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 March 31, 2004
----------------------
( ) 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 (I.R.S. employer Identification No.)
incorporation or organization)
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 May 17, 2004 there were 353,641,950 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 - March 31, 2004 and June 30, 2003 2
Consolidated Statements of Operations - Three and nine months
ended March 31, 2004 and 2003 3
Consolidated Statement of Shareholders' Equity - Nine months
ended March 31, 2004 4
Consolidated Statements of Cash Flows - Nine months ended
March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis or Plan
of Operations 16
ITEM 3. Controls and Procedures 28
PART II - Other Information
ITEM 2. Changes in Securities 29
ITEM 4. Submission of Matters to a Vote of Security Holders 29
ITEM 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 32
1
USA Technologies, Inc.
Consolidated Balance Sheets
March 31, June 30,
2004 2003
(Unaudited)
----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,459,429 $ 2,384,455
Accounts receivable, less allowance for uncollectible accounts
of $167,000 at March 31, 2004 and $65,000 at June 30, 2003 1,315,958 414,796
Other receivable 762,130 --
Inventory 1,425,126 457,900
Prepaid expenses and other current assets 337,636 201,383
Investment 88,206 904,049
Assets held for sale 93,300 --
Subscriptions receivable -- 1,013,400
------------ -------------
Total current assets 5,481,785 5,375,983
Property and equipment, less accumulated depreciation of
$2,858,489 at March 31, 2004 and $3,216,139 at
June 30, 2003 670,488 943,784
Software development costs, at cost, less accumulated amortization
of $5,326,187 at March 31, 2004 and $4,327,526 at June 30, 2003 -- 998,660
Goodwill 7,985,207 7,945,580
Intangibles, less accumulated amortization of $1,228,018 at
March 31, 2004 and $328,500 at June 30, 2003 11,140,982 2,591,500
Other assets 8,544 37,174
------------ -------------
Total assets $ 25,287,006 $ 17,892,681
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,881,330 $ 2,266,156
Accrued expenses 2,174,533 2,720,743
Current obligations under long-term debt 479,070 830,674
Convertible Senior Notes 387,255 349,942
------------ -------------
Total current liabilities 5,922,188 6,167,515
Convertible Senior Notes, less current portion 6,602,556 7,808,469
Long-term debt, less current portion 17,810 224,614
------------ -------------
Total liabilities 12,542,554 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--523,442 at March 31, 2004 and
524,492 at June 30, 2003 (liquidation preference of
$11,920,670 at March 31, 2004) 3,707,812 3,715,246
Common Stock, no par value:
Authorized shares--475,000,000 at March 31, 2004 and
400,000,000 at June 30, 2003
Issued and outstanding shares--300,151,941 at March 31, 2004
and 218,741,042 at June 30, 2003 104,236,037 78,790,405
Accumulated other comprehensive income 51,819 --
Accumulated deficit (95,251,216) (78,813,568)
------------ -------------
Total shareholders' equity 12,744,452 3,692,083
------------ -------------
Total liabilities and shareholders' equity $ 25,287,006 $ 17,892,681
============ =============
See accompanying notes
2
USA Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
March 31, March 31,
2004 2003 2004 2003
----------- ----------- ------------ ------------
Revenues:
Equipment sales $ 1,026,523 $ 307,598 $ 3,741,359 $ 880,545
Product sales and other 10,924 78,823 304,476 357,703
License and transaction fees 315,242 337,817 902,047 995,082
----------- ----------- ------------ ------------
Total revenues 1,352,689 724,238 4,947,882 2,233,330
Cost of sales (including amortization
of software development costs) 1,070,942 717,773 3,236,524 2,057,173
----------- ----------- ------------ ------------
Gross profit 281,747 6,465 1,711,358 176,157
Operating expenses:
General and administrative 1,814,437 1,940,270 5,096,447 4,951,021
Compensation 1,220,990 1,082,736 8,664,200 2,767,168
Depreciation and amortization 411,205 239,363 1,227,109 734,026
Loss on debt modification -- 959,352 318,915 959,352
----------- ----------- ------------ ------------
Total operating expenses 3,446,632 4,221,721 15,306,671 9,411,567
----------- ----------- ------------ ------------
Operating loss (3,164,885) (4,215,256) (13,595,313) (9,235,410)
Other income (expense):
Interest income 10,183 4,719 29,999 11,956
Gain (loss) on termination of contract (6,600) -- 509,244 --
Gain on sale of investment 572,119 -- 603,480 --
Interest expense:
Coupon or stated rate (343,679) (346,627) (850,919) (924,582)
Non-cash interest and
amortization of debt discount (450,708) (780,519) (3,120,769) (2,394,862)
----------- ----------- ------------ ------------
Total interest expense (794,387) (1,127,146) (3,971,688) (3,319,444)
----------- ----------- ------------ ------------
Total other income (expense) (218,685) (1,122,427) (2,828,965) (3,307,488)
----------- ----------- ------------ ------------
Net loss (3,383,570) (5,337,683) (16,424,278) (12,542,898)
Cumulative preferred dividends (393,144) (396,624) (786,513) (793,586)
----------- ----------- ------------ ------------
Loss applicable to common shares $ (3,776,714) $ (5,734,307) $(17,210,791) $(13,336,484)
=========== =========== ============ ============
Loss per common share (basic and diluted)$ (0.01) $ (0.05) $ (0.06) $ (0.15)
========================== ===========================
Weighted average number of common shares
outstanding (basic and diluted) 293,734,831 115,488,581 276,000,532 91,491,804
========================== ===========================
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
Issuance of 1,050 shares of Common Stock
from the conversion of 1,050 shares
of Preferred Stock (7,434) 7,434 -- -- --
Issuance of 1,337 shares of Common Stock
from the conversion of cumulative
preferred dividends at $10.00 per
share -- 13,370 (13,370) -- --
Exercise of 12,053,218 Common Stock
Warrants and Options -- 1,013,436 -- -- 1,013,436
Issuance of 10,743,154 shares of Common
Stock from the conversion of 12%
Senior Notes -- 2,148,630 -- -- 2,148,630
Issuance of 1,443,070 shares of Common
Stock in exchange for salaries and
professional services -- 387,155 -- -- 387,155
Issuance of 10,500,000 shares of Common
Stock to executive in connection with
employment agreement -- 4,620,000 -- -- 4,620,000
Issuance of 25,437,036 shares of Common
Stock from various private
placement offerings at varying
prices per share -- 5,517,754 -- -- 5,517,754
Issuance of 1,062,034 shares of
Common Stock and related Common Stock
Warrants in lieu of cash payment
for interest on the 12% Senior
Notes -- 478,646 -- -- 478,646
Debt discount relating to beneficial
conversion feature on 12% Senior Notes -- 1,981,007 -- -- 1,981,007
Issuance of 20,170,000 shares of Common
Stock in connection with the Bayview
acquisition -- 9,278,200 -- -- 9,278,200
Net loss -- -- (16,424,278) -- (16,424,278)
Unrealized gain on investment -- -- -- 51,819 51,819
------------
Total comprehensive loss -- -- -- -- (16,372,459)
-----------------------------------------------------------------------
Balance, March 31, 2004 $ 3,707,812 $104,236,037 $(95,251,216) $ 51,819 $ 12,744,452
=======================================================================
See accompanying notes.
