UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-QSB
(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, 2003
------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT
For the transition period from ____________________ to _____________________
Commission file number 0-50054
USA Technologies, Inc.
----------------------
(Exact name of small business issuer 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)
Registrant's telephone number, area code first. (610)-989-0340
--------------
Check whether the Registrant has (1) 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__
As of October 31, 2003, there were 283,565,516 shares of Common Stock, no par
value, outstanding.
USA TECHNOLOGIES, INC.
INDEX
PAGE NO.
PART I - Financial Information
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2003
and June 30, 2003 2
Consolidated Statements of Operations - Three months ended
September 30, 2003 and 2002 3
Consolidated Statement of Shareholders' Equity - Three months
ended September 30, 2003 4
Consolidated Statements of Cash Flows - Three months ended
September 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis or Plan
of Operations 14
ITEM 3. Controls and Procedures 21
PART II - Other Information 21
ITEM 2. Changes in Securities 21
ITEM 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 25
1
USA Technologies, Inc.
Consolidated Balance Sheets
SEPTEMBER 30, JUNE 30,
2003 2003
(UNAUDITED)
---------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,618,420 $ 2,384,455
Accounts receivable, less allowance for uncollectible
accounts of $69,000 at September 30, 2003 and
$65,000 at June 30, 2003 1,466,017 414,796
Other receivable 395,249 -
Inventory 911,463 457,900
Prepaid expenses and other current assets 312,328 201,383
Subscriptions receivable 406,687 1,013,400
Investment 658,264 904,049
----------------------------
Total current assets 8,768,428 5,375,983
Property and equipment, less accumulated depreciation of
$3,350,932 at September 30, 2003 and $3,216,139 at
June 30, 2003 1,150,959 943,784
Software development costs, at cost, less accumulated
amortization of $4,660,413 at September 30, 2003 and
$4,327,526 at June 30, 2003 665,773 998,660
Goodwill 8,275,141 7,945,580
Intangibles, less accumulated amortization of $609,718
at September 30, 2003 and $328,500 at June 30, 2003 11,759,282 2,591,500
Other assets 10,094 37,174
----------------------------
Total assets $ 30,629,677 $ 17,892,681
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,497,806 $ 2,266,156
Accrued expenses 3,071,905 2,720,743
Current obligations under long-term debt 813,681 830,674
Convertible Senior Notes 246,962 349,942
----------------------------
Total current liabilities 6,630,354 6,167,515
Convertible Senior Notes, less current portion 6,326,047 7,808,469
Long-term debt, less current portion 101,564 224,614
----------------------------
Total liabilities 13,057,965 14,200,598
Shareholders' equity:
Preferred Stock, no par value:
Authorized shares--1,800,000
Series A Convertible Preferred--Authorized shares - 900,000
Issued and outstanding shares--524,492 at September
30, 2003 and June 30, 2003 (liquidation preference of
$11,551,396 at September 30, 2003) 3,715,246 3,715,246
Common Stock, no par value:
Authorized shares--400,000,000
Issued and outstanding shares--281,237,382 at
September 30, 2003 and 218,741,042 at June 30, 2003 101,855,015 78,790,405
Accumulated other comprehensive income 118,103 -
Accumulated deficit (88,116,652) (78,813,568)
----------------------------
Total shareholders' equity 17,571,712 3,692,083
----------------------------
Total liabilities and shareholders' equity $ 30,629,677 $ 17,892,681
============================
See accompanying notes.
2
USA Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
--------------------------------
Revenues:
Equipment sales $ 1,286,478 $ 188,488
License and transaction fees 319,649 342,653
Product sales 74,481 203,304
--------------------------------
Total revenues 1,680,608 734,445
Cost of sales (including amortization of software
development costs) 1,082,163 667,460
--------------------------------
Gross profit 598,445 66,985
Operating expenses:
General and administrative 1,501,769 1,642,378
Compensation 5,703,198 845,719
Depreciation and amortization 394,959 247,084
Loss on debt modification 277,297 -
--------------------------------
Total operating expenses 7,877,223 2,735,181
--------------------------------
Operating loss (7,278,778) (2,668,196)
Other income (expense):
Interest income 7,729 2,974
Gain on sale of investment 31,361 -
Interest expense:
Coupon or stated rate (265,491) (256,278)
Non-cash interest and amortization of debt discount (1,797,905) (652,718)
--------------------------------
Total interest expense (2,063,396) (908,996)
--------------------------------
Total other income (expense) (2,024,306) (906,022)
--------------------------------
Net loss (9,303,084) (3,574,218)
Cumulative preferred dividends (393,369) (396,962)
--------------------------------
Loss applicable to common shares $ (9,696,453) $ (3,971,180)
=================================
Loss per common share (basic and diluted) $ (0.04) $ (0.06)
=================================
Weighted average number of common
shares outstanding (basic and diluted) 249,989,212 71,192,921
=================================
See accompanying notes.
3
USA Technologies, Inc.
Consolidated Statement of Shareholders' Equity
(Unaudited)
SERIES A ACCUMULATED
CONVERTIBLE OTHER
PREFERRED COMMON ACCUMULATED COMPREHENSIVE
STOCK STOCK DEFICIT INCOME TOTAL
-----------------------------------------------------------------------------
Balance, June 30, 2003 $3,715,246 $78,790,405 $(78,813,568) $ - $3,692,083
Exercise of 535,258 Common Stock
Warrants at $0.10 per share - 53,526 - - 53,526
Issuance of 7,500,834 shares of
Common Stock from the conversion
of 12% Senior Notes - 1,500,167 - - 1,500,167
Issuance of 475,000 shares of Common
Stock in exchange for professional
services - 177,000 - - 177,000
Issuance of 10,500,000 shares of
Common Stock to executive in
connection with employment
agreement - 4,620,000 - - 4,620,000
Issuance of 22,737,791 shares of
Common Stock with various private
placement offerings at varying prices
per share - 5,275,279 - - 5,275,279
Issuance of 577,457 shares of Common
Stock and related Common Stock
Warrants in lieu of cash payment for
interest on the 12% Senior Notes - 363,831 - - 363,831
Debt discount relating to beneficial
conversion feature on 12% Senior Notes - 1,796,607 - - 1,796,607
Issuance of 20,170,000 shares of Common
Stock in connection with the Bayview
acquisition - 9,278,200 - - 9,278,200
Net loss - - (9,303,084) - (9,303,084)
Unrealized gain on investment - - - 118,103 118,103
------------
Total comprehensive loss (9,184,981)
--------------------------------------------------------------------
Balance, September 30, 2003 $3,715,246 $101,855,015 $(88,116,652) $118,103 $17,571,712
====================================================================
See accompanying notes.
