UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
Commission File Number 001-15977
TIGER TELEMATICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4051167
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
550 Water Street, Suite 937 32202
(Address of principal executive offices) (Zip Code)
(904) 279-9240
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class September 30, 2005
---------------------- -------------------
Common Stock, Par 62,600,000
Value $0.001 per share
CONTENTS
Page
----
Part I
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statement of Stockholders' Deficiency 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
nd Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
Part II Tiger Telematics, Inc. Other Information
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 23
1
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2005 and December 31, 2004
Unaudited
March 31, December 31,
2005 2004
---- ----
ASSETS
Current Assets
Cash $ 336,105 $ 4,653,559
Accounts receivable 580,464 616,571
Other receivables 4,234,154 3,129,235
Inventories 599,459 38,532
Advances to employees 52,965 204,081
Deposits to suppliers 2,694,415 924,456
Prepaid expenses and other current assets 1,022,781 698,106
------------- -------------
Total current assets 9,520,343 10,264,540
Property and Equipment, net 2,682,781 350,626
Assets held for sale 1,441,062 755,227
Other assets:
Goodwill 3,975,670 3,975,670
Other intangible assets 1,901,765 1,901,765
------------- -------------
Deferred tax asset, net of valuation
allowance of $110,000,000 and $45,000,000
in 2005 and 2004 respectively
$ 19,521,621 $ 17,247,828
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable $ 13,711,766 $ 13,976,402
Amount due stockholders -- 248,266
Notes payable - Current portion 217,694 78,937
Accrued expenses 9,960,459 8,143,023
Foreign tax accrual 39,026,843 7,567,351
Deposits on common stock -- 1,871,730
Contingent liabilities arising from
discontinued operations 1,168,243 1,168,243
------------- -------------
Total current liabilities 64,085,005 33,053,952
Notes payable after one year 1,100,000 408,638
------------- -------------
Total liabilities 65,185,005 33,462,590
------------- -------------
2
COMMITMENTS AND CONTINGENCIES
Stockholders' Deficiency
Common stock - 0.001 par value, authorized
500,000,000 shares. Issued and outstanding
53,235,271 and 36,306,607 in 2005 and 2004
respectively 53,236 36,307
Additional paid-in-capital 239,940,639 107,017,140
Accumulated other comprehensive loss (1,743,709) (3,112,766)
Accumulated deficiency (283,913,550) (120,155,443)
------------- -------------
Stockholders' deficiency (45,663,384) (16,214,762)
------------- -------------
$ 19,521,621 $ 17,247,828
============= =============
See Notes to Consolidated Financial Statements
3
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2005 and 2004
Unaudited
2005 2004
---- ----
Net sales $ 420,196 $ --
Cost of goods sold 455,092 --
------------- -------------
Gross Loss (34,896) --
------------- -------------
Operating expenses
Selling expense 12,556,954 839,565
General and administrative 151,141,469 4,890,268
------------- -------------
Total Operating Expenses 163,571,423 5,729,833
------------- -------------
Operating Loss (163,606,319) (5,729,833)
------------- -------------
Other (expense)
Other (2,286)
Interest expense (149,502) (38,292)
------------- -------------
(151,788) (38,292)
------------- -------------
Net Loss $(163,758,107) $ (5,768,125)
============= =============
Net loss per common share - basic and diluted $ (3.81) $ (0.52)
============= =============
Weighted average shares outstanding - basic
and diluted 42,956,145 11,196,382
============= =============
See Notes to Consolidated Financial Statements
4
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
For the three months ended March 31, 2005
Unaudited
Accumulated
Additional Other Total
Common Stock Paid-in Comprehensive Accumulated Stockholders'
Shares Amount Capital Loss Deficit Deficiency
------------- ------------- ------------- ------------- ------------- -------------
Balance (deficiency)
December 31, 2004 36,306,607 $ 36,307 $ 107,017,140 $ (3,112,766) $(120,155,443) $ (16,214,762)
Issuance of common stock:
Private placement 1,161,711 1,162 19,180,482 -- -- 19,181,644
Stock based employee
compensation 4,859,284 4,859 36,961,504 -- -- 36,966,363
Services 10,307,669 10,308 72,606,113 -- -- 72,616,421
Contingent shares
related to Indie
acquisition 600,000 600 4,175,400 -- -- 4,176,000
Net loss -- -- -- (163,758,107) (163,758,107) (163,758,107)
Other comprehensive income
-foreign currency
translation adjustment 1,369,057 1,369,057
-------------
Total comprehensive loss (162,389,050)
=============
------------- ------------- ------------- ------------- ------------- -------------
Balance (deficiency)
March 31, 2005 53,235,271 $ 53,236 $ 239,940,639 $ (1,743,709) $(283,913,550) $ (45,663,384)
============= ============= ============= ============= ============= =============
See Notes to Consolidated Financial Statements
5
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2005 and 2004
Unaudited
2005 2004
---- ----
Cash Flows for Operating Activities:
Loss from operations $(163,758,107) $ (5,768,125)
Other comprehensive income (loss) - foreign currency
translation adjustment 1,369,057 (34,468)
Adjustments to reconcile net loss from operations to net cash used in
operating activities:
Depreciation 434,857 32,688
Expenses paid with common stock 113,758,784 380,358
Changes in assets and liabilities:
(Increase) in other receivable (1,104,919) (595,485)
Decrease (increase) in advances to employees 151,116 (1,151,359)
(Increase) in inventories (560,927) --
(Increase) in deposits with suppliers (1,769,959) --
(Increase) in prepaid expenses and other current assets (324,675) --
Increase (decrease) in accounts payable (264,636) 1,292,815
Increase in foreign tax accrual 31,459,491 221,967
Increase in accrued expenses 1,817,437 722,998
(Increase) decrease in accounts receivable 36,107 (75,527)
------------- -------------
Net cash used in operating activities (18,756,374) (4,974,138)
------------- -------------
