1. NATURE OF OPERATIONS
GPS Industries Inc., (the "Company" or "GPSI") a Nevada corporation, is involved
in the development of golf course management technology. The Company has
developed hand-held and cart mounted Global Positioning System ("GPS") units. At
December 31, 2004, the Company had substantially all of its assets and
operations in Canada.
Infotech Golf Technology 2000 Inc,
The Company's wholly owned subsidiary, Inforetech Golf Technology 2000 Inc.
(IGT), which had participated with the Company in the development of its
technology, filed petition for relief under Chapter 7 of the federal bankruptcy
laws of the United States Bankruptcy Court on December 19, 2002 and ceased
operations. These financial statements reflect the operations of the Company and
of IGT up until the time it ceased operations and its assets and liabilities at
that time and have not been adjusted to reflect the bankruptcy filing.
All remaining unresolved liabilities of IGT are reflected as liabilities related
to discontinued operations. All resolution of liabilities related to IGT are
reflected as either a gain (loss) on extinguishment of debt - discontinued
operations.
ProShot Golf, Inc.
The Company acquired ProShot Golf Inc., ("ProShot") on January 12, 2001. ProShot
is a California based Company that manufactures, markets, leases and installs an
integrated GPS system that provides golfers with yardage readings and potential
shot options from any location on a golf course. The ProShot GPS system is
installed directly on golf carts.
On September 21, 2001, the Company received notices of defaults from a group of
Inforetech shareholders (the "Guarantors") in regard to a finance agreement
dated April 24, 2001. The Company, being unable to cure those defaults, along
with one of its directors signed an agreement with the Guarantors stating that
the Company would use its best efforts to assist in the foreclosure of ProShot's
assets by its bank, so that the Bank debt and ultimately the obligation of the
Guarantors, to the Bank, in respect of their guarantee of ProShot's Bank debt,
might be reduced.
During the fourth quarter of 2001, the Company discontinued all operations of
ProShot, accordingly all revenues, expenses and liabilities associated with
ProShot in 2001 has been classified as discontinued operations.
On May 31, 2002 ProShot filed a petition for relief under Chapter 7 of the
federal bankruptcy laws of the United States Bankruptcy Court.
All remaining unresolved liabilities of ProShot are reflected as liabilities
related to discontinued operations. All resolution of liabilities related to IGT
are reflected as either a gain (loss) on extinguishment of debt - discontinued
operations.
2. ACQUISITIONS
On November 19, 2004 the Company entered into a Stock Purchase Agreement with
the shareholders of Optimal Golf Solutions, Inc. ("Optimal") to acquire 100% of
the common shares of Optimal (the "Share Acquisition") for $5,250,000. The
Company gave $2,270,000 of cash and stock pursuant to the terms of the agreement
as shown below. The remaining amount due from the Company in the amount of
$2,980,000 was recorded as a liability on the Company's balance sheet.
F-6
(i) Upon signing the purchase agreement the Company was required
to pay $100,000 and an additional $1,000,000 at closing.
(ii) The balance of $4,150,000 is to be paid in two tranches of
shares of common stock of the Company. Shares issued under
these tranches, can be liquidated by the shareholders of
Optimal over 360 trading days (after the effectiveness of a
registration statement referred to below) in accordance with
the terms of a Leakage Agreement; and an additional cash
payment, if required, depending on what amount Optimal
receives from the shares it sells into the market.
The first stock tranche (payment) is for 9,000,000 shares.
These shares were trading at $.13 on the date the agreement
was signed and valued at $1,170,000, accordingly. Under the
terms of the agreement the shares can be sold in accordance
with the Leakage Agreement over 180 trading days. Any funds
received from the sale of those shares in excess of $3,250,000
(i.e. $1,000,000 over the $2,250,000 target price for the
first share payment) will be deducted from the amount to be
paid with the second stock payment, targeted for the remaining
amount due of $1,900,000 (plus interest). The stock price has
not reached the target price of $.25 at any point from the
date of the acquisition and is trading at $.10 on at April 8,
2005, therefore the Company will have to issue additional
shares to cover the difference between the market price and
$.25 target price or cash. The second stock tranche (payment)
will be issued at a 15% discount to market price at the time
of issuance and can be sold into the market by Optimal over a
further 180 trading days. The Company has the right to pay out
any remaining balance plus interest owing at any time.
The Company will use its best efforts to file a Registration
Statement as required under the Stock Purchase Agreement to
make the stock payments required to the shareholders under
this Agreement. If the Registration Statement has not become
effective by June 30, 2005, GPSI must pay cash of $2,250,000
plus interest over eight monthly instalments of $250,000 each
starting June 1, 2005. In that case, the first stock payment
of shares would be returned to the Company. If the
Registration Statement has not become effective by September
30, 2005, then the Company must also pay cash to the
shareholders (in lieu of a second stock payment) of $1,900,000
plus interest in eight monthly payments of $237,500 commencing
on October 1, 2005.
Upon receipt of the first $727,000 of net proceeds from the
sale of shares issued to the shareholders for the second stock
payment, this amount will be forwarded to the Company's
attorney to be held in escrow for a period of 18 months from
closing to partially secure the shareholders indemnification
obligations to the Company under the Agreement
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Aggregated purchase price $ 5,250,000
===========
Patents acquired $ 1,500,000
Goodwill $ 3,750,000
-----------
Net assets acquired $ 5,250,000
==========
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These patents acquired have a remaining useful life of seven years and
expire on November 11, 2011. The value attributed to these patents is
F-7
based on discounted future earnings that the Company expects to receive
from existing license agreement royalties with various customers over
the life of the patents.
Acquired goodwill is considered to have an indefinite life pursuant to
SFAS 142 and accordingly is not amortized but subject to periodic
impairment tests. Acquired patents are considered to have a finite life
pursuant to SFAS 142 to be amortized over the period the asset is
expected to contribute to the future cash flows. Due to a review of
impairment of acquired goodwill of Optimal, management decided to
record a 100% write down of the acquired goodwill as of December 31,
2004. Management believes this more accurately reflects the current
goodwill valuation. The impairment loss (allocated to goodwill)
recorded for the year ended December 31, 2004 was $3,750,000.