4
USA Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
------------------------------
OPERATING ACTIVITIES
Net loss $ (9,303,084) $(3,574,218)
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 4,692,000 160,142
Interest expense on Senior Notes paid through the issuance of Common
Stock 363,831 139,113
Interest amortization related to Senior Notes and Convertible Debentures 1,434,074 513,605
Amortization 614,105 364,276
Depreciation 143,356 174,084
Loss on debt modification 277,297 -
Gain on sale of investment (31,361) -
Changes in operating assets and liabilities:
Accounts receivable (1,051,221) 47,524
Inventory (453,563) 21,970
Prepaid expenses and other assets 4,039 (77,588)
Accounts payable 231,650 1,052,811
Accrued expenses 351,162 (122,811)
------------------------------
Net cash used in operating activities (2,727,715) (1,301,092)
INVESTING ACTIVITIES
Purchase of property and equipment (105,826) (45,468)
Cash paid in connection with Bayview acquisition (727,969) -
------------------------------
Net cash used in investing activities (833,795) (45,468)
FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock and
exercise of Common Stock Warrants 4,933,355 294,931
Net proceeds from issuance of Senior Notes and Convertible Debentures - 1,064,560
Net repayment of long-term debt (140,043) (175,834)
Collection of subscriptions receivable 1,002,163 35,000
------------------------------
Net cash provided by financing activities 5,795,475 1,218,657
Net increase (decrease) in cash and cash equivalents 2,233,965 (127,903)
Cash and cash equivalents at beginning of period 2,384,455 557,970
-----------------------------
Cash and cash equivalents at end of period $ 4,618,420 $ 430,067
=============================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 249,423 $ 347,752
=============================
Subscriptions receivable $ 406,687 $ -
=============================
Conversion of Senior Notes to Common Stock $ 1,500,167 $ 120,000
=============================
Beneficial conversion feature related to Senior Notes $ 1,796,607 $ 410,247
=============================
Prepaid stock expenses through issuance of Common Stock $ 105,000 $ 204,000
=============================
Issuance of Common Stock in connection with the Bayview acquisition $ 9,278,200 $ -
=============================
Other receivable for sale of Jubilee investment $ 395,249 $ -
=============================
Deposits used to fund debt and equity $ - $ 360,000
=============================
Issuance of Common Stock related to Senior Note Offering $ - $ 854,288
=============================
See accompanying notes.
5
USA Technologies, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
1. BUSINESS
--------
USA Technologies, Inc., a Pennsylvania corporation (the Company), was
incorporated on January 16, 1992. The Company provides unattended cashless
payment/control systems and associated network and services for the copy, fax,
debit card, smart card, personal computer, laundry, and vending industries. The
Company's devices make available credit and debit card and other payment methods
in connection with the sale of a variety of products and services. The Company's
customers are principally located in the United States and are comprised of
hotels, chains, consumer package goods companies, information technology and
vending operators.
The Company offers the Business Express(R) and Business Express(R) Limited
Service (LSS) principally to the hospitality industry. The Business Express(R)
and Business Express(R) Limited Service (LSS) combines the Company's business
applications for computers, copiers and facsimile machines into a business
center unit. The Company has developed its next generation of cashless
control/payment systems (e-Port(TM)), which includes capabilities for
interactive multimedia and e-commerce, acceptance of other forms of electronic
payments and remote monitoring of host machine data and is being marketed and
sold to operators, distributors and original equipment manufacturers (OEM)
primarily in the vending industry.
With the acquisition of the assets of Bayview Technology Group, LLC in
July 2003, the Company also sells and distributes energy saving devices. These
devices control energy consumption in vending machines, glass front coolers,
laser printers, monitors and other office peripherals, and are used throughout
the United States by many of the same customers that use the Company's other
equipment and services.
2. ACCOUNTING POLICIES
-------------------
INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments considered necessary have been included.
Operating results for the three-month period ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 2004. The balance sheet at June 30, 2003 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.
6
For further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended June 30, 2003.
RECLASSIFICATION
Certain amounts in the prior period financial statements have been
reclassified to conform to the current year presentation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States 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.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and Stitch Networks Corporation ("Stitch"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents represent all highly liquid investments with original
maturities of three months or less. Cash equivalents are comprised of a money
market fund and certificates of deposit.
INVENTORY
Inventory, which principally consists of finished goods and components, is
stated at the lower of cost (first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The straight-line method of
depreciation is used over the estimated useful lives of the related assets.
Leasehold improvements are amortized on the straight-line basis over the lesser
of the estimated useful life of the asset or the respective lease terms.
IMPAIRMENT OF LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets", the Company
reviews its long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. If the
carrying amount of an asset or group of assets exceeds its net realizable value,
the asset will be written down to its fair value.
7
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of cost over fair value of the net assets
purchased in acquisitions. The Company accounts for goodwill in accordance with
Statement of Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill
and Other Intangible Assets". Under SFAS No. 142, goodwill is not amortized to
earnings, but instead is subject to periodic testing for impairment. The Company
tests goodwill for impairment using a two-step process. The first step screens
for potential impairment, while the second step measures the amount of
impairment, if any. The Company uses a discounted cash flow analysis to complete
the first step in this process. Testing for impairment is to be done at least
annually and at other times if events or circumstances arise that indicate that
impairment may have occurred. The Company has selected April 1 as its annual
test date. During the quarter ended September 30, 2003, no events or
circumstances arose indicating an impairment of goodwill may have occurred.
Intangible assets include patents, trademarks and non-compete arrangements
purchased in acquisitions. Amortization of these intangibles is computed using
the straight-line method over their estimated useful lives of five and ten
years. Amortization expense was $281,218 and $73,000 for the three months ended
September 30, 2003 and 2002, respectively.
REVENUE RECOGNITION
Revenue from the sale of equipment is recognized on the terms of
freight-on-board shipping point, or upon installation and acceptance of the
equipment if installation services are purchased for the related equipment.
Transaction processing revenue is recognized upon the usage of the Company's
cashless payment and control network. Service fees for access to the Company's
equipment and network services are recognized on a monthly basis. Product
revenues are recognized from the sale of products from Company owned vending
machines when there is purchase and acceptance of product by the vending
customer. Customers have the ability to return vended products for a full
refund. The Company estimates an allowance of product returns at the date of
sale.