Cash Flows From Investing Activities:
Purchase of property and equipment (2,767,012) (57,164)
Assets held for sale (685,835) --
------------- -------------
Net cash used in investing activities (3,452,847) (57,164)
------------- -------------
Cash Flows From Financing Activities:
Issuance of common stock and warrants 19,181,644 2,923,033
Net change in deposits on common stock (1,871,730) 2,108,139
Loans and advances from stockholders -- 55,000
Repayment to stockholders (248,266) (9,191)
Payments on notes payable (78,937) (9,529)
Proceeds from notes payable 909,056 --
------------- -------------
Cash provided by financing activity 17,891,767 5,067,452
------------- -------------
Net change in cash (4,317,454) 36,150
Cash:
Beginning of period 4,653,559 8,959
------------- -------------
End of period $ 336,105 $ 45,109
============= =============
6
Supplemental disclosure of cash flow Information:
Cash paid for interest $ 149,502 $ 4,719
============= =============
Supplemental Disclosure of Non-cash Investing and
Operating Activities - Stock issued for:
Operating expenses $ 72,616,421 $ 380,358
Employee compensation 36,966,363 --
Contingent consideration for Indie Studios acquisition 4,176,000 --
------------- -------------
113,758,784 380,358
============= =============
Financing Activities:
Conversion of stockholder debt to common stock $ -- $ 55,000
============= =============
See Notes to Consolidated Financial Statements
7
TIGER TELEMATICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The condensed consolidated financial statements as of March 31, 2005 and for the
three months ended March 31, 2005 and March 31, 2004, included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
information for the periods indicated have been included. For further
information regarding the Company's accounting policies, refer to the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004.
Tiger Telematics, Inc. ("Tiger Telematics" or the "Company"), a Delaware
corporation, is the parent company of several subsidiaries, including Gizmondo
Europe Ltd., the developer of the multi-entertainment wireless handheld gaming
device called the Gizmondo. The consolidated financial statements include the
accounts of Tiger Telematics and its subsidiaries, Gizmondo Europe Ltd. (and its
subsidiaries), Tiger Telematics USA, Inc., ISIS Models Ltd., Indie Studios, AB,
and Warthog Plc (including four wholly owned subsidiaries of Warthog Plc).
Intercompany accounts and transactions have been eliminated.
Going Concern:
The Company has sustained net losses aggregating $118 million for the three
years ended December 31, 2004 and $164 million for the three months ended March
31, 2005. In addition, the Company at March 31, 2005 had a net working capital
deficiency of $54.6 million. During those periods, $149 million of expenses were
funded by issuing restricted common stock in exchange for services and did not
require the use of cash. Management anticipates proceeds from sales of Gizmondo
units and accessories to increase significantly after the U. S. launch of the
product in the fourth quarter of 2005. Management also anticipates the issuance
of equity securities to meet working capital requirements and to fund
development costs incurred in connection with developing telematics related
products that the Company believes will enhance its operations. Additionally,
the Company borrowed approximately $21.2 million from shareholders on a
short-term basis during the second quarter and management believes that future
shareholder loans are available if needed.
In July 2005, the Company instituted significant cost savings measures
including: closing unneeded facilities, reducing staff by over 100 employees and
instituting other cost savings measures.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classifications of liabilities that might be necessary in the event the Company
cannot continue as a going concern.
8
Description of the business:
Tiger Telematics and its subsidiaries are principally engaged in the business of
developing and marketing the Gizmondo wireless handheld multi-entertainment
gaming device.
The Company started Gizmondo Europe, Ltd. (formerly Tiger Telematics Europe
Ltd.) in late 2002 to focus on developing new telematics products including next
generation fleet telematics products and child tracker products.
In 2003, the Company began developing a new multi-entertainment wireless
handheld gaming device referred to as Gizmondo. While the Company previously
developed a variety of commercial telematics products, since early 2005 the
Company's primary business strategy has been to develop the Gizmondo. The
Company launched the full-scale production of Gizmondo in the UK in March 2005,
and plans a full-scale introduction to the US market in the fourth quarter of
2005. The Gizmondo is powered by a Microsoft Windows CE.net platform, has a
2.8-inch TFT color screen with a Samsung ARM9 400Mhz processor and incorporates
the GoForce 3D 4500 NVIDIA graphics accelerator. Gizmondo provides cutting-edge
gaming, multimedia messaging, an MP3 music player, Mpeg4 movie playing
capability, a digital camera and a GPRS network link to allow wide-area network
gaming. Additionally, Gizmondo contains a GPS chip for location based services,
is equipped with Bluetooth for use in multi-player gaming and accepts MMC card
accessories. The Gizmondo represents the Company's primary business segment.
Valuation of Common Stock:
The shares of the Company's common stock issued as payment for services,
employee bonuses, acquisitions and debt payments are restricted securities and
may not be currently sold. An independent business valuation expert determines
the "fair value" of these restricted securities on a quarterly basis. Management
believes that the appraised value is a better indication of the fair value of
the restricted shares issued than the price of freely traded shares in the open
market due to the large number of issued restricted shares.
Segment Information:
The Company focuses primarily all of its business in one segment, the
development, production, and sale of the wireless handheld multi-entertainment
gaming device, Gizmondo.