4
USA Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
MARCH 31,
2004 2003
------------ ------------
OPERATING ACTIVITIES
Net loss $(16,424,278) $(12,542,898)
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 4,950,905 1,278,724
Interest expense on Senior Notes paid through the issuance of Common Stock 478,646 444,618
Interest amortization related to Senior Notes and Convertible Debentures 2,642,123 1,950,244
Amortization 1,898,178 1,092,828
Depreciation 373,347 632,182
Loss on debt modification 318,915 959,352
Gain on sale of investment (603,480) --
Gain on contract settlement (509,244) --
Changes in operating assets and liabilities:
Accounts receivable (907,662) (104,142)
Other receivable 674,649 --
Inventory (967,226) 190,095
Prepaid expenses and other assets (68,469) 13,008
Accounts payable 746,015 1,361,218
Accrued expenses (256,276) 295,115
------------ ------------
Net cash used in operating activities (7,653,857) (4,429,656)
INVESTING ACTIVITIES
Purchase of property and equipment (273,493) (200,741)
Cash received from sale of property and equipment 35,100 --
Cash paid in connection with Bayview acquisition (727,969) --
Cash received for sale of Jubilee shares 709,011 --
------------ ------------
Net cash used in investing activities (257,351) (200,741)
FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock and exercise of Common Stock Warrants 6,531,190 3,274,805
Net proceeds from issuance of Senior Notes and Convertible Debentures -- 1,792,150
Repayment of long-term debt (558,408) (455,700)
Collection of subscriptions receivable 1,013,400 35,000
------------ ------------
Net cash provided by financing activities 6,986,182 4,646,255
------------ ------------
Net (decrease) increase in cash and cash equivalents (925,026) 15,858
Cash and cash equivalents at beginning of period 2,384,455 557,970
------------ ------------
Cash and cash equivalents at end of period $ 1,459,429 $ 573,828
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 685,121 $ 642,842
============ ============
Conversion of Convertible Preferred Stock to Common Stock $ 7,434 $ 10,266
============ ============
Conversion of Convertible Preferred Dividends to Common Stock $ 13,370 $ 15,970
============ ============
Conversion of Senior Notes and Convertible Debenture to Common Stock $ 2,148,630 $ 252,858
============ ============
Beneficial conversion feature related to Senior Notes $ 1,981,007 $ 1,037,920
============ ============
Prepaid stock expenses through issuance of Common Stock $ 56,250 $ 884,475
============ ============
Issuance of Common Stock in connection with the Bayview acquisition $ 9,278,200 $ --
============ ============
Purchase of investment in Jubilee through issuance of Common Stock $ -- $ 2,850,000
============ ============
Subscriptions receivable $ -- $ 177,000
============ ============
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
companies 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, commercialized and marketed 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.
The Company has also developed, commercialized and is currently marketing
its eSuds Laundry system, an end-to-end solution for the commercial laundry
industry, and its Kiosk software, both of which utilize the Company's network
for transaction processing, web-based reporting, web-based remote monitoring and
management.
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.
6
Operating results for the three and nine month periods ended March 31, 2004 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.
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.
7
IMPAIRMENT OF LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144
(SFAS 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.
In the period when the plan of sale criteria of SFAS 144 are met,
long-lived assets are reported as held for sale, depreciation and amortization
cease, and the assets are reported at the lower of carrying value or fair value
less costs to sell.
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 nine months ended March 31, 2004, no events or
circumstances arose indicating that 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 $309,150 and $899,518 for the three and nine
months ended March 31, 2004, respectively, and $73,000 and $219,000 for the
three and nine months ended March 31, 2003, 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 for product returns at the date of
sale.
8
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 as a
separate component of shareholders' equity in accumulated 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.
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 were amortized over a useful life of two-years.
Amortization expense, reflected in cost of sales, was $332,887 and $998,661 for
the three and nine months ended March 31, 2004, respectively, and $291,276 and
$873,828 for the three and nine months ended March 31, 2003, 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
9
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 nine months ended March 31, 2004. 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 and nine months
ended March 31, 2004 and 2003 would be the same as reported by the Company under
APB 25.
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. ACQUISITIONS
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 provided 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 is used to reduce 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 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.
10
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
===========
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 nine months ended
March 31, 2004 would not have been significantly different than reported had the
acquisition taken place July 1, 2003 as the acquisition occurred on July 11,
2003. Pro-forma combined results for the nine months ended March 31, 2003 would
have been as follows had the acquisition taken place July 1, 2002 - revenues of
$6,306,838; net loss of $12,927,242; loss applicable to common shares of
$13,720,828; loss per common share (basic and diluted) of $0.12.
STITCH NETWORKS CORPORATION
In connection with the acquisition of Stitch, in May 2002, the Company
determined that it would vacate the office space previously occupied by Stitch.
Accordingly, the Company accrued the remaining lease exit costs relating to this
lease in the amount of approximately $354,000 as part of the cost of purchasing
Stitch.
In November 2003, Stitch and the lessor of the office space reached an
agreement that required Stitch to pay the lessor $55,000 as consideration to
release Stitch from any further obligations under the lease. In addition, a
security deposit of approximately $9,000 was retained by the lessor.
Accordingly, the difference between estimated lease exit costs accrued and
actual consideration paid, was recorded as a reduction of goodwill in the amount
of $290,000 during the nine months ended March 31, 2004.
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 in 1,870,091 shares of 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 not sell more than 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, and realized a gain
of $31,361 from this sale. In March 2004, the Company sold 969,091 of the
Jubilee shares for net proceeds of $1,075,891, and realized a gain of $572,119
11
from this sale. Sale proceeds of $762,130 were outstanding as of March 31, 2004
and are reflected as Other receivable in the accompanying financial statements.
