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 September 30, 2004
Commission File Number 001-15977
TIGER TELEMATICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4051167
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
10201 Centurion Parkway North Ste. 600
Jacksonville, FL 32256
(Address of principal executive offices) (Zip Code)
(904) 279-9240
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class May 31, 2005
--------------------------- --------------------------
Common Stock, Par 54,890,859
Value $0.001 per share
CONTENTS
Page
----
Part I
Item 1. Financial Statements
Condensed Consolidated Balance Sheets F-2
Condensed Consolidated Statements of Operations F-3
Condensed Consolidated Statement of Stockholders' Deficiency F-5
Condensed Consolidated Statements of Cash Flows F-6
Notes to Condensed Consolidated Financial Statements F-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations F-15
Part II Tiger Telematics, Inc. Other Information
Item 1. Legal Proceedings F-21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds F-22
Item 3. Defaults Upon Senior Securities F-22
Item 4. Submission of Matters to a Vote of Security Holders F-22
Item 5. Other Information F-22
Item 6. Exhibits F-22
F-1
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2004 and December 31, 2003
September 30, December 31,
2004 2003
Unaudited
ASSETS
Current Assets
Cash $ 1,116,030 $ 8,959
Accounts receivable 299,004 2,104
Other receivables 1,343,995 --
Inventories 35,988 35,570
Advances to employees 208,527 --
Prepaid expenses 57,823 45,383
------------- -------------
Total current assets 3,061,367 92,016
Property and equipment, net 699,469 344,376
Goodwill 3,911,835 --
------------- -------------
Total assets $ 7,672,671 $ 436,392
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable $ 10,719,519 $ 3,667,646
Amount due stockholders 75,100 9,191
Notes payable - current portion 43,000 37,140
Accrued expenses 6,130,986 1,750,005
Deposits on common stock 10,231,500 2,247,891
Liabilities of discontinued operations 1,144,480 1,168,243
------------- -------------
Total current liabilities 28,344,585 8,880,116
Notes payable after one year 81,968 123,743
------------- -------------
Total liabilities 28,426,553 9,003,859
------------- -------------
Stockholders' Deficiency
Common stock - 0.001 par value
authorized 500,000,000 and 250,000,000 shares
in 2004 and 2003 respectively. Issued and outstanding
22,975,488 and 9,498,105 in 2004 and 2003 respectively 22,975 9,498
Additional paid-in-capital 44,135,670 13,051,547
Accumulated other comprehensive loss (688,994) (763,732)
Accumulated deficit (64,223,533) (20,864,780)
------------- -------------
Stockholders' deficiency (20,753,882) (8,567,467)
------------- -------------
Total liabilities and stockholders' deficiency $ 7,672,671 $ 436,392
============= =============
See Notes to Consolidated Financial Statements
F-2
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30, 2004 and 2003
Unaudited
2004 2003
------------ ------------
Net sales $ 268,095 $ 230
Cost of goods sold 296,923 9,557
------------ ------------
Gross loss (28,828) (9,327)
------------ ------------
Operating expenses
Selling 3,971,312 68,757
General and administrative 13,894,092 1,034,077
------------ ------------
Total operating expenses 17,865,404 1,102,834
------------ ------------
Operating loss (17,894,232) (1,112,161)
------------ ------------
Other income (expense)
Other income 7,536 --
Interest expense (7,179) (11,475)
------------ ------------
357 (11,475)
------------ ------------
Net loss $(17,893,875) $ (1,123,636)
============ ============
Basic and diluted net loss per common share $ (0.87) $ (0.27)
============ ============
Weighted average shares outstanding
(basic and diluted) 20,571,366 4,158,719
============ ============
See Notes to Consolidated Financial Statements
F-3
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended September 30, 2004 and 2003
Unaudited
2004 2003
------------ ------------
Net sales $ 451,924 $ 8,477
Cost of goods sold 446,137 13,859
------------ ------------
Gross profit (loss) 5,787 (5,382)
------------ ------------
Operating expenses
Selling 5,993,240 165,709
General and administrative 37,332,413 1,829,916
------------ ------------
Total operating expenses 43,325,653 1,995,625
------------ ------------
Operating loss (43,319,866) (2,001,007)
------------ ------------
Other income (expense)
Other income 22,532 --
Interest expense (61,419) (35,853)
------------ ------------
(38,887) (35,853)
------------ ------------
Net Loss $(43,358,753) $ (2,036,860)
============ ============
Basic and diluted net loss per common share $ (2.70) $ (0.56)
============ ============
Weighted average shares outstanding
(basic and diluted) 16,032,697 3,640,130
============ ============
See Notes to Consolidated Financial Statements
F-4
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
For the nine months ended September 30, 2004
Unaudited
Accumulated
Additional Other Total
Common Stock Paid-in Comprehensive Accumulated Stockholders'
Shares Amount Capital Loss Deficit Deficiency
Balance (deficiency)
December 31, 2003 9,498,105 $ 9,498 $ 13,051,547 $ (763,732) $(20,864,780) $ (8,567,467)
Issuance of common stock:
Private placement 6,937,045 6,937 16,365,521 -- -- 16,372,458
Conversion of notes