INVESTMENT
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities". Management determines the appropriate
classifications of securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses reported in a
separate component of shareholders' equity in other comprehensive income (loss).
If the investment sustains an other-than-temporary decline in fair value, the
investment is written down to its fair value by a charge to earnings.
8
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs pursuant to Statement
of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", after technological
feasibility of the software is established and through the product's
availability for general release to the Company's customers. All costs incurred
in the research and development of new software and costs incurred prior to the
establishment of technological feasibility are expensed as incurred.
Amortization of software development costs commences when the product becomes
available for general release to customers. Amortization of software development
costs is calculated as the greater of the amount computed using (i) the ratio
that current gross revenues for a product bear to the total of current and
anticipated future gross revenues of that product or (ii) the straight-line
method over the remaining estimated economic life of the product. The Company
reviews the unamortized software development costs at each balance sheet date
and, if necessary, will write down the balance to net realizable value if the
unamortized costs exceed the net realizable value of the asset.
Software development costs are being amortized over a useful life of
two-years. Amortization expense, reflected in cost of sales, was $332,887 and
$291,276 for the three months ended September 30, 2003 and 2002, respectively.
ACCOUNTING FOR STOCK OPTIONS
Statement of Financial Accounting Standards No. 123 (SFAS No.123),
"Accounting for Stock-Based Compensation", provides companies with a choice to
follow the provisions of SFAS No. 123 in determination of stock-based
compensation expense or to continue with the provisions of APB No. 25 (APB 25),
"Accounting for Stock Issued to Employees and Related Interpretations in
Accounting for Stock-Compensation Plans" and the related FASB Interpretation No.
44. The Company has elected to follow the provisions of APB 25. Under APB 25, if
the exercise price of the Company's stock options granted to employees and
directors equals or exceeds the market price of the underlying Common Stock on
the date of grant, no compensation expense is recognized. All stock options
granted by the Company have been at prices equal to the market price of the
Company's Common Stock on the dates of grant. Under SFAS No. 123 the fair value
of stock options is estimated at the date of grant using an option pricing model
such as Black-Scholes and the value determined is amortized to expense over the
option vesting period.
There were no stock options granted during the year ended June 30, 2003 or
during the three months ended September 30, 2003. All options granted through
June 30, 2002 were vested as of that date. Therefore pro-forma net loss and
pro-forma net loss per common share under SFAS 123 for the three months ended
September 30, 2003 and 2002 would be the same as reported by the Company under
APB 25.
9
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 equity instruments. 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 for the periods
presented because the assumed exercise of these securities would be
anti-dilutive.
3. ACQUISITION OF ASSETS OF BAYVIEW TECHNOLOGY GROUP, LLC
------------------------------------------------------
On July 11, 2003, the Company acquired substantially all of the assets of
Bayview Technology Group, LLC (Bayview). Under the terms of the asset purchase
agreement the Company issued to Bayview 20,000,000 shares of its restricted
Common Stock and cash of $631,247 to settle an obligation of Bayview. The
definitive agreement also provides for the Company to assume certain obligations
under a royalty agreement expiring May 31, 2006. In connection with this
transaction the Company also agreed to issue 170,000 shares of its restricted
Common Stock to a consultant who provided certain services to the Company in
connection with this acquisition.
The acquired energy control equipment reduces energy consumption in
vending machines, glass front coolers, laser printers, monitors and other office
peripherals throughout the United States. As a result of the acquisition, the
Company believes it will be a leading provider of end-to-end networked solutions
that includes wireless and internet connections, cashless transaction and
security/ID capability and interactive media functionality, and remote inventory
and auditing control and energy cost reductions and environmental emissions
reductions. The Company also expects to reduce costs through economies of scale.
The preliminary acquisition cost of Bayview was $10,030,894, which
principally was comprised of the issuance of 20,000,000 shares of restricted
Common Stock valued at $9,200,000 and a cash payment of $631,247. The value of
the 20,000,000 shares of Common Stock was determined based on the average market
price of the Company's Common Stock over the two-day period before and after the
definitive agreement date of July 11, 2003. The purchase price also included
acquisition related costs of $199,647.
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition.
Current assets $ 7,628
Property and equipment 244,704
Intangible assets 9,449,000
Goodwill 329,562
--------------
Total assets acquired $ 10,030,894
==============
10
Of the $9,449,000 of acquired intangible assets, $7,424,000 was assigned
to patents that are subject to amortization over a 10-year period, $1,011,000
was assigned to non-compete agreements that are subject to amortization over a
5-year period and $1,014,000 was assigned to trademarks and trade names that are
not subject to amortization.
The acquisition was accounted for using the purchase method and,
accordingly, the results of operations of Bayview have been included in the
accompanying consolidated statements of operations since the date of
acquisition. Results of operations of the Company for the three months ended
September 30, 2003 would not have been significantly different than reported had
the acquisition taken place July 1, 2003. Pro-forma combined results for the
three months ended September 30, 2002 would have been as follows had the
acquisition taken place July 1, 2002 - revenues of $2,431,270; net loss of
$3,511,604; loss applicable to common shares of $3,908,566; loss per common
share (basic and diluted) of $0.04.
4. INVESTMENT IN JUBILEE INVESTMENT TRUST
--------------------------------------
During the year ended June 30, 2003, the Company issued 15,000,000 shares
of its Common Stock for an investment of 1,870,091 shares in Jubilee Investment
Trust, PLC ("Jubilee"), a United Kingdom Investment Trust whose shares trade on
the London Stock Exchange. The Company agreed not to sell the Jubilee shares for
a period of 90 days from January 24, 2003 and to sell a maximum of 10% of the
Jubilee shares during each month thereafter. Jubilee has agreed not to sell the
Company's shares of Common Stock for a period of two years from the date of
issuance unless agreed to by the Company. In September 2003, the Company sold
700,000 of its Jubilee shares for net proceeds of $395,249. These proceeds are
expected to be collected in the subsequent quarter and are reflected as an Other
receivable as of September 30, 2003. A gain of $31,361 was realized from the
sales of these shares. An unrealized gain of $118,103 on the remaining shares
held by the Company is reflected in shareholders' equity as Accumulated other
comprehensive income at September 30, 2003.