The table below summarizes the pro forma information of the results of
operations as though the business combination had been completed as of
January 1, 2003:
Twelve Months Ended
December 31,
2004 2003
------------ -----------
(unaudited) (unaudited)
Sales $2,601,397 $ 441,898
Cost of Goods 1,996,146 -
--------- ---------
Gross Profit 605,251 441,898
Operating Expenses 6,897,878 5,045,430
--------- ---------
Operating Loss (6,292,627) (4,603,532)
Other Income/(Expense) 700,210 (3,225,411)
--------- ---------
Net Loss $(5,592,417) $(7,828,943)
========= ==========
Net Loss per Share $ (0.03) $ (0.08)
========= ==========
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2. GOING CONCERN
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
carrying amounts of assets and liabilities presented in the consolidated
financial statements do not purport to represent the realizable or settlement
values. The Company has incurred significant losses and had a working capital
deficit at December 31, 2004. The successful commercialization of the Company's
technology is dependent on the Company's ability to successfully finance its
cash requirements through a combination of equity financings and payments from
potential strategic partners. The Company's independent registered public
accounting firm, in their report on the consolidated financial statements as of
and for the year ended December 31, 2004, have expressed substantial doubt about
the Company's ability to continue as a going concern.
The Company is attempting to restructure its debt obligations and raise new
capital. To the extent that the Company is unable to successfully restructure
its debt obligations and/or obtain the capital necessary to fund its future cash
requirements on a timely basis and under acceptable terms and conditions, the
Company will not have sufficient cash resources to maintain operations, and may
consider a formal or informal restructuring or reorganization.
F-8
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with generally
accepted accounting principles in the United States. The significant accounting
policies used in the preparation of these financial statements are summarized
below.
The Company prepared the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Management periodically evaluates the estimates and judgments made.
Management bases its estimates and judgments on historical experience and on
various factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates as a result of different
assumptions or conditions.
The following critical accounting policies affect the more significant judgments
and estimates used in the preparation of the Company's consolidated financial
statements.
Revenue recognition
The Company recognizes revenue only when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable, and
collectibility is probable. When other significant obligations remain after
products are delivered, revenue is recognized only after such obligations are
fulfilled. Cost of Goods Sold represents the cost of physical equipment products
delivered to the customer and installed on the customer's site. The costs of
installing the equipment on the customer's site, such as labor and travel and
accommodation expenses, are recorded as Installation Costs. The cost of
developing the equipment and the software installed in the equipment on the
customer's site is recorded as an operating expense in the category
"Engineering, Research and Development", all such costs are expensed as they are
incurred.
Impairment of Long-Lived Assets
The Company's long-lived assets consist of property and equipment. In assessing
the impairment of property and equipment, the Company makes assumptions
regarding the estimated future cash flows and other factors to determine the
fair value of the respective assets. The Company did not record any impairment
charges at December 31, 2004. However, if these estimates or the related
assumptions change in the future, the Company may be required to record
impairment charges for these assets at such time.
Consolidation
The consolidated financial statements include the operations of GPS Industries
Inc. (formerly Inforetech Wireless Technology, Inc.) and its wholly-owned
subsidiaries (the "Company"), including Optimal Golf Solutions, Inc. which it
acquired on November 19, 2004. All significant intercompany transactions and
balances have been eliminated in consolidation.
Loss Per Share
Basic loss per share is based on net loss divided by the weighted average common
shares outstanding or deemed to be outstanding during the period. Diluted loss
per share assumes exercise of in-the-money stock options and warrants
outstanding into common stock at the beginning of the year or date of issuance,
unless they are anti-dilutive. A total of 18,829,806 potential shares were
excluded from the fully diluted calculation as they are anti-dilutive.
Net Loss Per Common Share - Basic loss per common share is calculated by
dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted loss per common share reflects the potential dilution
F-9
that would occur if dilutive stock options and warrants were exercised. These
potentially dilutive securities were not included in the calculation of loss per
share for the periods presented because the Company incurred a loss during such
periods and thus their effect would have been anti-dilutive. Accordingly, basic
and diluted loss per common share is the same for all periods presented.
Use of Estimates
The preparation of financial statements in conformity with accounting principals
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain amounts have been reclassified in 2003 to conform to the presentation in
2004.
Financial Instruments
The fair value of financial instruments approximates their carrying value except
as otherwise disclosed in the financial statements.
Foreign Currency Translation
Assets and liabilities of subsidiaries operating in foreign countries are
translated into U.S. dollars using both the exchange rate in effect at the
balance sheet date of historical rate, as applicable. Results of operations are
translated using the average exchange rates prevailing throughout the year. The
effects of exchange rate fluctuations on translating foreign currency assets and
liabilities into U.S. dollars are included in stockholders equity (Accumulated
other comprehensive loss), while gains and losses resulting from foreign
currency transactions are included in operations.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts due us could be adversely affected. As of December
31, 2004 the allowance for doubtful accounts was $0.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using the
straight-line method over the following estimated useful lives:
Office equipment and furnishings 3-5 years
Computer Software 3 years
Leasehold improvements Lease term
Tooling 3 years
Patents Patent life
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The Company leases certain of its office equipment under capital lease
agreements. The assets and liabilities under capital leases are recorded at the
lesser of the present value of aggregate future minimum lease payments or the
fair value of the assets under the lease. Assets under capital lease are
depreciated over the shorter of their estimated useful lives or the lease term.
F-10
Depreciation expense for the years ended December 31, 2004 and 2003 was $81,074
and $72,170 respectively.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with maturities
of three months or less when purchased.
Inventories
Inventories are stated at the lower of cost or market, determined on an average
cost basis, and consist of raw material parts, work in process and finished
products ready to ship to customers.
Shipping and handling costs
The Company accounts for shipping and handling costs as a component of "Cost of
Sales".
Stock Based Compensation
Stock-Based Compensation - The Company periodically issues shares of common
stock for services rendered or for financing costs. Such shares are valued based
on the market price on the transaction date.
The Company periodically issues stock options and warrants to employees and
non-employees in non-capital raising transactions for services and for financing
costs.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the estimated fair value of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. The Company has
adopted the "disclosure only" alternative described in SFAS 123 and SFAS 148,
which require pro forma disclosures of net income and earnings per share as if
the fair value method of accounting had been applied.
Pro forma information regarding net income (loss) and net loss per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its stock options granted using the fair value method of SFAS No. 123. No
stock options were issued in the year ended December 31, 2004. The fair value
for options issued in the year ended December 31, 2003 was estimated at the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 6%; no dividend yield;
volatility factor of the expected market price of the Company's common stock of
150%, and the expected lives of the options were estimated at approximately 4
years. The weighted average fair value of stock options granted for the years
ended December 31, 2004 and 2003 was $Nil and $122,976, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a reliable single measure of the
fair value of its employee stock options.