NOTE B - ADVANCES TO AND AMOUNTS DUE EMPLOYEES AND STOCKHOLDERS AND OTHER
RECEIVABLES
Advances to employees and stockholders of subsidiaries of the Company of $52,965
and $204,081 at March 31, 2005 and December 31, 2004, respectively, are due on
demand, without interest.
Amounts due to employees and stockholders of $0 and $248,266 at March 31, 2005
and December 31, 2004, respectively, are due on demand, without interest.
Other receivables of $4,234,154 and $3,129,235 at March 31, 2005 and December
31, 2004, respectively, consist primarily of VAT tax recoverable from government
agencies.
9
NOTE C - EQUITY TRANSACTIONS
During the first quarter of 2005, the Company issued 16,928,664 shares of
restricted common stock in numerous private transactions with an aggregate value
of $132,940,428, all as more particularly described below:
Issued 10,307,669 shares of restricted common stock in payment of
services provided by unrelated vendors, principally consulting services
related to development of the Gizmondo, aggregating $72,616,421. The
shares issued were valued at $6.96 to $7.92 per share.
Sold 1,161,711 shares of restricted common stock in various private
placement transactions with individual and institutional investors
aggregating $19,181,644 in cash. The shares issued were valued at $3.00
to $20.00 per share.
Issued 600,000 shares of restricted common stock valued at $4,176,000
in connection with the successful completion of a product development
project.
Issued 4,859,284 shares of restricted common stock in payment to
employees aggregating $36,966,363. The shares were valued at $6.96 to
$7.92 per share. Of those shares, executives of the Company received
4,045,036 shares valued at $27,918,551, and Warthog employees received
422,000 shares valued at $3,204,862.
At March 31, 2005, 53,235,271 shares of common stock were issued and
outstanding. From April 1 to September 28, 2005, the Company issued
approximately 8.4 million additional shares in numerous private transactions (a)
for cash, (b) to settle accounts payable or other liabilities, and (c) to
purchase goods or services provided by vendors, strategic partners,
professionals, consultants and employees. In each case the Company recorded
capital surplus based upon the fair value of the Company's common stock at the
time of issuance or agreement to issue. The aggregate amount recorded during
2005 was approximately $200 million, including the above-described shares.
Following is a recap of additional shares issued after March 31, 2005:
-------------------------------- -------------- ------------------- --------------------
Number Price Per Share Common Stock and
of Shares Additional Paid
in Capital
-------------------------------- -------------- ------------------- --------------------
Balance, March 31, 2005 53,235,271 $239,993,875
-------------------------------- -------------- ------------------- --------------------
April 1, 2005 to June 30, 2005:
-------------------------------- -------------- ------------------- --------------------
Sale of Securities 1,351,088 $3.50 to $20.00 18,826,735
-------------------------------- -------------- ------------------- --------------------
Employee Compensation 57,392 $4.31 247,359
-------------------------------- -------------- ------------------- --------------------
Services 1,701,216 $4.31 to $5.18 7,405,060
-------------------------------- -------------- ------------------- --------------------
Totals - Three months ended
June 30, 2005 3,109,696 26,479,154
-------------------------------- -------------- ------------------- --------------------
10
-------------------------------- -------------- ------------------- --------------------
July 1 to September 30, 2005:
-------------------------------- -------------- ------------------- --------------------
Sale of Securities 4,106,368 $3.50 to $20.00 42,319,007
-------------------------------- -------------- ------------------- --------------------
Services 1,708,195 $5.20 to $6.06 9,363,708
-------------------------------- -------------- ------------------- --------------------
Totals at September 30, 2005 62,159,530 $318,155,744
-------------------------------- -------------- ------------------- --------------------
NOTE D- REVERSE STOCK SPLIT AND INCREASE IN AUTHORIZED SHARES
In July 2004, the Company's shareholders approved a 1 for 25 reverse stock
split. The number of authorized shares and par value were unchanged. All common
stock amounts described in this Form 10-Q have been adjusted to reflect this
change for all periods presented.
In May 2003, the Company's shareholders approved an increase in the number of
authorized shares from 100 million shares to 250 million shares. In January
2004, the authorized shares were increased to 500 million shares.
NOTE E - STOCK BASED COMPENSATION
The Company uses the intrinsic-value method of accounting for stock based
compensation. Under this method, compensation cost is the excess, if any, of the
fair value over the amount an employee must pay to acquire the stock at the date
of the grant. The Company generally grants options with an exercise price equal
to the market value of the common stock at the date of grant.
The Black-Scholes option price model was used to estimate the fair value as of
the date of grant using the following assumptions:
Dividend yield 0%
Risk-free interest rates 4.35%
Volatility 163.00%
Expected option term (years) 9.61
Weighted-average fair value of options
granted during the year $1.50
If the Company had determined compensation expense for the Plan based on the
fair value at the grant dates consistent with the method of SFAS No. 123 and
SFAS No. 148, the Company's pro-forma net loss and basic loss per share would
have been as follows:
11
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Net loss as reported $ (163,758,000) $ (5,768,000)
Stock based compensation expense, net of
tax ($0) included in the determination of
net loss as reported
$ (36,966,000) $ --
Stock based compensation expense
under the fair value based
method, net of tax ($0) $ (36,980,000) $ (14,000)
Pro forma net loss $ (163,772,000) $ (5,782,000)
Basic and diluted net loss per
share, as reported $ (3.81) $ (.52)
Pro forma basic and diluted net
loss per share $ (3.81) $ (.52)
NOTE F - RELATED PARTY TRANSACTIONS
Included in accrued expenses are amounts owed an executive officer and director
of $882,119 and $646,667 at March 31, 2005 and December 31, 2004, respectively,
for back salary and reimbursable expenses incurred on behalf of the Company.
