UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF
1934
For the transition period from ____________________ to _____________________
Commission file number 000-50054
USA Technologies, Inc.
----------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2679963
------------ ----------
(State or other jurisdiction of incorporation (I.R.S. employer
or organization) Identification No.)
100 Deerfield Lane, Suite 140, Malvern, Pennsylvania 19355
---------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(610) 989-0340
--------------
(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 [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
As of November 4, 2005, there were 453,960,687 shares of Common Stock, no par
value, outstanding.
USA TECHNOLOGIES, INC.
INDEX
PAGE NO.
Part I - Financial Information
Item 1. Condensed Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2005
and June 30, 2005 2
Consolidated Statements of Operations - Three months ended
September 30, 2005 and 2004 3
Consolidated Statement of Shareholders' Equity - Three months
ended September 30, 2005 4
Consolidated Statements of Cash Flows - Three months ended
September 30, 2005 and 2004 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures 16
Part II - Other Information
Item 1. Legal Proceedings 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 6. Exhibits 17
Signatures 18
Certifications 19
1
USA Technologies, Inc.
Consolidated Balance Sheets
September 30, June 30,
2005 2005
(Unaudited)
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 829,248 $ 2,097,881
Accounts receivable, less allowance for
uncollectible accounts of approximately
$210,000 at September 30, 2005 and
$196,000 at June 30, 2005 879,048 744,041
Finance receivables 253,757 255,595
Inventory 1,566,731 1,697,236
Prepaid expenses and other current assets 189,003 240,324
Subscriptions receivable -- 35,723
Investment 30,535 39,467
------------- -------------
Total current assets 3,748,322 5,110,267
Finance receivables, less current portion 251,588 269,722
Property and equipment, net 749,779 684,927
Intangibles, net 9,286,082 9,595,232
Goodwill 7,663,208 7,663,208
Other assets 68,409 68,409
------------- -------------
Total assets $ 21,767,388 $ 23,391,765
============= =============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 2,794,381 $ 3,265,928
Accrued expenses 1,443,246 1,479,352
Current obligations under long-term debt 89,460 100,646
Convertible Senior Notes 1,164,836 1,252,161
------------- -------------
Total current liabilities 5,491,923 6,098,087
Convertible Senior Notes, less current portion 8,091,894 7,897,314
Long-term debt, less current portion 64,346 87,179
------------- -------------
Total liabilities 13,648,163 14,082,580
Commitments and contingencies (Note 6)
Shareholders' equity:
Preferred Stock, no par value:
Authorized shares - 1,800,000
Series A Convertible Preferred - Authorized
shares-900,000 Issued and outstanding
shares- 521,642 as of September 30, 2005
and 522,742 as of June 30, 2005
(liquidation preference of $13,052,450
at September 30, 2005) 3,695,068 3,702,856
Common Stock, no par value:
Authorized shares - 560,000,000
Issued and outstanding shares - 449,233,378
at September 30, 2005 and 433,567,931 at
June 30, 2005 123,639,427 121,598,475
Subscriptions receivable (233,850) (233,850)
Accumulated other comprehensive income (loss) (5,852) 3,080
Accumulated deficit (118,975,568) (115,761,376)
------------- -------------
Total shareholders' equity 8,119,225 9,309,185
------------- -------------
Total liabilities and shareholders' equity $ 21,767,388 $ 23,391,765
============= =============
See accompanying notes.
2
USA Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
Three months ended
September 30,
2005 2004
------------- -------------
Revenues:
Equipment sales $ 1,072,370 $ 765,346
License and transaction fees 291,516 267,232
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Total revenues 1,363,886 1,032,578
Cost of sales 1,048,959 902,044
------------- -------------
Gross profit 314,927 130,534
Operating expenses:
General and administrative 1,107,503 1,442,178
Compensation 1,353,596 1,300,022
Depreciation and amortization 409,793 396,178
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Total operating expenses 2,870,892 3,138,378
------------- -------------
Operating loss (2,555,965) (3,007,844)
Other income (expense):
Interest income 20,492 10,537
Interest expense:
Coupon or stated rate (345,002) (296,591)
Non-cash interest and amortization
of debt discount (316,397) (346,739)
------------- -------------
Total interest expense (661,399) (643,330)
------------- -------------
Total other income (expense) (640,907) (632,793)
------------- -------------
Net loss (3,196,872) (3,640,637)
Cumulative preferred dividends (392,057) (392,057)
------------- -------------
Loss applicable to common shares $ (3,588,929) $ (4,032,694)
============= =============
Loss per common share (basic and diluted) $ (0.01) $ (0.01)
============= =============
Weighted average number of common shares
outstanding (basic and diluted)
402,765,774 355,719,640
============= =============
See accompanying notes.