payable and amounts due
Stockholders 65,000 65 54,935 -- -- 55,000
Acquisition of 1,200,000 1,200 2,831,600 -- -- 2,832,800
subsidiaries
Services 5,275,338 5,275 11,832,067 -- -- 11,837,342
Net loss -- -- -- (43,358,753) (43,358,753) (43,358,753)
Other comprehensive income
-foreign currency
translation adjustment 74,738 74,738
------------
Total comprehensive loss (43,284,015)
============
Balance (deficiency)
September 30, 2004 22,975,488 $ 22,975 $ 44,135,670 $ (688,994) $(64,223,533) $(20,753,882)
============ ============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements
F-5
TIGER TELEMATICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2004 and 2003
Unaudited
2004 2003
------------ ------------
Cash Flows from Operating Activities:
Net Loss $(43,358,753) $ (2,036,860)
Other comprehensive income (loss) 74,738 (230,056)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Depreciation 140,425 52,140
Expenses paid with common stock 11,837,342 151,600
Impairment of goodwill 55,777 --
Changes in assets and liabilities:
(Increase) in other receivables (1,343,995) --
Increase in accounts payable 6,512,675 1,137,308
Increase (decrease) in accrued expenses 4,276,611 (219,609)
Other - net (214,740) 253,304
------------ ------------
Net cash used in operating activities (22,019,920) (892,173)
------------ ------------
Cash Flows From Investing Activities:
Purchase of property and equipment (463,789) (38,262)
Acquisition of subsidiary (850,281) --
------------ ------------
Net cash used in investing activities (1,314,070) (38,262)
------------ ------------
Cash Flows From Financing Activities:
Issuance of common stock and warrants 16,372,458 901,111
Increase in deposits on common stock 7,983,609 819,123
Loans and advances from stockholders and employees 120,909 --
Repayment to stockholders -- (548,191)
Payments on notes payable (35,915) (15,791)
------------ ------------
Net cash provided by financing activities 24,441,061 1,156,252
------------ ------------
Net change in cash 1,107,071 225,817
Cash:
Beginning of period 8,959 --
------------ ------------
End of period $ 1,116,030 $ 225,817
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 61,419 $ 35,853
============ ============
Supplemental Disclosure of Non-cash Investing and
Operating Activities:
Expenses paid with common stock $ 11,837,342 $ 151,600
============ ============
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Financing Activities:
Conversion of stockholder debt to common stock $ 55,000 $ 24,000
============ ============
Investing Activities:
Cash paid for subsidiary 850,281 --
Common stock issued for acquisition 2,832,800 --
Liabilities in excess of assets acquired 284,531 --
------------ ------------
$ 3,967,612 $ --
============ ============
Acquisition of Subsidiaries:
Goodwill $ 3,967,612
Accounts receivable 327,308
Fixed assets 31,729
Accounts payable (539,198)
Due to related parties (14,437)
Accrued expenses (89,933)
Cash and common stock paid for subsidiaries (3,683,081)
------------
Cash received $ --
============
See Notes to Consolidated Financial Statements
F-7
TIGER TELEMATICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The condensed consolidated financial statements as of September 30, 2004 and for
the three and nine months ended September 30, 2004 and September 30, 2003,
included herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
information for the periods indicated have been included. For further
information regarding the Company's accounting policies, refer to the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the years ended December 31, 2003 and 2002.
The consolidated financial statements include the accounts of Tiger Telematics,
Inc. (Company), the public held parent company, Tiger Telematics USA, Inc.
(Tiger USA), a near dormant subsidiary, Tiger Telematics Europe, Ltd. (Tiger
Europe), ISIS Models Ltd. (ISIS), acquired in May 2004 and Indie Studios, AB
(Indie), acquired in August 2004. The Company started Tiger Europe (now named
Gizmondo Europe Ltd.) in December 2002 and a related entity Childtracker Ltd. (a
development entity) that existed as a part of Tiger Europe's focus on developing
new telematics products including next generation fleet telematic products, the
child tracker products and the handheld multi-entertainment gaming device now
called Gizmondo. Intercompany accounts and transactions have been eliminated.
The financial statements for the three and nine months ended September 30, 2003,
were not reviewed by the Company's independent certified public accountants.
However, the financial statements for the year ended December 31, 2003, have
been audited by the Company's independent certified public accountants. The
Company's management believes that a review by the Company's independent
certified public accountants of the financial statements mentioned above would
not result in any material changes to these financial statements. See Note J to
the financial statements - Restatement of 2003 financial statements.
Liquidity:
The Company has sustained net losses over the past three years and at September
30, 2004, had a net working capital deficit of approximately $25,283,000. The
Company reclassified deposits on common stock of $10,231,500 to equity in the
fourth quarter of 2004 when the Company issued the common share certificates.