In September 2004, Northern Lights Software Limited ("Northern Lights"), a
company registered in the United Kingdom, and Gizmondo Europe entered into a
License Agreement, pursuant to which Northern Lights licensed the games Chicane
and Colors and provided software development services to Gizmondo Europe.
During 2004, Gizmondo Europe paid Northern Lights a total of $3,513,000 under
the License Agreement, which amount was invoiced during the regular course of
business. Carl Freer, Chairman of the Company's Board of Directors, and Stefan
Eriksson are directors of both Northern Lights and Gizmondo Europe and each is
the beneficial owner of 23.5% of the issued and outstanding share capital of
Northern Lights. At December 31, 2004, the outstanding balance payable to
Northern Lights was $906,000, which amount was subsequently paid in 2005. Carl
Freer repaid this amount to an escrow account held by the Company on September
29, 2005, pending the determination of a special committee of independent
directors of the fairness of the transaction to the Company, relying upon
independent counsel and a fairness opinion of independent financial experts.
In 2004 and the first quarter of 2005, Gizmondo Europe paid Anneli Freer, the
spouse of Mr. Carl Freer, $116,000 and $57,831, respectively, for consultancy
services provided to Gizmondo Europe. Mrs. Freer provided marketing and public
relations services, an introduction to the performer Sting and time spent in
connection with the creation of the "Agaju" gaming concept currently in
development. Carl Freer reimbursed the Company for these entire amounts on
September 28, 2005. This amount was recorded as additional paid in capital upon
receipt.
In 2004, the Company paid $163,855 to Bankside Law for legal fees incurred on
behalf of Mr. Freer, personally. The Company included this amount as additional
12
compensation to Mr. Freer. Carl Freer reimbursed the Company for these entire
amounts on September 28, 2005. This amount was recorded as additional paid in
capital upon receipt.
During 2004, Mr. Carl Freer and Mr. Stefan Eriksson entered into a multi-party
transaction, whereby they caused Asiatic Bank and Finance, a company registered
in Panama with its head office in Hong Kong, to pay $7,622,000 that was
previously owed by Asiatic to Messrs. Freer and Eriksson directly to 3P PreForm
Marketing and Research AB and other non-affiliated third parties in repayment of
research and development expenditures owed to these parties by Gizmondo Europe.
Gizmondo Europe then credited this amount in payment of amounts previously owed
by Carl Freer and Stefan Eriksson to Gizmondo Europe. Asiatic Bank and Finance
owns 400,000 shares of common stock of the Company that it acquired in November
2003 at a price of $.50 per share.
Gizmondo Europe maintains directors accounts whereby amounts owing to and from
directors of Gizmondo Europe are netted in order to facilitate advances made and
expenses incurred by directors. During 2004, Gizmondo Europe was owed as much as
$5,723,860, and $3,122,210, by Messrs. Freer and Eriksson, respectively. Prior
to his becoming a director of the Company in August 2004, all amounts owed by
Mr. Freer and a portion of amounts owed by Mr. Eriksson were satisfied by
Asiatic in the transaction described in the preceding paragraph. As of December
31, 2004, Mr. Eriksson owed $204,081 to Gizmondo, which loans were subsequently
repaid. During 2005, Mr. Eriksson owed as much as $114,066 to Gizmondo Europe,
all of which has been repaid.
Several of the transactions described above were consummated without prior
approval by the Company's Board of Directors. Since the Company had three
directors, all of whom are involved in management of the Company and its
subsidiaries, none of these transactions were approved by independent directors.
On September 29, 2005, the Company appointed three independent directors. With
respect to the transactions in 2004 described above in which Mr. Carl Freer,
Mrs. Carl Freer and/or Mr. Stefan Eriksson had an interest, respectively, the
Company appointed the three independent directors as a special committee of the
Board, authorized to retain independent counsel and other experts and with their
assistance investigate, review and determine the fairness of these transactions
and, if appropriate, initiate remedial actions. The independent directors have
retained Marshall Stevens to assist in valuing these transactions.
NOTE G - INVENTORY
Inventories are stated at the lower of cost (specific identification basis) or
market, and consist of the following at March 31, 2005 and December 31, 2004:
2005 2004
---------- ----------
Electronic components $ 38,532 $ 38,532
Finished goods $ 560,927 --
---------- ----------
Total $ 599,459 $ 38,532
========== ==========
13
NOTE H - FOREIGN TAX ACCRUAL
The Company has accrued a UK Tax that may be levied on the restricted common
stock issued to employees as compensation.
NOTE I - LONG-TERM DEBT
The Company has increased long-term debt from $488,000 at December 31, 2004, to
$1,318,000 at March 31, 2005. The loans are secured by automobiles, some of
which are classified as assets held for sale. The loans are payable in monthly
installments over five years through January 2009.
NOTE J - CONTINGENCIES
In August 2005, the Company filed an action against Integra SP Holdings Limited
and Integra SP Nominee Limited (collectively "Integra") seeking a declaratory
judgment that the Company had properly terminated a stock purchase agreement
between the Company and Integra. In November 2004, the Company entered into an
agreement with Integra to acquire all of the outstanding share capital of
Integra SP Holdings Limited for Company common stock with a market value of
approximately $35 million based on $14.06 per share. The agreement, which was
amended in January 2005, required the satisfaction of numerous conditions in
order to close. Several of those conditions were not satisfied and on July 7,
2005, the Company notified Integra that it had elected to terminate the
agreement. In connection with entering into the agreement the Company had also
loaned Integra $1,541,280 under a debenture providing for loans by the Company
of up to $1,926,600 secured by Integra's intellectual property rights.