F-11
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
2004 2003
------ ------
Net loss as reported $(9,148,893) $ ( 3,910,975)
Pro forma compensation expense - (122,976)
------------ --------------
Pro forma net loss $(9,148,893) $ ( 4,033,951)
============ ==============
Net loss per share:
Basic and diluted, as reported $ (0.05) $ (0.04)
Basic and diluted, pro forma $ (0.05) $ (0.04)
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Income Taxes
The Company follows the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities using enacted tax rates that will be in effect for the year in which
the differences are expected to reverse.
The Company records a valuation allowance to reduce its deferred tax assets
arising from net operating loss carryforwards to the amount that is more likely
than not to be realized. In the event the Company was to determine that it would
be able to realize its deferred tax assets in the future in excess of its
recorded amount, an adjustment to the deferred tax assets would be credited to
operations in the period such determination was made. Likewise, should the
Company determine that it would not be able to realize all or part of its
deferred tax assets in the future, an adjustment to the deferred tax assets
would be charged to operations in the period such determination was made.
Warranty Obligations
The Company generally provides the ultimate consumer a warranty with each
product and accrues warranty expense at the time of the sale based on the
Company's prior claims history. This history is limited with regard to the
Company as the current year end of December 2004, is the year the Company
commenced sale and distribution of their GPS product. The Company does not
believe that it is exposed to any significant risk in its cash investment.
Recent Accounting Pronouncements
- In November 2004, the Financial Accounting Standards Board issued (`the
FASB") issued Statement of Financial Accounting Standards No. 151
("SFAS No. 151"), "Inventory Costs, an amendment of ARB No. 43, Chapter
4." SFAS No. 151 clarifies that abnormal inventory costs such as costs
of idle facilities, excess freight and handling costs, and wasted
materials (spoilage) are required to be recognized as current period
costs. The provisions of SFAS No.151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Management
is currently evaluating the provisions of SFAS No. 151 and does not
expect the adoption will have a material impact on the Company's
financial position, results of operations or cash flows.
F-12
In December 2004, the FASB finalized SFAS No. 123R "Share-Based
Payment" ("SFAS 123R"), amending SFAS No. 123, effective beginning the
Company's first quarter of fiscal 2006. SFAS 123R will require the
Company to expense stock options based on grant date fair value in its
financial statements. Further, adoption of SFAS No. 123R will require
additional accounting related to income tax effects and additional
disclosure regarding cash flow effects resulting from share-based
payments arrangements. The adoption of SFAS 123R will not effect the
Company's cash flows or financial position, but may have an adverse
impact on results of operations if options are granted in the future.
- In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment for APB Opinion No. 29". This
statement amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with
a general exception for exchanges of nonmonetary assets that do not
have commercial substance. A nonmonetary exchange has commercial
substance if future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions of SFAS No.
153 are effective for the Company's year ended December 31, 2006.
Management is currently evaluating the impact of the adoption of SFAS
No. 153 on the Company's consolidated financial position, liquidity, or
results of operations.
5. PROPERTY AND EQUIPMENT
At December 31, 2004 property and equipment consisted of the following:
Office equipment $ 302,536
Computer software 77,708
Leasehold improvements 105,628
Tooling 28,297
------
514,169
Less: accumulated depreciation (399,544)
---------
$ 114,625
=========
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6. PATENTS
In June 2004, in addition to patents acquired with the Optimal
purchase, the Company acquired the patent for installation of GPS golf
systems in eleven European countries as well as Japan and Australia,
referred to as the "Pinranger" patent. The purchase price for these
patents was $20,000 in cash and the issuance of 3,500,000 shares of
common stock valued at $0.08 per share or $280,000, for a total cost of
$300,000. These patents are being amortized over approximately 8.5
years, the expected future life of these patents. In addition to the
above acquisition costs, the Company capitalized related legal and
acquisition fees of $3,500.
In addition to the above Pinranger patents, the Company has possession
of all of Optimal's patents, since the acquisition of Optimal in
November 2004
The following is a reconciliation of all patents owned as of December 31, 2004:
Patents $ 1,803,500
Less: accumulated depreciation (44,433)
-----------
$ 1,759,067
===========
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F-13
Future amortization of patents is expected to be as follows:
Year Ended December 31,
2005 $ 249,992
2006 249,992
2007 249,992
2008 249,992
2009 249,992
Thereafter 509,107
-----------
$1,759,067
===========
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6. CAPITAL LEASES
The Company's subsidiary IGT leased certain equipment under capital lease
agreements that expire at various dates through January 2006. During 2002 IGT
defaulted on those leases and surrendered the equipment to the leasing Company.
The leasing Company took action in the Supreme Court of British Columbia for the
balances outstanding on the leases. No liability is expected to accrue to the
Company as a result of these actions, but the balance of the leases have been
shown as a current liability at December 31, 2004.
7. DEBT
The Company and its subsidiaries have significant debt liabilities. The
following table is a summary of debt at December 31, 2004.
Bank Indebtedness (a) $ 2,309,408
Bank Loan (h) 25,121
Short term loans (b) 1,663,332
Long term loan (f) 3,000,000
Discount on debt (f) (480,000)
---------
Sub-total: 2,520,000
---------
Convertible debt (c) 671,892
Note payable - related parties (g) 603,415
Promissory notes (d) 1,274,757
Loan to related party (e) 258,000
-----------
Total Debt 9,325,925
Less Current Portion (6,374,033)
-----------
Total Long-Term Debt $ 2,951,892
===========
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F-14
(a) (i) Effective June 27, 2003, the Company obtained a one year bank
line of credit for $1,425,000 to fund its operations. As of
December 31, 2004, the Company has drawn $1,333,499 under this
line of credit. The line of credit bears interest at prime
plus 0.5%, which was 4.75% at December 31, 2004. This line
is repayable in full on demand and is secured by a one year
standby bank letter of credit for $1,500,000 that was provided
by a third party, Hansen Inc. As consideration for providing
the standby bank letter of credit, the Company issued to
Hansen Inc. a common stock purchase warrant to purchase
1,000,000 shares of the Company's common stock, exercisable
$0.10 per share (a 15% discount to the market price) for a
period of three years. The fair value of this common stock
purchase warrant, calculated pursuant to the Black-Scholes
option pricing model, was determined to be $52,000, which was
charged to operations over the twelve month period beginning
July 2003 and ending June 2004. Accordingly, $26,000 was
charged to operations as finance costs for the twelve months
ended December 30, 2004. This letter of credit was renewed in
June 2004, December 2004, and in March 2005 until December
2005. For the extension granted in December 2004, the Company
issued warrants to purchase 500,000 shares, with an exercise
price of $0.10 per share. These warrants have been valued at
$52,000, and have been accounted for as a deferred finance
cost, in the accompanying shareholders' deficit. The cost will
be amortized over three months, the approximate length of the
extension of the line of credit. None of the deferred costs
have been amortized as of December 31, 2004. The value of the
warrants was determined with use of the Black-Scholes pricing
model with the following factors: 3 year life, risk free rate
of return of approximately 3.25% and a volatility factor of
approximately 125%. In March 2005 a further extension of the
credit line an additional 1,000,000 warrants were provided to
Hansen Inc. for three years at an exercise price of $0.12 per
share. Management is currently determining the valuation of
these warrants for the extension of the line of credit.