3
USA Technologies, Inc.
Consolidated Statement of Shareholders' Equity
(Unaudited)
Series A Accumulated
Convertible Other
Preferred Common Subscriptions Comprehensive Accumulated
Stock Stock Receivable Income (Loss) Deficit Total
-------------- ------------ -------------- -------------- -------------- -----------
Balance, June 30, 2005 $ 3,702,856 $121,598,475 $ (233,850) $ 3,080 $ (115,761,376) $ 9,309,185
Issuance of 14,426,900 shares
of Common Stock to accredited
investors at varying prices
per share -- 1,807,990 -- -- -- 1,807,990
Conversion of 1,100 shares of
Preferred Stock to 1,110
shares of Common Stock (7,788) 7,788 -- -- -- --
Conversion of $17,320 of
cumulative preferred
dividends into 1,732 shares
of Common Stock at $10.00 per
share 17,320 (17,320) --
Issuance of 1,185,715 shares of
Common Stock from the
conversion of Senior Notes -- 197,143 -- -- -- 197,143
Issuance of 50,000 shares of
Common Stock for employee
compensation -- 7,200 -- -- -- 7,200
Stock option compensation
charges -- 3,511 -- -- -- 3,511
Comprehensive loss:
Net loss -- -- -- (3,196,872) (3,196,872)
Unrealized loss on investment -- -- (8,932) -- (8,932)
-----------
Total comprehensive loss (3,205,804)
-------------- ------------ -------------- -------------- -------------- -----------
Balance, September 30, 2005 $ 3,695,068 $123,639,427 $ (233,850) $ (5,852) $ (118,975,568) $ 8,119,225
============== ============ ============== ============== ============== ===========
See accompanying notes.
4
USA Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
September 30,
2005 2004
----------- -----------
Operating activities
Net loss $(3,196,872) $(3,640,637)
Adjustments to reconcile net loss to net cash used
in operating activities:
Charges incurred in connection with the
issuance of Common Stock, Common Stock
Purchase Warrants and Senior Notes 7,200 8,500
Charges incurred in connection with stock
option compensation 3,511 --
Interest amortization related to Senior Notes 316,397 346,739
Amortization 309,150 309,150
Depreciation 100,643 87,028
Changes in operating assets and liabilities:
Accounts receivable (135,007) (112,474)
Finance receivables 19,972 (56,965)
Inventory 130,505 (188,922)
Prepaid expenses and other assets 51,321 (48,852)
Accounts payable (471,547) 5,496
Accrued expenses (36,106) (154,567)
----------- -----------
Net cash used in operating activities (2,900,833) (3,445,504)
Investing activities
Purchase of property and equipment, net (165,495) (93,904)
Cash received from the sale of assets held for
sale -- 23,700
----------- -----------
Net cash used in investing activities (165,495) (70,204)
Financing activities
Net proceeds from issuance of Common Stock and
exercise of Common Stock Warrants 1,807,990 933,411
Collection of subscriptions receivable 35,723 300,000
Repayment of senior notes (12,000) --
Repayment of long-term debt (34,018) (110,278)
----------- -----------
Net cash provided by financing activities 1,797,695 1,123,133
----------- -----------
Net decrease in cash and cash equivalents (1,268,633) (2,392,575)
Cash and cash equivalents at beginning of period 2,097,881 3,019,214
----------- -----------
Cash and cash equivalents at end of period $ 829,248 $ 626,639
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 355,039 $ 299,848
=========== ===========
Conversion of Senior Notes to Common Stock $ 197,143 $ 10,000
=========== ===========
Cancellation of Common Stock in connection with
the Bayview acquisition $ -- $ (322,000)
=========== ===========
Conversion of Convertible Preferred Stock to
Common Stock $ 7,788 $ --
=========== ===========
Conversion of Convertible Preferred Dividends to
Common Stock $ 17,320 $ --
=========== ===========
See accompanying notes.
5
1. Accounting Policies
Interim Financial Information
The accompanying unaudited consolidated financial statements of USA
Technologies, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and therefore should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended June 30, 2005.
In the opinion of management, all adjustments considered necessary, consisting
of normal recurring adjustments, have been included. Operating results for the
three-month month period ended September 30, 2005 are not necessarily indicative
of the results that may be expected for the year ending June 30, 2006. The
balance sheet at June 30, 2005 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The Company continues to incur operating losses and has a working capital
deficiency. These factors raise doubt about the Company's ability to continue as
a going concern. Management believes that the actions presently considered or
being taken, as described in the liquidity and capital resources section of item
2, will allow the company to continue as a going concern.
For further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended June 30,
2005.
Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Stitch Networks Corporation ("Stitch").
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassification
Certain amounts in the prior period financial statements have been reclassified
to conform to the current period presentation.
Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or market
and consists of finished goods and packaging materials.
6
1. Accounting Policies (Continued)
Income Taxes
No provision for income taxes has been made in the three months ended September
30, 2005 and 2004 given the Company's losses in 2005 and 2004 and available net
operating loss carryforwards. A benefit has not been recorded as the realization
of the net operating losses is not assured and the timing in which the Company
can utilize its net operating loss carryforwards in any year or in total may be
limited by provisions of the Internal Revenue Code regarding changes in
ownership of corporations.
Loss Per Common Share
Basic earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period.
Diluted earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period
plus the dilutive effect (unless such effect is anti-dilutive) of potential
common shares. No exercise of stock options, purchase rights, stock purchase
warrants, or the conversion of senior notes, debentures, preferred stock, or
cumulative preferred dividends was assumed during the periods presented because
the assumed exercise of these securities would be anti-dilutive.
Accounting For Stock Options
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment" ("FAS 123(R)"), which establishes standards
for transactions in which an entity exchanges its equity instruments for goods
or services. This standard requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award.
On July 1, 2006, the Company adopted FAS123(R) using the Modified Prospective
Application method. For outstanding nonvested share-based awards as of July 1,
2006, compensation expense for the portion of the award for which the requisite
services have not been rendered will be recognized in the Statement of
Operations as the services are rendered. Compensation expense will be recognized
based on the grant-date fair value of the share-based award as previously
calculated under FAS 123 at the time of the grant, however, the Company is
required to adjust the compensation expense for expected forfeitures. Awards
granted subsequent to July 1, 2005 will be based on the guidance provided by FAS
123(R).
Due to the adoption of FAS 123(R), the Company has recognized $3,511 of
compensation expense related to a single grant of 300,000 common stock options
during the prior fiscal year for which were not fully vested as of the date of
adoption. The remainder of the outstanding common stock options were fully
vested as of the date of adoption. The effect of the adoption on the Company's
operating loss and net loss for the quarter ended September 30, 2005 was $3,511.
There was no impact on cash flows or basic and diluted earnings per share.
There were no stock options granted during the quarter ended September 30, 2005
and 2004. The pro-forma disclosures required by FAS 123(R) have not been
included as the pro-forma compensation expense related to the vesting of options
during the quarter ended September 30, 2004 was not considered to be material.
7
2. Accrued Expenses
Accrued expenses consist of the following:
September 30, June 30,
2005 2005
------------- ----------
Accrued compensation and related sales commissions $ 367,207 $ 404,485
Accrued interest 435,459 445,495
Accrued professional fees 94,551 151,220
Accrued taxes and filing fees 100,461 97,860
Accrued consulting fees 60,000 122,500
Advanced customer billings 82,325 65,385
Accrued other 303,243 192,407
------------- ----------
$ 1,443,246 $1,479,352
============= ==========
3. Senior Notes
As of September 30, 2005, the outstanding balance of Senior Notes was
$9,256,730. This is comprised of notes with a face amount of $11,717,391 less
unamortized debt discount of $2,460,661.
Debt discount and other issuance costs associated with the Senior Notes are
amortized to interest expense over the remaining life of the Senior Notes. Upon
conversion of Senior Notes into Common Stock, unamortized costs relating to the
notes converted are charged to interest expense. Total charges to interest for
amortization of debt discount and other issuance costs were $316,397 for the
three months ended September 30, 2005 and $346,739 for the three months ended
September 30, 2004.
During the three months ended September 30, 2005 and 2004, Senior Notes totaling
$197,143 and $10,000, respectively, were converted into 1,185,715 and 50,000
shares, respectively, of the Company's Common Stock.
On September 26, 2005, the Company approved a private placement offering
(non-dilutive) of up to $2,000,000 of principal amount 10% Senior Notes due
December 31, 2008 (the "2008-B Senior Notes"). The offering will terminate on
November 30, 2005. Interest on the 2008-B Senior Notes shall be paid on a
quarterly basis in arrears at the rate of 10% per annum with the outstanding
principal amount of the 2008-B Senior Notes together with all accrued and unpaid
interest thereon to be paid in full no later than December 31, 2008. In
addition, for each $10,000 investment in the 2008-B Senior Notes, the subscriber
would also receive a special purchase right to purchase up to 100,000 shares of
Common Stock at $.20 per share at any time on or before December 31, 2008. If
all of the Senior Notes are sold, the Company would issue special purchase
rights to acquire up to 20,000,000 shares of Common Stock. As of the date
hereof, the number of issued and outstanding shares on a fully diluted basis is
slightly less than the number of our authorized shares.