Termination of the stock purchase agreement entitles the Company to demand
payment on the debenture with 60 days notice, which the Company did on July 7,
2005. The loan is included as other receivables. The Company considers this loan
to be recoverable given the value of the collateral securing this loan.
On August 19, 2005, Ogilvy Group Sweden Limited ("Ogilvy") commenced an action
against Gizmondo Europe Limited in the Stockholm District Court to collect
approximately $4.1 million plus interest allegedly owed to Ogilvy for marketing
and advertising services provided to Gizmondo Europe during 2003 and 2004.
Gizmondo Europe's relationship with Ogilvy was terminated on June 30, 2005.
Pursuant to a Securities Lending Agreement, the Company issued 400,000 shares of
its common stock to Ogilvy as collateral for Gizmondo Europe's obligations to
Ogilvy. At March 31, 2005, the value of these shares is included in accounts
payable. On October 3, 2005, Ogilvy filed an action against the Company and
Gizmondo Europe in the U. S. District Court, Southern District of New York, to
recover the amounts described above based on alleged defaults under the
Securities Lending Agreement.
On August 29, 2005, an affiliate of Ogilvy, Ogilvy Public Relations Worldwide,
Inc. ("Ogilvy PR"), commenced an arbitration proceeding in New York City against
Gizmondo Europe and the Company to collect approximately $305,000 plus interest
allegedly owed to Ogilvy PR for public relations services under an agreement
dated June 30, 2004. On September 20, 2005, the Company and Ogilvy PR settled
this dispute for $125,000 to be paid by the Company.
On September 2, 2005, MTV Networks Europe demanded payment of $1,527,500
previously invoiced to Gizmondo Europe under an agreement dated March 31, 2005
with Gizmondo Europe guaranteed by the Company. The agreement provides for
14
sponsorship fees of $2,600,000 plus VAT and airtime advertising fees of
$2,600,000. MTV Networks Europe has terminated the agreement effective September
9, 2005, reserving its right to bring legal proceedings for payment of the
outstanding invoices and damages for lost profits resulting from termination of
this agreement. Management anticipates an amicable settlement based on current
discussions with MTV.
Early in the third quarter of 2005, HandHeld Games, Inc. filed suit against the
Company for damages and costs in excess of $200,000 as a result of a dispute
between the Company and HandHeld Games over a game development contract for the
game "Chicane". The suit is in the discovery stages, but the Company believes it
has meritorious defenses and does not expect the outcome of the matter to have a
material effect on the financial condition of the Company.
In October 2004, Gizmondo Europe Ltd, (Gizmondo), a subsidiary of the Company
signed a contract with SCi Entertainment Group Plc (SCi), a leading games
publisher, under which Gizmondo has licensed the right to develop and publish
twelve SCi products for the Gizmondo platform. The agreement covers both
currently released titles as well as those in the pipeline, and establishes the
structure for continuing collaboration between the two companies. The agreement
has Gizmondo paying a minimum guarantee of approximately $1,250,000 allocated by
and among 12 products. The guarantee, which has been paid, is non-refundable but
fully recoverable against earned royalties of each product. An earned royalty of
5% of net receipts is to be paid on each product.
NOTE K - WARRANTS
During 2004, the Company issued warrants to purchase 250,000 shares of common
stock at an exercise price of $5 per share. The warrants are exercisable
immediately and expire on September 30, 2009. The Company also granted warrants
to purchase 245,525 shares of common stock at an exercise price of $11.25 per
share. These warrants are exercisable immediately and expire on June 30, 2006.
At March 31, 2005 and December 31, 2004, 495,525 warrants were outstanding. None
have been exercised.
NOTE L - ACQUISITIONS
The Company acquired several subsidiaries during 2004, ISIS Models, Ltd., Indie
Studios AB and four subsidiaries of Warthog, PLC.
The following proforma information reflects the net sales, net loss, and per
share amounts for the first quarter of 2004 as if the Company had made the 2004
Acquisitions on January 1, 2004.
March 31,
2004
------------
Pro forma net sales $ 3,582,000
Pro forma net loss $ 10,633,000
Pro forma basic and diluted net loss ($0.83)
per common share
Weighted average shares outstanding
- basic and diluted 12,784,247
15
NOTE M - SUBSEQUENT EVENTS
In August 2005, Gizmondo Europe and U. S. game developer Electronic Arts entered
into a Software Development Contract for the development of two games, FIFA and
FXXFSX. In connection with this contract, Gizmondo Europe paid Electronic Arts
$5.9 million.
In May 2005, two entities that are shareholders of the Company provided an
aggregate total of approximately $21.2 million in short term loans to Gizmondo
Europe. The loans are payable on October 31, 2005. The loans are guaranteed by
Carl Freer and Stefan Eriksson, personally. The Company also pledged 1,027,069
shares of its common stock as collateral for the loans.
During the second quarter of 2005, as payment for interest and loan fees, the
Company (i) issued 1,200,000 of its restricted common stock valued at
approximately $5,000,000 and (ii) granted warrants to purchase 3,027,069 shares
of the its restricted common stock for $8.00 per share. The warrants are valued
at approximately $2,512,876. The warrants are exercisable at any time and expire
as follows: December 31, 2005 - 1,027,069 shares; December 31, 2006 - 2,000,000
shares.