These proceeds were subsequently received in April 2004. An unrealized gain of
$51,819 on the remaining shares held by the Company is reflected in
shareholders' equity as Accumulated other comprehensive income at March 31,
2004.
5. FINANCING ACTIVITIES
The Company issued five series of Senior Notes with an interest rate of
12%, which are convertible into shares of the Company's Common Stock. The notes
were 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 expired on
December 31, 2003. Through December 31, 2003, certain Senior Note holders agreed
to exchange an aggregate of $2,303,953 of these notes for new notes maturing in
2006 and 2007. These exchanges included all but $10,000 of the Notes scheduled
to mature on December 31, 2003. Notes scheduled to mature on December 31, 2004
are reflected as a current liability as of March 31, 2004.
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 $318,915 remaining on the 2003 and 2004
Senior Notes exchanged and extinguished during the nine months ended March 31,
2004 have been expensed and have been reported in the consolidated statements of
operations as a Loss on debt modification ($0 and $959,352 for the three months
ended March 31, 2004 and March 31, 2003, respectively).
Through December 31, 2003, when noteholders agreed to exchange their 2003
and 2004 Senior Notes for 2006 and 2007 Senior Notes, respectively, the
Company's share price was often greater than the conversion price of the 2006
and 2007 Senior Notes. Therefore, the intrinsic value of this beneficial
conversion feature of $1,981,007 is reflected as additional equity and debt
discount and is being amortized to interest expense through the maturity dates
of these Senior Notes.
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 expense for debt discount and other issuance costs
were $451,679 and $2,642,123 for the three and nine months ended March 31, 2004,
respectively, and $661,912 and $1,950,244 for the three and nine months ended
March 31, 2003, respectively.
As of March 31, 2004, outstanding debt for Senior Notes reflected in the
consolidated balance sheet was $6,989,811. This is comprised of $10,398,187 face
amount of notes less unamortized debt discount and other issuance costs of
$3,408,376.
12
Through December 31, 2003, the holders of the Senior Notes had the right
to purchase shares of the Company's Common Stock at $0.20 per share using
quarterly interest payments that were due in lieu of a cash payment for the
interest. Additionally, for each share purchased, the note holder was 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. For the nine
months ended March 31, 2004, 1,062,034 common shares were issued (along with an
identical number of warrants) for payment of interest due for the period of
$212,388 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 interest to Common Stock totaled $266,258 and has
been recorded as additional interest expense for the period.
During the nine months ended March 31, 2004, the Company issued shares of
Common Stock in various transactions:
o 4,377,036 shares were issued at $0.10 per share under the 2003-A Private
Placement Offering authorized during fiscal year 2003 which generated net
proceeds of $432,754. The Company also issued 695,000 shares under this
offering for services rendered by consultants amounting to $185,000.
o 550,000 shares were issued at $0.15 per share under the 2004-A Private
Placement Offering, authorized in February 2004, which generated net
proceeds of $82,500 through March 31, 2004. Subsequent to March 31, 2004,
34,450,000 shares have been subscribed for, resulting in net proceeds of
$5,167,500, of which $3,460,000 has been received to date and $1,707,500
for which collection is expected in May 2004.
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.
o 500,000 shares of Common Stock were issued to an accredited investor as
settlement resulting from a non-registration event as defined under the
subscription agreement dated November 4, 2002.
6. LONG-TERM DEBT
Long-term debt consisted of the following:
March 31, June 30,
2004 2003
---------- ----------
Bank facility $ 377,653 $ 828,466
Working capital loans 76,765 166,765
Other, including capital lease obligations 42,462 60,057
---------- ----------
496,880 1,055,288
Less current portion 479,070 830,674
---------- ----------
$ 17,810 $ 224,614
========== ==========
13
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 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, scheduled to extend into the fiscal year ending June
30, 2005, is anticipated to occur during the year ending June 30, 2004 due to
the termination of the vending placement agreement and the removal from service
and sale of the vending machines used as collateral for the bank facility. See
Note 9 Termination of Kodak Vending Placement Agreement.
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 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. On November 6, 2003, the Company reached an agreement
with the bank to make monthly installments that will repay the remaining balance
by October 2004.
7. STOCK OPTIONS AND STOCK WARRANTS
The Company has granted options to employees 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 March 31, 2004, there were 2,134,232
options outstanding to purchase Common Stock at exercise prices ranging from
$0.165 to $2.00 per share, all of which were fully vested, and 35,793,687 fully
vested warrants to purchase Common Stock at exercise prices ranging from $0.070
to $1.25 per share.
On April 21, 2004, the Company and La Jolla Cove Investors, Inc. reached
an agreement regarding La Jolla's letter claiming damages for failure to
register the shares underlying La Jolla's warrants. Per this agreement, the
Company agreed to extend the expiration date of La Jolla's 13,510,000 remaining
warrants until December 1, 2005, La Jolla released all claims against the
Company, and La Jolla agreed to limit the sale of our shares during any calendar
month to an amount not greater than seven percent of the prior month's share
trading volume. On May 11, 2004, the Company agreed the reduce the exercise
price of La Jolla's remaining warrants from $0.1008 to $0.0908. During May 2004,
La Jolla exercised all of their remaining warrants at $0.0908 per share
generating net proceeds of $1,215,900.
8. AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT AND COMPENSATION ARRANGEMENTS
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
14
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 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
whatsoever.
9. TERMINATION OF KODAK VENDING PLACEMENT AGREEMENT
The Company's wholly owned subsidiary, Stitch, had entered into a vending
placement agreement whereby Stitch agreed to purchase film and cameras directly
from Eastman Kodak Company and vending machines from a supplier. Stitch placed
the vending machines at numerous locations throughout the United States under
agreements negotiated with the location owners and derived revenues amounting to
$124,000 and $471,000 for three and nine months ended March 31, 2004,
respectively.
As previously reported, Stitch alleged that the supplier and another party
to the vending agreement breached the vending agreement and the supplier and
another party to the vending agreement alleged that Stitch had breached the
vending agreement. Effective December 31, 2003, the parties finalized a
settlement of this matter which resulted in the termination of the vending
agreement as of December 31, 2003. Under the settlement agreement, the Company
received a payment from Kodak of approximately $675,000. The Company will also
receive payments of $300 per vending machine from the supplier of the vending
machines, as the machines are pulled from service at the supplier's sole cost
and expense. Upon receipt of the $300 per machine, title to the vending machine
will transfer from Stitch to the supplier. Through March 31, 2004 the Company
has received approximately $35,000 for these machines. The settlement agreement
provides that all machines are to be pulled from service no later than mid
calendar year 2004. The agreement also provides for the supplier to cancel a
$124,000 obligation of Stitch for the purchase of vending machines.
