, which majority shall include at least one of the Reviewing Preferred
Directors. The actions that must be approved by at least one Reviewing Preferred
Director are as follows: (i) reorganize the Company or voluntarily liquidate,
dissolve or wind up the Company, (ii) incur any new indebtedness or refinance
any existing indebtedness for borrowed money other than trade payables and
accrued expenses incurred in the ordinary course of business and indebtedness
not to exceed at any time $500,000 in the aggregate, (iii) approve, adopt or
amend the Company's annual budget, (iv) incur any capital or operating
expenditures (other than purchases of inventory purchased solely for, and
specifically to fill signed purchase orders) in excess of $50,000 in one or a
series of related expenditures, or in excess of $250,000 in the aggregate unless
included in the Company's annual budget approved by the Board of Directors
(including one of the Reviewing Preferred Directors), (v) hire or fire the
Company's Chief Executive Officer, the Chief Financial Officer, or any other
officer or employee of the Company who, at the time, earns or is expected to
earn a salary (excluding bonuses) of $100,000 or more per year, (vi) acquire any
assets or equity securities of any other business or entity, or sell any assets
of the Company (other than in the ordinary course of business), in each case if
the transaction value of such acquisition or disposition is greater than
$2,000,000, (vii) issue options or securities except under the Company's stock
compensation, bonus or other compensation plan, (viii) amend the Company's stock
compensation, bonus or other compensation plan, or (ix) enter into a transaction
with a stockholder or an affiliate of the Company or of a stockholder of the
Company. The foregoing restrictions will remain in effect until the earlier of
(a) the date on which Leisurecorp is the owner of record of less than 25% of the
number of Preferred Shares that it purchased pursuant to the Securities Purchase
Agreement, or (b) the Company meets or exceeds the approved annual budget for
two consecutive fiscal years.
In the event of any dissolution or winding up of the Company, whether voluntary
or involuntary, holders of each outstanding Preferred Shares shall be entitled
to be paid first out of the assets of the Company available for distribution to
shareholders, an amount equal to $10.00 per share (as adjusted). Therafter, the
remaining assets and funds of the Company legally available for distribution, if
any, shall be distributed among the holders of the Common Stock and the
Preferred Shares in proportion to the shares of Common Stock then held by them
and the shares of Common Stock which they have a right to acquire upon
conversion of the shares of the Preferred Shares held by them. The foregoing
liquidation distribution to the holders of the Preferred Shares shall be senior
to the Common Stock and senior to any subsequent series of preferred stock which
may be junior in right of preference to the Preferred Shares.
The Company may not declare, pay or set aside any dividends on shares of any
class or series of capital stock of the Company (other than dividends on shares
of Common Stock payable in shares of Common Stock) unless the holders of the
Preferred Shares shall first receive, or simultaneously receive, an equal
dividend on each outstanding share of Preferred Shares.
Registration Rights
In connection with the sale and issuance of the Preferred Shares and warrants to
GWSE and Leisurecorp under the Securities Purchase Agreement, and the issuance
of shares to Mr. Wood and Mr. Silzer in connection with the exchange by them of
certain Company obligations, at the closing of the transactions under the
Securities Purchase Agreement, the Company shall enter into a Registration
Rights Agreement. Under that agreement, the investors shall have the unlimited
right to demand the registration under the Securities Act of 1933, as amended
(the "Act"), of all or part of the shares of Common Stock issuable under the
Preferred Shares and warrants (or the Common Stock issuable to Mr. Silzer),
provided no demand for such registration shall be made for less than 10 million
shares of Common Stock. In addition, the investors also have piggy-back
registration rights and the right to have their shares registered on Form S-3,
if that form is available to the Company.
23
Shareholder Agreement
At the closing of the sale of the Preferred Shares and warrants under the
Securities Purchase Agreement, and as a condition to the closing, the Company
will be required to enter into a Shareholder Agreement, the form of which is
attached to the Securities Purchase Agreement, with GWSE, Leisurecorp, Robert C.
Silzer, Sr. and Douglas Wood. Under the Shareholder Agreement, GWSE and
Leisurecorp will agree to vote their Preferred Shares in favor of two designees
of Leisurecorp as the Preferred Directors and one designee of GWSE as the third
Preferred Director. GWSE and Leisurecorp will also make agreements with respect
to the voting of their Preferred Shares on other matters. In addition, under the
Shareholder Agreement, GWSE, Leisurecorp, Mr. Silzer, Sr. and Mr. Wood will
agree to certain restrictions on the transfer of their shares subject to the
Shareholder Agreement.