Management sold off its unprofitable flooring business and is pursuing its
telematics business and the wireless handheld multi-entertainment gaming device,
Gizmondo. The Company anticipates issuing equity securities to meet working
capital requirements and to fund development costs incurred in connection with
developing Gizmondo and telematics related products until sales of these
products generate sufficient cash to fund its operations.
F-8
Description of the Business:
The Company and its wholly owned subsidiaries are engaged in the business of
developing and marketing the Gizmondo wireless handheld multi-entertainment
gaming device.
The Company started Gizmondo Europe, Ltd. in late 2002 to focus on developing
new telematics products including next generation fleet telematics products.
In early 2003, the Company began developing a new multi-entertainment wireless
handheld gaming device that is now referred to as Gizmondo. Since then the
Company's primary business strategy has been to develop and market Gizmondo. The
Company initially launched a limited production version of the Gizmondo in the
UK on October 29, 2004, and launched the full-scale production of Gizmondo in
2005.
Segment Information: The Company focuses primarily all of its business in one
segment, the development, production, and sale of the handheld
multi-entertainment gaming device, Gizmondo.
NOTE B - ADVANCES TO AND AMOUNTS DUE EMPLOYEES AND STOCKHOLDERS AND OTHER
RECEIVABLES
The advances are due from employees and stockholders of subsidiaries of the
Company of $208,527 and 0 in 2004 and 2003, respectively, are due on demand,
without interest.
Amounts due to employees and stockholders of $75,100 and $9,191 in 2004 and
2003, respectively, are due on demand, without interest.
Other receivables of $1,343,995 at September 30, 2004 primarily consist of VAT
tax recoverable from government agencies.
NOTE C - EQUITY TRANSACTIONS
The Company issued 1,684,289 shares of restricted common stock during the third
quarter of 2004 in payment of services provided by unrelated vendors,
principally consulting, related to product development. The shares issued were
valued at $2.32 to $3.08 per share.
During the third quarter of 2004, the Company sold 2,775,806 shares of
restricted common stock primarily for $1.25 to $11.25 per share.
During the year ended December 31, 2004, the Company issued approximately
26,808,502 shares of restricted common stock, as follows:
F-9
Shares Dollars
Private placement 13,284,731 $ 55, 119,987
Conversion of debt to equity 80,000 $ 107,650
Satisfaction of contingencies 160,000 --
Acquisition of subsidiaries 1,537,866 $ 4,450,864
Payment for services 11,745,905 $ 34,313,896
------------- -------------
Total 26,808,502 $ 93,992,397
============= =============
Shares issued during the first quarter of 2005 16,928,664
=============
Shares issued and outstanding at March 31, 2005 53,235,271
=============
Shares issued from April 1 to May 31, 2005 1,655,588
=============
NOTE D- REVERSE STOCK SPLIT AND INCREASE IN AUTHORIZED SHARES
In July 2004, the Company's shareholders approved a 1 for 25 reverse stock
split. The number of authorized shares and par value were unchanged. All common
stock amounts have been adjusted to reflect this change for all periods
presented.
In May 2003, the Company's shareholders approved an increase in the number of
authorized shares from 100 million shares to 250 million shares. In January
2004, the authorized shares were increased to 500 million shares.
NOTE E - STOCK BASED COMPENSATION
The Company uses the intrinsic-value method of accounting for stock based
compensation. Under this method, compensation cost is the excess, if any, of the
quoted market price over the amount an employee must pay to acquire the stock at
the date of the grant. The Company generally grants options with an exercise
price equal to the market value of the common stock at the date of grant.
The Black-Scholes option price model was used to estimate the fair value as of
the date of grant using the following assumptions:
Dividend yield 0%
Risk-free interest rates 4.35%
Volatility 163.00%
Expected option term (years) 9.61
Weighted-average fair value of options
granted during the year $1.50
F-10
If the Company had determined compensation expense for the Plan based on the
fair value at the grant dates consistent with the method of SFAS No. 123 and
SFAS No. 148, the Company's pro-forma net loss and basic loss per share would
have been as follows:
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Net loss as reported $ (43,358,753) $ (2,036,860)
Stock based compensation expense
under the fair value based
method, net of tax ($0) $ (40,500) $ (40,500)
Pro forma net loss $ (43,399,253) $ (2,077,360)
Basic and diluted net loss per
share, as reported $ (2.70) $ (.56)
Pro forma basic and diluted net
loss per share $ (2.71) $ (.57)
NOTE F - RELATED PARTY TRANSACTIONS
Included in accrued expenses are amounts owed an executive officer and director
of $244,615 and $136,571 at September 30, 2004 and December 31, 2003,
respectively, for back salary and reimbursable expenses incurred on behalf of
the Company.
NOTE G - INVENTORY
Inventories are stated at the lower of cost (specific identification basis) or
market, and consist of electronic components.