8
3. Senior Notes (Continued)
As a result, the Common Stock underlying the special purchase rights has not and
will not be reserved for issuance by the Company. The special purchase rights
are non-dilutive and can only be exercised if the shares issuable upon the
exercise of the special purchase rights are made available through the
prepayment by the Company of the currently outstanding Convertible Senior Notes
that are convertible at $.20 per share. As of the date hereof, there are
approximately $9,000,000 principal amount of these Convertible Senior Notes
currently outstanding. The holders of the special purchase rights shall provide
the Company with at least 14-days advance notice of the intent to exercise the
special purchase rights. If the Company is not able to make the shares available
through the repayment of the existing Convertible Senior Notes during such
period, then the holder shall not be able to exercise the special purchase
rights and the special purchase rights attempted to be exercised shall be deemed
null and void. In such event, the appropriate principal amount of the related
2008-B Senior Note (i.e., $10,000 principal amount for each 100,000 of purchase
rights) shall become due and payable by the Company within six months. In
addition, the interest rate on the principal amount of the related 2008-B Senior
Note shall increase from 10% to 12% per annum effective retroactively from and
after the original issuance date of the related 2008-B Senior Note. The 2008-B
Senior Notes as well as any shares to be issued upon exercise of the special
purchase rights have not been registered under the Act and can not be sold or
transferred unless the shares or the 2008-B Senior Notes are so registered or
are transferred or sold pursuant to an exemption from registration. As of
October 21, 2005, there have been no issuances of the 2008-B Senior Notes.
4. Common Stock
On April 4, 2005, the Company entered into a Common Stock Purchase Agreement
("2005 Common Stock Agreement") that terminates August 11, 2007. Pursuant to the
2005 Common Stock Agreement, an accredited investor agreed to purchase shares of
the Company's Common Stock, provided that the aggregate purchase price does not
exceed $10,000,000. Under the 2005 Common Stock Agreement, the Company has the
right at any time to require the investor to purchase Common Stock from the
Company at the lower of: (i) $0.30 per share; or (ii) 90% of the closing bid
price per share on the date prior to the date of the delivery by the Company to
the investor of notice of his obligation to purchase. During any calendar month,
the investor cannot be required by the Company to purchase Common Stock for an
aggregate purchase price in excess of $800,000. The Company can require the
investor to purchase shares under the Common Stock Agreement only if the shares
have been registered by the Company for resale under the Act. Although the
Company filed a registration statement related to this agreement that included
20,500,000 shares of Common Stock and was effective May 13, 2005, the Company
has the right in the future, if necessary, to register additional shares in
order to ensure that a sufficient number of shares are available for purchase by
the investor. During the three months ended September 30, 2005, the Company
issued 14,426,900 shares of Common Stock under the 2005 Common Stock Agreement
for total gross proceeds of $1,807,990.
5. Common Stock Warrants
As of September 30, 2005, there were 32,132,019 Common Stock warrants
outstanding, all of which were exercisable at exercise prices ranging from $0.07
to $1.25 per share.
9
6. Commitments and Contingencies
Various legal actions and claims occurring in the normal course of business are
pending or may be instituted or asserted in the future against the Company. The
Company does not believe that the resolution of these matters will have a
material effect on the financial position or results of operations of the
Company.
As previously reported, a Complaint was filed against the Company by Swartz
Private Equity, LLC ("Swartz") alleging that the Company breached various
agreements entered into with Swartz in August and September 2000 in connection
with the so-called equity line of credit provided by Swartz to the Company. The
Complaint requests money damages of $4,350,381 representing the alleged value of
the warrants currently held by or claimed to be due to Swartz, money damages of
$196,953 representing a termination fee allegedly due in connection with the
termination of the agreements, and unspecified money damages relating to the
alleged breach of the rights of first refusal.
The Company's response to the Complaint denied any liability to Swartz and
asserted various counterclaims against Swartz that seek money damages and other
affirmative relief against Swartz. The Company's response, among other things,
states that the entire transaction is void and unenforceable because Swartz had
failed to register as a broker-dealer under applicable Federal and state
securities laws as required in order for Swartz to be engaged in the business of
providing equity line products. In September 2005, the Company served various
discovery requests upon Swartz that have not been responded to by Swartz as of
the date hereof.
The Company intends to vigorously defend this action and to prosecute its
counterclaims. In particular, the Company believes it has a substantial defense
to the Complaint because Swartz was not registered as a broker-dealer, and
intends to vigorously pursue this defense. At the present time, the Company is
unable to estimate the possible range of damages that the Company might incur
should this action be resolved against the Company.
As of September 30, 2005, the Company had committed to purchase approximately
$529,000 of inventory from a third party contract manufacturer through December
31, 2005.