5. FINANCING ACTIVITIES
--------------------
The Company currently has five series of Senior Notes outstanding with an
interest rate of 12%, which are convertible into shares of the Company's Common
Stock. The notes are scheduled to mature on December 31, 2003, 2004, 2005, 2006
and 2007. In March 2003, holders of the Senior Notes scheduled to mature on
December 31, 2003 and 2004, respectively, were granted the right to extend their
maturity to December 31, 2006 and 2007, respectively, in exchange for reducing
the conversion rates from $1.25 to $0.20 per share for the 2003 Senior Notes and
from $0.40 to $0.20 per share for the 2004 Senior Notes. This offer is scheduled
to expire on December 31, 2003. During the three months ended September 30,
2003, certain Senior Note holders agreed to exchange an aggregate of $1,824,096
of these notes for notes maturing in 2006 and 2007.
The exchange of the 2003 Senior Notes and 2004 Senior Notes for 2006
Senior Notes and 2007 Senior Notes was deemed a significant modification of the
terms of the 2003 and 2004 Senior Notes and, accordingly, the 2003 and 2004
Senior Notes that were exchanged have been extinguished. The unamortized debt
discount and other issuance costs of $277,297 remaining on the 2003 and 2004
Senior Notes exchanged and extinguished during the three months ended September
30, 2003 have been expensed and have been reported in the consolidated
statements of operations as a Loss on debt modification.
11
The Company's share price during the three months ended September 30, 2003
was greater than the conversion price of the 2006 and 2007 Senior Notes
exchanged for the respective 2003 and 2004 Senior Notes. Therefore, the
intrinsic value of this beneficial conversion feature of $1,796,607 is reflected
as additional equity and debt discount and is being amortized to interest
expense through the maturity dates of these Senior Notes.
During the three months ended September 30, 2003, Senior Notes totaling
$1,500,167 were converted into 7,500,834 shares of the Company's Common Stock.
Debt discount and other issuance costs associated with the Senior Notes
are being amortized to interest expense over the remaining life of the debt
instruments. Upon conversion of Senior Notes into Common Stock, unamortized
costs relating to the notes converted are also charged to interest expense.
Total charges to interest for debt discount and other issuance costs were
$1,434,074 and $513,605 for the three months ended September 30, 2003 and 2002,
respectively.
As of September 30, 2003, outstanding debt for Senior Notes reflected in
the consolidated balance sheet was $6,573,009. This is comprised of an
$11,046,651 face amount of notes less unamortized debt discount and other
issuance costs of $4,473,642. Subsequent to September 30, 2003, holders of 2003
Senior Notes have extended an additional $115,000 of their Senior Notes to 2006.
Accordingly, these notes are reflected in non-current liabilities in the
consolidated balance sheet as of September 30, 2003.
The holders of the Senior Notes currently have the right to purchase
shares of the Company's Common Stock at $0.20 per share using quarterly interest
payments that are due in lieu of a cash payment for the interest. Additionally,
for each share purchased, the note holder is entitled to receive a warrant to
purchase one share of the Company's Common Stock at $0.20 per share exercisable
at any time through June 30, 2004. The Board of Directors has authorized the
Company to offer Common Stock and Common Stock Warrants for cash interest due
through the quarter ended December 31, 2003. For the three months ended
September 30, 2003, 577,457 shares were issued (along with an identical number
of warrants) for payment of interest due for the quarter of $115,472 to those
note holders accepting the offer. The fair value of the warrants issued and the
beneficial conversion feature related to the $0.20 per share rate used to
convert the quarter's interest to Common Stock totaled $248,359 and has been
recorded as additional interest expense for the period.
During the three months ended September 30, 2003, the Company issued
shares of Common Stock in various transactions:
o 2,727,791 shares were issued at $0.10 per share under the 2003-A Private
Placement Offering authorized during fiscal year 2003 which generated
proceeds of $272,779. The Company also issued 295,000 shares under this
offering for services rendered by consultants amounting to $105,000.
o 20,010,000 shares of Common Stock were issued to accredited investors at
$0.25 per share in four private placement offerings, which generated proceeds
of $5,002,500. Included in this amount are Subscriptions receivable of
$315,000, which were collected in October 2003.
12
6. LONG-TERM DEBT
--------------
Long-term debt consisted of the following:
September 30, June 30,
2003 2003
--------------------------
Bank facility $ 696,305 $ 828,466
Working capital loans 166,765 166,765
Other, including capital lease obligations 52,175 60,057
---------- ---------
915,245 1,055,288
Less current portion 813,681 830,674
---------- ---------
$ 101,564 $ 224,614
========== ==========
The bank facility (the Facility) was utilized to fund the purchase of
vending machines placed at locations where Kodak film products are sold.
Borrowings were made from time to time under the Facility, with repayment
schedules set at the time of each borrowing, including equal monthly payments
over 36 months and an interest rate based upon 495 basis points over the three
year U.S. Treasury Notes. The Company granted the bank a security interest in
the film products vending machines. Repayment of principal is also insured by a
Surety Bond issued by a third-party insurer in exchange for an initial fee paid
by the Company. Final maturity of principal on the debt extends into the year
ending June 30, 2005.
In connection with the Stitch acquisition, the Company assumed long-term
debt which included a vending equipment borrowing facility and working capital
loans. These loans are secured by certain assets of Stitch. At September 30,
2003 and June 30, 2003, $166,765 of the working capital loans remain
outstanding, and bear interest at 6.75% per annum. Such loans were payable on
July 8, 2002. During fiscal year 2003, the bank extended the due date on these
loans on several occasions under forbearance agreements. The Company was in
default under this working capital loan agreement, however, on November 6, 2003,
the Company reached an agreement with the bank to pay the remaining balance in
installments over the next twelve months.
7. STOCK OPTIONS AND STOCK WARRANTS
--------------------------------
The Company has granted options to employees and its Board Members to
purchase shares of Common Stock at prices that were at or above fair market
value on the dates the options were granted. The option term and vesting
schedule were established by the contract that granted the option. As of
September 30, 2003, there were 2,646,485 options outstanding to purchase Common
Stock at exercise prices ranging from $0.165 to $4.50 per share, all of which
were fully vested. As of September 30, 2003, there were 47,253,208 fully vested
warrants to purchase Common Stock at exercise prices ranging from $0.07 to $1.25
per share.