Other
The (i) Preferred Shares and warrants to be issued to GWSE, Leisurecorp and Mr.
Wood, and (ii) the shares of Common Stock and warrants to be issued to Mr.
Silzer, will not be registered under the Act and will be issued and sold in
reliance upon the exemption from registration contained in Section 4(2) of the
Act and Regulation D promulgated thereunder. The Preferred Shares and the
warrants, as well as the shares underlying the warrants, may not be reoffered or
sold in the United States by the holders in the absence of an effective
registration statement, or exemption from the registration requirements, under
the Act.
Creation of Company Office
On November 3, 2006, the Board of Directors of the Company created a new
part-time office and elected Bart Collins, one of the Company's current
Directors, to that office. The new office, designated as the office of the
Executive Vice President, was established for the purposes of monitoring and
controlling specific operations or functions of the Company. In establishing the
new executive office, the Board of Directors decided that the Company may not
make any payment (or series of related payments) or agree to make any payment
(or series of related payments) or issue or agree to issue securities of the
Company in lieu of any payment to be made by or on behalf of the Company (a
"Securities Issuance") (a) in excess of $25,000, without the express written
approval of the new Executive Vice President and (b) in excess of $100,000,
without having the signature of the Executive Vice President on (x) the check or
other financial instrument pursuant to which such payment will be made, on (y)
the wire transfer instructions authorizing the wire transfer pursuant to which
such payment will be made or (z) in the case of a Securities Issuance, specific
authorization for such Securities Issuance including the number of shares or
securities to be issued and the terms thereof. The Company agreed to create the
office of Executive Vice President, and agreed to elect Mr. Collins to that
office, under the Securities Purchase Agreement. Pursuant to the Securities
Purchase Agreement, Mr. Collins must remain the Executive Vice President until
the Bridge Promissory Notes are repaid and, assuming that the closing occurs
under the Securities Purchase Agreement, thereafter until such time as the
Company's Common Stock is listed on either the Nasdaq Global Market or the
Nasdaq Capital Market.
Amendment of the Company's Bylaws
On November 3, 2006, the Board unanimously adopted certain resolutions to amend
the Company's Bylaws. The amendments to the Bylaws revise and clarify certain
procedures regarding the Company's special meetings and its regular annual and
quarterly meetings. In addition, the Bylaw amendment authorizes the Board of
Directors, from time to time, to create one or more part-time Executive Vice
President offices for the purposes of monitoring and controlling specific
operations or functions of the Company. Pursuant to the Bylaw amendment, on
November 3, 2006 the Company created the office of Executive Vice President and
elected Bart Collins to that office.
24
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 September
30, 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 September 30,
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.
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 September 30, 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 nine months ended September 30,
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 contract 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.
25
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 September 30, 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.
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.
On November 13, 2006, the Company entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement ") with Great White Shark Enterprises, Inc
(GWSE) and Leisurecorp, LLC (Leisurecorp) pursuant to which the Company agreed,
subject to certain closing conditions, to sell for an aggregate purchase price
of $15,740,890 (i) a total of 1,574,089 shares of newly authorized Series B
Convertible Preferred Stock (the "Preferred Shares") and warrants to purchase up
to 53,278,689 shares of the Company's Common Stock. The warrants will be
exercisable for five years, beginning after the closing under the Securities
Purchase Agreement, at an initial exercise price of $0.122 per share. In
addition, under the Securities Purchase Agreement, at the closing, the Company
shall issue to GWSE 274,089 Preferred Shares and warrants to purchase 6,606,497
shares of Common Stock in exchange for the cancellation of certain indebtedness
owed by the Company to GWSE having an aggregate unpaid balance of $2,740,890.
On November 13, 2006, the Company obtained a $1,500,000 loan from GWSE and a
$5,000,000 loan from Leisurecorp (individually, a "Lender" and collectively the
"Lenders"). GWSE currently is a shareholder of the Company and a lender to the
Company under an existing purchase order credit facility. Bart Collins, one of
the Company's directors, is the President of GWSE. The foregoing loans are each
evidenced by an unsecured promissory note (the "Bridge Promissory Notes"). At
the time of the execution of the Bridge Promissory Notes and the Securities
Purchase Agreement, Leisurecorp was not affiliated with the Company in any way.