Carl Freer loaned the Company $1,840,000 on September 18, 2005, and paid an
additional $1,489,000 on behalf of the Company to satisfy a payable due to a
component supplier. These amounts are interest free demand notes. The Company
satisfied these amounts shortly thereafter.
On September 8, 2005, the Company executed a Stock Purchase Agreement with
certain stockholders of Globicom, Inc., a Texas corporation, and closed the
transaction on that date, for the acquisition of approximately eighty-four
percent (84%) of the issued and outstanding common stock of Globicom, Inc. The
Company acquired Globicom in a move to provide wireless network support and
expand the wireless infrastructure for Gizmondo. The Company paid $200,000 in
cash and issued 116,859 shares of its restricted common stock on September 8,
2005. An additional contingent cash payment of $120,000 is due upon the
completion of certain milestones.
Payments amounting to $3,971,000 have been made to Games Factory Publishing Ltd
in connection with a games development agreement entered into in August 2005 for
the development of 19 games to be used on the Gizmondo handheld device. A 50%
shareholder of Games Factory Publishing Ltd owns 100,000 shares of the Company's
common stock. In October 2005, the Company exercised a withdrawal provision in
the agreement due to a delay in game delivery and received a reimbursement of
all amounts previously paid to Games Factory.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 23E of the Securities
Act of 1934, as amended. These statements relate to future events or future
financial performance. Any statements contained in this report that are not
statements of historical fact may be deemed to be forward-looking statements and
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. In some cases, forward-looking statements can be
identified by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "intend", "believe," "estimate," "predict," "potential" or
"continue," or the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
Investors are cautioned that these forward-looking statements reflect numerous
assumptions and involve risks and uncertainties that may affect the Company's
business and prospects and cause actual results to differ materially from these
forward-looking statements. Among the factors that could cause actual results to
differ are the Company's operating history; competition; low barriers to entry;
reliance on strategic relationships; rapid technological changes; inability to
complete transactions on favorable terms; consumer demand for video game
hardware and software; the timing of the introduction of new generation
competitive hardware systems; pricing changes by key vendors for hardware and
software and the timing of any such changes, and the adequacy of supplies of new
software products.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither the
Company, nor any other person or entity, assumes responsibility for the accuracy
and completeness of the forward-looking statements. The Company is under no
obligation to update any of the forward-looking statements after the filing of
this Form 10-Q to conform such statements to actual results or to changes in the
Company's expectations.
The following discussion should be read in conjunction with the Company's
financial statements, related notes and the other financial information
appearing elsewhere in this Form 10-Q.
General Overview
In early 2003, the Company began developing a new multi-entertainment wireless
handheld gaming device that is now referred to as Gizmondo. Since then the
Company's primary business strategy has been to develop and market Gizmondo. The
Company initially launched a limited production version of the Gizmondo in the
UK on March 19, 2005, and expects to launch the full-scale production of
Gizmondo and selling in the U.S. market in the fourth quarter of 2005. The
Gizmondo is powered by a Microsoft Windows CE.net platform, has a 2.8-inch TFT
color screen and a Samsung ARM9 400Mhz processor and incorporates the GoForce 3D
4500 NVIDIA graphics accelerator. Gizmondo provides cutting-edge gaming,
multimedia messaging, an MP3 music player, Mpeg4 movie playing capability, a
digital camera and a GPRS network link to allow wide-area network gaming.
Additionally, Gizmondo contains a GPS chip for location based services, is
equipped with Bluetooth for use in multi-player gaming and accepts MMC card
accessories.
17
Three months-ended March 31, 2005 compared to the three months ended March 31,
2004:
Net Sales: The Company's net sales were $420,000 for the three months ended
March 31, 2005 and $0 for the three months ended March 31, 2004. The Company
began selling its Gizmondo products in the United Kingdom in 2005. In both
quarters the Company has focused and will continue to focus its full attention
to the development of the Gizmondo device.
Gross Profits: The Company's gross loss was ($35,000) and ($0) for the periods
ended March 31, 2005 and 2004. Sales of the Gizmondo device began in 2005 and
only minor sales amounts have been recorded. Gross profit (loss) at this sales
level is not a meaningful measure.
Selling Expenses: Selling and marketing expenses for the three months ended
March 31, 2005 were $12,557,000 compared with $840,000 for the same time period
in 2004. Most of the increase can be attributed to moving towards the launch of
the Gizmondo device in Europe and the United States in the fourth quarter of
2005. Direct advertising expenses aggregated $892,000 in 2005 as compared to $
50,000 in the first quarter of 2004. Sales promotion activities aggregated
$11,120,000 in 2005 compared to $709,000 in for the same period in 2004.
Additional expenses were incurred in recruiting various distributors and
representatives in various market regions prior to the Gizmondo launch.
General and Administrative Expenses: General and administrative expenses for the
three months ended March 31, 2005 were $151,014,000 compared to $4,890,000 for
2004, or up approximately over $146 million. This increase came primarily from
expenses related to development of the Gizmondo device. The Company incurred
over $5,810,000 million in research and development costs directly attributable
to the Gizmondo in 2005 as compared to approximately $2,600,000 in 2004. All of
these costs are expensed as incurred and are not capitalized for financial
reporting purposes. In addition, salaries and related costs rose to over
$72,592,000 million in 2005 from $750,000 in 2004 as the Company continued in
the product development phase and awarded significant stock bonuses related to
the launch of the Gizmondo product. The Company also incurred over $72,257,000
million of legal, accounting and consulting costs in the first quarter of 2005,
up from $883,000 in 2004, as consultants were engaged to assist the Company in
activities related to the development and launch of the Gizmondo. In the first
quarter of 2005, approximately $113,759,000 of the above costs were paid by
issuance of the Company's restricted common stock.