The vending machines were used as collateral to secure the bank facility
used to purchase the machines under which $377,653 was outstanding as of March
31, 2004. The Company will repay this debt as the vending machines are returned
to the supplier.
This termination agreement resulted in a gain of $509,244 during the nine
months ended March 31, 2004 and such amount is reflected as Other income in the
Consolidated Statements of Operations. This gain is comprised of the payment
from Kodak of approximately $675,000 plus the cancellation of Stitch's
obligation to the supplier of the vending machines of approximately $124,000
reduced by a write down of the carrying value of vending machines of
approximately $290,000 to reflect the vending machines at their realizable value
15
of $300 per machine. The vending machines are reported as assets held for sale
in the Consolidated Balance Sheet, as it was determined that the plan of sale
criteria in FAS 144 was met in the termination agreement, at which time
depreciation of these assets ceased. To the extent any costs are incurred by
Stitch to fulfill its obligations under the settlement agreement, these costs
will be recorded as incurred, as any additional costs cannot be reasonably
estimated at this time.
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 the estimates under different assumptions or conditions.
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
16
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 $333,000 and $999,000 for the three and nine months ended March 31, 2004,
respectively, and $291,000 and $874,000 for the three and nine months ended
March 31, 2003, 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.
In the period when the plan of sale criteria of SFAS 144 are met,
long-lived assets are reported as held for sale, depreciation and amortization
cease, and assets are reported at the lower of carrying value or fair value less
costs to sell.
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. 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 $309,000 and $900,000 for the three and nine
months ended March 31, 2004, respectively, and $73,000 and $219,000 for the
three and nine months ended March 31, 2003, 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
17
carried at fair value, with the unrealized gains and losses reported as a
separate component of shareholders' equity in accumulated 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
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, 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.
18
RESULTS OF OPERATIONS
For the three months ended March 31, 2004 versus the three months ended March
31, 2003
The three months ended March 31, 2004 resulted in a net operating loss of
$3,383,570 (approximately $700,000 non-cash) compared to a net loss of
$5,337,683 (approximately $3,300,000 non-cash) for the comparable quarter in the
prior fiscal year.
Revenues for the three months ended March 31, 2004 increased to $1,352,689
from $724,238 during the same period in the prior fiscal year, an increase of
$628,451 or 87%. This increase was primarily attributed to sales of the
Company's energy conservation equipment for the three months ended March 31,
2004, as such revenues did not exist in the corresponding quarter of the prior
fiscal year since the acquisition of Bayview occurred in July 2003. The increase
in revenues is also partially attributable to an increase in the Company's
cashless technology and services. Revenues are discussed in more detail as
follows:
Equipment sales: Revenues from equipment sales increased to $1,026,523
from $307,598 in the corresponding quarter of the prior fiscal year, an increase
of $718,925 or 234%. This increase is mainly due to sales of the Company's
energy conservation equipment of approximately $644,000 for the three months
ended March 31, 2004, as such revenues did not exist in the corresponding
quarter of the prior year, since the acquisition of Bayview occurred in July
2003. In addition, sales of the Company's cashless technology, which includes
e-Port, e-Suds and Kiosk systems, increased to $211,000, approximately $122,000
or 137% over the corresponding period of the prior fiscal year. The increases in
sales were offset by a decrease in Business Center equipment sales of
approximately $40,000.
Product sales and other: Revenues from product sales and other decreased
to $10,924 from $78,823 directly due to a decrease in camera and film sales from
Company owned vending machines as a result of the wind down of the Kodak Vending
Placement Agreement.
License and transaction fees: Revenues from license and transaction fees
decreased $22,575 or 7% from $337,817 to $315,242 for the three months ended
March 31, 2003 and 2004, respectively. This decrease was due to a decrease in
fees earned from the Kodak Vending Placement Agreement of approximately $33,000
as a result of the wind down of the contract, offset by an increase in fees of
approximately $11,000 as a result of an increase in the number of devices
connected to the Company's network.
Cost of sales consisted of equipment, product and labor costs of
approximately $534,000 and $272,000 for the three months ended March 31, 2004
and 2003, respectively, an increase of $262,000; software development
amortization of approximately $333,000 and $291,000 for the three months ended
March 31, 2004 and 2003, respectively, an increase of $42,000; and network and
transaction related costs of $204,000 and $154,000 for the three months ended
March 31, 2004 and 2003, respectively, an increase of $50,000. The increase of
approximately $353,169 or 49% in total cost sales from $717,773 to $1,070,942
for the three months ended March 31, 2003 and 2004, respectively, was
principally attributable to the increase in energy conservation equipment sales.
19
Gross profit for the three months ended March 31, 2004 was $281,747,
compared to gross profit of $6,465 in the same period in the prior fiscal year.
The increase of $275,282 was due to increases in hardware sales, particularly
the addition of our higher margin, energy conservation equipment sales that were
not present in the same period in the prior fiscal year.
Total operating expenses of $3,446,632, for the three months ended March
31, 2004 decreased $775,089 or 18% from $4,221,721 for the same period ended
March 31, 2003. The components of operating expenses (General and
administrative, Compensation, Depreciation and amortization and Loss on debt
modification) and the causes of this significant decrease are explained further
below:
General and administrative expenses decreased from $1,940,270 for the
three months ended March 31, 2003 to $1,814,437 for the three months ended March
31, 2004, a decrease of $125,833 or 6%. This decrease is due to decreases of
$636,000 related to professional fees, primarily related to business consulting
and public relations. This decrease was offset by increases in overall general
and administrative expenses of approximately $269,000 related to the acquired
energy conservation operation, as such expenses did not exist in the comparable
period last fiscal year, as well as $114,000 of expenses related to the
recruitment of executive personnel, $91,000 of additional bad debt reserve and
an increase in utility expenses of $42,000.
Compensation expense increased to $1,220,990 for the three months ended
March 31, 2004, a $138,254 or 13% increase over the comparable period last
fiscal year. This increase is due to approximately $249,000 of additional
compensation, including employee benefits and sales commissions, related to the
energy conservation operations acquired in July 2003 as such expenses did not
exist in the comparable period last fiscal year and an increase of $43,000 due
to overall higher compensation levels and cost of employee benefits. These
increases were offset by a decrease in bonuses and sales commissions of
$153,000.