NOTE H - CONTINGENCIES
A shareholder of the Company borrowed some of the funds advanced to the Company
(with funds going to Tiger Telematics, Ltd. (Tiger Ltd), a former subsidiary of
the Company) from a private investment bank, London International Mercantile
Bank (LIM), based in London. The shareholder failed to repay the note when due
and LIM made demand on Tiger Ltd to repay the funds. The Company maintained that
it was not responsible for that obligation and responded to the demand
accordingly. Tiger Ltd entered into a settlement agreement the Court approved as
a Tomblin Order where the demand note payable to the shareholder was forgiven in
exchange for the Company entering into an installment note for approximately
$475,000, to be paid over time directly to LIM. The shareholder remained
contingently obligated for the sum owed plus interest in event that the payment
was not made timely by Tiger Ltd. The Company issued a limited guaranty for the
obligation to LIM.
The settlement agreement called for monthly payments at a variable interest
rate. Tiger Ltd repaid approximately $80,000 prior to the sale of the business
on December 17, 2002. Following the sale of Tiger Ltd, the Company was apprised
that Tiger Ltd was placed in liquidation insolvency under the laws of the United
Kingdom for failure to make the payments required under this arrangement.
F-11
LIM made demand on the Company for approximately $450,000 under the guarantee
but has made no attempt to collect on the guaranty as it pursues its direct
remedies against the original borrower of the funds. LIM also holds 140,000
shares of the Company's common stock and certain real estate provided by the
original borrower as collateral. The Company has reserved an amount that it
believes will cover any obligation that may arise. The Company has been advised
by the Shareholder that the obligation has now been retired.
On April 26, 2002, the Company entered into a Lease Agreement with Christian and
Timbers UK Ltd (C&T) for office premises for its subsidiary for a term of five
years. The Company paid the first year's rent by issuing 20,000 shares of common
stock. The subsidiary subsequently defaulted on the lease arrangement. In the
summer of 2003, C&T sued the Company pursuant to the Company's guarantee. In
October 2003, the Company entered into a judgment stipulation for $300,000 to
settle all obligations under the guarantee. The Company has issued shares of
common stock to C&T that it believes will satisfy the amount of the outstanding
judgment.
In March 2004, Jordan Grand Prix Limited, filed suit against the Company in the
High Court of Justice, Queen's Bench Division (Central Office), London, UK,
alleging violation of a sponsorship agreement and dated letter agreement entered
into in July 2003. Jordan sued the Company for $3 million and alleged that the
Company defaulted on a payment of $500,000, due on January 1, 2004, under the
sponsorship agreement, and a payment for $250,000, due on the same date under
the letter agreement. On February 26, 2004, Jordan terminated both agreements.
In order to avoid summary judgment in favor of the plaintiff, the Company
escrowed with the court 70,000 shares of its common stock and prior to trial is
required to substitute $1.5 million for the escrowed shares. In June 2005 the
Company placed an additional 60,000 shares of its restricted stock in escrow.
Trial is set for the week of July 14, 2005. The Company is currently engaged in
court-authorized mediation with Jordan to settle the case. While the Company is
unable to predict the outcome of this litigation, it believes that it has good
and meritorious defenses to the suit and intends to defend vigorously the claims
made against it.
In January 2005, the Company filed a lawsuit against a former investment advisor
of the Company, based on a breach of the agreement between the advisor and the
Company. As payment for investment advisory services, the Company originally
issued 40,000 (1,000,000 pre reverse split) shares of common stock in 2002 and
2003. The advisor subsequently alleged in December 2004 that the Company owed
him an additional 960,000 shares of common stock to maintain his ownership in
the Company at 1,000,000 shares. In April 2005, the Company and the advisor
agreed to settle all claims, with the Company issuing an additional 60,000
shares of common stock to the advisor.
In October 2004, Gizmondo Europe Ltd. (Gizmondo), a subsidiary of the Company
signed a contract with SCi Entertainment Group Plc (SCi), a games publisher,
under which Gizmondo has licensed the right to develop and publish twelve SCi
products for the Gizmondo platform. The agreement covers both currently released
titles as well as those in the pipeline, and establishes the structure for
continuing collaboration between the two companies.
The agreement has Gizmondo paying a minimum guarantee of approximately
$1,250,000 allocated by and among 12 products. The guarantee, which has been
paid, is non-refundable but fully recoverable against earned royalties of each
product. An earned royalty of 50% of net receipts is to be paid on each product.
F-12
On March 22, 2005, the Board of Regents of the University of Texas System filed
an action against the Company and one of its subsidiaries, Gizmondo Europe, Ltd.
in the United States District Court for the Western District of Texas, Austin
Division, alleging that predictive text software used in the Company's Gizmondo
gaming device infringes a patent held by the Board of Regents. The Company
believes that its software does not infringe the Board of Regents' patent. The
Company licenses this software from another company, which under the license
agreement has indemnified the Company for infringement claims. The Company and
its licensor intend to vigorously defend the infringement claims against the
Company and Gizmondo Europe, Ltd.
Early in the third quarter of 2004, Hand Held Games, Ltd. filed suit against the
Company for $75,000 plus damages and costs as a result of a dispute between the
Company and Hand Held 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.