13
8. AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT
-------------------------------------------
In July 2003, the Company and the Company's Chief Executive Officer (CEO)
amended the terms of his employment agreement (expiring June 2005). Under the
terms of the previous Executive Employment Agreement, the CEO would have been
granted seven percent (non-dilutive) of all the then issued and outstanding
shares of the Company's Common Stock in the event a "USA Transaction" (as
defined) occurs, which among other events includes a change in control of the
Company. The amended terms of the Executive Employment Agreement, eliminates the
seven percent (non-dilutive) right to receive Common Stock upon a "USA
Transaction" and now grants the CEO an aggregate of 14,000,000 shares of Common
Stock subject to adjustment for stock splits or combinations in the event a "USA
Transaction" occurs. In exchange for the amendment of these terms, the Company
issued an aggregate of 10,500,000 shares of its Common Stock to the CEO valued
at $4,620,000 or $0.44 per share representing the quoted market price of the
Company's Common Stock on the date the purchase agreement was entered into and
the shares were granted as required by generally accepted accounting principles.
The issuance of the shares to the CEO had no effect on shareholders' equity and
did not impact the Company's cash flow from operations. In connection with this
amendment, the CEO also entered into a lock-up agreement pursuant to which he
shall not sell 2,500,000 of these shares for a one-year period and 8,000,000 of
these shares for a two-year period. The CEO will not be required to pay any
additional consideration for these shares of Common Stock. At the time of a "USA
Transaction", all of the 14,000,000 shares to be issued to the CEO in connection
with this amendment are automatically deemed to be issued and outstanding, and
will be entitled to be treated as any other issued and outstanding shares of
Common Stock. These shares will be irrevocable and fully vested, and have no
expiration date and will not be affected by the termination of the CEO with the
Company for any reason whatever.
9. SUBSEQUENT EVENT
-----------------
In October 2003, the Company issued to Alpha Capital Atkiengesellschaft, a
current shareholder, an aggregate of 500,000 shares of Common Stock due to Alpha
as liquidated damages as a result of the occurrence of a Non-Registration Event
as defined under the Company's agreement with Alpha because the Company failed
to register within 120 days of issuance the securities issued to Alpha in
November 2002. The securities were sold to an accredited investor and the offer
and sale thereof did not involve any general advertising or solicitation and the
offer and sale was therefore exempt from registration under Section 4(2) under
the Act.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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. The Company believes that its critical accounting policies and
estimates relate to revenue recognition, software development costs, impairment
of long-lived assets, goodwill and intangible assets and investments. Future
results may differ from our estimates under different assumptions or conditions.
14
REVENUE RECOGNITION
Revenue from the sale of equipment is recognized on the terms of
freight-on-board shipping point, or upon installation and acceptance of the
equipment if installation services are purchased for the related equipment.
Transaction processing revenue is recognized upon the usage of the Company's
cashless payment and control network. Service fees for access to the Company's
equipment and network services are recognized on a monthly basis. Product
revenues are recognized from the sale of products from Company owned vending
machines when there is purchase and acceptance by the vending customer.
Customers have the ability to return vended products for a full refund. The
Company estimates an allowance of product returns at the date of sale.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs pursuant to Statement
of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", after technological
feasibility of the software is established and through the product's
availability for general release to the Company's customers. All costs incurred
in the research and development of new software and costs incurred prior to the
establishment of technological feasibility are expensed as incurred.
Amortization of software development costs commences when the product becomes
available for general release to customers. Amortization of software development
costs is calculated as the greater of the amount computed using (i) the ratio
that current gross revenues for a product bear to the total of current and
anticipated future gross revenues of that product or (ii) the straight-line
method over the remaining estimated economic life of the product. The Company
reviews the unamortized software development costs at each balance sheet date
and, if necessary, will write down the balance to net realizable value if the
unamortized costs exceed the net realizable value of the asset.
Software development costs are being amortized over a useful life of two
years ending in April 2004. Amortization expense, reflected in cost of sales,
was $332,887 and $291,276 for the three months ended September 30, 2003 and
2002, respectively.
IMPAIRMENT OF LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets", the Company
reviews its long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. If the
carrying amount of an asset or group of assets exceeds its net realizable value,
the asset will be written down to its fair value.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of cost over fair value of the net assets
purchased in acquisitions. The Company accounts for goodwill in accordance with
Statement of Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill
and Other Intangible Assets". Under SFAS No. 142, goodwill is not amortized to
15
earnings, but instead is subject to periodic testing for impairment. The Company
tests goodwill for impairment using a two-step process. The first step screens
for potential impairment, while the second step measures the amount of
impairment, if any. The Company uses a discounted cash flow analysis to complete
the first step in this process. Testing for impairment is to be done at least
annually and at other times if events or circumstances arise that indicate that
impairment may have occurred. The Company has selected April 1 as its annual
test date. To date, no impairment of goodwill has occurred.
Intangible assets include patents, trademarks and non-compete arrangements
purchased in acquisitions. Amortization of these intangibles is computed using
the straight-line method over their estimated useful lives of five and ten
years. Amortization expense was $281,218 and $73,000 for the three months ended
September 30, 2003 and 2002, respectively.
INVESTMENT
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities". Management determines the appropriate
classifications of securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses reported in a
separate component of shareholders' equity in other comprehensive income (loss).
A judgmental aspect of accounting for investments involves determining
whether an other-than-temporary decline in value of the investment has been
sustained. If it has been determined that an investment has sustained an
other-than-temporary decline in its value, the investment is written down to its
fair value, by a charge to earnings. Such evaluation is dependent on the
specific facts and circumstances. Factors that are considered by the Company
each quarter in determining whether an other-than-temporary decline in value has
occurred include: the market value of the security in relation to its cost
basis; the financial condition of the investee; and the intent and ability to
retain the investment for a sufficient period of time to allow for recovery in
the market value of the investment. In evaluating the factors above for
available-for-sale securities, management presumes a decline in value to be
other-than-temporary if the quoted market price of the security is below the
investment's cost basis for a period of six months or more. However, the
presumption of an other-than-temporary decline in these instances may be
overcome if there is persuasive evidence indicating that the decline is
temporary in nature (e.g., strong operating performance of investee, historical
volatility of investee, etc.).
FORWARD LOOKING STATEMENTS
This Form 10-QSB 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
16
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, including but
not limited to the exercise of outstanding options and warrants, (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 including the e-Port(TM), 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 (viii) the
ability of the Company to satisfy its trade obligations included in accounts
payable and accrued liabilities. 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
The quarter ended September 30, 2003 resulted in a net loss of $9,303,084
(approximately $7.5 million non-cash) compared to a net loss of $3,574,218
(approximately $1.4 million non-cash) for the quarter ended September 30, 2002.