Depreciation and amortization expense for the three months ended March 31,
2004 was $411,205, compared to $239,363 for the same period in the prior fiscal
year, a $171,842 or 72% increase. This increase was attributable to amortization
expense of intangible assets of $236,000 and depreciation expense of property
and equipment of $31,000 acquired from Bayview in July 2003, offset by decreases
in depreciation of existing assets that have reached the end of their estimated
useful life.
During March 2004, the Company sold 969,091 shares of its Jubilee
investment for net proceeds of $1,075,891, of which $762,130 was received
subsequent to March 31, 2004 and is reflected as an other receivable as of that
date, and realized a gain of $572,119 from the sale of these shares (see Note
4).
Total interest expense decreased from $1,127,146 to $794,387 for the three
months ended March 31, 2003 and 2004, respectively, a decrease of $332,759 or
30%. This decrease was primarily due to lower principal balances on the
Company's 12% Senior Notes as the result of conversions of the Senior Notes into
shares of the Company's Common Stock by Senior Note Holders. Upon the time of
conversion, the note holder is issued shares equivalent to the conversion rate
on the Senior Note, any unamortized debt discount on the note is accelerated and
charged to interest expense and future interest on the converted note ceases to
accrue. In addition, during the quarter ended March 31, 2004, the Company did
20
not offer Note holders the option to receive Common Stock and Common Stock
Warrants in lieu of cash for interest earned on the notes, as it did in the
corresponding quarter of the prior fiscal year. Warrants issued in connection
with this offer are valued and charged as additional non-cash interest.
Therefore, due to lower unamortized discount balances and the absence of a
warrant issuance, non-cash interest expense and debt discount amortization of
$450,708 for the three months ended March 31, 2004 decreased $329,811 from
$780,519 for the comparable period last fiscal year.
For the nine months ended March 31, 2004 versus the nine months ended March 31,
2003
The nine months ended March 31, 2004 resulted in a net operating loss of
$16,424,278 (approximately $9,500,000 non-cash) compared to a net loss of
$12,542,898 (approximately $3,100,000 million non-cash) for the comparable
period in the prior fiscal year.
Revenues for the nine months ended March 31, 2004 increased to $4,947,882
from $2,233,330 during the same period in the prior fiscal year, an increase of
$2,714,552 or 122%. This increase was primarily attributed to sales of the
Company's energy conservation equipment for the nine months ended March 31,
2004, as such revenues did not exist in the corresponding period of the prior
fiscal year since the acquisition of Bayview occurred in July 2003, as well as
increases in equipment sales of our cashless technologies and services. Revenues
are discussed in more detail as follows:
Equipment sales: Revenues from equipment sales increased to $3,741,359
from $880,545 in the corresponding period of the prior fiscal year, an increase
of $2,860,814 or 325%. This increase is mainly due to sales of the Company's
energy conservation equipment of approximately $2,751,000 for the nine months
ended March 31, 2004 as such revenues did not exist in the corresponding quarter
of the prior year, since the acquisition of Bayview occurred in July 2003. In
addition, sales of the Company's cashless technology, which includes e-Port,
e-Suds and Kiosk systems, increased to $521,000, approximately $225,000 or 76%
over the corresponding period of the prior fiscal year. The increases in sales
were offset by a decrease in Business Center equipment sales of approximately
$84,000.
Product sales and other: Revenues from product sales and other decreased
to $304,476 from $357,703, a decrease of $53,227 or 15% over the same period of
the prior fiscal year. This decrease was due to a decrease in camera and film
sales from Company owned vending machines of approximately $254,000 as a result
of the wind down of the Kodak Vending Placement Agreement, offset by $200,000 of
revenue recorded in the quarter ended December 31, 2003 relating to the
Strategic Alliance Agreement executed in October 2003 between the Company and
Conopco, Inc dba Unilever Home & Personal Care North America.
License and transaction fees: Revenues from license and transaction fees
decreased $93,035 or 9% from $995,082 to $902,047 for the nine months ended
March 31, 2003 and 2004, respectively. This decrease was due to a decrease in
fees earned from the Kodak Vending Placement Agreement of approximately $128,000
as a result of the wind down of the contract, offset by an increase in fees of
approximately $35,000 as a result of an increase in the number of devices
connected to the Company's network.
21
Cost of sales consisted of equipment, product and labor costs of
approximately $1,750,000 and $723,000 for the nine months ended March 31, 2004
and 2003, respectively, an increase of $1,027,000; software development
amortization of approximately $999,000 and $874,000 for the nine months ended
March 31, 2004 and 2003, respectively, an increase of $125,000; and network and
transaction related costs of $488,000 and $461,000 for the nine months ended
March 31, 2004 and 2003, respectively, a increase of $27,000. The increase of
$1,179,351 or 57% in total cost sales from $2,057,173 to $3,236,524 for the nine
months ended March 31, 2003 and 2004, respectively, was principally attributable
to the increase in equipment sales.
Gross profit for the nine months ended March 31, 2004 was $1,711,358,
compared to gross profit of $176,157 in the same period in the prior fiscal
year. The increase of $1,535,201 was due to increases in hardware sales,
particularly the addition of our higher margin, energy conservation equipment
sales that were not present in the same period in the prior fiscal year.
Total operating expenses for the nine months ended March 31, 2004 was
$15,306,671, (non-cash $7,200,000) an increase of $5,895,104 or 63% over the
same period from the prior fiscal year. The components of operating expenses
(General and administrative, Compensation, Depreciation and amortization and
Loss on debt modification) and the causes of this significant increase in each
category are explained further below:
General and administrative expenses increased from $4,951,021 for the nine
months ended March 31, 2003 to $5,096,447 for the nine months ended March 31,
2004, an increase of $145,426 or 3%. This increase is due to increases in
overall general and administrative expenses of approximately $1,001,000 related
to the acquired energy conservation operation, as such expenses did not exist in
the comparable period last fiscal year. This increase was offset by decreases of
$873,000 of professional fees, primarily related to business consulting,
promotion and public relations.
Compensation expense increased to $8,664,200 (non-cash $4,700,000) for the
nine months ended March 31, 2004, a $5,897,032 or 213% increase over the
comparable period last fiscal year. This increase is 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 payment valued at $4,620,000 representing 80% of the total
increase. Other components of this increase were due to approximately $554,000
increase in bonus expenses, primarily to the Company's executive officers and
approximately $662,000 of additional compensation, including employee benefits
and sales commissions, related to the acquired energy conservation operations in
July 2003, as such expenses did not exist in the comparable period last fiscal
year.