NOTE I - WARRANTS
The Company had outstanding at September 30, 2004, 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 had
outstanding warrants to purchase 245,525 shares of common stock at an exercise
price of $11.25 per share, which are exercisable immediately and expire on June
30, 2006.
NOTE J - RESTATEMENT OF 2003 FINANCIAL STATEMENTS:
The net loss for the quarter ended September 30, 2003 has been restated by
$314,202 from $(1,437,838) to $(1,123,636) to reflect the effect of audit
adjustments made during the 2002 and 2003 audit that was completed subsequent to
the date these financial statements were originally issued and the effect of
reclassifying foreign currency exchange losses from operations to Accumulated
Other Comprehensive Loss. The net loss for the nine months ended September 30,
2003 has been restated by $340,173 from $(2,377,033) to $(2,036,860) for the
same reasons as stated in the preceding sentence.
NOTE K - ACQUISITIONS
ISIS Models Ltd.
In May 2004 Gizmondo Europe, Ltd. acquired a seventy-five percent (75%) interest
in ISIS Models Ltd., for 40,000 shares of the Company's restricted common stock
issued in the third quarter of 2004, valued at $92,800. Because liabilities
acquired exceed assets obtained and the Company is expected to absorb future
losses, the minority interest is valued at zero and any allocation of future net
income or losses is not expected to be material. ISIS was acquired to provide
marketing support and arrangements for Gizmondo. The Company also assumed
liabilities in excess of the value of tangible assets acquired of $223,099. ISIS
is the successor company to ISIS Models Management Limited, a company that has
previously ceased operations. From the date of acquisition through June 30,
2004, ISIS generated revenue of $183,829. The excess of purchase price over the
value of the tangible assets acquired ($315,899), was assigned to Goodwill. The
Company subsequently realized an impairment loss of approximately $56,000, which
is included in general and administrative expenses.
F-13
Indie Studios
On August 2, 2004, Gizmondo closed the purchase of 100% of the net assets of
Indie pursuant to a Purchase Agreement dated May 20, 2004 for one million shares
of the Company's restricted common stock. Indie was acquired to enhance the
Company's game development operations. There are also 600,000 contingent shares
reserved for future issuance based on the completion of two games in progress as
of the acquisition date. The games were completed in January 2005 and the
contingent shares were issued. The value of the contingent shares, approximately
$4,560,000, was charged to Research & Development expense in the first quarter
of 2005. The Company assumed the excess of liabilities over the value of
tangible assets acquired of approximately $61,400; paid cash of approximately
$850,000 and issued stock valued at $2,740,000. The excess of purchase price
over the value of the tangible assets acquired ($3,651,713), was assigned to
Goodwill.
Indie had no sales and total expenses incurred in 2004 prior to the acquisition
were approximately $375,000.
The following proforma information reflects the net sales, net loss and per
share amounts for the nine-month period ended September 30, 2004, as if the
Company had acquired ISIS and Indie on January 1, 2004. Neither ISIS nor Indie
had operations prior to September 30, 2003. Therefore, no proforma amounts are
shown for the nine-month period ended September 30, 2003.
Pro forma net sales $ 1,444,000
Pro forma net loss $ (43,935,000)
Pro forma basic and diluted net loss per
common share $ (2.57)
Weighted average shares outstanding -
basic and diluted 17,072,697
Goodwill represents the excess of the cost of an acquisition over the fair value
of the net assets acquired. The Company tests goodwill and other intangible
assets on an annual basis, or more frequently if events or circumstances
indicate that there may have been impairment. The goodwill impairment test
estimates the fair value of each reporting unit, through the use of a discounted
cash flows model, and compares this fair value to the reporting unit's carrying
value. The goodwill impairment test requires management to make judgments in
determining the assumptions used in the calculations. Management believes the
remaining goodwill is not impaired and is properly recorded in the financial
statements.
NOTE L - SUBSEQUENT EVENTS
Warthog Plc
The Company executed an Asset Purchase Agreement dated November 3, 2004 and
closed the transaction on that date, for the acquisition of Warthog Plc's
F-14
subsidiaries, intellectual property and assets, in a move to further expand the
Company's games development agenda and management infrastructure. Within two
days of closing, the Company injected approximately $1.3 million into the
Warthog subsidiaries for working capital purposes.
As a result the Company paid $1,113,000 in cash and issued 497,866 shares of its
restricted common stock on November 3, 2004.
Integra SP
The Company executed a share Purchase Agreement dated October 29, 2004 to buy
the shares of Integra SP (Integra), which owns several UK subsidiaries that
provide software for process management and integration of real-time systems.
Integra's domain expertise and Altio product set enable businesses to provide
integration to various financial services institutions supporting a wide range
of formats and protocols. For the fiscal year ended June 30, 2004, Integra had
unaudited revenues of $4.1 million.
The transaction has not closed. When approved, the Company will issue 625,250
shares at closing and escrow 2,794,785 shares for payouts over two years, based
on an earn out formula. The maximum number of shares to be issued under the two
year payout is 1,984,469 and under the earn out is 3,420,035.