(ii) Effective March 23, 2004, the Company entered into a
Reimbursement Agreement with Douglas J. Wood, Daniel S. Wood
and James Liken (the Secured Party) to have them secure a new
$1,000,000 line of credit to be used for manufacturing
purposes. The security provided was a Letter of Credit from
Citicorp North America Inc. The Company's bankers HSBC Bank
Canada provided the Company this new line of credit on April
29, 2004 based on the security provided. As of December 31,
2004 The Company has drawn $975,909 from this credit line. The
credit line has been renewed until October 31, 2005. This line
bears interest at prime plus 0.5%, which was 4.75% at December
31, 2004.
As consideration, for the security for this credit line, the
Secured Party is to receive 1.25% of the maximum amount
outstanding per month of this credit line. This consideration
is payable 50% in US$ and 50% in common shares of the Company,
issued at a 10% discount to market based on the seven day
average price prior to each quarter end. Additionally, the
Company agreed to issue warrants to purchase 666,667 shares of
the Company's common stock at US$0.15 per share. The Company
also granted the Secured Party a security interest in all the
Company's inventory. This letter of credit, along with its
related Reimbursement Agreement, has been renewed until
October 31, 2005. These warrants have been valued at $72,000,
and have been accounted for as a deferred financial cost, in
the accompanying shareholders' deficit. The cost is being
amortized over one year, the approximate length of the line of
credit. A total of $54,000 of the deferred costs has been
amortized in the year ended December 31, 2004. The value of
the warrants was determined with use of the Black-Scholes
pricing model with the following factors: 3 year life, risk
free rate of return of approximately 1.9% and a volatility
factor of 200%.
F-15
(b) As at December 31, 2004 the Company has $1,663,332 owing on short term
notes from various employees and investors. These notes are payable on
demand, and bear interest at varying rates of 0% to 36% per annum.
These notes are unsecured.
(c) One convertible loan was outstanding as at December 31, 2004. Amount
due to The Shaar fund of $671,892.
The Shaar Fund:
Effective August 4, 2000, amended by agreement dated October 29, 2002
the Company entered into a securities purchase agreement with The Shaar
Fund Ltd., relating to the sale of $1,000,000 in principal amount of 8%
Convertible Debenture due November 2, 2007 and warrants to purchase up
to 100,000 shares of Common Stock. Interest of 6% accrues on this
debenture from September 12, 2000 and is payable quarterly commencing
September 30, 2000. The exercise price of the warrants is $6.25 and
they expire on September 12, 2005. The amending agreement also added
interest accrued as at the amendment date of $166,000 to principal.
As at December 31, 2004 the principal amount outstanding is $726,000
which is offset by unamortized debt discount of $42,624 and unamortized
finance costs of $11,484, giving a net balance of $671,892. The
principal is being repaid at $20,000 plus accrued interest per month.
At the time of issuance the proceeds raised of $1,000,000 have been
allocated to the debt ($634,649) and the warrants ($365,351) based on
their relative fair values at the date the loan was received. The fair
value of the warrant is considered to be a discount on the convertible
debenture, with a corresponding credit to additional paid in capital.
The debt discount is being amortized, on an effective basis, over the
five-year term of the debenture. During 2004 and 2003, $54,142 and
$73,068, respectively, of the discount was amortized and included in
financing costs, leaving an unamortized debt discount of $42,624. In
addition to the debt discount, the Company allocated a deferred
financing cost asset. During 2004 and 2003, $2,536 and $2,535,
respectively were amortized pertaining to this deferred finance cost,
leaving an unamortized balance of $11,484 as of December 31, 2004.
The debenture is convertible (plus related interest expense) into
Common Stock at the lesser of (i) $.32 or (ii) 75% of the average of
the three lowest closing bid prices of the Company's common shares for
the ten days immediately preceding the conversion date. These terms
give the holder an in the money conversion rate, the benefit of which
is limited to the proceeds allocated to the debt. Accordingly, a
beneficial conversion feature of $634,649 has been recognized as a
further discount on the convertible debenture liability with a
corresponding credit to additional paid in capital.
(d) This is a promissory note for $1,274,757, which was entered into by the
Company's discontinued, ProShot subsidiary in January 2001. The note
matured in January 2004, with accrued interest at 6% per annum,
accruing form October 1998. The Company has not accrued any interest on
this note since December 2001.
(e) The Company has a promissory note dated December 11, 1998 in the amount
of $258,000 due to a party related to ProShot. As these are part of
discontinued operations, the Company has not accrued ant interest
related to these notes in the years ended December 31, 2004 and 2003,
respectively.
(f) On December 3, 2004 GPS Industries, Inc. ("GPSI") entered into a Credit
Agreement with Great White Shark Enterprises, Inc. ("GWSE") for GWSE to
provide Term Loan of $3,000,000 to GPSI. These funds were received by
GPSI as follows: $1,000,000 on November 22, 2004 and the balance of
$2,000,000 on December 3, 2004. Collateral for the loan was a first
F-16
recorded priority security interest in (i) all of the shares of the
capital stock of Optimal Golf Solutions, Inc. ("Optimal") acquired by
GPSI pursuant to a Stock Purchase Agreement dated November 19, 2004
between GPSI and the former shareholders of Optimal, (ii) a second
security interest in the Optimal Patents behind the former Optimal
shareholders, in the event that GPSI does not fulfill their purchase
agreement of the Optimal and (iii) all rights of GPSI to the Pinranger
Patents acquired by GPSI pursuant to an Agreement dated July 2, 2004
between GPSI and Pinranger (Australia) Pty. Ltd. and PagiSat, LLC. The
Pinranger Patents are registered in 13 countries in Europe, Japan, and
Australia.
The Term Loan may be repaid at any time prior to maturity without
premium or penalty, except that the total minimum interest to be paid
must be $300,000 irrespective of when the loan is repaid. During the
term of the loan, GPSI must pay interest of 10% per annum on a monthly
basis in cash or shares. If GWSE chooses to receive shares, the
interest rate will be adjusted to 15% for the period selected and the
shares will be priced at a 15% discount to market, using the average
daily close for the three trading days prior to the end of the monthly
period for which interest is due. The maturity date on this loan is
November 15, 2011, and accordingly the entire loan is classified as
long-term.