Revenues were $1,680,608 compared to $734,445 from the previous year's
quarter. This $946,163 or 129% increase was mainly due to the inclusion of the
Company's energy conservation equipment revenues as such revenues did not exist
in the first quarter of the prior year, since the acquisition of Bayview
occurred in July 2003. The increase of $1,097,990 in equipment sales was
primarily due to approximately $945,000 of energy conservation equipment sales
and an increase of $126,000 in e-Port client equipment sales. License and
transaction fees and product sales decreased $23,004 and $128,823, respectively,
as a result of a decrease in the number of sited vending machines in the Kodak
vending placement program. Revenue is still well below the level required for
the Company to be profitable.
Cost of sales for the period consisted of equipment, product and labor
costs of approximately $598,000, software development amortization of
approximately $333,000 and network and transaction related costs of $151,000.
The increase in cost of sales of $414,703 or 62% over the prior year period was
directly attributable to the increase in equipment sales.
Gross profit for the three months ended September 30, 2003 was $598,455,
compared to gross profit of $66,985 in the same period in the prior fiscal year.
This 793% increase was primarily due to an increase in equipment sales of our
e-Port client equipment and the addition of our energy conservation equipment
sales that were not present in the same period in the prior fiscal year.
General and administrative expenses of $1,501,769 decreased by $140,609 or
9% from the same quarter last fiscal year. The decrease was principally due to a
decrease in product development expense of $595,000, offset by an increase in
total general and administrative costs of approximately $352,000 related to the
newly acquired energy conservation equipment line, which consisted primarily of
consulting expense of approximately $145,000 and royalty expense of
approximately $52,000.
17
Compensation expense of $5,703,198 increased by $4,857,479 or 574%
primarily due to the issuance of 10,500,000 shares of Common Stock to the
Company's Chief Executive Officer in connection with the amendment of his
employment agreement. This was a one-time, non-cash charge valued at $4,620,000
representing 95% of the total increase. Another component of this increase was
due to approximately $209,000 of additional compensation expense related to the
operations of the newly acquired energy conservation equipment line.
Depreciation and amortization expense increased by $147,875, largely due
to $238,000 related to the property and equipment and intangible assets
purchased from Bayview. This increase was offset by a decrease of approximately
$90,000 related to other depreciable assets due to a lower depreciable asset
base.
During the quarter, the Company incurred a charge of $277,297 related to
the modification of debt terms for certain 2003 and 2004 12% Convertible Senior
Notes. This charge represents the unamortized debt discount that remained on the
Senior Notes that were scheduled to mature in December 2003 and 2004, and whose
terms were substantially modified when the note holders agreed to extend the
maturity date of their notes in exchange for a reduction in the conversion rate
on the note. There was no such comparable charge in the prior year's quarter
ended September 30, 2002.
The interest expense increase of $1,154,400 was due mainly to non-cash
charges of $1,031,232 related to expensing the unamortized debt discount and
other issuance costs on the 12% Senior Notes that were converted into Common
Stock during the quarter. The decrease in cash interest expense of $82,261 was
mainly due to the issuance of Common Stock in lieu of cash for payment of
interest due to Senior Note holders.
PLAN OF OPERATIONS
With the acquisition of Bayview on July 11, 2003, the Company now designs
and manufactures patented energy conservation devices for equipment such as
laser printers, monitors, office peripherals, refrigerated vending machines and
glass front merchandisers (referred to as slide or visi coolers). These energy
conservation devices reduce power consumption of various types of equipment by
allowing the equipment to operate in power saving mode when full power mode is
not necessary. These devices, which include the VendingMiser, CoolerMiser,
SnackMiser, MonitorMiser and LaserMiser can use activity, occupancy,
temperature, timing or other various methods to determine which mode the
equipment should be in. Route to market for the energy conservation devices is
much the same as the Company's e-Port technology, with the notable addition of
governmental and utility rebate and give-away programs, where by part or all of
the cost of the energy management device is covered by government funds
allocated to energy conservation projects. In August and September 2003, the
Company fulfilled an order for over 3,400 VendingMiser units from Austin Energy
in Austin Texas for a total sale of approximately $486,000.
In October 2003, the Company signed a strategic alliance agreement with
Conopco, Inc. dba Unilever Home & Personal Care North America to be the
exclusive provider of laundry detergent for the e-Suds program to be used in
colleges and universities located in the United States. The agreement provides
for the Company to receive payments per injection of detergent as well as a
series of investment payments to be distributed to various operators who allow
branding of their machines with the Unilever "all" logo.
The Company's vending machines for the Kodak Program are purchased from
Dixie-Narco and the film and cameras are purchased directly from Eastman Kodak
Company. Product revenues through the fiscal year ended June 30, 2003 were
approximately $445,000 and approximately $75,000 for the three months ended
September 30, 2003. In May 2003, Stitch notified Maytag and Dixie-Narco that
they had breached the Kodak Agreement because Maytag had failed to create and
maintain during the term of the Kodak Agreement a customer focus team and Dixie
had failed to service, place and pick up the machines as required in the Kodak
Agreement. In June 2003, Maytag and Dixie-Narco indicated to Stitch that they
were not in breach of the Kodak Agreement and that Stitch had breached the
Agreement by failing to pay certain payments due thereunder. Maytag and Dixie
18
indicated that that the customer focus team was terminated due to Stitch's
breach of the Kodak Agreement by failing to pay fees due thereunder and Stitch's
not taking delivery of vending machines ordered from Dixie. The parties have
been negotiating a resolution of this matter although no settlement has been
finalized. The Company believes that any settlement would involve the
termination of the Kodak Agreement. In such event, although revenues of the
Company would be reduced, because the Kodak program is and has been operating at
a loss, the termination of the program would eliminate these ongoing losses. The
Company also believes that any settlement would involve the payment of the
amount due by Stitch to U.S. Bancorp by the other parties to the Kodak Agreement
and the forgiveness of the payments due by Stitch to Dixie in the approximate
amount of $123,716.
In March 2002, the Company signed an agreement with MEI (Mars
Electronics), a world leader in the manufacturing of electronic coin mechanisms
and dollar bill acceptors for the vending industry. MEI has agreed to sell and
distribute a MEI branded cashless payment system to be developed by the
Company, as part of its portfolio of vending solutions. Commercial availability
is planned for winter 2003. To date, no revenue has been generated from this
agreement.
In October 2002, the Company signed a Strategic Alliance Agreement with
ZiLOG Corporation, a semiconductor company, which is a supplier of
microprocessors to the retail point of sale industry. The agreement allows the
Company's proprietary network software (USALive) to be embedded on a chip
produced by ZiLOG. The Company licenses its software to the purchaser and is
entitled to a fee for the licensing of each such chip. A second revenue stream
could be generated from purchasers who buy the retail point of sales terminals
and begin to use them, if they elect to use the USA network embedded on the
chip. To date, no products have been available for commercial use and
accordingly, no revenues have been generated.