The Bridge Promissory Notes bear interest on the outstanding unpaid principal
balance at a rate 4.83% per annum, provided that the interest rate will increase
to 11% per annum in the event that an Event of Default (as defined in the Bridge
Promissory Notes) has occurred. The principal and all accrued and unpaid
interest is required to be paid in cash on the earliest to occur of (i) March
31, 2007, and (ii) the closing of the purchase by Lenders of the Company's
Series B Convertible Preferred Stock and warrants pursuant to the Securities
Purchase Agreement. If the Bridge Promissory Notes are paid at the closing of
the purchase by the Lenders of the Company's Series B Convertible Preferred
Stock, the Lenders will apply the outstanding principal and accrued interest due
under the Bridge Promissory Notes towards their purchases of the Company's
Series B Convertible Preferred Stock and Warrants.
26
The above transactions are more fully described in Note 8, Subsequent Events.
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
contract 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 nine months ended September 30, 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.
27
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.
Results of Operations:
Nine months ended September 30, 2006 and 2005
Revenue - The Company recorded total revenue in the nine months ended September
30, 2006 of $4,571,908 as compared to $4,039,278 in the first nine months of
2005. This amounted to an increase of $532,630 or 13% 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 $4,133,664 as compared to $3,494,822 in the
first nine months of 2005. This increase was primarily due to the Company's
introduction of its new generation of product and increasing customer
acceptance. As of September 30, 2006 the Company had approximately $421,727 of
installations in progress which will be recorded as revenue in the fourth
quarter. There was no revenue from distributorship partnership fees in 2006
compared to $154,000 in 2005. Total patent licence revenue earned by Optimal
Golf Solutions amounted to $438,244 as compared to $390,456 in the first nine
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 nine months ended September 30, 2006
was $2,908,817 of which $2,400,167 represents costs of goods sold and $508,650
represents installation costs. In the first nine months of 2005 Cost of Goods
Sold was $2,761,162 comprised of cost of goods sold of $2,142,546 and
installation costs of $618,616.
Selling and Marketing Expenses - Selling and marketing expenses were $1,720,778
for the nine months ended September 30, 2006, as compared to $1,439,274 for the
nine months ended September 30, 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
$2,716,005 for the nine months ended September 30, 2006, as compared to
$4,057,653 for the nine months ended September 30, 2005. The sum of expenses in
this category which were satisfied by stock issuances rather than cash payments
amounted to $219,636 or 8% of total general and administrative expenses compared
to $1,982,592, or 49% of the total, in the nine months ended September 30, 2005.
The stock based expenses incurred in 2005 were primarily for financing,
marketing and public relations consulting. The reduction in these expenses in
the nine months ending September 30, 2006 is the primary reason for the lower
general and administrative expenses recorded in this period compared to the
corresponding period in 2005.
Engineering, Research and Development Expenses - Engineering, research and
development expenses increased to $2,352,108 for the nine months ended September
30, 2006 from $1,454,659 for the nine months ended September 30, 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
$43,311 or 21% to $250,521 in the first nine months of 2006, as compared to
$207,210 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 $5,376,321 for the nine
months ended September 30, 2006, as compared to a loss from operations of
$5,880,680 for the nine months ended September 30, 2005. The decrease was
primarily due to the reduction in general and administrative expenses, offset by
higher engineering and R&D expenses in the period.
28
Interest Expense - Interest expense increased by $2,083,843 to $3,342,170 in
2006, as compared to $1,258,327 in 2005. The primary component of this increase
was the amortization of debt discount on the convertible notes, amounting to
$1,675,449. 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 $162,019 in first nine
months of 2006 as compared to $603,835 in the respective 2005 period.
Derivative Liabilities - Derivative liabilities were incurred in the year ended
December 31, 2005 arising from the issuance 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 September 30, 2006 the excess of the fair
value of the derivative liabilities had declined by $2,768,683. This reduction
is recorded as income for the period ended September 30, 2006. The valuation and
basis for this expense is more fully discussed in the "Derivative Liabilities"
note to the financial statements.