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.
F-15
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither the
Company, nor any other person or entity, assumes responsibility for the accuracy
and completeness of the forward-looking statements. The Company is under no
obligation to update any of the forward-looking statements after the filing of
this Form 10-Q to conform such statements to actual results or to changes in the
Company's expectations.
The following discussion should be read in conjunction with the Company's
financial statements, related notes and the other financial information
appearing elsewhere in this Form 10-Q.
General Overview
During 2001 and the first half of 2002, the Company's principal business was the
retail sale of flooring products, including carpet, area rugs, wood and
laminates, at discount prices, to commercial and retail customers. The Company
announced the discontinuation of the flooring business on June 6, 2002, and sold
the related assets on August 9, 2002.
In February 2002, the Company acquired Eagle Eye Scandinavian Distributions,
Ltd., a developer and distributor of telematics products and services to the
business-to-business segment in Europe and changed its name to Tiger Telematics,
Ltd. During 2002, the Company's principal business, selling telematics products
and services, was conducted through Tiger Telematics, Ltd., which was sold on
December 17, 2002.
The Company started Tiger Telematics Europe, Ltd. (now known as Gizmondo Europe,
Ltd.) in late 2002 to focus on developing new telematics products including next
generation fleet telematics products and to focus on marketing principally in
the UK.
Since early 2003, the Company has been developing a new multi-entertainment
wireless handheld gaming device that is now referred to as Gizmondo. The Company
initially launched a limited production version of the Gizmondo in the UK on
October 29, 2004, and launched the full scale production in the UK in March
2005. The Company expects to launch the full scale production of Gizmondo in
Europe and North America in the third quarter of 2005. The Gizmondo is powered
by a Microsoft Windows CE.net platform, has a 2.8-inch TFT color screen and a
Samsung ARM9 400Mhz processor and incorporates the GoForce 3D 4500 NVIDIA
graphics accelerator. Gizmondo provides cutting-edge gaming, multimedia
messaging, an MP3 music player, Mpeg4 movie playing capability, a digital camera
and a GPRS network link to allow wide-area network gaming. Additionally,
Gizmondo contains a GPS chip for location based services, is equipped with
Bluetooth for use in multi-player gaming and accepts MMC card accessories.
Three months-ended September 30, 2004 compared to the three months ended
September 30, 2003
Below is a summary of the results of the Company for the three months ended
September 30, 2004.
F-16
Net Sales: The Company's net sales were $268,000 for the three months ended
September 30, 2004 and were virtually $0 for the three months ended September
30, 2003. In both comparable quarters the Company has focused its full attention
to the development of the Gizmondo device and was not actively selling its GPS
Telematics products in either period. The Company continues to focus on the
development of Gizmondo and realized only incidental sales.
Gross Profits: The Company's gross loss was ($28,000) and ($9,000) for the
periods ended September 30, 2004 and 2003, respectively. The Company expended
funds in each period on the Gizmondo development. The gross loss in 2004 was
from ISIS Models, Ltd.
Selling Expenses: Selling and marketing expenses for the three months ended
September 30, 2004 were $3,971,000 compared with $69,000 for the same time
period in 2003. Most of the increase can be attributed to moving towards
preliminary marketing and market research related to the Gizmondo product.
Testing of the market size and potential market and development of buyer
profiles for the Gizmondo was a focus of expenditures during the 2004 time
period. 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 September 30, 2004 were $13,894,000 compared to $1,034,000
for 2003, or up approximately over $12.8 million. This increase came primarily
from expenses the research and development costs associated with the Gizmondo.
The Company incurred over $8.0 million in development costs directly
attributable to the Gizmondo in 2004. All of these costs are expensed as
incurred and are not capitalized for financial reporting purposes. In addition
salaries rose to over $1.5 million as the Company increased staff during the
product development phase. The Company also incurred over $3.5 million of legal,
accounting and consulting costs in the third quarter of 2004 as consultants were
engaged to assist the Company in activities related to the development and
launch of the Gizmondo. The Company anticipates a significant increase in its
general and administrative expenses in future quarterly periods as part of its
product development strategy.
Net Loss: The Company reported an operating loss of $17,894,000 in the quarter
ended September 30, 2004 compared to $1,124,000 for the same time period in
2003. The aforementioned costs associated with the development of Gizmondo
account for this material increase in operating loss. Management anticipates
that its losses in future quarters will grow materially as development costs for
its new gaming device, Gizmondo, continue to accelerate.
Nine months-ended September 30, 2004 compared to the nine months ended September
30, 2003
Below is a summary of the results of the Company for the nine months ended
September 30, 2004.
Net Sales: The Company's net sales were $452,000 for the nine months ended
September 30, 2004 compared to virtually zero in 2003. The Company is closer to
the release of its Gizmondo device now then it was in 2003. In both comparable
periods, the Company has focused its full attention to the development of the
Gizmondo device and was not actively selling its GPS Telematics products in
either period.