10
7. Subsequent Events
During October 2005, the Company approved a non-dilutive private placement
offering of up to $2,333,333 of principal amount 10% Convertible Senior Notes
due June 30, 2008 (the "2008-C Senior Notes") to the holders of the 2005-D
Common Stock Warrants, which were received in connection with an offering that
commenced on March 22, 2005 and ended on April 15, 2005 ("2005-D Private
Placement Offering) in which accredited investors purchased Common Stock at
$0.15 per share. The 2008-C Senior Note offering will terminate on November 30,
2005. The holders of the 2005-D Common Stock Warrants shall have the right to
purchase the principal amount of the 2008-C Senior Notes equal to the number of
2005-D Common Stock Warrants multiplied by $0.10. Upon any investment in the
offering, the corresponding 2005-D Common Stock Warrants shall be cancelled,
resulting in a non-dilutive offering. Interest on the 2008-C Senior Notes shall
be paid on a quarterly basis in arrears at the rate of 10% per annum with the
outstanding principal amount of the 2008-C Senior Notes together with all
accrued and unpaid interest thereon to be paid in full no later than June 30,
2008. The 2008-C Senior Notes are convertible at any time into Common Stock at
the rate of $0.10 per share. If all of the 2008-C Senior Notes were sold, the
Company would cancel the corresponding 23,333,333 2005-D Common Stock Warrants
and if the 2008-C Senior Notes were then converted, the Company would issue an
aggregate of 23,333,333 shares on Common Stock. In addition, for each $10,000
investment in the 2008-C Senior Notes, the subscriber would also receive a
special purchase right to purchase up to 100,000 shares of Common Stock at $.20
per share at any time on or before December 31, 2008. If all of the 2008-C
Senior Notes are sold, the Company would issue special purchase rights to
acquire up to 23,333,333 shares of Common Stock at $.20 per share.
As of the date hereof, the number of issued and outstanding shares on a fully
diluted basis is slightly less than the number of our authorized shares. As a
result, the Common Stock underlying the special purchase rights has not and will
not be reserved for issuance by the Company. The special purchase rights are
non-dilutive and can only be exercised if the shares issuable upon the exercise
of the special purchase rights are made available through the prepayment by the
Company of the currently outstanding Convertible Senior Notes that are
convertible at $.20 per share. As of the date hereof, there are approximately
$9,000,000 principal amount of these Convertible Senior Notes currently
outstanding. The holders of the special purchase rights shall provide the
Company with at least 14-days advance notice of the intent to exercise the
special purchase rights. If the Company is not able to make the shares available
through the repayment of the existing Convertible Senior Notes during such
period, then the holder shall not be able to exercise the special purchase
rights and the special purchase rights attempted to be exercised shall be deemed
null and void. In such event, the appropriate principal amount of the related
2008-C Senior Note (i.e., $10,000 principal amount for each 100,000 of purchase
rights) shall become due and payable by the Company within three months. In
addition, the interest rate on the principal amount of the related 2008-B Senior
Note shall increase from 10% to 12% per annum effective retroactively from and
after the original issuance date of the related 2008-C Senior Note. The 2008-C
Senior Notes as well as any shares to be issued upon exercise of the special
purchase rights have not been registered under the Act and can not be sold or
transferred unless the shares or the 2008-C Senior Notes are so registered or
are transferred or sold pursuant to an exemption from registration. As of
November 4, 2005, there were issuances of $373,333 of the 2008-C Senior Notes.
11
7. Subsequent Events (Continued)
During October 2005, the Company approved a temporary reduction in the exercise
price of the 2005-D Common Stock Warrants from $0.15 to $0.10 per share through
November 30, 2005. As of November 4, 2005, the Company received $300,000 and
issued 3,000,000 shares of Common Stock as a result of the exercise of the
2005-D Common Stock Warrants at $.10 per share.
During October 2005, the Company approved a non-dilutive private placement
offering of up to $1,000,000 of Notes ("Bridge Notes") due January 6, 2006 with
interest payable on the due date at a rate of 10% per annum. The offering will
terminate on November 30, 2005. If all of the aforementioned 2008-C Senior Notes
have not been subscribed on the due date of the Bridge Notes, the Bridge Notes
would be automatically exchanged for a like principal amount of new Convertible
Senior Notes due December 31, 2010 ("2010-B Senior Notes"), otherwise the
principal amount will be repaid. Interest on the 2010-B Senior Notes would be
payable quarterly at 10% per annum and would be convertible into Common Shares
at $0.10 per share.