Gain on Extinguishment of Debt - Gain on extinguishment of debt increased to
$403,820 in the nine months ended September 30, 2006 from $244,292 for the nine
months ended September 30, 2005. This gain was comprised of a gain of $494,900
relating to the write-off of debts of discontinued operations and a net loss
amounting to $91,080 arising from the issuance of stock in settlement of debt.
Net Loss - Net loss was $5,840,774 for the nine months ended September 30, 2006,
as compared to a net loss of $7,497,263 for the nine months ended September 30,
2005. This decrease is a reflection of the reduction in general and
administrative expenses and the decrease in the fair value of the derivative
liabilities, partially offset by the increase in engineering and R&D expenses.
Liquidity and Capital Resources - September 30, 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 its creditors under the bankruptcy laws.
On November 13, 2006, the Company entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement ") with Great White Shark Enterprises, Inc
(GWSE) and Leisurecorp, LLC (Leisurecorp) pursuant to which the Company agreed,
subject to certain closing conditions, to sell for an aggregate purchase price
of $15,740,890 (i) a total of 1,574,089 shares of newly authorized Series B
Convertible Preferred Stock (the "Preferred Shares") and warrants to purchase up
to 53,278,689 shares of the Company's Common Stock. The warrants will be
exercisable for five years, beginning after the closing under the Securities
Purchase Agreement, at an initial exercise price of $0.122 per share. In
addition, under the Securities Purchase Agreement, at the closing, the Company
shall issue to GWSE 274,089 Preferred Shares and warrants to purchase 6,606,497
shares of Common Stock in exchange for the cancellation of certain indebtedness
owed by the Company to GWSE having an aggregate unpaid balance of $2,740,890.
On November 13, 2006, the Company obtained a $1,500,000 loan from GWSE and a
$5,000,000 loan from Leisurecorp (individually, a "Lender" and collectively the
"Lenders"). GWSE currently is a shareholder of the Company and a lender to the
Company under an existing purchase order credit facility. Bart Collins, one of
the Company's directors, is the President of GWSE. The foregoing loans are each
evidenced by an unsecured promissory note (the "Bridge Promissory Notes"). At
the time of the execution of the Bridge Promissory Notes and the Securities
Purchase Agreement, Leisurecorp was not affiliated with the Company in any way.
The Bridge Promissory Notes bear interest on the outstanding unpaid principal
balance at a rate 4.83% per annum, provided that the interest rate will increase
to 11% per annum in the event that an Event of Default (as defined in the Bridge
Promissory Notes) has occurred. The principal and all accrued and unpaid
29
interest is required to be paid in cash on the earliest to occur of (i) March
31, 2007, and (ii) the closing of the purchase by Lenders of the Company's
Series B Convertible Preferred Stock and warrants pursuant to the Securities
Purchase Agreement. If the Bridge Promissory Notes are paid at the closing of
the purchase by the Lenders of the Company's Series B Convertible Preferred
Stock, the Lenders will apply the outstanding principal and accrued interest due
under the Bridge Promissory Notes towards their purchases of the Company's
Series B Convertible Preferred Stock and Warrants.
The above transactions are more fully described in Note 8, Subsequent Events.
Operating Activities - The Company's operations utilized cash of $4,920,802
during the nine months ended September 30, 2006, as compared to $3,984,877
during the nine months ended September 30, 2005.
At September 30, 2006, cash decreased by $118,361 to $12,813 as compared to
$131,174 at December 31, 2005.
The Company had a working capital deficit of $26,742,446 at September 30, 2006,
as compared to a working capital deficit of $23,771,591 at December 31, 2005. At
September 30, 2006 and December 31, 2005, $2,473,682 and $2,968,582 respectively
of the Company's current liabilities consisted of liabilities with respect to
discontinued operations. At September 30, 2006 and December 31, 2005, $6,691,683
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 $414,545 and
$316,572 for the nine months ended September 30, 2006 and 2005, respectively,
consisting of the purchase of equipment and the investment in Optimal Golf
Solutions, Inc.