Interest expense: Interest expense rose to $150,000 from $38,000 during the
quarters ended March 31, 2005 and 2004, respectively as notes payable related to
vehicle purchases increased from approximately $488,000 at March 31, 2004 to
approximately $1,318,000 at March 31, 2005.
Net Loss: The Company reported an operating loss of $163,758,000 for the quarter
ended March 31, 2005 compared to $5,768,000 for the same time period in 2004.
$113,759,000 of this loss was the non-cash cost of issuing shares for services
and goods. The aforementioned costs associated with the development of Gizmondo
account for this material increase in operating loss.
18
Liquidity and Capital Resources
The Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on its financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to investors.
The Company has funded its operations principally through private placements of
its common stock to accredited foreign investors, aggregating over $131,000,000
in cash since 2002 through March 31, 2005, and the issuance of common stock in
exchange for goods and services. During 2004 the Company's working capital
deficit increased from $8,800,000 to over $22,800,000 at December 31, 2004, and
by the end of the first quarter of 2005 the working capital deficit had
increased to over $54,500,000. Accounts payable and accrued expenses have
increased by over $33,000,000 while current assets decreased just over $744,000.
Without such funding, the Company would not have been able to sustain
operations.
A subsidiary of the Company, Warthog, had a $184,400 line of credit with a
balance of $121,500 (included in accrued expenses) outstanding at December 31,
2004. The note was unsecured, due on demand and was repaid in 2005. Interest is
computed at 3% over the bank's base rate.
In May 2005, two entities that are shareholders of the Company provided an
aggregate total of approximately $21.2 million in short term loans to Gizmondo
Europe. The maturity date of these loans has been extended and they are now
repayable for $13.49 million on November 31, 2005 and the additional $7.71
million is anticipated to be extended to October 31, 2005. The loans are
guaranteed by the Company and by Carl Freer and Stefan Eriksson, personally. The
Company also pledged 1,027,069 shares of its common stock as collateral for the
loans.
Carl Freer loaned the Company $1,840,000 on September 18, 2005, and paid an
additional $1,489,000 on behalf of the Company to satisfy a payable due to a
component supplier. These amounts are interest free demand notes. These amounts
have been satisfied by the company shortly thereafter.
From April 1, 2005 through September 30, 2005 the Company obtained additional
equity capital aggregating over $78,000,000 in cash and services. The Company
will seek to raise additional equity capital and will seek trade or bank
financing as needed to fund the development and the launch of the Gizmondo
product in different regions as needed. Management anticipates that it can
continue to raise equity capital through private placements of its common stock.
However, there can be no assurance that any future capital or other financing
will be available, or if available on terms reasonably acceptable to the
Company.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. Management bases its estimates on historical
experience and various other assumptions believed to be reasonable. Although
these estimates are based on management's best knowledge of current events and
actions that may impact the company in the future, actual results may be
different from the estimates. Our critical accounting policies are those that
affect our financial statements materially and involve difficult, subjective or
complex judgments by management. Those policies are stock-based compensation,
income taxes, goodwill impairment and revenue recognition.
19
Stock-Based Compensation
------------------------
We have chosen to account for stock options granted to employees and directors
under the recognition and measurement principles of Accounting Principles Board
Opinion No. 25 instead of the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-based Compensation Transition and Disclosure."
In addition, the Company has routinely exchanged shares of its common stock for
employee compensation and services and in satisfaction of debt owed by the
Company to shareholders. Common stock exchanged for services from employees and
unrelated parties, shareholder debt and suppliers is valued at the appraised
value of the Company's restricted common stock. Any differences between the
appraised value and the stated value of services or debt is charged to
operations.
The shares issued are restricted securities and may not be currently sold. The
value of these restricted securities is determined by an independent business
valuation expert on a quarterly basis. Management believes that the appraised
value is a better indication of the fair value of the restricted shares issued
than the price of freely traded shares in the open market due to the large
number of issued restricted shares.
Income Taxes
------------
The calculation of the Company's income tax provision and related valuation
allowance is complex and requires the use of estimates and judgments in its
determination. As part of the Company's evaluation and implementation of
business strategies, consideration is given to the regulations and tax laws that
apply to the specific facts and circumstances for any transaction under
evaluation. This analysis includes the amount and timing of the realization of
income tax liabilities or benefits. Management closely monitors tax developments
in order to evaluate the effect they may have on the Company's overall tax
position.
Impairment of Goodwill and Other Intangible Assets
--------------------------------------------------
Goodwill represents the excess of the cost of an acquisition over the fair value
of the net assets acquired. The Company tests goodwill and other intangible
assets on an annual basis, or more frequently if events or circumstances
indicate that there may have been impairment. The goodwill impairment test
estimates the fair value of each reporting unit, through the use of a discounted
cash flows model, and compares this fair value to the reporting unit's carrying
value. The goodwill impairment test requires management to make judgments in
determining the assumptions used in the calculations. Management believes
goodwill is not impaired and is properly recorded in the financial statements.