F-17
Gross Profits: Gross profits (loss) were negligible for the nine months ended
September 30, 2004 and for the nine months ended September 30, 2003. The Company
continues to focus on the development of Gizmondo and realized only incidental
sales.
Selling Expenses: Selling and marketing expenses for the nine months ended
September 30, 2004 were $5,993,000 compared with $166,000 for the same
nine-month period in 2003. Most of the increase can be attributed to increases
in staff and salaries as the Company moves towards preliminary marketing and
market research related to the Gizmondo product. Market testing and research of
the market size and potential market and buyer profile for the Gizmondo was a
focus of expenditures during the 2004 time period.
General and Administrative Expenses: General and administrative expenses for the
nine months ended September 30, 2004 were $37,332,000 compared to $1,830,000 for
the same nine month period in 2003, or up approximately over $35.5 million. This
increase came primarily from expenses the research and development costs
associated with the Gizmondo. The Company incurred over $24.5 million in
development costs directly attributable to the Gizmondo. All of these costs are
expensed as incurred and are not capitalized for financial reporting purposes.
In addition, salaries rose to $4.9 million as the Company increased staff during
the product development phase. The Company also incurred $11.8 million of legal,
accounting and consulting costs in 2004 as consultants were engaged to assist
the Company in activities related to the development and launch of the Gizmondo.
The Company anticipates a significant increase in its general and administrative
expenses in future quarterly periods as part of its product development
strategy.
Other Expenses: Other expenses were nil for both 2004 and 2003. Interest expense
was $61,400 on auto and office equipment leases in 2004 as compared to $35,900
in 2003. Interest in 2004 was higher than the same period in 2003 as the
European Gizmondo operations had higher average loan balances.
Net Loss: The Company reported a net loss of $43,359,000 in 2004 compared to
$2,037,000 for the same time period in 2003. The aforementioned costs associated
with the development of Gizmondo account for this material increase in operating
loss. Management anticipates that its losses in future quarters will grow
materially as it expenses development cost for its new Gizmondo gaming device.
Liquidity and Capital Resources
The Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on its financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to investors.
In 2002 through and into the second quarter of 2005, the Company funded its
operating losses and start-up costs principally with loans from stockholders or
other parties and, in increasing amounts, through the issuance of shares of
common stock. Without such equity funding the Company would not have been able
to sustain operations. In the nine months ended September 30, 2004, the
Company's working capital position deteriorated. This was primarily the result
of increases in current liabilities of over $19.5 million, including an increase
in accounts payable of over $7.0 million, an increase in accrued expense of over
$4.3 million, and an increase in deposits on common stock of approximately $8
F-18
million. At the same time current assets increased approximately $3 million,
consisting principally of an increase in other receivables of approximately $1.3
million, an increase in accounts receivable of $297,000 and an increase in cash
of over $1.1 million. The Company raised over $26.5 million in the nine months
ended September 30, 2004 from the sale of common stock and additional deposits
on common stock.
As of September 30, 2004, the Company received deposits on common stock of
$10,232,000, which represents cash received in third quarter 2004 that will be
transferred to equity in fourth quarter 2004.
The Company does not have any bank loans or lending facilities. The Company has
obtained loans from stockholders and raised additional financing through private
placements of shares of common stock principally from accredited foreign
investors. See also Note C to the financial statements - Equity Transactions.
The Company continued to issue shares of its common stock in 2004 and in early
2005 to retire certain obligations due for payment.
The Company incurred losses in 2002 and 2003 fiscal year end of $(11,087,747)
and $(7,812,449) respectively. The Company recorded a loss for the first nine
months of 2004 of approximately ($43.4 million). In 2004 the losses were
generated primarily from the costs of developing the Gizmondo. Since the Company
was not able to generate positive net cash flows from operations, additional
capital was needed. This capital has been provided by certain principal
stockholders, who have funded the Company through loans as needed, and primarily
from the sale of common stock and warrants through private placement and other
share subscription agreement transactions as detailed in Note C to the financial
statements - Equity Transactions.
The Company successfully raised funds to maintain operations, fund acquisitions
and to retire obligations and obtain services. During the remainder of 2004 and
the first quarter of 2005, the Company raised over $34 million. In the second
quarter of 2005, the Company raised over $21 million, through May 31, 2005,
through the sale of the Company's restricted common stock. This funding has
allowed the Company to maintain its business and to continue the development and
launch of its Gizmondo product line.
The Company will seek to raise additional equity capital and obtain trade or
bank financing as needed to fund the development and the launch of the Gizmondo
product in different regions as needed. However, there can be no assurance this
additional capital or other financing will be available, or if available on
terms reasonably acceptable to the Company.
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.
F-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
services and in satisfaction of debt owed by the Company to shareholders. Common
stock exchanged for services from unrelated parties and suppliers is valued at
the negotiated values for such common stock. Common stock exchanged for
shareholder debt is valued at recent market values for common stock sold to
unrelated investors. The difference between this "market value" and the amount
of the debt satisfied is charged to operations.