Financing Activities - Net cash provided by financing activities was $5,216,986
for the nine months ended September 30, 2006, as compared to $4,180,858 for the
nine months ended September 30, 2005. During the nine months ended September 30,
2006, the Company made payments on long term, convertible and related parties
loans of $758,357 and received proceeds from bank borrowings and short term
loans of $5,975,343
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 September 30, 2006, the Company had
borrowed approximately $2,041,953 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 December 31, 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 nine months ended September 30, 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. In the nine months ended September 30, 2006
Hansen Inc. loaned the Company a further $100,000. This amount is included in
the Short-Term Loan total below. In return for this loan and the extension of
the line of credit 1,500,000 warrants to Hansen Inc. were extended to a period
of five years at a price of $0.05 per share. The fair value of this change in
the warrants, amounting to $32,900 was charged to operations as a finance cost
for the period.
30
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. This line of credit was subsequently increased to $1,400,000 on June
16, 2006. 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
September 30, 2006 this line was drawn approximately $1,450,939. The excess
represents the cash float arising from timing differences between when payments
are issued from this account and when they are presented for payment. The term
was for a period of 1 year from the date of the agreement. As consideration for
the security provided, the Company agreed to pay the Secured Party 15% per annum
of the maximum amount outstanding in the month, payable 50% in US$ 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 September 30, 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 December 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 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.
The trading period for the first stock payment expired on August 22, 2006. Based
upon the receipts from the sale of the first stock payment during the trading
period the Company had a liability to the Optimal Shareholders for the balance
of the first stock payment of approximately $1.65 million at that date. The
Company also has a liability to issue approximately 30,400,000 shares to the
Optimal Shareholders to fund the second stock payment liability of approximately
$1.65 million. The Company is currently in negotiations with the Optimal
Shareholders regarding the settlement of the first stock payment and the
issuance of the shares for the second stock payment.
31
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 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.
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 paid $226,762 of this liability during the nine months ended
September 30, 2006. As at September 30, 2006 the principal amount outstanding is
$2,454,166 which is offset by unamortized debt discount of $360,000, giving a
net balance of $2,094,166.
On November 13, 2006 the Company entered into a Securities Purchase Agreement
with GWSE. Under the terms of this agreement the Term Loan will be cancelled by
GWSE in exchange for 274,089 of the Company's Series B Preferred Shares and
warrants to purchase 6,606,497 shares of the Company's common stock at a price
of $0.122 per share. This agreement is more fully described in Note 8,
Subsequent Events.
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.
32
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 September
30, 2006 amortization of these offsets amounted to $1,675,449.
The Noteholders exercised their conversion privileges to convert a total of
$467,863 of the principal amount in the period ended September 30, 2006 leaving
a principal balance payable of $2,599,820. Unamortized debt discount and
deferred interest amounted to $1,628,498 at September 30, 2006 giving a net
balance of $971,322.
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 September 30, 2006 as approximately $6.69 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 nine months ended September 30, 2006
resulted in income of $2,768,683. The derivative liabilities are more fully
disclosed in the "Derivative Liabilities" note to the Financial Statements.
On November 8, 2006 the Company entered into an agreement with the Noteholders
to pay $2.8 million and issue 3 million warrants to purchase shares of the
Company's common stock at a price of $0.122 per share in full satisfaction of
all amounts owing under the Notes. On November 15, 2006, the Company paid the
$2.8 million and on November 16, 2006 the Company issued the warrants to the
Noteholders. This agreement is more fully described in Note 8, Subsequent
Events.
33
Off Balance Sheet Arrangements.
The Company had no Off Balance Sheet arrangements for the nine months ended
September 30, 2006, or for the nine months ended September 30, 2005
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.
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.
34
In September 2006, the FASB issued FASB Statement No. 157. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is a
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practices. This Statement is effective for
financial statements for fiscal years beginning after November 15, 2007. Earlier
application is permitted provided that the reporting entity has not yet issued
financial statements for that fiscal year. Management is currently evaluating
the impact, if any, that the adoption of FAS 157 will have on its financial
statements.
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.
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.
35
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 ("Prolink"), 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.