In addition, for each $10,000 of 2010-B Senior Notes issued in exchange for the
Bridge Notes, the Company would also issue special purchase rights that would
enable the holder to purchase up to 100,000 shares of Common Stock at $0.20 per
share through December 31, 2008. The proceeds from the exercise of special
purchase rights would be used to prepay the existing convertible senior notes of
the Company that are convertible at $0.20 per share, therefore making the
special purchase rights non-dilutive. If all of the Bridge Notes are exchanged
for 2010-B Senior Notes, the Company would issue special purchase rights to
acquire up to 10,000,000 shares of Common Stock. As of the date hereof, the
number of issued and outstanding shares on a fully diluted basis is slightly
less than the number of our authorized shares. As a result, the Common Stock
underlying the special purchase rights has not and will not be reserved for
issuance by the Company. The special purchase rights are non-dilutive and can
only be exercised if the shares issuable upon the exercise of the special
purchase rights are made available through the prepayment by the Company of the
currently outstanding Convertible Senior Notes that are convertible at $.20 per
share. As of the date hereof, there are approximately $9,000,000 principal
amount of these Convertible Senior Notes currently outstanding. The holders of
the special purchase rights shall provide the Company with at least 14-days
advance notice of the intent to exercise the special purchase rights. If the
Company is not able to make the shares available through the repayment of the
existing Convertible Senior Notes during such period, then the holder shall not
be able to exercise the special purchase rights and the special purchase rights
attempted to be exercised shall be deemed null and void. In such event, the
appropriate principal amount of the related 2010-B Senior Note (i.e., $10,000
principal amount for each 100,000 of purchase rights) shall become due and
payable by the Company within three months. In addition, the interest rate on
the principal amount of the related 2010-B Senior Note shall increase from 10%
to 12% per annum effective retroactively from and after the original issuance
date of the related 2010-B Senior Note. The 2010-B Senior Notes as well as any
shares to be issued upon exercise of the special purchase rights have not been
registered under the Act and can not be sold or transferred unless the shares or
the 2010-B Senior Notes are so registered or are transferred or sold pursuant to
an exemption from registration. Through November 4, 2005, the Company issued
$200,000 of the Bridge Notes.
From October 1 through November 4, the Company issued an additional 1,725,998
shares of Common Stock under the 2005 Common Stock Agreement for total gross
proceeds of $160,000.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
This Form 10-Q contains certain forward looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
For this purpose, forward looking statements are any statements contained herein
that are not statements of historical fact and include, but are not limited to,
those preceded by or that include the words, "believes," "expects,"
"anticipates," or similar expressions. Those statements are subject to known and
unknown risks, uncertainties and other factors that could cause the actual
results to differ materially from those contemplated by the statements. The
forward looking information is based on various factors and was derived using
numerous assumptions. Important factors that could cause the Company's actual
results to differ materially from those projected, include, for example (i) the
ability of the Company to generate sufficient sales to generate operating
profits, or to sell products at a profit, (ii) the ability of the Company to
raise funds in the future through sales of securities, (iii) whether the Company
is able to enter into binding agreements with third parties to assist in product
or network development, (iv) the ability of the Company to commercialize its
developmental products, or if actually commercialized, to obtain commercial
acceptance thereof, (v) the ability of the Company to compete with its
competitors to obtain market share, (vi) the ability of the Company to obtain
sufficient funds through operations or otherwise to repay its debt obligations,
including but not limited to Senior Notes, or to fund development and marketing
of its products, (vii) the ability of the Company to obtain approval of its
pending patent applications or the risk that its technologies would infringe
patents owned by others, (viii) the ability of the Company to satisfy its trade
obligations included in accounts payable and accrued liabilities, and (ix) the
ability of the Company to predict or estimate its future quarterly or annual
revenues given the developing and unpredictable market for its products and the
lack of established revenues. Although the Company believes that the forward
looking statements contained herein are reasonable, it can give no assurance
that the Company's expectations will be met.
Results of Operations
Three months ended September 30, 2005
Revenues for the three months ended September 30, 2005 were $1,363,886 compared
to $1,032,578 for the corresponding three-month period in the previous fiscal
year. This $331,308 or 32% increase was primarily due to an increase in
equipment sales of approximately $307,000 and license and transaction fees of
approximately $24,000. The increase in equipment sales was due to an increase in
sales of approximately $64,000 of energy conservation equipment, approximately
$149,000 in laundry equipment, and approximately $135,000 in e-Port vending
equipment sales, offset by a decrease of approximately $36,000 in sales of
business centers.
Cost of sales for the period consisted of equipment costs of approximately
$856,000 and network and transaction related costs of $193,000. The increase in
cost of sales of $146,915 or 16% over the prior year period was due to an
increase in equipment costs of approximately $414,000, offset by a decrease of
approximately $267,000 of network and transaction related costs.
Gross profit for the three months ended September 30, 2005 was $314,927,
compared to gross profit of $130,534 for the corresponding three-month period in
the previous fiscal year. This 141% increase is due to the combined effect of
the increase in energy, laundry and vending equipment sales and the decrease in
network and transaction related costs.