Repayment of the principal and interest due under the Credit Agreement
has been provided for by GPSI giving to GWSE (commencing December 4,
2004) all License Payments GPSI receives under all license agreements
between Optimal as licensor and its licensees. Once the Term Loan and
accrued interest is paid in full, for a period of two years from the
repayment date, GWSE will receive 20% of the License Payments and
thereafter 40% of the License Payments for the remaining life of the
Patents. Any Licensee Fees received in connection with enforcement of
the Optimal Patents will also be paid to GWSE in accordance with the
above-mentioned formula, except that GPSI must pay all legal costs to
enforce the Optimal Patents. Any Licensee Fees received from
infringement payments relating to the Pinranger Patents will be shared
on a 50/50 basis (net of legal costs) until the Term Loan and accrued
interest are fully repaid, after which GPSI will have no further
obligation to GWSE regarding the Pinranger Patents for any revenue they
generate, and GWSE will assign its interest in the Pinranger Patents
back to GPSI.
To the extent that, during any calendar year commencing January 1,
2005, the total annual License Payments received by GWSE do not total
$500,000, then the shortfall must be paid to GWSE in equal monthly
payments over the next calendar year, above any beyond the following
year's Minimum License Payment. The maturity date of the Term Loan is
November 15, 2011, the termination of the life of one of the key
Optimal Patents.
In addition to the above-mentioned interest and security provided for
the Term Loan, GWSE will also receive an equity bonus of 3,000,000
restricted Common Shares of GPSI and a three year Warrant to purchase
2,000,000 Common Shares of GPSI at an exercise price of $.15. These
warrants are exercisable immediately.
The Company has recorded a debt discount of $480,000 with regards to
the issuance of 3,000,000 shares of common stock. This discount will be
amortized over the life of the loan, or until such time as the
principal is paid off. As of December 31, 2004, none of the discount
has been amortized.
With regards to the warrants attached to the note, the Company has
recorded a deferred financial cost of $280,000, in the accompanying
shareholders' deficit. The cost is being amortized over the life of the
loan, or until such time as the principal is paid off. As of December
31, 2004, none of the costs associated with this deferred cost has been
amortized. These warrants were valued base upon a Black-Scholes
calculation, assuming a three year life, a risk free rate of return of
approximately 2.25% and a volatility of approximately 125%.
(g) Promissory notes payable to the president of the Company are unsecured,
repayable on demand and bear interest at 8% per annum. As of December
31, 2004 the balance of the note is $603,415. Interest of $79,685 has
been accrued on this note through December 31, 2004.
F-17
(h) The Company has a loan from a commercial bank for $27,668. As part of a
settlement agreement the bank agreed that no further interest will
accrue on this loan.
All of the above notes are classified as short term, payable within one year,
except for the convertible loan outstanding due to the Shaar Fund. (Debt (c))
and the loan from Great White Shark Enterprises, Inc. (Debt (f))
Principal repayable on Long term debt is:
2005 $ 240,000
2006 $ 240,000
2007 $ 191,892
Thereafter $ 2,520,000
---------------
Total $ 3,191,892
===============
|
8. GAIN ON EXTINGUISHMENT OF DEBT
- In February 2001, the Company received a $1,185,000 loan bearing
interest at LIBOR plus 1% which was collateralized by certain
securities. The lender cannot be located at the date of this report,
and the Company believes this collateral has been realized. As a
result, the Company has written off this loan liability in the year
ended December 31, 2004. This write off amounted to $1,185,000, and has
been recorded in the Consolidated Statement of Operations as a gain on
extinguishment of debt.
- On May 10, 2004 the Company agreed to issue 6,336,883 shares of common
stock to Proshot Investors LLC and various other parties valued at
market value of $570,320 in settlement of debt guarantee liabilities of
$1,118,000, for a gain on extinguishment of debt of $547,680. Of the
shares issued in settlement, 1,873,651 are held in escrow and may be
used to satisfy a further recorded liability of the Company no later
than January, 2010. These shares were all issued in July, 2004. The
remaining liability represents a promissory note for $1,274,757 for
fees owed to Proshot's attorneys.
- During the year ended December 31, 2004 the Company wrote off trade
debts arising from discontinued operations amounting to $332,537. This
was based upon management's belief that these debt holders rights have
expired under the statutes of limitations in the various States in
which the debt holders reside.
- The Company also settled various other trade debts and loans payable in
the year by issue of common stock. These transactions resulted in a net
gain on extinguishment of debt amounting to $9,076.
9. STOCKHOLDERS' DEFICIT
Effective September 30, 2003, pursuant to a written consent of a majority of the
Company's stockholders, the Company amended its Articles of Incorporation to
change its name to GPS Industries Inc., to increase the authorized shares of
common stock from 100,000,000 shares to 250,000,000 shares, to authorize
25,000,000 shares of preferred stock, and to eliminate the dual classes of
common stock. The elimination of the dual classes of common stock has been
reflected in the Company's consolidated financial statements at December 31,
2003, and did not have any effect on the Company's consolidated results of
operations, financial position or cash flows.
F-18
A definitive proxy statement was filed with the SEC on March 21, 2005 to
increase the total number of authorized shares to 550,000,000 of which
500,000,000 will be common shares and 50,000,000 will be preferred shares. The
Company will hold a special meeting of shareholders on April 27, 2005 at 8:00 am
at their corporate offices in Surrey, B.C. to vote on the proposed increase of
authorized shares which will be used to raise additional equity capital for the
Company.
Details Of Shares Issued:
On January 7, 2003, the Company issued 250,000 shares of common stock
to a former employee of the Company, valued at market value of $10,000
as part of a severance package, which was charged to operations. This
employee is the son of the Company's Chief Executive Officer.
On January 29, 2003 the Company issued 1,903,363 shares to Augustine
Funds LP for principal and accrued interest of $45,000 and $8,770
respectively with respect to a $1,000,000 8% convertible debenture due
August, 2005
On February 1, 2003 and March 14, 2003, the Company issued 500,000
shares of common stock valued at $35,000 to a consultant for services
rendered.
On February 1, 2003, the Company issued 617,528 shares of common stock
to The Sharr Fund Ltd. for principal and accrued interest of $20,000
and $316, respectively, with respect to a $1,000,000 8% convertible
debenture due November 2, 2007. On March 1, 2003, the Company issued an
additional 600,294 shares of common stock to The Sharr Fund Ltd., for
principal and accrued interest of $20,000 and $1,315, respectively,
with respect to this convertible debenture. The debenture is
convertible (plus related accrued interest) into common stock at the
lesser of (i) $5.25 per share or (ii) 75% of the average of the three
lowest closing bid prices of the Company's common stock for the ten
days immediately preceding the conversion date.