Depreciation and amortization expense for the nine months ended March 31,
2004 was $1,227,109, compared to $734,026 for the same period in the prior
fiscal year, a $493,083 or 67% increase. This increase was attributable to
amortization expense of intangible assets of $681,000 and depreciation expense
of property and equipment of $90,000 acquired from Bayview in July 2003, offset
by decreases in depreciation of existing assets that have reached the end of
their estimated useful life.
22
The Company incurred charges during the nine months ended March 31, 2004
and 2003 relating to the modification of debt terms for certain of the Senior
Notes in the amount of $318,915 and $959,352, respectively. This charge is for
the write-off of the unamortized debt discount remaining for Senior Notes
scheduled to mature in December 2003 and December 2004 whose conversion and
maturity terms were modified. The Company offered these note modifications to
the Note holders, and recognized the related non-cash charge to operations in
order to manage short-term cash flows.
During the nine months ended March 31, 2004, a gain of $509,244 was
recorded relating to the termination the Kodak Vending Placement Agreement. This
gain is comprised of the payment from Kodak of approximately $675,000 plus the
cancellation of Stitch's obligation to the supplier of the vending machines of
approximately $124,000 less a write down of the carrying value of vending
machines of approximately $290,000 to their realizable value of $300 per vending
machine. To the extent any costs are incurred by Stitch to fulfill its
obligations under the settlement agreement, these costs will be recorded as
incurred, as any additional costs cannot be reasonably estimated at this time.
During the nine months ended March 31, 2004, the Company sold 1,669,091
shares of its Jubilee investment for net proceeds of $1,471,142, resulting in a
gain of $603,480. Proceeds of $762,130 were received subsequent to March 31,
2004 and are reflected as an other receivable as of that date (see Note 4).
Total interest expense increased from $3,319,444 to $3,971,688 for the
nine months ended March 31, 2003 and 2004, respectively, an increase of $652,244
or 20%. This increase was primarily attributable to charges incurred due to the
acceleration of unamortized debt discount and other issuance costs on the 12%
Senior Notes that were converted into Common Stock during the nine month period
ending March 31, 2004.
PLAN OF OPERATIONS
Vending
In February 2004, the Company and Motient Corporation, owner and operator
of a two-way wireless data network, together launched a marketing program to
bring vending machines online using the Company's e-Port cashless payment system
and Motient's wireless data network. In December 2003, the Motient wireless
network became available to the current generation of e-Port, on-line, vending
technology. This connectivity capability has enabled customers to substantially
ramp up the adoption of solutions such as cashless vending and data delivery.
The targeted goal for the marketing program is to bring 10,000 units online by
December 31, 2004. As of March 31, 2004, there were 260 units on the Company's
network and Motient wireless network as result of this initiative.
Coinciding with the Motient initiative, described above, was the
identifying and pursuit of target markets where customers can be assured of
early success from the adoption of cashless technology. As a result of this
initiative, sales in the quarter ended March 31, 2004 increased over the
23
previous two quarters of the 2004 fiscal year, the largest ever increase in
e-Port sales, with shipments to 19 different bottlers and vending operators, of
which 11 were new accounts. Most notable were sales to an operator for the new
Pop Century Hotel at Disney in Orlando, Florida and to a vending operator in
Southern California, to address a growing problem of vandalism in their hotel
locations e-Port cashless payment solution enabled this operator to replace
coins and bills completely, thus removing cash reserves in the machines.
Three other initiatives are targeted for the fourth quarter of fiscal year
2004. First, the availability of new combo readers (combined bill validator and
card reader in a single device) brings many joint selling opportunities with MEI
and Coinco, manufacturers of these devices. Second, the Company is pursuing a
campaign titled "Coca-Cola experience with cashless" aimed at acquiring as
customers, Coke bottlers throughout the U.S., based upon experiences with
current Coca-Cola customers. Lastly, the Company has appointed John Roughneen, a
successful vending executive, as VP of Strategic Business Development. Mr.
Roughneen is well known within the vending industry, and his reputation and
prior successes within the vending industry is already having a positive impact
on our business.
Energy Management
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 April 2004, the Company launched "Project Get Green", an incentive
program developed and sponsored by the National Automatic Merchandiser
Association (NAMA) and the Company. This program is aimed at helping the vending
industry meet new ENERGY STAR(R) standards for energy consumption that were
announced in April 2004 by the Environmental Protection Agency (EPA). The EPA's
new standards represent a significant opportunity for the Company, as our
technology will render a non-conforming vending machine ENERGY STAR(R)
equivalent or compliant. The Company estimates that 4.6 million machines in the
U.S. market are candidates for our energy management technology. The joint NAMA
and Company initiative includes a 20 percent marketing allowance on the
Company's energy management solutions through June 30, 2004 and the Company
anticipates increased sales as a result of vending operators taking proactive
actions to become compliant with the new EPA standards.
In February 2004, in an effort to continue to strengthen its network of
government and utility entities offering rebates for the Company's energy
products, Eugene Water & Electric Board, a publicly owned electric utilities
company located in the State of Oregon, agreed to offer a $120 rebate per
24
installation of the VendingMiser. To date the Company has Twenty-Two (22) power
utility or government agencies currently offering rebates to customers who
install the Company's energy products.
In January 2004, the Company entered into an alliance with the EnergySmart
Grocer, an energy consultant to independent grocers, to bring an energy
conservation program, utilizing the Company's CoolerMiser and VendingMiser
solutions, to thousands of independent grocery stores in the state of
California. The program includes a rebate of $90 for every CoolerMiser and
VendingMiser installed. To date, 390 units or $54,000 has been sold under this
program.
The Company has also targeted local, state and federal government agencies
as customers for this product line. In order to increase the Company's reach in
this regard, the Company embarked on a campaign for General Services
Administration (GSA) approval, which would make these products available to all
government agencies. The Company is anticipating GSA approval in the near term.
Laundry
In April 2004, the Company and Caldwell and Gregory entered into a
five-year agreement, whereby the Company has granted Caldwell and Gregory
rights, subject to total minimum purchase requirements of 10,500 units by
September 2008, to exclusively provide e-Suds to colleges and universities in
Pennsylvania, Delaware, Maryland, Virginia, West Virginia, Tennessee and the
District of Columbia.