General and administrative expense of $1,107,503 decreased by $334,675 or 23%
primarily due to a reduction in consulting fees of approximately $250,000 and a
reduction in public relations fees of approximately $56,000.
13
Compensation expense of $1,353,596 increased by $53,574 or 4% primarily due to
an increase in salaries expense of approximately $40,000 due to an increase in
the number of employees and annual salary increases.
The quarter ended September 30, 2005 resulted in a net loss of $3,196,872
(approximately $0.7 million of non-cash charges) compared to a net loss of
$3,640,637 (approximately $0.8 million of non-cash charges) for the quarter
ended September 30, 2004.
Liquidity and Capital Resources
For the three months ended September 30, 2005, net cash of $2,900,833 was used
by operating activities, primarily due to the net loss of $3,196,872 offset by
non-cash charges totaling $736,901 for transactions involving the issuance of
Common Stock for services, depreciation and amortization of assets, and
amortization of debt discount. In addition to these non-cash charges, the
Company's net operating assets decreased by $440,862 primarily due to a decrease
in accounts payable.
Proceeds from financing activities for the three months ended September 30, 2005
provided $1,797,695 of funds, which were necessary to support cash used in
operating and investing activities. Net proceeds of $1,797,695 were realized
from the issuance of Common Stock ($1,807,990), the collection of Common Stock
subscriptions receivable ($35,723), offset by cash used to repay long-term debt
($34,018) and Senior Notes ($12,000).
The Company has incurred losses since inception. Cumulative losses through
September 30, 2005 amounted to approximately $119,000,000. The Company has
continued to raise capital through equity and debt offerings to fund operations.
During the year ended June 30, 2005, cash used in operating activities was
approximately $992,000 per month. During the second half of fiscal year 2005,
the Company made efforts to improve its working capital management. For the six
months ended June 30, 2005, cash used in operating activities was approximately
$927,000 per month. Using the second half of the prior fiscal year as a basis
for estimating cash requirements for the year ending June 30, 2006 (which
assumes a static level of revenues), cash requirements for the fiscal year 2006,
including requirements for capital expenditures and repayments of long-term
debt, would be approximately $12,600,000.
As of September 30, 2005, the Company had approximately $829,000 of cash and
cash equivalents on hand.
On April 4, 2005, the Company and an accredited investor entered into a new
Common Stock Purchase Agreement ("2005 Common Stock Agreement") that terminates
August 11, 2007, as more fully described in Note 4 to the accompanying Condensed
Consolidated Financial Statements. As of November 4, 2005, there are
approximately 850,000 shares that remain registered for issuance under the 2005
Common Stock Agreement. Based upon a share price of $.10, these shares would
provide approximately $85,000 of available funds. After considering these funds,
approximately $7,500,000 of funds remain available under this 2005 Common Stock
Agreement, however, the Company would be required to increase the number of its
authorized shares and register these shares for resale under the Act.
On September 26, 2005, the Company approved a private placement offering
(non-dilutive), expiring November 30, 2005, of up to $2,000,000 of principal
amount 10% Senior Notes due December 31, 2008 (the "2008-B Senior Notes"), as
more fully described in Note 3 to the accompanying Condensed Consolidated
Financial Statements. Through November 4, 2005, the Company has not sold any of
the 2008-B Senior Notes.
14
During October 2005, the Company approved a non-dilutive private placement
offering of up to $2,333,333 of principal amount 10% Convertible Senior Notes
due June 30, 2008 (the "2008-C Senior Notes") to the holders of the 2005-D
Common Stock Warrants, as more fully described in Note 7 to the accompanying
Condensed Consolidated Financial Statements. Through November 4, 2005, the
Company has sold $373,333 of the 2008-C Senior Notes.
During October 2005, the Company approved a temporary reduction in the exercise
price of the 2005-D Common Stock Warrants from $0.15 to $0.10 per share through
November 30, 2005. As of November 4, 2005, the Company received $300,000 and
issued 3,000,000 shares of Common Stock as a result of the exercise of the
2005-D Common Stock Warrants at $.10 per share.
During October 2005, the Company approved a non-dilutive private placement
offering of up to $1,000,000 of Notes ("Bridge Notes") due January 6, 2006 with
interest payable on the due date at a rate of 10% per annum. If all of the
aforementioned 2008-C Senior Notes have not been subscribed on the due date of
the Bridge Notes, the Bridge Notes would be automatically exchanged for a like
principal amount of new Convertible Senior Notes due December 31, 2010 ("2010-B
Senior Notes"), otherwise the principal amount will be repaid, as more fully
described in Note 7 to the accompanying Condensed Consolidated Financial
Statements. Through November 4, 2005, the Company issued $200,000 of the Bridge
Notes.