On March 31, 2003, the Company issued 5,520,468 shares of common stock
to Augustine Funds, L.P. for principal and accrued interest of $127,000
and $26,193, respectively, with respect to a $1,000,000 8% convertible
debenture due August 4, 2005. The debenture is convertible (plus
related accrued interest) into common stock at the lesser of (i) $5.25
or (ii) 75% of the average closing bid price of the Company's common
stock for the five days immediately preceding the conversion date.
On April 15, 2003, the Company issued 3,100,000 shares of common stock
to various consultants for services rendered.
On April 22, 2003, the Company issued 446,914 shares of common stock to
The Sharr Fund Ltd. for principal and accrued interest of $20,000 and
$513, respectively, with respect to a $1,000,000 8% convertible
debenture due November 2, 2007.
On May 9, 2003, the Company issued 200,000 shares of common stock
valued at $38,000 for principal and accrued interest of $25,329 and
$12,671, respectively, for a partial payment on an $85,000 promissory
note obligation to La Jolla Investments.
On May 9, 2003, the Company issued 2,165,000 shares of common stock
valued at $411,350 to related parties for services rendered.
On June 24, 2003, the Company issued 422,459 shares of common stock to
the Shaar Fund Ltd. for principal and accrued interest of $40,000 and
$1,330, respectively, with respect to a $1,000,000 8% convertible
debenture due November 2, 2007.
F-19
During July 2003, the Company issued 6,000,000 shares of common stock
to Augustine Funds, L.P. for principal and accrued interest of $600,000
and $10,500, respectively, with respect to a $1,000,000 8% convertible
debenture due August 4, 2005.
On October 16, 2003 the Company issued 10,000,000 shares of common
stock in connection with a 57 month endorsement agreement. The shares
were valued at the market on date of issuance for $1,070,000.
Accordingly, this amount was recorded as deferred compensation and is
being amortized over the life of the agreement. The Company recognized
$168,950 in amortization expense for the year ended December 31, 2003.
On October 16, 2003 the Company issued 313,650 shares of common stock
valued at $ 12,546 to a former employee in settlement of a claim.
On December 1, 2003 the Company issued 200,000 shares of common stock
valued at $31,111 in partial settlement of accounts payable of $65,000.
On December 2, 2003 the Company issued 250,000 shares of common stock
valued at $25,000 to La Jolla for principal of $25,000 for a partial
payment on an $85,000 promissory note obligation to La Jolla
Investments.
On December 2, 2003 the Company issued 5,703,071 shares of common stock
valued at $399,215 in full payment of a convertible loan.
On December 2, 2003 the Company issued 100,000 shares of common stock
valued at $10,000 for services rendered.
On December 2, 2003 the Company issued 1,000,000 shares of common stock
valued at $100,000 to for advisory services.
On December 2, 2003 the Company issued 1,000,000 shares of common stock
valued at $100,000 for consulting services.
On December 2, 2003 the Company issued 17,000 shares of common stock
valued at $1,700 in full payment of a debt.
On December 2, 2003 the Company issued 155,500 shares of common stock
valued at $15,555 as a payment of interest on a short term loan.
On December 2, 2003 the Company issued 300,000 shares of common stock
valued at $30,000 as a signing bonus.
On December 2, 2003 the Company issued 2,068,000 shares of common stock
valued at $206,800 to related parties in lieu of the balance of a
severance settlement.
On December 2, 2003 the Company issued 500,000 shares of common stock
valued at $50,000 for services rendered.
On December 2, 2003 the Company issued 122,000 shares of common stock
valued at $18,300 to three former employees for salaries owed.
On December 2, 2003 the Company issued 3,445,131 shares of common stock
valued at $172,257 to a related party -in repayment of a long term debt
outstanding since 1999. The payment included interest accrued at the
rate of 5%, totalling $30,675
F-20
On December 2, 2003 the Company issued 2,802,567 shares of common stock
valued at $168,154 to Augustine Funds, L.P. for principal and accrued
interest of $148,000 and $20,154 respectively, with respect to a
$1,000,000 8% convertible debenture due August 4, 2005.
On December 2, 2003 the Company issued 500,000 shares of common stock
valued at $50,000 to five members of the Company's Board of Advisors.
On December 2, 2003 the Company issued 7,161,285 shares of common stock
for conversion of $500,000 of debt owed to Whag.
On December 2, 2003 the Company issued 500,000 shares of common stock
valued at $50,000 for legal fees provided.
On December 2, 2003 the Company issued 1,500,000 shares of common stock
valued at $150,000 to the Company's Board of Directors.
On December 2, 2003 the Company issued 1,107,000 shares of common stock
valued at $106,433 to the Sharr fund. Fund Ltd. for principal and
accrued interest of $100,000 and $6,433 respectively, with respect to a
$1,000,000 8% convertible debenture due November 2, 2007.
On December 2, 2003 the Company issued 2,066,100 shares of common stock
valued at $103,305 for conversion of debt
On December 31, 2003 the Company issued 6,316,802 shares of common
stock valued at $538,261 to Whag, $500,000 principal and accrued
interest of $38,261.
On December 31, 2003 the Company issued 3,000,000 shares of common
stock valued at $300,000 to Vindemiolla. $200,000 of this amount
related to the cancellation of a royalty program and the remaining
$100,000 related to the release of patent rights held as security.
On December 31, 2003 the Company issued 1,410,000 shares of common
stock valued at $141,000 for cash.
On December 31, 2003 the Company issued 150,000 shares of common stock
valued at $15,000 for principal of $15,000 for a partial payment on an
$85,000 promissory note obligation to La Jolla Investments.
On January 9, 2004, the Company issued 53,000 shares of common stock
valued at market value of $7,685 for services rendered.
On January 22, 2004, the Company issued 100,000 shares of common stock
valued at market value of $16,000 for services rendered.
On January 22, 2004, the Company issued 1,000,000 shares of common
stock valued at market value of $160,000 to Blue & Gold Capital in
settlement of debt.
On March 2, 2004 the Company issued 100,000 shares of common stock
valued at market value of $13,000 as a signing bonus to an employee.
On March 2, 2004 the Company issued 518,333 shares of common stock
valued at market value of $67,383 to various consultants for services
rendered.
On March 2, 2004 the Company issued 250,000 shares of common stock to
Atechs corporation valued at market value of $31,250 in settlement of
debt, related to a discontinued operation.
On March 2, 2004, the Company issued 23,518 shares of common stock
valued at $2,940 as payment of interest on a short term loan.