In laundry, American Sales Inc. (ASI) has signed a five-year agreement to
purchase units of Stitch's e-Suds laundry solution for their university
locations in the Midwest, with initial installations to begin in the fall of
2003. In October 2003, the Company installed a system at ASI's facilities for
final testing. The Company anticipates unit sales to begin during the second
quarter of fiscal year 2004.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 2003, net cash of $2,727,715 was
used by operating activities, primarily due to the net loss of $9,303,084 offset
by non-cash charges aggregating to $7,493,302 for transactions involving issuing
Common Stock for services and in connection with the amendment to the CEO's
employment agreement, depreciation and amortization of assets, amortization of
debt discount, loss on debt modifications relating to the Senior Notes and
interest expense relating to the Senior Notes paid through the issuance of
Common Stock and Common Stock Warrants, offset by a gain on the sale of
investment. In addition, the Company's operating assets increased by $917,933
primarily due to accounts receivable and inventory increases related to the
addition of the energy conservation equipment line from the Bayview acquisition.
For the three months ended September 30, 2003, net cash used in investing
activities was $833,795, primarily due to the cash component of the investment
in Bayview of $727,969.
Proceeds from financing activities for the three months ended September
30, 2003 provided the funds necessary to support cash used in operating and
investing activities. Proceeds of $5,935,518 were realized from several private
placement offerings of Common Stock, the exercise of Common Stock Warrants and
collection of Common Stock subscriptions receivable. Payments of long-term debt
and capital leases totaled $140,043 for the quarter.
Long-term debt obligations of the Company as of September 30, 2003 were as
follows:
Bank facility $696,305
Working capital loans 166,765
Other, including capital lease obligations 52,175
--------
915,245
Less current portion 813,681
--------
$101,564
========
The bank facility (the Facility) was utilized to fund the purchase of
vending machines placed at locations where Kodak film products are sold.
Borrowings were made from time to time under the Facility, with repayment
schedules set at the time of each borrowing, including equal monthly payments
over 36 months and an interest rate based upon 495 basis points over the three
year U.S. Treasury Notes. The Company granted the bank a security interest in
the film products vending machines. Repayment of principal is also insured by a
Surety Bond issued by a third-party insurer in exchange for an initial fee paid
by the Company. Final maturity of principal extends into the year ending June
30, 2005.
19
In connection with the Stitch acquisition, the Company assumed long-term
debt which included a vending equipment borrowing facility and working capital
loans. These loans are secured by certain assets of Stitch. At September 30,
2003, $166,765 of the working capital loans remain outstanding, and bear
interest at 6.75% per annum. Such loans were payable on July 8, 2002. During
fiscal year 2003, the bank extended the due date on these loans on several
occasions under forbearance agreements. The Company was in default under this
working capital loan agreement, however, on November 6, 2003, the Company
reached an agreement with the bank to pay the remaining balance in installments
over the next twelve months.
The Company has incurred losses since inception. For the three months
ended September 30, 2003, the net loss was $9,303,084 of which $7,493,302
related to non-cash charges. Cumulative losses through September 30, 2003
amounted to approximately $88 million. The Company has continued to raise
capital through equity and debt offerings to fund operations.
The impact of the Bayview acquisition on cash flow for the three months
ended September 30, 2003 was a net cash outflow of approximately $1.5 million -
$760,000 of cash used in operations and $728,000 invested in operating assets
and liabilities in connection with the purchase. The structure of the
acquisition of the energy conservation equipment line from Bayview did not
include acquiring the working capital required to support the business. The
quarter's operating cash flows reflected an investment for this working capital.
Such amount was greater than that expected to support the on-going business
activities of the energy conservation equipment line by approximately $650,000
due to the acquisition transition and integration. The Company has since reduced
working capital invested in October 2003 by that amount.
During the year ended June 30, 2003, cash used in operating activities was
approximately $750,000 per month. For the three months ended September 30, 2003
cash used in operating activities, excluding the excess working capital
investment related to Bayview, was approximately $700,000 per month. Using that
as a basis for estimating capital requirements for the next twelve months, along
with requirements for capital expenditures and repayment of long-term debt, the
Company anticipates cash needs of approximately $9.1 million through September
30, 2004.
This estimate does not consider the positive impact the Company expects to
achieve from the Bayview acquisition during the remainder of the year and the
incremental revenues from the Company's other products and services. The energy
conservation equipment line acquired from Bayview is expected to generate
revenues of $6 million during the fiscal 2004 year and produce operating cash
flow exceeding $2 million during the remainder of the year. However, deficits in
consolidated operating cash flows are still anticipated for fiscal year 2004 but
at reduced levels as compared to 2003.
As of September 30, 2003, the Company had $4.6 million of cash and cash
equivalents, primarily as a result of proceeds from several private placements
of Common Stock entered into during the three months ended September 30, 2003.
Subscriptions receivable of $406,687 as of September 30, 2003 were collected in
October 2003. Working capital investment related to energy conservation
equipment of $650,000 was realized in cash due to the collection of accounts
receivable subsequent to September 30, 2003. In September 2003, the Company also
20
sold 700,000 shares of its investment in the Jubilee Trust generating net
proceeds of $395,000 (expected to be collected in the subsequent quarter) and
anticipates selling a substantial portion of the remaining Jubilee shares during
fiscal year 2004 creating additional cash of approximately $700,000 based on the
investment's current quoted market price. These available sources of cash should
be sufficient to meet the Company's cash requirements for the remainder of the
2004 fiscal year.
The Company does not expect to rely on the proceeds from the exercise of
warrants to meet its capital requirements. To the extent that the sources of
capital described above are not sufficient to meet the Company's obligations
during the remainder of the year, the Company would reduce operating expenses
accordingly, primarily through reductions in discretionary expenditures such as
travel, marketing, advertising and research and development. In addition, the
Company will continue to employ means to minimize cash requirements such as (i)
issuing shares of Common Stock in lieu of cash for third-party services provided
to the Company, compensation to employees and interest on the 12% Convertible
Senior Notes, (ii) extending maturity dates on the 12% Convertible Senior Notes
by reducing the conversion terms to $0.20 per share on the 12% Convertible
Senior Notes and (iii) negotiating with vendors and suppliers to extend payment
terms of trade obligations.