Funding sources in place to meet the Company's cash requirements for the year
ending June 30, 2006 are primarily comprised of approximately $829,000 in cash
and cash equivalents on hand as of September 30, 2005, the proceeds that are
available under the 2005 Common Stock Purchase Agreement detailed above ($85,000
at $0.10 per share), the proceeds anticipated to be received in connection with
the sales of the 2008-B Senior Notes of up to $2,000,000, the proceeds
anticipated to be received in connection with the sales of the 2008-C Senior
Notes of up to $2,333,333, the proceeds anticipated to be received in connection
with sales of the Bridge Notes of up to $1,000,000, and future exercises of
warrants issued in connection with the 2005-D Private Placement Offering. The
Company believes these sources should provide sufficient funds through March 31,
2006, including repayment of approximately $900,000 of Senior Notes scheduled to
mature on December 31, 2005. Subsequent to March 31, 2006, and assuming that
there would be no material increase in revenues, the Company anticipates meeting
its liquidity needs through a combination of issuing debt securities or
additional equity securities. For example, the Company could issue additional
equity securities for up to approximately $7,500,000 under its existing 2005
Common Stock Agreement as more fully described above. If the Company is required
to issue additional equity securities, the Company would be required to increase
the number of its authorized and outstanding shares, as the number of issued and
outstanding shares on a fully diluted basis as of the date hereof is only
slightly less than the number of authorized shares (560,000,000).
If the capital resources described above do not materialize, or if the Company
is unsuccessful in meeting its forecasted operating plans, the Company has the
alternative of significantly reducing its expenses and operations to remain in
business.
The Company has scheduled its Annual Meeting of Shareholders for December 13,
2005. The matters scheduled for consideration and approval by the shareholders
at the Annual Meeting are the election of Directors, the ratification of the
appointment of the Company's independent registered public accounting firm, and
the increase of the authorized shares of Common Stock to 640,000,000 shares.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risks for interest rate changes is not
significant. Interest rates on its Senior Notes and long-term debt are generally
fixed and its investments in cash equivalents and other securities are not
significant. Market risks related to fluctuations of foreign currencies are not
significant and the Company has no derivative financial instruments.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The principal executive officer and principal financial officer have evaluated
the Company's disclosure controls and procedures as of September 30, 2005. Based
on this evaluation, they conclude that the disclosure controls and procedures
effectively ensure that the information required to be disclosed in our filings
and submissions under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
(b) Changes in internal controls.
There have been no changes during the quarter ended September 30, 2005 in the
Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, internal control over
financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
See Note 6 to the accompanying Condensed Consolidated Financial Statements,
which is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended September 30, 2005, the Company issued to Steve Illes
14,426,900 shares of Common Stock for an aggregate purchase price of $1,807,990
pursuant to a Common Stock Purchase Agreement dated April 4, 2005 between Mr.
Illes and the Company. The offer and sale of the shares were exempt from
registration under Rule 506 promulgated under Section 4(2) of the Act. Mr. Illes
is an accredited investor, made appropriate investment representations, was
afforded access to all public filings and all other information that the Company
could reasonably obtain. We have agreed to register the shares for resale under
the Act.
During the quarter ended September 30, 2005, the Company issued an aggregate of
1,185,715 shares of Common Stock to 6 holders of its Convertible Senior Notes
upon their conversion for an aggregate of $197,143. Of such Convertible Senior
Notes, $157,143 were converted at $.20 per share and $40,000 were converted at
$.10 per share. The offer and sales of the shares was exempt from the
registration requirements of the Act under Rule 506 promulgated thereunder. In
this regard, the offer and sale thereof was to existing security holders and did
not involve any general advertising or solicitation and the securities contained
appropriate restrictive legends under the Act.
Item 3. Defaults Upon Senior Securities
There were no defaults on any senior securities. However, on August 1, 2005, an
additional $392,057 of dividends accrued on our cumulative Series A Convertible
Preferred Stock. The total accrued and unpaid dividends on our Series A
Convertible Preferred Stock as of October 27, 2005 are $7,836,030. The dividend
accrual dates for our Preferred Stock are February 1 and August 1. The annual
cumulative dividend on our Preferred Stock is $1.50 per share.
16
Item 6. Exhibits
31.1 Certifications of Chief Executive Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934.
31.2 Certifications of Chief Financial Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934.
32 Certifications by the Chief Executive Officer and Chief Financial Officer
pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USA TECHNOLOGIES, INC.
Date: November 7, 2005 /s/ George R. Jensen, Jr.
-----------------------------------------
George R. Jensen, Jr., Chairman,
Chief Executive Officer
Date: November 7, 2005 /s/ David M. DeMedio
-----------------------------------------
David M. DeMedio, Chief Financial Officer
18