On October 26, 2006, the Company entered into a Settlement Agreement (the
"Settlement Agreement") with ProLink, Elumina Iberica S.A. and Elumina Iberica
Limited (collectively, the"Defendants"). ProLink, for and on behalf of the
Defendants, agreed to pay the Company $1,200,000 (the "Settlement Payment") in
settlement of the Company's claim that the Defendants infringed the Company's
European Patent 0 617 794 B1. The Settlement Payment is to be paid by an initial
payment of $202,500 and nineteen quarterly payments of $52,500 commencing
February 1, 2007. In consideration of the Settlement Payment, the Company
granted to ProLink a non-exclusive paid-up license in specified patents owned by
the Company in Australia, Japan and certain countries in Europe (the "Licensor
Patents") with respect to products for a golf course using GPS technology.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the nine months ended September 30, 2006 the Company issued a total of
43,364,759 shares of common stock, valued at a market value of $2,019,282. Of
these, 2,975,595 shares were issued for services rendered valued at a market
value of $186,330; 15,500,000 shares were issued in payment of convertible debt
valued at $467,863; 16,918,159 shares were issued in other debt settlement
valued at a market value of $1,109,351; 3,415,410 shares were issued in payment
of interest of $255,738 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.
36
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
On April 4, 2006 the Company issued 93,487 shares of common stock valued at
$4,207 in payment of interest on a short term loan.
On April 5, 2006 the Company issued 300,000 shares of common stock valued at
$13,500 for services rendered.
On April 7, 18, 21, & 27 2006 the Company issued a total of 6,000,000 shares of
common stock valued at $145,780 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 May 1, 2006 the Company issued 131,524 shares of common stock valued at
$6,445 in payment of interest on a short term loan.
On May 4, 2006 the Company issued 425,000 shares of common stock valued at
market value of $23,800 in settlement of debt.
On May 12, 2006 the Company issued 400,000 shares of common stock valued at
market value of $22,000 in settlement of debt.
On May 30, 2006 the Company issued 401,000 shares of common stock valued at
market value of $17,243 in settlement of debt.
On June 7, 2006 the Company issued 132,030 shares of common stock valued at
$6,337 in payment of interest on a short term loan.
On July 11, 2006 the Company issued 188,306 shares of common stock valued at
$9,604 in payment of interest on a short term loan.
On July 18, 2006 the Company issued 350,000 shares of common stock valued at
$19,950 for services rendered.
On August 8, 2006 the Company issued 2,793,497 shares of common stock valued at
$223,480 in payment of interest on loans.
On September 1, 2006 the Company issued 3,254,285 shares of common stock valued
at $244,071 for services rendered and interest on loans.
On September 18, 2006 the Company issued 76,566 shares of common stock valued at
$5,666 in payment of interest on loans.
37
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.
38
INDEX TO EXHIBITS
Exhibit Number Title
3.1 Articles of Incorporation as filed with the Nevada
Secretary of State on December 12, 1995 (1)
3.2 Certificate of Amendment to the Articles of
Incorporation as filed with the Nevada Secretary of
State on January 3, 2000 (2)
3.3 Certificate of Amendment to the Articles of
Incorporation as filed with the Nevada Secretary of
State on January 20, 2000 (2)
3.4 Bylaws (1)
10.1 Share Exchange and Finance Agreement dated as of
December 16, 1999 (2)
10.3 Stock Purchase Agreement to Acquire Optimal Golf
Solutions, Inc. (4)
10.4 Credit Agreement With Great White Shark Enterprises,
Inc. (5)
10.5 Amendment to Endorsement Agreement Dated April 1, 2003
Relating To Greg Norman Resigning From The Board Of
Directors And Going On To The Advisory Board. (6)
10.6 Entry into a Securities Purchase Agreement for the
Issuance of $3,720,000 Convertible Notes (7)
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*
(1) Incorporated by reference to the Exhibits to the Registration
Statement on Form 10-SB
(2) Incorporated by reference to the Exhibits to the Form 8-K filed on
Jan 29, 2002
(4) Incorporated by reference to the Form 8-K filed November 26, 2004
(5) Incorporated by reference to the Form 8-K filed December 8, 2004
(6) Incorporated by reference to the Form 8-K filed January 26, 2005
(7) Incorporated by reference to the Form 8-K filed September 26, 2006
* Filed herewith.
39
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: November 20, 2006 By: /s/ ROBERT C. SILZER, SR.
---------------------------
Robert C. Silzer, Sr.
Chief Executive Officer
(Duly Authorized Officer)
Date: November 20, 2006 By: /s/ MICHAEL MARTIN
---------------------------
Michael Martin
Chief Accounting Officer
(Duly Authorized Officer)