ITEM 3. 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,
2003. 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, 2003 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 2. CHANGES IN SECURITIES
During the quarter ended September 30, 2003, the Company issued an
aggregate of 535,258 shares of Common Stock to 7 holders of warrants at $0.10
per share for an aggregate of $53,526. Additionally, the Company issued 105,000
shares of Common Stock for services rendered or to be rendered to the Company.
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
21
advertising or solicitation and the securities contained appropriate restrictive
legends under the Act. The Company agreed to use its best efforts to register
the shares for resale under the Act.
During the quarter ended September 30, 2003, the Company issued an
aggregate of 7,500,834 shares of Common Stock to 31 holders of its Convertible
Senior Notes upon their conversion at the rate of $0.20 per share for an
aggregate of $1,500,167. 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.
During July 2003, the Company issued an aggregate of 10,500,000 shares to
George R. Jensen, Jr., our Chairman and Chief Executive Officer, as part of the
amendment to his employment agreement. The offer and sale of these shares was
exempt from registration under Section 4(2) of the Act. Mr. Jensen is an
accredited investor, made appropriate investment representations, was afforded
access to all public filings and all other information that USA could reasonable
obtain, and the securities contained appropriate restrictive legends under the
Act. Mr. Jensen has entered into a lock up agreement pursuant to which he shall
not sell 2,500,000 of the shares for a one year period and 8,000,000 of the
shares for a two year period.
On July 11, 2003, the Company issued 20,000,000 shares to Bayview
Technology Group, LLC, as part of the Company's purchase of substantially all of
the assets of Bayview. The securities were offered and sold under the exemption
from registration set forth in Rule 506 promulgated under the Act. Bayview was
introduced to the Company through the Company's consultant, Robert McGarrah, and
there was no general solicitation or advertising. Bayview has agreed not to sell
any of these shares until July 11, 2004, at which time Bayview shall be
permitted to sell during each calendar month thereafter (on a non-cumulative
basis) the greater of (i) 250,000 shares of the Stock, or (ii) that number of
shares of the Stock equal to five percent (5%) of the immediately prior calendar
month's trading volume of the shares of Common Stock of USA. USA has agreed to
use its best efforts to register all of the shares for resale by Bayview under
the Securities Act of 1933, as amended, for a period of one year (from July 11,
2004 through July 11, 2005).
During September 2003, the Company issued to Wellington Management
Company, LLP, an investment manager, on behalf of several of its clients, an
aggregate of 18,000,000 shares for $0.25 per share. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. All of these
clients are accredited investors. This investor approached the Company regarding
this investment and the Company did not solicit this investor. The Company has
agreed to register the shares for resale under the Act for a period of one year.
22
During September 2003, the Company issued to Prophecy Asset Management, an
accredited investor, an aggregate of 750,000 shares for $0.25 per share. The
offer and sale of the shares was exempt from registration under Section 4(2) of
the Act. This investor approached the Company regarding this investment and the
Company did not solicit this investor. The Company has agreed to register the
shares for resale under the Act for a period of one year.
During September 2003, the Company issued to Fulcrum Global Partners, LLC,
an accredited investor, an aggregate of 260,000 shares for $0.25 per share. The
offer and sale of the shares was exempt from registration under Section 4(2) of
the Act. This investor approached the Company regarding this investment and the
Company did not solicit this investor. The Company has agreed to register the
shares for resale under the Act for a period of one year.
During September 2003, the Company issued to George O'Connell, an
accredited investor and existing shareholder, an aggregate of 1,000,000 shares
for $0.25 per share. The offer and sale of the shares was exempt from
registration under Section 4(2) of the Act. We have agreed to register the
shares for resale under the Act for a period of one year.
During the quarter ended September 30, 2003, the Company issued an
aggregate of 2,727,791 shares of Common Stock to 13 accredited investors at
$0.10 per share in connection with the 2003-A offering for an aggregate of
$272,779. Additionally, the Company issued 295,000 shares for services rendered
or to be rendered to the Company. 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 did not involve any
general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act. The Company agreed to use its best efforts to
register the shares for resale under the Act for a period of two years.
In September 2003, the Company agreed to issue 577,457 shares of Common
Stock and Common Stock Warrants to purchase up to 577,457 shares to holders of
its Convertible Senior Notes who elected to receive these securities in lieu of
the cash interest payment due for the quarter ended September 30, 2003. The
shares were purchased at the rate of $0.20 per share and the Common Stock
Warrants are exercisable at $0.20 per share at any time through June 30, 2004.
The Company has agreed to use its best efforts to register these shares and the
shares underlying the warrants under the Act for resale through June 30, 2004.
The securities were offered and sold under the exemption from registration set
forth in Rule 506 promulgated under Section 4(2) of the Act. All of the note
holders are accredited investors and there was no general solicitation or
advertising.
During the quarter ended September 30, 2003, 54 holders of $1,081,000
principal amount of the Senior Notes maturing in December 2003 elected to extend
these notes until December 31, 2006 and to have the conversion rate reduced from
$1.25 per share to $0.20 per share. The note exchange was exempt from the
registration requirements of the Act pursuant to Section 3(a)(9) thereof.
During the quarter ended September 30, 2003, 23 holders of $743,096
principal amount of the Senior Notes maturing in December 2004 elected to extend
these notes until December 31, 2007 and to have the conversion rate reduced from
$0.40 per share to $0.20 per share. The note exchange was exempt form the
registration requirements of the Act pursuant to Section 3(a)(9) thereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
23
10.21.7 Letter agreement between USA and George R. Jensen, Jr. dated
July 16, 2003.
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32 Certifications by Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
During the three months ended September 30, 2003, the Company filed
the following reports on Form 8-K:
On July 14, 2003 the Company filed a Form 8-K to report information
under Item 2 thereof relating to the purchase of assets of Bayview
Technology Group, LLC (Bayview). In the same Form 8-K, the Company
also reported information under Item 5 thereof relating to the
amendment of the employment agreement of George R. Jensen, Jr., the
Company's Chief Executive Officer. On September 24, 2003 the Company
filed a Form 8-K/A reporting under Item 7 financial statements for
Bayview and related pro-forma financial information.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
USA TECHNOLOGIES, INC.
Date: November 19, 2003 /s/ George R. Jensen, Jr.
-----------------------------------
George R. Jensen, Jr.,
Chairman, Chief Executive Officer
Date: November 19, 2003 /s/ David M. DeMedio
-----------------------------------
David M. DeMedio,
Chief Financial Officer
25