Revenue Recognition
-------------------
The Company enters into agreements to sell products (hardware or software),
services, and other arrangements that include combinations of products and
20
services. Revenue from product sales, net of trade discounts and allowances, is
recognized provided that persuasive evidence of an arrangement exists, delivery
has occurred, the price is fixed or determinable, and collectibility is
reasonably assured. Delivery is considered to have occurred when title and risk
of loss have transferred to the customer. Revenue is reduced for estimated
product returns and distributor price protection, when appropriate. For sales
that include customer-specified acceptance criteria, revenue is recognized after
the acceptance criteria have been met. Revenue from services is deferred and
recognized over the contractual period or as services are rendered and accepted
by the customer. When arrangements include multiple elements, we use objective
evidence of fair value to allocate revenue to the elements and recognize revenue
when the criteria for revenue recognition have been met for each element. The
amount of product revenue recognized is affected by our judgments as to whether
an arrangement includes multiple elements and if so, whether vendor-specific
objective evidence of fair value exists for those elements. Changes to the
elements in an arrangement and the ability to establish vendor-specific
objective evidence for those elements could affect the timing of the revenue
recognition. Most of these conditions are subjective and actual results could
vary from the estimated outcome, requiring future adjustments to revenue.
Research and Development
------------------------
The Company expenses research and development costs as incurred.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
No market risk sensitive instruments
Item 4. Controls and Procedures.
In August 2005, the Company began a remediation program to correct the
deficiencies noted in Management's Report on Internal Control over Financial
Reporting in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004. The Company retained BDO Seidman to assist in preparing a
remediation plan. The plan was developed in October 2005 and is currently in the
design and implementation phase. The Company is planning to remediate all of the
areas of deficiency prior to the year end, December 31, 2005. For additional
information regarding Management's Report on Internal Control over Financial
Reporting, see the Company's Annual Report on Form 10-K for the year ended
December 31, 2004.
PART II
TIGER TELEMATICS, INC.
OTHER INFORMATION
Item 1. Legal Proceedings
In August 2005 the Company filed an action against Integra SP Holdings Limited
and Integra SP Nominee Limited (collectively "Integra") seeking a declaratory
judgment that the Company had properly terminated a stock purchase agreement
between the Company and Integra. In November 2004 the Company entered into an
agreement with Integra to acquire all of the outstanding share capital of
Integra SP Holdings Limited for Company common stock with a market value of
approximately $35 million based on $14.06 per share. The agreement, which was
amended in January 2005, required the satisfaction of numerous conditions in
21
order to close. Several of those conditions were not satisfied and on July 7,
2005, the Company notified Integra that it had elected to terminate the
agreement. In connection with entering into the agreement the Company had also
loaned Integra $1,541,280 in 2005 under a debenture providing for loans by the
Company of up to $1,926,600 secured by Integra's intellectual property rights.
Termination of the stock purchase agreement entitles the Company to demand
payment on the debenture with 60 days notice, which the Company did on July 7,
2005. The action was filed in Florida State Court and has been removed by
Integra to the U.S. District Court, Middle District of Florida, Jacksonville
Division. On October 13, 2005, Integra filed a motion for preliminary injunction
seeking the return of certain property held by the Company as collateral for the
debenture.
On August 19, 2005, Ogilvy Group Sweden Limited ("Ogilvy") commenced an action
against Gizmondo Europe Limited in the Stockholm District Court to collect
approximately $4.1 million plus interest allegedly owed to Ogilvy for marketing
and advertising services provided to Gizmondo Europe during 2003 and 2004.
Gizmondo Europe's relationship with Ogilvy was terminated on June 30, 2005.
Pursuant to a Securities Lending Agreement, the Company issued 400,000 shares of
its common stock to Ogilvy as collateral for Gizmondo Europe's obligations to
Ogilvy. On October 3, 2005, Ogilvy filed an action against the Company and
Gizmondo Europe in the U. S. District Court, Southern District of New York, to
recover the amounts described above based on alleged defaults under the
Securities Lending Agreement.
On August 29, 2005, an affiliate of Ogilvy, Ogilvy Public Relations Worldwide,
Inc. ("Ogilvy PR"), commenced an arbitration proceeding in New York City against
Gizmondo Europe and the Company to collect approximately $305,000 plus interest
allegedly owed to Ogilvy PR for public relations services under an agreement
dated June 30, 2004. The agreement was terminated in December 2004. On September
20, 2005, the Company and Ogilvy PR settled this dispute for $125,000 to be paid
by the Company.
Early in the third quarter of 2005, HandHeld Games, Inc. filed suit against the
Company for damages and costs in excess of $200,000 as a result of a dispute
between the Company and HandHeld Games over a game development contract for the
game "Chicane". The suit is in the discovery stages, but the Company believes it
has meritorious defenses and does not expect the outcome of the matter to have a
material effect on the financial condition of the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the first quarter of 2005, the Company sold 1,161,711 shares of
restricted common stock for an aggregate sum of $19,181,644, including,
$1,871,730 of its restricted common stock that was originally recorded as
deposits on common stock and subsequently moved to equity in the first quarter
2005 when the Company issued the common share certificates. The shares were sold
for $3.00 to $20.00 per share.
The Company negotiated the purchase price for the sale of restricted common
stock, based upon the market price of the securities at the time of the
negotiation and with an appropriate discount for the restrictions on resale. The
restricted common stock was issued to sophisticated, accredited foreign
investors or foreign corporations in transactions exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended. Each
investor had access to financial information available in public markets and was
given the opportunity to review the Company's books, records and other
information that they requested. The proceeds were used to fund the Company's
operations.
22
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
Exhibit 31 Rule 13a-14(a).
Exhibit 32 Section 1350 Certification.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized.
TIGER TELEMATICS, INC. October 19, 2005
/S/ Michael W. Carrender
-------------------------
Michael W. Carrender
Chief Executive Officer, Director and
Chief Financial Officer
24