Income Taxes
------------
The calculation of the Company's income tax provision and related valuation
allowance is complex and requires the use of estimates and judgments in its
determination. As part of the Company's evaluation and implementation of
business strategies, consideration is given to the regulations and tax laws that
apply to the specific facts and circumstances for any transaction under
evaluation. This analysis includes the amount and timing of the realization of
income tax liabilities or benefits. Management closely monitors tax developments
in order to evaluate the effect they may have on the Company's overall tax
position.
Impairment of Goodwill and Other Intangible Assets
--------------------------------------------------
Goodwill represents the excess of the cost of an acquisition over the fair value
of the net assets acquired. The Company tests goodwill and other intangible
assets on an annual basis, or more frequently if events or circumstances
indicate that there may have been impairment. The goodwill impairment test
estimates the fair value of each reporting unit, through the use of a discounted
cash flows model, and compares this fair value to the reporting unit's carrying
value. The goodwill impairment test requires management to make judgments in
determining the assumptions used in the calculations. Management believes
goodwill is not impaired and is properly recorded in the financial statements.
Revenue Recognition
-------------------
The Company enters into agreements to sell products (hardware or software),
services, and other arrangements that include combinations of products and
services. Revenue from product sales, net of trade discounts and allowances, is
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
F-20
objective evidence of fair value exists for those elements. Changes to the
elements in an arrangement and the ability to establish vendor-specific
objective evidence for those elements could affect the timing of the revenue
recognition. Most of these conditions are subjective and actual results could
vary from the estimated outcome, requiring future adjustments to revenue.
Research and Development
------------------------
The Company expenses research and development costs as incurred.
PART II
TIGER TELEMATICS, INC.
OTHER INFORMATION
Item 1. Legal Proceedings
In March 2004, Jordan Grand Prix Limited, filed suit against the Company in the
High Court of Justice, Queen's Bench Division (Central Office), London, UK,
alleging violation of a sponsorship agreement and dated letter agreement entered
into in July 2003. Jordan sued the Company for $3 million and alleged that the
Company defaulted on a payment of $500,000, due on January 1, 2004, under the
sponsorship agreement, and a payment for $250,000, due on the same date under
the letter agreement. On February 26, 2004, Jordan terminated both agreements.
In order to avoid summary judgment in favor of the plaintiff, the Company
escrowed 70,000 shares of its common stock with the court. Prior to trial, the
Company is required to substitute $1.5 million for the escrowed shares. In June
2005, the Company placed an additional 60,000 shares of its restricted common
stock in escrow. Trial is set for July 2005. While the Company is unable to
predict the outcome of this litigation, it believes that it has good and
meritorious defenses to the suit and intends to defend vigorously the claims
made against it. The Company is currently engaged in court authorized mediation
with Jordan to settle the case.
In January 2005, the Company filed a lawsuit in the Circuit Court in and for the
County of Duval, Florida against D. Weckstein and Company and Donald E.
Weckstein, a former investment advisor to the Company, for breach of the
Company's agreement with the advisor. In a mediation process completed in April
2005, the Company issued 60,000 additional shares of restricted common stock in
full settlement of the matter and was released from all past and future
obligations under the Agreement.
On March 22, 2005, the Board of Regents of the University of Texas System filed
an action against the Company and one of its subsidiaries, Gizmondo Europe, Ltd.
in the United States District Court for the Western District of Texas, Austin
Division, alleging that predictive text software used in the Company's Gizmondo
gaming device infringes a patent held by the Board of Regents. The Company
believes that its software does not infringe the Board of Regents' patent. The
Company licenses this software from another company, which under the license
agreement, has indemnified the Company for infringement claims. The Company and
its licensor intend to vigorously defend the infringement claims against the
Company and Gizmondo Europe, Ltd.
Early in the third quarter of 2004, Hand Held Games, Ltd. filed suit against the
Company for $75,000 plus damages and costs as a result of a dispute between the
F-21
Company and Hand Held 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.
Items 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the third quarter of 2004, the Company sold 2,775,806 shares of
restricted common stock for an aggregate sum of $9,476,590. The shares were sold
primarily for $1.25 to $11.25 per share.
The Company also sold $10,232,000 of its restricted stock that was recorded as
deposits on common stock and moved to equity in the fourth quarter 2004 when the
Company issued the common share certificates.
The Company negotiated the purchase price for the sale of restricted common
stock, based upon the market price of the securities at the time of the
negotiation and with an appropriate discount for the restrictions on resale. The
restricted common stock was issued to sophisticated, accredited foreign
investors or foreign corporations in transactions exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended. Each
investor had access to financial information available in public markets and was
given the opportunity to review the Company's books, records and other
information that they requested. The proceeds were used to fund the Company's
operations.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
Exhibit 31 Rule 13a-14(a).
Exhibit 32 Section 1350 Certification.
F-22
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.
July 5, 2005
------
/S/ Michael W. Carrender
------------------------
Michael W. Carrender
Chief Executive Officer, Director and
Chief Financial Officer
F-23