F-21
On April 15, 2004, the Company issued 20,000 shares of common stock
valued at market value of $2,400 for services rendered
On May 10, 2004 the Company issued 6,336,883 shares of common stock to
Proshot Investors LLC and various other parties valued at market value
of $570,320 in settlement of debt guarantee liabilities of $1,118,000.
1,873,651 of these shares are held in escrow and may be used to satisfy
a further recorded liability of the Company no later than January 2010.
On May 15, 2004, the Company issued 1,957,143 shares of common stock
valued at market value of $156,571 for services rendered.
On May 15, 2004, the Company issued 714,286 shares of common stock
valued at market value of $57,143 to Blue & Gold Capital in settlement
of debt and as payment for services rendered.
On June 7, 2004 the Company issued 60,590 shares of common stock to La
Jolla Cove Investors valued at market value of $4,847 in full
settlement of the debt outstanding.
On June 29, 2004, the Company issued 3,500,000 shares of common stock
to several parties valued at market value of $280,000 as payment for
the acquisition of the Pinranger patents.
On July 6, 2004 the Company issued 1,750,000 shares of common stock to
Mr. Ross McKenzie valued at market value of $157,500 in full settlement
of a promissory note outstanding.
On July 12, 2004, the Company issued 350,000 shares of common stock
valued at market value of $28,000 for services rendered
On July 26, 2004 the Company issued 2,991,088 shares of common stock
valued at $269,198 to the Shaar fund. Fund Ltd. for principal and
accrued interest of $160,000 and $25,543 respectively, with respect to
a portion of the $1,000,000 8% convertible debenture due November 2,
2007. The difference of $83,655 was charged to a loss on extinguishment
of debt.
On July 22, 2004 the Company issued 473,222 shares of common stock to
the MWW Group valued at market value of $42,590 in partial settlement
of a debt outstanding for $73,261, the difference of $30,671 has been
recorded as a corresponding gain on extinguishment of debt.
On August 30, 2004 the Company issued 500,000 shares of common stock
valued at $40,000 to Augustine Funds, L.P. for debt with respect to a
$1,000,000 8% convertible debenture due August 4, 2005, that was
previously settled in 2003. This settlement in 2004 was an additional
amount of settlement claimed by the debenture holders.
On August 30, 2004, the Company issued 400,000 shares of common stock
valued at market value of $32,000 for services rendered.
On August 30, 2004 the Company issued 1,450,000 shares of common stock
valued at market value of $116,000 as signing bonuses.
On August 30, 2004 the Company issued 2,857,143 shares of common stock
for cash purchase of $200,000. In connection with this investment, a
total of 714,285 warrants at an exercise price of $0.10 per share were
attached. These warrants have a three year life from the date of
issuance.
On August 30, 2004, the Company issued 1,428,571 shares of common stock
valued at market value of $112,857 for financing services rendered.
On November 3, 2004 the Company issued 500,000 shares of common stock
valued at $50,000 for services rendered.
On November 3, 2004 the Company issued 8,000,000 shares of common stock
valued at market value of $800,000 as part payment for the acquisition
of Optimal.
F-22
On November 24, 2004, the Company issued 10,000,000 shares of common
stock valued at market value of $1,000,000 in full settlement of an
outstanding debt.
On December 2, 2004, the Company issued 1,500,000 shares of common
stock valued at market value of $240,000 to various consultants for
services rendered.
On December 2, 2004 the Company issued 500,000 shares of common stock
valued at market value of $80,000 as part payment for the acquisition
of Optimal.
On December 2, 2004 the Company issued 450,000 shares of common stock
valued at market value of $67,500 to various consultants for services
rendered.
On December 27, 2004 the Company issued 2,446,428 shares of common
stock valued at $342,500 for services rendered.
On December 30, 2004 the Company issued 500,000 shares of common stock
valued at $70,000 for services rendered
On August 3, 2004, the Company issued 250,000 shares of Series A 5%
Convertible Preferred Stock for $250,000. This stock is convertible
into 3,521,126 common shares, at a conversion rate of $0.071 per share.
In addition, attached to the issuance are 880,282 common stock purchase
warrants at an exercise price of $0.167 per share. In connection with
this offering the Company recognized a deemed dividend of $120,423, of
which $76,057 is attributed to the beneficial conversion feature, and
$44,366 is attributed to the value of the warrants which are
exercisable upon issuance. The value of the warrants was determined
with use of the Black-Scholes pricing model with the following factors:
3 year life, risk free rate of return of 4% and a volatility factor of
125%.
On October 27, 2004, the Company issued 125,000 shares of Series A 5%
Convertible Preferred Stock for $125,000. This stock is convertible
into 2,371,912 common shares, at a conversion rate of $0.0527 per
share. In addition, attached to the issuance are 592,978 common stock
purchase warrants at an exercise price of $0.124 per share. In
connection with this offering the Company recognized a deemed dividend
of $68,785, of which $45,422 is attributed to the beneficial conversion
feature, and $23,363 is attributed to the value of the warrants which
are exercisable upon issuance. The value of the warrants was determined
with use of the Black-Scholes pricing model with the following factors:
3 year life, risk free rate of return of 4% and a volatility factor of
125%.
All of the above securities were issued pursuant to an exemption from
the registration requirements of the Securities Act 1933, as amended,
pursuant to Section 4(2) thereof.
10. STOCK PURCHASE WARRANTS
During the year ended December 31, 2004, the Company issued the following
warrants:
During the year ended December 31, 2004, the Company issued 3,166,667
warrants associated with various debt issuances. (see Note 7)
During the year ended December 31, 2004, the Company issued warrants to
purchase 714,285 shares at $0.10 in connections with the sale of common
stock (see Note 9)
During the year ended December 31, 2004, the Company issued for
services warrants to purchase 3,950,000 shares of common stock at
prices ranging from $0.055 to $0.19 per. The Company has valued
1,750,000 of these warrants at $183,000, and has accounted for this as
F-23
an operating expense. The valuation was based upon a Black-Scholes
calculation, assuming a three year life, a risk free rate of return of
ranging from approximately 2 to 4% and a volatility ranging from
approximately 100% to 250%. The remaining 2,200,000 warrants, issued
for services, were issued at exercise prices ranging from $0.10 to
$0.19 per share, with a 120 day life. These remaining 2,200,000
warrants were valued at $11,490, and has accounted for this as an
operating expense. Theses warrants were valued based upon a
Black-Scholes calculation, assuming a 120 day life, a risk free rate of
return of approximately 4% and a volatility of approximately 100% to
250%. These 2,200,000 warrants have expired as of December 31, 2003.