In March 2004, the Company installed its eSuds Internet connected laundry
system at Carnegie Mellon University, in Pittsburgh, Pennsylvania, on a limited
number of machines for a pilot phase working through Caldwell and Gregory, a
laundry service operator in the university and college laundry marketplace.
After only two weeks into the pilot phase, due to favorable student response,
Caldwell and Gregory and Carnegie Mellon University agreed to transition from
the pilot to full implementation for the fall semester 2004, giving the
universities 4,000 campus residents the ability to use the eSuds laundry
services.
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. Under the terms of the
agreement, the Company agrees to be a reseller of Unilever Products that are
dispensed through the USA e-Suds System and the Company will also receive fees
from Unilever based on the number of injections of Unilever Products through the
USA e-Suds System.
American Sales Inc. (ASI) has signed a five-year agreement to purchase
units of Stitch's eSuds laundry solution for their university locations in the
Midwest. In October 2003, the Company installed a system at ASI's facilities for
testing, which completed final testing in May 2004. The Company anticipates unit
sales to begin the fourth quarter of fiscal year 2004, with two universities
scheduled for installation in June 2004 and a third by August 2004.
ZiLOG Strategic Alliance
In October 2002, the Company signed a five-year Strategic Alliance with
ZiLOG Corporation, a semiconductor company, which is a supplier of
microprocessors to the retail point of sale and other industries. One of the
purposes of this alliance was to combine the Company's proprietary e-Port
software with ZiLOG's eZ80 line of microprocessors, such that the Company might
be able to improve price/performance of its product line, and allow ZiLOG to
market an e-Port enabled, network ready, eZ80 microprocessor. Since the signing
of this agreement, the Company has developed, commercialized and implemented,
for purchase by its customers, products and services utilizing the work-product
of this alliance. For example, in its e-Suds product line, the Company has
contracted with Caldwell and Gregory, and American Sales Inc. for up to 19,000
e-Suds `connections'. Additionally, the Company has developed, and is beginning
to test, its new G-5 e-Port for the vending market.
The Company has also worked with ZiLOG to create an e-Port enabled eZ80
ZiLOG processor, which is intended to allow ZiLOG customers to engineer and
manufacture their products with the capability to attach to a network, and in
some cases, the Company's network. The e-Port enabled eZ80 ZiLOG processor has
been shown at various trade events, and has been demonstrated to a limited
number of potential customers.
The Company expects to see an increase in sales of its products due to
improved price/performance - such as in e-Suds and the new G-5 e-Port for
vending. Additionally, the Company intends to license software embedded in the
e-Port enabled ZiLOG eZ80, as well as, possibly providing network services for
ZiLOG customers who engineer and manufacture the e-Port enabled eZ80 processor
into the products they bring to market.
Kodak Vending
In December 2003, the parties to the Kodak Vending Placement Agreement
agreed to terms of an early termination of the contract effective December 31,
2003. The settlement resulted in the termination of the vending agreement
pursuant to which the Company received a payment from Kodak of approximately
$675,000 and payments equal to $300 per vending machine from the supplier of the
vending machines as the machines are pulled from service at the supplier's sole
25
cost and expense. Upon receipt of the $300 per vending machine, title to the
vending machine will transfer to the supplier. The settlement agreement provides
that all machines are to be pulled from service no later than mid calendar year
2004. In addition, the supplier agreed to cancel an obligation for the purchase
of vending machines in the approximate amount of $124,000.
The vending machines were used as collateral to secure a bank facility
used to purchase the machines under which $377,653 was outstanding as of March
31, 2004. Final payment of the debt will occur no later than the time title of
the machines is transferred to the supplier.
Revenues of the Company will be reduced as a result of the vending
contract termination. However, because the Kodak program is and has been
operating at a loss, the termination of the program would eliminate these
ongoing losses. Revenues related to the Kodak program through the fiscal year
ended June 30, 2003 were approximately $1,092,000 and approximately $124,000 and
$471,000 for the three and nine months ended March 31, 2004, respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended March 31, 2004, net cash of $7,653,857 was used
by operating activities, primarily due to the net loss of $16,424,278 offset by
non-cash charges aggregating approximately $9,500,000 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 and gain on the termination of a contract. In addition, the
Company's net operating assets increased by $778,969 (primarily inventory and
accounts receivable), a substantial portion of which relates to the addition of
the energy conservation equipment line from the Bayview acquisition.
For the nine months ended March 31, 2004, net cash used in investing
activities was $257,351, comprised of the cash component of the investment in
Bayview, purchases of property and equipment and the proceeds received from the
sale of a portion of the investment in the Jubilee Trust.
Proceeds from financing activities for the nine months ended March 31,
2004 provided $6,986,182 of funds, which was necessary to support cash used in
operating and investing activities. Proceeds of $7,544,590 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 $558,408.
Long-term debt obligations of the Company as of March 31, 2004 were as
follows:
Bank facility $377,653
Working capital loans 76,765
Other, including capital lease obligations 42,462
--------
496,880
Less current portion 479,070
--------
$ 17,810
========
26
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 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, scheduled to extend into the fiscal year ending June
30, 2005, is anticipated to occur during the year ending June 30, 2004 due to
the termination of the vending placement agreement and the removal from service
and sale of the vending machines used as collateral for the bank facility. As
described above, the debt, with a balance outstanding at March 31, 2004 of
$377,653, will be repaid no later than the time Stitch returns the vending
machines to the supplier.
In connection with the Stitch acquisition, the Company assumed long-term
debt which included a working capital loan. This loan is secured by certain
assets of Stitch and bears interest at 6.75% per annum. On November 6, 2003, the
Company reached an agreement with the bank to make monthly installments that
will repay the remaining balance on the working capital loan by October 2004.
The Company has incurred losses since inception. For the nine months ended
March 31, 2004, the net loss was $16,424,278 of which approximately $9,500,000
related to non-cash charges. Cumulative losses through March 31, 2004 amounted
to approximately $95,000,000. 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 nine months
ended March 31, 2004 was a net cash outflow of approximately $1,000,000 -
$300,000 of cash used in operations and $728,000 invested in assets and
liabilities connected 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 nine months' operating
cash flows reflected an investment for this working capital.
During the year ended June 30, 2003, cash used in operating activities was
approximately $750,000 per month. For the nine months ended March 31, 2004 cash
used in operating activities was approximately $850,000 per month. Operating
cash flows during the nine months ended March 31, 2004 were impacted by working
capital increases that were disproportionate to the increase in revenues, as
well as the investment made in working capital to support the energy management
equipment line acquired from Bayview. The nine-month period also absorbed cash
bonuses of approximately $600,000, primarily to the Company's executive
officers. The Company believes it can improve its management of working capital,
primarily related to accounts receivables, and reduce cash used in operating
27
activities to approximately $700,000 per month, which is comparable to cash used
in operating activities during the three months ended March 31, 2004. The
foregoing estimated monthly cash requirement assumes no significant increase in
revenues. Using that as a basis for estimating cash requirements for the next
twelve months, along with requirements for capital expenditures and repayment of
long-term debt, the Company's cash needs would approximate $9,200,000 through
March 31, 2005.
As of March 31, 2004, the Company had approximately $1,500,000 of cash and
cash equivalents, primarily as a result of proceeds from several private
placements of Common Stock during fiscal 2004. In September 2003 and March 2004,
the Company sold a total of approximately 1,700,000 shares of its investment in
the Jubilee Trust generating net proceeds of approximately $1,500,000, of which
approximately $800,000 was received in April 2004.
In February 2004, the Company initiated a private placement offering (the
"2004-A" offering) involving an aggregate sale of up to 35,000,000 shares of
Common Stock at $0.15 per share. Through March 31, 2004, 550,000 shares were
sold, resulting in proceeds of $82,500 in connection with this offering. As of
May 17, 2004, an aggregate of 35,000,000 shares have been subscribed for,
resulting in proceeds of $5,250,000, of which $3,542,500 has been received as of
this date and $1,707,500 of which the Company believes will be collected in May,
2004.
During April and May 2004, La Jolla exercised a total of 14,000,000
warrants for an aggregate of approximately $1,265,000. As of March 31, 2004,
there were 35,793,687 fully vested warrants to purchase Common Stock at exercise
prices ranging from $0.070 to $1.25 per share, of which 30,464,194 warrants are
"in the money", with exercise prices below $0.11 per share. The potential
exercise of these "in the money" warrants could provide $2,576,000 of additional
proceeds to the Company. Subsequent to March 31,2004 17,608,402 warrants were
excercised providing proceeds of $1,433,000.
Using current revenue of approximately $1,500,000 per quarter and current
operating levels and considering cash on hand of $1,500,000 as of March 31,
2004, proceeds of $800,000 received in April 2004 from the sale of Jubilee
shares in March 2004, proceeds of $1,433,000 from the excercise of "in the
money" warrants subsequent to March 31,2004 and the expected proceeds of
approximately $5,000,000 from the 2004-A Private Placement Offering anticipated
to be received by May 2004, there will be sufficient capital available to fund
the Company's cash requirements through the end of the current fiscal year
ending June 30, 2004. However, if cash needs of $9,200,000 materialize over the
next twelve months on the basis described above, cash of approximately $500,000
will be required in addition to the sources enumerated above. A substantial
portion of this capital could likely come from increased revenues, the exercise
of warrants, as well as from further sales of the Company's securities. Given
the Company's current product offerings and the markets it is addressing, the
Company believes the capital markets should be available to raise additional
capital sufficient to fund its operating needs. If revenues increase over the
next twelve months from those realized by the Company in the past, cash
generated from such improved operations would help satisfy the Company's cash
requirements.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
28
The principal executive officer and principal financial officer have
evaluated the Company's disclosure controls and procedures as of March 31, 2004.
Based on this evaluation, they conclude that the disclosure controls and
procedures effectively ensure that the information required to be disclosed in
the Company's 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 March 31, 2004 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
In February 2004, the Company initiated a private placement offering (the
"2004-A" offering), consisting of up to 35,000,000 shares of restricted Common
Stock at $0.15 per share to accredited investors. The securities will be offered
and sold pursuant to the exemption from registration set forth in Section 4(2)
of the Act and Rule 506 promulgated thereunder. The Company has agreed at its
cost and expense to use its best efforts to register the Common Stock for resale
by the holder under the Act. Through March 31, 2004, the Company issued 550,000
shares to two (2) accredited investors and $82,500 of proceeds has been
received.
In January 2004, the Company issued 150,000 shares to CEOCast Inc., a
consultant for investor relation services to be rendered. The issuance is exempt
from the registration requirements of the Securities Act of 1933 pursuant to
Section 4(2). The Company has agreed to prepare and file at its expense a
registration statement covering the resale of the shares of Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on January 16, 2004.
(b) Election of Directors
Each of the following individuals was elected as a director at the Annual
Meeting. The number of votes cast with respect to the election of directors was
as follows:
For Withhold
--- --------
George R. Jensen, Jr 192,641,987 5,577,738
Stephen P. Herbert 191,717,390 6,502,335
William W. Sellers 191,761,317 6,458,408
William L. Van Alen, Jr 191,971,617 6,248,108
Steven Katz 193,743,872 4,475,853
Douglas M. Lurio 192,560,752 5,658,973
29
(c) In addition to the election of directors, the following other matters were
also voted on and approved at the Annual Meeting:
Ratification of the appointment of Ernst & Young LLP as independent public
accountants for the Company for its 2004 fiscal year:
Affirmative Votes 196,455,944
Negative Votes 1,047,715
Abstaining Votes 716,066
Approval of the increase to the number of authorized shares of Common
Stock from 400,000,000 to 475,000,000:
Affirmative Votes 177,477,247
Negative Votes 18,643,461
Abstaining Votes 2,099,017
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4.1 Addendum to Warrant to Purchase Common Stock dated April 21,
2004, between the Company and La Jolla Cove Investors, Inc.
4.2 Addendum to Warrant to Purchase Common Stock dated May 11, 2004,
between the Company and La Jolla Cove Investors, Inc.
4.3 Form of Subscription Agreement for 2004-A Offering.
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.
30
On January 7, 2004, the Company filed a report on Form 8-K to report
information under Item 12 thereof relating to revenues for the month
of December 2003 and the quarter ended December 31, 2003.
On January 22, 2004, the Company filed a report on Form 8-K to
report information under Item 5 thereof relating a Strategic
Alliance Agreement between the Company and Conopco, Inc dba Unilever
Home & Personal Care North America. The report also contained
information under Item 9 relating to the speech made by George R.
Jensen, Jr., Chairman and Chief Executive Officer, at the Company's
annual meeting of shareholders.
31
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: May 17, 2004 /s/ George R. Jensen, Jr.
--------------------------------------------------
George R. Jensen, Jr., Chairman,
Chief Executive Officer
Date: May 17, 2004 /s/ David M. DeMedio
--------------------------------------------------
David M. DeMedio, Chief Financial Officer
32