During the year ended December 31, 2003, the Company issued the following
warrants:
During the year ended December 31, 2003, the Company issued a warrant
for the purchase of 1,000,000 shares at $0.10 per share. These warrants
are associated with debt issuances. (see Note 7)
A reconciliation of warrant activity is as follows:
Number of Weighted
shares average
issuable exercise Price
-------------- ---------------
Balance at January 1, 2003 5,735,714 $ 0.055
Granted 1,000,000 0.10
Exercised - -
Expired (1,885,714) (1.07)
-------------- ---------------
Balance at December 31, 2003 4,850,000
0.053
Granted 9,504,211 0.143
Exercised - -
Expired (2,200,000) (0.152)
-------------- ---------------
Balance at December 31, 2004 12,154,211 $ 2.059
============== ===============
The following table summarized warrants outstanding and exercisable as of December 31, 2004:
Number of Weighted-average
shares remaining Number of
underlying contractual shares
Exercise Price warrants life exercisable
-------------------- -------------- -------------- --------------
(in Years)
$6.20 - $6.28 3,850,000 1.29 3,850,000
$0.32 - $0.15 4,996,948 2.66 4,996,948
$0.124 - $0.055 3,307,263 2.23 3,307,263
-------------- -------------- --------------
12,154,211 1.34 12,154,211
|
11. STOCK OPTIONS
On July 15, 2002, the Company's Board of Directors passed a resolution (i)
amending the 2001 Stock Option Plan, as permitted under section 8 thereof, to
increase the maximum number of Shares that may be issued or transferred pursuant
to Options to 14,000,000 and (ii) adopting the 2002 Stock Compensation Plan,
which provides for the issue of up to 1,250,000 shares at $0.02 per share and
1,250,000 at $0.03.
F-24
On July 31, 2002, the Company's Board of Directors passed a resolution providing
for the issue of cashless options to 2 former executives of the Company to
acquire a total of 8,003,875 shares of the Company at a deemed price of $0.0075
in settlement of outstanding salaries. Options covered by this resolution were
issued on September 9, 2002 resulting in an administrative cost of $60,029. As
of December 31, 2002, 3,448,280 of these options had been exercised leaving a
balance outstanding of 4,555,595.
On November 6, 2003, the Company's Board of Directors passed a resolution
amending the 2001 Stock Option Plan, as permitted under section 8 thereof, to
increase the maximum number of Shares that may be issued or transferred pursuant
to the Plan to 30,000,000. In the year ended December 31, 2003, the Company
granted to employees under this Plan 1,260,000 common share options. Of these
option granted in 2003, a total of 240,000 were cancelled in the year ended
December 31, 2004 upon termination of various employees.
In April 2003, the Company adopted the 2003 Stock Option Plan. A total of
4,000,000 shares may be issued under this Plan. As of December 31, 2004 no
options have been granted under this plan.
No options were issued to GPSI staff in the year ended December 31, 2004.
There were no options granted in the year ended December 31, 2004
Stock option activity under the stock option plan is as follows:
Weighted-
Number of Shares average
Issuable exercise
# price $
--------------------------- --------------------------- --------------
Balance December 31, 2002 5,655,595 $0.045
Granted 1,260,000 0.10
Exercised
--------------------------- ---------------------------- -----------
Balance December 31, 2003 6,915,595 0.055
Granted 0 0
Exercised 0 0
Expired (240,000) 0.10
-------------------------- ----------------------------- -----------
Balance December 31, 2004 6,675,595 $0.053
============================= ===========
|
The following table summarizes the outstanding and exercisable options as at
December 31, 2004
Exercise Number Weighted-average Number
prices outstanding remaining exercisable
$ # contractual life #
--------------- ------------------ -------------------- -------------
0.20 1,100,000 1.00 1,100,000
0.075 4,555,595 2.69 4,555,595
0.10 1,020,000 2.75 1,020,000
--------------- ------------------ -------------------- -----------
6,675,595 6,675,595
|
F-25
12. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office premises and certain of its office equipment under
operating leases with various expiration dates to 2006. Rent expense for the
years ended December 31, 2004 and December 31, 2003 was $111,983 and $58,299
respectively. This table shows future minimum lease commitments under the leases
at December 31, 2004
2005 $ 79,234
2006 6,610
-------
$ 85,844
=======
|
Legal Proceedings
The Company has been threatened with potential litigation for an amount of
approximately $155,000, which is included in accounts payable. The agreement is
that further negotiations will take place before any action is taken on this
balance.
The Company's wholly owned subsidiary, IGT is a defendant in a number of
lawsuits principally arising from vendor debt, which in the aggregate are not
material or accounted for on the books. Both IGT and ProShot have filed Chapter
7 petitions under the federal bankruptcy laws. The financial statements have not
been adjusted to reflect the bankruptcy filings.
13. INCOME TAXES
The Company is subject to United States Federal income taxes at an approximate
rate of 35% and is subject to Canadian federal and provincial combined tax rates
of approximately 36%. It is eligible for a credit against its US taxes of
amounts approximating its Canadian taxes.
The reconciliation of the provision (recovery) for income taxes before the
extraordinary loss, at the United States federal statutory rate compared to the
Company's income tax expense as reported is as follows:
2004 2003
---------- -----------
$ 000's $ 000's
---------- -----------
Expected (benefit) at U.S. statutory rates (3,147) (1,291)
Change in valuation allowance 1,834 668
Non-deductible expenses 1,313 623
---------- ----------
Income tax provision (benefit) - -
========== ==========
|
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company has
recognized, a valuation allowance for those deferred tax assets for which it is
more likely than not that realization will not occur. Significant components of
the Company's deferred tax assets as of December 31 are as follows:
F-26
1 2004
----------
$ 000's
----------
Net operating loss carryforwards 9,030
Research expenditures for Canadian tax purposes 1,170
----------
Total deferred tax assets 10,200
10,200
----------
Net deferred tax assets -
==========
|
The Company has scientific research expenditures for Canadian income tax
purposes in the amount of $3,655,000 that may be applied to reduce taxable
income of future years for Canadian income tax purposes.
The Company has net operating losses for United States and Canadian income tax
purposes of approximately $25,800,000, which will expire in the year 2024.
Pursuant to Section 382 of the Internal Revenue Code, use of the Company's net
operating loss carryforwards may be limited if the Company experiences a
cumulative change in ownership of greater than 50% in a moving three-year
period. Ownership changes could impact the Company's ability to utilize net
operating losses and credit carryforwards remaining at the ownership change
date. The limitation will be determined by the fair market value of common stock
outstanding prior to the ownership change, multiplied by the applicable federal
rate.
F-27
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